##### Table of Contents



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 June 29, 2008
 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
  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 June 29, 2008 and
December 30, 2007
    
    
    5Condensed Consolidated Statements of Operations for the Thirteen and
Twenty-Six Weeks Ended June 29, 2008 and July 1, 2007
    
    
    6Condensed Consolidated Statements of Cash Flows for the Thirteen and
Twenty-Six Weeks Ended June 29, 2008 and July 1, 2007
    
    
    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
    
    
    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
   forward-looking
   
    
    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 financial results depend on our ability to effectively manage our production capacity and our workforce.
 
    
    Our success is subject to the terms of our client contracts.
 
    
    Our success depends on our return to profitability.
 
    
    Our success depends on our ability to continue to reduce costs and achieve efficiencies.
 
    
    Our business may be affected by our cash flows from operations and our ability to comply with, or obtain waivers of or
changes to, our debt covenants.
 
    
    Our principal shareholder can exercise significant control over us.
  3




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##### Table of Contents




    
    Our financial results may be affected by risks associated with international operations and expansion, including
foreign currency fluctuations.
 
    
    Our success depends on key personnel.
  
    
    Our business operates in a highly competitive market.
 
    
    Circumstances outside our control such as typhoons, 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 off-shore business.
 
    
    Our inability to attract and retain a sufficient number of qualified employees could negatively impact our business.
 
    
    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.
  non-GAAP non-GAAP
  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)
 June 29,
    
    
    December 30,2008
    
    
    2007(Unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    1,633
    
    
    $
    1,426Accounts receivable, net
    
    
    31,715
    
    
    
    34,468Other current assets
    
    
    3,615
    
    
    
    5,971Total current assets
    
    
    36,963
    
    
    
    41,865Property and equipment, net
    
    
    24,221
    
    
    
    26,772Goodwill
    
    
    13,338
    
    
    
    13,338Other intangible assets, net
    
    
    4,712
    
    
    
    5,891Other assets
    
    
    1,624
    
    
    
    2,060Total assets
    
    $
    80,858
    
    
    $
    89,926LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Short-term debt
    
    $
    17,743
    
    
    $
    12,307Current portion of long-term debt
    
    
    
    
    
    
    2,400Accounts payable
    
    
    1,904
    
    
    
    2,287Income taxes payable
    
    
    220
    
    
    
    220Accrued payroll and related items
    
    
    17,888
    
    
    
    15,954Accrued liabilities
    
    
    13,352
    
    
    
    11,123Total current liabilities
    
    
    51,107
    
    
    
    44,291Long-term debt
    
    
    
    
    
    
    11,600Other liabilities
    
    
    2,335
    
    
    
    654Commitments and contingencies
    
    
    
    
    
    
    Shareholders equity:Common shares, $0.01 per share; authorized 200,000,000 shares;
50,499,296 shares issued and 50,473,312 shares outstanding at
June 29, 2008, and 50,379,296 shares issued and outstanding
at December 30, 2007
    
    
    506
    
    
    
    504Additional paid-in capital
    
    
    103,812
    
    
    
    102,647Accumulated deficit
    
    
    (76,850
    )
    
    
    (72,760
    )Accumulated other comprehensive (loss) income
    
    
    (25
    )
    
    
    2,990Treasury shares: 25,984 and 0 shares at cost at June 29, 2008, and
December 30, 2007, respectively
    
    
    (27
    )
    
    
    Total shareholders equity
    
    
    27,416
    
    
    
    33,381Total liabilities and shareholders equity
    
    $
    80,858
    
    
    $
    89,926
   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 EndedJune 29,
    
    
    July 1,
    
    
    June 29,
    
    
    July 1,2008
    
    
    2007
    
    
    2008
    
    
    2007Net revenue
    
    $
    60,710
    
    
    $
    53,819
    
    
    $
    124,227
    
    
    $
    106,203Cost of services
    
    
    49,978
    
    
    
    49,729
    
    
    
    105,724
    
    
    
    95,796Gross profit
    
    
    10,732
    
    
    
    4,090
    
    
    
    18,503
    
    
    
    10,407Operating expenses:Selling, general and
administrative
expenses
    
    
    7,827
    
    
    
    7,187
    
    
    
    16,395
    
    
    
    15,080Restructuring and other
charges:Restructuring charges
    
    
    (23
    )
    
    
    1,559
    
    
    
    (20
    )
    
    
    1,557Other severance charges
    
    
    460
    
    
    
    
    
    
    
    2,798
    
    
    
    Total operating expenses
    
    
    8,264
    
    
    
    8,746
    
    
    
    19,173
    
    
    
    16,637Operating income (loss)
    
    
    2,468
    
    
    
    (4,656
    )
    
    
    (670
    )
    
    
    (6,230
    )Other income
    
    
    (142
    )
    
    
    (44
    )
    
    
    (174
    )
    
    
    (91
    )Interest expense
    
    
    2,673
    
    
    
    812
    
    
    
    3,595
    
    
    
    1,650Loss before income taxes
    
    
    (63
    )
    
    
    (5,424
    )
    
    
    (4,091
    )
    
    
    (7,789
    )Income tax provision (benefit)
    
    
    
    
    
    
    12
    
    
    
    
    
    
    
    (17,568
    )Net income (loss)
    
    $
    (63
    )
    
    $
    (5,436
    )
    
    $
    (4,091
    )
    
    $
    9,779Net income (loss) per share:Basic
    
    $
    (0.00
    )
    
    $
    (0.11
    )
    
    $
    (0.08
    )
    
    $
    0.20Diluted
    
    $
    (0.00
    )
    
    $
    (0.11
    )
    
    $
    (0.08
    )
    
    $
    0.19Weighted average number of shares
outstanding:Basic
    
    
    50,393
    
    
    
    49,731
    
    
    
    50,307
    
    
    
    49,632Diluted
    
    
    50,393
    
    
    
    49,731
    
    
    
    50,307
    
    
    
    51,241
   6




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APAC CUSTOMER SERVICES, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
 Twenty-Six Weeks EndedJune 29,
    
    
    July 1,2008
    
    
    2007Operating activities:Net income (loss)
    
    $
    (4,091
    )
    
    $
    9,779Adjustments to reconcile net income (loss) to net cash provided
by operating activities:Depreciation and amortization
    
    
    6,422
    
    
    
    6,757Non-cash restructuring charges
    
    
    
    
    
    
    13Stock compensation expense
    
    
    844
    
    
    
    940Amortized gain on sale leaseback
    
    
    (63
    )
    
    
    (94
    )(Gain) loss on sale of property and equipment
    
    
    (1
    )
    
    
    53Income taxes payable
    
    
    
    
    
    
    (17,580
    )Change in operating assets and liabilities
    
    
    10,190
    
    
    
    6,829Net cash provided by operating activities
    
    
    13,301
    
    
    
    6,697Investing activities:Purchases of property and equipment, net
    
    
    (2,786
    )
    
    
    (7,033
    )Net proceeds from sale of property and equipment
    
    
    8
    
    
    
    15Net cash used in investing activities
    
    
    (2,778
    )
    
    
    (7,018
    )Financing activities:Net (payments) borrowings on long-term debt
    
    
    (14,000
    )
    
    
    10,000Net borrowings (payments) under revolving credit facility
    
    
    5,436
    
    
    
    (11,090
    )Cash received from exercise of stock options
    
    
    297
    
    
    
    582Net cash used in financing activities
    
    
    (8,267
    )
    
    
    (508
    )Effect of exchange rate change on cash
    
    
    (2,049
    )
    
    
    (38
    )Net increase (decrease) in cash and cash equivalents
    
    
    207
    
    
    
    (867
    )Cash and cash equivalents:Beginning balance
    
    
    1,426
    
    
    
    1,305Ending balance
    
    $
    1,633
    
    
    $
    438
   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
 
 2. New Accounting Pronouncements
 non-financial
    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
  June 29,
    
    
    December 30,2008
    
    
    2007Deferred rent
    
    $
    3,223
    
    
    $
    4,094Accrued workers compensation
    
    
    1,774
    
    
    
    2,089Accrued severance
    
    
    1,467
    
    
    
    Unrecognized loss on forward contracts
    
    
    1,450
    
    
    
    Accrued professional fees
    
    
    830
    
    
    
    644Accrued capital expenditures
    
    
    745
    
    
    
    Accrued restructuring charges
    
    
    574
    
    
    
    1,756Accrued property tax
    
    
    216
    
    
    
    332Other
    
    
    3,073
    
    
    
    2,208Total
    
    $
    13,352
    
    
    $
    11,123
 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 as otherwise indicated)
 5. Accounting for Stock-Based Compensation
    Number of SharesOutstanding on December 30, 2007
    
    
    366,758Granted
    
    
    50,000Exercised
    
    
    (298,199
    )Forfeited
    
    
    (50,000
    )Expired
    
    
    Outstanding on June 29, 2008
    
    
    68,559
   Weighted AverageNumber of
    
    
    Grant Price
    
    
    Exercise Price Per
    
    
    AggregateOptions
    
    
    Range Per Share
    
    
    Share
    
    
    Intrinsic ValueOutstanding on December 30,
2007
    
    
    6,495,396
    
    
    $
    0.85  $11.63
    
    
    $
    2.22Granted
    
    
    2,545,063
    
    
    
    0.79      1.21
    
    
    
    1.03Exercised
    
    
    (140,250
    )
    
    
    0.88       1.21
    
    
    
    0.93Forfeited
    
    
    (734,501
    )
    
    
    0.85      4.60
    
    
    
    1.53Expired
    
    
    (572,131
    )
    
    
    1.35    11.56
    
    
    
    3.32Outstanding on June 29, 2008
    
    
    7,593,577
    
    
    $
    0.79  $11.63
    
    
    $
    1.82
    
    
    $
    1,220Exercisable on June 29, 2008
    
    
    4,199,683
    
    
    $
    0.85   $11.63
    
    
    $
    2.15
    
    
    $
    441
  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 Ended
    
    
    Twenty-Six Weeks EndedJune 29,
    
    
    July 1,
    
    
    June 29,
    
    
    July 1,2008
    
    
    2007
    
    
    2008
    
    
    2007Net income (loss)
    
    $
    (63
    )
    
    $
    (5,436
    )
    
    $
    (4,091
    )
    
    $
    9,779Foreign currency translation adjustment
    
    
    (701
    )
    
    
    352
    
    
    
    (753
    )
    
    
    519Unrealized loss on forward contracts
    
    
    (1,526
    )
    
    
    
    
    
    
    (2,262
    )
    
    
    Total comprehensive income (loss)
    
    $
    (2,290
    )
    
    $
    (5,084
    )
    
    $
    (7,106
    )
    
    $
    10,298
   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)
   9. Restructuring and Other Charges
 twenty-six
 Other Severance Charges
  2007 Restructuring Initiatives
     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)
 2006 Restructuring Initiatives
  2005 Restructuring Initiatives
    December 30,
    
    
    Charges
    
    
    Asset
    
    
    Cash2007
    
    
    (Reversals)
    
    
    Write-off
    
    
    Payments
    
    
    June 29, 20082005 restructuring initiatives:Lease obligations and other
costs
    
    $
    1,123
    
    
    $
    (173
    )
    
    $
    
    
    
    $
    (694
    )
    
    $
    2562006 restructuring initiatives:Lease obligations and other
costs
    
    
    29
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    292007 restructuring initiatives:Employee severance costs
    
    
    333
    
    
    
    (1
    )
    
    
    
    
    
    
    (203
    )
    
    
    129Lease obligations and other
costs
    
    
    286
    
    
    
    154
    
    
    
    
    
    
    
    (262
    )
    
    
    178Total
    
    $
    1,771
    
    
    $
    (20
    )
    
    $
    
    
    
    $
    (1,159
    )
    
    $
    592
 10. Income Taxes
    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)
     Net Operating LossExpiration
    
    Carryforward2024
    
    $
    14,3552025
    
    
    13,9012026
    
    
    9,0462027
    
    
    12,5882028
    
    
    4,885$
    54,775
  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)
 11. Earnings Per Share
 twenty-six :
 Thirteen Weeks Ended
    
    
    Twenty-Six Weeks EndedJune 29,
    
    
    July 1,
    
    
    June 29,
    
    
    July 1,2008
    
    
    2007
    
    
    2008
    
    
    2007(In thousands, except earnings per share)Net income (loss)
    
    $
    (63
    )
    
    $
    (5,436
    )
    
    $
    (4,091
    )
    
    $
    9,779Shares used in basic per share
calculation
    
    
    50,393
    
    
    
    49,731
    
    
    
    50,307
    
    
    
    49,632Effects of dilutive securities:Stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,198Non-vested stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    411Shares used in diluted per
share calculation
    
    
    50,393
    
    
    
    49,731
    
    
    
    50,307
    
    
    
    51,241Net income (loss) per share:Basic
    
    $
    (0.00
    )
    
    $
    (0.11
    )
    
    $
    (0.08
    )
    
    $
    0.20Diluted
    
    $
    (0.00
    )
    
    $
    (0.11
    )
    
    $
    (0.08
    )
    
    $
    0.19
 12. Fair Value Measurements
 non-recurring,
 
    
    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.
  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)
  Fair Value Measurements at June 29, 2008 UsingLevel 1
    
    
    Level 2
    
    
    Level 3Cash and cash equivalents(1)
    
    $
    1,633
    
    
    $
    
    
    
    $
    Foreign currency contracts, net liability(2)
    
    $
    
    
    
    $
    1,450
    
    
    $
    
  (1)

    Cash and cash equivalents: The carrying amount of these items approximates fair value at period
end.(2)

    Foreign currency 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.
 13. Subsequent Events
    17




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
  Overview
  off-shore, off-shore off-shore
    18




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Critical Accounting Policies and Estimates
    19




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Results of Operations
  Thirteen Weeks Ended
    
    
    Twenty-Six Weeks EndedJune 29,
    
    
    July 1,
    
    
    Fav (Unfav)
    
    
    June 29,
    
    
    July 1,
    
    
    Fav (Unfav)2008
    
    
    2007
    
    
    % Change
    
    
    2008
    
    
    2007
    
    
    % ChangeNet Revenue:Domestic
    
    $
    45,117
    
    
    $
    43,739
    
    
    
    3.2
    %
    
    $
    93,862
    
    
    $
    86,066
    
    
    
    9.1
    %Off-shore
    
    
    15,593
    
    
    
    10,080
    
    
    
    54.7
    
    
    
    30,365
    
    
    
    20,137
    
    
    
    50.8Total net revenue
    
    
    60,710
    
    
    
    53,819
    
    
    
    12.8
    
    
    
    124,227
    
    
    
    106,203
    
    
    
    17.0Cost of Services:Direct labor
    
    
    34,449
    
    
    
    32,701
    
    
    
    (5.3
    )
    
    
    71,979
    
    
    
    62,322
    
    
    
    (15.5
    )Other facility expenses
    
    
    15,529
    
    
    
    17,028
    
    
    
    8.8
    
    
    
    33,745
    
    
    
    33,474
    
    
    
    (0.8
    )Total cost of services
    
    
    49,978
    
    
    
    49,729
    
    
    
    (0.5
    )
    
    
    105,724
    
    
    
    95,796
    
    
    
    (10.4
    )Percentage of revenue
    
    
    82.3
    %
    
    
    92.4
    %
    
    
    
    
    
    
    85.1
    %
    
    
    90.2
    %
    
    
    Gross profit
    
    
    10,732
    
    
    
    4,090
    
    
    
    162.4
    
    
    
    18,503
    
    
    
    10,407
    
    
    
    77.8Gross profit margin
    
    
    17.7
    %
    
    
    7.6
    %
    
    
    
    
    
    
    14.9
    %
    
    
    9.8
    %
    
    
    Operating Expenses:Selling, general &
administrative
expenses
    
    
    7,827
    
    
    
    7,187
    
    
    
    (8.9
    )
    
    
    16,395
    
    
    
    15,080
    
    
    
    (8.7
    )Restructuring and other
charges
    
    
    437
    
    
    
    1,559
    
    
    
    72.0
    
    
    
    2,778
    
    
    
    1,557
    
    
    
    (78.4
    )Total operating
expenses .
    
    
    8,264
    
    
    
    8,746
    
    
    
    5.5
    
    
    
    19,173
    
    
    
    16,637
    
    
    
    (15.2
    )Operating income (loss)
    
    
    2,468
    
    
    
    (4,656
    )
    
    
    153.0
    
    
    
    (670
    )
    
    
    (6,230
    )
    
    
    89.2Other income
    
    
    (142
    )
    
    
    (44
    )
    
    
    222.7
    
    
    
    (174
    )
    
    
    (91
    )
    
    
    91.2Interest expense
    
    
    2,673
    
    
    
    812
    
    
    
    (229.2
    )
    
    
    3,595
    
    
    
    1,650
    
    
    
    (117.9
    )Loss before income taxes
    
    
    (63
    )
    
    
    (5,424
    )
    
    
    98.8
    
    
    
    (4,091
    )
    
    
    (7,789
    )
    
    
    47.5Income tax benefit
    
    
    
    
    
    
    12
    
    
    
    *
    
    
    
    
    
    
    
    (17,568
    )
    
    
    *Net income (loss)
    
    $
    (63
    )
    
    $
    (5,436
    )
    
    
    98.8
    
    
    $
    (4,091
    )
    
    $
    9,779
    
    
    
    (141.8
    )
 
 *
    
    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 EndedJune 29,
    
    
    July 1,
    
    
    Fav (Unfav)
    
    
    June 29,
    
    
    July 1,
    
    
    Fav (Unfav)2008
    
    
    2007
    
    
    % Change
    
    
    2008
    
    
    2007
    
    
    % Change(Dollars in thousands except statistical data and notes)EBITDA (2)
    
    $
    5,561
    
    
    $
    (1,079
    )
    
    
    615.4
    %
    
    $
    5,926
    
    
    $
    618
    
    
    
    858.9
    %Free cash flow (3)
    
    
    3,533
    
    
    
    (5,035
    )
    
    
    170.2
    
    
    
    3,140
    
    
    
    (6,415
    )
    
    
    148.9Statistical information:Number of customer
care centers:Domestic
    
    
    9
    
    
    
    9
    
    
    
    
    
    
    
    9
    
    
    
    9Off-shore
    
    
    3
    
    
    
    3
    
    
    
    
    
    
    
    3
    
    
    
    3Total
    
    
    12
    
    
    
    12
    
    
    
    
    
    
    
    12
    
    
    
    12Number of workstations,
end of period:Domestic
    
    
    4,655
    
    
    
    4,504
    
    
    
    
    
    
    
    4,655
    
    
    
    4,504Off-shore
    
    
    3,259
    
    
    
    2,338
    
    
    
    
    
    
    
    3,259
    
    
    
    2,338Total
    
    
    7,914
    
    
    
    6,842
    
    
    
    
    
    
    
    7,914
    
    
    
    6,842
 Notes to Non-GAAP Financial Measures
 (1)
    
    We operate on a thirteen week fiscal quarter that ends on the Sunday closest to June 30.(2)
    
    We define EBITDA as net income (loss) plus the provision (benefit) for income taxes,
depreciation and amortization, and interest expense.  21




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##### Table of Contents



Thirteen Weeks Ended
    
    
    Twenty-Six Weeks EndedJune 29,
    
    
    July 1,
    
    
    June 29,
    
    
    July 1,2008
    
    
    2007
    
    
    2008
    
    
    2007(Dollars in thousands)Net income (loss)
    
    $
    (63
    )
    
    $
    (5,436
    )
    
    $
    (4,091
    )
    
    $
    9,779Interest expense
    
    
    2,673
    
    
    
    812
    
    
    
    3,595
    
    
    
    1,650Income tax
provision (benefit)
    
    
    
    
    
    
    12
    
    
    
    
    
    
    
    (17,568
    )Depreciation and
amortization
    
    
    2,951
    
    
    
    3,533
    
    
    
    6,422
    
    
    
    6,757EBITDA
    
    $
    5,561
    
    
    $
    (1,079
    )
    
    $
    5,926
    
    
    $
    618
 (3)
    
    We define free cash flow as EBITDA less capital expenditures. Thirteen Weeks Ended
    
    
    Twenty-Six Weeks EndedJune 29,
    
    
    July 1,
    
    
    June 29,
    
    
    July 1,2008
    
    
    2007
    
    
    2008
    
    
    2007(Dollars in thousands)EBITDA
    
    $
    5,561
    
    
    $
    (1,079
    )
    
    $
    5,926
    
    
    $
    618Capital expenditures
    
    
    (2,232
    )
    
    
    (3,956
    )
    
    
    (3,665
    )
    
    
    (7,033
    )Leasehold improvements funded by
landlord
    
    
    204
    
    
    
    
    
    
    
    879
    
    
    
    Free Cash Flow
    
    $
    3,533
    
    
    $
    (5,035
    )
    
    $
    3,140
    
    
    $
    (6,415
    )
  Thirteen Weeks Ended
    
    
    Twenty-Six Weeks EndedJune 29,
    
    
    July 1,
    
    
    June 29,
    
    
    July 1,2008
    
    
    2007
    
    
    2008
    
    
    2007(Dollars in thousands)Net cash provided by operating
activities
    
    $
    5,611
    
    
    $
    8,558
    
    
    $
    13,301
    
    
    $
    6,697Purchase of property and
equipment
    
    
    (2,028
    )
    
    
    (3,956
    )
    
    
    (2,786
    )
    
    
    (7,033
    )Income tax provision (benefit)
    
    
    
    
    
    
    12
    
    
    
    
    
    
    
    (17,568
    )Interest expense
    
    
    2,673
    
    
    
    812
    
    
    
    3,595
    
    
    
    1,650Amortized gain on sale
leaseback
    
    
    31
    
    
    
    49
    
    
    
    63
    
    
    
    94Gain (loss) on sale of
property and equipment
    
    
    1
    
    
    
    (51
    )
    
    
    1
    
    
    
    (53
    )Income taxes payable
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17,580Changes in operating assets
and liabilities
    
    
    (2,671
    )
    
    
    (9,900
    )
    
    
    (10,190
    )
    
    
    (6,829
    )Stock compensation expense
    
    
    (84
    )
    
    
    (544
    )
    
    
    (844
    )
    
    
    (940
    )Non-cash restructuring charges
    
    
    
    
    
    
    (15
    )
    
    
    
    
    
    
    (13
    )Free Cash Flow
    
    $
    3,533
    
    
    $
    (5,035
    )
    
    $
    3,140
    
    
    $
    (6,415
    )
  22




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Comparison of Results of Operations for the Thirteen Weeks Ended June 29, 2008 and July 1, 2007
         23




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##### Table of Contents



Comparison of Results of Operations for the Twenty-six Weeks Ended June 29, 2008 and July 1, 2007
      24




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##### Table of Contents



Liquidity and Capital Resources
  Twenty-Six Weeks EndedJune 29,
    
    
    July 1,2008
    
    
    2007(Dollars in thousands)Net cash provided by operating activities
    
    $
    13,301
    
    
    $
    6,697Net cash used in investing activities
    
    
    (2,778
    )
    
    
    (7,018
    )Net cash used in financing activities
    
    
    (8,267
    )
    
    
    (508
    )Effect of exchange rate changes on cash
    
    
    (2,049
    )
    
    
    (38
    )Net increase (decrease) in cash and cash
equivalents
    
    $
    207
    
    
    $
    (867
    )
  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
 15d-15(f)
 Inherent Limitations on the Effectiveness of Controls
    28




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##### Table of Contents



Part II. Other Information
 
 Item 1A. Risk Factors
  
 Item 4. Submission of Matters to a Vote of Security Holders
 (a)
    
    The Annual Meeting of Shareholders of the Company was held on June 6, 2008.(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
    
    
    46,167,890
    
    
    
    2,831,019John C. Kraft
    
    
    46,208,100
    
    
    
    2,790,809Michael P. Marrow
    
    
    48,799,414
    
    
    
    199,495Bhaskar Menon
    
    
    46,227,830
    
    
    
    2,771,079John J. Park
    
    
    46,182,930
    
    
    
    2,815,979Theodore G. Schwartz
    
    
    48,472,702
    
    
    
    526,207Samuel K. Skinner
    
    
    46,505,630
    
    
    
    2,493,279John L. Workman
    
    
    46,551,331
    
    
    
    2,447,578
 
 Item 6. Exhibits
   29




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##### Table of Contents



SIGNATURES
  APAC Customer Services, Inc. and SubsidiariesDate: August 4, 2008
    By:
    /s/ Michael P. MarrowMichael P. MarrowPresident and
Chief Executive Officer
(Principal Executive Officer)Date: August 4, 2008
    By:
    /s/ Andrew B. SzafranAndrew B. SzafranSenior Vice President and
Chief Financial Officer
(Principal Financial Officer)Date: August 4, 2008
    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
    
    
    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
    
    
    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 29, 2002.31.1
    
    
    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