**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

** **

----

** **

**FORM 10-Q**

** **

**(Mark One)**

** **

|                                                                                                                                                                                                                                                                       |   |                                                                                           |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------------------|
| **ý**                                                                                                                                                                                                                                                                 |   | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE  SECURITIES EXCHANGE ACT OF 1934.**  |
|                                                                                                                                                                                                                                                                       |   |                                                                                           |
| **For the quarterly period ended  March 30, 2003**                                                                                                                                                                                                                         |
| **or**                                                                                                                                                                                                                                                                     |
|                                                                                                                                                                                                                                                                       |   |                                                                                           |
| **o**                                                                                                                                                                                                                                                                      |   | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE  SECURITIES EXCHANGE ACT OF 1934.** |
|                                                                                                                                                                                                                                                                       |   |                                                                                           |
| **For  the transition period  from                   to                   ** |

 

**Commissionfile number 0-26786**

 

**APAC Customer Services, Inc.**

(Exactname of registrant as specified in its charter)

** **

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

 

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

 

Indicate by check markwhether registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months(or for such shorter periods that the registrant was required to file suchreports), and (2) has been subject to such filing requirements for the past 90days.

 

Yes  ý                   No  o

 

Indicate by check markwhether the registrant is an accelerated filer (as defined in rule 12b-2 of theExchange Act).

 

Yes  o                  No  ý

 

There were 49,441,592common shares, $0.01 par value outstanding as of May 12, 2003.

 

## ** **

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## **Index**

 
|                                                                                                               |   | **Page** |
|--------------------------------------------------------------------------------------------------------------------|--------|----------|
| **Part I.  Financial  Information**                                                                           |   |     |
|                                                                                                               |   |     |
| Item 1.  Financial Statements:                                                                                |   |     |
|                                                                                                               |   |     |
| Consolidated  Condensed Balance Sheets as of March 30, 2003, and December 29, 2002.                                |   | 3        |
|                                                                                                               |   |     |
| Consolidated  Condensed Statements of Operations for the Thirteen Weeks Ended March 30,  2003, and March 31, 2002. |   | 4        |
|                                                                                                               |   |     |
| Consolidated  Condensed Statements of Cash Flows for the Thirteen Weeks Ended March 30,  2003, and March 31, 2002. |   | 5        |
|                                                                                                               |   |     |
| Notes  to Consolidated Condensed Financial Statements                                                              |   | 6        |
|                                                                                                               |   |     |
| Item 2.   Management’s Discussion and Analysis of Financial Condition and  Results of Operations         |   | 9        |
|                                                                                                               |   |     |
| Item 3.   Quantitative and Qualitative Disclosures About Market Risk                                          |   | 13       |
|                                                                                                               |   |     |
| Item 4.   Controls and Procedures                                                                             |   | 14       |
|                                                                                                               |   |     |
| **Part  II.  Other Information**                                                                              |   |     |
|                                                                                                               |   |     |
| Item 1.  Legal Proceedings                                                                                    |   | 15       |
|                                                                                                               |   |     |
| Item 6.  Exhibits and Reports on Form 8-K                                                                     |   | 15       |

## ** **

2

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**APAC CustomerServices, Inc. and Subsidiaries**

**ConsolidatedCondensed Balance Sheets**

**(Unaudited)**

**(In thousands)**

 
|                                                                                                                              |   | **March 30,  2003** |       | **December  29,  2002** |       |
|-----------------------------------------------------------------------------------------------------------------------------------|--------|---------------------|------------|-------------------------|------------|
| **Assets**                                                                                                                        |   |                | ** ** |                    | ** ** |
|                                                                                                                              |   |                |       |                    |       |
| **Current  assets:**                                                                                                              |   |                |       |                    |       |
| Cash  and cash equivalents                                                                                                        |   | $                   | 11,970     |                    | $          | 14,530 |   |
| Accounts  receivable, net                                                                                                         |   | 53,141              |       | 51,508                  |       |
| Other  current assets                                                                                                             |   | 12,579              |       | 12,646                  |       |
| Total  current assets                                                                                                             |   | 77,690              |       | 78,684                  |       |
|                                                                                                                              |   |                |       |                    |       |
| **Property  and equipment**                                                                                                       |   | 25,700              |       | 25,680                  |       |
|                                                                                                                              |   |                |       |                    |       |
| **Goodwill**                                                                                                                      |   | 23,876              |       | 23,876                  |       |
|                                                                                                                              |   |                |       |                    |       |
| Customer  relationships                                                                                                           |   | 28,493              |       | 28,493                  |       |
| Less—accumulated  amortization                                                                                               |   | 11,698              |       | 11,111                  |       |
| **Customer relationships, net**                                                                                                   |   | 16,795              |       | 17,382                  |       |
|                                                                                                                              |   |                |       |                    |       |
| **Deferred taxes**                                                                                                                |   | 2,160               |       | 2,207                   |       |
| **Other assets**                                                                                                                  |   | 1,485               |       | 1,565                   |       |
| Total  assets                                                                                                                     |   | $                   | 147,706    |                    | $          | 149,394 |   |
|                                                                                                                              |   |                |       |                    |       |
| **Liabilities  and Shareholders’ Equity**                                                                                    |   |                |       |                    |       |
| **Current  liabilities:**                                                                                                         |   |                |       |                    |       |
| Current  maturities of long-term debt                                                                                             |   | $                   | 638        |                    | $          | 656 |   |
| Accounts  payable                                                                                                                 |   | 2,966               |       | 3,627                   |       |
| Other  current liabilities                                                                                                        |   | 35,803              |       | 37,034                  |       |
| Total  current liabilities                                                                                                        |   | 39,407              |       | 41,317                  |       |
|                                                                                                                              |   |                |       |                    |       |
| **Long-term  debt, less current maturities**                                                                                      |   | 27,230              |       | 28,872                  |       |
|                                                                                                                              |   |                |       |                    |       |
| **Other  liabilities**                                                                                                            |   | 2,488               |       | 2,778                   |       |
|                                                                                                                              |   |                |       |                    |       |
| **Commitments  and contingencies**                                                                                                |   | —              |       | —                  |       |
|                                                                                                                              |   |                |       |                    |       |
| **Shareholders’  equity**                                                                                                    |   |                |       |                    |       |
| Common  shares, $0.01 par value; 200,000,000 shares authorized; 49,695,699 shares  issued at March 30, 2003 and December 29, 2002 |   | 497                 |       | 497                     |       |
| Additional  paid-in capital                                                                                                       |   | 99,675              |       | 99,690                  |       |
| Accumulated  deficit                                                                                                              |   | (20,632             | )          | (22,752                 | )          |
| Treasury  shares: 273,046 and 286,871 shares, respectively, at cost                                                               |   | (959                | )          | (1,008                  | )          |
| Total  shareholders’ equity                                                                                                  |   | 78,581              |       | 76,427                  |       |
| Total  liabilities and shareholders’ equity                                                                                  |   | $                   | 147,706    |                    | $          | 149,394 |   |

 

See notes toconsolidated condensed financial statements

 

3

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**APACCustomer Services, Inc. and Subsidiaries**

**ConsolidatedCondensed Statements of Operations**

**(Unaudited)**

**(In thousands, except per share data)**

** **
|                                                  |   | **Thirteen  (13) Weeks  Ended** |       |
|-------------------------------------------------------|--------|--------------------------------------|------------|
|                                                  |   | **March 30,  2003**                  |       | **March 31,  2002** |   |
|                                                  |   |                                 | ** ** |   | ** ** |
| **Net revenue**                                       |   | $                                    | 86,197     |   | $ | 104,319 |   |
|                                                  |   |                                 |       |   |   |
| **Operating expenses:**                               |   |                                 |       |   |   |
|                                                  |   |                                 |       |   |   |
| Cost of services                                      |   | 69,428                               |       | 83,179 |   |
| Selling, general and administrative  expenses         |   | 12,996                               |       | 14,355 |   |
| Total operating expenses                              |   | 82,424                               |       | 97,534 |   |
| **Operating income**                                  |   | 3,773                                |       | 6,785 |   |
|                                                  |   |                                 |       |   |   |
| Interest expense, net                                 |   | 353                                  |       | 1,606 |   |
|                                                  |   |                                 |       |   |   |
| **Income before income taxes**                        |   | 3,420                                |       | 5,179 |   |
| Provision  for income taxes                           |   | 1,300                                |       | 2,020 |   |
|                                                  |   |                                 |       |   |   |
| **Net income**                                        |   | $                                    | 2,120      |   | $ | 3,159 |   |
|                                                  |   |                                 | ** ** |   | ** ** |
| **Net Income per share:**                             |   |                                 | ** ** |   | ** ** |
| Basic                                                 |   | $                                    | 0.04       |   | $ | 0.06 |   |
| Diluted                                               |   | $                                    | 0.04       |   | $ | 0.06 |   |
|                                                  |   |                                 |       |   |   |
| **Weighted average number of****shares outstanding:** |   |                                 |       |   |   |
| Basic                                                 |   | 49,422                               |       | 48,909 |   |
| Diluted                                               |   | 49,444                               |       | 49,056 |   |

 

See notes toconsolidated condensed financial statements.

 

4

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**APACCustomer Services, Inc. and Subsidiaries**

**ConsolidatedCondensed Statements of Cash Flows**

**(Unaudited)**

**(In thousands)**

 
|                                                            |   | **Thirteen  (13) Weeks Ended** |   |
|-----------------------------------------------------------------|--------|--------------------------------|--------|
|                                                            |   | **March 30,  2003**            |   | **March 31,  2002** |   |
|                                                            |   |                           |   |   |   |
| **Operating  activities:**                                      |   |                           |   |   |   |
|                                                            |   |                           |   |   |   |
| Net  income                                                     |   | $                              | 2,120  |   | $ | 3,159 |   |
| Depreciation  and amortization                                  |   | 3,131                          |   | 4,684 |   |
| Deferred  income taxes                                          |   | (80                            | )      | 792 |   |
| Change  in operating assets and liabilities                     |   | (3,541                         | )      | 12,718 |   |
| Net  cash provided by operating activities                      |   | 1,630                          |   | 21,353 |   |
|                                                            |   |                           |   |   |   |
| **Investing  activities:**                                      |   |                           |   |   |   |
|                                                            |   |                           |   |   |   |
| Purchases  of property and equipment, net                       |   | (2,564                         | )      | (1,010 | ) |
| Net  cash used by investing activities                          |   | (2,564                         | )      | (1,010 | ) |
|                                                            |   |                           |   |   |   |
| **Financing  activities:**                                      |   |                           |   |   |   |
|                                                            |   |                           |   |   |   |
| Payments  on long-term debt                                     |   | (160                           | )      | (11,133 | ) |
| Repayments  under revolving credit facility, net                |   | (1,500                         | )      | — |   |
| Stock  and warrant transactions                                 |   | 34                             |   | 130 |   |
| Net  cash used by financing activities                          |   | (1,626                         | )      | (11,003 | ) |
|                                                            |   |                           |   |   |   |
| **Net  increase  (decrease) in cash and cash equivalents** |   | (2,560                         | )      | 9,340 |   |
|                                                            |   |                           |   |   |   |
| **Beginning cash balance**                                      |   | 14,530                         |   | 21,213 |   |
|                                                            |   |                           |   |   |   |
| **Ending cash balance**                                         |   | $                              | 11,970 |   | $ | 30,553 |   |

 

See notes toconsolidated condensed financial statements

 

5

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**APAC Customer Services, Inc. andSubsidiaries**

**Notes to Consolidated CondensedFinancial Statements**

**(Dollars in thousands, except asotherwise indicated)**

**(Unaudited)**

**1.  Basis of Presentation**

 

The accompanyingunaudited consolidated condensed financial statements have been prepared inaccordance with generally accepted accounting principles for interim financialinformation and the instructions to Form 10-Q and Article 10 of RegulationS-X.  Accordingly, they do not includeall of the information and footnotes required by generally accepted accountingprinciples for complete financial statements. In the opinion of management, all adjustments (consisting of normalrecurring accruals) considered necessary for a fair presentation have beenincluded.  Operating results for thethirteen week period ended March 30, 2003, are not necessarily indicative ofthe results that may be expected for the fiscal year ending December 28, 2003.  The balance sheet at December 29, 2002, hasbeen derived from the audited financial statements at that date but does notinclude all of the information and footnotes required by generally acceptedaccounting principles for complete financial statements.  For additional information, refer to thefinancial statements and footnotes thereto included in the Company’s AnnualReport on Form 10-K for the year ended December 29, 2002.

 

**2.   Other CurrentLiabilities**

 

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

 
|                          |   | **March 30,  2003** |   | **December  29,  2002** |   |
|-------------------------------|--------|---------------------|--------|-------------------------|--------|
|                          |   |                |   |                    |   |
| Payroll  and related items    |   | $                   | 18,483 |                    | $      | 19,634 |   |
| Income  taxes payable         |   | 6,561               |   | 5,184                   |   |
| Accrued  insurance            |   | 3,230               |   | 3,251                   |   |
| Restructuring  charges        |   | 1,548               |   | 2,150                   |   |
| Accrued  professional fees    |   | 868                 |   | 1,168                   |   |
| Accrued  relocation/severance |   | 739                 |   | 616                     |   |
| Client  related liabilities   |   | 319                 |   | 977                     |   |
| Other                         |   | 4,055               |   | 4,054                   |   |
| Total                         |   | $                   | 35,803 |                    | $      | 37,034 |   |

 

6

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**3.   Accounting forStock-Based Compensation**

 

For stock-based employee compensation plans, theCompany has elected to use the intrinsic value method prescribed by AccountingPrinciples Board Opinion No. 25, “Accounting for Stock Issued toEmployees.” No compensation expense is recognized for stock options issued toemployees when the option price equals or exceeds the fair market value of theCompany’s Common shares at the date of grant. Stock-based compensation expense for non-employees is recognized in accordancewith SFAS No. 123 (“SFAS No.123”) “Accounting for Stock BasedCompensation.”

 

The following table illustrates the effect on netincome and earnings per share if the Company had adopted the fair valuerecognition provisions of SFAS No. 123.

 
|                                                                        |   | **March 30,  2003** |   | **March 31,  2002** |   |
|-----------------------------------------------------------------------------|--------|---------------------|--------|---------------------|--------|
|                                                                        |   |                |   |                |   |
| Net income as reported                                                      |   | $                   | 2,120  |                | $      | 3,159 |   |
| Less–compensation expense on stock options, net of  income tax benefit |   | (972                | )      | (580                | )      |
| Net income Pro forma                                                        |   | $                   | 1,148  |                | $      | 2,579 |   |
| Earnings per share – basic                                             |   |                |   |                |   |
| As reported                                                                 |   | $                   | 0.04   |                | $      | 0.06 |   |
| Pro forma                                                                   |   | $                   | 0.02   |                | $      | 0.05 |   |
| Earnings per share – diluted                                           |   |                |   |                |   |
| As reported                                                                 |   | $                   | 0.04   |                | $      | 0.06 |   |
| Pro forma                                                                   |   | $                   | 0.02   |                | $      | 0.05 |   |

 

In order to calculate the pro forma informationincluded above, the fair value of each option is estimated on the date of grantbased on the Black-Scholes option-pricing model.   Assumptions include no dividend yield, risk-free interest ratesranging from 5% to 7%, expected volatility ranging between 70% and 90%, and anexpected life ranging from 7 years to 10 years.

 

**4.   ComprehensiveIncome**

 

Comprehensive income is as follows:

 
|                       |   | **March 30,  2003** |   | **March 31,  2002** |   |
|----------------------------|--------|---------------------|--------|---------------------|--------|
|                       |   |                |   |                |   |
| Net income                 |   | $                   | 2,120  |                | $      | 3,159 |   |
| Other comprehensive income |   | —              |   | 491                 |   |
| Total Comprehensive income |   | $                   | 2,120  |                | $      | 3,650 |   |

 

Other comprehensive income in the first fiscal quarterof 2002 represented the change during the quarter in the unrealized loss on aswap agreement.   This swap agreementwas terminated in December 2002 when the Company refinanced its debt and repaidthe term loan related to the swap agreement.

 

7

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**5.   Legal Proceedings**

 

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

 

**6.   Long Term Debt**

 

On December 20, 2002, theCompany entered into an Amended and Restated Credit Agreement (“Current CreditAgreement”) replacing the previous Amended and Restated Credit Facility(“Previous Credit Facility”).  Under theterms of the Current Credit Agreement, the Company has a revolving creditfacility which expires December 2005. The facility initially provided $65.0 million of creditavailability.  Beginning on March 31,2003, the facility is being reduced by $1.25 million of availability eachquarter until the facility reaches $55.0 million at December 31, 2004.  Availability is also reduced by outstandingborrowings and any outstanding letters of credit.  As of March 30, 2003, there were $26.0 million of outstandingborrowings under the facility and approximately $6.2 million was utilizedthrough the issuance of standby letters of credit primarily to supportself-insurance reserves.  Netavailability as of March 30, 2003, under the Current Credit Agreement was $32.8million.

 

The Current CreditAgreement is secured principally by a grant of a security interest in allpersonal property and fixtures of the Company. Under the terms of the Current Credit Agreement, the Company is alsorequired to maintain certain financial covenants which limit the Company’sability to incur additional indebtedness, repurchase outstanding common shares,create liens, acquire, sell or dispose of certain assets, engage in certain mergersand acquisitions, and make certain restricted payments.   The Company is currently in compliance withall covenants and restrictions imposed by the terms of the Current CreditAgreement.

 

Borrowings under theCurrent Credit Agreement incur a floating interest rate usually based on theLIBOR index rate, although the Company has the option of using an alternatebase rate defined in the agreement.  Inaddition, the Company pays a commitment fee on the unused portion of therevolving facility as well as quarterly fees on the outstanding letters ofcredit.

 

8

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# **Item 2**. Management’s Discussion and Analysis ofFinancial Condition and Results of Operations

 

The following discussionof the Company’s results of operations and liquidity and capital resourcesshould be read in conjunction with Consolidated Condensed Financial Statementsof the Company and related notes thereto appearing elsewhere in this report.

 

**Resultsof Operations**

 

The following table setsforth consolidated condensed statements of income data as a percent of netrevenue from services provided by the Company for the thirteen week periodsended March 30, 2003, and March 31, 2002.

 
|                                          |   | **Thirteen  (13) Weeks Ended** |   |
|-----------------------------------------------|--------|--------------------------------|--------|
|                                          |   | **March 30,  2003**            |   | **March 31,  2002** |   |
|                                          |   |                           |   |   |   |
| **Net  revenues**                             |   | 100.0                          | %      | 100.0 | % |
|                                          |   |                           |   |   |   |
| **Operating  expenses:**                      |   |                           |   |   |   |
| Cost  of services                             |   | 80.5                           |   | 79.7 |   |
| Selling,  general and administrative expenses |   | 15.1                           |   | 13.8 |   |
| Total  operating expenses                     |   | 95.6                           |   | 93.5 |   |
| Operating  income                             |   | 4.4                            |   | 6.5 |   |
| **Interest expense, net**                     |   | .4                             |   | 1.5 |   |
|                                          |   |                           |   |   |   |
| Income  before income taxes                   |   | 4.0                            |   | 5.0 |   |
| **Provision for income taxes**                |   | 1.5                            |   | 2.0 |   |
| **Net  income**                               |   | 2.5                            | %      | 3.0 | % |

 

9

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**Comparison of Results of Operations for the thirteen weeksended March 30, 2003 and March 31, 2002**

 

Net revenue decreased17.4% to $86.2 million in the first quarter of fiscal 2003 from $104.3 millionin the same quarter of fiscal 2002. Approximately 80% of the revenue declinewas attributable to three clients due to a reduction of customer acquisitionservices provided by the Company to two of the clients and a reduction ofcustomer care services under the terms of a contract renewal with the thirdclient. 

 

Cost of servicesdecreased $13.8 million in the first quarter of fiscal 2003, or 16.5%, to $69.4million from $83.2 million in the same period of fiscal 2002.  This decrease is primarily due to volumerelated reductions.  Cost of services asa percent of revenue increased slightly to 80.5% from 79.7% and gross profitmargins decreased to 19.5% from 20.3% primarily as a result of investmentspending including costs associated with the start up of the Company’sPhilippine call center and higher employee related expenses.

 

Selling, general andadministrative expenses decreased to $13.0 million in the first quarter offiscal 2003 from $14.4 million in the first quarter of fiscal 2002, a decreaseof $1.4 million or 9.5%. Approximately 70% of the decline was in the area ofemployee expenses related to cost reduction initiatives implemented in 2002.The remaining decrease was primarily due to lower professional fees and sellingand facility expenses.  As a percent ofnet revenue, selling, general and administrative expenses were 15.1% in fiscal2003 versus 13.8% in fiscal 2002 due to the effect of volume relatedreductions.

 

The Company generatedoperating income of $3.8 million in the first quarter of fiscal 2003 comparedto $6.8 million for the same period of fiscal 2002.  The decrease is primarily due to the effect of lower volumes andgross profit margins partially offset by a reduction in selling, general and administrative expenses as previouslydiscussed.

 

Net interest expense forthe first quarter of fiscal 2002 decreased $1.2 million compared to the sameperiod in fiscal 2002.  This decreasereflects a $35.5 million reduction in debt from the end of the first quarter offiscal 2002 to March 30, 2003, and lower interest rates.

 

The Company’s effectiveincome tax rate is 38.0% for the quarter, versus 39.0% in the prior year period.

 

**Critical Accounting Policies andEstimates**

 

The preparation of the Company’s financial statementsin conformity with generally accepted accounting principles requires managementto make estimates and assumptions that affect the amounts reported in theconsolidated financial statements and accompanying notes. The Company believesits estimates and assumptions are reasonable; however, actual results and thetiming of the recognition of such amounts could differ from those estimates.The Company has identified the following critical accounting policies andestimates utilized by management in the preparation of the Company’s financialstatements: revenue recognition, accounting for long-lived assets, allowancefor doubtful accounts, employee benefit accounting and income taxes. Anydeviation from these policies or estimates could have a material impact on thefinancial statements of the Company.

 

**Revenue recognition**

 

The Company recognizes customerservices revenue as services are performed for our clients in accordance withStaff Accounting Bulletin (SAB) No.101 “Revenue Recognition”. The client contracts generally require thatclients be billed for the Company’s services on the basis of time spent byCompany representatives providing services. The Company’s services are alsooccasionally priced on a pay-for-performance basis, pursuant to which theCompany typically receives fees that are a combination of base-rate plus feeper sale. The Company is often subject to performance standards, such as salesper hour, average handle time, occupancy rate and abandonment rate.  The 

 

10

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Company’sperformance against such standards may provide bonus opportunities orconversely may subject the Company to penalties, which are recognized as earnedor incurred.

 

**Accounting for long-lived assets**

 

The Company has approximately$67.9 million of long-lived assets asof March 30, 2003. These assets consist primarily of property and equipment,capitalized software and intangible assets. In addition to the original cost ofthese assets, their recorded value is impacted by a number of policy electionsmade by the Company, including estimated useful lives and salvage values. Inaddition, any decision by the Company to reduce capacity by closing CustomerInteraction Centers or to abandon software may result in a write-off of the netbook value of these affected assets. In accordance with Statement of FinancialAccounting Standards No. 144, “Accounting for the Impairment or Disposal ofLong-Lived Assets,” the Company records impairment charges on long-lived assetsused in operations when events and circumstances indicate that the assets maybe impaired and the undiscounted cash flows estimated to be generated by thoseassets are less than the carrying amount of those assets. In this circumstance,the impairment charge is determined based upon the amount the net book value ofthe assets exceeds their fair market value. In making these determinations, theCompany utilizes certain assumptions, including, but not limited to,the estimated fair market value of the assets, which are based onadditional assumptions such as asset utilization, length of time the asset willbe used in the Company’s operations and estimated salvage values.

 

**Allowance for doubtful accounts**

 

The Company records an allowancefor doubtful accounts based on a quarterly assessment of the probable estimatedlosses in trade accounts receivable. This estimate is based on specificallowances for identified problem receivables and a general allowance for allother receivables based on their age and collection history.

 

**Accounting for employee benefits**

 

The Company records an accruedliability for group health and workers compensation claims based on an estimateof claims incurred but not reported as well as asserted claims at the end ofthe period. This estimate is derived from an analysis performed by actuarieshired by the Company who have expertise in this area.  However, although these estimates are generally reliable, changesin the employee mix and unforeseen events could result in an adjustment tothese estimates.

 

**Income Taxes**

 

The Company accounts for income taxes using the assetand liability approach.  Under the assetand liability method, deferred tax assets and liabilities are recognized forthe future tax consequences attributable to differences between the financialstatement carrying amounts of existing assets and liabilities and theirrespective tax bases.  Valuation allowancesare recorded when it is more likely than not that some portion or all of thedeferred tax assets will not be realized in the future.

 

11

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**Liquidityand Capital Resources**

 

The following table setsforth consolidated statements of cash flow data for the Company for thethirteen-week periods ended March 30, 2003, and March 31, 2002, respectively.

 
|                                       |   | **2003**            |   | **2002** |   |
|--------------------------------------------|--------|---------------------|--------|----------|--------|
|                                       |   | **(In  thousands)** |   |
|                                       |   |                |   |     |   |
| Net  cash provided by operating activities |   | $                   | 1,630  |     | $      | 21,353 |   |
| Net  cash used by investing activities     |   | (2,564              | )      | (1,010   | )      |
| Net  cash used by financing activities     |   | (1,626              | )      | (11,003  | )      |
| Net  increase (decrease) in cash           |   | ($2,560             | )      | $        | 9,340  |   |
|                                            |        |                     |        |          |        |  |  |

 

Cash from operatingactivities decreased $19.7 million versus the first quarter of 2002 primarilydue to a $13.0 million reduction in accounts receivable which occurred in thefirst quarter of 2002 versus a $1.6 million increase in the same period of2003.  Cash generated from operationswas slightly lower in 2003 due to lower operating margins and a reduction indepreciation and amortization.

 

Net cash used byinvesting activities increased $1.6 million from the same period of fiscal 2002due to expenditures related to the buildout of a facility in the Philippinesand equipment upgrades. Capital expenditures of $1.0 million in fiscal 2002were primarily due to the purchase of IT hardware, software and equipment.

 

The Company expects thatits cash balances, cash flows from future operations and available borrowingsunder its Current Credit Agreement will be sufficient to meet normal operatingneeds, fund any planned capital expenditures and repay debt obligations payableduring 2003.  However, a significantchange in operating cash flow could impact the Company’s ability to meet itscash requirement needs and comply with covenants of its credit facility.

 

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**Forward-Looking Statements**

 

The Private SecuritiesLitigation Reform Act of 1995 provides a “safe harbor” for certainforward-looking statements. This Report on Form 10-Q and other documentsthat the Company files with the SEC contain forward-looking statements thatreflect the Company’s current views with respect to future events and financialperformance. These forward-looking statements are subject to certain risks anduncertainties, which could cause future results to differ materially fromhistorical results or those anticipated. The words “believe,” “expect,”“anticipate,” “intend,” “estimate,” “goals,” “would,” “could,” “should,” andother expressions which indicate future events and trendsidentify forward-looking statements. Readers are cautioned not to placeundue reliance on these forward-looking statements, which speak only as oftheir dates. If no date is provided, such statements speak only as of the dateof this Report on Form 10-Q. Except as required under the Federal securities laws and rules andregulations of the SEC, the Company undertakes no obligation to publicly updateor revise any forward-looking statements in connection with newinformation or future events or otherwise. Factors that could cause futureresults to differ materially from historical results or those anticipatedinclude, but are not limited to, reliance by the Company on a small number ofprincipal clients for a substantial proportion of its total revenue; possiblechanges in or events affecting the business of the Company’s clients, includingchanges in customers’ interest in, and use of, clients’ products and services;fluctuations in quarterly results of operations due to timing of clients’ initiationand termination of large programs; changes in competitive conditions affectingthe Company’s industry; the ability of the Company’s clients to terminatecontracts with the Company on a relatively short notice; changes in theavailability and cost of qualified employees; variations in the performance ofthe Company’s automated system and other technological factors; changes ingovernment regulations affecting the teleservices and telecommunicationsindustries; and competition from other outside providers of customerinteraction solutions and in-house customer interaction operations.

 

See the Company’s filingswith the Securities and Exchange Commission for further discussion of the risksand uncertainties associated with the Company’s business, in particular thediscussion under the caption “Information Regarding Forward-Looking Statements”in Item 7 (Management’s Discussion and Analysis of Financial Condition andResults of Operations) of the Company’s Annual Report on Form 10-K for thefiscal year ended December 29, 2002.

 

**Item 3****.Quantitative and Qualitative Disclosures About Market Risk**

 

The Company is exposed to theimpact of U.S. interest rate changes directly related to its normal operatingand funding activities. From time to time, the Company enters into derivativesin order to minimize these risks but not for trading purposes.

 

The Company prepared asensitivity analysis of its debt assuming a one-percentage point adverse changein interest rates for the quarter ended March 30, 2003. Holding all othervariables constant, the hypothetical adverse change would not significantlyincrease interest expense. The sensitivity analysis assumes no changes in theCompany’s financial structure.

 

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**Item 4****. Controlsand Procedures**

 

(a)     *Evaluation of DisclosureControls and Procedures*.  The Company’s Chief Executive Officer andChief Financial Officer have evaluated the effectiveness of the Company’sdisclosure controls and procedures (as such term is defined in Rules 13a-14(c)and 15d-14(c) under the Securities Exchange Act of 1934, as amended (the“Exchange Act”)) as of a date within 90 days prior to the filing date of thisquarterly report (the “Evaluation Date”). Based on such evaluation, such officers have concluded that, as of theEvaluation Date, the Company’s disclosure controls and procedures are effectivein alerting them on a timely basis to material information relating to theCompany required to be included in the Company’s  reports filed or submitted under the Exchange Act.

 

(b)    *Changes in InternalControls*.  Since the Evaluation Date, there have notbeen any significant changes in the Company’s internal controls or in otherfactors that could significantly affect such controls.

 

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**Part II****. Other Information**

 

**Item1.  Legal Proceedings**

 

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

 

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

 

(a) Exhibits

 

Exhibit 99.1 Certifications pursuant to 18 U.S.C.Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of2002.

 

(b) Reports on Form 8-K

 

None

 

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**Signatures**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the Registrant has dulycaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.

 

 
|                                             |   | **APAC Customer Services, Inc.**                                                                                    |   |
|--------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------|--------|
|                                             |   |                                                                                                                |   |
|                                             |   |                                                                                                                |   |
| Date:     May  12, 2003 | By:    | /s/ Marc T.  Tanenberg                                                                                              |   |
|                                             |   | Senior Vice  President and  Chief Financial Officer (Principal Financial Officer  and duly authorized officer) |   |
|                                             |   |                                                                                                                |   |
|                                             |   |                                                                                                                |   |
|                                             |   |                                                                                                                |   |
| Date:     May  12, 2003 | By:    | */s/*Kenneth R.  Batko                                                                                              |   |
|                                             |   | Vice President  and Controller   (Principal Accounting Officer  and duly authorized officer)                        |   |

 

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**SECTION302 CERTIFICATION**

 

I, Theodore G. Schwartz, Chief Executive  Officer of APAC Customer Services, Inc.,certify that:

 

1.               I have reviewedthis quarterly report on Form 10-Q of APAC Customer Services, Inc.

 

2.               Based on myknowledge, this quarterly report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this quarterly report;

 

3.               Based on myknowledge, the financial statements, and other financial information includedin this quarterly report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this quarterly report;

 

4.               The registrant’sother certifying officer and I are responsible for establishing and maintainingdisclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and15d-14) for the registrant and have:

 

(a) designed suchdisclosure controls and procedures to ensure that material information relatingto the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which thisquarterly report is being prepared;

 

(b) evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

(c)presented in this quarterly   report ourconclusions   about the effectiveness ofthe disclosure controls and procedures based on our evaluation as of theEvaluation Date;

 

5.               The registrant’sother certifying officer and I have disclosed, based on our most recentevaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunctions):

 

(a)all significant deficiencies in the design or operation of internal controlswhich could adversely affect the registrant’s ability to record, process,summarize and report  financial  data and  have  identified for the  registrant’s  auditors anymaterial  weaknesses in  internal controls; and

(b)  any fraud, whether or not material,  that involves management or other  employees who have a  significant role in the  registrant’s  internal controls; and

 

6.               The  registrant’s  other  certifying  officer and I have  indicated in this quarterly  report  whether or not  there  were  significant changes  in  internal controls  or in other  factors that could  significantly  affect internal   controls  subsequent to the date of our mostrecent  evaluation,  including  any corrective actions with regard to significant deficiencies andmaterial  weaknesses.

 

 
| Date:  May 12, 2003 | /s/Theodore G. Schwartz |   |
|--------------------------|-------------------------|--------|
|                     | Theodore G. Schwartz    |
|                     | Chief Executive Officer |

 

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**SECTION302 CERTIFICATION**

 

I, Marc T.Tanenberg,  Chief Financial Officer ofAPAC Customer Services, Inc., certify that:

 

1.               I havereviewed  this  quarterly  report on Form10-Q of APAC Customer Services, Inc.

 

2.               Based on myknowledge,  this  quarterly report does not contain any untrue statement of a material fact or omitto state a  material fact  necessary to make the statements  made, in light of the  circumstances  under which such statements were made, not misleading withrespect to the period covered by  thisquarterly report;

 

3.               Based on my  knowledge, the  financial  statements, and  other  financial information  included  in this quarterly  report,  fairly present  in all  material respects the financial  condition, results of operations and cash flows of the  registrant  as of, and for,  the  periods  presented in this  quarterly report;

 

4.               The  registrant’s  other  certifying  officer and  I are  responsible for  establishing and maintainingdisclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

 

(a)  designed such  disclosure  controls and  procedures  to ensure that  material  information relating  to  the registrant,   including  its consolidated subsidiaries,  ismade known to us by others within those entities,  particularly  during  the period in which  this  quarterly report is being prepared;

 

(b)  evaluated the  effectiveness of the registrant’s  disclosure  controls andprocedures as of a date within 90 days prior to the filing date of  this quarterly report (the “EvaluationDate”); and

 

(c)  presented in  this  quarterly report  our  conclusions about  the  effectiveness  of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

 

5.               Theregistrant’s  other certifying  officer and I have disclosed,  based on our most recent  evaluation, to the  registrant’s  auditors and the audit  committee of  registrant’s  board of directors (or persons performing  the  equivalent functions):

 

(a)  all significant  deficiencies  in the design or operation of internalcontrols  which could  adversely affect the  registrant’s  ability to record,  process,   summarize and  report  financial data  and  have identified for the registrant’s  auditors anymaterial  weaknesses in  internal controls; and

 

(b)  any fraud, whether or not material,  that involves management or other  employees who have a  significant role in the  registrant’s  internal controls; and

 

6.               The  registrant’s  other  certifying  officer and I have  indicated in this quarterly  report  whether or not there  were significant  changes  in internal  controls  or in other factors  that could  significantly  affect  internal   controls subsequent to the date of our most recent  evaluation, including   any correctiveactions with regard to significant deficiencies and material  weaknesses.

 

 
| Date:  May 12, 2003 | /s/Marc T. Tanenberg    |   |
|--------------------------|-------------------------|--------|
|                     | Marc T. Tanenberg       |
|                     | Chief Financial Officer |

 

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# **Exhibit Index**

 
| **Exhibit  Number** |   | **Description**                                                                                                           |
|---------------------|--------|---------------------------------------------------------------------------------------------------------------------------|
|                |   |                                                                                                                      |
| 99.1                |   | Certifications  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002 |

 

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