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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-Q
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
 For the quarterly period ended July 1, 2007
 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
 For
the Transition Period From ____ to ____
 Commission file number 0-26786
 APAC Customer Services, Inc.
  Illinois
    
    36-2777140(State or other jurisdiction of 
incorporation or organization)
    
    (I.R.S. Employer Identification No.)
 Six Parkway North, Deerfield, Illinois 60015
 (847) 374-4980
  þ o
  o o þ
  o þ




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##### 



INDEX
 PageForward-Looking Statements and Factors That May Affect Future Results
    
    
    3Part I.
    
    Financial Information
    
    
    5Item 1.
    
    Condensed Consolidated Financial Statements (Unaudited):
    
    
    5Condensed Consolidated Balance Sheets as of July 1, 2007 and December
31, 2006
    
    
    5Condensed Consolidated Statements of Operations for the Thirteen and
Twenty-Six Weeks Ended July 1, 2007 and July 2, 2006
    
    
    6Condensed Consolidated Statements of Cash Flows for the Twenty-Six Weeks
Ended July 1, 2007 and July 2, 2006
    
    
    7Notes to Condensed Consolidated Financial Statements
    
    
    8Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results
of Operations
    
    
    18Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    28Item 4.
    
    Controls and Procedures
    
    
    28Part II.
    
    Other Information
    
    
    29Item 1A.
    
    Risk Factors
    
    
    29Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    30Item 6.
    
    Exhibits
    
    
    30Exhibit 10.9Exhibit 10.10Exhibit 10.11Exhibit 10.12Exhibit 10.13Exhibit 10.14Exhibit 10.15Exhibit 10.16Exhibit 31.1Exhibit 31.2Exhibit 32.1
   2




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Forward-Looking Statements and Factors That May Affect Future Results
     Ø
    
    Our revenue is generated from a limited number of clients and the loss of one or more of them, or a reduction in their
demand for our services, could materially affect our financial results.Ø
    
    Circumstances outside our control such as typhoons, earthquakes and other acts of God, political instability, equipment
malfunction, telephone or data service interruptions, changes in the telecommunications market, war and terrorism could
seriously harm our domestic or off-shore business.Ø
    
    Our financial results depend on our ability to effectively manage the capacity of our domestic customer care centers
and the growth of our off-shore customer care centers.Ø
    
    Our inability to attract and retain a sufficient number of qualified employees could negatively impact our business.Ø
    
    Our success is subject to the terms of our client contracts.Ø
    
    Our success depends on sustaining a return to profitability.Ø
    
    Our business operates in a highly competitive market.Ø
    
    Our financial results may be affected by risks associated with international operations and expansion, including
foreign currency fluctuations.Ø
    
    Our business may be affected by our cash flows from operations and our ability to comply with our debt covenants.Ø
    
    Our business and our clients businesses are subject to federal and state regulation and industry standards, including
laws and industry standards regarding consumer privacy and information security.Ø
    
    Our success depends on key personnel.Ø
    
    Our principal shareholder can exercise significant control over the Company.Ø
    
    Our liquidity and ability to meet the terms of our current loan agreements could be materially affected should we not
prevail in our dispute with the Internal Revenue Service.
  3




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4




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PART I. FINANCIAL INFORMATION
 
 Item 1. Condensed Consolidated Financial Statements
 APAC CUSTOMER SERVICES, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
 July 1,
    
    
    December 31,2007
    
    
    2006(Unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    438
    
    
    $
    1,305Accounts receivable, net
    
    
    29,377
    
    
    
    37,858Other current assets
    
    
    5,278
    
    
    
    6,717Total current assets
    
    
    35,093
    
    
    
    45,880Property and equipment, net
    
    
    25,332
    
    
    
    23,930Goodwill
    
    
    13,338
    
    
    
    13,338Other intangible assets, net
    
    
    7,110
    
    
    
    8,070Other assets
    
    
    1,565
    
    
    
    836Total assets
    
    $
    82,438
    
    
    $
    92,054LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Short-term debt
    
    $
    2,688
    
    
    $
    13,778Current portion of long-term debt
    
    
    2,200
    
    
    
    600Accounts payable
    
    
    1,497
    
    
    
    2,890Income taxes payable
    
    
    220
    
    
    
    17,800Accrued payroll and related items
    
    
    14,940
    
    
    
    14,603Accrued liabilities
    
    
    12,004
    
    
    
    12,888Total current liabilities
    
    
    33,549
    
    
    
    62,559Long-term debt
    
    
    12,800
    
    
    
    4,400Other liabilities
    
    
    962
    
    
    
    1,789Commitments and contingencies
    
    
    
    
    
    
    Shareholders equity:Common shares, $0.01 per share; authorized 200,000,000 shares;
50,253,296 and 50,066,628 shares issued at July 1, 2007, and
December 31, 2006, respectively; 50,253,296 and 49,866,583
shares outstanding at July 1, 2007, and December 31, 2006,
respectively
    
    
    503
    
    
    
    501Additional paid-in capital
    
    
    101,894
    
    
    
    101,077Accumulated deficit
    
    
    (68,069
    )
    
    
    (77,849
    )Accumulated other comprehensive income
    
    
    799
    
    
    
    280Treasury shares: 0 and 200,045 shares; at cost at July 1, 2007 and
December 31, 2006, respectively
    
    
    
    
    
    
    (703
    )Total shareholders equity
    
    
    35,127
    
    
    
    23,306Total liabilities and shareholders equity
    
    $
    82,438
    
    
    $
    92,054
   5




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APAC CUSTOMER SERVICES, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
(Unaudited)
 Thirteen Weeks Ended
    
    
    Twenty-Six Weeks EndedJuly 1,
    
    
    July 2,
    
    
    July 1,
    
    
    July 2,2007
    
    
    2006
    
    
    2007
    
    
    2006Net revenue
    
    $
    53,819
    
    
    $
    58,236
    
    
    $
    106,203
    
    
    $
    118,959Cost of services
    
    
    49,729
    
    
    
    51,127
    
    
    
    95,796
    
    
    
    104,374Gross profit
    
    
    4,090
    
    
    
    7,109
    
    
    
    10,407
    
    
    
    14,585Operating expenses:Selling, general and administrative expenses
    
    
    7,187
    
    
    
    7,730
    
    
    
    15,080
    
    
    
    15,620Restructuring and other charges
    
    
    1,559
    
    
    
    384
    
    
    
    1,557
    
    
    
    371Total operating expenses
    
    
    8,746
    
    
    
    8,114
    
    
    
    16,637
    
    
    
    15,991Operating loss
    
    
    (4,656
    )
    
    
    (1,005
    )
    
    
    (6,230
    )
    
    
    (1,406
    )Other (income) expense
    
    
    (44
    )
    
    
    34
    
    
    
    (91
    )
    
    
    6Interest expense
    
    
    812
    
    
    
    442
    
    
    
    1,650
    
    
    
    898Loss before income taxes
    
    
    (5,424
    )
    
    
    (1,481
    )
    
    
    (7,789
    )
    
    
    (2,310
    )Income tax provision (benefit)
    
    
    12
    
    
    
    (688
    )
    
    
    (17,568
    )
    
    
    (776
    )Net (loss) income
    
    $
    (5,436
    )
    
    $
    (793
    )
    
    $
    9,779
    
    
    $
    (1,534
    )Net (loss) income per share:Basic
    
    $
    (0.11
    )
    
    $
    (0.02
    )
    
    $
    0.20
    
    
    $
    (0.03
    )Diluted
    
    $
    (0.11
    )
    
    $
    (0.02
    )
    
    $
    0.19
    
    
    $
    (0.03
    )Weighted average number of shares outstanding:Basic
    
    
    49,731
    
    
    
    49,455
    
    
    
    49,632
    
    
    
    49,455Diluted
    
    
    49,731
    
    
    
    49,455
    
    
    
    51,241
    
    
    
    49,455
   6




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APAC CUSTOMER SERVICES, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
 Twenty-Six Weeks EndedJuly 1,
    
    
    July 2,2007
    
    
    2006Operating activities:Net income (loss)
    
    $
    9,779
    
    
    $
    (1,534
    )Adjustments to reconcile net income (loss) to net cash provided by
operating activities:Depreciation and amortization
    
    
    6,757
    
    
    
    6,045Non-cash restructuring charges
    
    
    13
    
    
    
    371Deferred income taxes
    
    
    
    
    
    
    (818
    )Stock compensation expense
    
    
    940
    
    
    
    758Amortized gain on sale leaseback
    
    
    (94
    )
    
    
    Loss on sale of property and equipment
    
    
    53
    
    
    
    Income taxes payable
    
    
    (17,580
    )
    
    
    Change in operating assets and liabilities
    
    
    6,829
    
    
    
    (2,398
    )Net cash provided by operating activities
    
    
    6,697
    
    
    
    2,424Investing activities:Purchases of property and equipment, net
    
    
    (7,033
    )
    
    
    (4,745
    )Net proceeds from sale of property and equipment
    
    
    15
    
    
    
    Net cash used in investing activities
    
    
    (7,018
    )
    
    
    (4,745
    )Financing activities:Borrowings on long-term debt
    
    
    10,000
    
    
    
    Net (payments) borrowings under revolving credit facility
    
    
    (11,090
    )
    
    
    2,007Cash received from exercise of stock options
    
    
    582
    
    
    
    Net cash (used in) provided by financing activities
    
    
    (508
    )
    
    
    2,007Effect of exchange rate change on cash
    
    
    (38
    )
    
    
    (130
    )Net decrease in cash and cash equivalents
    
    
    (867
    )
    
    
    (444
    )Cash and cash equivalents:Beginning balance
    
    
    1,305
    
    
    
    960Ending balance
    
    $
    438
    
    
    $
    516
   7




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APAC CUSTOMER SERVICES, INC. AND SUBSIDIARIES
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except as otherwise indicated)
 1. Basis of Presentation and Principles of Consolidation
 http://www.sec.gov.
 st
 2. New Accounting Pronouncements
 Accounting for
Uncertainty in Income Taxes: an interpretation of FASB Statement No. 109 , Accounting for Income Taxes
   8




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APAC CUSTOMER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except as otherwise indicated)
 3. Accrued Liabilities
  July 1,
    
    
    December 31,2007
    
    
    2006Deferred rent
    
    $
    2,881
    
    
    $
    3,070Accrued workers compensation
    
    
    2,141
    
    
    
    2,705Accrued restructuring charges
    
    
    2,954
    
    
    
    2,032Accrued professional fees
    
    
    783
    
    
    
    837Other
    
    
    3,245
    
    
    
    4,244Total
    
    $
    12,004
    
    
    $
    12,888
 4. Goodwill and Other Intangible Assets
 Goodwill and Other Intangible Assets
  5. Accounting for Stock-Based Compensation
    9




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APAC CUSTOMER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except as otherwise indicated)
  AggregateNumber of Shares
    
    
    Intrinsic ValueOutstanding on December 31, 2006
    
    
    370,929Granted
    
    
    106,000Exercised
    
    
    Forfeited/Cancelled
    
    
    (65,611
    )Outstanding on July 1, 2007
    
    
    411,318
    
    
    $
    1,000Exercisable on July 1, 2007
    
    
    
    
    
    
    
   Weighted AverageNumber of
    
    
    Grant Price Range
    
    
    Exercise Price Per
    
    
    AggregateOptions
    
    
    Per Share
    
    
    Share
    
    
    Intrinsic ValueOutstanding on December 31, 2006
    
    
    7,261,965
    
    
    $
    0.85-$16.75
    
    
    $
    2.15Granted
    
    
    293,172
    
    
    
    3.02 -   4.73
    
    
    
    4.07Exercised
    
    
    (346,324
    )
    
    
    0.86 -   3.57
    
    
    
    1.68Forfeited/Cancelled
    
    
    (204,848
    )
    
    
    1.06 - 16.75
    
    
    
    2.79Outstanding on July 1, 2007
    
    
    7,003,965
    
    
    $
    0.85-$11.63
    
    
    $
    2.23
    
    
    $
    4,689Exercisable on July 1, 2007
    
    
    3,880,492
    
    
    $
    0.85-$11.63
    
    
    $
    2.62
    
    
    $
    2,048
   10




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APAC CUSTOMER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except as otherwise indicated)
 6. Comprehensive Income (Loss)
  Thirteen Weeks
    
    
    Twenty-Six WeeksEnded
    
    
    EndedJuly 1,
    
    
    July 2,
    
    
    July 1,
    
    
    July 2,2007
    
    
    2006
    
    
    2007
    
    
    2006Net income (loss)
    
    $
    (5,436
    )
    
    $
    (793
    )
    
    $
    9,779
    
    
    $
    (1,534
    )Foreign currency translation gain (loss)
    
    
    352
    
    
    
    (116
    )
    
    
    519
    
    
    
    (78
    )Total comprehensive income (loss)
    
    $
    (5,084
    )
    
    $
    (909
    )
    
    $
    10,298
    
    
    $
    (1,612
    )
  7. Legal Proceedings
  8. Debt
      11




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APAC CUSTOMER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except as otherwise indicated)
         12




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APAC CUSTOMER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except as otherwise indicated)
         13




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APAC CUSTOMER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except as otherwise indicated)
   9. Restructuring and Other Charges
  2007 Restructuring Initiatives
   2006 Restructuring Initiatives
   2005 Restructuring Initiatives
    14




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APAC CUSTOMER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except as otherwise indicated)
  Adj toDecember
    
    
    Charges
    
    
    Asset
    
    
    Other
    
    
    Cash
    
    
    July 1,31, 2006
    
    
    (Reversals)
    
    
    Write-off
    
    
    Accts
    
    
    Payments
    
    
    2007Restructuring initiatives prior to 2005:
    
    $
    2
    
    
    $
    (2
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2005 restructuring initiatives:Lease obligations and other costs
    
    
    1,731
    
    
    
    358
    
    
    
    
    
    
    
    
    
    
    $
    (1,020
    )
    
    $
    1,0692006 restructuring initiatives:Employee severance costs
    
    
    6
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6
    )
    
    
    Lease obligations and other costs
    
    
    1,438
    
    
    
    4
    
    
    
    
    
    
    $
    (18
    )
    
    
    (286
    )
    
    
    1,1382007 restructuring initiatives:Employee severance costs
    
    
    
    
    
    
    550
    
    
    
    
    
    
    
    
    
    
    
    (53
    )
    
    
    497Property and equipment
    
    
    
    
    
    
    13
    
    
    $
    (13
    )
    
    
    
    
    
    
    
    
    
    
    Lease obligations and other costs
    
    
    
    
    
    
    634
    
    
    
    
    
    
    
    
    
    
    
    (30
    )
    
    
    604Total
    
    $
    3,177
    
    
    $
    1,557
    
    
    $
    (13
    )
    
    $
    (18
    )
    
    $
    (1,395
    )
    
    $
    3,308
 10. Income Taxes
      15




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APAC CUSTOMER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except as otherwise indicated)
   Accounting for Uncertainty in Income Taxes: an
interpretation of FASB Statement No. 109
 11. Earnings Per Share
 :
 Thirteen Weeks Ended
    
    
    Twenty-Six Weeks EndedJuly 1,
    
    
    July 2,
    
    
    July 1,
    
    
    July 2,2007
    
    
    2006
    
    
    2007
    
    
    2006(In thousands, except earnings per share)Net income (loss)
    
    $
    (5,436
    )
    
    $
    (793
    )
    
    $
    9,779
    
    
    $
    (1,534
    )Shares used in basic per share calculation
    
    
    49,731
    
    
    
    49,455
    
    
    
    49,632
    
    
    
    49,455Effects of dilutive securities:Stock options
    
    
    
    
    
    
    
    
    
    
    1,198
    
    
    
    Non-vested stock
    
    
    
    
    
    
    
    
    
    
    411
    
    
    
    Shares used in diluted per share calculation
    
    
    49,731
    
    
    
    49,455
    
    
    
    51,241
    
    
    
    49,455Net income (loss) per share:Basic
    
    $
    (0.11
    )
    
    $
    (0.02
    )
    
    $
    0.20
    
    
    $
    (0.03
    )Diluted
    
    $
    (0.11
    )
    
    $
    (0.02
    )
    
    $
    0.19
    
    
    $
    (0.03
    )
  16




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APAC CUSTOMER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except as otherwise indicated)
 12. Reclassification
   13. Subsequent Events
   17




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
  Overview
     First-Half of 2007
   18




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Critical Accounting Policies and Estimates
 Accounting for
Uncertainty in Income Taxes: an interpretation of FASB Statement No. 109
  19




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Results of Operations
  Thirteen Weeks Ended
    
    
    Twenty-Six Weeks EndedJuly 1,
    
    
    July 2,
    
    
    Fav (Unfav)
    
    
    July 1,
    
    
    July 2,
    
    
    Fav (Unfav)2007
    
    
    2006
    
    
    % Change
    
    
    2007
    
    
    2006
    
    
    % ChangeNet Revenue:Domestic
    
    $
    43,739
    
    
    $
    51,636
    
    
    
    (15.3
    )%
    
    $
    86,066
    
    
    $
    106,117
    
    
    
    (18.9
    )%Off-shore
    
    
    10,080
    
    
    
    6,600
    
    
    
    52.7
    
    
    
    20,137
    
    
    
    12,842
    
    
    
    56.8Total net revenue
    
    
    53,819
    
    
    
    58,236
    
    
    
    (7.6
    )
    
    
    106,203
    
    
    
    118,959
    
    
    
    (10.7
    )Cost of Services:Direct labor
    
    
    32,701
    
    
    
    33,534
    
    
    
    2.5
    
    
    
    62,322
    
    
    
    68,407
    
    
    
    8.9Other facility expenses
    
    
    17,028
    
    
    
    17,593
    
    
    
    3.2
    
    
    
    33,474
    
    
    
    35,967
    
    
    
    6.9Total cost of services
    
    
    49,729
    
    
    
    51,127
    
    
    
    2.7
    
    
    
    95,796
    
    
    
    104,374
    
    
    
    8.2Percentage of revenue
    
    
    92.4
    %
    
    
    87.8
    %
    
    
    
    
    
    
    90.2
    %
    
    
    87.7
    %
    
    
    Gross profit
    
    
    4,090
    
    
    
    7,109
    
    
    
    (42.5
    )
    
    
    10,407
    
    
    
    14,585
    
    
    
    (28.6
    )Gross profit margin
    
    
    7.6
    %
    
    
    12.2
    %
    
    
    
    
    
    
    9.8
    %
    
    
    12.3
    %
    
    
    Operating Expenses:Selling, general & administrative
expenses
    
    
    7,187
    
    
    
    7,730
    
    
    
    7.0
    
    
    
    15,080
    
    
    
    15,620
    
    
    
    3.5Restructuring and other charges
    
    
    1,559
    
    
    
    384
    
    
    
    *
    
    
    
    1,557
    
    
    
    371
    
    
    
    *Total operating expenses
    
    
    8,746
    
    
    
    8,114
    
    
    
    (7.8
    )
    
    
    16,637
    
    
    
    15,991
    
    
    
    (4.0
    )Operating loss
    
    
    (4,656
    )
    
    
    (1,005
    )
    
    
    *
    
    
    
    (6,230
    )
    
    
    (1,406
    )
    
    
    *Other (expense) income
    
    
    (44
    )
    
    
    34
    
    
    
    *
    
    
    
    (91
    )
    
    
    6
    
    
    
    *Interest expense
    
    
    812
    
    
    
    442
    
    
    
    (83.7
    )
    
    
    1,650
    
    
    
    898
    
    
    
    (83.7
    )Loss before income taxes
    
    
    (5,424
    )
    
    
    (1,481
    )
    
    
    *
    
    
    
    (7,789
    )
    
    
    (2,310
    )
    
    
    *Income tax provision (benefit )
    
    
    12
    
    
    
    (688
    )
    
    
    101.7
    
    
    
    (17,568
    )
    
    
    (776
    )
    
    
    *Net income (loss)
    
    $
    (5,436
    )
    
    $
    (793
    )
    
    
    *
    
    
    $
    9,779
    
    
    $
    (1,534
    )
    
    
    *
 
 *
    
    Means that the percentage change is not meaningful Non-GAAP Financial Measures
    20




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##### Table of Contents



Thirteen Weeks Ended (1)
    
    
    Twenty-Six Weeks EndedJuly 1,
    
    
    July 2,
    
    
    Fav (Unfav)
    
    
    July 1,
    
    
    July 2,
    
    
    Fav (Unfav)2007
    
    
    2006
    
    
    % Change
    
    
    2007
    
    
    2006
    
    
    % Change(Dollars in thousands except statistical data and notes)EBITDA (2)
    
    $
    (1,079
    )
    
    $
    1,991
    
    
    
    (154.2
    )%
    
    $
    618
    
    
    $
    4,633
    
    
    
    (86.7
    )%Free cash flow (3)
    
    
    (5,035
    )
    
    
    (1,814
    )
    
    
    (177.6
    )
    
    
    (6,415
    )
    
    
    (112
    )
    
    
    *Statistical information:Number of customer care centers:Domestic
    
    
    9
    
    
    
    11
    
    
    
    
    
    
    
    9
    
    
    
    11Off-shore
    
    
    3
    
    
    
    2
    
    
    
    
    
    
    
    3
    
    
    
    2Total
    
    
    12
    
    
    
    13
    
    
    
    
    
    
    
    12
    
    
    
    13Number of workstations:Domestic
    
    
    4,504
    
    
    
    5,163
    
    
    
    
    
    
    
    4,504
    
    
    
    5,163Off-shore
    
    
    2,338
    
    
    
    1,419
    
    
    
    
    
    
    
    2,338
    
    
    
    1,419Total
    
    
    6,842
    
    
    
    6,582
    
    
    
    
    
    
    
    6,842
    
    
    
    6,582Annualized net weighted average
revenue per workstation:Domestic
    
    $
    35,495
    
    
    $
    38,709
    
    
    
    
    
    
    $
    35,791
    
    
    $
    39,742Off-shore
    
    
    17,759
    
    
    
    20,371
    
    
    
    
    
    
    
    18,355
    
    
    
    20,425Total
    
    
    29,902
    
    
    
    35,124
    
    
    
    
    
    
    
    30,325
    
    
    
    36,059
 
 *
    
    Means that the percentage change is not meaningful Notes to Non-GAAP Financial Measures
     21




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##### Table of Contents



Thirteen Weeks Ended
    
    
    Twenty-Six Weeks EndedJuly 1,
    
    
    July 2,
    
    
    July 1,
    
    
    July 2,2007
    
    
    2006
    
    
    2007
    
    
    2006(Dollars in thousands)Net income (loss)
    
    $
    (5,436
    )
    
    $
    (793
    )
    
    $
    9,779
    
    
    $
    (1,534
    )Interest expense
    
    
    812
    
    
    
    442
    
    
    
    1,650
    
    
    
    898Income tax provision (benefit)
    
    
    12
    
    
    
    (688
    )
    
    
    (17,568
    )
    
    
    (776
    )Depreciation and amortization
    
    
    3,533
    
    
    
    3,030
    
    
    
    6,757
    
    
    
    6,045EBITDA
    
    $
    (1,079
    )
    
    $
    1,991
    
    
    $
    618
    
    
    $
    4,633
   Thirteen Weeks Ended
    
    
    Twenty-Six Weeks EndedJuly 1,
    
    
    July 2,
    
    
    July 1,
    
    
    July 2,2007
    
    
    2006
    
    
    2007
    
    
    2006(Dollars in thousands)EBITDA
    
    $
    (1,079
    )
    
    $
    1,991
    
    
    $
    618
    
    
    $
    4,633Capital expenditures
    
    
    (3,956
    )
    
    
    (5,935
    )
    
    
    (7,033
    )
    
    
    (7,995
    )Leasehold improvements funded by landlord
    
    
    
    
    
    
    2,130
    
    
    
    
    
    
    
    3,250Free Cash Flow
    
    $
    (5,035
    )
    
    $
    (1,814
    )
    
    $
    (6,415
    )
    
    $
    (112
    )
  Thirteen Weeks Ended
    
    
    Twenty-Six Weeks EndedJuly 1,
    
    
    July 2,
    
    
    July 1,
    
    
    July 2,2007
    
    
    2006
    
    
    2007
    
    
    2006(Dollars in thousands)Net cash provided by (used in) operating activities
    
    $
    8,558
    
    
    $
    (121
    )
    
    $
    6,697
    
    
    $
    2,424Purchase of property and equipment
    
    
    (3,956
    )
    
    
    (3,805
    )
    
    
    (7,033
    )
    
    
    (4,745
    )Income tax provision (benefit)
    
    
    12
    
    
    
    (688
    )
    
    
    (17,568
    )
    
    
    (776
    )Interest expense
    
    
    812
    
    
    
    442
    
    
    
    1,650
    
    
    
    898Amortized gain on sale leaseback
    
    
    49
    
    
    
    
    
    
    
    94
    
    
    
    Loss on sale of property and equipment
    
    
    (51
    )
    
    
    
    
    
    
    (53
    )
    
    
    Income taxes payable
    
    
    
    
    
    
    
    
    
    
    17,580
    
    
    
    Changes in operating assets and liabilities
    
    
    (9,900
    )
    
    
    2,576
    
    
    
    (6,829
    )
    
    
    2,398Increase in deferred income taxes
    
    
    
    
    
    
    564
    
    
    
    
    
    
    
    818Stock compensation expense
    
    
    (544
    )
    
    
    (398
    )
    
    
    (940
    )
    
    
    (758
    )Non-cash restructuring charges
    
    
    (15
    )
    
    
    (384
    )
    
    
    (13
    )
    
    
    (371
    )Free Cash Flow
    
    $
    (5,035
    )
    
    $
    (1,814
    )
    
    $
    (6,415
    )
    
    $
    (112
    )
  22




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##### Table of Contents



Comparison of Results of Operations for the Thirteen Weeks Ended July 1, 2007 and July 2, 2006
          23




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##### Table of Contents



Comparison of Results of Operations for the Twenty-Six Weeks Ended July 1, 2007 and July 2, 2006
        24




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##### Table of Contents



Liquidity and Capital Resources
  Twenty-Six Weeks EndedJuly 1,
    
    
    July 2,2007
    
    
    2006(Dollars in thousands)Net cash provided by operating activities
    
    $
    6,697
    
    
    $
    2,424Net cash used in investing activities
    
    
    (7,018
    )
    
    
    (4,745
    )Net cash (used in) provided by financing activities
    
    
    (508
    )
    
    
    2,007Effect of exchange rate changes on cash
    
    
    (38
    )
    
    
    (130
    )Net decrease in cash and cash equivalents
    
    $
    (867
    )
    
    $
    (444
    )
  25




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##### Table of Contents



Operating Activities
  Investing Activities
  Financing Activities
  Bank Financing
     26




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##### Table of Contents



Free Cash Flow
   27




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##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures About Market Risk
   
 Item 4. Controls and Procedures
 Disclosure Controls and Procedures
  Internal Control Over Financial Reporting
  Inherent Limitations on the Effectiveness of Controls
    28




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##### Table of Contents



Part II. Other Information
 
 Item 1A. Risk Factors
  Our business may be affected by our cash flows from operations and our ability to comply with our
debt covenants.
      29




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##### Table of Contents



Item 4. Submission of Matters to a Vote of Security Holders
 (a)
    
    The Annual Meeting of Shareholders of the Company was held on June 1, 2007.
 (b)
    
    The name of each director elected at the Annual Meeting of Shareholders is set forth
under (c) below.
 (c)
    
    Set forth below is the tabulation of the votes for each nominee for election as a
director of the Company. All votes against nominees were recorded by the inspector of
election as withheld.
 Withhold AuthorityName
    
    For
    
    
    (including broker non-vote)Cindy K. Andreotti
    
    
    46,225,586
    
    
    
    1,039,902John W. Gerdelman
    
    
    46,573,472
    
    
    
    692,016John C. Kraft
    
    
    47,179,409
    
    
    
    86,079Robert J. Keller
    
    
    47,199,729
    
    
    
    65,759John J. Park
    
    
    47,183,029
    
    
    
    82,459Theodore G. Schwartz
    
    
    47,195,934
    
    
    
    69,554
 
 Item 6. Exhibits
   30




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##### Table of Contents



SIGNATURES
  APAC Customer Services, Inc. and SubsidiariesDate: August 10, 2007
    
    By:
    
    /s/ Robert J. KellerRobert J. KellerPresident andChief Executive Officer(Principal Executive Officer)Date: August 10, 2007
    
    By:
    
    /s/ George H. Hepburn IIIGeorge H. Hepburn IIISenior Vice President andChief Financial Officer(Principal Financial Officer)Date: August 10, 2007
    
    By:
    
    /s/ Joseph R. DoolanJoseph R. DoolanVice President and Controller(Principal Accounting Officer)
  31




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##### Table of Contents



Exhibit Index
 ExhibitNumber
    
    
    Description3.1
    
    
    Articles of Incorporation of APAC Customer Services, Inc., incorporated
by reference to APAC Customer Services, Inc.s Annual Report on Form
10-K for the fiscal year ended December 31, 2006.3.2
    
    
    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, 2004.4.1
    
    
    Specimen Common Stock Certificate, incorporated by reference to APAC
Customer Services, Inc.s Annual Report on Form 10-K for the fiscal
year ended December 29, 2002.10.1
    
    
    Second Amended and Restated Loan and Security Agreement, dated January
31, 2007, incorporated by reference to APAC Customer Services, Inc.s
Current Report on Form 8-K, dated February 5, 2007.10.2
    
    
    Second Lien Loan and Security Agreement, dated January 31, 2007,
incorporated by reference to APAC Customer Services, Inc.s Current
Report on Form 8-K, dated February 5, 2007.10.3
    
    
    Amendment No. 1 to Second Amended and Restated Loan and Security
Agreement, dated June 29, 2007, incorporated by reference to APAC
Customer Services, Inc.s Current Report on Form 8-K, dated July 3,
2007.10.4
    
    
    First Amendment to Second Lien Loan and Security Agreement, dated June
29, 2007, incorporated by reference to APAC Customer Services, Inc.s
Current Report on Form 8-K, dated July 3, 2007.10.5
    
    
    APAC Customer Services, Inc. Amended and Restated 2005 Incentive Stock
Plan, effective April 4, 2007, incorporated by reference to APAC
Customer Services, Inc.s Quarter Report on Form 10-Q for the quarter
ended April 1, 2007.10.6
    
    
    Form of APAC Customer Services, Inc. Non-Employee Director Stock Option
Agreement (revised 2007), incorporated by reference to APAC Customer
Services, Inc.s Quarter Report on Form 10-Q for the quarter ended
April 1, 2007.10.7
    
    
    Form of APAC Customer Services, Inc. Employee Stock Option Agreement
(revised 2007), incorporated by reference to APAC Customer Services,
Inc.s Quarter Report on Form 10-Q for the quarter ended April 1, 2007.10.8
    
    
    Form of APAC Customer Services, Inc. Restricted Stock Award Agreement
(revised 2007), incorporated by reference to APAC Customer Services,
Inc.s Quarter Report on Form 10-Q for the quarter ended April 1, 2007.10.9
    
    
    APAC Customer Services, Inc. Management Incentive Plan, as amended and
restated effective August 2, 2007.10.10
    
    
    Amended and Restated Executive Employment Agreement of Robert J. Keller.10.11
    
    
    Form of Amended and Restated Employment Security Agreement.10.12
    
    
    Form of Employment Security Agreement.10.13
    
    
    Amendment to Employment Agreement of George H. Hepburn.10.14
    
    
    Amendment to Employment Agreement of James M. McClenahan.10.15
    
    
    Amendment to Employment Agreement of Mark E. McDermott.10.16
    
    
    Amendment to Employment Agreement of Pamela R. Schneider.31.1
    
    
    Certification of Chief Executive Officer, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    
    Certification of Chief Financial Officer, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    
    Certification of the Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
  32