**PRELIMINARYDRAFT 10-28-04**

** **

**UNITED STATESSECURITIES 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 September 26,2004**

 

**or**

 
| **o** | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.** |
|-------|------------------------------------------------------------------------------------------------|

 

**For theTransition Period From                to                **

 

**Commission file number 0-26786**

 

**APACCustomer Services, Inc.**

(Exact name of registrant as specified in itscharter)

 

| **Illinois**                                                                                    |   | **36-2777140**                        |
|-------------------------------------------------------------------------------------------------|--------|---------------------------------------|
| (State or other jurisdiction  of incorporation or organization)                                 |   | (I.R.S. Employer  Identification No.) |
|                                                                                            |   |                                  |
| **Six Parkway North, Deerfield, Illinois  60015**                                               |
| (Address of Principal Executive  Offices, Zip Code)                                             |
|                                                                                            |   |                                  |
| Registrant’s telephone number,  including area code:    **(847)  374-4980** |

 

Indicate bycheck mark whether registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter periods that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.

 

Yes ý             No o

 

Indicate bycheck mark whether the registrant is an accelerated filer (as defined in rule12b-2 of the Exchange Act).

 

Yes ý             No o

 

There were49,454,654 common shares, $0.01 par value per share, outstanding as of November3, 2004.

 

## ** **

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## **Index**

## ** **

|                                                                                                                                      | **Page** |
|-------------------------------------------------------------------------------------------------------------------------------------------|----------|
| **Part I. Financial Information**                                                                                                         |     |
|                                                                                                                                      |     |
| Item 1. Consolidated Condensed Financial  Statements (Unaudited):                                                                         |     |
|                                                                                                                                      |     |
| Consolidated Condensed Balance Sheets as of  September 26, 2004, and December 28, 2003                                                    | 3        |
|                                                                                                                                      |     |
| Consolidated Condensed Statements of Operations  for the Thirteen and Thirty-Nine Weeks Ended September 26, 2004, and  September 28, 2003 | 4        |
|                                                                                                                                      |     |
| Consolidated Condensed Statements of Cash  Flows for the Thirty-Nine Weeks Ended September 26, 2004, and September 28,  2003              | 5        |
|                                                                                                                                      |     |
| Notes to Consolidated Condensed Financial  Statements..                                                                                   | 6        |
|                                                                                                                                      |     |
| Item 2. Management’s Discussion and  Analysis of Financial Condition and Results of Operations                                       | 10       |
|                                                                                                                                      |     |
| Item 3. Quantitative and Qualitative  Disclosures About Market Risk                                                                       | 16       |
|                                                                                                                                      |     |
| Item 4. Controls and Procedures.                                                                                                          | 17       |
|                                                                                                                                      |     |
| **Part II. Other Information**                                                                                                            |     |
|                                                                                                                                      |     |
| Item 1. Legal Proceedings                                                                                                                 | 18       |
|                                                                                                                                      |     |
| Item 6. Exhibits.                                                                                                                         | 18       |
|                                                                                                                                      |     |

## ** **

2

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## **Part I. Financial Information**

## ** **

# **Item1.**Consolidated Condensed Financial Statements

# ** **

## **APAC Customer Services, Inc. and Subsidiaries**

**Consolidated Condensed Balance Sheets**

**(Unaudited)**

**(In thousands)**

 
| ** **                                                                                                                             | ** ** | **September 26,  2004** | ** ** | **December 28,  2003** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|------------------------|------------|
| **Assets**                                                                                                                             | ** ** | ** **              | ** ** | ** **             | ** ** |
| ** **                                                                                                                             | ** ** | ** **              | ** ** | ** **             | ** ** |
| **Current assets:**                                                                                                                    | ** ** | ** **              | ** ** | ** **             | ** ** |
| Cash and cash equivalents                                                                                                              |       | $                       | 10,621     |                   | $          | 11,428 |   |
| Accounts receivable, net                                                                                                               |       | 38,201                  |       | 46,896                 |       |
| Other current assets                                                                                                                   |       | 8,217                   |       | 9,218                  |       |
| Total current assets                                                                                                                   |       | 57,039                  |       | 67,542                 |       |
|                                                                                                                                   |       |                    |       |                   |       |
| **Property and equipment, net**                                                                                                        |       | 22,010                  |       | 24,147                 |       |
|                                                                                                                                   |       |                    |       |                   |       |
| **Goodwill**                                                                                                                           |       | 23,876                  |       | 23,876                 |       |
|                                                                                                                                   |       |                    |       |                   |       |
| **Other intangible assets, net**                                                                                                       |       | 13,275                  |       | 15,035                 |       |
|                                                                                                                                   |       |                    |       |                   |       |
| **Deferred taxes**                                                                                                                     |       | 3,111                   |       | 3,072                  |       |
|                                                                                                                                   |       |                    |       |                   |       |
| **Other assets**                                                                                                                       |       | 630                     |       | 921                    |       |
| Total assets                                                                                                                           |       | $                       | 119,941    |                   | $          | 134,593 |   |
|                                                                                                                                   |       |                    |       |                   |       |
| **Liabilities and Shareholders’ Equity**                                                                                          |       |                    |       |                   |       |
| **Current liabilities:**                                                                                                               |       |                    |       |                   |       |
| Current maturities of long-term debt                                                                                                   |       | $                       | 413        |                   | $          | 389 |   |
| Accounts payable                                                                                                                       |       | 2,570                   |       | 4,046                  |       |
| Accrued payroll and related items                                                                                                      |       | 15,440                  |       | 18,367                 |       |
| Income taxes payable                                                                                                                   |       | 13,282                  |       | 17,952                 |       |
| Other accrued liabilities                                                                                                              |       | 10,771                  |       | 11,107                 |       |
| Total current liabilities                                                                                                              |       | 42,476                  |       | 51,861                 |       |
|                                                                                                                                   |       |                    |       |                   |       |
| **Long-term debt, less current maturities**                                                                                            |       | —                  |       | 313                    |       |
|                                                                                                                                   |       |                    |       |                   |       |
| **Other liabilities**                                                                                                                  |       | 1,462                   |       | 1,689                  |       |
|                                                                                                                                   |       |                    |       |                   |       |
| **Commitments and contingencies**                                                                                                      |       | —                  |       | —                 |       |
|                                                                                                                                   |       |                    |       |                   |       |
| **Shareholders’ equity**                                                                                                          |       |                    |       |                   |       |
| Common shares, $0.01 par value; 200,000,000  shares authorized; 49,695,699 shares issued at September 26, 2004, and  December 28, 2003 |       | 497                     |       | 497                    |       |
| Additional paid-in capital                                                                                                             |       | 99,598                  |       | 99,620                 |       |
| Accumulated deficit                                                                                                                    |       | (23,108                 | )          | (18,413                | )          |
| Accumulated other comprehensive loss                                                                                                   |       | (137                    | )          | (82                    | )          |
| Treasury shares: 241,045 and 254,107  shares,  respectively, at cost                                                                   |       | (847                    | )          | (892                   | )          |
| Total shareholders’ equity                                                                                                        |       | 76,003                  |       | 80,730                 |       |
| Total liabilities and shareholders’ equity                                                                                        |       | $                       | 119,941    |                   | $          | 134,593 |   |
|                                                                                                                                        |            |                         |            |                        |            |  |  |  |  |

 

Seenotes to consolidated condensed financial statements

 

3

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** **

**APAC Customer Services, Inc. and Subsidiaries**

**Consolidated Condensed Statements ofOperations**

**(Unaudited)**

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

** **
| ** **                                          | ** ** | **Thirteen Weeks Ended**  | ** ** | **Thirty-Nine Weeks Ended** | ** ** |
|-----------------------------------------------------|------------|---------------------------|------------|-----------------------------|------------|
| ** **                                          | ** ** | **September 26,****2004** | ** ** | **September 28,  2003**     | ** ** | **September 26,  2004** | ** ** | **September 28,  2003** | ** ** |
| ** **                                          | ** ** | ** **                | ** ** | ** **                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Net revenue**                                     |       | $                         | 64,626     |                        | $          | 79,658 |   | $ | 204,036 |   | $ | 247,939 |   |
|                                                |       |                      |       |                        |       |   |   |   |   |
| **Operating expenses:**                             |       |                      |       |                        |       |   |   |   |   |
|                                                |       |                      |       |                        |       |   |   |   |   |
| Cost of services                                    |       | 58,060                    |       | 65,338                      |       | 176,686 |   | 201,411 |   |
| Selling, general and  administrative  expenses |       | 9,967                     |       | 12,124                      |       | 30,468 |   | 38,039 |   |
| Restructuring and other charges                     |       | 159                       |       | 1,800                       |       | 2,009 |   | 1,800 |   |
| Asset impairment charges                            |       | —                    |       | 108                         |       | 2,234 |   | 108 |   |
| Total operating expenses                            |       | 68,186                    |       | 79,370                      |       | 211,397 |   | 241,358 |   |
| **Operating income (loss)**                         |       | (3,560                    | )          | 288                         |       | (7,361 | ) | 6,581 |   |
|                                                |       |                      |       |                        |       |   |   |   |   |
| Interest expense, net                               |       | 115                       |       | 226                         |       | 212 |   | 885 |   |
|                                                |       |                      |       |                        |       |   |   |   |   |
| **Income (loss) before income  taxes**              |       | (3,675                    | )          | 62                          |       | (7,573 | ) | 5,696 |   |
| Provision (benefit) for income taxes                |       | (1,397                    | )          | (228                        | )          | (2,878 | ) | 1,912 |   |
|                                                |       |                      |       |                        |       |   |   |   |   |
| **Net income (loss)**                               |       | $                         | (2,278     | )                           | $          | 290 |   | $ | (4,695 | ) | $ | 3,784 |   |
| ** **                                          | ** ** | ** **                | ** ** | ** **                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Net income (loss) per share:**                    | ** ** | ** **                | ** ** | ** **                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Basic                                               |       | $                         | (0.05      | )                           | $          | 0.01 |   | $ | (0.10 | ) | $ | 0.08 |   |
| Diluted                                             |       | $                         | (0.05      | )                           | $          | 0.01 |   | $ | (0.10 | ) | $ | 0.08 |   |
| **Weighted average number of  shares outstanding:** |       |                      |       |                        |       |   |   |   |   |
| Basic                                               |       | 49,455                    |       | 49,442                      |       | 49,452 |   | 49,434 |   |
| Diluted                                             |       | 49,455                    |       | 49,475                      |       | 49,452 |   | 49,465 |   |
|                                                     |            |                           |            |                             |            |  |  |  |  |  |  |  |  |  |  |  |

 

See notes to consolidated condensed financialstatements.

 

4

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** **

**APAC Customer Services, Inc. and Subsidiaries**

**Consolidated Condensed Statements of Cash Flows**

**(Unaudited)**

**(In thousands)**

 
| ** **                                       | ** ** | **Thirty-Nine Weeks Ended** | ** ** |
|--------------------------------------------------|------------|-----------------------------|------------|
| ** **                                       | ** ** | **September 26,  2004**     | ** ** | **September 28,  2003** | ** ** |
| ** **                                       | ** ** | ** **                  | ** ** | ** ** | ** ** |
| **Operating activities:**                        |       |                        |       |   |   |
|                                             |       |                        |       |   |   |
| Net income (loss)                                |       | $                           | (4,695     | ) | $ | 3,784 |   |
| Depreciation and amortization                    |       | 8,127                       |       | 9,153 |   |
| Non-cash restructuring charges                   |       | 279                         |       | — |   |
| Asset impairment charges                         |       | 2,200                       |       | 108 |   |
| Deferred income taxes                            |       | 758                         |       | 130 |   |
| Change in operating assets and liabilities       |       | (565                        | )          | 3,517 |   |
| Net cash provided by operating activities        |       | 6,104                       |       | 16,692 |   |
|                                             |       |                        |       |   |   |
| **Investing activities:**                        |       |                        |       |   |   |
|                                             |       |                        |       |   |   |
| Purchases of property and equipment, net         |       | (6,646                      | )          | (5,571 | ) |
| Net cash used by investing activities            |       | (6,646                      | )          | (5,571 | ) |
|                                             |       |                        |       |   |   |
| **Financing activities:**                        |       |                        |       |   |   |
|                                             |       |                        |       |   |   |
| Payments on long-term debt                       |       | (289                        | )          | (488 | ) |
| Repayments under revolving credit facility,  net |       | —                      |       | (15,500 | ) |
| Stock and warrant transactions                   |       | 24                          |       | 46 |   |
| Net cash used by financing activities            |       | (265                        | )          | (15,942 | ) |
|                                             |       |                        |       |   |   |
| **Net change in cash and cash equivalents**      |       | (807                        | )          | (4,821 | ) |
|                                             |       |                        |       |   |   |
| **Cash and cash equivalents:**                   |       |                        |       |   |   |
|                                             |       |                        |       |   |   |
| **Beginning balance**                            |       | 11,428                      |       | 14,530 |   |
|                                             |       |                        |       |   |   |
| **Ending balance**                               |       | $                           | 10,621     |   | $ | 9,709 |   |

 

See notes to consolidated condensed financialstatements

 

5

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** **

**APAC Customer Services, Inc. and Subsidiaries**

**Notes to Consolidated Condensed FinancialStatements**

**(Unaudited)**

**(Dollars in thousands, except as otherwiseindicated)**

 

**1.   Basis of Presentation**

 

The accompanyingunaudited consolidated condensed financial statements of APAC CustomerServices, Inc. and its subsidiaries (collectively, the “Company”) havebeen prepared in accordance with generally accepted accounting principles forinterim financial information and the instructions to Form 10-Q and Article 10of Regulation S-X.  Accordingly, they donot include all of the information and footnotes required by generally acceptedaccounting principles for complete financial statements.  In the opinion of management, all adjustments(consisting of normal recurring accruals) considered necessary for a fairpresentation have been included. Operating results for the thirteen and thirty-nine week periods endedSeptember 26, 2004, are not necessarily indicative of the results that may beexpected for the fiscal year ending January 2, 2005.  The balance sheet at December 28, 2003, 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 28, 2003.

 

**2.   Other Accrued Liabilities**

 

The components ofother accrued liabilities included in the consolidated condensed balance sheetsare as follows:

 
| ** **                         | ** ** | **September 26,  2004** | ** ** | **December 28,  2003** | ** ** |
|------------------------------------|------------|-------------------------|------------|------------------------|------------|
|                               |       |                    |       |                   |       |
| Accrued worker’s compensation |       | $                       | 3,149      |                   | $          | 3,097 |   |
| Accrued professional fees          |       | 1,405                   |       | 795                    |       |
| Restructuring charges              |       | 743                     |       | 2,706                  |       |
| Accrued relocation                 |       | 708                     |       | 607                    |       |
| Accrued property tax               |       | 603                     |       | 741                    |       |
| Accrued telecommunications         |       | 513                     |       | 573                    |       |
| Other                              |       | 3,650                   |       | 2,588                  |       |
| Total                              |       | $                       | 10,771     |                   | $          | 11,107 |   |
|                                    |            |                         |            |                        |            |  |  |  |

 

 

**3.   Intangible Assets**

 

The identifiable intangible assets of the Company represent acquiredcustomer relationships with a gross carrying value of $28,493 and accumulatedamortization of $15,218 and $13,458 as of September 26, 2004, and December 28,2003, respectively.  Under the provisionsof Statement of Financial Accounting Standards No. 142, “Goodwill and OtherIntangible Assets” (“SFAS No. 142”), identifiable intangible assets with finitelives are amortized.  The customerrelationship intangible assets are amortized on a straight-line basis over theexpected period of benefit of 12 years. Total amortization expense relatedto intangible assets as of September 26, 2004, and September 28, 2003, was $587per quarter and $1,760 year to date. Annual amortization expense is expected tobe $2.3 million for fiscal 2004 through 2009 and $1.0 million in fiscal2010.

 

Under SFAS No. 142, the Company is required to test all existinggoodwill and intangible assets for impairment at least annually.  The Company’s policy is to test goodwill forimpairment as of the end of the fiscal year.

 

6

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**4.   Accountingfor Stock-Based Compensation**

 

For stock-based employee compensation plans, the Company has elected touse the intrinsic value method prescribed by Accounting Principles BoardOpinion No. 25, “Accounting for Stock Issued to Employees” (“APB No. 25”).  In accordance with APB No. 25, nocompensation expense is recognized for stock options issued to employees whenthe option price equals or exceeds the fair market value of the Company’scommon shares at the date of grant. Stock-based compensation expense for non-employees is recognized inaccordance with Statement of Financial Accounting Standards No. 123, “Accountingfor Stock Based Compensation” (“SFAS No. 123”).

 

The following table illustrates the effect on net income and earningsper share if the Company had adopted the fair value recognition provisions ofSFAS No. 123.

 
| ** **                                                             | ** ** | **Thirteen Weeks Ended** | ** ** | **Thirty-Nine Weeks Ended** | ** ** |
|------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                                                             | ** ** | **September 26,  2004**  | ** ** | **September 28,  2003**     | ** ** | **September 26,  2004** | ** ** | **September 28,  2003** | ** ** |
|                                                                   |       |                     |       |                        |       |   |   |   |   |
| Net income (loss) as reported                                          |       | $                        | (2,278     | )                           | $          | 290 |   | $ | (4,695 | ) | $ | 3,784 |   |
| Less-compensation expense on stock options,  net of income tax benefit |       | (306                     | )          | (881                        | )          | (1,051 | ) | (2,310 | ) |
| Net income (loss) pro forma                                            |       | $                        | (2,584     | )                           | $          | (591 | ) | $ | (5,746 | ) | $ | 1,474 |   |
| Earnings (loss) per share – basic                                 |       |                     |       |                        |       |   |   |   |   |
| As reported                                                            |       | $                        | (0.05      | )                           | $          | 0.01 |   | $ | (0.10 | ) | $ | 0.08 |   |
| Pro forma                                                              |       | $                        | (0.05      | )                           | $          | (0.01 | ) | $ | (0.12 | ) | $ | 0.03 |   |
| Earnings (loss) per share – diluted                               |       |                     |       |                        |       |   |   |   |   |
| As reported                                                            |       | $                        | (0.05      | )                           | $          | 0.01 |   | $ | (0.10 | ) | $ | 0.08 |   |
| Pro forma                                                              |       | $                        | (0.05      | )                           | $          | (0.01 | ) | $ | (0.12 | ) | $ | 0.03 |   |

 

In order to calculate the pro forma information set forth above, thefair value of each option is estimated on the date of grant based on the Black-Scholesoption-pricing model.   Assumptionsinclude no dividend yield, risk-free interest rates ranging from 4% to 7%,expected volatility ranging between 45% and 90%, and an expected life rangingfrom 7 years to 10 years.

 

**5.   ComprehensiveIncome (Loss) and Accumulated Other Comprehensive Income (Loss)**

 

Comprehensive income (loss) is as follows:

 
| ** **                          | ** ** | **Thirteen Weeks Ended** | ** ** | **Thirty-Nine Weeks Ended** | ** ** |
|-------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                          | ** ** | **September 26,  2004**  | ** ** | **September 28,  2003**     | ** ** | **September 26,  2004** | ** ** | **September 28,  2003** | ** ** |
|                                |       |                     |       |                        |       |   |   |   |   |
| Net income (loss)                   |       | $                        | (2,278     | )                           | $          | 290 |   | $ | (4,695 | ) | $ | 3,784 |   |
| Foreign currency translation (loss) |       | (8                       | )          | (62                         | )          | (55 | ) | (62 | ) |
| Total comprehensive income (loss)   |       | $                        | (2,286     | )                           | $          | 228 |   | $ | (4,750 | ) | $ | 3,722 |   |

 

7

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The foreign currency translation losses in the first nine months offiscal 2004 and 2003 relate to the impact of a change in exchange rates on netassets located outside of the United States.

 

**6.   Legal Proceedings**

 

The Company is a party to an arbitrationproceeding with Apogee Enterprises, Inc. and Harmon Glass Solutions, which isdescribed in the Company’s Quarterly Report on Form 10-Q for the first quarterof fiscal 2004.

 

The Company is also subject to occasionallawsuits, governmental investigations and claims arising out of the normalconduct of its business.  Management doesnot believe the outcome of any such pending claims will have a material adverseimpact on the Company’s consolidated financial position, annual results ofoperations or liquidity.  Although theCompany does not believe that any of these proceedings will result in amaterial adverse effect, no assurance to that effect can be given.

 

**7.   Long Term Debt**

 

On December 20, 2002, theCompany entered into an Amended and Restated Credit Agreement (“CreditAgreement”) replacing the previous Amended and Restated Credit Facility.  Under the terms of the Credit Agreement, theCompany has a revolving credit facility, which expires in December 2005.  The facility initially provided $65.0 millionof total credit availability which was gradually reduced to $57.5 million as ofSeptember 26, 2004.

 

On October 26,2004, the Credit Agreement was amended, reducing the size of the revolver to$50 million. Under terms of the amendment, availability will vary monthly basedon the level of eligible receivables at the end of the preceding month. If theamendment had been in place during the third quarter, the Company would havehad between $29 million and $33 million of availability.

 

The Credit Agreement issecured principally by a grant of a security interest in all personal propertyand fixtures of the Company.  Under theterms of the Credit Agreement, the Company is also required to maintain certainfinancial covenants which limit the Company’s ability to incur additionalindebtedness, repurchase outstanding common shares, create liens, acquire, sellor dispose of certain assets, engage in certain mergers and acquisitions andmake certain restricted payments.

 

Borrowings under theCredit Agreement incur a floating interest rate usually based on the LIBORindex rate, although the Company has the option of using an alternate base ratedefined in the agreement.  In addition,the Company pays a commitment fee on the unused portion of the revolving facilityas well as quarterly fees on the outstanding letters of credit.

 

8

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# **8.   Restructuring and Other Charges/AssetImpairment Charges**

# ** **

The Company recorded $2.1 million of restructuring charges in the firstnine months of fiscal 2004 related to the closure of three Customer InteractionCenters, the transition of one center to a client and the elimination ofcertain administrative and support positions. These charges included severancecosts of $1.6 million resulting from the elimination of 37 administrative andsupport positions and $0.5 million for the write down of property and leasetermination and other costs. Cash charges totaling $1.2 million relatingto the restructuring have been paid through September 26, 2004. The remaining$0.7 million of cash charges, primarily related to severance costs, are payableover the next two years.  The Companyalso recorded $2.2 million of asset impairment charges during the first ninemonths of fiscal 2004 relating to the write-off of unutilized software and telecommunicationsequipment.

 

Restructuring and other charges also include the reversal of $0.1million of prior year charges, which were not utilized.

 

Following is a summary of the fiscal 2004 year-to-date activity in thereserves established in connection with the Company’s restructuringinitiatives:

 

 
| ** **                           | ** ** | ** **              | ** ** | **2004**                  | ** ** | ** **              | ** ** |
|--------------------------------------|------------|-------------------------|------------|---------------------------|------------|-------------------------|------------|
| ** **                           | ** ** | **Balance****12/28/03** | ** ** | **Charges/  (Reversals)** | ** ** | **Asset****Write-down** | ** ** | **Cash****Payments** | ** ** | **Balance****9/26/04** | ** ** |
| ** **                           | ** ** | ** **              | ** ** | ** **                | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** |
| 2002                                 |       |                    |       |                      |       |                    |       |   |   |   |   |
| Employee severance costs             |       | $                       | 112        |                      | $          | (42                     | )          | $ | — |   | $ | (70 | ) | $ | — |   |
| Lease obligations and other          |       | 1,261                   |       | 33                        |       | —                  |       | (1,252 | ) | 42 |   |
|                                 |       |                    |       |                      |       |                    |       |   |   |   |   |
| 2003                                 |       |                    |       |                      |       |                    |       |   |   |   |   |
| Employee severance costs             |       | 1,295                   |       | (122                      | )          | —                  |       | (810 | ) | 363 |   |
| Write down of property and equipment |       | 48                      |       | 24                        |       | (72                     | )          | — |   | — |   |
| Lease obligations and other          |       | 337                     |       | (24                       | )          | —                  |       | (303 | ) | 10 |   |
|                                 |       |                    |       |                      |       |                    |       |   |   |   |   |
| 2004                                 |       |                    |       |                      |       |                    |       |   |   |   |   |
| Employee severance costs             |       | —                  |       | 1,571                     |       | —                  |       | (1,068 | ) | 503 |   |
| Write down of property and equipment |       | —                  |       | 218                       |       | (218                    | )          | — |   | — |   |
| Lease obligations and other          |       | —                  |       | 351                       |       | —                  |       | (173 | ) | 178 |   |
| Total                                |       | $                       | 3,053      |                      | 2,009      |                    | (290       | ) | (3,676 | ) | 1,096 |   |
|                                      |            |                         |            |                           |            |                         |            |  |  |  |  |  |  |  |  |  |

# ** **

9

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# **9.   Income Taxes**

# ** **

The Companyaccounts for income taxes using the asset and liability approach.  Under the asset and liability method,deferred tax assets and liabilities are recognized for the future taxconsequences attributable to differences between the financial statementcarrying amounts of existing assets and liabilities and their respective taxbases.  Valuation allowances are recordedwhen management believes it is more likely than not that some portion or all ofthe deferred tax assets will not be realized in the future.  The Company records a reserve for taxcontingencies until management believes it is probable that the deductionsgiving rise to these contingencies will not be successfully challenged.  The Company’s effective income tax rate is38.0% and 34.0% for the nine months ended September 26, 2004, and September 28,2003, respectively.

 

# **Item 2. Management’sDiscussion and Analysis of**

# **FinancialCondition and Results of Operations**

# ** **

The Company isa leading provider of customer interaction solutions for market leaders in thecommunications, financial services, insurance, health care, logistics,publishing and travel and hospitality industries. To help its clients bettermanage their customer relationships, APAC Customer Services develops anddelivers customer care and customer acquisition programs. The Company operatesand manages approximately 6,600 workstations in 24 Customer InteractionCenters. The Customer Interaction Centers are managed centrally through theapplication of telecommunications and computer technology to promote theconsistent delivery of quality service. The Company consists of a single operating segment that offers customerinteraction solutions to its clients.

 

The following discussion of theCompany’s results of operations and liquidity and capital resources should beread in conjunction with the Consolidated Condensed Financial Statements of theCompany and related notes thereto appearing elsewhere in this report.

 

**Results of Operations**

 

The following table sets forth the Consolidated Condensed Statements ofOperations data as a percent of net revenue for the thirteen and thirty-nineweek periods ended September 26, 2004, and September 28, 2003, respectively.

 
| ** **                                    | ** ** | **Thirteen Weeks Ended** | ** ** | **Thirty-Nine Weeks Ended** | ** ** |
|-----------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                                    | ** ** | **September 26,  2004**  | ** ** | **September 28,  2003**     | ** ** | **September 26,  2004** | ** ** | **September 28,  2003** | ** ** |
| ** **                                    | ** ** | ** **               | ** ** | ** **                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Net revenues**                              |       | 100.0                    | %          | 100.0                       | %          | 100.0 | % | 100.0 | % |
|                                          |       |                     |       |                        |       |   |   |   |   |
| Operating expenses:                           |       |                     |       |                        |       |   |   |   |   |
| Cost of services                              |       | 89.8                     |       | 82.0                        |       | 86.6 |   | 81.2 |   |
| Selling, general and administrative  expenses |       | 15.5                     |       | 15.2                        |       | 14.9 |   | 15.3 |   |
| Restructuring and other charges               |       | .2                       |       | 2.3                         |       | 1.0 |   | .7 |   |
| Asset impairment charges                      | ** ** | **—**               |       | .1                          |       | 1.1 |   | .1 |   |
| Total operating expenses                      |       | 105.5                    |       | 99.6                        |       | 103.6 |   | 97.3 |   |
| Operating income (loss)                       |       | (5.5                     | )          | .4                          |       | (3.6 | ) | 2.7 |   |
|                                          |       |                     |       |                        |       |   |   |   |   |
| **Interest expense, net**                     |       | .2                       |       | .3                          |       | .1 |   | .4 |   |
| Income (loss) before income taxes             |       | (5.7                     | )          | .1                          |       | (3.7 | ) | 2.3 |   |
|                                          |       |                     |       |                        |       |   |   |   |   |
| **Provision (benefit) for income taxes**      |       | (2.2                     | )          | (.3                         | )          | (1.4 | ) | .8 |   |
| Net income (loss)                             |       | (3.5                     | )%         | .4                          | %          | (2.3 | )% | 1.5 | % |

 

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**Comparison of Results of Operations for the thirteen weeks endedSeptember 26, 2004, and September 28, 2003**

 

Net revenue decreased 18.9% to $64.6 million in the third quarter offiscal 2004 from $79.7 million in the same period of fiscal 2003, adecrease of $15.1 million. The revenue decline from the third quarter of fiscal2003 is attributable to the decision by Comcast, a major client of the Company,to bring certain marketing programs in-house, softness in the mortgageservicing business and reduced customer acquisition volumes related to thecutback in marketing programs by several telecommunications clients.

 

Cost of services decreased $7.2 million in the third quarter of fiscal2004, or 11.1%, to $58.1 million from $65.3 million in the same period offiscal 2003. Approximately 69% of the decrease in cost of services resultedfrom lower direct costs associated with the decline in revenue, while theremaining reduction related to savings associated with center closings. Thesereductions were partially offset by higher wages, overhead costs, andoperational improvement initiatives. As a percent of revenue, cost of servicesincreased to 89.8% in the third quarter of fiscal 2004 from 82.0% in the thirdquarter of fiscal 2003, principally due to the effect of lower capacityutilization, higher labor costs, operational improvement initiatives andsoftening prices in certain client programs.

 

Selling, general and administrative expenses decreased to$10.0 million in the third quarter of fiscal 2004 from $12.1 million inthe same period of fiscal 2003, a decrease of $2.1 million or 17.8%.Expenses declined from the prior year primarily due to lower employee relatedexpenses resulting from headcount reductions and reduced incentive expense. Asa percent of net revenue, selling, general and administrative expenses were15.5% in the third quarter of fiscal 2004 versus 15.2% in the same period offiscal 2003.

 

The Company recorded $0.2 million of restructuring charges in the thirdquarter of fiscal 2004 related to the closure of one Customer InteractionCenter. These charges will be paid during the fourth quarter of fiscal 2004.

 

During the third quarter of fiscal 2003, the Company recordedrestructuring charges of $1.8 million related to severance costs due to theelimination of 121 administrative, support and call center positions.  The Company also recorded $0.1 million ofasset impairment charges related to the write-off of computer hardware.

 

The Company generated a net loss of $2.3 million in the thirdquarter of fiscal 2004 compared to $0.3 million of net income for the sameperiod of fiscal 2003. The decrease is primarily due to the lower revenue andgross profit margins, partially offset by a reduction in selling, general andadministrative expenses and restructuring charges, as previously discussed.

 

Net interest expense for the third quarter of fiscal 2004 decreased$0.1 million from the same period of fiscal 2003. This decrease reflectsthe pay down of substantially all debt in fiscal 2003.

 

The Company recorded a $1.4 million tax benefit for the third quarterof fiscal 2004 related to the pre-tax loss from operations, versus $0.2 millionof tax benefit in the prior year period.  The benefits recorded in the third quarter of fiscal 2003 were due tothe effect of a change in the year to date estimated effective tax rateresulting from the impact of tax credits on lower income.

 

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**Comparison of Results of Operations for the thirty-nine weeks endedSeptember 26, 2004, and September 28, 2003**

 

Net revenue decreased 17.7% to $204.0 million in the first nine monthsof fiscal 2004 from $247.9 million in the same period of fiscal 2003, adecrease of $43.9 million. The revenue decline from fiscal 2003 is attributableto the decision by Comcast, a major client of the Company, to bring certainmarketing programs in-house, reduced customer acquisition volumes related tothe impact of the rollout of the national Do Not Call registry on October 1,2003, and softness in the credit card acquisition and mortgage servicingbusiness.

 

Cost of services decreased $24.7 million in the first nine monthsof fiscal 2004, or 12.3%, to $176.7 million from $201.4 million in thesame period of fiscal 2003. Approximately 75% of the decrease in cost ofservices resulted from lower direct costs associated with the decline inrevenue, while the remaining reduction related to cutbacks in overheadspending, including savings associated with center closings.  These reductions were partially offset byhigher wages and operational improvement initiatives. As a percent of revenue,cost of services increased to 86.6% in the first nine months of fiscal 2004from 81.2% in the same period of fiscal 2003 principally due to the effect oflower capacity utilization, higher labor costs, operational improvementinitiatives and softening prices in certain client programs.

 

Selling, general and administrative expenses decreased to $30.5 millionin the first nine months of fiscal 2004 from $38.0 million in the same periodof fiscal 2003, a decrease of $7.5 million or 19.9%. Expenses declinedfrom the prior year primarily due to lower salary expense resulting fromheadcount reductions and reduced incentive expense and overhead spending. As apercent of net revenue, selling, general and administrative expenses were 14.9%in the first nine months of fiscal 2004 versus 15.3% in the same period of fiscal2003.

 

The Company recorded $2.1 million of restructuring charges in the firstnine months of fiscal 2004 related to the closure of three Customer InteractionCenters, the transition of one center to a client and the elimination ofcertain administrative and support positions. These charges included severancecosts of $1.6 million resulting from the elimination of 37 administrative andsupport positions, and $0.5 million for the write down of property and leasetermination and other costs. Cash charges totaling $1.2 million relatingto the restructuring have been paid through September 26, 2004. The remaining$0.7 million of cash charges, primarily related to severance costs, are payableover the next two years.  The Companyalso recorded $2.2 million of asset impairment charges during the first ninemonths of fiscal 2004 relating to the write-off of unutilized software andtelecommunications equipment.

 

Restructuring and other charges in fiscal 2004 also include thereversal of $0.1 million of prior year charges, which were not utilized.

 

Restructuring charges for the first nine months of fiscal 2003 relateto the charges recorded in the third quarter as previously discussed.

 

The Company generated a net loss of $4.7 million in the first ninemonths of fiscal 2004 compared to $3.8 million of net income for the sameperiod of fiscal 2003. The decrease is primarily due to the lower revenue andgross profit margins, and $2.2 million of asset impairment charges in thefirst nine months of fiscal 2004, partially offset by a reduction of selling,general and administrative expenses, as previously discussed.

 

Net interest expense for the first nine months of fiscal 2004 decreased$0.7 million from the same period of fiscal 2003. This decrease reflectsthe pay down of substantially all debt in fiscal 2003 and the receipt of $0.2million of other investment income in fiscal 2004.

 

The Company’s effective income tax rate is 38.0% for the first ninemonths of fiscal 2004, versus 34.0% in the prior year period.  The lower tax rate for fiscal 2003 wasprimarily due to the effect of tax credits on taxable income in fiscal 2003.

 

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**Critical Accounting Policies and Estimates**

 

The preparation ofthe Company’s financial statements in conformity with generally acceptedaccounting principles requires management to make estimates and assumptionsthat affect the amounts reported in the consolidated financial statements andaccompanying notes. The Company believes its estimates and assumptions arereasonable; however, actual results and the timing of the recognition of suchamounts could differ from those estimates. The Company has identified thefollowing critical accounting policies and estimates utilized by management inthe preparation of the Company’s financial statements: revenue recognition,accounting for long-lived assets, allowance for doubtful accounts, accountingfor employee benefits and income taxes. Any deviation from these policies orestimates could have a material impact on the financial statements of theCompany.

 

**Revenue recognition**

 

The Company recognizes customer services revenue as services areperformed for our clients. Client contracts generally require that clients bebilled for the Company’s services on the basis of time spent by Companyrepresentatives 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 Company’s performance against suchstandards may provide bonus opportunities or conversely may subject the Companyto penalties, which are recognized as earned or incurred.

 

**Accounting for long-lived assets**

 

The Company’s long-lived assets consist primarily of property andequipment, capitalized software and intangible assets. In addition to theoriginal cost of these assets, their recorded value is impacted by a number ofpolicy elections made by the Company, including estimated useful lives andsalvage values. In addition, any decision by the Company to reduce capacity byclosing Customer Interaction Centers or to abandon software may result in awrite-off of the net book value of these affected assets. In accordance withStatement of Financial Accounting Standards No. 144, “Accounting for theImpairment or Disposal of Long-Lived Assets,” the Company records impairmentcharges on long-lived assets used in operations when events and circumstancesindicate that the assets may be impaired and the undiscounted cash flowsestimated to be generated by those assets are less than the carrying amount ofthose assets. In this circumstance, the impairment charge is determined basedupon the amount the net book value of the assets exceeds their fair marketvalue. In making these determinations, the Company utilizes certainassumptions, including, but not limited to, the estimated fair marketvalue of the assets, which are based on additional assumptions such as assetutilization, length of time the asset will be used in the Company’s operationsand estimated salvage values.

 

Under SFAS No. 142, the Company is required to test all existinggoodwill and intangible assets for impairment at least annually.  The Company’s policy is to test goodwill forimpairment as of the end of the fiscal year.

 

**Allowance for doubtful accounts**

 

The Company records an allowance for doubtfulaccounts based on a quarterly assessment of the probable estimated losses intrade accounts receivable. This estimate is based on specific allowances foridentified problem receivables and an additional allowance for estimated losseson all other receivables based on their age and the Company’s collectionhistory.

 

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** **

**Accounting for employee benefits**

 

The Company records an accrued liability for group health and workerscompensation claims based on an estimate of claims incurred, but not reported,as well as asserted claims at the end of the period. This estimate is derivedfrom an analysis performed by actuaries hired by the Company who have expertisein this area.  Although these estimatesare generally reliable, changes in the employee mix and unforeseen events couldresult in an adjustment to these estimates.

 

The balances of these accounts at September26, 2004, and September 28, 2003, were:

 
| ** **             | ** ** | **(in thousands)** | ** ** |
|------------------------|------------|--------------------|------------|
| ** **             | ** ** | **2004**           | ** ** | **2003** | ** ** |
| Group Health Insurance |       | $                  | 2,665      |   | $ | 3,831 |   |
| Workers Compensation   |       | 3,149              |       | 3,293 |   |
|                        |            |                    |            |  |  |  |  |

 

**Income taxes**

 

The Companyaccounts for income taxes using the asset and liability approach.  Under the asset and liability method,deferred tax assets and liabilities are recognized for the future taxconsequences attributable to differences between the financial statementcarrying amounts of existing assets and liabilities and their respective taxbases.  Valuation allowances are recordedwhen management believes it is more likely than not that some portion or all ofthe deferred tax assets will not be realized in the future.  The Company records a reserve for taxcontingencies until management believes it is probable that the deductionsgiving rise to these contingencies will not be successfully challenged.

 

**Liquidityand Capital Resources**

 

The following table sets forth consolidated statements of cash flowdata for the Company for the thirty-nine week periods ended September 26, 2004,and September 28, 2003, respectively.

 
| ** **                                | ** ** | **2004**           | ** ** | **2003** | ** ** |
|-------------------------------------------|------------|--------------------|------------|----------|------------|
| ** **                                | ** ** | **(In thousands)** | ** ** |
|                                      |       |               |       |     |       |
| Net cash provided by operating activities |       | $                  | 6,104      |     | $          | 16,692 |   |
| Net cash used by investing activities     |       | (6,646             | )          | (5,571   | )          |
| Net cash used by financing activities     |       | (265               | )          | (15,942  | )          |
| Net decrease in cash                      |       | $                  | (807       | )        | $          | (4,821 | ) |

 

Cash fromoperating activities decreased $10.6 million versus the first nine months offiscal 2003, primarily due to lower operating margins, a decrease in accruedliabilities and income taxes payable, $1.2 million of payments related torestructuring charges and lower depreciation and amortization.

 

Net cash used byinvesting activities was $6.6 million in the first nine months of fiscal 2004primarily due to expenditures related to the buildout of additional seats inthe Company’s call center in the Philippines and computer hardware and softwareupgrades. Capital expenditures of $5.6 million in the first nine months offiscal 2003 were primarily related to the intitial buildout of the facility inthe Philippines and equipment upgrades.

 

Net cash used byfinancing activities primarily related to the repayment of capital leasepayments in fiscal 2003 and 2004 and $15.5 million of bank debt in 2003.

 

On October 26,2004, the Credit Agreement was amended, reducing the size of the revolver from$56.3 million to $50 million. Under terms of the amendment, availability willvary monthly based on the level of eligible receivables at the

 

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end of thepreceding month. If the amendment had been in place during the third quarter,the Company would have had between $29 million and $33 million of availability.

 

In 2003, the Companyreceived an $11.6 million cash tax refund as a result of carrying back againstprior years’ taxable income a $48.1 million loss reported on its 2002 taxreturn, which is subject to audit. This loss resulted from the Company taking a$59.9 million deduction to write-off, for tax purposes, its remaininginvestment in ITI Holdings, Inc. (for book purposes the Company recordedappropriate impairment charges related to ITI in previous fiscal years). Thetotal combined liquidity benefit to the Company from this deduction is expectedto be $20.9 million, which includes the $11.6 million cash tax refund, $3.3million of cash tax savings related to the 2002 tax year and the release of $6.0million of tax credits generated and utilized in prior years to be used incurrent and future periods. The potential income statement benefit of thisdeduction will not be recognized and the associated income tax liabilityeliminated until the Company believes it is probable the deduction will not besuccessfully challenged.

 

The Company expects that its cash balances, cash flows from futureoperations and available borrowings under its Credit Agreement will besufficient to meet normal operating needs, fund any planned capitalexpenditures and repay debt obligations payable during fiscal 2004.  However, a significant change in operatingcash flow could impact the Company’s ability to meet its cash requirement needsand comply with covenants of its Credit Agreement.

 

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** **

**Forward-Looking Statements**

 

The Private Securities Litigation Reform Act of 1995 provides a “safeharbor” for certain forward-looking statements. This Report on Form 10-Qand other documents that the Company files with the SEC contain forward-lookingstatements that reflect the Company’s current views with respect to futureevents and financial performance. These forward-looking statements are subjectto certain risks and uncertainties, which could cause future results to differmaterially from historical results or those anticipated. The words “believe,” “expect,”“anticipate,” “intend,” “estimate,” “goals,” “would,” “could,” “should,” andother expressions which indicate future events and trends identify forward-lookingstatements. Readers are cautioned not to place undue reliance on these forward-lookingstatements, which speak only as of their dates. If no date is provided, suchstatements speak only as of the date of this Report on Form 10-Q. Exceptas required under the Federal securities laws and rules and regulations of theSEC, the Company undertakes no obligation to publicly update or revise anyforward-looking statements in connection with new information or future eventsor otherwise. Factors that could cause future results to differ materially fromhistorical results or those anticipated include, but are not limited to,reliance by the Company on a small number of principal clients for asubstantial proportion of its total revenue; possible changes in or eventsaffecting the business of the Company’s clients, including changes in customers’interest in, and use of, clients’ products and services; fluctuations inquarterly results of operations due to timing of clients’ initiation and terminationof large programs; risks in conducting business internationally; changes incompetitive conditions affecting the Company’s industry; the ability of theCompany’s clients to terminate contracts with the Company on a relatively shortnotice; changes in the availability and cost of qualified employees; variationsin the performance of the Company’s automated systems and other technologicalfactors; changes in government regulations affecting the teleservices andtelecommunications industries; and competition from other outside providers ofcustomer interaction solutions and in-house customer interaction operations.

 

See the Company’s filingswith the SEC for further discussion of the risks and uncertainties associatedwith the Company’s business, in particular, the discussion under the caption “InformationRegarding Forward-Looking Statements” in Item 7 (Management’s Discussion andAnalysis of Financial Condition and Results of Operations) of the Company’sAnnual Report on Form 10-K for the fiscal year ended December 28, 2003.

 

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

 

Historically, the Company has been exposed to the impact of U.S.interest rate changes directly related to its normal operating and fundingactivities. From time to time, the Company has entered into derivatives inorder to minimize these risks, but not for trading purposes. The Company doesnot have any derivative agreements at this time.

 

The Company prepared a sensitivity analysis of its average debt for thequarter ended September 26, 2004, assuming a one-percentage point adversechange in interest rates. Holding all other variables constant, thehypothetical adverse change would not significantly increase interest expense.The sensitivity analysis assumes no changes in the Company’s financialstructure.

 

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# **Item 4. Controls andProcedures**

# ** **

# **DisclosureControls and Procedures**

# ** **

The Company’s management, with the participation of the Company’s ChiefExecutive Officer and Chief Financial Officer, has evaluated the effectivenessof the Company’s disclosure controls and procedures (as such term is defined inRules 13a-15(e) under the Securities Exchange Act, as amended (the “ExchangeAct”)) as of the end of the period covered by this report.  Based on such evaluation, the Company’s ChiefExecutive Officer and Chief Financial Officer have concluded that, as of theend of such period, the Company’s disclosure controls and procedures areeffective in recording, processing, summarizing and reporting, on a timelybasis, information required to be disclosed by the Company in the reports thatit files or submits under the Exchange Act.

 

**InternalControl Over Financial Reporting**

** **

There have not been changes in the Company’s internal control overfinancial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f)under the Exchange Act) during the fiscal quarter to which this report relatesthat have materially affected, or are reasonably likely to materially affect, theCompany’s internal control over financial reporting.

 

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## ** **

## **Part II. OtherInformation**

## ** **

**Item 1.  Legal Proceedings**

 

The Company is a party toan arbitration proceeding with Apogee Enterprises, Inc. and Harmon GlassSolutions, which is described in the Company’s Quarterly Report on Form 10-Qfor the first quarter of fiscal 2004.

 

The Companyis also subject to occasional lawsuits, governmental investigations and claimsarising out of the normal conduct of its business.  Management does not believe the outcome ofany such pending claims will have a material adverse impact on the Company’sconsolidated financial position, annual results of operations orliquidity.  Although the Company does notbelieve that any of these proceedings will result in a material adverse effect,no assurance to that effect can be given.

 

**Item6.  Exhibits**

 

(a) The exhibits required by Item 601 ofRegulation S-K are listed in the Exhibit Index attached hereto.

 

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**Signatures**

 

Pursuant to the requirements of the Securities Exchange Act of 1934,the Registrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

 
| ** ** | ** **       | ** ** | **APAC Customer Services, Inc.** | ** ** |
|------------|------------------|------------|----------------------------------|------------|
|       |             |       |                             |       |
|       |             |       |                             |       |
| Date:      | November 3, 2004 | By:        | /s/ Marc T. Tanenberg            |       |   |
|       |             |       | Senior Vice President and        |       |   |
|       |             |       | Chief Financial Officer          |       |   |
|       |             |       | (Principal Financial Officer     |       |   |
|       |             |       | and duly authorized officer)     |       |   |
|       |             |       |                             |       |   |
|       |             |       |                             |       |   |
| Date:      | November 3, 2004 | By:        | */s/*Kenneth R. Batko            |       |   |
|       |             |       | Vice President and Controller    |       |   |
|       |             |       | (Principal Accounting Officer    |       |   |
|       |             |       | and duly authorized officer)     |       |   |

 

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# **Exhibit Index**

# ** **

| **Exhibit  Number** | ** ** | **Description**                                                                                                                                                                                                                                                |
|---------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |       |                                                                                                                                                                                                                                                           |
| 3.1                 |       | Articles of Incorporation of APAC Customer  Services, Inc. are incorporated by reference to APAC Customer Services,  Inc.’s Quarterly Report on Form 10-Q for the Quarter ended October 3, 1999.                                                          |
|                |       |                                                                                                                                                                                                                                                           |
| 3.2                 |       | Amended and Restated Bylaws of APAC  Customer Services, Inc. as amended through April 30, 2000, incorporated by  reference to APAC Customer Services, Inc.’s Quarterly Report on Form 10-Q for  the Quarter ended April 2, 2000.                          |
|                |       |                                                                                                                                                                                                                                                           |
| 3.3                 |       | Certificate of Amendment of the Amended and  Restated Bylaws of APAC Customer Services, Inc. as amended March 10, 2004,  incorporated by reference to APAC Customer Services, Inc.’s Quarterly Report  on Form 10-Q for the quarter ended March 28, 2004. |
|                |       |                                                                                                                                                                                                                                                           |
| 10.1                |       | Amendment to the Amended and Restated  Credit Agreement dated October 26, 2004, incorporated by reference to APAC Customer  Services, Inc.’s Current Report on Form 8-K, dated October 27, 2004.                                                          |
|                |       |                                                                                                                                                                                                                                                           |
| 31.1                |       | Certification of Chief Executive Officer  pursuant to Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act, as adopted  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                            |
|                |       |                                                                                                                                                                                                                                                           |
| 31.2                |       | Certification of Chief Financial Officer  pursuant to Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act, 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.                                                                           |

 

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