| APAC CUSTOMER SERVICE INC Item 1A Risk Factors 15 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: Our revenue is generated from a limited number of clients |
| We derive a substantial portion of our revenue from a small number of clients |
| 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, that the volumes of our most profitable or larger programs will not be reduced, or that, should we lose a client, we would be able to replace such clients or programs with clients or programs that generate a comparable amount of revenue or profits |
| Consequently, the loss of one or more of our significant clients 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 "e Our Target Industries and Clients—Major Clients "e |
| Our success is subject to the terms of our client contracts |
| We provide services to our clients under contracts, many of which may be terminated by the client (but not by us) for convenience |
| In addition, most of our 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 |
| 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 payment of penalties for failure to meet performance metrics, 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 "e Client Relationships "e |
| Our success depends on the continued progress of our business turnaround |
| We made a strategic decision to move our service scope from a universal service agency providing both inbound and outbound calling services to a company that is focused on competing more successfully in the customer care segment of our industry |
| While preliminary results from implementing these changes have been encouraging, there can be no assurance that these trends will continue or that we will successfully turn around our business |
| Failure to realize continued improvements in revenue, gross profit margins, capacity utilization and operating expenses could materially adversely affect our business, results of operations, liquidity, and financial condition |
| See Item 1 of this Annual Report on Form 10-K under the caption "e Business Turnaround "e |
| 15 _________________________________________________________________ Our business may be affected by our cash flows from operations and borrowing availability under our current loan agreement |
| Our cash flow is significantly impacted by our ability to collect our clients &apos accounts receivable on a timely basis |
| To the extent that our business with a single client or small group of clients represents a more significant portion of our revenue, a delay in receiving payment could materially adversely affect the availability of cash to fund operations |
| Our current loan agreement requires us to comply with certain financial and other covenants, including limitations on our ability to make capital expenditures, incur additional indebtedness, create liens, and acquire, sell or dispose of certain assets |
| Our ability to borrow under the 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, including a reserve related to the Internal Revenue Services &apos proposed adjustment to our 2002 tax return which is described below |
| 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 |
| 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 October 2003, we received an dlra11dtta6 million cash tax refund associated with the write-off for tax purposes in 2002 of our remaining investment in ITI Holdings, Inc |
| The Internal Revenue Service has audited our 2002 tax return and proposed an adjustment that would disallow this deduction |
| We believe that we have sufficient support for the deduction and intend to pursue our available remedies |
| On November 30, 2005, we filed a protest contesting the proposal adjustment and requesting a hearing with an Internal Revenue Service Appeals Officer |
| At this point, it is unclear as to how this issue will ultimately be resolved |
| Although we have not recognized the income tax benefit related to this deduction and have previously recorded a liability for the amount of the refund, should we not prevail in this matter, we may be required to pay some or all of the previously received refund of dlra11dtta6 million, as well as interest related thereto |
| The timing of any repayment of the previously received refund could have a material adverse effect on our liquidity, require us to seek additional financing to fund the repayment, and result in a default under our loan agreement |
| There can be no assurance that we will be able to get access to the necessary funds on acceptable terms |
| A significant change in operating cash flow, a failure to successfully complete our business turnaround or an adverse outcome in our pending dispute with the Internal Revenue Service could have a material adverse effect on our liquidity and our ability to comply with the covenants in the loan agreement |
| Our financial results depend on our ability to effectively manage our customer care center capacity |
| Our profitability is influenced significantly by our customer care center capacity utilization |
| We currently have significantly higher utilization during weekdays |
| We periodically assess the long-term capacity utilization of our customer care centers |
| In order to create additional capacity necessary to accommodate new and expanded programs and clients, we must consider opening new centers |
| The opening or expansion of customer care centers may result, at least in the short-term, in idle capacity until the new or expanded program can be fully implemented |
| There can be no assurance that we will be able to achieve optimum utilization of our customer care center capacity |
| If we lose one or more significant clients, if the volume of calls from clients declines, or a significant contract is not implemented in the time frame or budget anticipated, our results of operations are likely to be adversely affected unless and until we are able to reduce expenses proportionately or generate additional revenues |
| See Item 1 of this Annual Report on Form 10-K under the caption "e Operations and Capacity Utilization—Capacity and Workforce Management "e |
| 16 _________________________________________________________________ Our inability to attract and retain a sufficient number of qualified employees could negatively impact our business |
| Our industry is very labor intensive and has experienced high personnel turnover |
| Many of our employees receive modest hourly wages and, although we employ a significant number of full-time employees, many are nevertheless employed on a part-time basis |
| Much of our operations, particularly complex technology-based inbound customer service, involve extensive training and require specially trained employees |
| A higher turnover rate among our employees would increase our recruiting and training costs and decrease operating efficiencies and productivity |
| See Item 1 of this Annual Report on Form 10-K under the caption "e Personnel and Training "e |
| Growth in our business will require us to recruit and train qualified personnel at an accelerated rate from time to time |
| There can be no assurance that we will be able to hire, train and retain a sufficient labor force of qualified employees |
| A significant portion of our costs consists 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 |
| Our business operates in a highly competitive market |
| We operate in a fragmented and highly competitive market and such competition may intensify in the future |
| Our competitors range in size from small firms offering specialized applications to large, publicly-traded firms operating in the business process outsourcing field |
| Our competitors also include clients and potential clients who provide their own customer care services internally |
| A number of our competitors have greater resources and capabilities |
| See Item 1 of this Annual Report on Form 10-K under the caption "e Competition "e |
| We believe the principal competitive factors in our industry are management credibility and reputation, technological expertise, service quality, performance against client metrics, strength of relationships, ability to develop and implement quality, customized products and services quickly, and cost of services |
| We believe several significant factors impact the current competitive environment: (1) the marketapstas movement from hourly pricing to other pricing models, including per call, per transaction, and per phone minute; (2) the growth in offshore capacity, which offers lower pricing than domestic capacity, largely due to the cost of labor differential; (3) many competitors have unutilized capacity; and (4) clients and potential clients are increasingly utilizing the services of call center procurement consultants in the bidding process |
| Such factors, when combined, are causing clients and prospective clients to demand more competitive pricing and higher quality service |
| There can be no assurance that we can successfully compete in this environment |
| Further, we believe several other factors may affect the demand for our services |
| The increased use of new 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 is increasing political concern regarding the movement of service jobs offshore, 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 and changing market conditions could cause our services to lose market acceptance 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 |
| 17 _________________________________________________________________ Our future success and competitiveness will depend on our ability to keep our technology up-to-date |
| Our business 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 develop information technology solutions that keep pace with evolving industry standards and changing client demands |
| There can be no assurance that we will successfully meet this challenge or that the technologies developed by our competitors will not render our products and services obsolete |
| See Item 1 of this Annual Report on Form 10-K under the caption "e Technology and Telecommunications "e |
| Our business may be affected by the success of our clients and their demand for our services |
| Most of our clients are concentrated in the communications, healthcare, financial services, business services, travel and entertainment, and publishing industries |
| There can be no assurance that our clients will continue to market products and services or develop new products or services that require them to use our services |
| A significant downturn in any of these industries, a trend in any of these industries to reduce their outsourced customer care services, or a change in the customer relationship strategy in any of these industries could have a material adverse effect on our business |
| Circumstances outside our control such as acts of God, political instability, equipment malfunction, war and terrorism could seriously harm our business |
| Our success is dependent on the continued operation of our customer care centers |
| In the event of fire, power loss, weather related 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 |
| 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 highly dependent on our computer and telephone equipment and software systems |
| Should we experience a temporary or permanent loss of such equipment or systems (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 |
| 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 |
| Our business and our clients &apos businesses are subject to federal and state 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 in the telecommunications, healthcare, and financial services industries |
| 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, pharmaceutical and gaming businesses impose licensing and regulatory obligations on us |
| In addition, federal and state laws regulate telephone solicitations to 18 _________________________________________________________________ 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 "e Government Regulation "e |
| 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 |
| Future laws and regulations may require us to modify our operations or service offerings in order to effectively meet our clients &apos service requirements, and there can be no assurance that additional regulations would not limit our activities or significantly increase the cost of regulatory compliance |
| There is increasing federal and state interest in further regulation of consumer privacy and the regulation of the movement of service jobs offshore, some aspects of which could impose additional regulatory pressure on our clients &apos businesses and, less directly, on our business |
| Additional regulation in these areas could reduce the demand for our services |
| Our financial results may be affected by risks associated with international operations and expansion |
| We intend to continue to expand and pursue opportunities for our offshore customer care center in the Philippines and may consider other foreign operations |
| 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 &apos sourcing preferences and potentially adverse tax consequences |
| In particular, we serve an increasing number of US clients from our customer care center in the Philippines |
| Contracts with these clients are typically priced in US dollars while costs incurred in operating the center are denominated in Philippine pesos, which represent a foreign currency exchange risk to us |
| There can be no assurance that one or more such factors will not have a material adverse effect on our international operations and, consequently, on our business, results of operations, liquidity and financial condition |
| Increases in the cost of telephone and data services or significant interruptions in such services could seriously harm our business |
| Our business is materially dependent on telephone and data services provided by various local and long distance telephone companies |
| Because of this dependence, 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 |
| A significant increase in the cost of telephone services that is not recoverable through an increase in the price of our services, or any significant interruption in telephone services, could have a material adverse effect on our business, results of operations, liquidity and financial condition |
| Our success depends on key personnel |
| Our 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 be able to attract, motivate and retain the services, of such officers and employees |
| The loss of key personnel could have a material adverse effect on our business, results of operations, liquidity and financial condition |
| 19 _________________________________________________________________ Our principal shareholder can exercise significant control over the Company |
| Theodore G Schwartz, our Chairman, beneficially owns approximately 20prca of our outstanding common shares |
| In addition, four trusts and a partnership established by Mr |
| Schwartz, beneficially own an aggregate 30dtta5prca of our outstanding common shares |
| Schwartz is able to exercise significant control over the outcome of substantially all matters requiring action by our shareholders |
| Such voting concentration may have the effect of discouraging, delaying or preventing a change in control |