** **

**UNITED STATES**SECURITIES AND EXCHANGE COMMISSION

## **Washington, D.C. 20549**

 

----

 

**FORM 10-Q**

 

**(MarkOne)**

 

| **ý**                                       |   | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF  1934.**  |
|--------------------------------------------------|--------|-------------------------------------------------------------------------------------------------|
|                                             |   |                                                                                            |
| **For the quarterly period ended June 27, 2004** |
|                                             |   |                                                                                            |
| **or**                                           |
|                                             |   |                                                                                            |
| **o**                                            |   | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF  1934.** |

 

**For theTransition Period From              to**

 

**Commission file number 0-26786**

 

**APAC Customer Services, Inc.**

(Exact name of registrant as specified in its charter)

 
| **Illinois**                                                       |   | **36-2777140**                        |
|--------------------------------------------------------------------|--------|---------------------------------------|
| (State or other jurisdiction  of incorporation or organization)    |   | (I.R.S. Employer  Identification No.) |
|                                                               |   |                                  |
| **Six Parkway North Center, Suite 400, Deerfield, Illinois 60015** |
| (Address of Principal Executive  Offices, Zip Code)                |

 

Registrant’s telephone number, including areacode:  **(847)374-4980**

 

Indicate bycheck mark whether registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter periods that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.

 

| Yes  ý |   | No  o |
|------------------|--------|------------|

 

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

 

| Yes  ý |   | No  o |
|------------------|--------|------------|

 

There were49,454,654 common shares, $0.01 par value per share, outstanding as of August4, 2004.

 

 

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## **Index**

 
| **Part I.  Financial Information**                                                                                         |   |
|---------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                            |   |
| Item 1.  Financial Statements  (Unaudited):                                                                                |   |
|                                                                                                                            |   |
| Consolidated Condensed Balance Sheets as of  June 27, 2004, and December 28, 2003.                                              |   |
|                                                                                                                            |   |
| Consolidated Condensed Statements of  Operations for the Thirteen and Twenty-Six Weeks Ended June 27, 2004, and  June 29, 2003. |   |
|                                                                                                                            |   |
| Consolidated Condensed Statements of Cash  Flows for the Twenty-Six Weeks Ended June 27, 2004, and June 29, 2003.               |   |
|                                                                                                                            |   |
| Notes to Consolidated Condensed Financial  Statements                                                                           |   |
|                                                                                                                            |   |
| Item 2.   Management’s Discussion and Analysis of Financial Condition and  Results of Operations                      |   |
|                                                                                                                            |   |
| Item 3.   Quantitative and Qualitative Disclosures About Market Risk                                                       |   |
|                                                                                                                            |   |
| Item 4.   Controls and Procedures                                                                                          |   |
|                                                                                                                            |   |
| **Part II.  Other Information**                                                                                            |   |
|                                                                                                                            |   |
| Item 1.  Legal Proceedings                                                                                                 |   |
|                                                                                                                            |   |
| Item 4.   Submission of Matters to a Vote of Security Holders                                                              |   |
|                                                                                                                            |   |
| Item 6.   Exhibits and Reports on Form 8-K                                                                                 |   |

## ** **

2

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## **Part I. FinancialInformation**

 

# **Item 1. Financial Statements**

 

## **APAC Customer Services, Inc. and Subsidiaries**

**ConsolidatedCondensed Balance Sheets**

**(Unaudited)**

**(In thousands)**

 
|                                                                                                                                    |   | **June 27,  2004** |    | **December  28,  2003** |   |
|-----------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------|---------|-------------------------|--------|
|                                                                                                                                    |   |               |    |                    |   |
| **Assets**                                                                                                                              |   |               |    |                    |   |
| **Current assets:**                                                                                                                     |   |               |    |                    |   |
| Cash and cash equivalents                                                                                                               |   | $                  | 10,184  |                    | $      | 11,428 |   |
| Accounts receivable, net                                                                                                                |   | 42,478             |    | 46,896                  |   |
| Other current assets                                                                                                                    |   | 8,754              |    | 9,218                   |   |
| Total current assets                                                                                                                    |   | 61,416             |    | 67,542                  |   |
|                                                                                                                                    |   |               |    |                    |   |
| **Property and equipment, net**                                                                                                         |   | 21,791             |    | 24,147                  |   |
|                                                                                                                                    |   |               |    |                    |   |
| **Goodwill**                                                                                                                            |   | 23,876             |    | 23,876                  |   |
|                                                                                                                                    |   |               |    |                    |   |
| **Other intangible assets, net**                                                                                                        |   | 13,861             |    | 15,035                  |   |
|                                                                                                                                    |   |               |    |                    |   |
| **Deferred taxes**                                                                                                                      |   | 3,353              |    | 3,072                   |   |
|                                                                                                                                    |   |               |    |                    |   |
| **Other assets**                                                                                                                        |   | 733                |    | 921                     |   |
| Total assets                                                                                                                            |   | $                  | 125,030 |                    | $      | 134,593 |   |
|                                                                                                                                    |   |               |    |                    |   |
| **Liabilities and Shareholders’ Equity**                                                                                           |   |               |    |                    |   |
| **Current liabilities:**                                                                                                                |   |               |    |                    |   |
| Current maturities of long-term debt                                                                                                    |   | $                  | 404     |                    | $      | 389 |   |
| Accounts payable                                                                                                                        |   | 1,997              |    | 4,046                   |   |
| Accrued payroll and related items                                                                                                       |   | 17,047             |    | 18,367                  |   |
| Income taxes payable                                                                                                                    |   | 15,368             |    | 17,952                  |   |
| Other accrued liabilities                                                                                                               |   | 10,250             |    | 11,107                  |   |
| Total current liabilities                                                                                                               |   | 45,066             |    | 51,861                  |   |
|                                                                                                                                    |   |               |    |                    |   |
| **Long-term debt, less current maturities**                                                                                             |   | 106                |    | 313                     |   |
|                                                                                                                                    |   |               |    |                    |   |
| **Other liabilities**                                                                                                                   |   | 1,568              |    | 1,689                   |   |
|                                                                                                                                    |   |               |    |                    |   |
| **Commitments and contingencies**                                                                                                       |   | —             |    | —                  |   |
|                                                                                                                                    |   |               |    |                    |   |
| **Shareholders’ equity**                                                                                                           |   |               |    |                    |   |
| Common shares, $0.01 par value;  200,000,000  shares authorized;  49,695,699 shares issued at June 27, 2004, and December 28, 2003 |   | 497                |    | 497                     |   |
| Additional paid-in capital                                                                                                              |   | 99,599             |    | 99,620                  |   |
| Accumulated deficit                                                                                                                     |   | (20,830            | )       | (18,413                 | )      |
| Accumulated other comprehensive income                                                                                                  |   | (129               | )       | (82                     | )      |
| Treasury shares: 241,045 and 254,107  shares, respectively, at cost                                                                     |   | (847               | )       | (892                    | )      |
| Total shareholders’ equity                                                                                                         |   | 78,290             |    | 80,730                  |   |
| Total liabilities and shareholders’ equity                                                                                         |   | $                  | 125,030 |                    | $      | 134,593 |   |

 

See notes to consolidatedcondensed financial statements

 

3

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**APACCustomer Services, Inc. and Subsidiaries**

**ConsolidatedCondensed Statements of Ope****rations**

**(Unaudited)**

**(In thousands, exceptper share data)**

** **
|                                                  |   | **Thirteen Weeks Ended** |   | **Twenty-Six Weeks Ended** |   |
|-------------------------------------------------------|--------|--------------------------|--------|----------------------------|--------|
|                                                  |   | **June 27,  2004**       |   | **June 29,  2003**         |   | **June 27,  2004** |   | **June 29,  2003** |   |
|                                                  |   |                     |   |                       |   |   |   |   |   |
| **Net revenue**                                       |   | $                        | 68,006 |                       | $      | 82,084 |   | $ | 139,410 |   | $ | 168,281 |   |
|                                                  |   |                     |   |                       |   |   |   |   |   |
| **Operating  expenses:**                              |   |                     |   |                       |   |   |   |   |   |
|                                                  |   |                     |   |                       |   |   |   |   |   |
| Cost of services                                      |   | 58,496                   |   | 66,645                     |   | 118,626 |   | 136,073 |   |
| Selling, general and  administrative  expenses        |   | 9,682                    |   | 12,919                     |   | 20,501 |   | 25,915 |   |
| Restructuring and other charges                       |   | 999                      |   | —                     |   | 1,850 |   | — |   |
| Asset impairment charges                              |   | 124                      |   | —                     |   | 2,234 |   | — |   |
| Total operating expenses                              |   | 69,301                   |   | 79,564                     |   | 143,211 |   | 161,988 |   |
| **Operating income (loss)**                           |   | (1,295                   | )      | 2,520                      |   | (3,801 | ) | 6,293 |   |
|                                                  |   |                     |   |                       |   |   |   |   |   |
| Interest  (income) expense, net                       |   | (63                      | )      | 306                        |   | 97 |   | 659 |   |
|                                                  |   |                     |   |                       |   |   |   |   |   |
| **Income (loss) before income taxes**                 |   | (1,232                   | )      | 2,214                      |   | (3,898 | ) | 5,634 |   |
| Provision (benefit) for income  taxes                 |   | (468                     | )      | 840                        |   | (1,481 | ) | 2,140 |   |
|                                                  |   |                     |   |                       |   |   |   |   |   |
| **Net income  (loss)**                                |   | $                        | (764   | )                          | $      | 1,374 |   | $ | (2,417 | ) | $ | 3,494 |   |
|                                                  |   |                     |   |                       |   |   |   |   |   |
| **Net income  (loss) per share:**                     |   |                     |   |                       |   |   |   |   |   |
| Basic                                                 |   | $                        | (0.02  | )                          | $      | 0.03 |   | $ | (0.05 | ) | $ | 0.07 |   |
| Diluted                                               |   | $                        | (0.02  | )                          | $      | 0.03 |   | $ | (0.05 | ) | $ | 0.07 |   |
|                                                  |   |                     |   |                       |   |   |   |   |   |
| **Weighted average  number of  shares  outstanding:** |   |                     |   |                       |   |   |   |   |   |
| Basic                                                 |   | 49,454                   |   | 49,439                     |   | 49,451 |   | 49,430 |   |
| Diluted                                               |   | 49,454                   |   | 49,487                     |   | 49,451 |   | 49,461 |   |

 

See notes to consolidated condensed financial statements.

 

4

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**APAC Customer Services, Inc. and Subsidiaries**

**ConsolidatedCondensed Statements of Cas****h Flows**

**(Unaudited)**

**(In thousands)**

 
|                                             |   | **Twenty-Six  Weeks Ended** |   |
|--------------------------------------------------|--------|-----------------------------|--------|
|                                             |   | **June 27,  2004**          |   | **June 29,  2003** |   |
|                                             |   |                        |   |   |   |
| **Operating activities:**                        |   |                        |   |   |   |
|                                             |   |                        |   |   |   |
| Net income (loss)                                |   | $                           | (2,417 | ) | $ | 3,494 |   |
| Depreciation and amortization                    |   | 5,423                       |   | 6,165 |   |
| Non-cash restructuring charges                   |   | 190                         |   | — |   |
| Asset impairment charges                         |   | 2,200                       |   | — |   |
| Deferred income taxes                            |   | 32                          |   | 131 |   |
| Change in operating assets and liabilities       |   | (2,277                      | )      | 3,366 |   |
| Net cash provided by operating activities        |   | 3,151                       |   | 13,156 |   |
|                                             |   |                        |   |   |   |
| **Investing activities:**                        |   |                        |   |   |   |
|                                             |   |                        |   |   |   |
| Purchases of property and equipment, net         |   | (4,227                      | )      | (4,208 | ) |
| Net cash used by investing activities            |   | (4,227                      | )      | (4,208 | ) |
|                                             |   |                        |   |   |   |
| **Financing activities:**                        |   |                        |   |   |   |
|                                             |   |                        |   |   |   |
| Payments on long-term debt                       |   | (192                        | )      | (323 | ) |
| Repayments under revolving credit facility,  net |   | —                      |   | (11,000 | ) |
| Stock and warrant transactions                   |   | 24                          |   | 45 |   |
| Net cash used by financing activities            |   | (168                        | )      | (11,278 | ) |
| **Net change in cash and cash equivalents**      |   | (1,244                      | )      | (2,330 | ) |
|                                             |   |                        |   |   |   |
| **Beginning cash balance**                       |   | 11,428                      |   | 14,530 |   |
|                                             |   |                        |   |   |   |
| **Ending cash balance**                          |   | $                           | 10,184 |   | $ | 12,200 |   |

 

See notes to consolidated condensed financial statements

 

5

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**APAC CustomerServices, Inc. and Subsidiaries**

**Notes to ConsolidatedCondensed Financia****l Statements**

**(Unaudited)**

**(Dollars inthousands, except as otherwise indicated)**

 

**1. Basis of Presentation**

 

The accompanyingunaudited consolidated condensed financial statements of APAC Customer Services, Inc.and its subsidiaries (collectively, the “Company”) have been prepared inaccordance with generally accepted accounting principles for interim financialinformation and the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of theinformation and footnotes required by generally accepted accounting principlesfor complete financial statements.  Inthe opinion of management, all adjustments (consisting of normal recurringaccruals) considered necessary for a fair presentation have been included.  Operating results for the thirteen andtwenty-six week periods ended June 27, 2004, are not necessarily indicative ofthe results that may be expected for the fiscal year ending January 2,2005.  The balance sheet at December 28,2003, has been derived from the audited financial statements at that date butdoes not include all of the information and footnotes required by generallyaccepted accounting principles for complete financial statements.  For additional information, refer to thefinancial statements and footnotes thereto included in the Company’s AnnualReport on Form 10-K for the year ended December 28, 2003.

 

**2.  Other AccruedLiabilities**

 

The components of otheraccrued liabilities included in the consolidated condensed balance sheets areas follows:

 

|                               |   | **June 27,  2004** |   | **December  28,  2003** |   |
|------------------------------------|--------|--------------------|--------|-------------------------|--------|
|                               |   |               |   |                    |   |
| Accrued worker’s compensation |   | $                  | 3,092  |                    | $      | 3,097 |   |
| Restructuring charges              |   | 1,324              |   | 2,706                   |   |
| Accrued professional fees          |   | 1,101              |   | 795                     |   |
| Accrued relocation                 |   | 711                |   | 607                     |   |
| Accrued telecommunications         |   | 610                |   | 573                     |   |
| Other                              |   | 3,412              |   | 3,329                   |   |
| Total                              |   | $                  | 10,250 |                    | $      | 11,107 |   |

 

**3. Intangible Assets**

 

The identifiable intangibleassets of the Company represent acquired customer relationships with a grosscarrying value of $28,493 and accumulated amortization of $14,632 and $13,458as of June 27, 2004, and December 28, 2003, respectively.  Under the provisions of Statement ofFinancial Accounting Standards No. 142, “Goodwill and Other Intangible Assets”(“SFAS No. 142”), identifiable intangible assets with finite lives areamortized.  The customer relationshipintangible assets are being amortized on a straight-line basis over theexpected period of benefit of 12 years. Total amortization expense relatedto intangible assets as of June 27, 2004, and June 29, 2003, was $587 perquarter and $1,174 year to date, respectively. Annual amortization expense isexpected to be $2.3 million for fiscal 2004 through 2009 and $1.0 millionin fiscal 2010.

 

6

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**4. Accounting for Stock-Based Compensation**

 

For stock-based employee compensation plans, the Company has elected touse the intrinsic value method prescribed by Accounting Principles BoardOpinion No. 25, “Accounting for Stock Issued to Employees” (“APB No.25”).  In accordance with APB No. 25, nocompensation expense is recognized for stock options issued to employees whenthe option price equals or exceeds the fair market value of the Company’s commonshares at the date of grant.  Stock-basedcompensation expense for non-employees is recognized in accordance withStatement of Financial Accounting Standards No. 123, “Accounting for StockBased Compensation” (“SFAS No. 123”).

 

The following table illustrates the effect on net income and earningsper share if the Company had adopted the fair value recognition provisions ofSFAS No. 123.

 
|                                                                        |   | **Thirteen  Weeks Ended** |   | **Twenty-Six  Weeks Ended** |   |
|-----------------------------------------------------------------------------|--------|---------------------------|--------|-----------------------------|--------|
|                                                                        |   | **June 27,  2004**        |   | **June 29,  2003**          |   | **June 27,  2004** |   | **June 29,  2003** |   |
|                                                                        |   |                      |   |                        |   |   |   |   |   |
| Net income (loss) as reported                                               |   | $                         | (764   | )                           | $      | 1,374 |   | $ | (2,417 | ) | $ | 3,494 |   |
| Less–compensation expense on stock options,  net of income tax benefit |   | (326                      | )      | (458                        | )      | (746 | ) | (1,430 | ) |
| Net income (loss) pro forma                                                 |   | $                         | (1,090 | )                           | $      | 916 |   | $ | (3,163 | ) | $ | 2,064 |   |
| Earnings (loss) per share – basic                                      |   |                      |   |                        |   |   |   |   |   |
| As reported                                                                 |   | $                         | (0.02  | )                           | $      | 0.03 |   | $ | (0.05 | ) | $ | 0.07 |   |
| Pro forma                                                                   |   | $                         | (0.02  | )                           | $      | 0.02 |   | $ | (0.06 | ) | $ | 0.04 |   |
| Earnings (loss) per share – diluted                                    |   |                      |   |                        |   |   |   |   |   |
| As reported                                                                 |   | $                         | (0.02  | )                           | $      | 0.03 |   | $ | (0.05 | ) | $ | 0.07 |   |
| Pro forma                                                                   |   | $                         | (0.02  | )                           | $      | 0.02 |   | $ | (0.06 | ) | $ | 0.04 |   |

 

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

 

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

 

Comprehensive income (loss) is as follows:
|                                |   | **Thirteen Weeks  Ended** |   | **Twenty-Six  Weeks Ended** |   |
|-------------------------------------|--------|---------------------------|--------|-----------------------------|--------|
|                                |   | **June 27,  2004**        |   | **June 29,  2003**          |   | **June 27,  2004** |   | **June 29,  2003** |   |
|                                |   |                      |   |                        |   |   |   |   |   |
| Net income (loss)                   |   | $                         | (764   | )                           | $      | 1,374 |   | $ | (2,417 | ) | $ | 3,494 |   |
| Foreign currency translation (loss) |   | —                    |   | —                      |   | (47 | ) | — |   |
| Total comprehensive income (loss)   |   | $                         | (764   | )                           | $      | 1,374 |   | $ | (2,464 | ) | $ | 3,494 |   |

 

7

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

 

**6. Legal Proceedings**

 

The Company is a party to an arbitration proceeding withApogee Enterprises, Inc. and Harmon Glass Solutions, which is described in theCompany’s Quarterly Report on Form 10-Q for the first quarter of fiscal 2004.

 

TheCompany is also subject to occasional lawsuits, governmental investigations andclaims arising out of the normal conduct of its business.  Management does not believe the outcome ofany such pending claims will have a material adverse impact on the Company’sconsolidated financial position, annual results of operations orliquidity.  Although the Company doesnot believe that any of these proceedings will result in a material adverseeffect, no assurance to that effect can be given.

 

**7. Long Term Debt**

 

On December 20, 2002, the Company entered into anAmended and Restated Credit Agreement (“Credit Agreement”) replacing theprevious Amended and Restated Credit Facility. Under the terms of the Credit Agreement, the Company has a revolvingcredit facility, which expires in December 2005.  The facility initially provided $65.0 million of creditavailability.  Beginning on March 31,2003, the facility is being reduced by $1.25 million of availability eachquarter until the facility reaches $55.0 million at December 31, 2004.  Availability is also reduced by outstandingborrowings and any outstanding letters of credit.  As of June 27, 2004, there were no outstanding borrowings underthe facility and approximately $3.0 million was utilized through the issuanceof standby letters of credit primarily to support self-insurance reserves.  Net availability as of June 27, 2004, underthe Credit Agreement was $55.7 million.

 

The Credit Agreement is secured principally by a grantof a security interest in all personal property and fixtures of theCompany.  Under the terms of the CreditAgreement, the Company is also required to maintain certain financial covenantswhich limit the Company’s ability to incur additional indebtedness, repurchaseoutstanding common shares, create liens, acquire, sell or dispose of certainassets, engage in certain mergers and acquisitions and make certain restrictedpayments.

 

Borrowings under the Credit Agreement incur a floatinginterest rate usually based on the LIBOR index rate, although the Company hasthe option of using an alternate base rate defined in the agreement.  In addition, the Company pays a commitmentfee on the unused portion of the revolving facility as well as quarterly feeson the outstanding letters of credit.

 

8

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# **8.  Restructuring and Other Charges/AssetImpairment Charges**

# ** **

The Company recorded $2.0million of restructuring charges in the first half of fiscal 2004 related tothe closure of two Customer Interaction Centers, the transition of one centerto a client and the elimination of certain administrative and supportpositions. These charges included severance costs of $1.5 million resultingfrom the elimination of 37 administrative and support positions, and $0.5 millionfor the write down of property and lease termination and other costs. Cashcharges totaling $0.9 million relating to the restructuring have been paidthrough June 27, 2004. The remaining $1.0 million of cash charges, primarilyrelated to severance costs, are payable over the next two years.  The Company also recorded $2.2 million ofasset impairment charges during the first half of fiscal 2004 relating to thewrite-off of unutilized software and telecommunications equipment.

 

Restructuring and other chargesalso include the reversal of $0.2 million of prior year charges, which were notutilized.

 

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

 
|                                 |   |                  |   | **2004**                  |   |                  |   |
|--------------------------------------|--------|-----------------------|--------|---------------------------|--------|-----------------------|--------|
|                                 |   | **Balance  12/28/03** |   | **Charges/  (Reversals)** |   | **Asset  Write-down** |   | **Cash  Payments** |   | **Balance  6/27/04** |   |
|                                 |   |                  |   |                      |   |                  |   |   |   |   |   |
| 2002                                 |   |                  |   |                      |   |                  |   |   |   |   |   |
| Employee severance costs             |   | $                     | 112    |                      | $      | (42                   | )      | $ | — |   | $ | (70 | ) | $ | — |   |
| Lease obligations and other          |   | 1,261                 |   | (27                       | )      | —                |   | (1,046 | ) | 188 |   |
|                                 |   |                  |   |                      |   |                  |   |   |   |   |   |
| 2003                                 |   |                  |   |                      |   |                  |   |   |   |   |   |
| Employee severance costs             |   | 1,295                 |   | (115                      | )      | —                |   | (716 | ) | 464 |   |
| Write down of property and equipment |   | 48                    |   | 24                        |   | (72                   | )      | — |   | — |   |
| Lease obligations and other          |   | 337                   |   | (21                       | )      | —                |   | (242 | ) | 74 |   |
|                                 |   |                  |   |                      |   |                  |   |   |   |   |   |
| 2004                                 |   |                  |   |                      |   |                  |   |   |   |   |   |
| Employee severance costs             |   | —                |   | 1,519                     |   | —                |   | (784 | ) | 735 |   |
| Write down of property and equipment |   | —                |   | 129                       |   | (129                  | )      | — |   | — |   |
| Lease obligations and other          |   | —                |   | 383                       |   | —                |   | (85 | ) | 298 |   |
| Total                                |   | $                     | 3,053  |                      | $      | 1,850                 |   | $ | (201 | ) | $ | (2,943 | ) | $ | 1,759 |   |

# ** **

# **9.  Income Taxes**

# ** **

The Company accounts for income taxes usingthe asset and liability approach.  Underthe asset and liability method, deferred tax assets and liabilities arerecognized for the future tax consequences attributable to differences betweenthe financial statement carrying amounts of existing assets and liabilities andtheir respective tax bases.  Valuationallowances are recorded when management believes it is more likely than notthat some portion or all of the deferred tax assets will not be realized in thefuture.  The Company records a reservefor tax contingencies until management believes it is probable that thedeductions giving rise to these contingencies will not be successfullychallenged.  TheCompany’s effective income tax rate is 38.0% for the six months ended June 27,2004, and June 29, 2003.

 

9

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# **Item2. Management’s Discussion and Analysis of** Financial Condition and Results of Operations

# ** **

The Company is a leading provider of customerinteraction solutions for market leaders in the communications, financialservices, insurance, health care, logistics and travel and hospitalityindustries. To help its clients better manage their customer relationships,APAC Customer Services develops and delivers customer care and customeracquisition programs. The Company operates and manages approximately 6,600workstations in 25 Customer Interaction Centers. The Customer InteractionCenters are managed centrally through the application of telecommunications andcomputer technology to promote the consistent delivery of quality service.  The Company consists of a single operatingsegment that offers customer interaction solutions to its clients.

 

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

 

**Results of Operations**

 

The following table sets forththe Consolidated Condensed Statements of Operations data as a percent of netrevenue from services provided by the Company for the thirteen and twenty-sixweek periods ended June 27, 2004, and June 29, 2003, respectively.

 
|                                        |   | **Thirteen  Weeks Ended** |   | **Twenty-Six  Weeks Ended** |   |
|---------------------------------------------|--------|---------------------------|--------|-----------------------------|--------|
|                                        |   | **June 27,  2004**        |   | **June 29,  2003**          |   | **June 27,  2004** |   | **June 29,  2003** |   |
|                                        |   |                      |   |                        |   |   |   |   |   |
| **Net revenues**                            |   | 100.0                     | %      | 100.0                       | %      | 100.0 | % | 100.0 | % |
|                                        |   |                      |   |                        |   |   |   |   |   |
| Operating expenses:                         |   |                      |   |                        |   |   |   |   |   |
| Cost of services                            |   | 86.0                      |   | 81.2                        |   | 85.1 |   | 80.9 |   |
| Selling, general and administrativeexpenses |   | 14.2                      |   | 15.7                        |   | 14.7 |   | 15.4 |   |
| Restructuring and other charges             |   | 1.5                       |   | —                      |   | 1.3 |   | — |   |
| Asset impairment charges                    |   | .2                        |   | —                      |   | 1.6 |   | — |   |
| Total operating expenses                    |   | 101.9                     |   | 96.9                        |   | 102.7 |   | 96.3 |   |
| Operating income (loss)                     |   | (1.9                      | )      | 3.1                         |   | (2.7 | ) | 3.7 |   |
|                                        |   |                      |   |                        |   |   |   |   |   |
| Interest (income) expense, net              |   | (.1                       | )      | .4                          |   | .1 |   | .4 |   |
| Income (loss) before income  taxes          |   | (1.8                      | )      | 2.7                         |   | (2.8 | ) | 3.3 |   |
|                                        |   |                      |   |                        |   |   |   |   |   |
| Provision (benefit) for income  taxes       |   | (.7                       | )      | 1.0                         |   | (1.1 | ) | 1.2 |   |
| Net income (loss)                           |   | (1.1                      | )%     | 1.7                         | %      | (1.7 | )% | 2.1 | % |

 

10

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**Comparison of Results of Operations for thethirteen weeks ended June 27, 2004, and June 29, 2003**

 

Netrevenue decreased 17.2% to $68.0 million in the second quarter of fiscal 2004from $82.1 million in the same period of fiscal 2003, a decrease of$14.1 million. The revenue decline from the second quarter of fiscal 2003is attributable to the decision by Comcast, a major client of the Company, tobring in-house certain marketing programs, softness in the mortgage servicingbusiness and reduced customer acquisition volumes related to the cutback inmarketing programs by several telecommunications clients.

 

Cost of services decreased $8.1 million in the second quarter of fiscal2004, or 12.2%, to $58.5 million from $66.6 million in the same period offiscal 2003. Approximately 85% of the decrease in cost of services resultedfrom lower direct costs associated with the decline in revenue, while theremaining reduction related to cutbacks in overhead spending, including savingsassociated with center closings, partially offset by higher wages. As a percentof revenue, cost of services increased to 86.0% in the second quarter of fiscal2004 from 81.2% in the second quarter of fiscal 2003, principally due to theeffect of lower capacity utilization, higher labor costs and softening pricesin certain client programs.

 

Selling, general and administrative expenses decreased to$9.7 million in the second quarter of fiscal 2004 from $12.9 million inthe same period of fiscal 2003, a decrease of $3.2 million or 25.1%.Expenses declined from the prior year primarily due to lower employee relatedexpenses resulting from headcount reductions and reduced incentive expense andoverhead spending. As a percent of net revenue, selling, general andadministrative expenses were 14.2% in the second quarter of fiscal 2004 versus15.7% in the same period of fiscal 2003.

 

The Company recorded $1.1million of restructuring charges in the second quarter of fiscal 2004 relatedto the closure of one Customer Interaction Center, the transition of one centerto a client and the elimination of certain administrative and supportpositions. These charges included severance costs of $0.7 million resultingfrom the elimination of 15 administrative and support positions, and $0.4million for the write down of property and lease termination and other costs.Cash charges totaling $0.4 million relating to the restructuring have beenpaid through June 27, 2004. The remaining $0.6 million of cash charges,primarily related to severance costs, is payable over the next year.  The Company also recorded $0.1 million ofasset impairment charges relating to the write off of telecommunicationsequipment.

 

The Company generated a net loss of $0.8 million in the secondquarter of fiscal 2004 compared to $1.4 million of net income for the sameperiod of fiscal 2003. The decrease is primarily due to the lower revenue andgross profit margins, and $1.1 million of restructuring and assetimpairment charges in the second quarter of fiscal 2004, partially offset by areduction of selling, general and administrative expenses, as previouslydiscussed.

 

Net interest expense for the second quarter of fiscal 2004 decreased$0.4 million from the same period of fiscal 2003. This decrease reflectsthe pay down of substantially all debt in fiscal 2003 and the receipt of $0.2million of other investment income.

 

The Company’s effective income tax rate was 38.0% for the secondquarter of fiscal 2004 and 2003.

 

**Comparison of Results of Operations for thetwenty-six weeks ended June 27, 2004, and June 29, 2003**

 

Netrevenue decreased 17.2% to $139.4 million in the first half of fiscal 2004 from$168.3 million in the same period of fiscal 2003, a decrease of $28.9million. The revenue decline from the first half of fiscal 2003 is attributableto the decision by Comcast, a major client of the Company, to bring in-housecertain marketing programs, reduced customer acquisition volumes related to theimpact of the rollout of the national Do Not Call (“DNC”) registry on October1, 2003, and softness in the credit card acquisition and mortgage servicingbusiness.

 

Cost of services decreased $17.5 million in the first half offiscal 2004, or 12.8%, to $118.6 million from $136.1 million in the sameperiod of fiscal 2003. Approximately 80% of the decrease in cost of servicesresulted from lower direct costs associated with the decline in revenue, whilethe remaining reduction related to cutbacks in overhead spending, including

 

11

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savings associated with center closings, partially offset by higherwages. As a percent of revenue, cost of services increased to 85.1% in thefirst half of fiscal 2004 from 80.9% in the first half of fiscal 2003 principallydue to the effect of lower capacity utilization, higher labor costs andsoftening prices in certain client programs.

 

Selling, general and administrative expenses decreased to $20.5 millionin the first half of fiscal 2004 from $25.9 million in the same period offiscal 2003, a decrease of $5.4 million or 20.9%. Expenses declined fromthe prior year primarily due to lower salary expense resulting from headcountreductions, reduced incentive expense and overhead spending. As a percent ofnet revenue, selling, general and administrative expenses were 14.7% in thefirst half of fiscal 2004 versus 15.4% in the same period of fiscal 2003.

 

The Company recorded $2.0million of restructuring charges in the first half of fiscal 2004 related tothe closure of two Customer Interaction Centers, the transition of one centerto a client and the elimination of certain administrative and supportpositions. These charges included severance costs of $1.5 million resultingfrom the elimination of 37 administrative and support positions, and $0.5million for the write down of property and lease termination and other costs.Cash charges totaling $0.9 million relating to the restructuring have beenpaid through June 27, 2004. The remaining $1.0 million of cash charges, primarilyrelated to severance costs, are payable over the next two years.  The Company also recorded $2.2 million ofasset impairment charges during the first half of fiscal 2004 relating to thewrite-off of unutilized software and telecommunications equipment.

 

Restructuring and other charges also include the reversal of $0.2million of prior year charges, which were not utilized.

 

The Company generated a net loss of $2.4 million in the first halfof fiscal 2004 compared to $3.5 million of net income for the same period offiscal 2003. The decrease is primarily due to the lower revenue and grossprofit margins, and $4.1 million of restructuring and asset impairmentcharges in the first half of fiscal 2004, partially offset by a reduction ofselling, general and administrative expenses, as previously discussed.

 

Net interest expense for the first half of fiscal 2004 decreased$0.6 million from the same period of fiscal 2003. This decrease reflectsthe pay down of substantially all debt in fiscal 2003 and the receipt of $0.2million of other investment income.

 

**Critical Accounting Policies and Estimates**

 

The preparation of theCompany’s financial statements in conformity with generally accepted accountingprinciples requires management to make estimates and assumptions that affectthe amounts reported in the consolidated financial statements and accompanyingnotes. The Company believes its estimates and assumptions are reasonable;however, actual results and the timing of the recognition of such amounts coulddiffer from those estimates. The Company has identified the following criticalaccounting policies and estimates utilized by management in the preparation ofthe Company’s financial statements: revenue recognition, accounting forlong-lived assets, allowance for doubtful accounts, accounting for employeebenefits and income taxes. Any deviation from these policies or estimates couldhave a material impact on the financial statements of the Company.

 

**Revenue recognition**

 

The Company recognizes customer services revenue as services areperformed for our clients. Client contracts generally require that clients bebilled for the Company’s services on the basis of time spent by Companyrepresentatives providing services. The Company’s services are alsooccasionally priced on a pay-for-performance basis, pursuant to which theCompany typically receives fees that are a combination of base-rate plus feeper sale. The Company is often subject to performance standards, such as salesper hour, average handle time, occupancy rate and abandonment rate.  The Company’s performance against suchstandards may provide bonus opportunities or conversely may subject the Companyto penalties, which are recognized as earned or incurred.

 

12

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**Accounting for long-lived assets**

 

The Company’slong-lived assets consist primarily of property and equipment, capitalizedsoftware and intangible assets. In addition to the original cost of theseassets, their recorded value is impacted by a number of policy elections madeby the Company, including estimated useful lives and salvage values. Inaddition, any decision by the Company to reduce capacity by closing CustomerInteraction Centers or to abandon software may result in a write-off of the netbook value of these affected assets. In accordance with Statement of FinancialAccounting Standards No. 144, “Accounting for the Impairment or Disposalof Long-Lived Assets,” the Company records impairment charges on long-livedassets used in operations when events and circumstances indicate that theassets may be impaired and the undiscounted cash flows estimated to begenerated by those assets are less than the carrying amount of those assets. Inthis circumstance, the impairment charge is determined based upon the amountthe net book value of the assets exceeds their fair market value. In makingthese determinations, the Company utilizes certain assumptions, including, butnot limited to, the estimated fair market value of the assets, which arebased on additional assumptions such as asset utilization, length of time theasset will be used in the Company’s operations and estimated salvage values.

 

**Allowance for doubtful accounts**

 

The Companyrecords an allowance for doubtful accounts based on a quarterly assessment ofthe probable estimated losses in trade accounts receivable. This estimate isbased on specific allowances for identified problem receivables and anadditional allowance for estimated losses on all other receivables based ontheir age and the Company’s collection history.

 

**Accounting for employee benefits**

 

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

 

The balances of these accounts at June 27, 2004, and June 29, 2003,were:

 

|                   |   | **(in  thousands)** |   |
|------------------------|--------|---------------------|--------|
|                   |   | **2004**            |   | **2003** |   |
| Group Health Insurance |   | $                   | 2,905  |   | $ | 3,866 |   |
| Workers Compensation   |   | 3,092               |   | 3,199 |   |
|                        |        |                     |        |  |  |  |  |

 

**Income taxes**

 

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

 

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**Liquidityand Capital Resources**

 

The following table sets forthconsolidated statements of cash flow data for the Company for the twenty-sixweek periods ended June 27, 2004, and June 29, 2003, respectively.

 
|                                      |   | **2004**            |   | **2003** |   |
|-------------------------------------------|--------|---------------------|--------|----------|--------|
|                                      |   | **(In  thousands)** |   |
|                                      |   |                |   |     |   |
| Net cash provided by operating activities |   | $                   | 3,151  |     | $      | 13,156 |   |
| Net cash used by investing activities     |   | (4,227              | )      | (4,208   | )      |
| Net cash used by financing activities     |   | (168                | )      | (11,278  | )      |
| Net decrease in cash                      |   | $                   | (1,244 | )        | $      | (2,330 | ) |

 

Cash from operatingactivities decreased $10.0 million versus the first half of fiscal 2003,primarily due to lower operating margins, a decrease in accrued liabilities andincome taxes payable, $3.0 million of payments related to restructuring chargesand lower depreciation and amortization.

 

Net cash used by investing activities was $4.2 millionin the first half of fiscal 2004 primarily due to expenditures related to thebuildout of additional seats in the Company’s call center in the Philippinesand computer equipment upgrades. Capital expenditures of $4.2 million in the firsthalf of fiscal 2003 were primarily related to the initial buildout of afacility in the Philippines and equipment upgrades.

 

Net cash used by financing activities primarilyrelated to the repayment of capital lease payments in fiscal 2003 and 2004 and$11.0 million of bank debt in 2003.

 

In 2003, the Company received an $11.6 million cashtax refund as a result of carrying back against prior years’ taxable income a$48.1 million loss reported on its 2002 tax return, which is subject to audit.This loss resulted from the Company taking a $59.9 million deduction towrite-off, for tax purposes, its remaining investment in ITI Holdings, Inc.(for book purposes the Company recorded appropriate impairment charges relatedto ITI in previous fiscal years). The total combined liquidity benefit to theCompany from this deduction is expected to be $20.9 million, which includes the$11.6 million cash tax refund, $3.3 million of cash tax savings related to the2002 tax year and the release of $6.0 million of tax credits generated andutilized in prior years to be used in current and future periods. The potentialincome statement benefit of this deduction will not be recognized and theassociated income tax liability eliminated until the Company believes it isprobable the deduction will not be successfully challenged.

 

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

 

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**Forward-Looking Statements**

 

The Private Securities Litigation Reform Act of 1995 provides a “safeharbor” for certain forward-looking statements. This Report on Form 10-Qand other documents that the Company files with the SEC contain forward-lookingstatements that reflect the Company’s current views with respect to futureevents and financial performance. These forward-looking statements are subjectto certain risks and uncertainties, which could cause future results to differmaterially from historical results or those anticipated. The words “believe,”“expect,” “anticipate,” “intend,” “estimate,” “goals,” “would,” “could,”“should,” and other expressions which indicate future events and trendsidentify forward-looking statements. Readers are cautioned not to place unduereliance on these forward-looking statements, which speak only as of theirdates. If no date is provided, such statements speak only as of the date ofthis Report on Form 10-Q. Except as required under the Federal securitieslaws and rules and regulations of the SEC, the Company undertakes no obligationto publicly update or revise any forward-looking statements in connection withnew information or future events or otherwise. Factors that could cause futureresults to differ materially from historical results or those anticipatedinclude, but are not limited to, reliance by the Company on a small number ofprincipal clients for a substantial proportion of its total revenue; possiblechanges in or events affecting the business of the Company’s clients, includingchanges in customers’ interest in, and use of, clients’ products and services;fluctuations in quarterly results of operations due to timing of clients’initiation and termination of large programs; risks in conducting businessinternationally; changes in competitive conditions affecting the Company’sindustry; the ability of the Company’s clients to terminate contracts with theCompany on a relatively short notice; changes in the availability and cost ofqualified employees; variations in the performance of the Company’s automatedsystems and other technological factors; changes in government regulationsaffecting the teleservices and telecommunications industries; and competitionfrom other outside providers of customer interaction solutions and in-housecustomer interaction operations.

 

See the Company’s filings with the SEC for furtherdiscussion of the risks and uncertainties associated with the Company’sbusiness, in particular, the discussion under the caption “InformationRegarding Forward-Looking Statements” in Item 7 (Management’s Discussion andAnalysis of Financial Condition and Results of Operations) of the Company’sAnnual Report on Form 10-K for the fiscal year ended December 28, 2003.

 

**Item3****.  Quantitativeand Qualitative Disclosures About Market Risk**

 

Historically, the Company has been exposed to the impact of U.S.interest rate changes directly related to its normal operating and fundingactivities. From time to time, the Company has entered into derivatives inorder to minimize these risks, but not for trading purposes. The Company doesnot have any derivative agreements at this time.

 

The Company prepared a sensitivity analysis of its average debt for thequarter ended June 27, 2004 assuming a one-percentage point adverse change ininterest rates. Holding all other variables constant, the hypothetical adversechange would not significantly increase interest expense. The sensitivityanalysis assumes no changes in the Company’s financial structure.

 

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# **Item 4**.  Controls and Procedures

# ** **

# **Disclosure Controls and Procedures**

# ** **

The Company’s management, withthe participation of the Company’s Chief Executive Officer and Chief FinancialOfficer, has evaluated the effectiveness of the Company’s disclosure controlsand procedures (as such term is defined in Rules 13a-15(e) under the SecuritiesExchange Act, as amended (the “Exchange Act”)) as of the end of the periodcovered by this report.  Based on suchevaluation, the Company’s Chief Executive Officer and Chief Financial Officerhave concluded that, as of the end of such period, the Company’s disclosurecontrols and procedures are effective in recording, processing, summarizing andreporting, on a timely basis, information required to be disclosed by theCompany in the reports that it files or submits under the Exchange Act.

 

**InternalControl Over Financial Reporting**

** **

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

 

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## **Part II**. Other Information

## ** **

**Item 1.  Legal Proceedings**

 

The Company is a party to an arbitration proceeding with ApogeeEnterprises, Inc. and Harmon Glass Solutions, which is described in theCompany’s Quarterly Report on Form 10-Q for the first quarter of fiscal 2004.

 

The Company is also subject to occasional lawsuits,governmental investigations and claims arising out of the normal conduct of itsbusiness.  Management does not believethe outcome of any such pending claims will have a material adverse impact onthe Company’s consolidated financial position, annual results of operations orliquidity.  Although the Company does notbelieve that any of these proceedings will result in a material adverse effect,no assurance to that effect can be given.

 

# **Item4.  Submission of Matters to a Vote** of Security Holders

# ** **

(a)           The Annual Meeting of Shareholders ofthe Company was held on June 4, 2004.

 

(b)           Not applicable

 

(c)           Set forth below is the tabulation ofthe votes for each nominee for election as a director of the Company.

 
|                 |   | **For**    |   | **Withhold  Authority  (Including Broker non-vote)** |   |
|----------------------|--------|------------|--------|------------------------------------------------------|--------|
|                 |   |       |   |                                                 |   |
| Robert F. Bernard    |   | 46,420,655 |   | 493,193                                              |   |
|                 |   |       |   |                                                 |   |
| Thomas M. Collins    |   | 46,400,614 |   | 513,234                                              |   |
|                 |   |       |   |                                                 |   |
| John W. Gerdelman    |   | 46,055,609 |   | 858,239                                              |   |
|                 |   |       |   |                                                 |   |
| Robert J. Keller     |   | 46,512,399 |   | 401,449                                              |   |
|                 |   |       |   |                                                 |   |
| Theodore G. Schwartz |   | 46,506,197 |   | 407,651                                              |   |
|                 |   |       |   |                                                 |   |
| Samuel K. Skinner    |   | 46,407,879 |   | 505,969                                              |   |

 

**Item6.  Exhibits and Reports on Form 8-****K**

 

(a)  The exhibits required by Item 601 of Regulation S-K arelisted in the Exhibit Index attached hereto.

 

(b)  Reports onForm 8-K

 

On April 22, 2004, the Company filed a current report on Form 8-Ksetting forth the earnings release for the fiscal quarter ended March 28, 2004.

 

On May 28, 2004, the Company filed a current report on Form 8-Kregarding the resignation of Paul J. Liska from the Board of Directors.

 

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**Signatures**

 

Pursuant to the requirements ofthe Securities Exchange Act of 1934, the Registrant has duly caused this reportto be signed on its behalf by the undersigned, thereunto duly authorized.

 

 
|   |            |   | **APAC Customer Services, Inc.**                                                    |
|--------|-----------------|--------|-------------------------------------------------------------------------------------|
|   |            |   |                                                                                |
|   |            |   |                                                                                |
| Date:  | August 4,  2004 | By:    | /s/ Marc T. Tanenberg                                                               |
|   |            |   | Senior Vice President and                                                           |
|   |            |   | Chief Financial Officer  (Principal Financial Officer  and duly authorized officer) |
|   |            |   |                                                                                |
|   |            |   |                                                                                |
| Date:  | August 4,  2004 | By:    | */s/*Kenneth R. Batko                                                               |
|   |            |   | Vice President and Controller                                                       |
|   |            |   | (Principal Accounting Officer                                                       |
|   |            |   | and duly authorized officer)                                                        |

 

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# **Exhibit Index**

 
| **Exhibit  Number** |   | **Description** |
|---------------------|--------|-----------------|
|                |   |            |
|                | 3.1    |            | Articles of Incorporation of APAC Customer Services, Inc. are  incorporated by reference to APAC Customer Services, Inc.’s Quarterly Report  on Form 10-Q for the Quarter ended October 3, 1999. |
|                |   |            |   |
|                | 3.2    |            | Amended and Restated Bylaws of APAC Customer Services, Inc. as  amended through April 30, 2000, incorporated by reference to APAC Customer  Services, Inc.’s Quarterly Report on Form 10-Q for the Quarter ended April 2,  2000. |
|                |   |            |   |
|                | 3.3    |            | Certificate of Amendment of the Amended and Restated Bylaws of APAC  Customer Services, Inc. as amended March 10, 2004, incorporated by reference  to APAC Customer Services, Inc.’s Quarterly Report on Form 10-Q for the  quarter ended March 28, 2004. |
|                |   |            |   |
|                | 10.1*  |            | Employment Agreement with James M. McClenahan dated May 19, 2004. |
|                |   |            |   |
|                | 10.2*  |            | Employment Agreement with Susan L. Menzel dated June 4, 2004. |
|                |   |            |   |
|                | 10.3*  |            | Employment Agreement with Robert J. Keller dated March 10, 2004,  incorporated by reference to APAC Customer Services, Inc.’s Annual Report on  Form 10-K for the Fiscal Year ended December 28, 2003. |
|                |   |            |   |
|                | 10.4*  |            | Employment Agreement with Linda R. Witte dated April 20, 1999,  incorporated by reference to APAC Customer Services, Inc.’s Annual Report on  Form 10-K for the Fiscal Year ended December 29, 2002. |
|                |   |            |   |
|                | 10.5*  |            | Employment Agreement with George L. Puig dated November 21, 2003,  incorporated by reference to APAC Customer Services, Inc.’s Annual Report on  Form 10-K for the Fiscal Year ended December 28, 2003. |
|                |   |            |   |
|                | 10.6*  |            | Employment Agreement with Marc. T. Tanenberg dated August 17, 2001,  incorporated to APAC Customer Services, Inc.’s Annual Report on Form 10-K for  the Fiscal Year ended December 30, 2001. |
|                |   |            |   |
|                | 10.7*  |            | First Amendment to the Second Amended and Restated 1995 Incentive  Stock Plan incorporated by reference to APAC Customer Services, Inc.’s  Quarterly Report on Form 10-Q for the Quarter ended July 2, 2000. |
|                |   |            |   |
|                | 10.8*  |            | Second Amendment to the Second Amended and Restated 1995 Incentive  Stock Plan incorporated by reference to APAC Customer Services, Inc.’s  Quarterly Report on Form 10-Q for the Quarter ended June 29, 2003. |
|                |   |            |   |
|                | 10.9*  |            | Third Amendment to the Second Amended and Restated 1995 Incentive  Stock Plan incorporated by reference to APAC Customer Services, Inc.’s Annual  Report on Form 10-K for the Fiscal Year ended December 28, 2003. |
|                |   |            |   |
|                | 10.10* |            | Management Incentive Plan incorporated by reference to APAC Customer  Services, Inc.’s Quarterly Report on Form 10-Q for the Quarter ended July 1,  2001. |

 

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|   | 10.11* |   | Revised form of Employment Security Agreement between the Company and  its Senior Management Team incorporated by reference to APAC Customer  Services, Inc. Annual Report on Form 10-K for the Fiscal Year ended December  31, 2000. |
|--------|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |   |                                                                                                                                                                                                                                  |
|   | 10.12  |   | Amended and Restated Credit Agreement dated December 20, 2002,  incorporated by reference to APAC Customer Services, Inc.’s Annual Report on  Form 10-K for the Fiscal Year ended December 29, 2002.                             |
|   |   |   |                                                                                                                                                                                                                                  |
|   | 31.1   |   | Certification of Chief Executive Officer pursuant to Rule 13a-15(e)  and Rule 15d-15(e) of the Exchange Act, as adopted pursuant to Section 302 of  the Sarbanes-Oxley Act of 2002.                                                   |
|   |   |   |                                                                                                                                                                                                                                  |
|   | 31.2   |   | Certification of Chief Financial Officer pursuant to Rule 13a-15(e)  and Rule 15d-15(e) of the Exchange Act, as adopted pursuant to Section 302 of  the Sarbanes-Oxley Act of 2002.                                                   |
|   |   |   |                                                                                                                                                                                                                                  |
|   | 32.1   |   | Certification of the Chief Executive Officer and Chief Financial  Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section  906 of the Sarbanes-Oxley Act of 2002.                                                  |

 

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*          Indicates management employmentcontracts or compensatory plans or arrangements.

 

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