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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 October 3, 2010
 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
(State or other jurisdiction of 
incorporation or organization)
    
    36-2777140
(I.R.S. Employer Identification No.)
 Bannockburn Lake Office, 2201 Waukegan Road, Suite 300, Bannockburn, Illinois 60015
 (847) 374-4980
 Bannockburn Lake Office Plaza 1, 2333 Waukegan Road, Suite 100, Bannockburn, Illinois 60015
  þ o
  o o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer* o
    
    Smaller reporting company o(*Do not check if a smaller reporting company)
  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 October 3, 2010 and January 3, 2010
    
    
    5Condensed Consolidated Statements of Operations for the Thirteen and Thirty-Nine Weeks Ended October 3, 2010 and September 27, 2009
    
    
    6Condensed Consolidated Statements of Cash Flows for the Thirty-Nine Weeks Ended October 3, 2010 and September 27, 2009
    
    
    7Notes to Condensed Consolidated Financial Statements
    
    
    8Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    17Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    27Item 4. Controls and Procedures
    
    
    27Part II. Other Information
    
    
    28Item 1. Legal Proceedings
    
    
    28Item 1A. Risk Factors
    
    
    28Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    29Item 6. Exhibits
    
    
    29Exhibit 31.1Exhibit 31.2Exhibit 32.1
   2




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Forward-Looking Statements and Factors That May Affect Future Results
      
    
    A large portion of our revenue is generated from a limited number
of clients and the loss of one or more of them, or a reduction in
their demand for our services, could materially affect our
financial results.
 
    
    Our operating results and financial condition may be affected by
the performance of our clients and unfavorable general economic
conditions.
 
    
    The failure to effectively manage our production capacity and our
workforce could negatively impact our financial results.
 
    
    Our success is subject to the terms of our client contracts and if
we are unable to continue operating under existing client
contracts or renew existing client contracts with terms favorable
to us, our results of operations and financial condition may be
adversely affected by the loss of clients or by the less favorable
terms.
 
    
    Our business may be affected by our cash flows from operations and
our ability to comply with our debt covenants and funding
requirements under our credit facility.
 
    
    Our financial results may be affected by risks associated with
international operations and expansion, including, but not limited
to foreign currency fluctuations and changes to laws in other
countries.
 
    
    Our principal shareholder can exercise significant control over
the Company and, as a result of such control may be able to exert
considerable influence over our future direction and operations.
 
    
    Our success depends on our ability to recruit and retain a
sufficient number of qualified key personnel and the loss of the
services of key personnel without adequate replacement or the
inability to attract new qualified personnel could have a material
adverse effect on us.
 
    
    We operate in a highly competitive industry and our financial
results may suffer if we are unable to adequately address
potential downward pricing pressures and other competitive
factors.
  3




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
    
    Circumstances outside our control such as typhoons, hurricanes, earthquakes, floods and other
acts of God, political instability, equipment malfunction, telephone or data service
interruptions, changes in the telecommunications market, war and terrorism could seriously harm
our domestic or international business operations.
 
    
    Unauthorized disclosure of sensitive or confidential client and
customer data could expose us to protracted and costly litigation,
penalties and may cause us to lose clients.
 
    
    Our business and our clients businesses are subject to federal
and state regulation and industry standards and the costs of
compliance with, or liability for violation of, existing or future
regulations or standards could significantly increase our costs of
doing business.
 
    
    The costs and management time and attention associated with
litigation could result in a negative impact to financial results.
 
    
    Our business is subject to rapid changes in technology and if our
technology is rendered obsolete or we are unable to compete
effectively, our operating results and financial condition could
be materially and adversely affected.
 
    
    Volatility in our stock price may result in loss of investment for
shareholders as well as litigation, substantial cost and diversion
of managements attention.
    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)
 October 3,
    
    
    January 3,2010
    
    
    2010(Unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    49,743
    
    
    $
    20,557Accounts receivable, net
    
    
    41,164
    
    
    
    45,358Deferred tax assets, current
    
    
    6,567
    
    
    
    14,593Other current assets
    
    
    8,864
    
    
    
    6,323Total current assets
    
    
    106,338
    
    
    
    86,831Property and equipment, net
    
    
    24,318
    
    
    
    25,653Goodwill
    
    
    13,338
    
    
    
    13,338Other intangible assets, net
    
    
    230
    
    
    
    1,028Deferred tax assets, non-current
    
    
    10,170
    
    
    
    10,170Other assets
    
    
    2,043
    
    
    
    1,585Total assets
    
    $
    156,437
    
    
    $
    138,605LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Capital leases  current portion
    
    $
    670
    
    
    $
    397Accounts payable
    
    
    2,580
    
    
    
    2,770Income taxes payable
    
    
    
    
    
    
    365Accrued payroll and related items
    
    
    20,232
    
    
    
    21,964Accrued liabilities
    
    
    13,906
    
    
    
    9,190Total current liabilities
    
    
    37,388
    
    
    
    34,686Other non-current liabilities
    
    
    3,585
    
    
    
    4,171Commitments and contingencies
    
    
    
    
    
    
    Shareholders equity:Common shares, $0.01 per share; authorized 200,000,000 shares;
52,892,438 shares issued and 52,732,500 outstanding at October 3, 2010,
and 52,318,726 shares issued and outstanding at January 3, 2010
    
    
    529
    
    
    
    523Additional paid-in capital
    
    
    109,015
    
    
    
    109,818Accumulated earnings (deficit)
    
    
    4,845
    
    
    
    (11,688
    )Accumulated other comprehensive income
    
    
    1,874
    
    
    
    1,095Treasury shares: 159,938 and 0 shares at cost at October 3, 2010, and
January 3, 2010, respectively
    
    
    (799
    )
    
    
    Total shareholders equity
    
    
    115,464
    
    
    
    99,748Total liabilities and shareholders equity
    
    $
    156,437
    
    
    $
    138,605
   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
    
    
    Thirty-Nine Weeks EndedOctober 3,
    
    
    September 27,
    
    
    October 3,
    
    September 27,2010
    
    
    2009
    
    
    2010
    
    2009Net revenue
    
    $
    76,878
    
    
    $
    68,360
    
    
    $
    239,518
    
    
    $
    207,648Cost of services
    
    
    62,032
    
    
    
    54,195
    
    
    
    187,849
    
    
    
    159,529Gross profit
    
    
    14,846
    
    
    
    14,165
    
    
    
    51,669
    
    
    
    48,119Operating expenses:Selling, general and administrative
expenses
    
    
    7,430
    
    
    
    7,489
    
    
    
    23,692
    
    
    
    22,813Legal settlement
    
    
    (556
    )
    
    
    
    
    
    
    1,851
    
    
    
    4Severance and other charges
    
    
    1,268
    
    
    
    20
    
    
    
    1,256
    
    
    
    (7
    )Total operating expenses
    
    
    8,142
    
    
    
    7,509
    
    
    
    26,799
    
    
    
    22,810Operating income
    
    
    6,704
    
    
    
    6,656
    
    
    
    24,870
    
    
    
    25,309Other (income) expense, net
    
    
    (247
    )
    
    
    (15
    )
    
    
    (217
    )
    
    
    (45
    )Interest (income) expense, net
    
    
    (24
    )
    
    
    (60
    )
    
    
    (39
    )
    
    
    (18
    )Income before income taxes
    
    
    6,975
    
    
    
    6,731
    
    
    
    25,126
    
    
    
    25,372Income tax expense
    
    
    2,331
    
    
    
    143
    
    
    
    8,593
    
    
    
    429Net income
    
    $
    4,644
    
    
    $
    6,588
    
    
    $
    16,533
    
    
    $
    24,943Net income per share:Basic
    
    $
    0.09
    
    
    $
    0.13
    
    
    $
    0.32
    
    
    $
    0.49Diluted
    
    $
    0.08
    
    
    $
    0.12
    
    
    $
    0.30
    
    
    $
    0.46Weighted average number of shares
outstanding:Basic
    
    
    52,571
    
    
    
    51,835
    
    
    
    52,452
    
    
    
    51,352Diluted
    
    
    54,744
    
    
    
    55,199
    
    
    
    54,807
    
    
    
    53,962
   6




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APAC CUSTOMER SERVICES, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Dollars in thousands)
 (Unaudited)
 Thirty-Nine Weeks EndedOctober 3,
    
    
    September 27,2010
    
    
    2009Operating activities:Net income
    
    $
    16,533
    
    
    $
    24,943Adjustments to reconcile net income to net cash provided
by operating activities:Depreciation and amortization
    
    
    8,840
    
    
    
    8,711Deferred income taxes
    
    
    8,026
    
    
    
    Stock compensation expense
    
    
    1,856
    
    
    
    509Amortized gain on sale leaseback
    
    
    (93
    )
    
    
    (70
    )(Gain) loss on sale of property and equipment
    
    
    (1
    )
    
    
    7Income taxes payable
    
    
    (365
    )
    
    
    370Change in operating assets and liabilities
    
    
    167
    
    
    
    (8,180
    )Net cash provided by operating activities
    
    
    34,963
    
    
    
    26,290Investing activities:Purchases of property and equipment, net
    
    
    (5,325
    )
    
    
    (7,965
    )Net proceeds from sale of property and equipment
    
    
    1
    
    
    
    1Net cash used in investing activities
    
    
    (5,324
    )
    
    
    (7,964
    )Financing activities:Net payments under revolving credit facility
    
    
    
    
    
    
    (6,100
    )Payment of capital lease obligations
    
    
    (445
    )
    
    
    (59
    )Stock option transactions, including related excess income tax benefits
    
    
    533
    
    
    
    2,264Purchase of treasury stock
    
    
    (799
    )
    
    
    Net cash used in financing activities
    
    
    (711
    )
    
    
    (3,895
    )Effect of exchange rate change on cash
    
    
    258
    
    
    
    1,127Net increase in cash and cash equivalents
    
    
    29,186
    
    
    
    15,558Cash and cash equivalents:Beginning balance
    
    
    20,557
    
    
    
    618Ending balance
    
    $
    49,743
    
    
    $
    16,176
   7




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APAC CUSTOMER SERVICES, INC. AND SUBSIDIARIES
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 (Dollars in thousands, except per share data)
 1. Basis of Presentation and Principles of Consolidation
  http://www.sec.gov
 
 2. New Accounting Pronouncements
 Fair Value
 Fair Value Measurements and Disclosures
 Revenue Recognition
 Revenue Recognition
  8




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APAC CUSTOMER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share data)
 Subsequent Events
 Subsequent Events
 3. Accrued Liabilities
  October 3,
    
    
    January 3,2010
    
    
    2010Option repurchase obligation (1)
    
    $
    3,186
    
    
    $
    Non-qualified retirement plan liability
    
    
    2,228
    
    
    
    1,931Accrued legal settlement (2)
    
    
    1,850
    
    
    
    Deferred rent
    
    
    868
    
    
    
    1,134Accrued professional fees
    
    
    853
    
    
    
    719Accrued severance costs
    
    
    776
    
    
    
    261Accrued capital expenditures
    
    
    610
    
    
    
    890Accrued workers compensation
    
    
    564
    
    
    
    929Accrued telecommunications expense
    
    
    493
    
    
    
    961Accrued temporary labor
    
    
    347
    
    
    
    839Other accrued liabilities
    
    
    2,131
    
    
    
    1,526Total
    
    $
    13,906
    
    
    $
    9,190
 
 (1)
    
    For more information regarding the option repurchase obligation, see Note 9.(2)
    
    For more information regarding the accrued legal settlement, see Note 7. 4. Goodwill and Other Intangible Assets
    9




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APAC CUSTOMER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share data)
 5. Accounting for Stock-Based Compensation
    Number of SharesOutstanding on January 3, 2010
    
    
    25,000Granted
    
    
    250,000Issued
    
    
    (25,000
    )Forfeited
    
    
    Expired
    
    
    Outstanding on October 3, 2010
    
    
    250,000
   Weighted AverageNumber of
    
    
    Grant Price Range Per
    
    
    Exercise Price Per
    
    
    AggregateOptions
    
    
    Share
    
    
    Share
    
    
    Intrinsic ValueOutstanding on January 3, 2010
    
    
    6,136,677
    
    
    $
    0.79
    
    
    $
    11.63
    
    
    $
    2.24Granted
    
    
    1,470,290
    
    
    
    4.91
    
    
    
    6.43
    
    
    
    5.45Exercised
    
    
    (323,712
    )
    
    
    1.06
    
    
    
    3.57
    
    
    
    1.65Forfeited
    
    
    (137,500
    )
    
    
    1.49
    
    
    
    5.53
    
    
    
    5.11Expired (1)
    
    
    (927,000
    )
    
    
    1.21
    
    
    
    11.63
    
    
    
    1.44Outstanding on October 3, 2010
    
    
    6,218,755
    
    
    $
    0.79
    
    
    $
    6.43
    
    
    $
    3.08
    
    
    $
    16,098Exercisable on October 3, 2010
    
    
    2,924,649
    
    
    $
    0.79
    
    
    $
    6.05
    
    
    $
    2.34
    
    
    $
    9,693
 
 (1)
    
    Includes 900,000 options that expired in September 2010 as part of the Companys severance
agreement with Michael Marrow, its former President and CEO. At the time of Mr. Marrows
resignation, all unvested options included in his February 25, 2008 option grant immediately vested
and then were expired as part of the terms of an option repurchase agreement.   10




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APAC CUSTOMER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share data)
 6. Comprehensive Income
  Thirteen Weeks Ended
    
    
    Thirty-Nine Weeks EndedOctober 3,
    
    
    September 27,
    
    
    October 3,
    
    
    September 27,2010
    
    
    2009
    
    
    2010
    
    
    2009Net income
    
    $
    4,644
    
    
    $
    6,588
    
    
    $
    16,533
    
    
    $
    24,943Foreign currency translation adjustment
    
    
    392
    
    
    
    121
    
    
    
    415
    
    
    
    17Unrealized gain on derivative contracts
    
    
    730
    
    
    
    494
    
    
    
    364
    
    
    
    1,108Total comprehensive income
    
    $
    5,766
    
    
    $
    7,203
    
    
    $
    17,312
    
    
    $
    26,068
 7. Legal Proceedings
       11




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APAC CUSTOMER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share data)
 8. Debt
       9. Severance and Other Charges
     12




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APAC CUSTOMER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share data)
 10. Income Taxes
   11. Earnings Per Share
 :
 Thirteen Weeks Ended
    
    
    Thirty-Nine Weeks EndedOctober 3,
    
    
    September 27,
    
    
    October 3,
    
    
    September 27,2010
    
    
    2009
    
    
    2010
    
    
    2009(In thousands, except earnings per share)Net income
    
    $
    4,644
    
    
    $
    6,588
    
    
    $
    16,533
    
    
    $
    24,943Shares used in basic per share calculation
    
    
    52,571
    
    
    
    51,835
    
    
    
    52,452
    
    
    
    51,352Effects of dilutive securities:Stock options
    
    
    2,172
    
    
    
    3,339
    
    
    
    2,351
    
    
    
    2,585Non-vested stock
    
    
    1
    
    
    
    25
    
    
    
    4
    
    
    
    25Shares used in diluted per share calculation
    
    
    54,744
    
    
    
    55,199
    
    
    
    54,807
    
    
    
    53,962Net income per share:Basic
    
    $
    0.09
    
    
    $
    0.13
    
    
    $
    0.32
    
    
    $
    0.49Diluted
    
    $
    0.08
    
    
    $
    0.12
    
    
    $
    0.30
    
    
    $
    0.46
   13




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APAC CUSTOMER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share data)
 12. Fair Value Measurements
  
    
    Level 1  Quoted prices in active markets for identical assets or liabilities.
 
    
    Level 2  Inputs, other than the quoted prices in active markets, that are observable
either directly or indirectly.
 
    
    Level 3  Unobservable inputs based on the Companys own assumptions.
  Fair Value Measurements as of October 3, 2010Level 1
    
    
    Level 2
    
    
    Level 3Assets:Cash equivalents(1)
    
    $
    45,789
    
    
    $
    
    
    
    $
    Non-qualified retirement plan(2)
    
    
    2,228
    
    
    
    
    
    
    
    Foreign currency derivative contracts(3)
    
    
    
    
    
    
    1,199
    
    
    
    Non-current investments(4)
    
    
    363
    
    
    
    
    
    
    
    Liabilities:Non-qualified retirement plan obligation(2)
    
    $
    2,228
    
    
    $
    
    
    
    $
    
 
 (1)
    
    Cash equivalents: The carrying amount of these items approximates fair value at period end.(2)
    
    Non-qualified retirement plan: The Company maintains a non-qualified retirement plan (Select
Plan) for highly compensated employees who are limited in the amount of contributions that they can
make in the Companys 401-K plan. As of October 3, 2010, the fair value of investments in the
Select Plan totaled $2.2 million and is reflected on the Companys balance sheet in other current
assets. The related obligation to employees participating in the Select Plan, which will always
equal the fair value of the investments, are recorded on the Companys balance sheet in other
current liabilities.(3)
    
    Foreign currency derivative contracts: The carrying amount of these items is based on
valuations provided by the counter-party institution, but there are no guaranteed selling prices
for these forward currency contracts.(4)
    
    Non-current investments: The carrying amount of these items, which represent Philippine
treasury bills, approximates fair value as of October 3, 2010 and is recorded as a component of
other assets on the Companys balance sheet.    14




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APAC CUSTOMER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share data)
 13. Derivative Instruments
     Asset DerivativesFair ValueBalance Sheet
    
    
    October 3,
    
    
    January 3,Location
    
    2010
    
    
    2010Derivatives designated as hedging instruments:Foreign currency contracts
    
    Other Current Assets
    
    $
    1,199
    
    
    $
    657Total derivatives
    
    
    
    
    
    $
    1,199
    
    
    $
    657
 Liability DerivativesFair ValueBalance Sheet
    
    
    October 3,
    
    
    January 3,Location
    
    2010
    
    
    2010Derivatives designated as hedging instruments:Foreign currency contracts
    
    Accrued Liabilities
    
    $
    
    
    
    $
    15Total derivatives
    
    
    
    
    
    $
    
    
    
    $
    15
  15




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APAC CUSTOMER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share data)
  Thirteen Weeks EndedDerivatives
    
    Amount of Gain (Loss)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Gain (Loss) Recognized in Income onDesignated as
    
    Recognized in OCI on
    
    
    Gain (Loss) Reclassified from Accumulated
    
    
    Derivatives (Ineffective Portion and AmountCash Flow
    
    Derivatives (Effective Portion)
    
    
    OCI into Income (Effective Portion)
    
    
    Excluded from Effectiveness Testing)Hedging
    
    October 3,
    
    
    September 27,
    
    
    
    
    
    
    October 3,
    
    
    September 27,
    
    
    
    
    
    
    October 3,
    
    
    September 27,Instruments
    
    2010
    
    
    2009
    
    
    Location
    
    2010
    
    
    2009
    
    
    Location
    
    
    2010
    
    
    2009Foreign currency
contracts
    
    $
    730
    
    
    $
    494
    
    
    Cost of Services
    
    $
    158
    
    
    $
    (240
    )
    
    na
    
    $
    
    
    
    $
    
 Thirty-Nine Weeks EndedDerivatives
    
    Amount of Gain (Loss)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Gain (Loss) Recognized in Income onDesignated as
    
    Recognized in OCI on
    
    
    Gain (Loss) Reclassified from Accumulated
    
    
    Derivatives (Ineffective Portion and AmountCash Flow
    
    Derivatives (Effective Portion)
    
    
    OCI into Income (Effective Portion)
    
    
    Excluded from Effectiveness Testing)Hedging
    
    October 3,
    
    
    September 27,
    
    
    
    
    
    
    October 3,
    
    
    September 27,
    
    
    
    
    
    
    October 3,
    
    
    September 27,Instruments
    
    2010
    
    
    2009
    
    
    Location
    
    2010
    
    
    2009
    
    
    Location
    
    
    2010
    
    
    2009Foreign currency
contracts
    
    $
    364
    
    
    $
    1,108
    
    
    Cost of Services
    
    $
    623
    
    
    $
    (1,183
    )
    
    na
    
    $
    
    
    
    $
    
 14. Reclassifications
  15. Subsequent Events
   16




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
  Overview
   at 
     17




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##### Table of Contents



Critical Accounting Policies and Estimates
    18




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##### Table of Contents



Results of Operations
  Thirteen Weeks Ended
    
    
    Thirty-Nine Weeks EndedOctober 3,
    
    
    September 27,
    
    
    Fav (Unfav)
    
    
    October 3,
    
    
    September 27,
    
    
    Fav (Unfav)2010
    
    
    2009
    
    
    % Change
    
    
    2010
    
    
    2009
    
    
    % ChangeNet Revenue
    
    $
    76,878
    
    
    $
    68,360
    
    
    
    12.5
    %
    
    $
    239,518
    
    
    $
    207,648
    
    
    
    15.3
    %Cost of Services:Direct labor
    
    
    41,295
    
    
    
    37,648
    
    
    
    (9.7
    )
    
    
    127,667
    
    
    
    110,168
    
    
    
    (15.9
    )Other facility expenses
    
    
    20,737
    
    
    
    16,547
    
    
    
    (25.3
    )
    
    
    60,182
    
    
    
    49,361
    
    
    
    (21.9
    )Total cost of services
    
    
    62,032
    
    
    
    54,195
    
    
    
    (14.5
    )
    
    
    187,849
    
    
    
    159,529
    
    
    
    (17.8
    )Percentage of revenue
    
    
    80.7
    %
    
    
    79.3
    %
    
    
    
    
    
    
    78.4
    %
    
    
    76.8
    %
    
    
    Gross profit
    
    
    14,846
    
    
    
    14,165
    
    
    
    4.8
    
    
    
    51,669
    
    
    
    48,119
    
    
    
    7.4Gross profit margin
    
    
    19.3
    %
    
    
    20.7
    %
    
    
    
    
    
    
    21.6
    %
    
    
    23.2
    %
    
    
    Operating Expenses:Selling, general &
administrative expenses
    
    
    7,430
    
    
    
    7,489
    
    
    
    0.8
    
    
    
    23,692
    
    
    
    22,813
    
    
    
    (3.9
    )Legal settlement
    
    
    (556
    )
    
    
    
    
    
    
    *
    
    
    
    1,851
    
    
    
    4
    
    
    
    *Severance and other charges
    
    
    1,268
    
    
    
    20
    
    
    
    *
    
    
    
    1,256
    
    
    
    (7
    )
    
    
    *Total operating expenses
    
    
    8,142
    
    
    
    7,509
    
    
    
    (8.4
    )
    
    
    26,799
    
    
    
    22,810
    
    
    
    (17.5
    )Operating income
    
    
    6,704
    
    
    
    6,656
    
    
    
    0.7
    
    
    
    24,870
    
    
    
    25,309
    
    
    
    (1.7
    )Other (income) expense, net
    
    
    (247
    )
    
    
    (15
    )
    
    
    *
    
    
    
    (217
    )
    
    
    (45
    )
    
    
    382.2Interest (income) expense, net
    
    
    (24
    )
    
    
    (60
    )
    
    
    (60.0
    )
    
    
    (39
    )
    
    
    (18
    )
    
    
    116.7Income before income taxes
    
    
    6,975
    
    
    
    6,731
    
    
    
    3.6
    
    
    
    25,126
    
    
    
    25,372
    
    
    
    (1.0
    )Income tax expense
    
    
    2,331
    
    
    
    143
    
    
    
    *
    
    
    
    8,593
    
    
    
    429
    
    
    
    *Net income
    
    $
    4,644
    
    
    $
    6,588
    
    
    
    (29.5
    )%
    
    $
    16,533
    
    
    $
    24,943
    
    
    
    (33.7
    )%
 
 *
    
    Means that the percentage change is not meaningful Non-GAAP Financial Measures
     19




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Thirteen Weeks Ended (1)
    
    
    Thirty-Nine Weeks EndedOctober 3,
    
    
    September 27,
    
    
    
    
    
    
    October 3,
    
    
    September 27,2010
    
    
    2009
    
    
    Fav (Unfav)
    
    
    2010
    
    
    2009
    
    
    Fav (Unfav)(Dollars in thousands except statistical data and notes)EBITDA (2)
    
    $
    9,720
    
    
    $
    9,600
    
    
    
    1.3
    %
    
    $
    33,927
    
    
    $
    34,065
    
    
    
    (0.4
    )%Adjusted EBITDA (2)
    
    $
    10,694
    
    
    $
    9,620
    
    
    
    11.2
    %
    
    $
    37,602
    
    
    $
    34,062
    
    
    
    10.4
    %Statistical information:Number of customer care centers:Domestic
    
    
    10
    
    
    
    9
    
    
    
    
    
    
    
    10
    
    
    
    9International
    
    
    5
    
    
    
    4
    
    
    
    
    
    
    
    5
    
    
    
    4Total
    
    
    15
    
    
    
    13
    
    
    
    
    
    
    
    15
    
    
    
    13Number of workstations,
end of period:Domestic
    
    
    6,288
    
    
    
    5,391
    
    
    
    
    
    
    
    6,288
    
    
    
    5,391International
    
    
    4,279
    
    
    
    3,879
    
    
    
    
    
    
    
    4,279
    
    
    
    3,879Total
    
    
    10,567
    
    
    
    9,270
    
    
    
    
    
    
    
    10,567
    
    
    
    9,270
 Notes to Non-GAAP Financial Measures
 (1)
    
    We operate on a thirteen-week fiscal quarter that ends on the Sunday closest to September 30.     20




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Thirteen Weeks Ended
    
    
    Thirty-Nine Weeks EndedOctober 3,
    
    
    September 27,
    
    
    October 3,
    
    
    September 27,2010
    
    
    2009
    
    
    2010
    
    
    2009(Dollars in thousands)Net income
    
    $
    4,644
    
    
    $
    6,588
    
    
    $
    16,533
    
    
    $
    24,943Interest (income) expense, net
    
    
    (24
    )
    
    
    (60
    )
    
    
    (39
    )
    
    
    (18
    )Income tax expense
    
    
    2,331
    
    
    
    143
    
    
    
    8,593
    
    
    
    429Depreciation and amortization
    
    
    2,769
    
    
    
    2,929
    
    
    
    8,840
    
    
    
    8,711EBITDA
    
    $
    9,720
    
    
    $
    9,600
    
    
    $
    33,927
    
    
    $
    34,065Legal settlement
    
    
    (556
    )
    
    
    
    
    
    
    1,851
    
    
    
    4Severance and other charges
    
    
    1,268
    
    
    
    20
    
    
    
    1,256
    
    
    
    (7
    )Accelerated stock compensation expense (a)
    
    
    262
    
    
    
    
    
    
    
    568
    
    
    
    Adjusted EBITDA
    
    $
    10,694
    
    
    $
    9,620
    
    
    $
    37,602
    
    
    $
    34,062
 
 (a)
    
    Accelerated stock compensation expense resulting from the acceleration of the vesting of the
stock options related to the June 2010 retirement of two members of our Board of Directors and the
September 2010 severance agreement with our former President and CEO.  21




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##### Table of Contents



Comparison of Results of Operations for the Thirteen Weeks Ended October 3, 2010 and September 27,
2009
          22




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##### Table of Contents



Comparison of Results of Operations for the Thirty-nine Weeks Ended October 3, 2010 and September
27, 2009
     23




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24




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Liquidity and Capital Resources
  Thirty-Nine Weeks EndedOctober 3,
    
    
    September 27,2010
    
    
    2009(Dollars in thousands)Net cash provided by operating activities
    
    $
    34,963
    
    
    $
    26,290Net cash used in investing activities
    
    
    (5,324
    )
    
    
    (7,964
    )Net cash used in financing activities
    
    
    (711
    )
    
    
    (3,895
    )Effect of exchange rate changes on cash
    
    
    258
    
    
    
    1,127Net increase in cash and cash equivalents
    
    $
    29,186
    
    
    $
    15,558
 Operating Activities
  Investing Activities
  Financing Activities
   25




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Bank Financing
     Future Liquidity
     26




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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
   27




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##### Table of Contents



Part II. Other Information
 
 Item 1. Legal Proceedings
    
 Item 1A. Risk Factors
   28




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##### Table of Contents



Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  Issuer Purchases of Equity SecuritiesTotal Number of
    
    
    Maximum NumberTotal Number
    
    
    
    
    
    
    Shares Purchased
    
    
    of Shares that Mayof Shares (or
    
    
    Average Price
    
    
    as Part of Publicly
    
    
    Yet Be PurchasedUnits)
    
    
    Paid per Share
    
    
    Announced Plans
    
    
    Under the Plans orPeriod
    
    Purchased
    
    
    (or Unit)
    
    
    or Programs (1)
    
    
    Programs (1)7/5/2010-8/1/2010
    
    
    
    
    
    $
    
    
    
    
    
    
    
    
    5,000,0008/2/2010-8/29/2010
    
    
    159,938
    
    
    
    5.00
    
    
    
    159,938
    
    
    
    4,840,0628/30/2010-10/3/2010
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,840,062Total
    
    
    159,938
    
    
    $
    5.00
    
    
    
    159,938
    
    
    
    4,840,062
 
 (1)
    
    On August 18, 2010, we announced that our Board of Directors had authorized the repurchase of
up to an aggregate of five million shares of our common stock. Under the stock repurchase program,
purchases will be made from time to time on the open market at prevailing market prices or in
negotiated transactions off the market. The repurchase program is expected to continue over the
next 12 months unless extended or shortened by the Board of Directors. We are not obligated to
acquire any particular amount of common stock as a result of the plan, which may be suspended at
any time at our discretion. 
 Item 6. Exhibits
   29




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SIGNATURES
  APAC Customer Services, Inc.Date: November 9, 2010
    
    By:
    
    /s/ Kevin T. KeleghanKevin T. KeleghanPresident and
Chief Executive Officer
(Principal Executive Officer)Date: November 9, 2010
    
    By:
    
    /s/ Andrew B. SzafranAndrew B. SzafranSenior Vice President and
Chief Financial Officer
(Principal Financial Officer)Date: November 9, 2010
    
    By:
    
    /s/ Joseph R. DoolanJoseph R. DoolanVice President and Controller
(Principal Accounting Officer)
  30




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##### Table of Contents



Exhibit Index
 ExhibitNumber
    
    Description3.1
    
    
    Amended and Restated Articles of Incorporation of APAC Customer
Services, Inc., incorporated by reference to APAC Customer
Services, Inc.s Annual Report on Form 10-K for the fiscal year
ended January 1, 2006.3.2
    
    
    Second Amended and Restated Bylaws of APAC Customer
Services, Inc., dated August 20, 2007, incorporated by reference
to APAC Customer Services, Inc.s Current Report on Form 8-K,
dated August 22, 2007.4.1
    
    
    Specimen Common Stock Certificate, incorporated by reference to
APAC Customer Services, Inc.s Annual Report on Form 10-K for the
fiscal year ended December 28, 2008.10.1
    
    
    Executive Employment Agreement with Kevin T. Keleghan, dated
September 13, 2010, incorporated by reference to APAC Customer
Services, Inc.s Current Report on Form 8-K, filed September 13,
2010.10.2
    
    
    Employment Security Agreement with Kevin T. Keleghan, dated
September 13, 2010, incorporated by reference to APAC Customer
Services, Inc.s Current Report on Form 8-K, filed September 13,
2010.10.3
    
    
    Agreement Protecting Company Interests with Kevin T. Keleghan,
dated September 13, 2010, incorporated by reference to APAC
Customer Services, Inc.s Current Report on Form 8-K, filed
September 13, 2010.10.4
    
    
    Letter Amendment to Executive Employment Agreement with Michael
P. Marrow, dated September 12, 2010, incorporated by reference to
APAC Customer Services, Inc.s Current Report on Form 8-K, filed
September 13, 2010 (amendment filed September 14, 2010.)10.5
    
    
    Letter Amendment to Employment Agreement with Arthur DiBari,
executed October 1, 2010, incorporated by reference to APAC
Customer Services Inc.s Current Report of Form 8-K, filed October
6, 2010.31.1
    
    
    Certification of Chief Executive Officer, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    
    Certification of Chief Financial Officer, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    
    Certification of the Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
  31