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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
| þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended January 2, 2011
OR
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number: 0-26786
APAC Customer Services, Inc.
(Exact name of registrant as specified in its charter)
| Illinois | ||
| (State or other jurisdiction of incorporation or | 36-2777140 | |
| organization) | (I.R.S. employer identification no.) |
Bannockburn Lake Office, 2201 Waukegan Road, Suite 300, Bannockburn, Illinois 60015
(Address of principal executive offices)
(Address of principal executive offices)
Registrant’s telephone number, including area code: (847) 374-4980
Securities registered pursuant to Section 12(b) of the Act: Common Shares, $0.01 Par Value, NASDAQ
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act. Yes o No þ
Indicate by checkmark if the registrant is not required to file reports pursuant to Section 13 or
Section 15 (d) of the Act. Yes o No þ
Indicate by check mark whether the registrant (l) 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 has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes
o No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of registrant’s knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K þ
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.
| Large accelerated filer o | Accelerated filer þ | Non-accelerated filer* o | Smaller reporting company o | |||
| (*Do not check if a smaller reporting company) |
Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
The aggregate market value of the registrant’s common shares held by non-affiliates was
approximately $180.4 million based on the last sale price as of July 2, 2010.
As of February 11, 2011, there were 52,042,476 common shares outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the Registrant’s Proxy Statement for the Annual Meeting of Shareholders to be
held on June 7, 2011 are incorporated by reference into Part III of this Annual Report on
Form 10-K.
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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 Annual Report on Form 10-K 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 those of 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 Annual Report on
Form 10-K. 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 Annual Report on Form 10-K, primarily in Items 1,
1A, 3, 7, and 7A. 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:
| • | A large portion of 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 and adversely
affect our financial results. |
|
| • | Our operating results and financial condition may be affected by
the performance of our clients and unfavorable general economic
conditions. |
|
| • | The failure to effectively manage our production capacity and our
workforce could negatively impact our financial results. |
|
| • | Our success is subject to the terms of our client contracts and if
we are unable to continue operating under existing client
contracts or renew existing client contracts with terms favorable
to us, our results of operations and financial condition may be
adversely affected by the loss of clients or by the less favorable
terms. |
|
| • | Our business may be affected by our cash flows from operations and
our ability to comply with our debt covenants and funding
requirements under our credit facility. |
|
| • | Our financial results may be affected by risks associated with
international operations and expansion, including, but not limited
to foreign currency fluctuations, tax obligations and changes to
laws in other countries. |
|
| • | Our principal shareholder can exercise significant control over us
and, as a result of such control may be able to exert considerable
influence over our future direction and operations. |
|
| • | Our success depends on our ability to recruit and retain a
sufficient number of qualified key personnel and the loss of the
services of key personnel without adequate replacement or the
inability to attract new qualified personnel could have a material
adverse effect on us. |
|
| • | We operate in a highly competitive industry and our financial
results may suffer if we are unable to adequately address
potential downward pricing pressures and other competitive
factors. |
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| • | Circumstances outside our control such as typhoons, hurricanes,
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 international business operations. |
|
| • | Unauthorized disclosure of sensitive or confidential client and
customer data could expose us to protracted and costly litigation,
penalties and may cause us to lose clients. |
|
| • | Our business and our clients’ businesses are subject to federal
and state regulation and industry standards and the costs of
compliance with, or liability for violation of, existing or future
regulations or standards could significantly increase our costs of
doing business. |
|
| • | The costs and management time and attention associated with
litigation could result in a negative impact to our financial
results. |
|
| • | Our business is subject to rapid changes in technology and if our
technology is rendered obsolete or we are unable to compete
effectively, our operating results and financial condition could
be materially and adversely affected. |
|
| • | Volatility in our stock price may result in loss of investment for
shareholders, potential litigation and substantial cost associated
with litigation, as well as diversion of management’s attention. |
More detailed discussions of these risk factors can be found in Items 1A and Item 7 of this Annual
Report on Form 10-K.
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PART I
| Item 1. | Description of Business. |
General Overview
We are a leading provider of customer care services and solutions to market leaders in the
healthcare, communications, business services, media & publishing, travel & entertainment,
technology and financial services industries. We deliver highly customized customer care services
and solutions that involve communicating with customers and managing situations that are unique to
each core industry. We provide service through multiple communication channels, including
telephone, internet, on-line chat, email, fax, mail correspondence and automated response generated
through technology. We operate ten customer care centers in the United States, two of which are
client-owned facilities, four off-shore customer care centers in the Philippines and one near-shore
customer care center in the Dominican Republic. As of January 2, 2011, the domestic operations
consisted of approximately 6,300 workstations and the international operations consisted of
approximately 4,600 workstations.
Our principal executive office is located at 2201 Waukegan Road., Suite 300, Bannockburn, Illinois
60015 and the telephone number at that address is (847) 374-4980.
In 2005, we initiated a strategic realignment to exit our outbound customer acquisition business,
focus our resources on inbound client relationships in a number of key industries and reposition
ourselves for long-term growth and profitability. We exited virtually all of our outbound customer
acquisition business which resulted in the closure of 16 centers. We invested heavily in the
growth of our off-shore capacity in the Philippines and increased our off-shore revenue. In the
period from 2006 to 2009, we opened three additional centers in the Philippines, bringing our total
number of off-shore centers to four. Also, in 2009, we opened our first near-shore center in Latin
America, located in the Dominican Republic. In 2010, we signed a lease for a facility in Uruguay
and expect to begin operations there in early 2011.
In September 2010, Kevin Keleghan joined the Company as President and Chief Executive Officer after
serving on our Board of Directors the previous year. Mr. Keleghan brings broad-based experience and
strong strategic capabilities to lead us into the future. He has more than 25 years of experience
in financial and business services, call center management, and outsourcing, along with a strong
track record of operational leadership and of strategically building businesses.
Our Approach and Competitive Strategy
Our focus is to provide customized, high quality customer care services and solutions to market
leaders in the communications, healthcare, business services, media & publishing, travel &
entertainment, financial services and technology industries. Traditionally, we have focused a
majority of our efforts on voice-based interactions with our clients’ customers. In mid-2009, we
dedicated resources to focus more directly on knowledge-based and back office services. We believe
the increasing breadth of related services we provide enables us to build stronger, long-term
partnerships with our clients resulting in increased client retention and growth and thereby
improving the consistency of our revenue flow.
The services we provide are critical to our clients’ success and involve significant integration
with our clients’ information technology infrastructure. The applications we integrate into our
clients’ systems are complex, resulting in implementation and ramp-up periods that typically take
six to twelve months.
We believe that service quality and value are critical factors in a client’s outsourcing decision.
Our sales and client solutions teams are dedicated to prospecting and servicing clients in each of
our core industries. We believe that focusing their time and expertise on understanding discrete
industries enables them to better understand our clients’ needs.
We continue to focus on providing customized, high quality customer care services and solutions to
market leaders in industries that place significant value on long-term customer relationships. Our
high level growth strategy is to continually provide the highest level of quality services to our
clients. We strive to operate as efficiently as possible, optimizing our capacity and maximizing
our utilization, in order to achieve our target margins. We expect to achieve growth both with
existing and new clients, both domestically and globally. We will add new centers on the basis of
client needs. Through growth, we will seek to diversify our client base and reduce client
concentration. We also manage our business with a goal of leveraging our expense base and
increasing cash flow.
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Our mission is to help our clients serve their customers better. Each of our clients has developed
their own unique view on what constitutes good service and the resulting levels of customer
satisfaction achieved through those services. Our strategy is to provide a variety of service
solutions so that a client can choose options that best fit with their unique view on servicing
their
customers. We advocate solutions that we believe will best meet our clients’ needs, but we believe
that the final choice is that of our clients. Cost and quality are universally important to our
clients. With that in mind, we provide choices for location including domestic, near-shore and
off-shore; training developed by us, by our clients or a mix; varying agent experience levels and
hiring criterion; and live operator interaction, self-service or a mix of the two. We provide
services from our facilities and from our clients’ facilities. Service levels, quality criterion
and supervisory ratios are always tailored to a clients’ unique needs. We believe providing
customized solutions, which help our clients serve their customers better, creates a long lasting,
mutually beneficial relationship with our clients.
Our Core Industries
Core Industries
Our business model is to partner with robust, growing businesses with leadership positions in their
markets that place a premium on customer loyalty and retention and consider high quality customer
care programs an important competitive advantage.
We have focused on the following industries: healthcare, communications, business services, media &
publishing, travel & entertainment, technology and financial services. In fiscal year 2010,
approximately 98% of our revenue was derived from clients in these key industry verticals and
approximately 81% of our revenue was generated from clients in our three largest industry
verticals: healthcare, communications and business services.
Seasonality
Due to the nature of certain clients’ businesses, we experience seasonality of revenues. In
particular, our healthcare industry clients’ call volumes experience seasonality, peaking during
open enrollment and plan initiation periods, typically in the fourth and first quarter of each
fiscal year. Our business services client also experiences peak processing needs from November
through December coinciding with the holiday season. As healthcare and business services represent
a significant portion of our revenue our business is significantly impacted by this seasonality.
Our Services
Our services are provided through customer care centers staffed with skilled customer service
representatives in domestic, international and client-owned locations. Our services are highly
customized customer care services and solutions that involve communicating with customers and
managing situations that are unique to each core industry. We provide service through multiple
communication channels, including telephone, internet, on-line chat, email, fax, mail
correspondence and automated response generated through technology. We offer the following
services in each of our core client industries:
Healthcare
Within the healthcare industry, we offer customer service support for a wide variety of medical
plans, including pharmacy, medical, dental, vision and Medicare Part D, to plan members and
healthcare plan providers alike. Our customer service representatives answer questions regarding
healthcare members’ plan coverage, including benefits and eligibility, claims processing,
enrollment and plan comparisons, prescription coverage and co-payment determination, and they
provide internet service help desk support and insurance and coverage application assistance. For
healthcare providers, our customer service representatives provide similar information regarding
member eligibility and benefits and claims processing. For more complex programs, we employ
clinical staff such as nurses, pharmacists and pharmacy technicians to handle member and provider
interactions. We also provide various healthcare clients with internal help desk support and back
office functions for their organizations.
Communications
Within the communications industry, we provide the following services: product sales, ongoing
account maintenance, billing issue resolution, basic technical support, identifying and remediating
product issues, warranty and exchange processes, product set-up services, pre-paid account
inquiries, customer retention activities, number portability, provisioning and targeted inbound
customer acquisition.
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Business Services
Within the business services industry, we provide a variety of solutions and services including
customer care, delivery scheduling, delivery issue resolution, strategic account management,
international services, business to business contact management and sales, account set-up and
maintenance, billing research and resolution, and claims processing.
Media & Publishing
Within the media industry, we provide email support for social networking sites and postings, as
well as image review for the content on those sites. Additionally, we support cable and broadband
subscribers’ inquiries in multiple languages, handling issues ranging from program and content to
installation and technical support dispatch. Within the publishing industry, we provide services
for account management, subscriber acquisition, verification and retention, and billing and payment
support. In addition to our phone services, we also provide extensive solutions in support of
customer correspondence, back-office document processing and email.
Travel & Entertainment
Within the travel & entertainment industry, we provide customer care services including reservation
booking for general and corporate travel, information on hotels, resort properties locations and
amenities, car rental and airline policies, cancellations, billing and account management as well
as complaint resolution.
Technology
Within the technology industry, we provide customer care services that include technical support
for laptops, desktops and tablets, smartphones and related applications, music and other devices,
as well as services for customer care calls and billing support inquiries.
Financial Services
Within the financial services industry, our services include assisting customers with card
activation, credit inquiries, billing issue resolution, account maintenance, balance inquiries and
transfers, credit line increases, and credit insurance products. We also support the insurance,
fraud protection and identity theft products often delivered to the consumer customers of these
cards. Our client-specific teams handle inquiries from plan and program members related to
information updates, fraud alerts, cross-sell/up-sell and cancel/save initiatives.
Personnel and Training
Our ability to attract, retain and develop our customer service representatives is critical to our
success at delivering quality customer service. We use a hiring model designed to select employees
motivated to provide high-quality customer care services. We use our performance management review
process and pay-for-performance compensation program to develop and motivate our employees.
We provide each new employee with extensive job skills training delivered in an interactive
environment. Training programs for customer service representatives are customized to client
programs and teach specialized customer service skills. We provide additional customer care
training, empathy training and telephone etiquette for all of our customer service employees. In
addition to training for specific job performance, our teams receive training on our culture and
our guiding values of honesty, integrity and respect for others. In our international facilities
we also provide basic skills training, voice inflection and accent neutralization training and
education in United States geography.
We also provide coaching, management and leadership training to front line supervisors. Our use of
leading technology enables our front line supervisors to provide coaching opportunities to
representatives by direct observation, as does our centralized quality function. See “Quality” and
“Technology and Telecommunications.”
We had approximately 13,400 employees on January 31, 2011. None of our employees are subject to
collective bargaining agreements.
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Operations and Capacity Utilization
Customer Care Centers
As of January 2, 2011, we operated 15 customer care centers: eight domestic, two domestic
client-owned facilities, four international centers located in the Philippines and one
international center located in the Dominican Republic. The United States operations consisted of
approximately 6,300 workstations and the international operations consisted of approximately 4,600
workstations. We expect to begin operations in Uruguay in early 2011.
We operate across multiple shifts in our customer care centers, most having the capability to run
24 hours a day, seven days a week. Customer care centers can be configured to meet specific client
needs and deliver customer care services across multiple contact channels, including telephone,
internet, on-line chat, email, correspondence and facsimile. See Item 2 of this Annual Report on
Form 10-K under the caption “Properties.”
Capacity and Workforce Management
Our profitability is influenced significantly by our ability to effectively manage our production
capacity and our workforce. To maximize profitability we need to continually increase our revenue
per production seat and our capacity utilization, and maximize our workforce productivity.
We closely monitor the utilization of our production seats and balance the costs associated with
maintaining unutilized and under-utilized seats with the flexibility needed to quickly respond to
incremental client demands. We use leading workforce management platforms which allow us to more
effectively manage our employees’ time, quickly respond to changing client needs and maximize
workforce productivity. See “Technology and Telecommunications—Operating Systems and Telephony.”
In conjunction with client forecasted call volume, we manage our production capacity and workforce
to match call arrival patterns, matching staffing to skill sets to meet application complexity and
maintaining strict schedule adherence for our agents.
See Item 1A of this Annual Report on Form 10-K under the caption “The failure to effectively manage
our production capacity and our workforce could negatively impact our financial results.”
Operational Disciplines
We operate our business according to a set of documented core operations practices and procedures.
Self-audits of our standard operating procedures are conducted on a regular basis to ensure
consistent implementation of our practices across all of our customer care centers.
Program Implementation
We use an integrated team of professionals to manage the implementation and expansion of client
programs. This team is led by a project manager and includes subject matter experts from
operations, information technology, human resources, training, quality, sales, and account
management and compliance. The implementation team serves as the primary interface with our
clients’ own implementation resources, is actively involved in the creation of detailed project
plans, and is responsible for end-to-end implementation. In addition, we typically provide
additional front line supervisors at the outset of a new program to ensure smooth program start-up.
The progress of each implementation project is reviewed by our senior executive team on a weekly
basis.
Quality
We believe our ability to retain existing clients and to acquire new clients is directly related to
the quality of the services we provide. Our customer service representatives have direct contact
with our clients’ customers and help form an impression of our clients’ commitment to quality
service. We believe these contacts are a critical component to our clients’ long-term success and
are committed to optimizing the level of quality service provided to our clients’ customers.
We utilize a quality monitoring system across all of our customer care centers, other than our
client-owned facilities where quality is monitored directly by the client. We have a quality
assurance organization which provides independent, ongoing assessments of program quality through
direct monitoring of our customer service representatives’ interactions with customers. We follow a
comprehensive quality calibration process, which helps ensure that our representative monitoring
and feedback stays aligned with our clients’ view of quality.
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We use a compensation model that rewards customer service representatives on quality and continuous
improvement. Managers at every customer care center are required to monitor every customer service
representative regularly and provide coaching sessions designed to continuously improve
performance. Additionally, we utilize verification recording technologies to monitor selected calls
and provide coaching to the customer services representatives.
We also regularly measure the quality of our services by evaluating such factors as client
satisfaction, customer service levels, average handle times, first call resolution, and average
speed of answer. We provide site operations management and clients with status reports on a
real-time basis and can transmit summary data and captured information electronically to our
clients. This data enables us to quickly modify or enhance ongoing services to improve quality and
effectiveness.
Technology and Telecommunications
Our technology and telecommunications platform consists of customer care applications, operating
systems and telephony. We partner with industry leaders to provide tools that we believe are
necessary to maximize our business performance, including voice and data switching, customer
relationship management (CRM) development, quality assurance, workforce administration and data
storage and retrieval.
We continue to invest in technology in order to expand our capacity, update and enhance our
internal capabilities, and continue to provide reliable voice and data networks, operational
support systems and customized application solutions to our clients. We also expect to continue to
invest in both established and emerging call center technologies in order to fully optimize our
operational performance and quality. We are committed to protecting sensitive customer data and
utilize industry accepted technologies and processes to meet our clients’ needs.
Customer Care Applications
Our customer care application strategy is to continually upgrade our capabilities within our
flexible and robust multi-channel technology solution. Each application is customized to
efficiently manage the unique customer inquiries that occur in our core industries and meet market
specialization, channel specific needs and complex architecture/process integration.
We maintain open-system thin-client platforms in which we develop customized (multi-channel)
application solutions for our clients. Developed on third-party, industry-standard platforms, we
maintain a library of redeployable, proprietary code to develop new client solutions. We have also
invested in open-system integration layers (third-party middleware) that allow us to integrate our
solutions with our clients’ systems infrastructure. These solutions allow for enhanced information
exchange with our clients which we believe improves overall performance and results in an enhanced
customer experience.
We have developed a fully integrated web-based reporting system tool that provides real-time and
historic productivity data from a secure site and communicates the data with a comprehensive set of
detailed interaction reports. Reports are also routinely customized, leveraging internal and
client-based data to meet individual clients’ requirements.
Operating Systems and Telephony
We have operational support systems that we deploy in each of our customer care centers. We use
leading workforce management platforms to maximize our ability to forecast interaction volumes,
schedule customer service representatives, monitor adherence to scheduled hours in order to meet
fluctuating client needs and maximize agent productivity, and provide quality assurance. We
believe these platforms, in concert with internally developed best practices, improve our ability
to provide high quality and efficient services to our clients.
We deploy VOIP (voice over internet protocol) technology to support both our domestic and
international advanced routing requirements. The investment in this flexible, scaleable and cost
effective technology improves our responsiveness to client requirements. This technology also
enables us to increase capacity utilization by effectively balancing call demands across multiple
call centers.
We continue to use leading technology to support our atHOME™ agent program, which we believe we can
enhance workforce optimization and improve quality on certain programs by using agents that work
from their own homes. We have built an internal infrastructure to support this program and provide
all of the necessary equipment to agents we deploy in this fashion. All supporting systems have
been fully integrated to ensure synergy with our customer care center operations.
We also maintain a number of internal systems to support our business. Anchored by a commercially
available enterprise financial platform, we use a combination of internally developed and
third-party add-on systems to measure our business. We
have made significant efforts to build and maintain systems and processes that ensure regulatory
compliance at all levels of the organization.
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We contract with multiple, well-established leading providers for domestic and international voice
and data services. We currently obtain pricing based on volume and usage commitments obligating us
to pay a minimum charge over the term of the contracts.
System Architecture and Redundancy
Our total systems architecture incorporates a number of advanced technology solutions such as
telephony and network switching platforms, interactive voice response systems, on-line chat, email,
web collaboration, facsimile, customer relationship management solutions, knowledge-based tools,
quality management, workforce management and optimization, training, and reporting platforms. These
tools are used to create specific solutions for our clients offering them a comprehensive set of
customer care solutions.
All of the above solutions are supported by a number of back-end production systems that
consolidate, process, and transfer data. A technology recovery plan has been developed to address
interruptions in voice and data services and equipment malfunctions and is tested regularly. We
also develop and maintain technology continuity plans for clients which are tailored to their
unique requirements. Additionally, we maintain fail over voice capacity and a fully redundant data
infrastructure as part of our technology disaster recovery strategy. See Item 1A of this Annual
Report on Form 10-K under the caption “Circumstances outside our control such as typhoons,
hurricanes, 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 international business operations.”
Client Relationships
We provide services to our clients under written contracts which generally provide for engagements
of one to five years. Most contracts permit clients to terminate for convenience on short notice
and some contracts provide us with a similar right to terminate without cause. Many contracts for
customer care services require adherence to a termination schedule allowing for the gradual
reduction of services over three-month to six-month periods. We have, however, historically
established long-term relationships with many of our clients. The duration of our relationships
with individual clients who represent more than 10% of our annual fiscal year 2010 revenue range in
duration from eleven to fifteen years.
Contracts are tailored to the specific requirements of each client and generally require that we
bill for our services based on time worked by customer service representatives, time spent
interacting with customers or on a per call or per transaction basis. Billing for phone minutes of
service requires greater customer service representative productivity to achieve an equivalent
hourly rate. Billing on a per call or per transaction basis shifts additional operational risk to
us, since managing the duration of each call is critical to achieving efficiency under this pricing
method.
We are generally subject to varying client quality and performance standards, such as average
handle time, occupancy rate, abandonment rate, call quality and customer satisfaction. Our
performance against such standards may provide bonus opportunities or, conversely, may subject us
to penalties.
Overall, the profitability of a particular client contract is impacted by numerous factors
including: whether we bill the client based on time spent for all staff hours, on a per call basis
or on a per minute basis; our ability to effectively implement the program and reach our
anticipated productivity and performance metrics; our ability to efficiently service the clients’
business and perform at the required quality and service levels demanded by the client over the
contract term; and whether we are incurring penalties or being paid a bonus for our performance.
See Item 1A of this Annual Report on Form 10-K under the captions “The failure to effectively
manage our production capacity and our workforce could negatively impact our financial results” and
“Our success is subject to the terms of our client contracts and if we are unable to continue
operating under existing client contracts or renew existing client contracts with terms favorable
to us, our results of operations and financial condition may be adversely affected by the loss of
clients or by the less favorable terms.”
Competition
We operate in a fragmented and highly competitive growing market. Our competitors range in size
from small firms offering specialized applications to large firms that have more financial
resources that enable them to invest more substantially in growing their business.
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We believe that the principal competitive factors in the industry are cost of services, service
quality, the ability to develop and implement quality, customized products and services quickly,
technological expertise, performance against client metrics, strength of relationship and
management credibility and reputation. These factors also include scalability, efficiency and
productivity. We believe that the companies that succeed are companies that build strong client
relationships and are able to successfully deliver quality customer services and solutions that
provide real value, furthering their clients’ progress toward business goals.
In our opinion, several significant factors impact the current competitive environment: (1)
increasing competition is putting pressure on clients and prospective clients to provide higher
quality customer service while containing costs and improving margins; (2) outsourcing is becoming
more prevalent and accepted in our core industries as threshold concerns regarding customer privacy
and information security have been addressed; (3) growth in international capacity, which offers
lower pricing than domestic capacity, largely due to the cost of labor differential; (4) increased
competition for labor and (5) technology advances. Such factors, when combined, are causing clients
and prospective clients to demand more competitive pricing and higher quality service. See Item 1A
of this Annual Report on Form 10-K under the caption “We operate in a highly competitive industry
and our financial results may suffer if we are unable to adequately address potential downward
pricing pressures and other competitive factors.”
Government Regulation and Industry Self-Regulation
Our business is subject to varying degrees of governmental regulation. In addition, several of the
industries in which our clients operate are similarly regulated, particularly the healthcare,
telecommunications and financial services industries. Federal and state laws governing consumer
privacy, the collection, use and security of consumer data, the use and disclosure of customer
proprietary network information, the sale of insurance products, mortgage banking activities and
the operations of healthcare and pharmaceutical businesses impose regulatory and licensing
obligations on us. There are also self-imposed industry standards that apply to the use and
security of certain consumer data. In addition, both federal and state laws regulate telephone
solicitations to residential customers. Finally, our Part D Medicare enrollment and customer care
programs are subject to the rules and regulations of the Center for Medicare Services.
Consumer Privacy and Information Security
Key federal laws regulating consumer privacy and information security include the
Gramm-Leach-Bliley Act, the Health Insurance Portability and Accountability Act (HIPAA) and the
Telecommunications Act of 1996. In addition, the Payment Card Industry Standards or PCI Standards
apply to the capture, storage and transmission of certain consumer credit card information.
Our healthcare clients are “covered entities” under HIPAA and are required to comply with standards
for privacy, transaction and code sets and data security. Due to the nature of our services, we are
a “business associate” under HIPAA. As a “business associate” we are required to protect the
security and privacy of “protected health information” provided to our clients.
Our telecommunications clients are subject to regulations governing the unauthorized disclosure of
customer proprietary network information. These regulations limit the disclosure of non-public
customer information regarding telephone services such as the type of service and usage and billing
information. In providing services to our telecommunications clients, we are required to comply
with these regulations.
Many of our clients obtain payment for their services with credit cards. To the extent our
services to these clients involve capturing, storing or transmitting consumer credit card
information, these activities are governed by the PCI Standards which require us to maintain
certain information security procedures.
There is increasing federal and state interest in privacy protections and information security,
some aspects of which could impose additional regulatory requirements on our clients’ businesses
and, indirectly, on our business.
Licensing
We and our employees who are involved in certain types of sales activities, such as the sale of
insurance or certain healthcare products, are required to be licensed by various state commissions
or regulatory bodies and to comply with regulations enacted by those entities. Other examples of
activities that require licensing include pharmaceutical and mortgage banking activities.
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Outbound Telemarketing Sales
While the portion of our business dedicated to outbound telemarketing sales is not significant, we
are subject to various federal and state regulations. On the federal level, both the Federal Trade
Commission (FTC) and the Federal Communications Commission (FCC) regulate the initiation of
telephone solicitations to residential telephone subscribers. Federal regulations prohibit the use
of deceptive, unfair and abusive telemarketing sales practices. States have also enacted and
continue to enact legislation governing telephone solicitations, which contain similar
restrictions, as well as registration requirements.
Compliance Activities
We have policies and procedures in place which are intended to meet the requirements of all
applicable laws and regulations that are material to our business. Companies that violate any of
these laws or regulations may be subject to enforcement actions, civil actions or private causes of
action initiated by consumers, shareholders or employees, as well as adverse publicity which may
damage their reputation. See Item 1A of this Annual Report on Form 10-K under the captions “Our
business and our clients’ businesses are subject to federal and state regulation and industry
standards and the costs of compliance with, or liability for violation of, existing or future
regulations or standards could significantly increase our costs of doing business” and
“Unauthorized disclosure of sensitive or confidential client and customer data could expose us to
protracted and costly litigation, penalties and may cause us to lose clients.”
Financial Information about Industry Segments
We have one reportable segment and, therefore, in accordance with Accounting Standards Codification
(ASC) 280 “Segment Reporting” on disclosures about segments of an enterprise and related
information, all segment-related financial information is included in the consolidated financial
statements. The reportable segment reflects our operating and reporting structure.
Available Information
We file annual, quarterly and current reports, proxy statements and other information with the
Securities and Exchange Commission (SEC). These filings are available to the public over the
internet at the SEC’s website at www.sec.gov. The documents we file with the SEC may also
be read and copied at the SEC’s public reference room located at 100 F Street, N.E., Room 1580,
Washington, D.C. 20549. Information regarding the SEC’s public reference room may be obtained by
calling the SEC at 1-800-SEC-0330.
We maintain a website with the address www.apaccustomerservices.com. We are not including
the information contained on our website as a part of, or incorporating it by reference into, this
Annual Report on Form 10-K. We make available free of charge (other than an investor’s own internet
access charges) through our website on the “Investors” section our Annual Report on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to these reports, as
soon as reasonably practicable after we electronically file such material with, or furnish such
material to, the SEC.
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| Item 1A. | Risk Factors. |
Risk Relating to the Company and its Business
In addition to the risks and uncertainties of ordinary business operations, the following factors
could cause actual results to differ from expectations or have a material adverse effect on our
business, results of operations, liquidity or financial condition:
A large portion of 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 and adversely
affect our financial results.
We derive a substantial portion of our revenue from a small number of clients. Most of our revenue
is concentrated in the healthcare, communications, business services, media & publishing, travel &
entertainment, technology and financial services industries. There can be no assurance that we
will not become more dependent on a few significant clients, that we will be able to retain any of
our larger clients or that we will be able to maintain our current volume or margins with these
clients. Should we lose a client or experience a reduction in demand for our services from, or
decline in the profitability of, a large client, we may not be able to replace such clients or
programs with clients or programs that generate a comparable amount of revenue or profits or
terminate such unprofitable client relationships. Our five largest clients accounted for 72% of
our fiscal year 2010 revenue and our ten largest clients accounted for 89% of our fiscal year 2010
revenue.
The loss of one or more of our significant clients, a significant downturn in any of our core
industries, a trend in any of these industries to reduce their outsourced customer care services, a
change in the customer relationship strategy of any of these clients or industries or a change in
the volume or profitability of one or more of these client relationships could have a material
adverse effect on our business, results of operations, liquidity and financial condition.
Our operating results and financial condition may be affected by the performance of our clients and
unfavorable general economic conditions.
Our business is directly impacted by the performance of our clients and general economic
conditions. Unfavorable general economic conditions, including the current economic downturn in
the United States and the on-going financial crisis affecting the banking system and financial
markets, could negatively affect our business. These conditions could adversely affect the demand
for some of our client’s products and services and, in turn, could cause a decline in their demand
for our services. A decline in our clients’ business or performance, including potential client
bankruptcies, could impair their ability to pay for our services. Our cash flow is significantly
impacted by our overall profitability and our ability to collect our accounts receivable on a
timely basis. To the extent that our business with a single client or small group of clients
represents a significant portion of our revenue, a delay in receiving payment could materially
adversely affect the availability of cash to fund operations, thereby increasing our reliance on
borrowings under our current loan agreement. Also, our clients may not be able to obtain adequate
access to credit, which could affect their ability to make timely payments to us. If these events
were to occur, we could be required to increase our allowance for doubtful accounts. Our business,
financial condition, results of operations and cash flows would be adversely affected if any of our
major clients were unable or unwilling, for any reason, to pay for our services. If the current
economic conditions persist or decline, this could adversely affect our business, results of
operations, liquidity, or financial condition.
The failure to effectively manage our production capacity and our workforce could negatively impact
our financial results.
Our profitability is influenced significantly by our ability to effectively manage our production
capacity and our workforce. To maximize profitability we need to continually increase our revenue
per production seat and our capacity utilization, and maximize our workforce productivity.
Capacity utilization and workforce productivity may be affected at various times for numerous
reasons including call volume, call arrival patterns, our ability to accurately forecast and staff
to anticipated volume and call arrival patterns, employee attrition and seasonality. We currently
have significantly higher capacity utilization during daytime weekday hours.
We periodically assess the long-term capacity of our customer care centers, both domestically and
internationally, including the ability to accommodate new and expanded programs and clients, and
make strategic decisions regarding the opening or expansion of customer care centers. We use a
workforce administration platform which allows us to more effectively manage our employees’ time,
quickly respond to changing client needs and maximize our workforce productivity. There can be no
assurance that we will be able to achieve optimum capacity utilization, maximize the productivity
of our workforce or keep pace with the anticipated growth in demand for our services. If we
maintain idle production seats or fail to effectively manage our workforce productivity, our
business, results of operations, liquidity or financial condition may be materially and adversely
affected. See Item 1 of this Annual Report on Form 10-K under the caption “Operations and Capacity
Utilization.”
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Our success is subject to the terms of our client contracts and if we are unable to continue
operating under existing client contracts or renew existing client contracts with terms favorable
to us, our results of operations and financial condition may be adversely affected by the loss of
clients or by the less favorable terms.
Most of our client contracts do not have minimum volume requirements and the profitability of each
client program may fluctuate, sometimes significantly, throughout various stages of a program.
Certain contracts have performance-related bonus and/or penalty provisions, whereby the client may
pay us a bonus or we may have to issue a credit based upon our meeting, or failing to meet,
agreed-upon service levels and performance metrics. Our objective is to sign multi-year contracts
with our clients. However, our contracts generally enable the clients to terminate the contract
for convenience or reduce customer interaction volumes. There can be no assurance that our clients
will not terminate their contracts before their scheduled expiration date, that the volume of
services for these programs will not be reduced or that we will be able to avoid penalties or earn
performance bonuses. In addition, there can be no assurance that each client program will be
profitable for us or that we will be able to terminate unprofitable client relationships without
incurring significant liabilities. The loss of one or more of our significant clients, the
substantial reduction of the amount of services we perform for a significant client, the reduction
of revenues due to penalties for failure to meet performance metrics, an unprofitable client or
client program, unfavorable changes to current contracts, or our inability to terminate an
unprofitable client contract could have a material adverse effect on our business, results of
operations, liquidity, and financial condition. See Item 1 of this Annual Report on Form 10-K under
the caption “Client Relationships.”
Our business may be affected by our cash flows from operations and our ability to comply with our
debt covenants and funding requirements under our credit facility.
Our ability to borrow under our loan agreement depends on the amount of eligible accounts
receivable from our clients and there are limitations on the concentration of these accounts with a
single client. In addition, our lender retains certain reserves against otherwise available
borrowing capacity. Our current loan agreement requires us to comply with certain financial and
other covenants, including limitations on the amount of our capital expenditures, required
maintenance of a minimum fixed charge coverage ratio, and prohibitions on our 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. These limitations may affect our liquidity and limit our
ability to make capital expenditures. In addition, our failure to adhere to the financial and other
covenants could give rise to a default under the loan agreement. We obtained a waiver from our
current lender permitting us to execute a stock repurchase program as approved by our Board of
Directors. There can be no assurances that we will be able to meet the financial and other
covenants in our loan agreement or, in the event of non-compliance, that we will be able to obtain
waivers or amendments from our lender. In addition, our current loan facility expires in May 2011.
There can be no assurance that we will be able to obtain alternative financing. Our inability to
obtain a new loan facility could have a material adverse effect on our business, results of
operations, liquidity and financial condition.
Our financial results may be affected by risks associated with international operations and
expansion, including, but not limited to foreign currency fluctuations, tax obligations and changes
to laws in other countries.
We intend to continue to expand and pursue opportunities for our customer care centers in the
Philippines, the Dominican Republic and Uruguay, and may consider other international locations.
There are certain risks inherent in conducting business internationally, including exposure to
currency fluctuations, the necessity to comply with foreign laws, unexpected changes in foreign
laws and regulations, difficulties in staffing and managing foreign operations, foreign political
instability, changes in clients’ sourcing preferences and potentially adverse tax consequences.
In particular, we serve an increasing number of U.S. clients from our customer care centers in the
Philippines and the Dominican Republic and we are expanding into Uruguay. Contracts with these
clients are typically priced in U.S. dollars while costs incurred in operating the centers are
generally denominated in the local currency, which presents a foreign currency exchange risk to us,
the amount of which increases as our international operations continue to grow. We have, from time
to time, taken limited actions, such as using foreign currency forward contracts, to attempt to
mitigate our foreign currency exchange exposure. However, there can be no assurance that we will
be able to take any actions to mitigate such exposure in the future and, if taken, that such
actions will be successful or that future changes in currency exchange rates will not have a
material impact on our future operating results, liquidity and financial condition.
In addition, we benefit from a Philippine income tax holiday as a Philippine Economic Zone
Authority (PEZA) registrant. We are required to comply with certain financial metrics to continue
to qualify for the income tax holiday. There can also be no assurance that we will continue to
meet the requirements necessary to enjoy the continued benefits of the PEZA income tax holiday or
that the Philippine government will not eliminate or change these requirements in the future. As a
result of our free
zone status, we are exonerated from income tax and certain other taxes. Our inability to realize
continued benefits from this income tax holiday could have a material adverse effect on our results
of operations, liquidity and financial condition.
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Our principal shareholder can exercise significant control over us and, as a result of such
control, may be able to exert considerable influence over our future direction and operations.
Mr. Theodore G. Schwartz, our Chairman, and four trusts and a partnership established by Mr.
Schwartz collectively own approximately 38% of our outstanding common shares. As a result, Mr.
Schwartz is able to exercise significant influence over operations and significant control over the
outcome of substantially all matters requiring action by our shareholders. Such voting
concentration may also have the effect of discouraging, delaying or preventing a change in control.
In his role as Chairman, Mr. Schwartz has been involved in an advisory and oversight capacity on
certain of our operational aspects, particularly with respect to senior management recruiting and
transition.
Our success depends on our ability to recruit and retain a sufficient number of qualified key
personnel and the loss of the services of key personnel without adequate replacement or the
inability to attract new qualified personnel could have a material adverse effect on us.
Our growth and success depends in large part upon the abilities and continued service of our
executive officers and other key employees. There can be no assurance that we will succeed in
sustaining consistent and improving profitability. The loss of, or failure to motivate, key
officers and employees could have a material adverse effect on our business, results of operations,
liquidity and financial condition.
Our industry requires a large work force which has historically experienced high personnel
turnover. Many of our employees receive modest hourly wages and a significant portion of our costs
consist of wages to hourly workers. An increase in hourly wages, costs of employee benefits,
employment taxes or recruiting and training costs could have a material adverse effect on our
business, results of operations, liquidity and financial condition.
Complex technology-based inbound customer service involves extensive training and requires
specially trained employees. Growth in our business will require us to recruit and train qualified
personnel at an accelerated rate from time to time. A higher turnover rate among our employees
would increase our recruiting and training costs and decrease operating efficiencies and
productivity. There can be no assurance that we will be able to hire, train and retain a
sufficient labor force of qualified employees. See Item 1 of this Annual Report on Form 10-K under
the caption “Personnel and Training.”
We operate in a highly competitive industry and our financial results may suffer if we are unable
to adequately address potential downward pricing pressures and other competitive factors.
The outsourcing of customer care services is a highly competitive, growing market and such
competition may intensify in the future. Our competitors range in size from small firms offering
specialized applications to large firms operating in the broader business process outsourcing
market. Many of our competitors have greater resources and capabilities than we do. In addition,
market factors are causing clients and prospective clients to demand more competitive pricing and
higher quality service. Furthermore, many of our existing or potential clients have their own
in-house operations. See Item 1 of this Annual Report on Form 10-K under the caption
“Competition.” There can be no assurance that we can successfully compete in this environment.
Our ability to compete will depend on a number of factors, including our ability to initiate,
develop and maintain new client relationships, expand existing client programs, staff and equip
suitable customer care facilities in a timely manner, and develop new solutions and enhance
existing solutions we provide to our clients.
Further, we believe several other factors may affect the demand for our services. The increased use
of telephone-based technologies, such as interactive voice response systems, and increased use of
the internet could reduce the demand for certain of our customer care offerings. In addition, there
may be political concern regarding the movement of service jobs off-shore which could result in
potentially adverse legislation, and there can be no assurance that we will be able to anticipate
and successfully respond to all such trends in a timely manner.
Competitive pressures from current or future competitors and changing market conditions could cause
our services to lose market share or result in significant price and margin erosion which could
have a material adverse effect on our business, results of operations, liquidity or financial
condition.
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Circumstances outside our control such as typhoons, hurricanes, 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
international business operations.
Our success is dependent on the continued operation of our customer care centers. In the event of
fire, power loss, typhoon, earthquake, flood or other natural disaster, political instability, and
other similar events, the operation of one or more customer care centers could be temporarily or
permanently interrupted. If we experience a temporary or permanent interruption at one or more of
our customer care centers our business could be materially adversely affected and we may be
required to pay contractual damages to some clients or allow some clients to terminate or
renegotiate their contracts. Our international operations are more at risk to adverse weather
conditions, including earthquakes, typhoons and hurricanes. We maintain property and business
interruption insurance, however, such insurance may not adequately compensate for any losses we may
incur.
In addition, our business is materially dependent on telephone and data services provided by
various local and long distance telephone companies as well as our computer equipment, telephone
systems and software. Because of our dependence on third party service providers, any change to the
telecommunications market that would disrupt these services or limit our ability to obtain services
at favorable rates could adversely affect our business, results of operations, liquidity and
financial condition. Should we experience a significant increase in the cost of telephone services
or a temporary or permanent loss of computer or telephone equipment, systems or services (through
casualty or operating malfunction), or should the security of our computer or telephone systems be
compromised or breached, our business, results of operations, liquidity and financial condition
could be materially and adversely affected.
Political and social instability, as demonstrated by terrorist threats, regime change, and civil
unrest could cause service interruptions, or impact our employee base or reduce the quality of
services we provide, resulting in a reduction of our revenues. These activities may also cause our
clients to delay or defer decisions regarding the use of our services and, thus, result in the loss
of additional revenues. In addition, the risks of war and potential terrorist attacks on our
operations cannot be estimated. War and terrorist attacks could disrupt operations and have a
material adverse effect on our business, results of operations, liquidity and financial condition.
Unauthorized disclosure of sensitive or confidential client and customer data could expose us to
protracted and costly litigation, penalties and may cause us to lose clients.
Our business involves access to and transmission of information about our employees, our clients
and customers of our clients. We are reliant on information technology networks and systems to
process, transmit and store such electronic data. Security breaches of this infrastructure could
lead to shutdowns or disruptions of our systems and potential unauthorized disclosure of
confidential information. We are also required at times to manage, utilize and store sensitive or
confidential client or customer data. As a result, we are subject to numerous federal and state
laws and regulations designed to protect this information. See Item 1 of this Annual Report on
Form 10-K under the caption “Government Regulation and Industry Self-Regulation.” While we take
measures to protect the security and privacy of this information and to prevent unauthorized
access, it is possible that our security controls over personal data and other practices we follow
may not prevent the improper access to or disclosure of personally identifiable information. If
any person, including any of our employees, negligently disregards or intentionally breaches our
established controls with respect to such data or otherwise mismanages or misappropriates that
data, we could be subject to monetary damages, fines and/or criminal prosecution. Unauthorized
disclosure of sensitive or confidential client or customer data, whether through system failure,
employee negligence, fraud or misappropriation, could damage our reputation and cause us to lose
clients. Similarly, unauthorized access to or through our information systems or those we develop
for clients, whether by our employees or third parties, could result in negative publicity, legal
liability and damage to our reputation, business, financial condition, results of operations and
cash flows.
Our business and our clients’ businesses are subject to federal and state regulation and industry
standards and the costs of compliance with, or liability for violation of, existing or future
regulations or standards could significantly increase our costs of doing business.
Our business is subject to varying degrees of governmental regulation. In addition, several of the
industries in which our clients operate are similarly regulated, particularly in the
telecommunications, healthcare, and financial services industries. Finally, certain of our
activities are subject to self-regulatory standards established by the industries in which our
clients operate.
Federal and state laws governing consumer privacy, the collection and use of consumer data, the use
and disclosure of customer proprietary network information, the sale of insurance products,
mortgage banking activities and the operations of healthcare and pharmaceutical businesses, and
industry standards regarding the security of credit card information, impose regulatory and
licensing obligations on us. In addition, federal and state laws regulate telephone solicitations
to consumers. Finally, our Part D
Medicare enrollment and customer care programs are subject to the rules and regulations of the
Center for Medicare Services. See Item 1 of this Annual Report on Form 10-K under the caption
“Government Regulation and Industry Self-Regulation.” There can be no assurance that we will not
be subject to agency or state proceedings alleging violation of such laws. We also could be subject
to a variety of enforcement or private actions due to our failure or the failure of our clients to
comply with such regulations or industry standards.
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Future laws, regulations and industry standards may require us to modify our operations or service
offerings in order to effectively meet our clients’ service requirements, and there can be no
assurance that additional regulations would not limit our activities or significantly increase the
costs of compliance.
There is increasing federal and state interest in further regulation of consumer privacy,
information security and the regulation of the movement of service jobs off-shore, some aspects of
which could impose additional regulatory pressure on our clients’ businesses and, indirectly, on
our business. Additional regulation in these areas could reduce the demand for our services.
The costs and management time and attention associated with litigation could result in a negative
impact to our financial results.
We are subject to lawsuits, claims and governmental investigations arising out of the normal
conduct of our business. We cannot predict whether any material lawsuits, claims, or
investigations may arise in the future. Regardless of the outcome of any future actions, claims, or
investigations, we may incur substantial defense costs and such actions may cause a disruption of
management’s attention to the day-to-day operations of the business. Also, it is possible that we
may be required to pay substantial damages or settlement costs which could have a material adverse
effect on our business, results of operations, liquidity, or financial condition. See Item 3 of
this Annual Report on Form 10-K under the caption “Legal Proceedings.”
Our business is subject to rapid changes in technology and if our technology is rendered obsolete
or we are unable to compete effectively, our operating results and financial condition could be
materially and adversely affected.
Rapid technological advances, frequent new product introductions and enhancements, and changes in
client requirements are commonplace in the market for outsourced customer contact management
services. Our future success depends on our ability to develop and implement systems technology and
outsourcing services and solutions that anticipate and respond to continuing changes in technology,
industry developments, and client needs.
Our ability to develop and implement quality, customized products and services is highly dependent
on our computer and telecommunications equipment and software capabilities. We anticipate that it
will be necessary to continue to select, invest in and develop new and enhanced technology on a
timely basis in the future in order to maintain our competitiveness. Our future success will
depend in part on our ability to continue to invest in and develop information technology solutions
that keep pace with evolving industry standards and changing client demands. We must be able to
service new products and platforms and respond to rapidly changing developments in technology.
These factors will require us to provide adequately trained personnel to address the increasingly
sophisticated, complex and evolving needs of our clients. There can be no assurance that we will
have sufficient expertise or capital to meet these challenges or that the technologies developed by
our competitors will not render our products and services obsolete over a period of time. See Item
1 of this Annual Report on Form 10-K under the caption “Technology and Telecommunications” and Item
7 of this Annual Report on Form 10-K under the caption “Liquidity and Capital Resources — Future
Liquidity.” Any failure by us to anticipate or respond rapidly to technological advances, new
products and enhancements, or changes in client requirements could have a material adverse effect
on our business, results of operations, liquidity, or financial condition.
Volatility in our stock price may result in loss of investment for shareholders, potential
litigation and substantial cost associated with litigation, as well as diversion of management’s
attention.
The trading price of our common stock has experienced considerable volatility over short and long
periods of time. The stock market in general, the NASDAQ Global Market and the market for other
companies in our industry have experienced volatility, which could affect the market price of our
common stock regardless of our financial results or performance. Various factors such as general
economic conditions, changes or volatility in the financial markets, changing market conditions in
the outsourced customer contact management services industry, quarterly variations in our financial
results, and changes in financial estimates and recommendations by securities analysts could cause
the market price of our common stock to fluctuate substantially in the future.
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| Item 1B. | Unresolved Staff Comments. |
Not applicable.
| Item 2. | Properties. |
As of January 2, 2011, our corporate headquarters was located in Bannockburn, Illinois in a leased
facility consisting of 14,089 square feet of office space rented under a lease that expires in
February 2016. Our main data center is located within our 54,600 square foot facility in Cedar
Rapids, Iowa. We owned this facility until October 10, 2006 at which time the property was sold in
a sale-leaseback transaction.
We lease all of the other non-client owned facilities on what we believe are commercially
reasonable terms. The leases for our facilities generally have terms ranging from one to ten years
and typically contain renewal options. We believe that our existing facilities are suitable and
adequate for our current operations, but additional facilities may be required to support our
growth. We believe that suitable additional or alternative space will be available as needed on
commercially reasonable terms.
As of January 2, 2011, we operated customer care centers and workstations in the following
locations:
| Number of | ||||
| Customer Care Center Locations | Workstations | |||
Cedar Rapids, Iowa |
529 | |||
Corpus Christi, Texas |
425 | |||
Davenport, Iowa |
713 | |||
Green Bay, Wisconsin |
806 | |||
LaCrosse, Wisconsin |
379 | |||
Newport News, Virginia (client owned) |
717 | |||
Tampa, Florida (client owned) |
677 | |||
Tuscon, Arizona (East) |
853 | |||
Tuscon, Arizona (West) |
615 | |||
Utica, New York |
409 | |||
atHOME™ |
151 | |||
Total Domestic |
6,274 | |||
Alabang, Muntilupa City, Philippines |
1,309 | |||
Alabang, Muntilupa City, Philippines |
442 | |||
Cubao, Quezon City, Philippines |
1,831 | |||
Palo, Leyte, Philippines |
798 | |||
Santo Domingo, Dominican Republic |
193 | |||
Montevideo, Uruguay 1 |
— | |||
Total International |
4,573 | |||
Total all customer care center locations |
10,847 | |||
| (1) | In October 2010, we signed a lease for our newest center in Montevideo, Uruguay and we expect
to begin operations in early 2011. |
| Item 3. | Legal Proceedings. |
We are subject to lawsuits, claims and governmental investigations arising out of the normal
conduct of our business. We do not believe that the outcome of any pending claims will have a
material adverse effect on our business, results of operations, liquidity or financial condition.
Although we do not believe that any such proceeding will result in a material adverse effect, no
assurance to that effect can be given.
On May 27, 2009, a purported collective/class action complaint captioned Tiffany Sharpe, et al. v.
APAC Customer Services, Inc. was filed in the United States District Court for the Western District
of Wisconsin. On behalf of the named plaintiff, a non-exempt call center employee, and other
similarly situated individuals, the complaint asserted violations under the Federal Fair Labor
Standards Act (FLSA) related to overtime compensation and wage records. The complaint also
asserted violations under Wisconsin Wage Payment and Overtime Compensation Laws based upon the same
alleged facts. The complaint purported to allege claims as a nationwide collective action under
federal law, as well as a class action under Wisconsin state law. The complaint sought various
forms of relief, including injunctive relief, unpaid overtime wages, liquidated damages, interest,
and
attorneys’ fees and costs. On January 8, 2010, the court entered an order which conditionally
certified the case as a collective action under the FLSA.
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In March 2010, we entered into an agreement to resolve the collective action. On June 16, 2010,
the Court entered an order approving the resolution of all claims under the FLSA collective action.
Under the terms of the agreement, we agreed to pay a maximum amount of $4.0 million to resolve
claims by eligible class members, including payments to class members and payments for plaintiff
attorneys’ fees. As a result, we recorded a liability of $2.4 million for the thirteen weeks ended
April 4, 2010 which represented our estimate at the time of the costs to be incurred for attorneys’
fees and claims, based on expected opt-in rates for claimants in similar actions. Based on the
court’s final order approving the agreement, (including setting the amount of plaintiffs’
attorneys’ fees) and a revised estimated rate of participation from eligible class members, we
reduced the previously recorded liability by $0.5 million during the thirteen weeks ended October
3, 2010 to an adjusted recorded liability of $1.8 million which reflected the revised expectation
of the final amount which would ultimately be paid.
On December 21, 2010, a final order of dismissal was entered by the Court triggering our payment
obligations under the agreement to resolve the collective action. The final amount paid to class
members who participated in the action and to plaintiff’s attorney was approximately $1.8 million.
We denied and continue to deny the allegations in the complaint and contend that our policies and
practices regarding compensation were proper and in compliance with the law at all times. We deny
all liability and wrongdoing in this case, but decided to settle this lawsuit in order to avoid the
distraction and additional legal expenses that would otherwise be incurred.
| Item 4. | (Removed and Reserved) |
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Table of Contents
Executive Officers of the Registrant
Our executive officers are as follows:
| Name | Age | Position | ||||
Kevin T. Keleghan
|
53 | President and Chief Executive Officer | ||||
Christopher H. Crowley
|
40 | Senior Vice President, Sales | ||||
Arthur D. DiBari
|
53 | Senior Vice President, Operations | ||||
Joseph R. Doolan
|
47 | Vice President and Controller | ||||
Mark E. McDermott
|
50 | Vice President and Chief Information Officer | ||||
Robert B. Nachwalter
|
40 | Senior Vice President, General Counsel and Corporate Secretary | ||||
Andrew B. Szafran
|
44 | Senior Vice President and Chief Financial Officer | ||||
Kevin T. Keleghan joined us in September 2010 as President and Chief Executive Officer. Mr.
Keleghan has been a member of our Board of Directors since December 2009. From October 2008
through December 2009, Mr. Keleghan was employed by Axiant, LLC as President and Chief Executive
Officer. From 2002 to 2008 Mr. Keleghan was employed by Outsourcing Solutions, Inc. as President
and Chief Executive Officer.
Christopher H. Crowley joined us in March 2009 as Senior Vice President of Sales. From January
2009 to February 2009, Mr. Crowley was employed by Cybernet Software Systems where he served as
Senior Vice President of Sales focusing on IT Solutions for technology companies. From May 2008 to
August 2008, Mr. Crowley was employed by Teletech Holdings, Inc. where he served as Senior Vice
President of Sales. From May 1997 to April 2008, Mr. Crowley was employed by Sutherland Global
Services, where he held a variety of positions, most recently, Senior Vice President of Sales.
Arthur D. DiBari joined us in March 2008 as Senior Vice President of Operations. From February
2004 to February 2008, Mr. DiBari was employed by Affiliated Computer Systems, Inc. where he held a
variety of positions, most recently Regional Vice President for the Emerging Markets Group. From
1997 to 2004, Mr. DiBari was employed by Aegis Communications Group, Inc. where he was the Senior
Vice President of Operations.
Joseph R. Doolan joined us in January 2006 as Vice President and Controller. From April 2004 to
January 2006, Mr. Doolan was employed by CNH Capital, where he held various positions, most
recently Vice President, Controller. Prior to joining CNH Capital, Mr. Doolan was Controller at GE
Healthcare Financial Services from 2002-2003.
Mark E. McDermott joined us in March 1996 and is currently Vice President and Chief Information
Officer. Mr. McDermott previously served in a number of operational and information technology
related positions within the Company.
Robert B. Nachwalter, Senior Vice President, General Counsel and Corporate Secretary, joined us in
November 2008. From April 2006 to November 2008, Mr. Nachwalter served as Senior Vice President,
General Counsel and Corporate Secretary for Whitehall Jewelers Holdings, Inc. From May 2003 to
April 2006, Mr. Nachwalter was senior legal counsel with Ryder System, Inc.
Andrew B. Szafran joined us in May 2008 as Senior Vice President and Chief Financial Officer. From
June 2002 to June 2007, Mr. Szafran was employed by Communications Supply Corp. where he served as
the Vice President and Chief Financial Officer. From 1995 to 2002, Mr. Szafran was employed by
Alliant Exchange, Inc. and its affiliate Alliant Foodservice, Inc. where he held a variety of
financial management positions, most recently, Senior Vice President — Finance.
20
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PART II
| Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. |
Our common shares are quoted on the NASDAQ Global Market under the symbol “APAC.” The following
table sets forth, for the periods indicated, the high and low sale prices of our common shares as
reported on the NASDAQ Global Market during such periods.
| High | Low | |||||||
Fiscal Year 2010: |
||||||||
First Quarter |
$ | 6.26 | $ | 5.04 | ||||
Second Quarter |
$ | 6.64 | $ | 5.37 | ||||
Third Quarter |
$ | 5.98 | $ | 4.61 | ||||
Fourth Quarter |
$ | 6.50 | $ | 4.92 | ||||
| High | Low | |||||||
Fiscal Year 2009: |
||||||||
First Quarter |
$ | 3.30 | $ | 0.94 | ||||
Second Quarter |
$ | 6.40 | $ | 2.55 | ||||
Third Quarter |
$ | 6.27 | $ | 4.67 | ||||
Fourth Quarter |
$ | 7.02 | $ | 5.02 | ||||
As of February 11, 2011, there were approximately 760 holders of record of our common shares. We
did not pay any dividends on common shares in fiscal years 2010 or 2009. We currently intend to
retain a significant portion of future earnings to finance our growth and development and do not
anticipate paying any cash dividends. We do anticipate making purchases of common shares in
accordance with the stock repurchase program authorized by our Board of Directors on August 18,
2010. Although our revolving loan agreement restricts the payment of cash dividends and the
repurchase of common shares, we obtained a waiver from our current lender permitting us to
repurchase up to an aggregate of five million shares of common stock pursuant to the previously
described stock repurchase program. See Item 7 of this Annual Report on Form 10-K under the
caption “Liquidity and Capital Resources —Bank Financing.” Payment of any future dividends or
purchases of any common shares will depend upon the future earnings and capital requirements and
other factors our Board of Directors considers appropriate. See Item 12 of this Annual Report on
Form 10-K under the caption “Equity Compensation Plan Information.”
| Issuer Purchases of Equity Securities | ||||||||||||||||
| Total Number of | Maximum Number | |||||||||||||||
| Total Number | Shares Purchased | of Shares that May | ||||||||||||||
| of Shares (or | Average Price | as Part of Publicly | Yet Be Purchased | |||||||||||||
| Units) | Paid per Share | Announced Plans | Under the Plans or | |||||||||||||
| Period | Purchased | (or Unit) | or Programs (1) | Programs (1) | ||||||||||||
7/05/2010 - 8/01/2010 |
— | $ | — | — | 5,000,000 | |||||||||||
8/02/2010 - 8/29/2010 |
159,938 | 5.00 | 159,938 | 4,840,062 | ||||||||||||
8/30/2010 - 10/03/2010 |
— | — | — | 4,840,062 | ||||||||||||
10/04/2010 - 10/31/2010 |
— | — | — | 4,840,062 | ||||||||||||
11/01/2010 - 11/28/2010 |
406,677 | 5.57 | 406,677 | 4,433,385 | ||||||||||||
11/29/2010 - 1/02/2011 |
304,018 | 5.97 | 304,018 | 4,129,367 | ||||||||||||
Total |
870,633 | $ | 5.60 | 870,633 | 4,129,367 | |||||||||||
| (1) | On August 18, 2010, we announced that our Board of Directors had authorized the
repurchase of up to an aggregate of five million shares of our common stock. Under the stock
repurchase program, purchases will be made from time to time on the open market at prevailing
market prices or in negotiated transactions off the market. The repurchase program is expected to
continue over the next 12 months unless extended or shortened by the Board of Directors. We are
not obligated to acquire any particular amount of common stock as a result of the plan, which may
be suspended at any time at our discretion. |
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Table of Contents
The following graph sets forth a comparison of the cumulative total shareholder return on our
common shares for the period beginning December 31, 2005, and ending December 31, 2010, as compared
with the cumulative total return of the S&P 500 Index and a Peer Group Index. The Peer Group
consists of: Convergys Corp., StarTek, Inc., Sykes Enterprises, Inc., and Teletech Holdings, Inc.
The total shareholder return for each company in the Peer Group has been weighted according to the
company’s stock market capitalization. This graph assumes an investment of $100 in each of our
common shares, the S&P 500 Index and the Peer Group Index on December 31, 2005, including
reinvestment of dividends, if any. The stock price performance shown on the graph below is not
necessarily indicative of future stock price performance.
22
Table of Contents
| Item 6. | Selected Financial Data. |
The following unaudited selected financial data should be read in conjunction with Item 7 of this
Annual Report on Form 10-K and the Consolidated Financial Statements and the related notes
appearing in Item 8 of this Annual Report on Form 10-K.
| For the Fiscal Years Ended1 | ||||||||||||||||||||
| January 2, | January 3, | December 28, | December 30, | December 31, | ||||||||||||||||
| 2011 | 2010 | 2008 | 2007 | 2006 | ||||||||||||||||
| (Dollars in thousands, except share data and notes) | ||||||||||||||||||||
Operating Data: |
||||||||||||||||||||
Net revenue |
$ | 325,958 | $ | 293,177 | $ | 248,799 | $ | 224,683 | $ | 224,297 | ||||||||||
Cost of services |
257,490 | 227,845 | 207,953 | 203,880 | 197,881 | |||||||||||||||
Gross profit |
68,468 | 65,332 | 40,846 | 20,803 | 26,416 | |||||||||||||||
Selling, general and administrative
expenses |
31,427 | 30,773 | 30,118 | 28,366 | 30,794 | |||||||||||||||
Legal settlement 2 |
1,793 | (41 | ) | 30 | (4 | ) | 485 | |||||||||||||
Severance, restructuring and other
charges (reversals) 3 |
1,404 | (56 | ) | 3,635 | 1,632 | 2,384 | ||||||||||||||
Total operating expenses |
34,624 | 30,676 | 33,783 | 29,994 | 33,663 | |||||||||||||||
Operating income (loss) |
33,844 | 34,656 | 7,063 | (9,191 | ) | (7,247 | ) | |||||||||||||
Other (income) expense, net |
(138 | ) | (36 | ) | (347 | ) | (249 | ) | (101 | ) | ||||||||||
Interest (income) expense, net |
(31 | ) | (34 | ) | 4,358 | 3,537 | 2,013 | |||||||||||||
Income (loss) before income taxes |
34,013 | 34,726 | 3,052 | (12,479 | ) | (9,159 | ) | |||||||||||||
Income tax expense (benefit) 4 |
11,159 | (23,327 | ) | 33 | (17,568 | ) | 21,380 | |||||||||||||
Net income (loss) |
$ | 22,854 | $ | 58,053 | $ | 3,019 | $ | 5,089 | $ | (30,539 | ) | |||||||||
Net income (loss) per share: |
||||||||||||||||||||
Basic |
$ | 0.44 | $ | 1.13 | $ | 0.06 | $ | 0.10 | $ | (0.62 | ) | |||||||||
Diluted |
$ | 0.42 | $ | 1.09 | $ | 0.06 | $ | 0.10 | $ | (0.62 | ) | |||||||||
Weighted average shares outstanding: |
||||||||||||||||||||
Basic |
52,455 | 51,570 | 50,424 | 49,800 | 49,458 | |||||||||||||||
Diluted |
54,706 | 53,296 | 50,477 | 52,019 | 49,458 | |||||||||||||||
Balance Sheet Data: |
||||||||||||||||||||
Cash and cash equivalents |
$ | 41,399 | $ | 20,557 | $ | 618 | $ | 1,426 | $ | 1,305 | ||||||||||
Working capital (deficit) |
75,979 | 52,145 | (1,549 | ) | 645 | (16,679 | ) | |||||||||||||
Capital expenditures, net |
12,305 | 12,102 | 5,810 | 12,827 | 10,713 | |||||||||||||||
Total assets |
163,165 | 138,605 | 76,564 | 89,926 | 92,054 | |||||||||||||||
Short-term obligations |
696 | 397 | 6,100 | 14,707 | 14,378 | |||||||||||||||
Long-term obligations, less current
maturities |
646 | 667 | — | 11,600 | 4,400 | |||||||||||||||
Shareholders’ equity |
121,471 | 99,748 | 35,420 | 33,381 | 23,306 | |||||||||||||||
See accompanying Notes to Selected Financial Data.
23
Table of Contents
Notes to Selected Financial Data
| (1) | We operate on a 52/53-week fiscal year that ends on the Sunday closest to December 31. All
fiscal years presented were 52 weeks, except for fiscal year 2009 which ended on January 3,
2010. Fiscal year 2009 was 53 weeks. The effect of the additional week in fiscal year 2009
was to increase revenues and gross profit by $6.0 million and $0.9 million, respectively and
to increase net income by $0.4 million. |
|
The fiscal years presented are as follows: |
||
| Fiscal Year | Fiscal Year End | |
2006
|
December 31, 2006 | |
2007
|
December 30, 2007 | |
2008
|
December 28, 2008 | |
2009
|
January 3, 2010 | |
2010
|
January 2, 2011 |
| (2) | During fiscal year 2010, we recorded legal settlement expense of $1.8 million related to the
settlement of the Tiffany Sharpe, et al. v APAC Customer Services, Inc. suit. See Note 10 of
the Notes to Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K
for more information. |
|
| (3) | We recorded severance, restructuring and other charges (reversals) in each of the fiscal
years presented in the “Selected Financial Data” table noted above. For fiscal years 2010,
2009 and 2008, see Note 7 of the Notes to Consolidated Financial Statements in Item 8 of this
Annual Report on Form 10-K for more information. We recorded $1.6 million of restructuring
and other charges in fiscal year 2007 related to downsizing space in our Tucson, Arizona
customer care center and eliminating certain administrative and operations positions.
Restructuring and other charges related to this plan were $1.4 million and included $0.6
million in lease termination and other costs and $0.8 million in severance costs related to
the elimination of six positions. During 2007, we also reversed $0.1 million in lease
termination and other costs associated with the 2006 restructuring initiatives as operating
expenses were lower than originally estimated and recorded $0.3 million in charges related to
our July 2005 restructuring as a result of our conclusion that we would be unable to sublet
the remaining unused space in our corporate office in Deerfield, Illinois. We recorded $2.4
million of restructuring and other charges in fiscal year 2006. During that year, we closed
four customer care centers with approximately 960 workstations. Restructuring and other
charges associated with these closures were $1.8 million comprised of lease termination and
other costs of $0.8 million, the write down of property and equipment of $0.5 million net of
reductions from the proceeds from the sale of related assets, and severance costs of $0.5
million related to the elimination of 119 administrative and support positions. We also
recorded additional charges of $0.9 million related to the 2005 restructuring as a result of
delays in subletting space in our corporate office, which charges were partially offset by a
reversal of $0.3 million of prior year charges not utilized |
|
| (4) | During fiscal year 2009, we reversed $37.9 million of the valuation allowance that had been
provided against the deferred tax assets, which resulted in a deferred income tax benefit of
$23.8 million. In 2007, we reversed a $17.6 million tax reserve and related accrued interest,
in connection with the Internal Revenue Services’ proposed adjustment to our 2002 tax return,
which was favorably resolved in 2007. We provided a valuation allowance of $27.3 million
against deferred tax assets as of December 31, 2006. See Note 8 of the Notes to Consolidated
Financial Statements in Item 8 of this Annual Report on Form 10-K for more information. |
24
Table of Contents
| Item 7. | 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 the audited consolidated financial statements and accompanying notes which
appear in Item 8 of this Annual Report on Form 10-K. Our management’s discussion and analysis
contains certain “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. For an explanation of certain 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 see Item 1A of this Annual Report on Form
10-K.
Overview
We are a leading provider of customer care services and solutions to market leaders in the
healthcare, communications, business services, media & publishing, travel & entertainment,
technology and financial services industries. As of January 2, 2011, we operated 15 customer care
centers: eight domestic, two domestic client-owned facilities, four international centers located
in the Philippines and one international facility located in the Dominican Republic. The lease for
our newest center in Montevideo, Uruguay was signed in 2010 and we expect to begin operations in
early 2011. As of January 2, 2011, our United States operations consisted of approximately 6,300
workstations and our international operations consisted of approximately 4,600 workstations. This
compares to approximately 6,200 domestic workstations and approximately 4,200 international
workstations as of January 3, 2010.
In 2005, we initiated a strategic realignment to exit our outbound customer acquisition business,
focus our resources on inbound client relationships in a number of key industries and reposition
ourselves for long-term growth and profitability. We exited virtually all of our outbound customer
acquisition business, which resulted in the closure of 16 domestic customer care centers.
We invested heavily in the growth of our off-shore capacity in the Philippines and increased our
off-shore revenue. In the period from 2006 to 2009, we opened three additional centers in the
Philippines, bringing our total number of off-shore centers to four. Also, in 2009, we opened our
first near-shore center in Latin America, located in the Dominican Republic. In 2010, we signed a
lease for a facility in Uruguay and expect to begin operations in early 2011.
During 2008, we implemented cost savings initiatives which resulted in the reduction of overhead
costs and headcount, refinanced our debt, and took steps to improve our operating efficiencies. We
realized an immediate impact from these and other cost savings initiatives resulting in us being
profitable on a full year basis for fiscal year 2008. In 2009, we expanded the sales organization
and focused on expanding our service offerings and client base. In 2010, we continued to expand
our service offerings in off-shore locations and increased our capital spending positioning us for
future growth. These actions have resulted in an increase in revenue of 11.2% to $326.0 million
for 2010, and resulted in a gross profit margin of 21.0% for 2010. Fiscal year 2010 included legal
settlement expense, severance charges and accelerated stock compensation expense totaling $3.8
million and fiscal year 2009 included an extra week of earnings totaling $0.4 million. Excluding
these items, income before taxes for 2010 was $37.8 million, a 10.2% increase, as compared to $34.3
million for 2009.
In September 2010, Kevin Keleghan joined the Company as President and Chief Executive Officer after
serving on our Board of Directors during the previous year. Mr. Keleghan brings broad-based
experience and strong strategic capabilities to lead us into the future. He has more than 25 years
of experience in financial and business services, call center management, and outsourcing, along
with a strong track record of operational leadership and of strategically building businesses.
Business Outlook
For 2011, we expect to continue to expand our operations off-shore and maintain efficiencies
domestically which we believe should continue to improve our financial performance. We will
continue to focus on providing customized, high quality customer care services and solutions to
market leaders in industries that place significant value on long-term customer relationships. Our
focus is to continually provide the highest level of quality services to our clients. We will
strive to operate as efficiently as possible, optimizing our capacity and maximizing our
utilization, in order to achieve our objectives. We expect to achieve growth both with existing
and new clients. We intend to expand our service offerings globally. We may add new centers on
the basis of client needs. Through growth, we seek to diversify our client base and reduce client
concentration. We also manage our business with a goal of leveraging our infrastructure and
increasing cash flow.
25
Table of Contents
Results of Operations
The following table sets forth selected information about our results of operations for the fiscal
years ended January 2, 2011, January 3, 2010 and December 28, 2008 (fiscal years 2010, 2009 and
2008, respectively). Certain additional components of cost of services have been included as we
believe they enhance an understanding of our results of operations.
| For the Fiscal Year Ended1 | ||||||||||||||||||||
| January 2, | January 3, | December 28, | 2010 vs 2009 | 2009 vs 2008 | ||||||||||||||||
| 2011 | 2010 | 2008 | % Fav (Unfav) | % Fav (Unfav) | ||||||||||||||||
| (Dollars in thousands, except statistical data and notes) | ||||||||||||||||||||
Net revenue |
$ | 325,958 | $ | 293,177 | $ | 248,799 | 11.2 | % | 17.8 | % | ||||||||||
Cost of Services: |
||||||||||||||||||||
Direct labor |
175,915 | 158,669 | 143,500 | (10.9 | ) | (10.6 | ) | |||||||||||||
Other facility expenses |
81,575 | 69,176 | 64,453 | (17.9 | ) | (7.3 | ) | |||||||||||||
Total cost of services |
257,490 | 227,845 | 207,953 | (13.0 | ) | (9.6 | ) | |||||||||||||
Percentage of revenue |
79.0 | % | 77.7 | % | 83.6 | % | ||||||||||||||
Gross profit |
68,468 | 65,332 | 40,846 | 4.8 | 59.9 | |||||||||||||||
Gross profit margin |
21.0 | % | 22.3 | % | 16.4 | % | ||||||||||||||
Operating Expenses: |
||||||||||||||||||||
Selling, general & administrative
expenses |
31,427 | 30,773 | 30,118 | (2.1 | ) | (2.2 | ) | |||||||||||||
Legal settlement |
1,793 | (41 | ) | 30 | * | 236.7 | ||||||||||||||
Severance, restructuring and
other charges (reversals) |
1,404 | (56 | ) | 3,635 | * | 101.5 | ||||||||||||||
Total operating expenses |
34,624 | 30,676 | 33,783 | (12.9 | ) | 9.2 | ||||||||||||||
Operating income |
33,844 | 34,656 | 7,063 | (2.3 | ) | 390.7 | ||||||||||||||
Other (income) expense, net |
(138 | ) | (36 | ) | (347 | ) | 283.3 | (89.6 | ) | |||||||||||
Interest (income) expense, net |
(31 | ) | (34 | ) | 4,358 | (8.8 | ) | 100.8 | ||||||||||||
Income before income taxes |
34,013 | 34,726 | 3,052 | (2.1 | ) | 1,037.8 | ||||||||||||||
Income tax expense (benefit) |
11,159 | (23,327 | ) | 33 | (147.8 | ) | * | |||||||||||||
Net income |
$ | 22,854 | $ | 58,053 | $ | 3,019 | (60.6 | )% | 1,822.9 | % | ||||||||||
| (1) | We operate on a 52/53-week fiscal year that ends on the Sunday closest to December 31.
All fiscal years presented were 52 weeks, except for fiscal year 2009 which ended on January
3, 2010. Fiscal year 2009 was 53 weeks. The effect of the additional week in fiscal year
2009 was to increase revenues and gross profit by $6.0 million and $0.9 million, respectively
and to increase net income by $0.4 million. |
|
| * | Percentage change is not meaningful. |
Non-GAAP Financial Measures
To supplement our consolidated financial statements presented in accordance with GAAP, we present
EBITDA, adjusted EBITDA and certain adjusted financial results, which are defined as non-GAAP
financial measures. 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. 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 that are not part of our ordinary business operations.
EBITDA, adjusted EBITDA and non-GAAP adjusted financial results are measures used by our lenders,
investors and analysts to evaluate our financial performance and our ability to pay interest and
repay debt. These measures are 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 and evaluate our overall progress towards meeting our long-term financial
objectives.
26
Table of Contents
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 EBITDA, adjusted EBITDA and non-GAAP adjusted financial results 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 consolidated financial statements presented
in accordance with GAAP.
Our calculation of EBITDA, adjusted EBITDA and non-GAAP financial results may not be consistent
with calculations of similar measures used by other companies. The accompanying notes have more
details on the GAAP financial measure that is most directly comparable to our non-GAAP financial
measure and the related reconciliation between these financial measures.
| For the Fiscal Year Ended1 | ||||||||||||||||||||
| January 2, | January 3, | December 28, | 2010 vs 2009 | 2009 vs 2008 | ||||||||||||||||
| 2011 | 2010 | 2008 | % Fav (Unfav) | % Fav (Unfav) | ||||||||||||||||
| (Dollars in thousands, except statistical data and notes) | ||||||||||||||||||||
EBITDA 2 |
$ | 45,585 | $ | 46,562 | $ | 19,477 | (2.1 | )% | 139.1 | % | ||||||||||
Adjusted EBITDA 2 |
49,350 | 46,465 | 23,207 | 6.2 | 100.2 | |||||||||||||||
Statistical Information: |
||||||||||||||||||||
Number of customer care centers |
||||||||||||||||||||
Domestic |
10 | 10 | 9 | — | 1 | |||||||||||||||
International |
5 | 5 | 4 | — | 1 | |||||||||||||||
Total |
15 | 15 | 13 | — | 2 | |||||||||||||||
Number of workstations, end of period |
||||||||||||||||||||
Domestic |
6,274 | 6,222 | 4,855 | 52 | 1,367 | |||||||||||||||
International |
4,573 | 4,206 | 3,467 | 367 | 739 | |||||||||||||||
Total |
10,847 | 10,428 | 8,322 | 419 | 2,106 | |||||||||||||||
Notes to Non-GAAP Financial Measures
| (1) | We operate on a 52/53- week fiscal year that ends on the Sunday closest to December 31. All
fiscal years presented were 52 weeks, except for fiscal year 2009 which ended on January 3, 2010.
Fiscal year 2009 was 53 weeks. |
|
| (2) | We define EBITDA as net income plus income tax expense (benefit), depreciation and
amortization, and interest expense. We define adjusted EBITDA as EBITDA adjusted for legal
settlement expense, severance, restructuring and other charges (reversals) and the acceleration of
certain stock compensation expense. |
EBITDA and adjusted EBITDA are measures used by our lenders, investors and analysts to evaluate our
financial performance and our ability to pay interest and repay debt. These measures are 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 and evaluate our overall
progress towards meeting our long-term financial objectives.
EBITDA and adjusted EBITDA are not intended to be considered in isolation or used as a substitute
for net income or cash flow from operations data presented in accordance with GAAP or as a measure
of liquidity. The items excluded from EBITDA and adjusted EBITDA are significant components of our
statements of operations and must be considered in performing a comprehensive assessment of our
overall financial results.
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EBITDA and adjusted EBITDA can be reconciled to net income, which we believe to be the most
directly comparable financial measure calculated and presented in accordance with GAAP, as follows:
| For the Fiscal Year Ended | ||||||||||||
| January 2, | January 3, | December 28, | ||||||||||
| 2011 | 2010 | 2008 | ||||||||||
| (Dollars in thousands) | ||||||||||||
Net income |
$ | 22,854 | $ | 58,053 | $ | 3,019 | ||||||
Interest (income) expense, net |
(31 | ) | (34 | ) | 4,358 | |||||||
Income tax expense (benefit) |
11,159 | (23,327 | ) | 33 | ||||||||
Depreciation and amortization |
11,603 | 11,870 | 12,067 | |||||||||
EBITDA |
$ | 45,585 | $ | 46,562 | $ | 19,477 | ||||||
Legal settlement |
1,793 | (41 | ) | 30 | ||||||||
Severance, restructuring and other charges (reversals) |
1,404 | (56 | ) | 3,635 | ||||||||
Accelerated stock compensation expense (a) |
568 | — | 65 | |||||||||
Adjusted EBITDA |
$ | 49,350 | $ | 46,465 | $ | 23,207 | ||||||
| (a) | Accelerated stock compensation expense for fiscal year 2010 was the result of the acceleration
of the vesting of stock options related to the June 2010 retirement of two members of our Board of
Directors and the September 2010 severance agreement with our former President and CEO.
Accelerated stock compensation expense for fiscal year 2008 was the result of the acceleration of
the vesting of stock options related to the June 2008 retirement of one member of our Board of
Directors. |
Non-GAAP Adjusted Financial Results
Non-GAAP adjusted financial results measure revenue, and profit adjusted for the income tax benefit
resulting from the reversal of the valuation allowance and the financial impact of the additional
week of operating results for fiscal year 2009. The presentation of non-GAAP adjusted financial
results is not intended to be considered in isolation or as a substitute for net income presented
in accordance with GAAP. The items excluded from non-GAAP adjusted financial results are
significant components of our financial statements and must be considered in performing a
comprehensive assessment of our overall financial results.
We believe this information is useful to investors and analysts in order to provide a better
understanding of our operating results on a comparable basis. We believe that this information
provides investors and analysts with a more complete understanding of underlying operating results
and ongoing operations by excluding the effect of infrequent activities. We use this information,
together with our GAAP financial metrics, to assess our financial performance, allocate resources,
and evaluate our overall progress towards meeting our long-term financial objectives.
We recognize that the computation of non-GAAP adjusted financial results may not be consistent with
calculations of similar information used by other companies. The accompanying table has more
details on the GAAP financial measures that are most directly comparable to non-GAAP adjusted
financial results and the related reconciliations between this financial information.
Non-GAAP adjusted financial results for the 53 weeks ended January 3, 2010 can be reconciled to
revenue, gross profit, income before taxes, income tax expense (benefit), and net income which we
believe to be the most directly comparable financial measures calculated and presented in
accordance with GAAP, as follows:
| For the Fiscal Year Ended January 3, 2010 | ||||||||||||||||
| Non-GAAP Adjustments | ||||||||||||||||
| Valuation | Non-GAAP | |||||||||||||||
| Actual | Allowance | Fifty-Third Week | Adjusted | |||||||||||||
| (Dollars in thousands) | ||||||||||||||||
Revenue |
$ | 293.2 | $ | — | $ | (6.0 | ) | $ | 287.2 | |||||||
Gross profit |
65.3 | — | (0.9 | ) | 64.5 | |||||||||||
Pretax profit (IBT) |
34.7 | — | (0.4 | ) | 34.4 | |||||||||||
Income tax expense (benefit) |
(23.3 | ) | 23.8 | — | 0.5 | |||||||||||
Net income |
58.1 | (23.8 | ) | (0.4 | ) | 33.8 | ||||||||||
Adjusted EBITDA |
46.5 | — | (0.4 | ) | 46.1 | |||||||||||
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Fiscal Year 2010 Results of Operations Compared to Fiscal Year 2009 Results of Operations
Net revenue increased $32.8 million, or 11.2% to $326.0 million in fiscal year 2010, as compared to
$293.2 million in fiscal year 2009. In fiscal year 2010, revenue of $7.3 million was generated
from new clients across most verticals who began operations with us during the year. The $32.8
million increase is primarily driven by growth from existing and new clients of $19.5 million in
the media & publishing vertical, $8.6 million in the business services vertical, $3.7 million in
the healthcare vertical, $2.8 million in the technology vertical, $1.6 million in the financial
services vertical and $2.4 million of other services, partially offset by a decline of $4.3 million
in the communications vertical and $1.5 million in the travel & entertainment vertical. Fiscal
year 2009 included 53 weeks as compared to 52 weeks in fiscal year 2010 and the additional week
resulted in $6.0 million of extra revenue in fiscal year 2009. Excluding the extra week in fiscal
year 2009, net revenue for fiscal year 2010 increased $38.8 million or 13.5%.
Cost of services increased $29.7 million, or 13.0% to $257.5 million for fiscal year 2010, as
compared to $227.8 million for fiscal year 2009. Direct labor increased $17.2 million, or 10.9%,
primarily driven by increased volume in the media & publishing vertical both domestically and
off-shore, increased volume in the domestic business services, healthcare, technology and financial
services verticals, higher domestic wage rates and benefits and decreased domestic efficiencies,
partially offset by lower wage rates and benefits off-shore. Total facility and other costs
increased by $12.4 million, or 17.9%, primarily due to $7.1 million of increased facility costs
primarily related to the addition of our second customer care center in Tucson, Arizona, the
opening of our fourth customer care center in the Philippines and the opening of a customer care
center in the Dominican Republic, all of which took place in 2009, and growth in our customer care
centers in Green Bay, Wisconsin and Davenport, Iowa. Other facility expenses increased $5.3
million due to $2.3 million of salaries and wages associated with increased operational support,
$1.0 million of increased information technology costs, $0.4 million of telecommunication costs
associated with increased volumes domestically and off-shore and $1.6 million of other facility
expenses. Cost of services as a percentage of revenue increased to 79.0% for fiscal year 2010, up
from 77.7% in fiscal year 2009, as a result of higher domestic wage rates and benefits, decreased
domestic efficiencies and increased facility and other costs.
Gross profit increased $3.1 million, or 4.8%, to $68.4 million for fiscal year 2010, as compared to
$65.3 million for fiscal year 2009, primarily due to increased volume in the media & publishing
vertical both domestically and off-shore, increased volume in the domestic business services,
healthcare, technology and financial services verticals and lower wage rates and benefits
off-shore, partially offset by increased facility and other costs, higher domestic wage rates and
benefits and decreased domestic efficiencies. Gross profit margin was 21.0% for fiscal year 2010,
as compared to 22.3% for fiscal year 2009 driven by higher domestic wage rates and benefits,
decreased domestic efficiencies and increased facility and other costs.
Selling, general and administrative expenses were $31.4 million for fiscal year 2010, an increase
of $0.7 million from $30.7 million for fiscal year 2009. The increase is primarily due to a $2.7
million increase in compensation and benefits primarily associated with an increase in our sales,
human resources and executive teams, a $1.2 million increase in stock compensation expense
resulting from the acceleration of the vesting of stock options related to the June 2010 retirement
of two members of our Board of Directors and the September 2010 severance agreement with our former
President and CEO, and the impact of an expense reversal during the first quarter of fiscal year
2009 related to options vesting at that time, but which were forfeited in earlier periods, a $0.8
million increase in travel and entertainment expense and $0.8 million increase in information
technology expenses, partly offset by a $2.3 million decrease in incentive compensation, a $1.5
million decrease in costs associated with the final amortization of intangible assets and a $1.0
million decrease in professional fees.
Legal settlement expense of $1.8 million in fiscal year 2010 relates to the settlement of the
Tiffany Sharpe, et al. v. APAC Customer Services, Inc. suit which included payments to eligible
class members and their attorneys. See Note 10 of the Notes to Consolidated Financial Statements
in Item 8 of this Annual Report on Form 10-K for more information.
Severance, restructuring and other charges increased $1.5 million to $1.4 million in fiscal 2010,
as compared to a recovery of $0.1 million in fiscal 2009. The $1.4 million of severance and other
charges recorded in fiscal year 2010 include $1.3 million related to the September 2010 resignation
of the Company’s former President and CEO and $0.1 million related to other positions. The fiscal
year 2009 restructuring reversal was primarily related to adjustments in severance charges and
retirement obligations recorded in fiscal year 2008 and the reversal of the remaining reserve for
property taxes associated with the 2006 restructuring initiative. See Note 7 of the Notes to
Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K for more
information.
Operating income was $33.8 million for fiscal year 2010, as compared to $34.7 million for fiscal
year 2009. The $0.9 million decrease was the result of the legal settlement of $1.8 million, an
increase in severance, restructuring and other charges of $1.5 million and increased selling,
general and administrative expenses of $0.7 million, partially offset by the $3.1 million increase
in gross profit, as noted above.
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Net interest income of less than $0.1 million for the fiscal year 2010 was primarily related to
$0.5 million from the amortization of points on forward contracts, partially offset by $0.5 million
of fees and interest associated with the Revolving Loan Agreement with PNC Bank National
Association (PNC). Net interest income of less than $0.1 million for fiscal year 2009 was
primarily related to $0.7 million from the amortization of points on forward contracts, partially
offset by $0.6 million of fees and interest associated with borrowings under the Revolving Loan
Agreement with PNC.
EBITDA was $45.6 million for fiscal year 2010, a decrease of $1.0 million as compared to $46.6
million for fiscal year 2009. Adjusting for the legal settlement expense, severance, restructuring
and other charges and the acceleration of certain stock compensation expense, adjusted EBITDA
improved $2.9 million to $49.4 million for fiscal year 2010 from $46.5 million for fiscal year
2009, primarily due to the increase in gross profit, as noted above. More information concerning
these non-GAAP financial measures, including the definition of EBITDA and adjusted EBITDA and a
reconciliation of these measures 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.
Income tax expense was $11.2 million for fiscal year 2010 for an effective tax rate of 32.8%. The
effective rate is below the statutory rate mainly due to the generation of employment credits. The
income tax benefit of $23.3 million for fiscal year 2009 was driven by a deferred income tax
benefit of $23.8 million resulting from the reversal of substantially all of the valuation
allowance previously provided against the deferred tax assets, partially offset by $0.5 million tax
expense related to the gross income earned tax of 5% on a portion of our Philippine financial
results and domestic state income taxes.
Net income was $22.9 million for fiscal year 2010, as compared to $58.1 million for fiscal year
2009. The $35.2 million decrease was primarily due to the $34.5 million increase in income tax
expense and a $0.9 million decrease in operating income as noted above, partially offset by a $0.1
million increase in other income.
Fiscal Year 2009 Results of Operations Compared to Fiscal Year 2008 Results of Operations
Net revenue increased 17.8% to $293.2 million in fiscal year 2009, as compared to $248.8 in fiscal
year 2008. Fiscal year 2009 included 53 weeks as compared to 52 weeks in fiscal year 2008. The
additional week results in an increase of $6.0 million in revenue. The increase in revenue of
$44.4 million is primarily driven by growth with existing and new clients of $46.4 million in the
communications vertical, $13.0 million in the healthcare vertical, excluding the seasonal Medicare
Part D program, $2.2 million in the media & publishing vertical and $1.0 million in the financial
services vertical. This was partially offset by the decline in revenue of $9.7 million from the
seasonal Medicare Part D program, $2.9 million due to the exit of a retail client in 2008, $2.2
million in the business services vertical, $1.5 million in the travel & entertainment vertical and
$1.9 million of other services.
Cost of services increased $19.9 million, or 9.6%, to $227.8 million for fiscal year 2009, as
compared to $208.0 million for fiscal year 2008. The impact of the additional week in fiscal year
2009 was an increase in cost of services of $5.1 million. Direct labor increased $15.2 million, or
10.6%, primarily driven by higher volume in the domestic communications vertical and higher volume
off-shore, partially offset by lower wage rates and benefits and improved efficiencies both
domestically and offshore. Total facility and other costs increased $4.7 million, or 7.3%,
primarily due to a $4.4 million increase in facility costs associated with domestic expansion and
the build-out of our fourth facility in the Philippines and a $1.4 million increase in
telecommunication costs primarily associated with increased volumes off-shore, partly offset by a
$1.0 million decrease in facility and other costs associated with continued cost savings
initiatives both domestically and offshore. Cost of services as a percentage of revenue declined
to 77.7% for fiscal year 2009 from 83.6% in fiscal year 2008, primarily driven by lower wages and
benefits, improved efficiencies and leveraging fixed costs.
Gross profit increased $24.5 million, or 59.9%, to $65.3 million for fiscal year 2009, as compared
to $40.8 million for fiscal year 2008, primarily due to higher volume domestically and off-shore,
and lower wage rates and benefits and improved efficiencies both domestically and off-shore. Gross
profit margin increased to 22.3% for fiscal year 2009 from 16.4% for fiscal year 2008 due to
efficiencies in cost of services as noted above.
Selling, general and administrative expenses were $30.7 million for fiscal year 2009, an increase
of $0.6 million from $30.1 million for fiscal year 2008. The increase is primarily due to a $1.8
million increase in compensation and benefits related primarily to incentive compensation, a $0.7
million increase in salaries and wages primarily associated with an increase in our sales personnel
and a $0.4 million increase in professional fees, partially offset by a $1.5 million reduction in
bad debt expense related to the specific reserves recorded in 2008 in the publishing vertical and a
recovery of a portion of these reserves recognized in 2009, a $0.6 million reduction in rent and
other facility charges resulting from the relocation of our corporate office in late 2008 and $0.2
million of other cost savings obtained through continued efforts to control expenses.
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Restructuring and other charges decreased $3.7 million to a recovery of $0.1 million in fiscal year
2009, as compared to a charge of $3.6 million in fiscal year 2008. The fiscal year 2009
restructuring reversal was primarily related to adjustments in severance charges and retirement
obligations recorded in fiscal year 2008 and the reversal of the remaining reserve for property
taxes associated with the 2006 restructuring initiative. We recorded $3.5 million of severance
charges in fiscal year 2008 related to changes in our executive team and operational and
administrative positions. We recorded less than $0.1 million of restructuring charges in fiscal
year 2008, primarily related to changes in the May 2007 downsizing of our Tucson, Arizona customer
care center as a result of delays in subletting space in the center. See Note 7 of the Notes to
Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K for more
information.
Operating income was $34.7 million for fiscal year 2009, as compared to $7.1 million for fiscal
year 2008. The $27.6 million improvement was the result of a $24.5 million increase in gross
profit and a $3.7 million decrease in restructuring and other charges, partially offset by a $0.6
million increase in selling, general and administrative expenses as noted above.
Net interest income was less than $0.1 million for fiscal year 2009 and was primarily related to
$0.7 million from the amortization of points on forward contracts, partially offset by $0.6 million
of fees and interest associated with borrowings under the Revolving Loan Agreement with PNC.
Interest expense of $4.4 million for fiscal year 2008 was primarily related to the acceleration of
deferred financing charges and prepayment of 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. as lender and Atalaya Administrative, LLC, as agent (Atalaya), $1.5 million of fees and
interest associated with borrowings against those loan facilities and $1.2 million of fees and
interest associated with borrowings under the new Revolving Loan Agreement with PNC, partially
offset by $0.1 million from the amortization of points on forward contracts.
EBITDA was $46.6 million for fiscal year 2009, an increase of $27.1 million, as compared to $19.5
million for fiscal year 2008. The increase is driven by higher gross profit, partially offset by
an increase in selling, general and administrative expenses. Adjusting for the legal settlement
expense, severance, restructuring and other charges and the acceleration of certain stock
compensation expense, adjusted EBITDA improved $23.3 million to $46.5 million for fiscal year 2009
from $23.2 million for fiscal year 2008, primarily due to the increase in gross profit, as noted
above. More information concerning these non-GAAP financial measures, including the definition of
EBITDA and adjusted EBITDA and a reconciliation of these measures 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 income tax benefit for fiscal year 2009 was $23.3 million, driven by a deferred income tax
benefit of $23.8 million resulting from the reversal of substantially all of the valuation
allowance previously provided against the deferred tax assets, partially offset by $0.5 million tax
expense related to the gross income earned tax of 5% on a portion of our Philippine financial
results and domestic state income taxes. For fiscal year 2008, the tax provision associated with
the income before income taxes of $1.2 million was offset with a corresponding utilization of net
operating loss carryforwards. The effective income tax rate for fiscal year 2008 was 1.1% due to
net operating loss carryforwards.
Net income for fiscal year 2009 was $58.1 million, as compared to $3.0 million for fiscal year
2008. The $55.1 million increase includes a $0.4 million impact from the additional week in fiscal
year 2009 and a $23.8 million deferred income tax benefit, resulting from the valuation allowance
reversal of $37.9 million in fiscal year 2009. In fiscal year 2010, with no such valuation
allowance reversal, we anticipate our effective income tax rate to be approximately 38%.
Liquidity and Capital Resources
The following table sets forth our consolidated statements of cash flow data for the fiscal years
ended January 2, 2011, January 3, 2010 and December 28, 2008, respectively.
| For the Fiscal Year Ended | ||||||||||||
| January 2, | January 3, | December 28, | ||||||||||
| 2011 | 2010 | 2008 | ||||||||||
| (Dollars in thousands) | ||||||||||||
Net cash provided by operating activities |
$ | 36,541 | $ | 31,937 | $ | 27,035 | ||||||
Net cash used in investing activities |
(11,359 | ) | (10,898 | ) | (5,753 | ) | ||||||
Net cash used in financing activities |
(4,776 | ) | (1,812 | ) | (20,849 | ) | ||||||
Effect of exchange rates on cash |
436 | 712 | (1,241 | ) | ||||||||
Net change in cash |
$ | 20,842 | $ | 19,939 | $ | (808 | ) | |||||
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Operating Activities
Net cash provided by operating activities was $36.5 million in fiscal year 2010 and primarily
related to $22.9 million of net income, adjustments for non-cash expenses of $11.6 million for
depreciation and amortization, $10.6 million for deferred income taxes and $2.1 million for stock
compensation expense, partially offset by a $7.1 million increase in accounts receivable due to
increased revenue and timing of collections, $2.3 million of excess income tax benefits from stock
option transactions and a $1.3 million net change in operating assets and liabilities.
Net cash provided by operating activities was $31.9 million in fiscal year 2009 and primarily
related to $58.1 million of net income, $11.9 million of depreciation and amortization and $0.9
million of stock compensation expense, partially offset by a $24.8 million increase in deferred tax
assets resulting from the reversal of the valuation allowance, a $13.8 million increase in accounts
receivable due to increased revenue and the timing of collections and $0.4 million net change in
operating assets and liabilities.
Net cash provided by operating activities was $27.0 million in fiscal year 2008 and primarily
related to $3.0 million of net income, adjustments for non-cash expenses including $12.1 million
for depreciation and amortization and $1.3 million for stock compensation expense, a $7.7 million
net change in operating assets and liabilities and a $2.9 million decrease in accounts receivable.
Investing Activities
Net cash used in investing activities increased $0.5 million to $11.4 million in fiscal year 2010
as compared to $10.9 million in fiscal year 2009. Cash used in investing activities in 2010
consisted primarily of $6.2 million in capital expenditures related to client implementations and
expansions and $5.2 million in continued investment in operational and information technology
equipment.
Net cash used in investing activities increased $5.1 million to $10.9 million in fiscal year 2009
as compared to $5.8 million in fiscal year 2008. Cash used in investing activities in 2009
consisted primarily of $5.7 million in capital expenditures related to client implementations, $2.8
million in continued investment in operational and information technology equipment and $2.4
million in capital expenditures related to the build-out of our fourth customer care center in the
Philippines.
Net cash used in investing activities was $5.8 million in fiscal year 2008 and consisted primarily
of $2.1 million in capital expenditures related to client implementations, $1.5 million in capital
expenditures and build-out related to our third and fourth customer care centers in the
Philippines, $1.3 million for the build-out of our Davenport, Iowa customer care center, net of
funding from the landlord, and $1.0 million in continued investment in information technology
equipment.
Financing Activities
Net cash used in financing activities of $4.8 million for fiscal year 2010 is primarily the result
of a $4.9 million repurchase of our common stock, a $3.2 million payment to our former CEO
resulting from a stock option repurchase agreement and $0.7 million of payments against capital
lease obligations, partially offset by $2.3 million in excess income tax benefits from stock option
transactions and $1.7 million cash received from the exercise of stock options.
Net cash used in financing activities of $1.8 million for fiscal year 2009 is primarily the result
of net payments of $6.1 million against the Revolving Loan Agreement and $0.1 million of payments
against capital lease obligations, offset by $4.4 million cash received from the exercise of stock
options, including the excess tax benefit.
Net cash used in financing activities of $20.8 million for fiscal year 2008 is the result of net
payments of $14.0 million as repayment in full of our outstanding term loan with Atalaya, net
decreased borrowings of $6.2 million under our Revolving Loan Agreement and $1.0 million in
financing costs associated with the debt facility with PNC entered into in May 2008, partially
offset by $0.4 million in cash received from the exercise of stock options.
Bank Financing
As of January 2, 2011, there were no outstanding borrowings under the Revolving Loan Agreement and
the Company had cash and cash equivalents of $41.4 million.
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During the fifty-two weeks ended January 2, 2011, we were party to 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.
With the upcoming expiration, we are currently evaluating various financing alternatives and intend
to obtain a replacement facility prior to the maturity of the current Revolving Loan Agreement. We
anticipate more favorable terms for a new facility, however there can be no assurance that we will
enter into such an arrangement. 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 us (with limited
exceptions) 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. We obtained a waiver
from our current lender permitting us to execute our stock repurchase program as approved by our
Board of Directors. Our ability to borrow under the Revolving Loan Agreement depends on the amount
of eligible accounts receivable from our clients.
We had no amounts outstanding under our Revolving Loan Agreement and had approximately $32.6
million of undrawn borrowing capacity under the Revolving Loan Agreement as of January 2, 2011,
based upon borrowing base calculations. We were in compliance with our financial covenants as of
January 2, 2011. For more information regarding the Revolving Loan Agreement, see Note 9 of the
Notes to Consolidated Financial Statements in Item 8 in this Annual Report on Form 10-K.
Future Liquidity
We expect that our cash balances of $41.4 million, cash flow from operations and available
borrowings of $32.6 million under our Revolving Loan Agreement will be sufficient to meet projected
operating needs, fund any planned capital expenditures, and repay debt obligations for the next
twelve months.
We are not aware of any issues with our lenders which might cause funds not to be available for us
to draw upon under the terms of our Revolving Loan Agreement.
Off Balance Sheet Arrangements
We do not have any off balance sheet arrangements other than operating leases.
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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 condition and
operating performance may be material. Based on the foregoing, we have identified the following
accounting policies and estimates that we believe are most critical in the preparation of our
consolidated financial statements: accounting for derivatives, allowance for doubtful accounts,
accounting for employee benefits, revenue recognition, accounting for stock-based compensation and
income taxes. We have used methodologies that are consistent from year to year in all material
respects.
Accounting for derivatives
We use forward contracts to mitigate foreign currency risk. Our derivatives are designated as cash
flow hedges to the extent that the instruments qualify for accounting as a hedging instrument and
therefore, the effective portion of gains and losses that result from changes in fair value of the
derivative instruments are recorded in accumulated other comprehensive income until the hedged
transaction affects income, at which time gains and/or losses are realized. If the instrument does
not qualify for accounting as a hedge, the change in the value of the instrument during the
reporting period is recorded immediately to earnings. Unrealized gain and unrealized loss in value
of outstanding forward contracts was $1.1 million and less than $0.1 million, respectively, and was
recorded in other assets and other liabilities as of January 2, 2011. We expect these amounts to
be reclassified into earnings over the next eighteen months.
Changes in the currency exchange rate subsequent to January 2, 2011 will have the impact of
increasing or decreasing the forward contract settlement, which is recorded periodically through
earnings. A decrease in the U.S. dollar to the foreign currency exchange rate would have the
effect of reducing earnings and conversely, an increase in the foreign currency exchange rate would
have the effect of increasing earnings.
Allowance for doubtful accounts
We recorded an allowance for doubtful accounts of $1.1 million as of January 2, 2011 based on our
assessment of the probable estimated losses in trade accounts receivable. This estimate is based
on specific allowances for certain identified receivables with balances outstanding generally
greater than 90 days. An additional allowance for estimated losses on all other receivables is
based on their age and our collection history. The collection history is determined based on a
range of the average losses incurred in our receivables portfolio over the prior three years. If
the financial condition of one or more of our customers were to deteriorate significantly,
resulting in a reduced ability to make payments, or our collection history were to materially
deteriorate, additional allowances would be required which would have the effect of reducing
earnings.
Accounting for employee benefits and obligations
We recorded a liability for group health claims of $1.5 million as of January 2, 2011 and workers’
compensation claims of $0.4 million as of January 2, 2011 based on an estimate of claims incurred,
but not reported, as well as known claims at the end of the period. The estimate for group health
claims is derived from an analysis prepared by an experienced third party actuary. The estimate is
based on the number of participants in the medical plan at an estimated average claim per
participant. The estimated claim per participant is determined with reference to our average
medical costs incurred per participant over the prior two years and other relevant factors. Should
actual claims incurred exceed our estimates, we would record an additional liability which results
in a charge to earnings. The estimate for workers compensation claims is derived from an analysis
performed by an experienced third party actuary. The reserve is based upon outstanding claims from
the prior years. Unforeseen claims or claims exceeding estimates provided by the actuary could
result in an adjustment to the estimated liability and an additional charge to earnings.
Conversely, should favorable trends result in a reduction in the estimates provided by the actuary,
we would reduce our estimated liability which would benefit earnings.
Revenue recognition
We provide customer care services according to each client’s contract. We recognize revenues only
when there is evidence of an arrangement, services have been provided, the price is fixed and
determinable, and collection is considered probable. Client contracts generally require that we
bill for our services based on time spent by customer service representatives or on a per call or
per transaction basis.
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Delivery of services to our clients generally entails an initial implementation effort during which
costs are incurred in connection with information and telephony systems implementation,
establishment of operating processes and hiring and training of employees. Certain of our client
contracts provide for payment of fees in connection with some of these activities and, in such
instances, related costs are expensed as incurred. Revenue for training and other implementation
services is recognized based on the transactional services delivered. The initial implementation
effort is not considered a separate element, but rather, these implementation activities, together
with the ongoing service delivery, constitute a single unit of accounting. Revenue recognized is
limited to the amount which we are contractually entitled to collect from our clients.
Certain client contracts do not provide for separate payment of fees for implementation activities;
rather such fees are implicitly included within the rates associated with the ongoing service
delivery. For these arrangements, no revenue is recognized related to the implementation
activities and specific direct and incremental costs associated with the implementation activities
are deferred and amortized over the period the related ongoing service revenue is recognized.
Deferred costs were $0.4 million at January 2, 2011. Should the contract with our client terminate
before its expected termination period any deferred costs associated with the terminated client
would be immediately recorded as a charge to earnings.
In many cases, we are subject to varying client quality, service level, and performance standards,
such as average handle time, occupancy rate, abandonment rate, call quality, and customer
satisfaction. Our performance against such standards may provide bonus opportunities, or
conversely, may subject us to penalties, which are recognized as earned or incurred.
Accounting for stock-based compensation
We account for stock-based compensation using the modified prospective transition method to apply
fair value estimates. Under the modified prospective transition method, compensation expense is
recognized for all share-based payment awards granted prior to, but not yet vested as of January 2,
2006 based on the grant-date estimated fair value. In addition, stock-based compensation expense
for all share-based payment awards newly awarded after January 2, 2006 is based on the grant-date
estimated fair value. Compensation expense related to share-based awards, net of a forfeiture
rate, is amortized on a straight-line basis over the requisite employees’ service period in
selling, general and administrative expenses in the Consolidated Statements of Operations in
accordance with the classification of the related employees’ compensation and benefits.
There are several assumptions used in calculating the fair value of options and common share
awards. The assumptions used in calculating the fair value of options include expected volatility,
risk-free interest rate, expected life, and annualized forfeiture rate. The annualized forfeiture
rate is also used in calculating the value of common share awards. We estimated the forfeiture
rate of 5.4%, volatility ranging between 78% to 90% and expected life for all awards ranging from
3.1 years to 3.4 years based on our experience during the preceding fiscal years. The risk-free
interest rate of .63% to 1.7% is based on the three year treasury bond. Any changes in the
assumptions used or future significant awards granted or forfeited will change the future stock
compensation expense recorded. An increase in compensation expense will have the effect of
reducing earnings, and conversely, a decrease in compensation expense will increase earnings.
Income taxes
We account for income taxes using the asset and liability approach. Under the asset and liability
method, deferred tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. A valuation allowance is recorded when we believe it is
more likely than not that some portion or all of the deferred tax assets will not be realized in
the near term. We record a reserve for tax contingencies unless we believe it is probable that the
deductions giving rise to these contingencies will be sustained if challenged by taxing
authorities.
On a quarterly basis, we review the likelihood that deferred tax assets will be realized in future
tax periods under the more-likely-than-not criteria. In making this judgment, all available
evidence, both positive and negative, is considered in determining whether, based on the available
evidence, a valuation allowance is required. Due to the uncertainty in the ability to realize
forecasted earnings, a full valuation allowance of $39.0 million existed as of December 28, 2008 to
fully offset our net deferred tax assets. Pretax earnings increased substantially in 2009 to $34.7
million and we expected to be profitable in future periods as well. Because we believed it was
more-likely-than-not that the deferred tax assets will be realized in future tax periods, we
reversed substantially all of the valuation allowance in fiscal year 2009. The remaining valuation
allowance of $0.4 million relates to state net operating loss carryforwards where realization of
the net operating loss carryforward is uncertain.
35
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New Accounting Pronouncements
Fair Value
In January 2010, the Financial Accounting Standards Board (FASB) issued guidance amending ASC Topic
820 “Fair Value Measurements and Disclosures”. ASC Sub-topic 820-10 and related guidance was
amended to require disclosure of the transfers in and out of Levels 1 and 2 and a schedule for
Level 3 that separately identifies purchases, sales, issuances and settlements and requires more
detailed disclosures regarding valuation techniques and inputs. This update is effective for
interim and annual reporting periods beginning after December 15, 2009 except for the disclosures
about purchases, sales issuances and settlements in the roll forward of activity in Level 3 fair
value measurements. Those disclosures are effective for fiscal years beginning after December 15,
2010, and for interim periods within those fiscal years. We adopted this guidance, as it relates
to transfers in and out of Levels 1 and 2, effective January 4, 2010, the beginning of our 2010
fiscal year with no material impact on our consolidated financial statements. We have evaluated
the impact of this guidance, as it relates to disclosures regarding Level 3 and determined it will
not have a material impact on our consolidated financial statements. For more information
regarding fair value disclosures see Note 16 of the Notes to Consolidated Financial Statements in
Item 8 in this Annual Report on Form 10-K.
Revenue Recognition
In October 2009, the FASB issued guidance on revenue arrangements with multiple deliverables which
revises the criteria for separating, measuring, and allocating arrangement consideration to each
deliverable in a multiple element arrangement. The guidance requires companies to allocate revenue
using the relative selling price of each deliverable, which must be estimated if the company does
not have a history of selling the deliverable on a stand-alone basis or third-party evidence of
selling price. This guidance is effective prospectively for revenue arrangements entered into or
materially modified in fiscal years beginning on or after June 15, 2010, with early adoption
permitted. We have evaluated the impact of this guidance and determined it will not have a
material impact on our consolidated financial statements.
Contractual Obligations and Commitments
We have the following contractual obligations and commercial commitments:
| Payment due by period | ||||||||||||||||||||
| Less than 1 | Over 5 | |||||||||||||||||||
| Year | 2 to 3 Years | 4 to 5 Years | Years | Total | ||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||
Contractual Obligations: |
||||||||||||||||||||
Operating leases |
$ | 6,861 | $ | 11,860 | $ | 10,667 | $ | 11,687 | $ | 41,075 | ||||||||||
Capital leases |
696 | 529 | 151 | — | 1,376 | |||||||||||||||
Total contractual obligations |
$ | 7,557 | $ | 12,389 | $ | 10,818 | $ | 11,687 | $ | 42,451 | ||||||||||
Other Commercial Commitments: |
||||||||||||||||||||
Telecommunications commitments |
$ | 4,221 | $ | 5,165 | $ | — | $ | — | $ | 9,386 | ||||||||||
Letters of Credit |
3,090 | — | — | — | 3,090 | |||||||||||||||
Total other commercial
commitments |
$ | 7,311 | $ | 5,165 | $ | — | $ | — | $ | 12,476 | ||||||||||
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| Item 7A. | Quantitative and Qualitative Disclosures About Market Risk. |
We are 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
international locations. Our Revolving Loan Agreement bears 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 change in the
U.S. dollar relative to the Philippine peso and the increase in cost of services due to our
expanded operations in international locations. We maintain 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 U.S. operations to the
Philippines representing the Philippines’ share of revenue. As of January 2, 2011, forward
contracts to purchase 1,235 million Philippine pesos at a U.S. dollar notional of $27.3 million
were outstanding.
We prepared a sensitivity analysis of our foreign currency exposure for the fiscal year ended
January 2, 2011, assuming a one point adverse change in the foreign exchange rates. Holding all
other variables constant, the hypothetical adverse change would result in less than a $1.0 million
impact on our financial results.
As we continue to expand operations in the Dominican Republic and Uruguay, the impact from foreign
currency exchange rates will become more significant. We will evaluate the use of derivatives to
mitigate this exposure as deemed necessary.
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Table of Contents
| Item 8. | Financial Statements and Supplementary Data. |
The following financial information is included in this Annual Report on Form 10-K:
| Page | ||||
| 39 | ||||
| 40 | ||||
| 41 | ||||
| 42 | ||||
| 43 | ||||
| 44 | ||||
Quarterly Results of Operations for the Fiscal Years Ended January 2, 2011 and
January 3, 2010 |
63 | |||
| 64 | ||||
| 65 | ||||
38
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and
Shareholders of APAC Customer Services, Inc.
Shareholders of APAC Customer Services, Inc.
We have audited the accompanying consolidated balance sheet of APAC Customer Services, Inc. as of
January 2, 2011 and January 3, 2010, and the related consolidated statements of operations, cash
flows and shareholders’ equity for each of the three years in the period ended January 2, 2011. Our
audits also included the financial statement schedule listed in the Index at Item 15(a). These
financial statements and schedule are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material
respects, the consolidated financial position of APAC Customer Services, Inc. at January 2, 2011
and January 3, 2010, and the consolidated results of its operations and its cash flows for each of
the three years in the period ended January 2, 2011, in conformity with U.S. generally accepted
accounting principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), APAC Customer Services, Inc.’s internal control over financial reporting as
of January 2, 2011, based on criteria established in Internal Control — Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated
February 18, 2011, expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Chicago, Illinois
February 18, 2011
February 18, 2011
39
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APAC CUSTOMER SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars and shares in thousands, except net income per share data)
| For the Fiscal Year Ended | ||||||||||||
| January 2, | January 3, | December 28, | ||||||||||
| 2011 | 2010 | 2008 | ||||||||||
Net revenue |
$ | 325,958 | $ | 293,177 | $ | 248,799 | ||||||
Cost of services |
257,490 | 227,845 | 207,953 | |||||||||
Gross profit |
68,468 | 65,332 | 40,846 | |||||||||
Operating expenses: |
||||||||||||
Selling, general and administrative expenses |
31,427 | 30,773 | 30,118 | |||||||||
Legal settlement |
1,793 | (41 | ) | 30 | ||||||||
Severance, restructuring and other charges
(reversals) |
1,404 | (56 | ) | 3,635 | ||||||||
Total operating expenses |
34,624 | 30,676 | 33,783 | |||||||||
Operating income |
33,844 | 34,656 | 7,063 | |||||||||
Other (income) expense, net |
(138 | ) | (36 | ) | (347 | ) | ||||||
Interest (income) expense, net |
(31 | ) | (34 | ) | 4,358 | |||||||
Income before income taxes |
34,013 | 34,726 | 3,052 | |||||||||
Income tax expense (benefit) |
11,159 | (23,327 | ) | 33 | ||||||||
Net income |
$ | 22,854 | $ | 58,053 | $ | 3,019 | ||||||
Net income per share: |
||||||||||||
Basic |
$ | 0.44 | $ | 1.13 | $ | 0.06 | ||||||
Diluted |
$ | 0.42 | $ | 1.09 | $ | 0.06 | ||||||
Weighted average shares outstanding: |
||||||||||||
Basic |
52,455 | 51,570 | 50,424 | |||||||||
Diluted |
54,706 | 53,296 | 50,477 | |||||||||
See Notes to Consolidated Financial Statements.
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APAC CUSTOMER SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share data)
| January 2, | January 3, | |||||||
| 2011 | 2010 | |||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 41,399 | $ | 20,557 | ||||
Accounts receivable, less allowances of $1,065 and $1,144, respectively |
52,483 | 45,358 | ||||||
Deferred tax assets, current |
11,051 | 14,593 | ||||||
Other current assets |
8,204 | 6,323 | ||||||
Total current assets |
113,137 | 86,831 | ||||||
Property and equipment, net |
28,030 | 25,653 | ||||||
Goodwill |
13,338 | 13,338 | ||||||
Other intangible assets, net |
425 | 1,028 | ||||||
Deferred tax assets, non-current |
5,387 | 10,170 | ||||||
Other assets |
2,848 | 1,585 | ||||||
Total assets |
$ | 163,165 | $ | 138,605 | ||||
LIABILITIES AND SHAREHOLDERS’ EQUITY |
||||||||
Current liabilities: |
||||||||
Capital leases — current portion |
$ | 696 | $ | 397 | ||||
Accounts payable |
4,964 | 2,770 | ||||||
Income taxes payable |
93 | 365 | ||||||
Accrued payroll and related items |
22,205 | 21,964 | ||||||
Accrued liabilities |
9,200 | 9,190 | ||||||
Total current liabilities |
37,158 | 34,686 | ||||||
Other non-current liabilities |
4,536 | 4,171 | ||||||
Commitments and contingencies |
— | — | ||||||
Shareholders’ equity: |
||||||||
Common Shares, $0.01 per share; authorized 200,000,000 shares;
53,359,090 shares issued and 52,488,457 shares outstanding at January 2,
2011, and 52,318,726 shares issued and outstanding at January 3, 2010 |
533 | 523 | ||||||
Additional paid-in capital |
112,668 | 109,818 | ||||||
Accumulated earnings (deficit) |
11,166 | (11,688 | ) | |||||
Accumulated other comprehensive income |
1,980 | 1,095 | ||||||
Treasury shares: 870,633 and 0 shares at cost at January 2, 2011
and January 3, 2010, respectively |
(4,876 | ) | — | |||||
Total shareholders’ equity |
121,471 | 99,748 | ||||||
Total liabilities and shareholders’ equity |
$ | 163,165 | $ | 138,605 | ||||
See Notes to Consolidated Financial Statements.
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APAC CUSTOMER SERVICES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Dollars in thousands, except share data)
| Accumulated | |||||||||||||||||||||||||||||
| Common | Common | Additional | Accumulated | Other | Total | ||||||||||||||||||||||||
| Shares | Share | Paid-In | Earnings | Comprehensive | Treasury | Shareholders’ | |||||||||||||||||||||||
| Issued | Amount | Capital | (Deficit) | Income | Stock | Equity | |||||||||||||||||||||||
Balance, December 30, 2007 |
50,379,296 | $ | 504 | $ | 102,647 | $ | (72,760 | ) | $ | 2,990 | $ | — | $ | 33,381 | |||||||||||||||
Net income |
— | — | 3,019 | — | — | 3,019 | |||||||||||||||||||||||
Foreign currency translation adjustment, net of tax |
— | — | — | (1,315 | ) | — | (1,315 | ) | |||||||||||||||||||||
Unrealized loss on derivative contracts, net of tax |
— | — | — | (1,539 | ) | — | (1,539 | ) | |||||||||||||||||||||
Total comprehensive income |
165 | ||||||||||||||||||||||||||||
Issuance of warrants |
— | 215 | — | — | — | 215 | |||||||||||||||||||||||
Purchase of treasury stock |
— | — | — | — | (49 | ) | (49 | ) | |||||||||||||||||||||
Exercise of employee stock options,
including related excess income tax
benefits |
404,016 | 5 | 350 | — | — | 48 | 403 | ||||||||||||||||||||||
Stock compensation expense |
— | 1,305 | — | — | — | 1,305 | |||||||||||||||||||||||
Balance, December 28, 2008 |
50,783,312 | $ | 509 | $ | 104,517 | $ | (69,741 | ) | $ | 136 | $ | (1 | ) | $ | 35,420 | ||||||||||||||
Net income |
— | — | 58,053 | — | — | 58,053 | |||||||||||||||||||||||
Foreign currency translation adjustment, net of tax |
— | — | — | 25 | — | 25 | |||||||||||||||||||||||
Unrealized gain on derivative contracts, net of tax |
— | — | — | 934 | — | 934 | |||||||||||||||||||||||
Total comprehensive income |
59,012 | ||||||||||||||||||||||||||||
Purchase of treasury stock |
— | — | — | — | (6 | ) | (6 | ) | |||||||||||||||||||||
Exercise of employee stock options,
including related excess income tax
benefits |
1,535,414 | 14 | 4,441 | — | — | 7 | 4,462 | ||||||||||||||||||||||
Stock compensation expense |
— | 860 | — | — | — | 860 | |||||||||||||||||||||||
Balance, January 3, 2010 |
52,318,726 | $ | 523 | $ | 109,818 | $ | (11,688 | ) | $ | 1,095 | $ | — | $ | 99,748 | |||||||||||||||
Net income |
— | — | 22,854 | — | — | 22,854 | |||||||||||||||||||||||
Foreign currency translation adjustment, net of tax |
— | — | — | 583 | — | 583 | |||||||||||||||||||||||
Unrealized gain on derivative contracts, net of tax |
— | — | — | 302 | — | 302 | |||||||||||||||||||||||
Total comprehensive income |
23,739 | ||||||||||||||||||||||||||||
Purchase of treasury stock |
— | — | — | — | (4,876 | ) | (4,876 | ) | |||||||||||||||||||||
Exercise of employee stock options |
1,040,364 | 10 | 1,641 | — | — | — | 1,651 | ||||||||||||||||||||||
Option settlement obligation |
— | (3,186 | ) | — | — | — | (3,186 | ) | |||||||||||||||||||||
Excess tax benefit from share-based payments |
2,307 | — | — | — | 2,307 | ||||||||||||||||||||||||
Stock compensation expense |
— | 2,088 | — | — | — | 2,088 | |||||||||||||||||||||||
Balance, January 2, 2011 |
53,359,090 | $ | 533 | $ | 112,668 | $ | 11,166 | $ | 1,980 | $ | (4,876 | ) | $ | 121,471 | |||||||||||||||
See Notes to Consolidated Financial Statements.
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APAC CUSTOMER SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
| For the Fiscal Year Ended | ||||||||||||
| January 2, | January 3, | December 28, | ||||||||||
| 2011 | 2010 | 2008 | ||||||||||
Operating Activities: |
||||||||||||
Net income |
$ | 22,854 | $ | 58,053 | $ | 3,019 | ||||||
Adjustments to reconcile net income to net cash
provided by operating activities |
||||||||||||
Depreciation and amortization |
11,603 | 11,870 | 12,067 | |||||||||
Deferred income taxes |
10,632 | (24,763 | ) | — | ||||||||
Non-cash restructuring charges |
— | — | 14 | |||||||||
Stock compensation expense |
2,088 | 860 | 1,305 | |||||||||
Excess income tax benefits from stock option transactions |
(2,307 | ) | — | — | ||||||||
Non-cash warrant issuances |
— | — | 215 | |||||||||
Loss on sale of property and equipment |
2 | 38 | 193 | |||||||||
Amortized gain on sale leaseback |
(133 | ) | (94 | ) | (118 | ) | ||||||
Changes in operating assets and liabilities: |
||||||||||||
Accounts receivable, net |
(7,125 | ) | (13,811 | ) | 2,921 | |||||||
Other current assets |
(1,880 | ) | (2,782 | ) | 2,955 | |||||||
Accounts payable |
2,194 | 1,129 | (646 | ) | ||||||||
Accrued payroll and related items |
241 | 3,237 | 2,773 | |||||||||
Income taxes (receivable) payable |
(272 | ) | 112 | 33 | ||||||||
Accrued liabilities |
306 | (1,310 | ) | 2,471 | ||||||||
Other assets and liabilities |
(1,662 | ) | (602 | ) | (167 | ) | ||||||
Net cash provided by operating activities |
36,541 | 31,937 | 27,035 | |||||||||
Investing Activities: |
||||||||||||
Purchase of property and equipment, net |
(11,360 | ) | (10,899 | ) | (5,810 | ) | ||||||
Net proceeds from sale of property and equipment |
1 | 1 | 57 | |||||||||
Net cash used in investing activities |
(11,359 | ) | (10,898 | ) | (5,753 | ) | ||||||
Financing Activities: |
||||||||||||
Borrowings under revolving credit facility |
— | 326,021 | 324,936 | |||||||||
Payments under revolving credit facility |
— | (332,121 | ) | (331,143 | ) | |||||||
Payments on long-term debt |
— | — | (14,000 | ) | ||||||||
Payment of capital lease obligations |
(672 | ) | (139 | ) | — | |||||||
Payment of financing costs |
— | (29 | ) | (996 | ) | |||||||
Payment of stock option repurchase obligation |
(3,186 | ) | — | — | ||||||||
Stock option transactions |
1,651 | 4,462 | 403 | |||||||||
Excess income tax benefits from stock option transactions |
2,307 | — | — | |||||||||
Purchase of treasury stock |
(4,876 | ) | (6 | ) | (49 | ) | ||||||
Net cash used in financing activities |
(4,776 | ) | (1,812 | ) | (20,849 | ) | ||||||
Effect of exchange rates on cash |
436 | 712 | (1,241 | ) | ||||||||
Net increase (decrease) in cash and cash equivalents |
20,842 | 19,939 | (808 | ) | ||||||||
Cash and Cash Equivalents: |
||||||||||||
Beginning of year |
20,557 | 618 | 1,426 | |||||||||
End of year |
$ | 41,399 | $ | 20,557 | $ | 618 | ||||||
Supplemental Disclosures: |
||||||||||||
Cash payments for interest |
$ | 231 | $ | 393 | $ | 2,396 | ||||||
Cash payments for income taxes |
1,441 | 227 | — | |||||||||
Capital expenditures funded by others |
624 | 295 | 1,413 | |||||||||
Property and equipment purchases acquired under capital
leases |
945 | 1,203 | — | |||||||||
See Notes to Consolidated Financial Statements.
43
Table of Contents
APAC CUSTOMER SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share data and as otherwise indicated)
1. Description of Business
APAC Customer Services, Inc. (Company) is a leading provider of customer care services and
solutions to market leaders in the healthcare, communications, business services, media &
publishing, travel & entertainment, technology and financial services industries. As of January 2,
2011, the Company operated 15 customer care centers: eight domestic, two domestic client-owned
facilities, four international centers located in the Philippines and one international center
located in the Dominican Republic. The domestic operations consist of approximately 6,300
workstations and the international operations consist of approximately 4,600 workstations. The
Company consists of a single operating segment that offers customer care services and solutions to
its clients.
2. Basis of Presentation and Principles of Consolidation
Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned
subsidiaries. All of the Company’s subsidiaries are wholly-owned and are included in the
consolidated financial statements. The Company’s international customer care centers use their
local currency as their functional currency. Assets and liabilities of international customer care
centers have been translated at period-end exchange rates, and income and expenses have been
translated using average exchange rates for the period. All inter-company transactions and
balances have been eliminated in consolidation.
Use of estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting
principles requires management to make estimates and assumptions that affect the amounts reported
in the financial statements and accompanying notes. Actual results could differ from those
estimates.
Fiscal Year
The Company operates on a 52/53-week fiscal year that ends on the Sunday closest to December 31.
All fiscal years presented were 52 weeks, except for fiscal year 2009 which ended on January 3,
2010. Fiscal year 2009 was 53 weeks.
3. Summary of Significant Accounting Policies and Estimates
Revenue recognition
The Company provides customer care services according to each client’s contract. Each contract is
evaluated to determine the appropriate treatment for revenue recognition. The Company recognizes
revenues only when there is evidence of an arrangement, services have been provided, the price is
fixed and determinable, and collection is considered probable. Client contracts generally require
that the Company bill for its services based on time spent by customer service representatives or
on a per call or per transaction basis.
Delivery of services to the Company’s clients generally entails an initial implementation effort
during which costs are incurred in connection with information and telephony systems
implementation, establishment of operating processes and hiring and training of employees.
Certain of the Company’s client contracts provide for payment of fees in connection with some of
these activities and, in such instances, related costs are expensed as incurred. Revenue for
training and other implementation services is recognized based on the transactional services
delivered. The initial implementation effort is not considered a separate element, but rather,
these implementation activities, together with the ongoing service delivery, constitute a single
unit of accounting. Revenue recognized is limited to the amount which the Company is contractually
entitled to collect from its clients.
44
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APAC CUSTOMER SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Dollars in thousands, except share data and as otherwise indicated)
Certain client contracts do not provide for separate payment of fees for implementation activities;
rather such fees are implicitly included within the rates associated with the ongoing service
delivery. For these arrangements, no revenue is recognized related to the implementation
activities and specific direct and incremental costs associated with the implementation activities
are deferred and amortized over the period the related ongoing services revenue is recognized.
Should the contract with the Company’s client terminate before its expected termination period any
deferred costs associated with the terminated client would be immediately recorded as a charge to
earnings.
In many cases, the Company is subject to varying client quality, service level, and performance
standards, such as average handle time, occupancy rate, abandonment rate, call quality, and
customer satisfaction. The Company’s performance against such standards may provide bonus
opportunities, or conversely, may subject us to penalties, which are recognized as earned or
incurred.
Cost of services
The Company generally recognizes costs associated with its customer care services as they are
incurred in accordance with guidance on the recognition and measurement in financial statements of
business enterprise. Cost of services include direct labor, telephone and other facility expenses
directly related to providing customer care services to its clients.
Delivery of services to the Company’s clients generally entails an initial implementation effort
during which costs are incurred in connection with information and telephony systems
implementation, establishment of operating processes and hiring and training of employees. Certain
of the Company’s client contracts provide for payment of fees in connection with some of these
activities and, in such instances, related costs are expensed as incurred. Certain client
contracts do not provide for separate payment of fees for implementation activities. For these
arrangements specific direct and incremental costs associated with the implementation activities
are deferred and amortized over the period the related ongoing services revenue is recognized.
Accounting for derivatives
The Company uses forward contracts to mitigate foreign currency risk. The Company’s derivatives
are designated as cash flow hedges to the extent that the instruments qualify for accounting as a
hedging instrument; therefore, the effective portion of gains and losses that result from changes
in fair value of the derivative instruments are recorded in accumulated other comprehensive income
until the hedged transaction affects income, at which time gains and/or losses are realized. The
Company expects these amounts to be reclassified into earnings over the next eighteen months. If
the instrument does not qualify for accounting as a hedge, the change in the value of the
instrument during the reporting period is recorded immediately to earnings. The Company assesses
hedge effectiveness each reporting period. See Note 17 for more information.
Allowance for doubtful accounts
The Company records an allowance for doubtful accounts based on a quarterly assessment of the
probable estimated losses in trade accounts receivable. This estimate is based on specific
allowances for certain identified receivables with balances outstanding generally greater than 90
days and an additional allowance for estimated losses on all other receivables based on their age
and collection history. The Company charges off uncollectible accounts when it has exhausted all
possible collection efforts.
Accounting for employee benefits and obligations
The Company records a liability for group health and workers’ compensation claims based on an
estimate of claims incurred, but not reported, as well as known claims at the end of the reporting
period. The estimate for workers’ compensation claims is derived from an analysis performed by an
experienced third party actuary. The reserve is based upon outstanding claims from the prior
years. The estimate for group health claims is also derived from an analysis prepared by an
experienced third party actuary. The estimate for group health claims is based on the number of
participants in the medical plan at an estimated average claim per participant. The estimated
claim per participant is determined with reference to the Company’s average medical costs incurred
per participant over the prior two years and other relevant factors.
45
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APAC CUSTOMER SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Dollars in thousands, except share data and as otherwise indicated)
The liability recorded for these accounts, which are included in accrued payroll and related items
and accrued liabilities, at January 2, 2011 and January 3, 2010, were:
| 2010 | 2009 | |||||||
Group Health Insurance |
$ | 1,486 | $ | 1,170 | ||||
Workers’ Compensation |
$ | 431 | $ | 929 | ||||
Income taxes
The Company accounts for income taxes using the asset and liability approach. Under the asset and
liability method, deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. A valuation allowance is recorded
when the Company believes it is more likely than not that some portion or all of the deferred tax
assets will not be realized in the near term. The Company records a reserve for tax contingencies
unless it believes it is probable that the deductions giving rise to these contingencies will be
sustained if challenged by taxing authorities.
In applying the criterion that an individual tax position would have to meet for some or all of the
benefit of that position to be recognized in an entity’s financial statements, the Company is
required to evaluate a tax position using a two-step process. First, the Company evaluates the
position for recognition. The Company recognizes the financial statement benefit of a tax position
if it determines that it is more likely than not that the position will be sustained on
examination. Next, the Company measures the amount of benefit that should be recognized for those
tax positions that meet the more-likely-than-not test.
Cash equivalents
Cash equivalents consist of highly liquid, short-term investments readily convertible to cash.
Accounting for long-lived assets
The Company’s long-lived assets consist primarily of property and equipment, including capital
leases and intangible assets. In addition to the original cost of these assets, the recorded value
is impacted by a number of policy elections made by the Company, including estimated useful lives
and salvage values. Any decision by the Company to reduce capacity by closing customer care
centers or to abandon assets may result in a write-off of the net book value of the affected
assets. The Company records impairment charges on long-lived assets used in operations when events
and circumstances indicate that the assets may be impaired and the undiscounted cash flows
estimated to be generated by those assets are less than the carrying amount of those assets. In
this circumstance, the impairment charge would be determined based upon the amount by which the net
book value of the assets exceeds their fair market value. In making these determinations, the
Company utilizes certain assumptions, including, but not limited to, the estimated fair market
value of the assets, which are based on additional assumptions such as asset utilization, length of
time the asset will be used in the Company’s operations and estimated salvage values.
Property and Equipment
Property and equipment are recorded at cost and depreciated on a straight-line basis, using
estimated useful lives of up to 15 years for buildings, the life of the lease for leasehold
improvements, 3 to 7 years for telecommunications equipment, and 3 to 7 years for workstations and
office equipment. The Company also capitalizes certain costs associated with the leasing of
various computer equipment, which is included in property and equipment. As of January 2, 2011,
the gross carrying value of capital leases was $2.2 million. Amortization of capital leases is
provided on a straight line basis over the term of each lease, which is generally three to five
years. The Company had $1.4 million of unamortized capital lease costs as of January 2, 2011. See
Note 9 for information regarding long-term lease obligations and future minimum capital lease
payments.
46
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APAC CUSTOMER SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Dollars in thousands, except share data and as otherwise indicated)
Excluding capitalized software, the total depreciation expense for property and equipment,
including amortization of capital leases for fiscal years 2010, 2009 and 2008 was $8.8 million,
$8.0 million and $8.3 million, respectively. No interest cost was capitalized as a component of
building and leasehold improvements for the fiscal year ended January 2, 2011. Interest cost of
less than $0.1 million was capitalized for the fiscal year ended January 3, 2010.
| January 2, | January 3, | |||||||
| 2011 | 2010 | |||||||
Building and leasehold improvements |
$ | 23,833 | $ | 22,677 | ||||
Telecommunications equipment |
44,736 | 39,691 | ||||||
Workstations and office equipment |
13,770 | 12,435 | ||||||
Capitalized software |
22,117 | 18,972 | ||||||
Construction in progress |
4,861 | 2,151 | ||||||
Accumulated depreciation and amortization |
(81,287 | ) | (70,273 | ) | ||||
Property and equipment, net |
$ | 28,030 | $ | 25,653 | ||||
Net property and equipment located at the Company’s international customer care centers totaled
$9.1 million and $10.5 million as of January 2, 2011 and January 3, 2010, respectively.
Capitalized Software
The Company capitalizes certain costs related to the purchase and installation of computer software
and for internally developed software for internal use. Amortization is provided on a
straight-line basis over estimated useful lives of up to 5 years. The Company had $3.6 million of
unamortized capitalized software costs as of January 2, 2011 and $1.7 million of unamortized
capitalized software costs as of January 3, 2010. Amortization expense for capitalized software
costs was $1.9 million in fiscal year 2010 and $1.5 million in fiscal years 2009 and 2008.
Goodwill
Under the provisions of FASB ASC 250, goodwill is not amortized, but instead 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 2010 and 2009, resulting in no impairment being recorded. As of January 2, 2011,
the Company had $13.3 million of goodwill.
Financial Information about Industry Segments
The Company has one reportable segment and therefore, in accordance with FASB ASC 280 “Segment
Reporting”, all segment-related financial information is included in the consolidated financial
statements. The reportable segment reflects the Company’s operating and reporting structure.
Accounting for Stock-Based Compensation
At January 2, 2011, 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 was 11.8 million at January 2, 2011, of which 1.1 million shares are
available for future grants.
Options to purchase common shares are granted at the closing price of the common shares on The
NASDAQ Global Market on the date of the 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.
47
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APAC CUSTOMER SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Dollars in thousands, except share data and as otherwise indicated)
The Company accounts for stock-based compensation using the modified prospective transition method
to apply fair value estimates. Under the modified prospective transition method, compensation
expense is recognized for all share-based payment awards granted prior to, but not yet vested as of
January 2, 2006 based on the grant-date estimated fair value. In addition, stock-based
compensation expense for all share-based payment awards newly awarded after January 2, 2006 is
based on the grant-date estimated fair value. Compensation expense related to share-based awards,
net of a forfeiture rate, is amortized on a straight-line basis over the requisite employees’
service periods in selling, general and administrative expenses in the Consolidated Statements of
Operations in accordance with the classification of the related employees’ compensation and
benefits. The Company estimated the forfeiture rate, volatility and expected life for all awards
based on its experience during the preceding fiscal years. The interest rate is based on the three
year treasury bond.
Total stock-based compensation expense was $2.1 million, $0.9 million and $1.3 million for the
fiscal years ended January 2, 2011, January 3, 2010 and December 28, 2008, respectively. As of
January 2, 2011, there was $5.9 million of unrecognized compensation cost related to unvested
awards that is expected to be recognized over a weighted-average period of approximately 3.4 years.
During the fiscal year ended January 2, 2011, the Company awarded 250,000 non-vested common shares
at a weighted average value per share of $5.23 that vest ratably five years from the grant date.
The Company did not award non-vested common shares during the fiscal year ended January 3, 2010.
During the fiscal year ended December 28, 2008, the Company awarded 50,000 non-vested common shares
to employees at a weighted average value per share of $1.10 that vest ratably two years from the
grant date.
Concentrations of Credit and Other Risk
Financial instruments that potentially subject the Company to significant concentrations of credit
risk consist principally of cash and cash equivalents, receivables and foreign currency forward
contracts. The Company places its cash and cash equivalents with major financial institutions and
limits the amount of financial exposure to any one institution.
The Company’s accounts receivable arise from sales to clients in a variety of industries. The
Company performs continuing credit evaluations of its clients, maintains allowances for potential
credit losses and generally does not require collateral. The Company makes judgments as to its
ability to collect outstanding receivables based primarily on management’s evaluation of the
customer’s financial condition, past collection history and overall aging of the receivables. The
top five clients accounted for approximately 72%, 76% and 78% of total revenue in fiscal years
2010, 2009 and 2008, respectively. Three of the Company’s clients were each responsible for 10% or
more of its revenues in fiscal year 2010. See Note 5 for more information about significant client
concentration.
The counterparties to the Company’s foreign currency contracts are three major financial
institutions. The Company has not experienced non-performance by any of its counterparties nor
does the Company expect there to be significant non-performance risk associated with its
counterparties for derivative contracts outstanding as of January 2, 2011.
New Accounting Pronouncements
Fair Value
In January 2010, the FASB issued guidance amending ASC Topic 820 “Fair Value Measurements and
Disclosures”. ASC Sub-topic 820-10 and related guidance was amended to require disclosure of the
transfers in and out of Levels 1 and 2 and a schedule for Level 3 that separately identifies
purchases, sales, issuances and settlements and requires more detailed disclosures regarding
valuation techniques and inputs. This update is effective for interim and annual reporting periods
beginning after December 15, 2009 except for the disclosures about purchases, sales issuances and
settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures
are effective for fiscal years beginning after December 15, 2010, and for interim periods within
those fiscal years. The Company adopted this guidance, as it relates to transfers in and out of
Levels 1 and 2, effective January 4, 2010, the beginning of its’ current fiscal year with no
material impact on its consolidated financial statements. The Company has evaluated the impact of
this guidance, as it relates to disclosures regarding Level 3 and determined it will not have a
material impact on its consolidated financial statements. See Note 16 for more information about
fair value disclosures.
48
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APAC CUSTOMER SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Dollars in thousands, except share data and as otherwise indicated)
Revenue Recognition
In October 2009, the FASB issued guidance on ASC Topic 605 “Revenue Recognition” related to revenue
arrangements with multiple deliverables which revises the criteria for separating, measuring, and
allocating arrangement consideration to each deliverable in a multiple element arrangement. The
guidance requires companies to allocate revenue using the relative selling price of each
deliverable, which must be estimated if the Company does not have a history of selling the
deliverable on a stand-alone basis or third-party evidence of selling price. This guidance is
effective prospectively for revenue arrangements entered into or materially modified in fiscal
years beginning on or after June 15, 2010, with early adoption permitted. The Company has
evaluated the impact of this guidance and determined it will not have a material impact on its
consolidated financial statements.
4. Comprehensive Income
Comprehensive income for fiscal years 2010, 2009 and 2008 is as follows:
| 2010 | 2009 | 2008 | ||||||||||
Net income |
$ | 22,854 | $ | 58,053 | $ | 3,019 | ||||||
Foreign currency translation adjustment 1 |
583 | 25 | (1,315 | ) | ||||||||
Unrealized gain (loss) on derivative contracts |
302 | 934 | (1,539 | ) | ||||||||
Total comprehensive income |
$ | 23,739 | $ | 59,012 | $ | 165 | ||||||
| (1) | The foreign currency translation adjustments in fiscal year 2010, 2009 and 2008 relate to the
impact of the change in exchange rates on net assets located outside of the United States. |
The following is a summary of the Company’s accumulated other comprehensive income activity for the
years ended January 2, 2011, January 3, 2010 and December 28, 2008.
| Cash Flow | Accumulated | |||||||||||
| Hedges - | Other | |||||||||||
| Currency | Derivative | Comprehensive | ||||||||||
| Translations | Contracts | Income | ||||||||||
Balance, December 30, 2007 |
$ | 2,197 | $ | 793 | $ | 2,990 | ||||||
Depreciation on current period hedging
transactions |
— | (2,260 | ) | (2,260 | ) | |||||||
Realized loss reclassified to earnings |
— | 721 | 721 | |||||||||
Foreign currency translation adjustment |
(1,315 | ) | — | (1,315 | ) | |||||||
Tax effect |
— | — | — | |||||||||
Balance, December 28, 2008 |
$ | 882 | $ | (746 | ) | $ | 136 | |||||
Appreciation on current period hedging
transactions |
— | 1,012 | 1,012 | |||||||||
Realized loss reclassified to earnings |
— | 161 | 161 | |||||||||
Foreign currency translation adjustment |
176 | — | 176 | |||||||||
Tax effect |
(151 | ) | (239 | ) | (390 | ) | ||||||
Balance, January 3, 2010 |
$ | 907 | $ | 188 | $ | 1,095 | ||||||
Appreciation on current period hedging
transactions |
— | 1,879 | 1,879 | |||||||||
Realized gain reclassified to earnings |
— | (1,412 | ) | (1,412 | ) | |||||||
Foreign currency translation adjustment |
674 | — | 674 | |||||||||
Tax effect |
(91 | ) | (165 | ) | (256 | ) | ||||||
Balance, January 2, 2011 |
$ | 1,490 | $ | 490 | $ | 1,980 | ||||||
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APAC CUSTOMER SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Dollars in thousands, except share data and as otherwise indicated)
5. Significant Clients
The Company’s ten largest clients collectively accounted for approximately 89% of the Company’s
revenue in fiscal year 2010 and 90% in fiscal years 2009 and 2008. Clients that were individually
responsible for 10% or more of the Company’s revenues for fiscal years 2010, 2009 and 2008 were as
follows:
| 2010 | 2009 | 2008 | ||||||||||
Verizon Wireless |
21.6 | % | 27.7 | % | 21.0 | % | ||||||
United Parcel Services, Inc. |
21.0 | 20.6 | 25.1 | |||||||||
Medco Health Solutions, Inc. |
13.9 | 13.5 | 11.5 | |||||||||
WellPoint, Inc. |
5.8 | 6.9 | 12.5 | |||||||||
Total |
62.3 | % | 68.7 | % | 70.1 | % | ||||||
Accounts receivable related to these significant clients as a percentage of net accounts receivable
at the end of fiscal year 2010 and 2009, respectively, were:
| Percent of Net | ||||||||
| Accounts Receivable | ||||||||
| 2010 | 2009 | |||||||
Verizon Wireless |
19.1 | % | 34.7 | % | ||||
Medco Health Solutions, Inc. |
13.6 | 12.4 | ||||||
United Parcel Services, Inc |
5.4 | 9.9 | ||||||
WellPoint, Inc. |
3.9 | 8.8 | ||||||
Total |
42.0 | % | 65.7 | % | ||||
6. Supplemental Balance Sheet Data
The components of other current assets and other accrued liabilities included in the consolidated
balance sheets are as follows:
| January 2, | January 3, | |||||||
| Consolidated Balance Sheet | 2011 | 2010 | ||||||
Prepaid expenses and other assets |
$ | 4,365 | $ | 2,931 | ||||
Non-qualified retirement plan |
2,375 | 1,931 | ||||||
Unrecognized gain on forward contracts |
1,109 | 657 | ||||||
Non-trade receivables |
355 | 804 | ||||||
Other current assets |
$ | 8,204 | $ | 6,323 | ||||
Non-qualified retirement plan obligation |
$ | 2,375 | $ | 1,931 | ||||
Accrued capital expenditures |
1,901 | 890 | ||||||
Accrued professional fees |
654 | 719 | ||||||
Accrued severance |
536 | 261 | ||||||
Accrued temporary labor |
476 | 839 | ||||||
Deferred rent |
473 | 1,134 | ||||||
Accrued workers’ compensation |
431 | 929 | ||||||
Accrued telecom |
424 | 961 | ||||||
Other accrued liabilities |
1,930 | 1,526 | ||||||
Accrued liabilities |
$ | 9,200 | $ | 9,190 | ||||
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APAC CUSTOMER SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Dollars in thousands, except share data and as otherwise indicated)
7. Severance, Restructuring and Other Charges
Severance and Other Charges
The Company recorded $1.4 million in severance and other charges for fiscal year 2010, of which
$1.3 million related to the September 2010 resignation of Michael Marrow as the Company’s President
and Chief Executive Officer. Cash payments of $0.5 million for severance and other charges have
been made through January 2, 2011 and remaining cash payments of $0.9 million are payable through
December 2012.
An additional $0.3 million of accelerated stock compensation expense was recorded directly in
selling, general and administrative expense as part of overall stock compensation expense and was
the result of the immediate vesting of all remaining unvested options included in Mr. Marrow’s
February 25, 2008 option grant.
The Company had a repurchase obligation of $3.2 million related to these vested stock options as
part of the Company’s severance agreement with Mr. Marrow. The full amount of this repurchase
obligation was charged to equity in accordance with ASC 718-20-35-1 “Repurchases or Cancellations
of Awards of Equity Instruments”. The repurchase obligation was paid in October 2010.
The Company recorded a reversal of severance charges of less than $0.1 million for fiscal year
2009, primarily related to adjustments in severance charges and retirement obligations recorded in
fiscal year 2008.
The Company recorded $3.5 million of severance charges in fiscal year 2008 related to changes in
the Company’s executive team and operational and administrative positions. During fiscal year
2008, several changes in the executive team occurred and the Company also eliminated approximately
130 operational and administrative positions throughout the company. All payments related to 2008
severance charges have been made through January 2, 2011.
Restructuring Charges
The Company did not record any restructuring charges in fiscal year 2010. The Company recorded a
reversal of restructuring charges of less than $0.1 million in fiscal in fiscal year 2009,
primarily related to adjustments to severance charges resulting from the 2007 restructuring
initiative and the reversal of the remaining reserve for property taxes associated with the 2006
restructuring initiative.
The Company recorded less than $0.1 million of restructuring charges in fiscal year 2008, primarily
related to incremental costs resulting from delays in subletting space in the Company’s Tucson,
Arizona customer care center.
8. Income Taxes
The income tax expense (benefit) for fiscal years 2010, 2009 and 2008 consisted of the following:
| 2010 | 2009 | 2008 | ||||||||||
Current foreign provision |
$ | 336 | $ | 275 | $ | — | ||||||
Current state provision |
423 | 236 | 33 | |||||||||
Total current provision |
759 | 511 | 33 | |||||||||
Deferred federal provision (benefit) |
10,180 | (23,108 | ) | — | ||||||||
Deferred state provision (benefit) |
220 | (730 | ) | — | ||||||||
Total deferred provision (benefit) |
10,400 | (23,838 | ) | — | ||||||||
Total income tax expense (benefit) |
$ | 11,159 | $ | (23,327 | ) | $ | 33 | |||||
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APAC CUSTOMER SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Dollars in thousands, except share data and as otherwise indicated)
A reconciliation of the statutory federal income tax expense (benefit) to the actual effective
income tax expense (benefit) for fiscal years 2010, 2009 and 2008 is as follows:
| 2010 | 2009 | 2008 | ||||||||||
U.S. Statutory tax expense — rate (35%) |
$ | 11,905 | $ | 12,154 | $ | 1,068 | ||||||
U.S. State taxes, net of U.S. Federal benefit
and state credits |
625 | 790 | 63 | |||||||||
Work Opportunity Tax Credits |
(1,880 | ) | (558 | ) | (246 | ) | ||||||
Work Opportunity Tax Credits add back to income |
771 | — | — | |||||||||
Other, including permanent items |
90 | 411 | 30 | |||||||||
Decrease in state NOL |
231 | 993 | — | |||||||||
Deferred tax asset adjustment |
— | 783 | (2,418 | ) | ||||||||
Valuation allowance (reversal) |
(583 | ) | (37,900 | ) | 1,536 | |||||||
Actual tax expense (benefit) |
$ | 11,159 | $ | (23,327 | ) | $ | 33 | |||||
The valuation allowance decreased by $37.9 million during fiscal year 2009, due primarily to 2009
earnings and by a $23.8 million reversal due to the Company’s improved financial performance and
the expectation that generating future profits will enable it to fully utilize these deferred tax
assets.
The significant components of deferred income tax assets and liabilities are as follows:
| January 2, | January 3, | |||||||
| 2011 | 2010 | |||||||
Deferred tax assets: |
||||||||
Net operating loss and credit carryforwards |
$ | 10,030 | $ | 20,270 | ||||
Payroll related items |
2,228 | 1,480 | ||||||
Depreciation |
1,899 | 550 | ||||||
Stock compensation expense |
1,263 | 925 | ||||||
Deferred rent |
1,206 | 1,498 | ||||||
Self-insurance related costs |
713 | 781 | ||||||
Other |
788 | 900 | ||||||
Total deferred tax assets |
18,127 | 26,404 | ||||||
Deferred tax liabilities: |
||||||||
Foreign exchange adjustment on fixed assets |
(242 | ) | (151 | ) | ||||
Derivative contracts |
(404 | ) | (239 | ) | ||||
Intangible assets |
(646 | ) | (271 | ) | ||||
Total deferred tax liabilities |
(1,292 | ) | (661 | ) | ||||
Net deferred tax assets before valuation
allowance |
16,835 | 25,743 | ||||||
Valuation allowance |
(397 | ) | (980 | ) | ||||
Net deferred tax assets |
$ | 16,438 | $ | 24,763 | ||||
52
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APAC CUSTOMER SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Dollars in thousands, except share data and as otherwise indicated)
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. In accordance with FASB ASC740
“Income Taxes”, the Company assesses the realizability of its deferred tax assets. A valuation
allowance must be established when, based upon the evaluation of all available evidence, it is
more-likely-than-not that all or a portion of the deferred tax assets will not be realized. In
making this determination, the Company analyzed, among other things, its recent history of earnings
and cash flows, the nature and timing of future deductions and benefits represented by the deferred
tax assets and its cumulative earnings for the last twelve quarters. After considering both the
positive and negative evidence, the Company determined that it was more-likely-than-not that it
would not realize the full value of a portion of its deferred tax assets related to certain state
net operating loss carryforwards. As a result, a valuation allowance of $0.4 million and $1.0
million was established as of January 2, 2011 and January 3, 2010.
The Company’s net deferred tax assets are $16.4 million as of January 2, 2011, of which $0.6
million relates to state net operating losses incurred in the prior years. The Company has no
federal net operating loss carryforwards as of January 2, 2011.
State tax net operating loss carryforwards of $20.0 million expire over the following periods:
| Net Operating Loss | ||||
| Expiration | Carryforward | |||
2011 |
$ | 246 | ||
2012 |
402 | |||
2013 |
4 | |||
2014 |
406 | |||
2015 |
0 | |||
Thereafter |
18,913 | |||
| $ | 19,971 | |||
The Company has Work Opportunity Tax Credits and Alternative Minimum Tax Credits of $7.7 million
and $1.3 million, respectively, as of January 2, 2011. The Work Opportunity Tax Credits expire at
various periods between 2018 and 2030. The Alternative Minimum Tax Credit is available
indefinitely.
In applying the FASB criterion that an individual tax position would have to meet for some or all
of the benefit of that position to be recognized in an entity’s financial statements, an entity is
required to evaluate a tax position using a two-step process. First, the entity should evaluate the
position for recognition. An entity should recognize the financial statement benefit of a tax
position if it determines that it is more-likely-than-not that the position will be sustained on
examination. Next, the entity should measure the amount of benefit that should be recognized for
those tax positions that meet the more-likely-than-not test.
The Company benefits from an income tax holiday as a Philippine Economic Zone Authority (PEZA)
registrant. The Company is required to comply with certain financial metrics to qualify for the
income tax holiday. The tax holiday for the Alabang facilities expired in April 2009. The tax
holiday for the Cubao, Philippines facility expires in 2012. The tax holiday for the Leyte,
Philippines facility expires in 2013. As a result of its free zone status, the Company is
exonerated from income tax and certain other taxes.
The U.S. federal statute of limitations remains open for the years of 2007 and forward. Foreign
and U.S. state jurisdictions have statutes ranging from three to four years.
53
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APAC CUSTOMER SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Dollars in thousands, except share data and as otherwise indicated)
9. Long-term Obligations
Debt
The Company did not have any long-term debt outstanding as of January 2, 2011 and January 3, 2010.
As of January 2, 2011, there were no outstanding borrowings under the Revolving Loan Agreement and
the Company had cash and cash equivalents of $41.4 million.
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. With the upcoming expiration, the
Company is currently evaluating various financing alternatives and intends to obtain a replacement
facility prior to the maturity of the current Revolving Loan Agreement. The Company anticipates
more favorable terms for a new facility, however there can be no assurance that it will enter into
such an arrangement.
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. The
Company obtained a waiver from PNC permitting it to repurchase common shares under the program
approved by the Company’s Board of Directors.
Borrowings under the Revolving Loan Agreement incur a floating interest rate based on the LIBOR
index rate or an alternate base rate which approximates the prime rate defined in the Revolving
Loan Agreement, subjecting the Company to interest rate risk, and may require up to a $5.0 million
interest rate hedge.
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.
The Company was in compliance with its financial covenants as of January 2, 2011. At the end of
fiscal year 2010, the Company had approximately $32.6 million in undrawn borrowing capacity under
its Revolving Loan Agreement, based upon borrowing base calculations.
Capital Leases
Long-term obligations as of January 2, 2011 and January 3, 2010 consisted of capital leases and are
included as a component of other liabilities.
| January 2, | January 3, | |||||||
| 2011 | 2010 | |||||||
Obligations under capital leases |
$ | 1,376 | $ | 1,064 | ||||
Less: current portion of capital leases |
696 | 397 | ||||||
Long-term obligations of capital leases |
$ | 680 | $ | 667 | ||||
54
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APAC CUSTOMER SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Dollars in thousands, except share data and as otherwise indicated)
The Company entered into capital leases for the acquisition of computer hardware which are included
in property and equipment. Amortization of capital lease assets is provided on a straight-line
basis over the term of each lease, which is generally three to five years, and is recorded as a
component of depreciation and amortization expense. The Company’s capital leases as of January 2,
2011 and January 3, 2010, are as follows:
| January 2, | January 3, | |||||||
| 2011 | 2010 | |||||||
Capital leases |
$ | 2,151 | $ | 1,203 | ||||
Less: accumulated amortization |
790 | 150 | ||||||
Net capital leases |
$ | 1,361 | $ | 1,053 | ||||
The present value of future net minimum lease payments (included in long term obligations and
current portion shown above) as of January 2, 2011, are as follows:
| Capital | ||||
| Leases | ||||
2011 |
$ | 781 | ||
2012 |
418 | |||
2013 |
131 | |||
2014 |
105 | |||
2015 |
61 | |||
Total minimum lease payments |
1,496 | |||
Less: amount representing estimated executory costs |
73 | |||
Net minimum lease payments |
1,423 | |||
Less: amount representing interest |
47 | |||
Present value of net minimum lease payments |
$ | 1,376 | ||
10. Commitments and Contingencies
Lease Commitments
The Company leases its customer care centers, administrative offices and certain equipment under
operating leases. Rent expense for fiscal years 2010, 2009 and 2008 was $7,324, $6,853 and $7,038,
respectively.
On October 10, 2006, the Company sold its Cedar Rapids, Iowa facility in a sale-leaseback
transaction that resulted in a net gain of $0.8 million. The gain has been deferred and is being
amortized over terms based on the individual lease agreements.
Future minimum rental payments for real estate and equipment at January 2, 2011, are as follows:
| Operating | ||||
| Leases | ||||
2011 |
$ | 6,861 | ||
2012 |
6,269 | |||
2013 |
5,591 | |||
2014 |
5,336 | |||
2015 |
5,331 | |||
Years thereafter |
11,687 | |||
Total payments |
$ | 41,075 | ||
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APAC CUSTOMER SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Dollars in thousands, except share data and as otherwise indicated)
Telecommunications Commitments
The Company has contracts with its telecommunications providers that require certain minimum usage
each year of the contract. At January 2, 2011, the commitments under these contracts are as
follows:
| Total | ||||
2011 |
$ | 4,221 | ||
2012 |
4,221 | |||
2013 |
944 | |||
Total commitments |
$ | 9,386 | ||
Legal Proceedings
The Company is subject to lawsuits, claims and governmental investigations arising out of the
normal conduct of its business. Management does not believe that the outcome of any pending claims
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.
On May 27, 2009, a purported collective/class action complaint captioned Tiffany Sharpe, et al. v.
APAC Customer Services, Inc. was filed in the United States District Court for the Western District
of Wisconsin. On behalf of the named plaintiff, a non-exempt call center employee, and other
similarly situated individuals, the complaint asserted violations under the Federal Fair Labor
Standards Act (FLSA) related to overtime compensation and wage records. The complaint also
asserted violations under Wisconsin Wage Payment and Overtime Compensation Laws based upon the same
alleged facts. The complaint purported to allege claims as a nationwide collective action under
federal law, as well as a class action under Wisconsin state law. The complaint sought various
forms of relief, including injunctive relief, unpaid overtime wages, liquidated damages, interest,
and attorneys’ fees and costs. On January 8, 2010, the court entered an order which conditionally
certified the case as a collective action under the FLSA.
In March 2010, the Company entered into an agreement to resolve the collective action. On June 16,
2010, the Court entered an order approving the resolution of all claims under the FLSA collective
action. Under the terms of the agreement, the Company agreed to pay a maximum amount of $4.0
million to resolve claims by eligible class members, including payments to class members and
payments for plaintiff attorneys’ fees. As a result, the Company recorded a liability of $2.4
million for the thirteen weeks ended April 4, 2010 which represented its estimate at the time of
the costs to be incurred for attorneys’ fees and claims, based on expected opt-in rates for
claimants in similar actions. Based on the court’s final order approving the agreement, (including
setting the amount of plaintiffs’ attorneys’ fees) and a revised estimated rate of participation
from eligible class members, the Company reduced the previously recorded liability by $0.5 million
during the thirteen weeks ended October 3, 2010 to an adjusted recorded liability of $1.8 million
which reflected its revised expectation of the final amount which would ultimately be paid.
On December 21, 2010, a final order of dismissal was entered by the Court triggering the Company’s
payment obligations under the agreement to resolve the collective action. The final amount paid to
class members who participated in the action and to plaintiff’s attorney was approximately $1.8
million.
The Company denied and continues to deny the allegations in the complaint and contends that its
policies and practices regarding compensation were proper and in compliance with the law at all
times. The Company denies all liability and wrongdoing in this case, but decided to settle this
lawsuit in order to avoid the distraction and additional legal expenses that would otherwise be
incurred.
56
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APAC CUSTOMER SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Dollars in thousands, except share data and as otherwise indicated)
11. Shareholders’ Equity
The authorized capital stock of the Company consists of 200 million common shares, $.01 par value
per share, of which 53,359,090 were issued as of January 2, 2011, and 50 million preferred shares,
$.01 par value per share, of which no shares have been issued. During fiscal year 2010, the
Company repurchased a total of 870,633 shares at a cost of $4.9 million under a stock repurchase
program authorized by the Board of Directors in August 2010. Under the approved program, the
Company can repurchase up to an aggregate of five million shares of its common stock on the open
market at prevailing market prices or in negotiated transactions off the market. The Company is
not obligated to acquire any particular amount of common stock as a result of the plan, which may
be suspended at any time at its discretion.
In fiscal years 2009 and 2008 treasury shares of 959 and 46,234 were issued through the Company’s
Incentive Stock Plan. No treasury shares have been issued through the Plan in fiscal year 2010.
12. 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 plus the effect of dilutive
potential common shares outstanding and non-vested common shares using the treasury stock method.
The following table sets forth the computations of basic and diluted earnings per share:
| 2010 | 2009 | 2008 | ||||||||||
Net income |
$ | 22,854 | $ | 58,053 | $ | 3,019 | ||||||
Weighted average common shares outstanding |
52,455 | 51,570 | 50,424 | |||||||||
Income per share—basic |
$ | 0.44 | $ | 1.13 | $ | 0.06 | ||||||
Effects of dilutive securities |
2,251 | 1,726 | 53 | |||||||||
Weighted average common and common
equivalent shares outstanding |
54,706 | 53,296 | 50,477 | |||||||||
Income per share—diluted |
$ | 0.42 | $ | 1.09 | $ | 0.06 | ||||||
Options to purchase 1.4 million, 1.0 million and 3.7 million shares of common stock for the fiscal
years 2010, 2009 and 2008, respectively, were outstanding, but not included in the computation of
diluted net income per share because the effect would have been anti-dilutive.
13. Stock Awards
The Amended and Restated 2005 Incentive Stock Plan (Plan) adopted on April 4, 2007 replaced and
superseded the 2005 Incentive Stock Plan. Under the Plan, directors, officers, key employees and
non-employee consultants may be granted non-qualified stock options, incentive stock options, stock
appreciation rights, performance shares and stock awards, as determined by the Compensation
Committee of the Board of Directors. Options to purchase common shares are granted with an
exercise price equal to the closing price of the common shares on The NASDAQ Global Market on the
date of the grant. A total of 11.8 million shares have been authorized for grant under the Plan.
At January 2, 2011, 1.1 million shares were available for future grant under the Plan. The exercise
price of stock options granted under the Plan may not be less than 100% of the fair market value of
the common shares on the date of grant. Options under the Plan expire no later than 10 years after
date of grant.
Each non-employee director receives four quarterly grants of an equal number of options. The number
of options granted is determined once each year by dividing $90 by the average fair market value of
the stock for the previous year. The exercise price is the fair market value of the underlying
stock on the date of the grant. In fiscal years 2010, 2009 and 2008, non-employee directors
received an aggregate of 211,165, 299,614 and 256,852 options, respectively.
57
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APAC CUSTOMER SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Dollars in thousands, except share data and as otherwise indicated)
The Company estimated the fair value of its new option grants during fiscal years 2010, 2009 and
2008 using the Black-Scholes option-pricing model with the following assumptions:
| For the Fiscal Year Ended | ||||||||||||
| January 2, | January 3, | December 28, | ||||||||||
| 2011 | 2010 | 2008 | ||||||||||
Expected volatility |
78 - 90 | % | 87 - 91 | % | 81 - 93 | % | ||||||
Risk-free interest rate |
0.63 - 1.70 | % | 1.27 - 1.70 | % | 2.14 - 3.99 | % | ||||||
Expected life in years |
3.14 - 3.42 | 2.96 - 3.29 | 2.11 - 2.40 | |||||||||
Annualized forfeiture rate |
5.4 | % | 13.3 | % | 14.4 | % | ||||||
Weighted average grant date fair value |
$ | 3.11 | $ | 2.60 | $ | 0.56 | ||||||
Stock Option Activity
Stock option activity under the Plan for fiscal years 2010, 2009 and 2008 was as follows:
| Weighted | ||||||||||||||||
| Grant Price | Average | Aggregate | ||||||||||||||
| Range | Exercise Price | Intrinsic | ||||||||||||||
| Description | Shares | Per Share | Per Share | Value | ||||||||||||
Outstanding as of December 30, 2007 |
6,944,019 | $ | 0.85 - $11.63 | $ | 2.22 | |||||||||||
Granted |
2,859,352 | 0.79 - 2.15 | 1.19 | |||||||||||||
Exercised |
(450,250 | ) | 0.85 - 1.35 | 0.90 | ||||||||||||
Forfeited |
(1,140,501 | ) | 0.79 - 4.60 | 1.66 | ||||||||||||
Expired |
(1,697,981 | ) | 1.35 - 11.56 | 2.59 | ||||||||||||
Outstanding as of December 28, 2008 |
6,514,639 | $ | 0.79 - $11.63 | $ | 1.98 | |||||||||||
Granted |
1,216,114 | 1.38 - 6.05 | 4.42 | |||||||||||||
Exercised |
(1,268,502 | ) | 0.86 - 5.64 | 2.47 | ||||||||||||
Forfeited |
(191,224 | ) | 1.38 - 5.84 | 3.98 | ||||||||||||
Expired |
(134,350 | ) | 1.35 - 10.97 | 4.79 | ||||||||||||
Outstanding as of January 3, 2010 |
6,136,677 | $ | 0.79 - $11.63 | $ | 2.24 | |||||||||||
Granted |
1,490,165 | 4.91 - 6.43 | 5.45 | |||||||||||||
Exercised |
(790,364 | ) | 0.86 - 5.53 | 2.09 | ||||||||||||
Forfeited |
(256,500 | ) | 1.49 - 5.75 | 5.35 | ||||||||||||
Expired |
(935,500 | ) | 1.21 - 11.63 | 1.48 | ||||||||||||
Outstanding as of January 2, 2011 |
5,644,478 | $ | 0.79 - $6.43 | $ | 3.09 | $ | 16,832 | |||||||||
Stock options exercisable
at January 2, 2011 |
2,636,975 | $ | 2.31 | $ | 9,920 | |||||||||||
The weighted average grant date fair value of options granted in fiscal years 2010, 2009 and 2008
was $3.11, $2.60 and $0.56 per share, respectively.
58
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APAC CUSTOMER SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Dollars in thousands, except share data and as otherwise indicated)
The following table summarizes information concerning stock options outstanding as of January 2,
2011:
| Per Share Exercise Price Ranges | Total | |||||||||||||||
| $0.79-$1.62 | $1.64-$5.23 | $5.31-$6.43 | $0.79-$6.43 | |||||||||||||
Outstanding as of January 2,
2011 |
2,182,078 | 2,518,445 | 943,955 | 5,644,478 | ||||||||||||
Weighted average remaining term |
6.52 | 6.87 | 8.19 | 6.96 | ||||||||||||
Weighted average exercise price |
$ | 1.25 | $ | 3.72 | $ | 5.67 | $ | 3.09 | ||||||||
Exercisable as of January 2,
2011 |
1,263,824 | 1,163,809 | 209,342 | 2,636,975 | ||||||||||||
Weighted average remaining term |
5.10 | |||||||||||||||
Weighted average exercise price |
$ | 1.31 | $ | 2.79 | $ | 5.67 | $ | 2.31 | ||||||||
Non-vested Common Share Activity
Non-vested common share grant activity for fiscal year 2010 was as follows:
| Description | Shares | |||
Outstanding as of January 3, 2010 |
25,000 | |||
Granted |
250,000 | |||
Issued |
(25,000 | ) | ||
Cancelled |
— | |||
Outstanding as of January 2, 2011 |
250,000 | |||
In fiscal year 2010, the Company awarded 250,000 non-vested common shares at a weighted average
value per share of $5.23.
14. Benefit Plans
Employees meeting certain eligibility requirements may contribute up to 25% of pretax gross wages,
subject to certain restrictions, to the 401(k) savings plan. The Company also sponsors a
non-qualified retirement plan (Select Plan) for senior employees. Those employees meeting the
eligibility requirements as defined therein may contribute up to 25% of their base wages across the
401(k) plan and the Select Plan, subject to certain restrictions. The Company makes matching
contributions of 50% of the first 6% of an employee’s wages contributed to these plans. Company
matching contributions vest 20% per year over a five-year period. For fiscal years 2010, 2009 and
2008 the Company made matching contributions to the plans of $547, $499 and $553, respectively. As
of January 2, 2011, the fair value of investments in the Select Plan totaled $2.4 million and are
reflected on the Company’s balance sheet in other current assets. The offsetting obligation to
employees participating in the Select Plan, which will always equal the fair value of the
investments in accordance with the plan documents, are recorded on the Company’s balance sheet in
other current liabilities.
15. Related Party Transactions
In connection with the Revolving Loan Agreement with PNC, the Company had a $9.0 million 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. On March
20, 2009, PNC released the Credit Enhancement Letter of Credit based on the Company having achieved
certain financial ratios and EBITDA and having met 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 had
also entered into a Reimbursement and Security Agreement, dated May 5, 2008 (Reimbursement
Agreement). The Company paid $0.3 million in 2008 to TCS for fees related to the Credit
Enhancement Letter of Credit and the Reimbursement Agreement.
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APAC CUSTOMER SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Dollars in thousands, except share data and as otherwise indicated)
16. Fair Value Measurements
Fair value is defined 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. The accounting standards
establish 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. |
The following table presents the fair value hierarchy for those assets and liabilities measured at
fair value on a recurring basis as of January 2, 2011:
| Fair Value Measurements as of January 2, 2011 | ||||||||||||
| Level 1 | Level 2 | Level 3 | ||||||||||
Assets: |
||||||||||||
Cash equivalents 1 |
$ | 38,465 | $ | — | $ | — | ||||||
Non-qualified retirement plan 2 |
2,375 | — | — | |||||||||
Foreign currency contracts 3 |
— | 1,109 | — | |||||||||
Non-current investments 4 |
1,179 | — | — | |||||||||
Liabilities: |
||||||||||||
Foreign currency contracts 3 |
$ | — | $ | 22 | $ | — | ||||||
Non-qualified retirement plan obligation 2 |
2,375 | — | — | |||||||||
| (1) | Cash equivalents: The carrying amount of these items approximates fair value at period end. |
|
| (2) | Non-qualified retirement plan: The Company maintains a non-qualified retirement plan (Select
Plan) for highly compensated employees who are limited in the amount of contributions that they can
make in the Company’s 401K plan. As of January 2, 2011, the fair value of investments in the Select
Plan totaled $2.4 million and is reflected on the Company’s balance sheet in other current assets.
The offsetting obligation to employees participating in the Select Plan, which will always equal
the fair value of the investments, are recorded on the Company’s balance sheet in other current
liabilities. |
|
| (3) | Foreign currency contracts: The carrying amount of these items is based on the market valuation
approach which is provided by the counter-party institutions and uses the closing or mid-market
rate and forward points obtained from external sources on the date of valuation. There are no
guaranteed selling prices for these forward currency contracts. |
|
| (4) | Non-current investments: The carrying amount of these items, which represent Philippine
treasury bills, approximates fair value at fiscal year-end and is recorded as a component of other
assets on the Company’s balance sheet. |
The carrying amounts of accounts receivable, accounts payable and short-term debt approximate fair
value.
There were no transfers of assets or liabilities between Level 1 and Level 2 during fiscal year
2010.
17. Derivative Instruments
The Company uses forward contracts to mitigate foreign currency risk. The derivatives are
designated as cash flow hedges to the extent that the instruments qualify for accounting as a
hedging instrument; therefore, the effective portion of gains and losses that result from changes
in fair value of the derivative instruments are recorded in accumulated other comprehensive income
(OCI) until the hedged transaction affects income, at which time gains and/or losses are realized.
The Company expects these amounts to be reclassified into earnings over the next eighteen months.
If the instrument does not qualify for accounting as a
hedge, the change in the value of the instrument during the reporting period is recorded
immediately to earnings. The Company assesses hedge effectiveness each reporting period.
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APAC CUSTOMER SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Dollars in thousands, except share data and as otherwise indicated)
The objective of the foreign currency hedge contract 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 U.S. operations to the Philippines
representing the Philippine’s share of revenue. The Company currently engages in forward
contracts with three major financial credit institutions. As of January 2, 2011, forward contracts
to purchase 1,235 million Philippine pesos at a U.S. dollar notional of $27.3 million were
outstanding.
Each contract is designated to a hedged item which is settled periodically. The hedged item
represents the change in the U.S. dollar cash flow necessary to settle the accounts payable balance
at periodic intervals over the next eighteen months. The settlement timing corresponds with the
payroll and rent cycles in the Philippines. No ineffectiveness is anticipated because the notional
amount of the contracts is no more than 95% of the anticipated payable balance and declines
steadily over the course of the next eighteen months. Also, the maturity date of the forward
contract coincides with the timing of the effective repayment of the intercompany payable. The
Company had no gain or loss recognized in income related to ineffectiveness for fiscal years 2010,
2009 and 2008.
The Company had entered into an interest rate swap with the objective of mitigating the variability
in cash flows resulting from changes in the underlying interest rate index or changes in the LIBOR
rate. As of December 28, 2008, a pay fixed / receive floating interest rate swap for a $5.0
million notional amount was outstanding. The interest rate swap had a maturity date of May 2011.
The interest rate swap did not meet the criteria to be accounted for as a hedge and therefore, the
unrealized loss of less than $0.1 million and $0.3 million for the fiscal years ended January 3,
2010 and December 28, 2008, respectively, was recognized as a component of interest expense in the
Company’s Statement of Operations. The contract was terminated in June 2009 due to the
elimination of outstanding borrowings.
At January 2, 2011 and January 3, 2010, the fair value carrying amount of the Company’s derivative
instruments was recorded as follows:
| Asset Derivatives | Liability Derivatives | |||||||||||||||||||||||
| Fair Value | Fair Value | |||||||||||||||||||||||
| Balance Sheet | January 2, | January 3, | Balance Sheet | January 2, | January 3, | |||||||||||||||||||
| Location | 2011 | 2010 | Location | 2011 | 2010 | |||||||||||||||||||
Derivatives designated as
hedging instruments : |
||||||||||||||||||||||||
Foreign currency contracts |
Other Current Assets | $ | 1,109 | $ | 657 | Accrued Liabilities | $ | 22 | $ | 15 | ||||||||||||||
Derivatives not designated
as hedging instruments: |
||||||||||||||||||||||||
NA |
Other Current Assets | — | — | Accrued Liabilities | — | — | ||||||||||||||||||
Total derivatives |
$ | 1,109 | $ | 657 | $ | 22 | $ | 15 | ||||||||||||||||
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APAC CUSTOMER SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Dollars in thousands, except share data and as otherwise indicated)
The effect of derivative instruments on the Consolidated Statement of Operations for fiscal years
2010, 2009 and 2008 was as follows:
| Amount of Gain (Loss) Recognized | Gain (Loss) Reclassified from Accumulated | |||||||||||||||||||||||||||
| Derivatives Designated as | in OCI on Derivatives (Effective Portion) | OCI into Income (Effective Portion) | ||||||||||||||||||||||||||
| Cash Flow | January 2, | January 3, | December 28, | January 2, | January 3, | December 28, | ||||||||||||||||||||||
| Hedging Instruments | 2011 | 2010 | 2008 | Location | 2011 | 2010 | 2008 | |||||||||||||||||||||
Foreign currency
contracts |
$ | 302 | $ | 934 | $ | (1,539 | ) | Cost of Services | $ | 1,412 | $ | (161 | ) | $ | (721 | ) | ||||||||||||
| Amount of Gain (Loss) Recognized in Income | ||||||||||||||||
| on Derivative | ||||||||||||||||
| Derivatives not Designated | Location of Gain (Loss) Recognized | January 2, | January 3, | December 28, | ||||||||||||
| as Hedging Instruments | in Income on Derivative | 2011 | 2010 | 2008 | ||||||||||||
Interest rate swap |
Interest income (expense) | $ | — | $ | (18 | ) | $ | (278 | ) | |||||||
18. Subsequent Events
On February 14, 2011, the Company entered into an amendment to its existing Vendor Agreement, dated
October 4, 2004, with Medco Health Services, Inc. (“Medco”). The amendment has an effective date
of December 29, 2010. Pursuant to the amendment, the Company agreed to continue to provide
call-center services to Medco on the revised terms set forth in the amendment. A copy of the
amendment is being filed as an Exhibit to this Form 10-K.
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APAC CUSTOMER SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Dollars in thousands, except share data and as otherwise indicated)
19. Quarterly Data (Unaudited)
The following is a summary of the quarterly results of operations, including income per share, for
the Company for the quarterly periods of fiscal years 2010 and 2009:
| First | Second | Third | Fourth | Full | ||||||||||||||||
| Quarter | Quarter | Quarter | Quarter | Year | ||||||||||||||||
Fiscal year ended January 2, 2011: |
||||||||||||||||||||
Net revenue |
$ | 85,254 | $ | 77,386 | $ | 76,878 | $ | 86,440 | $ | 325,958 | ||||||||||
Gross profit |
20,446 | 16,377 | 14,846 | 16,799 | 68,468 | |||||||||||||||
Operating income |
9,899 | 8,267 | 6,704 | 8,974 | 33,844 | |||||||||||||||
Net income |
6,560 | 5,329 | 4,644 | 6,321 | 22,854 | |||||||||||||||
Net income per share: |
||||||||||||||||||||
Basic |
$ | 0.13 | $ | 0.10 | $ | 0.09 | $ | 0.12 | $ | 0.44 | ||||||||||
Diluted |
$ | 0.12 | $ | 0.10 | $ | 0.08 | $ | 0.12 | $ | 0.42 | ||||||||||
Fiscal year ended January 3, 2010: |
||||||||||||||||||||
Net revenue |
$ | 73,246 | $ | 66,042 | $ | 68,360 | $ | 85,529 | $ | 293,177 | ||||||||||
Gross profit |
18,550 | 15,404 | 14,165 | 17,213 | 65,332 | |||||||||||||||
Operating income |
10,852 | 7,801 | 6,656 | 9,347 | 34,656 | |||||||||||||||
Net income |
10,619 | 7,736 | 6,588 | 33,110 | 58,053 | |||||||||||||||
Net income per share: |
||||||||||||||||||||
Basic |
$ | 0.21 | $ | 0.15 | $ | 0.13 | $ | 0.63 | $ | 1.13 | ||||||||||
Diluted |
$ | 0.20 | $ | 0.14 | $ | 0.12 | $ | 0.61 | $ | 1.09 | ||||||||||
The Company operates on a 52/53-week fiscal year. All fiscal quarters presented were 13-weeks,
except for the fourth quarter of fiscal year 2009 which ended on January 3, 2010. The fourth
quarter of fiscal year 2009 was 14 weeks. The effect of the additional week in the fourth quarter
of 2009 was to increase revenues and gross profit by $6.0 million and $0.9 million, respectively,
and to increase operating income and net income by $0.4 million.
Total quarterly earnings per common share may not equal the full year amount because net income per
common share is calculated independently for each quarter. Common share equivalents can change on a
quarter-to-quarter basis due to their dilutive impact on each quarterly earnings per share
calculation.
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| Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. |
We have not had disagreements with our independent registered public accounting firm regarding
accounting or financial disclosure matters.
| Item 9A. | Controls and Procedures. |
Disclosure Controls and Procedures
As of January 2, 2011, under the direction of our Chief Executive Officer and Chief Financial
Officer, we evaluated the effectiveness of our disclosure controls and procedures. The term
“disclosure controls and procedures,” as defined in Rules 13a-15(e) under the Securities Exchange
Act of 1934, as amended, means controls and other procedures of a company that are designed to
ensure that information required to be disclosed by a company in the reports that it files or
submits under the Exchange Act is recorded, processed, summarized and reported, within the time
periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls
and procedures include, without limitation, controls and procedures designed to ensure that
information required to be disclosed by a company in the reports that it files or submits under the
Securities Exchange Act is accumulated and communicated to the company’s management, including its
principal executive and principal financial officers, as appropriate to allow timely decisions
regarding required disclosure. Management recognizes that any controls and procedures, no matter
how well designed and operated, can provide only reasonable assurance of achieving their objectives
and management necessarily applies its judgment in evaluating the cost-benefit relationship of
possible controls and procedures. Based on the evaluation of our disclosure controls and
procedures as of January 2, 2011, our Chief Executive Officer and Chief Financial Officer concluded
that, as of such date, our disclosure controls and procedures were effective at the reasonable
assurance level.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting (as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f)). 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
internal control over financial reporting based on the framework in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on
our evaluation under the framework in Internal Control—Integrated Framework, our management
concluded that our internal control over financial reporting was effective as of January 2, 2011.
The effectiveness of our internal control over financial reporting as of January 2, 2011 has been
audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their
report which is included elsewhere in this Annual Report on Form 10-K.
Internal Control Over Financial Reporting
There have been no 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) that occurred during the fourth
fiscal quarter ended January 2, 2011 that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Shareholders of APAC Customer Services, Inc.
Shareholders of APAC Customer Services, Inc.
We have audited APAC Customer Services, Inc.’s internal control over financial reporting as of
January 2, 2011, based on criteria established in Internal Control — Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). APAC
Customer Services, Inc.’s management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal control over financial
reporting included in the accompanying management’s Report on Internal Control Over Financial
Reporting. Our responsibility is to express an opinion of the company’s internal control over
financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control, and performing such other
procedures as we considered necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
company’s internal control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
In our opinion, APAC Customer Services, Inc. maintained, in all material respects, effective
internal control over financial reporting as of January 2, 2011 based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated balance sheets of APAC Customer Services, Inc. as of
January 2, 2011 and January 3, 2010, and the related consolidated statements of operations,
shareholders’ equity and cash flows for each of the three years in the period ended January 2, 2011
and our report dated February 18, 2011, expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Chicago, Illinois
February 18, 2011
February 18, 2011
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| Item 9B. | Other Information. |
Not applicable.
PART III
| Item 10. | Directors, Executive Officers and Corporate Governance. |
Except as set forth below, the information required by this Item (except for the information
regarding executive officers required by Item 401 of Regulation S-K which is included in Part I
under the caption “Executive Officers of Registrant”) will be set forth in our Proxy Statement for
the Annual Meeting of Shareholders to be held on June 7, 2011 under the caption “Election of
Directors,” which information is incorporated herein by reference.
We have adopted a financial code of ethics that applies to our Chief Executive Officer and senior
financial and accounting officers. This financial code of ethics is posted on our website. The
internet address for our website is http://www.apaccustomerservices.com and the financial
code of ethics may be found in the Investor Relations portion of that website. We intend to
satisfy the disclosure requirement under Item 10 of Form 8-K regarding an amendment to, or waiver
from, a provision of this code of ethics by posting such information on our website, at the address
and location specified above.
Information concerning compliance with Section 16 of the Exchange Act will be set forth in our
Proxy Statement for the Annual Meeting of Shareholders to be held on June 7, 2011 under the caption
“Section 16(a) Beneficial Ownership Reporting Compliance,” which information is hereby incorporated
by reference.
| Item 11. | Executive Compensation. |
The information required by this Item will be set forth in our Proxy Statement for the Annual
Meeting of Shareholders to be held on June 7, 2011 under the captions “Election of Directors —
Compensation Committee Interlocks and Insider Participation” and “Executive Compensation,” which
information is incorporated herein by reference.
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters. |
| (a) | The information concerning the security ownership of certain beneficial owners required by
this Item will be set forth in our Proxy Statement for the Annual Meeting of Shareholders to
be held on June 7, 2011 under the caption “Common Shares Beneficially Owned by Principal
Shareholders and Management,” which information is hereby incorporated by reference. |
|
| (b) | The information concerning security ownership of management required by this Item will be set
forth in our Proxy Statement for the Annual Meeting of Shareholders to be held on June 7, 2011
under the caption “Common Shares Beneficially Owned by Principal Shareholders and Management,”
which information is hereby incorporated by reference. |
Equity Compensation Plan Information
The following table summarizes the status of common shares authorized for issuance under our
Amended and Restated 2005 Incentive Stock Plan as of January 2, 2011.
| Number of Securities | Number of Securities Remaining | |||||||||||
| to Be Issued Upon | Weighted Average | Available for Future Issuance | ||||||||||
| Exercise of | Exercise Price of | Under Equity Compensation | ||||||||||
| Outstanding Options, | Outstanding Options, | Plans (Excluding Securities | ||||||||||
| Plan Category | Warrants, and Rights | Warrants, and Rights | Reflected in the First Column) | |||||||||
Equity compensation plans
approved by security holders |
5,644,478 | $ | 3.09 | 1,127,766 | ||||||||
Equity compensation plans not
approved by security holders |
— | — | — | |||||||||
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Table of Contents
| Item 13. | Certain Relationships and Related Transactions, and Director Independence. |
The information required by this Item will be set forth in our Proxy Statement for the Annual
Meeting of Shareholders to be held on June 7, 2011 under the captions “Election of Directors” and
“Certain Relationships and Related Transactions,” which information is hereby incorporated by
reference.
| Item 14. | Principal Accounting Fees and Services. |
The information required by this Item will be set forth in our Proxy Statement for the Annual
Meeting of Shareholders to be held on June 7, 2011 under the caption “Relationships with
Independent Registered Public Accounting Firm,” which information is incorporated herein by
reference.
PART IV
| Item 15. | Exhibits and Financial Statement Schedules. |
(a) (1) Financial Statements
The following financial statements of the Company are included in Part II, Item 8 of this
Annual Report on Form 10-K:
| (i) | Report of Independent Registered Public Accounting Firm for the Fiscal Years
Ended January 2, 2011, January 3, 2010, and December 28, 2008 |
||
| (ii) | Consolidated Statements of Operations for the Fiscal Years Ended January 2,
2011, January 3, 2010, and December 28, 2008 |
||
| (iii) | Consolidated Balance Sheets as of January 2, 2011 and January 3, 2010 |
||
| (iv) | Consolidated Statements of Shareholders’ Equity for the Fiscal Years Ended
January 2, 2011, January 3, 2010, and December 28, 2008 |
||
| (v) | Consolidated Statements of Cash Flows for the Fiscal Years Ended January 2,
2011, January 3, 2010, and December 28, 2008 |
||
| (vi) | Notes to Consolidated Financial Statements |
||
| (vii) | Quarterly Results of Operations for the Fiscal Years Ended January 2, 2011 and
January 3, 2010 |
(2) Financial Statement Schedules
The following financial statement schedule is submitted as part of this Annual Report on Form
10-K:
| (i) | Schedule II—Valuation and Qualifying Accounts |
All other schedules are not submitted because they are not applicable or are not required
under Regulation S-X or because the required information is included in the financial
statements or notes thereto.
(3) Exhibits
The exhibits required by Item 601 of Regulation S-K are listed in the Exhibit Index attached
hereto.
(b) Exhibits
The response to this portion of Item 15 is submitted as a separate section of this Annual
Report on Form 10-K. See Item 15(a) (3) above.
(c) Financial Statement Schedules
The response to this portion of Item 15 is submitted as a separate section of this Annual
Report on Form 10-K. See Item 15(a) (2) above.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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. |
||||
| By: | /s/ Andrew B. Szafran | |||
| Andrew B. Szafran | ||||
| Senior Vice President and Chief Financial Officer |
||||
Dated: February 18, 2011
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the registrant and in the capacities and on the dates
indicated:
| Signature | Title | Date | ||
/s/ Theodore G. Schwartz*
|
Chairman of the Board of Directors | February 18, 2011 | ||
/s/ Kevin T. Keleghan
|
Director, President and Chief Executive Officer (Principal Executive Officer) |
February 18, 2011 | ||
/s/ Andrew B. Szafran
|
Senior Vice President and Chief Financial Officer (Principal Financial Officer) |
February 18, 2011 | ||
/s/ Joseph R. Doolan
|
Vice President and Controller (Principal Accounting Officer) |
February 18, 2011 | ||
/s/ Katherine Andreasen*
|
Director | February 18, 2011 | ||
/s/ John J. Park *
|
Director | February 18, 2011 | ||
/s/ Samuel K. Skinner*
|
Director | February 18, 2011 | ||
/s/ John L. Workman *
|
Director | February 18, 2011 |
| * | Andrew B. Szafran, as attorney in fact for each person indicated. |
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Table of Contents
Schedule II
VALUATION AND QUALIFYING ACCOUNTS
(Dollars in thousands)
(Dollars in thousands)
| Column A | Column B | Column C | Column D | Column E | ||||||||||||
| Balance at | Charged to | Balance at | ||||||||||||||
| Beginning of | Costs | End of | ||||||||||||||
| Description | Period | and Expenses | Deductions (a) | Period | ||||||||||||
Allowance for doubtful accounts: |
||||||||||||||||
Fiscal Year ended December 28, 2008 |
1,097 | 2,203 | 1,865 | 1,435 | ||||||||||||
Fiscal Year ended January 3, 2010 |
1,435 | 888 | 1,179 | 1,144 | ||||||||||||
Fiscal Year ended January 2, 2011 |
1,144 | 427 | 506 | 1,065 | ||||||||||||
| (a) | Represents charges for which the allowance account was created. |
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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 January 1, 2006. |
|||
| 3.2 | Second Amended and Restated By-laws of APAC Customer Services, Inc., 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 28, 2008. |
|||
| *10.1 | APAC Customer Services, Inc. Amended and Restated 2005 Incentive Stock Plan incorporated by reference into
APAC Customer Services, Inc.’s Quarterly Report on Form 10-Q for the fiscal quarter ended April 1, 2007. |
|||
| *10.2 | Form of Non-Employee Director Stock Option Agreement (revised 2007), incorporated by reference to APAC
Customer Services, Inc.’s Quarterly Report on Form 10-Q for the fiscal quarter ended April 1, 2007. |
|||
| *10.3 | Form of Employee Stock Option Agreement (revised 2007), incorporated by reference to APAC Customer Services,
Inc.’s Quarterly Report on Form 10-Q for the fiscal quarter ended April 1, 2007. |
|||
| *10.4 | Form of Restricted Stock Award Agreement (revised 2007), incorporated by reference to APAC Customer Services,
Inc.’s Quarterly Report on Form 10-Q for the fiscal quarter ended April 1, 2007. |
|||
| *10.5 | APAC Customer Services, Inc. Retirement Plan for Senior Employees, incorporated by reference to APAC Customer
Services, Inc.’s Annual Report on Form 10-K for the fiscal year ended December 30, 2007. |
|||
| *10.6 | Amended and Restated Executive Employment Agreement with Robert J. Keller, dated August 6, 2007, incorporated
by reference to APAC Customer Services, Inc.’s Quarterly Report on Form 10-Q for the fiscal quarter ended July
1, 2007. |
|||
| *10.7 | Letter Agreement, dated January 16, 2008, with Robert J. Keller, incorporated by reference to APAC Customer
Services, Inc.’s Current Report on Form 8-K, dated January 17, 2008. |
|||
| *10.8 | Employment Agreement with Mark E. McDermott, dated April 12, 2004, incorporated by reference into APAC
Customer Services, Inc.’s Annual Report on Form 10-K for the fiscal year ended January 2, 2005. |
|||
| *10.9 | Amendment to Employment Agreement with Mark E. McDermott, dated August 6, 2007, incorporated by reference to
APAC Customer Services, Inc.’s Quarterly Report on Form 10-Q for the fiscal quarter ended July 1, 2007. |
|||
| *10.10 | Employment Agreement with Joseph R. Doolan, dated January 11, 2006, incorporated by reference to APAC Customer
Services, Inc.’s Current Report on Form 8-K, dated February 9, 2006. |
|||
| *10.11 | APAC Customer Services, Inc. Management Incentive Plan, as amended and restated effective August 2, 2007,
incorporated by reference into APAC Customer Services, Inc.’s Quarterly Report on Form 10-Q for the fiscal
quarter ended July 1, 2007. |
|||
| *10.12 | Form of Amended and Restated Employment Security Agreement, incorporated by reference to APAC Customer
Services, Inc.’s Quarterly Report on Form 10-Q for the fiscal quarter ended July 1, 2007. |
|||
| *10.13 | Form of Employment Security Agreement, incorporated by reference to APAC Customer Services, Inc.’s Quarterly
Report on Form 10-Q for the fiscal quarter ended July 1, 2007. |
|||
| *10.14 | Executive Employment Agreement, dated February 18, 2008, with Michael P. Marrow, incorporated by reference to
APAC Customer Services, Inc.’s Current Report on Form 8-K, dated February 19, 2008. |
|||
| 10.15 | Registration Rights Agreement, incorporated by reference to APAC TeleServices, Inc.’s Registration Statement
on Form S-1, as amended, Registration No. 33-95638. |
|||
| 10.16 | Master Services Agreement, dated April 24, 2008, with United Parcel Services OASIS Supply Corporation,
incorporated by reference to APAC Customer Services, Inc.’s current Report on Form 8-K, dated April 28, 2008. |
|||
| 10.17 | Vendor Agreement for Call Center Services, dated September 26, 2004 with Medco Health Solutions, Inc.,
incorporated by reference to APAC Customer Services, Inc.’s Annual Report on Form 10-K for the fiscal year
ended December 28, 2008. |
|||
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Table of Contents
| Exhibit | ||||
| Number | Description | |||
| 10.18 | Revolving Loan and Security Agreement, dated May 5, 2008, among APAC Customer Services, Inc. and PNC Bank,
National Association, as agent, and the financial institutions from time to time party thereto as lenders,
incorporated by reference to APAC Customer Services, Inc.’s Current Report on Form 8-K, dated May 6, 2008. |
|||
| *10.19 | Employment Agreement with Arthur DiBari, dated March 11, 2008, incorporated by reference to APAC Customer
Services, Inc.’s Quarterly Report on Form 10-Q for the fiscal quarter ended March 30, 2008. |
|||
| *10.20 | Employment Agreement with Andrew B. Szafran, dated May 12, 2008, incorporated by reference to APAC Customer
Services, Inc.’s Current Report on Form 8-K, dated May 14, 2008. |
|||
| *10.21 | Employment Agreement with Robert B. Nachwalter, dated October 31, 2008, incorporated by reference to APAC
Customer Services, Inc.’s Current Report on Form 8-K, dated November 20, 2008. |
|||
| 10.22 | Form of Indemnification Agreement dated April 28, 2009, incorporated by reference to APAC Customer Services,
Inc.’s Current Report on Form 8-K, dated April 28, 2009. |
|||
| *10.23 | Employment Agreement with Christopher H. Crowley, dated February 12, 2009, incorporated by reference to APAC
Customer Services, Inc.’s Current Report on Form 8-K, dated March 12, 2009. |
|||
| 10.24 | Master Agreement for Call Center Services Between Verizon Corporate Services Group Inc. and APAC Customer
Services, Inc., incorporated by reference to APAC Customer Services, Inc.’s Current Report on Form 8-K, dated
July 14, 2009. |
|||
| *10.25 | Employment Agreement with Eric Tinch, dated April 1, 2010, incorporated by reference to APAC Customer
Services, Inc.’s Current Report on Form 8-K, dated April 12, 2010. |
|||
| *10.26 | Executive Employment Agreement with Kevin T. Keleghan, dated September 13, 2010, incorporated by reference to
APAC Customer Services, Inc.’s Current Report on Form 8-K, filed September 13, 2010. |
|||
| *10.27 | Employment Security Agreement with Kevin T. Keleghan, dated September 13, 2010, incorporated by reference to
APAC Customer Services, Inc.’s Current Report on Form 8-K, filed September 13, 2010. |
|||
| *10.28 | Agreement Protecting Company Interests with Kevin T. Keleghan, dated September 13, 2010, incorporated by
reference to APAC Customer Services, Inc.’s Current Report on Form 8-K, filed September 13, 2010. |
|||
| *10.29 | Letter Amendment to Executive Employment Agreement with Michael P. Marrow, dated September 12, 2010,
incorporated by reference to APAC Customer Services, Inc.’s Current Report on Form 8-K, filed September 13,
2010 (amendment filed September 14, 2010.) |
|||
| *10.30 | Letter Amendment to Employment Agreement with Arthur DiBari, executed on October 1, 2010, incorporated by
reference to APAC Customer Services, Inc.’s Current Report on Form 8-K, filed October 6, 2010. |
|||
| *10.31 | Letter Amendment, dated December 31, 2010, to Employment Agreement with Eric Tinch, incorporated by reference
to APAC Customer Services, Inc.’s Current Report on Form 8-K, filed January 3, 2011. |
|||
| 10.32 | Amendment to Vendor Agreement, dated February 14, 2011 but effective as of December 29, 2010, between APAC
Customer Services, Inc. and Medco Health Services, Inc., |
|||
| 21.1 | Subsidiaries of APAC Customer Services, Inc. |
|||
| 23.2 | Consent of Ernst & Young LLP. |
|||
| 24.1 | Power of attorney executed by Katherine Andreasen, John J. Park, Theodore G. Schwartz, Samuel K. Skinner and
John L. Workman. |
|||
| 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. |
|||
| * | Indicates management employment contracts or compensatory plans or arrangements. |
71