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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 September 28, 2008
 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934.
 For the Transition Period From  to
 Commission file number: 0-26786
 APAC Customer Services, Inc.
  Illinois
(State or other jurisdiction of 
incorporation or organization)
    
    36-2777140
(I.R.S. Employer Identification No.)
 Bannockburn Lake Office Plaza 1, 2333 Waukegan Road, Suite 100, Bannockburn, Illinois 60015
(847) 374-4980
  Six Parkway North, Deerfield, Illinois 60015
  þ o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer* o
(*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 September 28, 2008 and December 30, 2007
    
    
    5Condensed Consolidated Statements of Operations for the Thirteen and Thirty-Nine Weeks Ended September 28, 2008 and September 30, 2007
    
    
    6Condensed Consolidated Statements of Cash Flows for the Thirteen and Thirty-Nine Weeks Ended September 28, 2008 and September 30, 2007
    
    
    7Notes to Condensed Consolidated Financial Statements
    
    
    8Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    18Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    28Item 4. Controls and Procedures
    
    
    28Part II. Other Information
    
    
    29Item 1A. Risk Factors
    
    
    29Item 6. Exhibits
    
    
    29Exhibit 31.1Exhibit 31.2Exhibit 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 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 success depends on our ability to continue to reduce costs and achieve efficiencies.
    
    Our business may be affected by our cash flows from operations and our ability to comply with our debt covenants and
funding requirements under our credit facility.
    
    Our principal shareholder can exercise significant control over us.
    
    Our financial results may be affected by risks associated with international operations and expansion, including
foreign currency fluctuations.
    
    Our success depends on key personnel.
    
    Our business operates in a highly competitive market.
    
    Circumstances outside our control such as typhoons, earthquakes, floods and other acts of God, political instability,
equipment malfunction, telephone or data service interruptions, changes in the telecommunications market, war and
terrorism could seriously harm our domestic or off-shore business.
    
    Our inability to attract and retain a sufficient number of qualified employees could negatively impact our business.
    
    Our business and our clients businesses are subject to federal and state regulation and industry standards, including
laws and industry standards regarding consumer privacy and information security.
  3




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4




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PART I. FINANCIAL INFORMATION
 
 Item 1. Condensed Consolidated Financial Statements
 APAC CUSTOMER SERVICES, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (Dollars in thousands)
 September 28,
    
    
    December 30,2008
    
    
    2007(Unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    452
    
    
    $
    1,426Accounts receivable, net
    
    
    31,946
    
    
    
    34,468Other current assets
    
    
    4,407
    
    
    
    5,971Total current assets
    
    
    36,805
    
    
    
    41,865Property and equipment, net
    
    
    22,190
    
    
    
    26,772Goodwill
    
    
    13,338
    
    
    
    13,338Other intangible assets, net
    
    
    4,037
    
    
    
    5,891Other assets
    
    
    1,468
    
    
    
    2,060Total assets
    
    $
    77,838
    
    
    $
    89,926LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Short-term debt
    
    $
    13,806
    
    
    $
    12,307Current portion of long-term debt
    
    
    
    
    
    
    2,400Accounts payable
    
    
    1,410
    
    
    
    2,287Income taxes payable
    
    
    253
    
    
    
    220Accrued payroll and related items
    
    
    18,070
    
    
    
    15,954Accrued liabilities
    
    
    10,346
    
    
    
    8,052Total
current liabilities
    
    
    43,885
    
    
    
    41,220Long-term debt
    
    
    
    
    
    
    11,600Other liabilities
    
    
    4,394
    
    
    
    3,725Commitments and contingencies
    
    
    
    
    
    
    Shareholders equity:Common shares, $0.01 per share; authorized 200,000,000 shares; 
50,603,312
shares issued and outstanding at September 28, 2008,
and 
50,379,296 shares issued and outstanding at December 30, 2007
    
    
    507
    
    
    
    504Additional paid-in capital
    
    
    104,137
    
    
    
    102,647Accumulated deficit
    
    
    (74,846
    )
    
    
    (72,760
    )Accumulated
other comprehensive (loss) income
    
    
    (239
    )
    
    
    2,990Total shareholders equity
    
    
    29,559
    
    
    
    33,381Total
liabilities and shareholders equity
    
    $
    77,838
    
    
    $
    89,926
   5




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APAC CUSTOMER SERVICES, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (Dollars in thousands, except per share data)
 (Unaudited)
 Thirteen Weeks Ended
    
    
    Thirty-Nine Weeks EndedSeptember 28,
    
    
    September 30,
    
    
    September 28,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Net revenue
    
    $
    59,243
    
    
    $
    56,820
    
    
    $
    183,470
    
    
    $
    163,023Cost of services
    
    
    49,172
    
    
    
    52,299
    
    
    
    154,896
    
    
    
    148,095Gross profit
    
    
    10,071
    
    
    
    4,521
    
    
    
    28,574
    
    
    
    14,928Operating expenses:Selling, general and administrative expenses
    
    
    7,187
    
    
    
    6,500
    
    
    
    23,582
    
    
    
    21,580Restructuring and other charges:Restructuring charges
    
    
    54
    
    
    
    8
    
    
    
    34
    
    
    
    1,565Other severance charges
    
    
    562
    
    
    
    
    
    
    
    3,360
    
    
    
    Total operating expenses
    
    
    7,803
    
    
    
    6,508
    
    
    
    26,976
    
    
    
    23,145Operating
income (loss)
    
    
    2,268
    
    
    
    (1,987
    )
    
    
    1,598
    
    
    
    (8,217
    )Other income
    
    
    (129
    )
    
    
    (163
    )
    
    
    (303
    )
    
    
    (254
    )Interest expense
    
    
    359
    
    
    
    939
    
    
    
    3,954
    
    
    
    2,589Income (loss) before income taxes
    
    
    2,038
    
    
    
    (2,763
    )
    
    
    (2,053
    )
    
    
    (10,552
    )Income tax
provision (benefit)
    
    
    33
    
    
    
    
    
    
    
    33
    
    
    
    (17,568
    )Net income (loss)
    
    $
    2,005
    
    
    $
    (2,763
    )
    
    $
    (2,086
    )
    
    $
    7,016Net income
(loss) per share:Basic
    
    $
    0.04
    
    
    $
    (0.06
    )
    
    $
    (0.04
    )
    
    $
    0.14Diluted
    
    $
    0.04
    
    
    $
    (0.06
    )
    
    $
    (0.04
    )
    
    $
    0.13Weighted average number of shares
outstanding:Basic
    
    
    50,486
    
    
    
    49,930
    
    
    
    50,367
    
    
    
    49,732Diluted
    
    
    51,160
    
    
    
    49,930
    
    
    
    50,367
    
    
    
    53,035
   6




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APAC CUSTOMER SERVICES, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Dollars in thousands)
 (Unaudited)
 Thirty-Nine Weeks EndedSeptember 28,
    
    
    September 30,2008
    
    
    2007Operating activities:Net income (loss)
    
    $
    (2,086
    )
    
    $
    7,016Adjustments to reconcile net income (loss) to net cash
provided
by operating activities:Depreciation and amortization
    
    
    9,239
    
    
    
    10,247Non-cash restructuring charges
    
    
    14
    
    
    
    13Stock compensation expense
    
    
    1,082
    
    
    
    1,272Amortized gain on sale leaseback
    
    
    (95
    )
    
    
    (143
    )Loss (gain) on sale of property and equipment
    
    
    193
    
    
    
    (50
    )Income taxes payable
    
    
    33
    
    
    
    (17,580
    )Change in operating assets and liabilities
    
    
    7,662
    
    
    
    1,981Net cash provided by operating activities
    
    
    16,042
    
    
    
    2,756Investing activities:Purchases of property and equipment, net
    
    
    (3,137
    )
    
    
    (10,483
    )Net proceeds from sale of property and equipment
    
    
    57
    
    
    
    191Net cash used in investing activities
    
    
    (3,080
    )
    
    
    (10,292
    )Financing activities:Net (payments) borrowings on long-term debt
    
    
    (14,000
    )
    
    
    9,400Net borrowings (payments) under revolving credit facility
    
    
    1,499
    
    
    
    (3,366
    )Cash received from exercise of stock options
    
    
    412
    
    
    
    719Net cash (used in) provided by financing activities
    
    
    (12,089
    )
    
    
    6,753Effect of exchange rate change on cash
    
    
    (1,847
    )
    
    
    (110
    )Net decrease in cash and cash equivalents
    
    
    (974
    )
    
    
    (893
    )Cash and cash equivalents:Beginning balance
    
    
    1,426
    
    
    
    1,305Ending balance
    
    $
    452
    
    
    $
    412
   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
  September 28,
    
    
    December 30,2008
    
    
    2007Accrued workers compensation
    
    $
    1,720
    
    
    $
    2,089Accrued severance
    
    
    1,577
    
    
    
    Unrecognized loss on forward
contracts
    
    
    1,219
    
    
    
    Deferred rent
    
    
    1,041
    
    
    
    1,023Accrued professional fees
    
    
    801
    
    
    
    644Accrued restructuring charges
    
    
    317
    
    
    
    1,756Accrued property tax
    
    
    260
    
    
    
    332Other
    
    
    3,411
    
    
    
    2,208Total
    
    $
    10,346
    
    
    $
    8,052
 4. Goodwill and Other Intangible Assets
    9




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APAC CUSTOMER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except as otherwise indicated)
  5. Accounting for Stock-Based Compensation
    Number of SharesOutstanding on December 30, 2007
    
    
    366,758Granted
    
    
    50,000Exercised
    
    
    (298,199
    )Forfeited
    
    
    (50,000
    )Expired
    
    
    Outstanding on September 28, 2008
    
    
    68,559
   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)
  Weighted AverageNumber of
    
    
    Grant Price Range
    
    
    Exercise Price Per
    
    
    AggregateOptions
    
    
    Per Share
    
    
    Share
    
    
    Intrinsic ValueOutstanding on
December 30, 2007
    
    
    6,495,396
    
    
    $
    0.85 - $11.63
    
    
    $
    2.22Granted
    
    
    2,707,080
    
    
    
    0.79 -     1.49
    
    
    
    1.05Exercised
    
    
    (270,250
    )
    
    
    0.85 -     1.35
    
    
    
    0.91Forfeited
    
    
    (820,501
    )
    
    
    0.85 -     4.60
    
    
    
    1.56Expired
    
    
    (1,132,281
    )
    
    
    1.35 -   11.56
    
    
    
    2.61Outstanding on
September 28, 2008
    
    
    6,979,444
    
    
    $
    0.79 - $11.63
    
    
    $
    1.83
    
    
    $
    3,284Exercisable on
September 28, 2008
    
    
    3,667,149
    
    
    $
    0.86 - $11.63
    
    
    $
    2.21
    
    
    $
    1,199
  6. Comprehensive Income (Loss)
  Thirteen Weeks Ended
    
    
    Thirty-Nine Weeks EndedSeptember 28,
    
    
    September 30,
    
    
    September 28,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Net income (loss)
    
    $
    2,005
    
    
    $
    (2,763
    )
    
    $
    (2,086
    )
    
    $
    7,016Foreign currency translation adjustment
    
    
    (374
    )
    
    
    343
    
    
    
    (1,127
    )
    
    
    862Unrealized gain (loss) on derivative
contracts
    
    
    160
    
    
    
    
    
    
    
    (2,102
    )
    
    
    Total comprehensive income (loss)
    
    $
    1,791
    
    
    $
    (2,420
    )
    
    $
    (5,315
    )
    
    $
    7,878
    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)
  7. Legal Proceedings
  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
  Other Severance Charges
  2007 Restructuring Initiatives
   2006 Restructuring Initiatives
  2005 Restructuring Initiatives
    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)
  December 30,
    
    
    Charges
    
    
    Asset
    
    
    Cash
    
    
    September 28,2007
    
    
    (Reversals)
    
    
    Write-off
    
    
    Payments
    
    
    20082005 restructuring initiatives:Lease obligations and other
costs
    
    $
    1,123
    
    
    $
    (42
    )
    
    $
    14
    
    
    $
    (880
    )
    
    $
    2152006 restructuring initiatives:Lease obligations and other
costs
    
    
    29
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    292007 restructuring initiatives:Employee severance costs
    
    
    333
    
    
    
    
    
    
    
    
    
    
    
    (260
    )
    
    
    73Lease obligations and other
costs
    
    
    286
    
    
    
    62
    
    
    
    
    
    
    
    (348
    )
    
    
    Total
    
    $
    1,771
    
    
    $
    20
    
    
    $
    14
    
    
    $
    (1,488
    )
    
    $
    317
 10. Income Taxes
      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)
   Net Operating LossExpiration
    
    Carryforward2024
    
    $
    11,1302025
    
    
    13,9012026
    
    
    9,0462027
    
    
    11,774$
    45,851
 11. Earnings Per Share
  Thirteen Weeks Ended
    
    
    Thirty-Nine Weeks EndedSeptember 28,
    
    
    September 30,
    
    
    September 28,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(In thousands, except earnings per share)Net income (loss)
    
    $
    2,005
    
    
    $
    (2,763
    )
    
    $
    (2,086
    )
    
    $
    7,016Shares used in basic per share
calculation
    
    
    50,486
    
    
    
    49,930
    
    
    
    50,367
    
    
    
    49,732Effects of dilutive securities:Stock options
    
    
    605
    
    
    
    
    
    
    
    
    
    
    
    2,892Non-vested stock
    
    
    69
    
    
    
    
    
    
    
    
    
    
    
    411Shares used in diluted per
share calculation
    
    
    51,160
    
    
    
    49,930
    
    
    
    50,367
    
    
    
    53,035Net income (loss) per share:Basic
    
    $
    0.04
    
    
    $
    (0.06
    )
    
    $
    (0.04
    )
    
    $
    0.14Diluted
    
    $
    0.04
    
    
    $
    (0.06
    )
    
    $
    (0.04
    )
    
    $
    0.13
  16




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APAC CUSTOMER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except as otherwise indicated)
 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 September 28, 2008 UsingLevel 1
    
    
    Level 2
    
    
    Level 3Cash and cash equivalents(1)
    
    $
    452
    
    
    $
    
    
    
    $
    Foreign currency contracts, net
liability(2)
    
    $
    
    
    
    $
    1,094
    
    
    $
    Interest rate swap, net liability(3)
    
    $
    
    
    
    $
    43
    
    
    $
    
 Notes to Fair Value Measurements(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. Reclassification
   17




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




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Critical Accounting Policies and Estimates
    19




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Results of Operations
  Thirteen Weeks Ended
    
    
    Thirty-Nine Weeks EndedSeptember 28,
    
    
    September 30,
    
    
    Fav (Unfav)
    
    
    September 28,
    
    
    September 30,
    
    
    Fav (Unfav)2008
    
    
    2007
    
    
    % Change
    
    
    2008
    
    
    2007
    
    
    % ChangeNet Revenue:Domestic
    
    $
    43,026
    
    
    $
    45,704
    
    
    
    (5.9
    )%
    
    $
    136,888
    
    
    $
    131,770
    
    
    
    3.9
    %Off-shore
    
    
    16,217
    
    
    
    11,116
    
    
    
    45.9
    
    
    
    46,582
    
    
    
    31,253
    
    
    
    49.0Total net revenue
    
    
    59,243
    
    
    
    56,820
    
    
    
    4.3
    
    
    
    183,470
    
    
    
    163,023
    
    
    
    12.5Cost of Services:Direct labor
    
    
    34,239
    
    
    
    34,326
    
    
    
    0.3
    
    
    
    106,218
    
    
    
    96,648
    
    
    
    (9.9
    )Other facility expenses
    
    
    14,933
    
    
    
    17,973
    
    
    
    16.9
    
    
    
    48,678
    
    
    
    51,447
    
    
    
    5.4Total cost of services
    
    
    49,172
    
    
    
    52,299
    
    
    
    6.0
    
    
    
    154,896
    
    
    
    148,095
    
    
    
    (4.6
    )Percentage of revenue
    
    
    83.0
    %
    
    
    92.0
    %
    
    
    
    
    
    
    84.4
    %
    
    
    90.8
    %
    
    
    Gross profit
    
    
    10,071
    
    
    
    4,521
    
    
    
    122.8
    
    
    
    28,574
    
    
    
    14,928
    
    
    
    91.4Gross profit margin
    
    
    17.0
    %
    
    
    8.0
    %
    
    
    
    
    
    
    15.6
    %
    
    
    9.2
    %
    
    
    Operating Expenses:Selling, general &
administrative expenses
    
    
    7,187
    
    
    
    6,500
    
    
    
    (10.6
    )
    
    
    23,582
    
    
    
    21,580
    
    
    
    (9.3
    )Restructuring and other
charges
    
    
    616
    
    
    
    8
    
    
    
    *
    
    
    
    3,394
    
    
    
    1,565
    
    
    
    (116.9
    )Total operating expenses
    
    
    7,803
    
    
    
    6,508
    
    
    
    (19.9
    )
    
    
    26,976
    
    
    
    23,145
    
    
    
    (16.6
    )Operating income (loss)
    
    
    2,268
    
    
    
    (1,987
    )
    
    
    214.1
    
    
    
    1,598
    
    
    
    (8,217
    )
    
    
    119.4Other income
    
    
    (129
    )
    
    
    (163
    )
    
    
    (20.9
    )
    
    
    (303
    )
    
    
    (254
    )
    
    
    19.3Interest expense
    
    
    359
    
    
    
    939
    
    
    
    61.8
    
    
    
    3,954
    
    
    
    2,589
    
    
    
    (52.7
    )Income (loss) before
income taxes
    
    
    2,038
    
    
    
    (2,763
    )
    
    
    173.8
    
    
    
    (2,053
    )
    
    
    (10,552
    )
    
    
    80.5Income tax
provision (benefit)
    
    
    33
    
    
    
    
    
    
    
    *
    
    
    
    33
    
    
    
    (17,568
    )
    
    
    *Net income (loss)
    
    $
    2,005
    
    
    $
    (2,763
    )
    
    
    172.6
    %
    
    $
    (2,086
    )
    
    $
    7,016
    
    
    
    (129.7
    )%
 
 *
    
    Means that the percentage
change is not meaningful. Non-GAAP Financial Measures
    20




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##### Table of Contents



Thirteen Weeks Ended (1)
    
    
    Thirty-Nine Weeks EndedSeptember 28,
    
    
    September 30,
    
    
    Fav (Unfav)
    
    
    September 28,
    
    
    September 30,
    
    
    Fav (Unfav)2008
    
    
    2007
    
    
    % Change
    
    
    2008
    
    
    2007
    
    
    % Change(Dollars in thousands except statistical data and notes)EBITDA (2)
    
    $
    5,214
    
    
    $
    1,666
    
    
    
    213.0
    %
    
    $
    11,140
    
    
    $
    2,284
    
    
    
    387.7
    %Free cash flow (3)
    
    
    4,863
    
    
    
    (1,784
    )
    
    
    372.6
    
    
    
    8,003
    
    
    
    (8,199
    )
    
    
    197.6Statistical information:Number of customer care centers:Domestic
    
    
    9
    
    
    
    9
    
    
    
    
    
    
    
    9
    
    
    
    9Off-shore
    
    
    3
    
    
    
    3
    
    
    
    
    
    
    
    3
    
    
    
    3Total
    
    
    12
    
    
    
    12
    
    
    
    
    
    
    
    12
    
    
    
    12Number of workstations,
end of period:Domestic
    
    
    4,486
    
    
    
    4,473
    
    
    
    
    
    
    
    4,486
    
    
    
    4,473Off-shore
    
    
    3,275
    
    
    
    2,533
    
    
    
    
    
    
    
    3,275
    
    
    
    2,533Total
    
    
    7,761
    
    
    
    7,006
    
    
    
    
    
    
    
    7,761
    
    
    
    7,006
 Notes to Non-GAAP Financial Measures
 (1)
    
    We operate on a thirteen week fiscal quarter that ends on the Sunday closest to September 30.(2)
    
    We define EBITDA as net income (loss) plus the provision (benefit) for income taxes,
depreciation and amortization, and interest expense.
  21




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Thirteen Weeks Ended
    
    
    Thirty-Nine Weeks EndedSeptember 28,
    
    
    September 30,
    
    
    September 28,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(Dollars in thousands)Net income (loss)
    
    $
    2,005
    
    
    $
    (2,763
    )
    
    $
    (2,086
    )
    
    $
    7,016Interest expense
    
    
    359
    
    
    
    939
    
    
    
    3,954
    
    
    
    2,589Income tax provision (benefit)
    
    
    33
    
    
    
    
    
    
    
    33
    
    
    
    (17,568
    )Depreciation and amortization
    
    
    2,817
    
    
    
    3,490
    
    
    
    9,239
    
    
    
    10,247EBITDA
    
    $
    5,214
    
    
    $
    1,666
    
    
    $
    11,140
    
    
    $
    2,284
 (3)
    
    We define free cash flow as EBITDA less net capital expenditures.
 Thirteen Weeks Ended
    
    
    Thirty-Nine Weeks EndedSeptember 28,
    
    
    September 30,
    
    
    September 28,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(Dollars in thousands)EBITDA
    
    $
    5,214
    
    
    $
    1,666
    
    
    $
    11,140
    
    
    $
    2,284Capital expenditures
    
    
    (771
    )
    
    
    (3,450
    )
    
    
    (4,436
    )
    
    
    (10,483
    )Capital expenditures funded by
landlord and others
    
    
    420
    
    
    
    
    
    
    
    1,299
    
    
    
    Free Cash Flow
    
    $
    4,863
    
    
    $
    (1,784
    )
    
    $
    8,003
    
    
    $
    (8,199
    )
  Thirteen Weeks Ended
    
    
    Thirty-Nine Weeks EndedSeptember 28,
    
    
    September 30,
    
    
    September 28,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(Dollars in thousands)Net cash provided by (used in) operating
activities
    
    $
    2,741
    
    
    $
    (3,941
    )
    
    $
    16,042
    
    
    $
    2,756Purchase of property and equipment
    
    
    (351
    )
    
    
    (3,450
    )
    
    
    (3,137
    )
    
    
    (10,483
    )Income tax provision (benefit)
    
    
    33
    
    
    
    
    
    
    
    33
    
    
    
    (17,568
    )Interest expense
    
    
    359
    
    
    
    939
    
    
    
    3,954
    
    
    
    2,589Amortized gain on sale leaseback
    
    
    32
    
    
    
    49
    
    
    
    95
    
    
    
    143(Loss) gain on sale of property and
equipment
    
    
    (194
    )
    
    
    103
    
    
    
    (193
    )
    
    
    50Income taxes payable
    
    
    (33
    )
    
    
    
    
    
    
    (33
    )
    
    
    17,580Changes in operating assets and liabilities
    
    
    2,528
    
    
    
    4,848
    
    
    
    (7,662
    )
    
    
    (1,981
    )Stock compensation expense
    
    
    (238
    )
    
    
    (332
    )
    
    
    (1,082
    )
    
    
    (1,272
    )Non-cash restructuring charges
    
    
    (14
    )
    
    
    
    
    
    
    (14
    )
    
    
    (13
    )Free Cash Flow
    
    $
    4,863
    
    
    $
    (1,784
    )
    
    $
    8,003
    
    
    $
    (8,199
    )
  22




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Comparison of Results of Operations for the Thirteen Weeks Ended September 28, 2008 and September
30, 2007
          23




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Comparison of Results of Operations for the Thirty-Nine Weeks Ended September 28, 2008 and
September 30, 2007
        24




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Liquidity and Capital Resources
  Thirty-Nine Weeks EndedSeptember 28,
    
    
    September 30,2008
    
    
    2007(Dollars in thousands)Net cash provided by operating activities
    
    $
    16,042
    
    
    $
    2,756Net cash used in investing activities
    
    
    (3,080
    )
    
    
    (10,292
    )Net cash (used in) provided by financing activities
    
    
    (12,089
    )
    
    
    6,753Effect of exchange rate changes on cash
    
    
    (1,847
    )
    
    
    (110
    )Net decrease in cash and cash equivalents
    
    $
    (974
    )
    
    $
    (893
    )
 Operating Activities
   25




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##### Table of Contents



Investing Activities
   Financing Activities
   Bank Financing
      26




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Free Cash Flow
   27




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##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures About Market Risk
   
 Item 4. Controls and Procedures
 Disclosure Controls and Procedures
  Internal Control Over Financial Reporting
  Inherent Limitations on the Effectiveness of Controls
    28




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##### Table of Contents



Part II. Other Information
 
 Item 1A. Risk Factors
  
 Item 6. Exhibits
   29




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SIGNATURES
  APAC Customer Services, Inc.Date: November 5, 2008
    By:
    /s/ Michael P. MarrowMichael P. MarrowPresident and
Chief Executive Officer
(Principal Executive Officer)Date: November 5, 2008
    By:
    /s/ Andrew B. SzafranAndrew B. SzafranSenior Vice President and
Chief Financial Officer
(Principal Financial Officer)Date: November 5, 2008
    By:
    /s/ Joseph R. DoolanJoseph R. DoolanVice President and Controller
(Principal Accounting Officer)  30




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##### Table of Contents



Exhibit Index
 ExhibitNumber
    
    Description3.1
    
    
    Articles of Incorporation of APAC Customer Services, Inc.,
incorporated by reference to APAC Customer Services, Inc.s Annual
Report on Form 10-K for the fiscal year ended December 31, 2006.3.2
    
    
    Second Amended and Restated Bylaws of APAC Customer Services,
Inc., dated August 20, 2007, incorporated by reference to APAC
Customer Services, Inc.s Current Report on Form 8-K, dated August
22, 2007.4.1
    
    
    Specimen Common Stock Certificate, incorporated by reference to
APAC Customer Services, Inc.s Annual Report on Form 10-K for the
fiscal year ended December 29, 2002.31.1
    
    
    Certification of Chief Executive Officer, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    
    Certification of Chief Financial Officer, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    
    Certification of the Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
  31