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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-Q
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934.
 For the quarterly period ended March 29, 2009
 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
    
    (I.R.S. Employer Identification No.)incorporation or organization)
 Bannockburn Lake Office Plaza 1, 2333 Waukegan Road, Suite 100, Bannockburn, Illinois 60015
  (847) 374-4980
  þ o
  o o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer* þ
(*Do not check if a smaller reporting company)
    
    Smaller reporting company o
  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 March 29, 2009 and
December 28, 2008
    
    
    5Condensed Consolidated Statements of Operations for the Thirteen
Weeks Ended March 29, 2009 and March 30, 2008
    
    
    6Condensed Consolidated Statements of Cash Flows for the Thirteen
Weeks Ended March 29, 2009 and March 30, 2008
    
    
    7Notes to Condensed Consolidated Financial Statements
    
    
    8Item 2. Managements Discussion and Analysis of Financial Condition and Results
of Operations
    
    
    17Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    25Item 4. Controls and Procedures
    
    
    25Part II. Other Information
    
    
    26Item 1A. Risk Factors
    
    
    26Item 6. Exhibits
    
    
    26EX-31.1EX-31.2EX-32.1
   2




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Forward-Looking Statements and Factors That May Affect Future Results
      
    
    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 business may be affected by the performance of our clients and general economic conditions.
    
    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 ability to sustain profitability.
    
    Our business may be affected by our cash flows from operations and our ability to comply with our debt covenants and
funding requirements under our credit facility.
    
    Our financial results may be affected by risks associated with international operations and expansion, including
foreign currency fluctuations.
    
    Our principal shareholder can exercise significant control over us.
    
    Our success depends on key personnel.
    
    We operate in a highly competitive environment.
    
    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.
  3




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##### Table of Contents




    
    Unauthorized disclosure of sensitive or confidential client and customer data could expose us to protracted and costly
litigation, penalties and may cause us to lose clients.
    
    Our business and our clients businesses are subject to federal and state regulation and industry standards.
    4




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1. Condensed Consolidated Financial Statements
 APAC CUSTOMER SERVICES, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (Dollars in thousands)
 March 29,
    
    
    December 28,2009
    
    
    2008(Unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    801
    
    
    $
    618Accounts receivable, net
    
    
    38,573
    
    
    
    31,547Other current assets
    
    
    3,311
    
    
    
    3,515Total current assets
    
    
    42,685
    
    
    
    35,680Property and equipment, net
    
    
    23,864
    
    
    
    22,664Goodwill
    
    
    13,338
    
    
    
    13,338Other intangible assets, net
    
    
    2,832
    
    
    
    3,434Other assets
    
    
    1,516
    
    
    
    1,448Total assets
    
    $
    84,235
    
    
    $
    76,564LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Short-term debt
    
    $
    6,063
    
    
    $
    6,100Accounts payable
    
    
    2,494
    
    
    
    1,641Income taxes payable
    
    
    401
    
    
    
    253Accrued payroll and related items
    
    
    16,397
    
    
    
    18,727Accrued liabilities
    
    
    8,853
    
    
    
    10,508Total current liabilities
    
    
    34,208
    
    
    
    37,229Other liabilities
    
    
    3,747
    
    
    
    3,915Commitments and contingencies
    
    
    
    
    
    
    Shareholders equity:Common shares, $0.01 per share; authorized 200,000,000 shares;
51,052,142 shares issued and 51,051,183 shares outstanding
at March 29, 2009, and 50,783,312 shares issued and 50,782,353
shares outstanding at December 28, 2008
    
    
    512
    
    
    
    509Additional paid-in capital
    
    
    104,521
    
    
    
    104,517Accumulated deficit
    
    
    (59,122
    )
    
    
    (69,741
    )Accumulated other comprehensive income
    
    
    370
    
    
    
    136Treasury shares: 959 shares at cost at March 29, 2009 and
December 28, 2008
    
    
    (1
    )
    
    
    (1
    )Total shareholders equity
    
    
    46,280
    
    
    
    35,420Total liabilities and shareholders equity
    
    $
    84,235
    
    
    $
    76,564
   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 EndedMarch 29,
    
    
    March 30,2009
    
    
    2008Net revenue
    
    $
    73,246
    
    
    $
    63,517Cost of services
    
    
    54,696
    
    
    
    55,746Gross profit
    
    
    18,550
    
    
    
    7,771Operating expenses:Selling, general and administrative expenses
    
    
    7,754
    
    
    
    8,568Restructuring and other chargesRestructuring charges (reversals)
    
    
    (22
    )
    
    
    3Other severance charges (reversals)
    
    
    (34
    )
    
    
    2,338Total operating expenses
    
    
    7,698
    
    
    
    10,909Operating income (loss)
    
    
    10,852
    
    
    
    (3,138
    )Other income
    
    
    (7
    )
    
    
    (32
    )Interest expense
    
    
    89
    
    
    
    922Income (loss) before income taxes
    
    
    10,770
    
    
    
    (4,028
    )Income tax provision
    
    
    151
    
    
    
    Net income (loss)
    
    $
    10,619
    
    
    $
    (4,028
    )Net income (loss) per share:Basic
    
    $
    0.21
    
    
    $
    (0.08
    )Diluted
    
    $
    0.20
    
    
    $
    (0.08
    )Weighted average number of shares outstanding:Basic
    
    
    50,818
    
    
    
    50,222Diluted
    
    
    53,163
    
    
    
    50,222
   6




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APAC CUSTOMER SERVICES, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Dollars in thousands)
 (Unaudited)
 Thirteen Weeks EndedMarch 29,
    
    
    March 30,2009
    
    
    2008Operating activities:Net income (loss)
    
    $
    10,619
    
    
    $
    (4,028
    )Adjustments to reconcile net income (loss) to net cash provided
by operating activities:Depreciation and amortization
    
    
    2,829
    
    
    
    3,471Stock compensation expense
    
    
    7
    
    
    
    760Amortized gain on sale leaseback
    
    
    (23
    )
    
    
    (32
    )Income taxes payable
    
    
    149
    
    
    
    Change in operating assets and liabilities
    
    
    (10,398
    )
    
    
    7,287Net cash provided by operating activities
    
    
    3,183
    
    
    
    7,458Investing activities:Purchases of property and equipment, net
    
    
    (3,370
    )
    
    
    (758
    )Net cash used in investing activities
    
    
    (3,370
    )
    
    
    (758
    )Financing activities:Net payments on long-term debt
    
    
    
    
    
    
    (600
    )Net payments under revolving credit facility
    
    
    (37
    )
    
    
    (5,803
    )Payments of financing costs
    
    
    
    
    
    
    232Stock option transactions, including related excess income tax benefits
    
    
    
    
    
    
    74Net cash used in financing activities
    
    
    (37
    )
    
    
    (6,097
    )Effect of exchange rate change on cash
    
    
    407
    
    
    
    (680
    )Net increase (decrease) in cash and cash equivalents
    
    
    183
    
    
    
    (77
    )Cash and cash equivalents:Beginning balance
    
    
    618
    
    
    
    1,426Ending balance
    
    $
    801
    
    
    $
    1,349
   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
    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
  March 29,
    
    
    December 28,2009
    
    
    2008Accrued workers compensation
    
    $
    1,486
    
    
    $
    1,536Accrued professional fees
    
    
    1,360
    
    
    
    767Deferred rent
    
    
    1,080
    
    
    
    1,071Accrued severance
    
    
    884
    
    
    
    1,372Recognized / unrecognized loss on derivative contracts
    
    
    546
    
    
    
    954Accrued telecom
    
    
    330
    
    
    
    163Accrued property tax
    
    
    167
    
    
    
    256Other
    
    
    3,000
    
    
    
    4,389Total
    
    $
    8,853
    
    
    $
    10,508
 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 28, 2008
    
    
    53,000Granted
    
    
    Issued
    
    
    (25,000
    )Forfeited
    
    
    Expired
    
    
    Outstanding on March 29, 2009
    
    
    28,000
   Weighted AverageGrant Price Range
    
    
    Exercise Price Per
    
    
    AggregateNumber of Options
    
    
    Per Share
    
    
    Share
    
    
    Intrinsic ValueOutstanding on December 28, 2008
    
    
    6,578,261
    
    
    
    $0.79  $11.63
    
    
    $
    1.81Granted
    
    
    287,017
    
    
    
    1.38  1.89
    
    
    
    1.74Exercised
    
    
    (512,245
    )
    
    
    0.90
    
    
    
    0.90Forfeited
    
    
    (41,500
    )
    
    
    1.49  2.82
    
    
    
    1.74Expired
    
    
    (72,850
    )
    
    
    1.35  3.57
    
    
    
    2.34Outstanding on March 29, 2009
    
    
    6,238,683
    
    
    
    $0.79  $11.63
    
    
    $
    1.87
    
    
    $
    8,992Exercisable on March 29, 2009
    
    
    2,858,559
    
    
    
    $0.79  $11.63
    
    
    $
    2.34
    
    
    $
    3,136
   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 EndedMarch 29,
    
    
    March 30,2009
    
    
    2008Net income (loss)
    
    $
    10,619
    
    
    $
    (4,028
    )Foreign currency translation adjustment
    
    
    (123
    )
    
    
    (52
    )Unrealized gain (loss) on derivative contracts
    
    
    357
    
    
    
    (736
    )Total comprehensive income (loss)
    
    $
    10,853
    
    
    $
    (4,816
    )
    7. Legal Proceedings
    11




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




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




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APAC CUSTOMER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except as otherwise indicated)
 9. Restructuring and Other Charges
 Severance Charges
   10. Income Taxes
     Net Operating LossExpiration
    
    Carryforward2024
    
    $
    2,1472025
    
    
    13,9012026
    
    
    9,1872027
    
    
    12,823$
    38,058
  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)
 11. Earnings Per Share
  Thirteen Weeks EndedMarch 29,
    
    
    March 30,2009
    
    
    2008(In thousands, except earnings per share)Net income (loss)
    
    $
    10,619
    
    
    $
    (4,028
    )Shares used in basic per share calculation
    
    
    50,818
    
    
    
    50,222Effects of dilutive securities:Stock options
    
    
    2,317
    
    
    
    Non-vested stock
    
    
    28
    
    
    
    Shares used in diluted per share calculation
    
    
    53,163
    
    
    
    50,222Net income (loss) per share:Basic
    
    $
    0.21
    
    
    $
    (0.08
    )Diluted
    
    $
    0.20
    
    
    $
    (0.08
    )
 12. Fair Value Measurements
  
    
    Level 1  Quoted prices in active markets for identical assets or liabilities.
    
    Level 2  Inputs, other than the quoted prices in active markets, that are observable
either directly or indirectly.
    
    Level 3  Unobservable inputs based on the Companys own assumptions.
  Fair Value Measurements at March 29, 2009Level 1
    
    
    Level 2
    
    
    Level 3Cash and cash equivalents(1)
    
    $
    801
    
    
    $
    
    
    
    $
    Foreign currency contracts, net liability(2)
    
    $
    
    
    
    $
    9
    
    
    $
    Interest rate swap, net liability(3)
    
    $
    
    
    
    $
    256
    
    
    $
    
  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)
  (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.(3)
    
    Interest rate swap: The carrying amount of this item is based on a valuation provided by the
counter-party institution, but there is no guaranteed selling price for this contract.  13. Reclassifications
   16




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




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Critical Accounting Policies and Estimates
    18




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Results of Operations
  Thirteen Weeks EndedMarch 29,
    
    
    March 30,
    
    
    Fav (Unfav)2009
    
    
    2008
    
    
    % ChangeNet Revenue:
    
    $
    73,246
    
    
    $
    63,517
    
    
    
    15.3
    %Cost of Services:Direct labor
    
    
    38,308
    
    
    
    37,530
    
    
    
    (2.1
    )Other facility expenses
    
    
    16,388
    
    
    
    18,216
    
    
    
    10.0Total cost of services
    
    
    54,696
    
    
    
    55,746
    
    
    
    1.9Percentage of revenue
    
    
    74.7
    %
    
    
    87.8
    %
    
    
    Gross profit
    
    
    18,550
    
    
    
    7,771
    
    
    
    138.7Gross profit margin
    
    
    25.3
    %
    
    
    12.2
    %
    
    
    Operating Expenses:Selling, general &
administrative expenses
    
    
    7,754
    
    
    
    8,568
    
    
    
    9.5Restructuring and other charges (reversals)
    
    
    (56
    )
    
    
    2,341
    
    
    
    102.4Total operating expenses
    
    
    7,698
    
    
    
    10,909
    
    
    
    29.4Operating income (loss)
    
    
    10,852
    
    
    
    (3,138
    )
    
    
    445.8Other income
    
    
    (7
    )
    
    
    (32
    )
    
    
    (78.1
    )Interest expense
    
    
    89
    
    
    
    922
    
    
    
    90.3Income (loss) before income taxes
    
    
    10,770
    
    
    
    (4,028
    )
    
    
    367.4Income tax provision
    
    
    151
    
    
    
    
    
    
    
    *Net income (loss)
    
    $
    10,619
    
    
    $
    (4,028
    )
    
    
    363.6
    %
 
 *
    
    Means that the percentage change is not meaningful Non-GAAP Financial Measures
     19




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Thirteen Weeks Ended (1)March 29,
    
    
    March 30,
    
    
    Fav (Unfav)2009
    
    
    2008
    
    
    % Change(Dollars in thousands except statistical data and notes)EBITDA (2)
    
    $
    13,688
    
    
    $
    365
    
    
    
    3650.1
    %Statistical information:Number of customer care centers:Domestic
    
    
    9
    
    
    
    9Off-shore
    
    
    4
    
    
    
    3Total
    
    
    13
    
    
    
    12Number of workstations, end of period:Domestic
    
    
    4,848
    
    
    
    4,537Off-shore
    
    
    3,380
    
    
    
    2,965Total
    
    
    8,228
    
    
    
    7,502
 Notes to Non-GAAP Financial Measures
 (1)
    
    We operate on a thirteen-week fiscal quarter that ends on the Sunday closest to March 31.(2)
    
    We define EBITDA as net income (loss) plus the provision (benefit) for income taxes,
depreciation and amortization, and interest expense.   20




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Thirteen Weeks EndedMarch 29,
    
    
    March 30,2009
    
    
    2008(Dollars in thousands)Net income (loss)
    
    $
    10,619
    
    
    $
    (4,028
    )Interest expense
    
    
    89
    
    
    
    922Income tax provision
    
    
    151
    
    
    
    Depreciation and amortization
    
    
    2,829
    
    
    
    3,471EBITDA
    
    $
    13,688
    
    
    $
    365
  21




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Comparison of Results of Operations for the Thirteen Weeks Ended March 29, 2009 and March 30, 2008
          22




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Liquidity and Capital Resources
  Thirteen Weeks EndedMarch 29,
    
    
    March 30,2009
    
    
    2008(Dollars in thousands)Net cash provided by operating activities
    
    $
    3,183
    
    
    $
    7,458Net cash used in investing activities
    
    
    (3,370
    )
    
    
    (758
    )Net cash used in financing activities
    
    
    (37
    )
    
    
    (6,097
    )Effect of exchange rate changes on cash
    
    
    407
    
    
    
    (680
    )Net increase (decrease) in cash and cash equivalents
    
    $
    183
    
    
    $
    (77
    )
 Operating Activities
  Investing Activities
  Financing Activities
   23




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Bank Financing
     Future Liquidity
    24




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Item 3. Quantitative and Qualitative Disclosures About Market Risk
   
 Item 4. Controls and Procedures
 Disclosure Controls and Procedures
  Internal Control Over Financial Reporting
  Inherent Limitations on the Effectiveness of Controls
    25




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Part II. Other Information
 
 Item 1A. Risk Factors
  
 Item 6. Exhibits
   26




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SIGNATURES
  APAC Customer Services, Inc.Date: May 5, 2009
    By:
    /s/ Michael P. MarrowMichael P. MarrowPresident and
Chief Executive Officer
(Principal Executive Officer)Date: May 5, 2009
    By:
    /s/ Andrew B. SzafranAndrew B. SzafranSenior Vice President and
Chief Financial Officer
(Principal Financial Officer)Date: May 5, 2009
    By:
    /s/ Joseph R. DoolanJoseph R. DoolanVice President and Controller
(Principal Accounting Officer)  27




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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 28, 2008.10.1
    
    
    Indemnification Agreement, dated February 18, 2009, incorporated
by reference to APAC Customer Services, Inc.s Current Report on
Form 8-K, dated February 24, 2009.10.2
    
    
    Employment Agreement with Christopher H. Crowley, dated February
12, 2009, incorporated by reference to APAC Customer Services,
Inc.s Current Report on Form 8-K, dated March 12, 2009.31.1
    
    
    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.
  28