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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 30, 2007
 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934.
 For the Transition Period From  to
 Commission file number: 0-26786
 APAC Customer Services, Inc.
  Illinois
    
    36-2777140(State or other jurisdiction of
    
    (I.R.S. Employer Identification No.)incorporation or organization)
 Six Parkway North, Deerfield, Illinois 60015
 (847) 374-4980
  þ o
  o o þ
  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 30, 2007
and December 31, 2006
    
    
    5Condensed Consolidated Statements of Operations for the Thirteen and
Thirty-Nine Weeks Ended September 30, 2007 and October 1, 2006
    
    
    6Condensed Consolidated Statements of Cash Flows for the Thirty-Nine
Weeks Ended September 30, 2007 and October 1, 2006
    
    
    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
    
    
    30Exhibit 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 success is subject to the terms of our client contracts.
 
    
    Our success depends on sustaining a return to profitability.
 
    
    Our business may be affected by our cash flows from operations and our ability to comply with, or obtain waivers of or
changes to, our debt covenants.
 
    
    Our financial results depend on our ability to effectively manage the capacity of our domestic customer care centers
and the growth of our off-shore customer care centers.
 
    
    Our financial results may be affected by risks associated with international operations and expansion, including
foreign currency fluctuations.
 
    
    Our business operates in a highly competitive market.
 
    
    Our principal shareholder can exercise significant control over the Company.
 
    
    Circumstances outside our control such as typhoons, earthquakes 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.
 
    
    Our success depends on key personnel.
  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 30,
    
    
    December 31,2007
    
    
    2006(Unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    412
    
    
    $
    1,305Accounts receivable, net
    
    
    36,217
    
    
    
    37,858Other current assets
    
    
    5,523
    
    
    
    6,717Total current assets
    
    
    42,152
    
    
    
    45,880Property and equipment, net
    
    
    26,245
    
    
    
    23,930Goodwill
    
    
    13,338
    
    
    
    13,338Other intangible assets, net
    
    
    6,500
    
    
    
    8,070Other assets
    
    
    1,830
    
    
    
    836Total assets
    
    $
    90,065
    
    
    $
    92,054LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Short-term debt
    
    $
    10,412
    
    
    $
    13,778Current portion of long-term debt
    
    
    2,200
    
    
    
    600Accounts payable
    
    
    2,260
    
    
    
    2,890Income taxes payable
    
    
    220
    
    
    
    17,800Accrued payroll and related items
    
    
    15,700
    
    
    
    14,603Accrued liabilities
    
    
    13,317
    
    
    
    12,888Total current liabilities
    
    
    44,109
    
    
    
    62,559Long-term debt
    
    
    12,200
    
    
    
    4,400Other liabilities
    
    
    580
    
    
    
    1,789Commitments and contingencies
    
    
    
    
    
    
    Shareholders equity:Common shares, $0.01 per share; authorized 200,000,000 shares;
50,398,296 and 50,066,628 shares issued at September 30, 2007,
and December 31, 2006, respectively; 50,398,296 and 49,866,583
shares outstanding at September 30, 2007, and December 31, 2006,
respectively
    
    
    505
    
    
    
    501Additional paid-in capital
    
    
    102,362
    
    
    
    101,077Accumulated deficit
    
    
    (70,833
    )
    
    
    (77,849
    )Accumulated other comprehensive income
    
    
    1,142
    
    
    
    280Treasury shares: 0 and 200,045 shares at cost at September 30, 2007,
and December 31, 2006, respectively
    
    
    
    
    
    
    (703
    )Total shareholders equity
    
    
    33,176
    
    
    
    23,306Total liabilities and shareholders equity
    
    $
    90,065
    
    
    $
    92,054
   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 30,
    
    
    October 1,
    
    
    September 30,
    
    
    October 1,2007
    
    
    2006
    
    
    2007
    
    
    2006Net revenue
    
    $
    56,820
    
    
    $
    49,282
    
    
    $
    163,023
    
    
    $
    168,241Cost of services
    
    
    52,299
    
    
    
    46,320
    
    
    
    148,095
    
    
    
    150,694Gross profit
    
    
    4,521
    
    
    
    2,962
    
    
    
    14,928
    
    
    
    17,547Operating expenses:Selling, general and administrative
expenses
    
    
    6,500
    
    
    
    8,008
    
    
    
    21,580
    
    
    
    23,628Restructuring and other charges
    
    
    8
    
    
    
    2,329
    
    
    
    1,565
    
    
    
    2,700Total operating expenses
    
    
    6,508
    
    
    
    10,337
    
    
    
    23,145
    
    
    
    26,328Operating loss
    
    
    (1,987
    )
    
    
    (7,375
    )
    
    
    (8,217
    )
    
    
    (8,781
    )Other income
    
    
    (163
    )
    
    
    (62
    )
    
    
    (254
    )
    
    
    (56
    )Interest expense
    
    
    939
    
    
    
    490
    
    
    
    2,589
    
    
    
    1,388Loss before income taxes
    
    
    (2,763
    )
    
    
    (7,803
    )
    
    
    (10,552
    )
    
    
    (10,113
    )Income tax benefit
    
    
    
    
    
    
    (2,798
    )
    
    
    (17,568
    )
    
    
    (3,574
    )Net income (loss)
    
    $
    (2,763
    )
    
    $
    (5,005
    )
    
    $
    7,016
    
    
    $
    (6,539
    )Net income (loss) per share:Basic
    
    $
    (0.06
    )
    
    $
    (0.10
    )
    
    $
    0.14
    
    
    $
    (0.13
    )Diluted
    
    $
    (0.06
    )
    
    $
    (0.10
    )
    
    $
    0.13
    
    
    $
    (0.13
    )Weighted average number of shares
outstanding:Basic
    
    
    49,930
    
    
    
    49,455
    
    
    
    49,732
    
    
    
    49,455Diluted
    
    
    49,930
    
    
    
    49,455
    
    
    
    53,035
    
    
    
    49,455
   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 30,
    
    
    October 1,2007
    
    
    2006Operating activities:Net income (loss)
    
    $
    7,016
    
    
    $
    (6,539
    )Adjustments to reconcile net income (loss) to net cash provided
by operating activities:Depreciation and amortization
    
    
    10,247
    
    
    
    9,094Non-cash restructuring charges
    
    
    13
    
    
    
    517Deferred income taxes
    
    
    
    
    
    
    (3,834
    )Stock compensation expense
    
    
    1,272
    
    
    
    1,105Amortized gain on sale leaseback
    
    
    (143
    )
    
    
    Gain on sale of property and equipment
    
    
    (50
    )
    
    
    Income taxes payable
    
    
    (17,580
    )
    
    
    Change in operating assets and liabilities
    
    
    1,981
    
    
    
    7,239Net cash provided by operating activities
    
    
    2,756
    
    
    
    7,582Investing activities:Purchases of property and equipment, net
    
    
    (10,483
    )
    
    
    (6,295
    )Net proceeds from sale of property and equipment
    
    
    191
    
    
    
    10Net cash used in investing activities
    
    
    (10,292
    )
    
    
    (6,285
    )Financing activities:Borrowings on long-term debt, net
    
    
    9,400
    
    
    
    Net payments under revolving credit facility
    
    
    (3,366
    )
    
    
    (1,807
    )Cash received from exercise of stock options
    
    
    719
    
    
    
    Net cash provided by (used in) financing activities
    
    
    6,753
    
    
    
    (1,807
    )Effect of exchange rate change on cash
    
    
    (110
    )
    
    
    (86
    )Net decrease in cash and cash equivalents
    
    
    (893
    )
    
    
    (596
    )Cash and cash equivalents:Beginning balance
    
    
    1,305
    
    
    
    960Ending balance
    
    $
    412
    
    
    $
    364
   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
 st
 2. New Accounting Pronouncements
 Accounting for
Uncertainty in Income Taxes: An interpretation of FASB Statement No. 109 , Accounting for Income Taxes
   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 30,
    
    
    December 31,2007
    
    
    2006Deferred rent
    
    $
    4,082
    
    
    $
    3,070Accrued restructuring charges
    
    
    2,390
    
    
    
    2,032Accrued workers compensation
    
    
    2,021
    
    
    
    2,705Accrued professional fees
    
    
    709
    
    
    
    837Other
    
    
    4,115
    
    
    
    4,244Total
    
    $
    13,317
    
    
    $
    12,888
 4. Goodwill and Other Intangible Assets
 Goodwill and Other Intangible Assets
  5. Accounting for Stock-Based Compensation
    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)
  Number of
    
    
    AggregateShares
    
    
    Intrinsic ValueOutstanding on December 31, 2006
    
    
    370,929Granted
    
    
    106,000Exercised
    
    
    Forfeited/Cancelled
    
    
    (65,611
    )Outstanding on September 30, 2007
    
    
    411,318
    
    
    $
    1,037Exercisable on September 30, 2007
    
    
    
    
    
    
    
   Grant Price
    
    
    WeightedAverage
    
    
    AggregateNumber of
    
    
    Range Per
    
    
    Exercise Price
    
    
    IntrinsicOptions
    
    
    Share
    
    
    Per Share
    
    
    ValueOutstanding
on December 31, 2006
    
    
    7,261,965
    
    
    $
    0.85-$16.75
    
    
    $
    2.15Granted
    
    
    497,682
    
    
    
    2.62-    4.73
    
    
    
    3.54Exercised
    
    
    (491,324
    )
    
    
    0.86-    3.57
    
    
    
    1.46Forfeited/Cancelled
    
    
    (239,096
    )
    
    
    1.06-  16.75
    
    
    
    3.36Outstanding on
September 30, 2007
    
    
    7,029,227
    
    
    $
    0.85-$11.63
    
    
    $
    2.25
    
    
    $
    4,876Exercisable on
September 30, 2007
    
    
    3,816,987
    
    
    $
    0.85-$11.63
    
    
    $
    2.60
    
    
    $
    2,152
   10




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APAC CUSTOMER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except as otherwise indicated)
 6. Comprehensive Income (Loss)
  Thirteen Weeks Ended
    
    
    Thirty-Nine Weeks EndedSeptember 30,
    
    
    October 1,
    
    
    September 30,
    
    
    October 1,2007
    
    
    2006
    
    
    2007
    
    
    2006Net income (loss)
    
    $
    (2,763
    )
    
    $
    (5,005
    )
    
    $
    7,016
    
    
    $
    (6,539
    )Foreign currency translation gain
    
    
    343
    
    
    
    170
    
    
    
    862
    
    
    
    92Total comprehensive income (loss)
    
    $
    (2,420
    )
    
    $
    (4,835
    )
    
    $
    7,878
    
    
    $
    (6,447
    )
  7. Legal Proceedings
  8. Debt
      11




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




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APAC CUSTOMER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except as otherwise indicated)
         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
  2007 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)
 2006 Restructuring Initiatives
    2005 Restructuring Initiatives
    Asset
    
    
    Adj toDecember
    
    
    Charges
    
    
    Write-
    
    
    Other
    
    
    Cash
    
    
    September31, 2006
    
    
    (Reversals)
    
    
    off
    
    
    Accts
    
    
    Payments
    
    
    30, 2007Restructuring initiatives prior to 2005:
    
    $
    2
    
    
    $
    (2
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2005 restructuring initiatives:Lease obligations and other costs
    
    
    1,731
    
    
    
    390
    
    
    
    
    
    
    
    
    
    
    $
    (1,463
    )
    
    $
    6582006 restructuring initiatives:Employee severance costs
    
    
    6
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6
    )
    
    
    Lease obligations and other costs
    
    
    1,438
    
    
    
    (69
    )
    
    
    
    
    
    $
    (18
    )
    
    
    (349
    )
    
    
    1,0022007 restructuring initiatives:Employee severance costs
    
    
    
    
    
    
    592
    
    
    
    
    
    
    
    (12
    )
    
    
    (282
    )
    
    
    298Property and equipment
    
    
    
    
    
    
    13
    
    
    $
    (13
    )
    
    
    
    
    
    
    
    
    
    
    Lease obligations and other costs
    
    
    
    
    
    
    641
    
    
    
    
    
    
    
    
    
    
    
    (185
    )
    
    
    456Total
    
    $
    3,177
    
    
    $
    1,565
    
    
    $
    (13
    )
    
    $
    (30
    )
    
    $
    (2,285
    )
    
    $
    2,414
  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)
 10. Income Taxes
      Accounting for Uncertainty in Income Taxes: an
interpretation of FASB Statement No. 109
  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)
 11. Earnings Per Share
 :
 Thirteen Weeks Ended
    
    
    Thirty-Nine Weeks EndedSeptember 30,
    
    
    October 1,
    
    
    September 30,
    
    
    October 1,2007
    
    
    2006
    
    
    2007
    
    
    2006(In thousands, except earnings per share)Net income (loss)
    
    $
    (2,763
    )
    
    $
    (5,005
    )
    
    $
    7,016
    
    
    $
    (6,539
    )Shares used in basic per share calculation
    
    
    49,930
    
    
    
    49,455
    
    
    
    49,732
    
    
    
    49,455Effects of dilutive securities:Stock options
    
    
    
    
    
    
    
    
    
    
    2,892
    
    
    
    Non-vested stock
    
    
    
    
    
    
    
    
    
    
    411
    
    
    
    Shares used in diluted per share calculation
    
    
    49,930
    
    
    
    49,455
    
    
    
    53,035
    
    
    
    49,455Net income (loss) per share:Basic
    
    $
    (0.06
    )
    
    $
    (0.10
    )
    
    $
    0.14
    
    
    $
    (0.13
    )Diluted
    
    $
    (0.06
    )
    
    $
    (0.10
    )
    
    $
    0.13
    
    
    $
    (0.13
    )
 12. Reclassification
   13. Subsequent Events
   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
  Accounting for Uncertainty in Income Taxes: an
interpretation of FASB Statement No. 109
   19




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Results of Operations
  Thirteen Weeks Ended
    
    
    Thirty-Nine Weeks EndedSeptember 30,
    
    
    October 1,
    
    
    Fav (Unfav)
    
    
    September 30,
    
    
    October 1,
    
    
    Fav (Unfav)2007
    
    
    2006
    
    
    % Change
    
    
    2007
    
    
    2006
    
    
    % ChangeNet Revenue:Domestic
    
    $
    45,704
    
    
    $
    42,468
    
    
    
    7.6
    %
    
    $
    131,770
    
    
    $
    148,585
    
    
    
    (11.3
    )%Off-shore
    
    
    11,116
    
    
    
    6,814
    
    
    
    63.1
    
    
    
    31,253
    
    
    
    19,656
    
    
    
    59.0Total net revenue
    
    
    56,820
    
    
    
    49,282
    
    
    
    15.3
    
    
    
    163,023
    
    
    
    168,241
    
    
    
    (3.1
    )Cost of Services:Direct labor
    
    
    34,326
    
    
    
    29,776
    
    
    
    (15.3
    )
    
    
    96,648
    
    
    
    98,182
    
    
    
    1.6Other facility expenses
    
    
    17,973
    
    
    
    16,544
    
    
    
    (8.6
    )
    
    
    51,447
    
    
    
    52,512
    
    
    
    2.0Total cost of services
    
    
    52,299
    
    
    
    46,320
    
    
    
    (12.9
    )
    
    
    148,095
    
    
    
    150,694
    
    
    
    1.7Percentage of revenue
    
    
    92.0
    %
    
    
    94.0
    %
    
    
    
    
    
    
    90.8
    %
    
    
    89.6
    %
    
    
    Gross profit
    
    
    4,521
    
    
    
    2,962
    
    
    
    52.6
    
    
    
    14,928
    
    
    
    17,547
    
    
    
    (14.9
    )Gross profit margin
    
    
    8.0
    %
    
    
    6.0
    %
    
    
    
    
    
    
    9.2
    %
    
    
    10.4
    %
    
    
    Operating Expenses:Selling, general &
administrative expenses
    
    
    6,500
    
    
    
    8,008
    
    
    
    18.8
    
    
    
    21,580
    
    
    
    23,628
    
    
    
    8.7Restructuring and other
charges
    
    
    8
    
    
    
    2,329
    
    
    
    99.7
    
    
    
    1,565
    
    
    
    2,700
    
    
    
    42.0Total operating expenses
    
    
    6,508
    
    
    
    10,337
    
    
    
    37.0
    
    
    
    23,145
    
    
    
    26,328
    
    
    
    12.1Operating loss
    
    
    (1,987
    )
    
    
    (7,375
    )
    
    
    73.1
    
    
    
    (8,217
    )
    
    
    (8,781
    )
    
    
    6.4Other income
    
    
    (163
    )
    
    
    (62
    )
    
    
    *
    
    
    
    (254
    )
    
    
    (56
    )
    
    
    *Interest expense
    
    
    939
    
    
    
    490
    
    
    
    (91.6
    )
    
    
    2,589
    
    
    
    1,388
    
    
    
    (86.5
    )Loss before income taxes
    
    
    (2,763
    )
    
    
    (7,803
    )
    
    
    64.6
    
    
    
    (10,552
    )
    
    
    (10,113
    )
    
    
    (4.3
    )Income tax benefit
    
    
    
    
    
    
    (2,798
    )
    
    
    *
    
    
    
    (17,568
    )
    
    
    (3,574
    )
    
    
    *Net income (loss)
    
    $
    (2,763
    )
    
    $
    (5,005
    )
    
    
    44.8
    
    
    $
    7,016
    
    
    $
    (6,539
    )
    
    
    207.3
 
 *
    
    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 30,
    
    
    October 1,
    
    
    Fav (Unfav)
    
    
    September 30,
    
    
    October 1,
    
    
    Fav (Unfav)2007
    
    
    2006
    
    
    % Change
    
    
    2007
    
    
    2006
    
    
    % Change(Dollars in thousands except statistical data and notes)EBITDA (2)
    
    $
    1,666
    
    
    $
    (4,264
    )
    
    
    139.1
    %
    
    $
    2,284
    
    
    $
    369
    
    
    
    519.0
    %Free cash flow (3)
    
    
    (1,784
    )
    
    
    (5,814
    )
    
    
    69.3
    
    
    
    (8,199
    )
    
    
    (5,926
    )
    
    
    (38.4
    )Statistical information:Number of customer care
centers:Domestic
    
    
    9
    
    
    
    8
    
    
    
    
    
    
    
    9
    
    
    
    8Off-shore
    
    
    3
    
    
    
    2
    
    
    
    
    
    
    
    3
    
    
    
    2Total
    
    
    12
    
    
    
    10
    
    
    
    
    
    
    
    12
    
    
    
    10Number of workstations:Domestic
    
    
    4,473
    
    
    
    4,625
    
    
    
    
    
    
    
    4,473
    
    
    
    4,625Off-shore
    
    
    2,533
    
    
    
    1,520
    
    
    
    
    
    
    
    2,533
    
    
    
    1,520Total
    
    
    7,006
    
    
    
    6,145
    
    
    
    
    
    
    
    7,006
    
    
    
    6,145Annualized net weighted average
revenue per workstation:Domestic
    
    $
    41,010
    
    
    $
    35,543
    
    
    
    
    
    
    $
    37,531
    
    
    $
    38,444Off-shore
    
    
    18,387
    
    
    
    18,027
    
    
    
    
    
    
    
    18,365
    
    
    
    19,525Total
    
    
    33,054
    
    
    
    31,336
    
    
    
    
    
    
    
    31,235
    
    
    
    34,538
 
 *
    
    Means that the percentage change is not meaningful Notes to Non-GAAP Financial Measures
     21




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##### Table of Contents



Thirteen Weeks Ended
    
    
    Thirty-Nine Weeks EndedSeptember 30,
    
    
    October 1,
    
    
    September 30,
    
    
    October 1,2007
    
    
    2006
    
    
    2007
    
    
    2006(Dollars in thousands)Net income (loss)
    
    $
    (2,763
    )
    
    $
    (5,005
    )
    
    $
    7,016
    
    
    $
    (6,539
    )Interest expense
    
    
    939
    
    
    
    490
    
    
    
    2,589
    
    
    
    1,388Income tax benefit
    
    
    
    
    
    
    (2,798
    )
    
    
    (17,568
    )
    
    
    (3,574
    )Depreciation and amortization
    
    
    3,490
    
    
    
    3,049
    
    
    
    10,247
    
    
    
    9,094EBITDA
    
    $
    1,666
    
    
    $
    (4,264
    )
    
    $
    2,284
    
    
    $
    369
   Thirteen Weeks Ended
    
    
    Thirty-Nine Weeks EndedSeptember 30,
    
    
    October 1,
    
    
    September 30,
    
    
    October 1,2007
    
    
    2006
    
    
    2007
    
    
    2006(Dollars in thousands)EBITDA
    
    $
    1,666
    
    
    $
    (4,264
    )
    
    $
    2,284
    
    
    $
    369Capital expenditures
    
    
    (3,450
    )
    
    
    (1,550
    )
    
    
    (10,483
    )
    
    
    (9,545
    )Leasehold improvements funded by
landlord
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,250Free Cash Flow
    
    $
    (1,784
    )
    
    $
    (5,814
    )
    
    $
    (8,199
    )
    
    $
    (5,926
    )
  Thirteen Weeks Ended
    
    
    Thirty-Nine Weeks EndedSeptember 30,
    
    
    October 1,
    
    
    September 30,
    
    
    October 1,2007
    
    
    2006
    
    
    2007
    
    
    2006(Dollars in thousands)Net cash (used in) provided by operating
activities
    
    $
    (3,941
    )
    
    $
    5,158
    
    
    $
    2,756
    
    
    $
    7,582Purchase of property and equipment
    
    
    (3,450
    )
    
    
    (1,550
    )
    
    
    (10,483
    )
    
    
    (6,295
    )Income tax benefit
    
    
    
    
    
    
    (2,798
    )
    
    
    (17,568
    )
    
    
    (3,574
    )Interest expense
    
    
    939
    
    
    
    490
    
    
    
    2,589
    
    
    
    1,388Amortized gain on sale leaseback
    
    
    49
    
    
    
    
    
    
    
    143
    
    
    
    Gain on sale of property and equipment
    
    
    103
    
    
    
    
    
    
    
    50
    
    
    
    Income taxes payable
    
    
    
    
    
    
    
    
    
    
    17,580
    
    
    
    Changes in operating assets and liabilities
    
    
    4,848
    
    
    
    (9,637
    )
    
    
    (1,981
    )
    
    
    (7,239
    )Increase in deferred income taxes
    
    
    
    
    
    
    3,016
    
    
    
    
    
    
    
    3,834Stock compensation expense
    
    
    (332
    )
    
    
    (347
    )
    
    
    (1,272
    )
    
    
    (1,105
    )Non-cash restructuring charges
    
    
    
    
    
    
    (146
    )
    
    
    (13
    )
    
    
    (517
    )Free Cash Flow
    
    $
    (1,784
    )
    
    $
    (5,814
    )
    
    $
    (8,199
    )
    
    $
    (5,926
    )
  22




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##### Table of Contents



Comparison of Results of Operations for the Thirteen Weeks Ended September 30, 2007 and October 1,
2006
          23




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##### Table of Contents



Comparison of Results of Operations for the Thirty-nine Weeks Ended September 30, 2007 and October
1, 2006
       24




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##### Table of Contents



Liquidity and Capital Resources
  Thirty-Nine Weeks EndedSeptember 30,
    
    
    October 1,2007
    
    
    2006(Dollars in thousands)Net cash provided by operating activities
    
    $
    2,756
    
    
    $
    7,582Net cash used in investing activities
    
    
    (10,292
    )
    
    
    (6,285
    )Net cash provided by (used in) financing activities
    
    
    6,753
    
    
    
    (1,807
    )Effect of exchange rate changes on cash
    
    
    (110
    )
    
    
    (86
    )Net decrease in cash and cash equivalents
    
    $
    (893
    )
    
    $
    (596
    )
  25




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##### Table of Contents



Operating Activities
  Investing Activities
  Financing Activities
  Bank Financing
     26




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##### Table of Contents



Free Cash Flow
   27




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##### Table of Contents



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




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##### Table of Contents



Part II. Other Information
 
 Item 1A. Risk Factors
  Our business may be affected by our cash flows from operations and our ability to comply with, or
obtain waivers of or changes to, our debt covenants.
    Our financial results may be affected by risks associated with international operations and
expansion, including foreign currency fluctuations.
     29




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##### Table of Contents



Item 6. Exhibits
   30




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##### Table of Contents



SIGNATURES
  APAC Customer Services, Inc. and SubsidiariesDate: November 9, 2007
    By:
    /s/ Robert J. KellerRobert J. KellerPresident and
Chief Executive Officer
(Principal Executive Officer)Date: November 9, 2007
    By:
    /s/ George H. Hepburn IIIGeorge H. Hepburn IIISenior Vice President and
Chief Financial Officer
(Principal Financial Officer)Date: November 9, 2007
    By:
    /s/ Joseph R. DoolanJoseph R. DoolanVice President and Controller
(Principal Accounting Officer)  31




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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.
  32