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 ~~April~~July 3, 2011


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.

(Exact name of registrant as specified in its charter)


Illinois		36-2777140
(State or other jurisdiction of		(I.R.S. Employer Identification No.)
incorporation or organization)

Bannockburn Lake Office, 2201 Waukegan Road, Suite 300, Bannockburn, Illinois 60015
(Address of Principal Executive Offices, Zip Code)

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

Indicate by check mark whether registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o

Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company (see the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act).


Large accelerated filer o	Accelerated filer þ	Non-accelerated filer* o	Smaller reporting company o
		(*Do not check if a smaller reporting company)

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

~~Yes~~There ~~o No~~were þ51,321,416 common shares, $0.01 par value per share, outstanding as of July 22, 2011.

There were 51,218,419 common shares, $0.01 par value per share, outstanding as of May 6, 2011.

INDEX

	Page
Forward-Looking Statements and Factors That May Affect Future Results		3
Part I. Financial Information		5
Item 1. Condensed Consolidated Financial Statements (Unaudited)		5
Condensed Consolidated Balance Sheets as of April 3, 2011 and January 2, 2011		5
Condensed Consolidated Balance Sheets as of July 3, 2011 and January 2, 2011		5
Condensed Consolidated Statements of Operations for the Thirteen Weeks Ended April 3, 2011 and April 4, 2010		6
Condensed Consolidated Statements of Operations for the Thirteen and Twenty-Six Weeks Ended July 3, 2011 and July 4, 2010		6
Condensed Consolidated Statements of Cash Flows for the Thirteen Weeks Ended April 3, 2011 and April 4, 2010		7
Condensed Consolidated Statements of Cash Flows for the Twenty-Six Weeks Ended July 3, 2011 and July 4, 2010		7
Notes to Condensed Consolidated Financial Statements		8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		1618
Item 3. Quantitative and Qualitative Disclosures About Market Risk		2428
Item 4. Controls and Procedures		2428
Part II. Other Information		2529
Item 1A. Risk Factors		2529
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		2530
Item 6. Exhibits		2530
EX-31.1
EX-31.2
Exhibit 32.1
EX-32.1
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT

Forward-Looking Statements and Factors That May Affect Future Results

In passing the Private Securities Litigation Reform Act of 1995 (the “Reform Act”), Congress encouraged public companies to make “forward-looking statements” by creating a “safe harbor” to protect companies from securities law liability in connection with forward-looking statements. We intend to qualify our written and oral forward-looking statements for protection under the Reform Act and any other similar safe harbor provisions. Unless the context indicates otherwise, the words “Company,” “we,” “our,” and “us” when used in this Quarterly Report on Form 10-Q refer collectively to APAC Customer Services, Inc. and its wholly-owned subsidiaries.

Generally, forward-looking statements include expressed expectations, estimates and projections of future events and financial performance and the assumptions on which these expressed expectations, estimates and projections are based. Statements that are not historical facts, including statements about our beliefs and expectations and those of our management, are forward-looking statements. Sometimes these statements will contain words such as “believes,” “expects,” “anticipates,” “intends,” “estimates,” “goals,” “would,” “could,” “should,” “plans,” and other similar words. All forward-looking statements are inherently uncertain as they are based on various expectations and assumptions about future events, and they are subject to known and unknown risks and uncertainties and other factors that can cause actual events and results to differ materially from historic results and those projected. Such statements are based upon the current beliefs and expectations of the Company’s management. The risks included below are not exhaustive.

Due to such uncertainties, the investment community is cautioned not to place undue reliance on our written or oral forward-looking statements, which speak only as of the date on which they were made. If no date is provided, such statements speak only as of the date of this Quarterly Report on Form 10-Q. We expressly undertake no obligation to publicly update or revise any forward-looking statements as a result of changed assumptions, new information, future events or otherwise.

Forward-looking statements are contained in this Quarterly Report on Form 10-Q, primarily in Items 2 and 3. Moreover, through our senior management, we may from time to time make forward-looking statements about matters described herein or about other matters concerning us.

There are numerous factors that could prevent us from achieving our goals and cause future results to differ materially from historic results or those expressed or implied by forward-looking statements including, but not limited to, the following:

• A large portion of 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 and adversely affect our financial results. • Our operating results and financial condition may be affected by the performance of our clients and unfavorable general economic conditions. • The failure to effectively manage our production capacity and our workforce could negatively impact our financial results. • Our success is subject to the terms of our client contracts and if we are unable to continue operating under existing client contracts or renew existing client contracts with terms favorable to us, our results of operations and financial condition may be adversely affected by the loss of clients or by the less favorable terms. • Our business may be affected by our cash flows from operations and our ability to comply with our debt covenants and funding requirements under our credit facility. • Our financial results may be affected by risks associated with international operations and expansion, including, but not limited to foreign currency fluctuations, tax obligations and changes to laws in other countries. • Our principal shareholder can exercise significant control over us and, as a result of such control may be able to exert considerable influence over our future direction and operations. • Our success depends on our ability to recruit and retain a sufficient number of qualified key personnel and the loss of the services of key personnel without adequate replacement or the inability to attract new qualified personnel could have a material adverse effect on us. ~~• We operate in a highly competitive industry and our financial results may suffer if we are unable to adequately address potential downward pricing pressures and other competitive factors.~~

• We operate in a highly competitive industry and our financial results may suffer if we are unable to adequately address potential downward pricing pressures and other competitive factors. • Circumstances outside our control such as typhoons, hurricanes, 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 international business operations. • Unauthorized disclosure of sensitive or confidential client and customer data could expose us to protracted and costly litigation, penalties and may cause us to lose clients. • Our business and our clients’ businesses are subject to federal and state regulation and industry standards and the costs of compliance with, or liability for violation of, existing or future regulations or standards could significantly increase our costs of doing business. • The costs and management time and attention associated with litigation could result in a negative impact to our financial results. • Our business is subject to rapid changes in technology and if our technology is rendered obsolete or we are unable to compete effectively, our operating results and financial condition could be materially and adversely affected. • Volatility in our stock price may result in loss of investment for shareholders, potential litigation and substantial cost associated with litigation, as well as diversion of management’s attention. • Our inability to complete the Merger with an affiliate of One Equity Partners (“One Equity”) or if the Merger Agreement is otherwise terminated may result in adverse consequences to the Company. • The impact of the Merger on our business relationships, operating results and business generally is unknown and may negatively impact our business. • The costs, delay and management time and attention associated with litigation related to the Merger could negatively affect the Merger or result in a negative impact to our financial results. • There is the possibility that competing offers will be made which could result in the termination of the Merger Agreement as well as additional cost, delay and potential diversion of management’s attention.

See our filings with the Securities and Exchange Commission (SEC) for further discussion of the risks and uncertainties associated with our business, in particular, the discussion in Item 1A of Part I of our Annual Report on Form 10-K for the fiscal year ended January 2, 2011, and in Item 1A of Part II of this Quarterly Report on Form 10-Q.

In various places throughout this Quarterly Report on Form 10-Q we use certain non-GAAP financial measures when describing our performance. A “non-GAAP financial measure” is defined as a numerical measure of a company’s financial performance that excludes or includes amounts so as to be different than the most directly comparable measure calculated and presented in accordance with GAAP in the statements of operations, balance sheets or statements of cash flows of a company. We believe that non-GAAP financial measures provide meaningful supplemental information and are useful in understanding our results of operations and analyzing of trends because they exclude certain charges such as interest, taxes and depreciation and amortization expenses that are not part of our ordinary business operations. We also believe that non-GAAP financial measures are useful to investors and analysts in allowing for greater transparency with respect to the supplemental information used by us in our financial and operational decision-making. In addition, we believe investors, analysts and lenders benefit from referring to non-GAAP measures when assessing our performance and expectations of our future performance. However, this information should not be used as a substitute for our GAAP financial information; rather it should be used in conjunction with financial statement information contained in our unaudited condensed consolidated financial statements prepared in accordance with GAAP. We discuss non-GAAP financial measures in Item 2 of this Quarterly Report on Form 10-Q under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Financial Measures.” Pursuant to the requirements of Regulation G, we have provided a reconciliation of all non-GAAP financial measures to the most directly comparable GAAP financial measure in Item 2 of this Quarterly Report on Form 10-Q.

PART I. FINANCIAL INFORMATION


Item 1.		Condensed Consolidated Financial Statements

APAC CUSTOMER SERVICES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (Dollars in thousands)

(Dollars in thousands)


	July 3,			January 2,
	2011			2011
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	49,741		$	41,399
Accounts receivable, net		45,671			52,483
Deferred tax assets, current		7,094			11,051
Other current assets		10,661			8,204

Total current assets		113,167			113,137

Property and equipment, net		29,372			28,030
Goodwill and intangible assets, net		20,597			13,763
Deferred tax assets, non-current		5,387			5,387
Other assets		2,876			2,848

Total assets	$	171,399		$	163,165

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Capital leases — current portion	$	548		$	696
Accounts payable		4,545			4,964
Income taxes payable		108			93
Accrued payroll and related items		22,096			22,205
Accrued liabilities		10,405			9,200

Total current liabilities		37,702			37,158
Other non-current liabilities		6,472			4,536
Commitments and contingencies		—			—

Shareholders’ equity:
Common shares, $0.01 per share; authorized 200,000,000 shares; 53,519,267 shares issued and 51,285,652 shares outstanding at July 3, 2011, and 53,359,090 shares issued and 52,488,457 shares outstanding at January 2, 2011		535			533
Additional paid-in capital		113,809			112,668
Accumulated earnings		23,635			11,166
Accumulated other comprehensive income		2,141			1,980
Treasury shares: 2,233,615 and 870,633 shares at cost at July 3, 2011 and January 2, 2011, respectively		(12,895	)		(4,876	)

Total shareholders’ equity		127,225			121,471

Total liabilities and shareholders’ equity	$	171,399		$	163,165

	April 3,			January 2,
	2011			2011
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	51,268		$	41,399
Accounts receivable, net		46,772			52,483
Deferred tax assets, current		7,606			11,051
Other current assets		8,288			8,204
Total current assets		113,934			113,137
Property and equipment, net		28,065			28,030
Goodwill and intangible assets, net		13,783			13,763
Deferred tax assets, non-current		5,387			5,387
Other assets		2,761			2,848
Total assets	$	163,930		$	163,165
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Capital leases — current portion	$	617		$	696
Accounts payable		3,719			4,964
Income taxes payable		401			93
Accrued payroll and related items		22,477			22,205
Accrued liabilities		8,324			9,200
Total current liabilities		35,538			37,158
Other non-current liabilities		4,510			4,536
Commitments and contingencies		—			—
Shareholders’ equity:
Common shares, $0.01 per share; authorized 200,000,000 shares; 53,417,300 shares issued and 51,625,975, shares outstanding at April 3, 2011, and 53,359,090 shares issued and 52,488,457 shares outstanding at January 2, 2011		534			533
Additional paid-in capital		113,145			112,668
Accumulated earnings		18,187			11,166
Accumulated other comprehensive income		2,323			1,980
Treasury shares: 1,791,325 and 870,633 shares at cost at April 3, 2011 and January 2, 2011, respectively		(10,307	)		(4,876	)
Total shareholders’ equity		123,882			121,471
Total liabilities and shareholders’ equity	$	163,930		$	163,165

See Notes to Condensed Consolidated Financial Statements.

APAC CUSTOMER SERVICES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars in thousands, except per share data)

(Dollars in thousands, except per share data)

(Unaudited)

	Thirteen Weeks Ended					Twenty-Six Weeks Ended
	April 3,		April 4,
	July 3,		July 4,			July 3,		July 4,
	2011		2010			2011		2010
Net revenue	$	8882,~~043~~494	$	8577,~~254~~386		$	170,537	$	162,640
Cost of services		6865,~~544~~958		6461,~~808~~009			134,502		125,817
Gross profit		1916,~~499~~536		2016,~~446~~377			36,035		36,823
Operating expenses:
Selling, general and administrative expenses		8,~~301~~086		8,~~146~~116			16,387		16,262
Legal settlement		21		~~2,400~~7			3		2,407
Severance and other charges		425		1
Severance and other charges (reversals)		71		(13	)		496		(12	)
Total operating expenses		8,~~728~~158		108,~~547~~110			16,886		18,657
Operating income		108,~~771~~378		98,~~899~~267			19,149		18,166
Other (income) expense, net		20		(109	)
Other expense, net		34		139			54		30
Interest (income) expense, net		3228		(87	)		60		(15	)
Income before income taxes		108,~~719~~316		108,~~016~~135			19,035		18,151
Income tax expense		32,~~698~~869		32,~~456~~806			6,567		6,262
Net income	$	75,~~021~~447	$	65,~~560~~329		$	12,468	$	11,889
Net income per share:
Basic	$	0.1411	$	0.1310		$	0.24	$	0.23
Diluted	$	0.1310	$	0.1210		$	0.23	$	0.22
Weighted average number of shares outstanding:
Basic		51,~~797~~052		52,~~309~~476			51,425		52,393
Diluted		5352,~~528~~735		54,~~630~~831			53,131		54,745

See Notes to Condensed Consolidated Financial Statements.

APAC CUSTOMER SERVICES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) (Unaudited)

(Dollars in thousands)


	Twenty-Six Weeks Ended
	July 3,			July 4,
	2011			2010
Operating activities:
Net income	$	12,468		$	11,889
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		5,900			6,071
Deferred income taxes		3,957			5,548
Stock compensation expense		837			1,195
Amortized gain on sale leaseback		(81	)		(52	)
Loss (gain) on sale of property and equipment		8			(1	)
Income taxes payable (refundable)		15			(365	)
Change in operating assets and liabilities		2,505			4,676

Net cash provided by operating activities		25,609			28,961

Investing activities:
Purchases of property and equipment, net		(6,785	)		(3,968	)
Net proceeds from sale of property and equipment		—			1
Acquisition of business		(2,200	)		—

Net cash used in investing activities		(8,985	)		(3,967	)

Financing activities:
Payment of capital lease obligations		(527	)		(332	)
Stock option transactions, including related excess income tax benefits		307			533
Purchase of treasury stock		(8,019	)		—

Net cash (used in) provided by financing activities		(8,239	)		201

Effect of exchange rate change on cash		(43	)		(336	)

Net increase in cash and cash equivalents		8,342			24,859

Cash and cash equivalents:
Beginning balance		41,399			20,557

Ending balance	$	49,741		$	45,416

(Unaudited)

	Thirteen Weeks Ended
	April 3,			April 4,
	2011			2010
Operating activities:
Net income	$	7,021		$	6,560
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		2,921			3,112
Deferred income taxes		3,445			138
Stock compensation expense		372			500
Amortized gain on sale leaseback		(40	)		(23	)
Loss (gain) on sale of property and equipment		8			(1	)
Income taxes payable		309			3,296
Change in operating assets and liabilitie		3,650			8,661
Net cash provided by operating activities		17,686			22,243
Investing activities:
Purchases of property and equipment, net		(2,408	)		(2,231	)
Net proceeds from sale of property and equipment		—			1
Net cash used in investing activities		(2,408	)		(2,230	)
Financing activities:
Payment of capital lease obligations		(285	)		(124	)
Stock option transactions		106			11
Purchase of treasury stock		(5,431	)		—
Net cash used in financing activities		(5,610	)		(113	)
Effect of exchange rate change on cash		201			209
Net increase in cash and cash equivalents		9,869			20,109
Cash and cash equivalents:
Beginning balance		41,399			20,557
Ending balance	$	51,268		$	40,666

See Notes to Condensed Consolidated Financial Statements.

APAC CUSTOMER SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(Unaudited)

(Dollars in thousands, except per share data)

1. Basis of Presentation and Principles of Consolidation

The accompanying unaudited condensed consolidated financial statements of APAC Customer Services, Inc. and its subsidiaries (collectively, the Company) have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of a normal recurring nature) considered necessary for a fair presentation have been included. Interim consolidated financial statements are not necessarily indicative of the financial position or operating results for an entire year.

The Company’s international customer care centers use their local currency, the Philippine peso ~~and~~, the Dominican peso and the Uruguayan Peso, as their functional currency. Assets and liabilities of international customer care centers have been translated at period-end rates, and income and expenses have been translated using average exchange rates for the respective periods. All inter-company transactions and balances have been eliminated. The balance sheet at ~~April~~July 3, 2011 has been derived from the unaudited financial statements at that date and includes all of the information and notes required by GAAP for interim financial statements. These interim financial statements should be read in conjunction with the audited financial statements and notes thereto included in Item 8 of Part II of the Company’s Annual Report on Form 10-K for the fiscal year ended January 2, 2011. Copies of the Company’s filings are available on a web site maintained by the SEC at at http://www.sec.gov.

The Company operates on a thirteen week fiscal quarter that ends on the Sunday closest to ~~March~~June 3130. The Company operates on a 52/53 week fiscal year that ends on the Sunday closest to December 31.

2. New Accounting Pronouncements

Revenue Recognition

In October 2009, the Financial Accounting Standards Board (FASB) issued guidance on Accounting Standards Codification (ASC) Topic 605 “Revenue Recognition” related to revenue arrangements with multiple deliverables, which revises the criteria for separating, measuring, and allocating arrangement consideration to each deliverable in a multiple element arrangement. The guidance requires companies to allocate revenue using the relative selling price of each deliverable, which must be estimated if the company does not have a history of selling the deliverable on a stand-alone basis or third-party evidence of selling price. This guidance is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with early adoption permitted. The adoption of this guidance effective January 3, 2011, the beginning of the Company’s current fiscal year, did not have any material impact on the Company’s unaudited condensed consolidated financial statements.

Comprehensive Income

In June 2011, the FASB issued amendments to ASC Topic 220 “Comprehensive Income” related to how entities present total comprehensive income. The amendments require that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In the two-statement approach, the first statement should present total net income and its components followed consecutively by a second statement that should present total other comprehensive income, the components of other comprehensive income, and the total of comprehensive income. The amendments should be applied retrospectively and are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, with early adoption permitted. The Company is currently evaluating these amendments and does not expect them to have a material impact on its unaudited condensed consolidated financial statements.

APAC CUSTOMER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share data)

3. ~~Accrued~~Acquisition ~~Liabilities~~of Fargo, North Dakota Call Center Operations

~~The~~On ~~components~~April 29, of2011, ~~other~~the ~~current~~Company ~~accrued~~acquired certain assets and assumed certain liabilities ~~included~~of inthe Fargo, North Dakota tele-sales services business unit (“Fargo”) of Shields Enterprises International LLC (“SEI”). The acquisition includes the ~~unaudited~~contracts ~~condensed~~and related services, including ~~consolidated~~sales ~~balance~~and ~~sheets~~marketing ~~are~~and partner channel support, which SEI has historically delivered to one of the world’s leading technology companies. The acquisition is accounted for as ~~follows:~~a business under ASC Topic 805, Business Combinations.

	April 3,		January 2,
	2011		2011
Non-qualified retirement plan obligation	$	2,260	$	2,375
Accrued capital expenditures		967		1,901
Accrued severance		732		536
Accrued professional fees		703		654
Deferred rent		582		473
Accrued telecom		432		424
Accrued workers’ compensation		412		431
Other accrued liabilities		2,236		2,406
Total	$	8,324	$	9,200

The purchase price totaled $6.4 million, which represents the preliminary fair values of the assets acquired and liabilities assumed as of the acquisition date, and consisted of the following: cash of $2.2 million, and contingent consideration of $4.2 million.

4A significant portion of the acquisition purchase price includes amounts determined on the achievement of certain contingent financial performance measures. ~~Accounting~~If the Fargo related revenue for the ~~Stock-Based~~month ~~Compensation~~of August 2011 exceeds $0.3 million the Company will pay contingent consideration equal to $2.2 million multiplied by the percentage difference between actual Fargo related revenue and $0.3 million, however if the actual revenue for August 2011 exceeds $0.6 million the payment will be $2.2 million. Additional contingent consideration is paid to SEI equal to 3.5% of the Fargo related revenue for a period of sixty months after the closing date. In addition, consideration of 1% of certain new revenue generated from activities or services related to the Fargo operations is paid for a period of 24 months for any additional services engaged within sixty months of the closing date.

The ~~Company~~acquisition ~~has~~results ain ~~share-based incentive compensation plan for employees and non-employee directors, which authorizes~~ the ~~granting~~generation of ~~various~~intangible ~~equity-based~~assets ~~incentive~~relating ~~awards,~~to ~~including~~customer ~~stock options and~~relationships and non-~~vested~~competition ~~common~~agreements ~~shares~~totaling $4.8 million, ~~The~~which ~~total~~will ~~number~~be ofamortized ~~common~~over ~~shares~~their ~~authorized~~estimated useful ~~for~~lives ~~issuance~~ranging ~~under~~from ~~the~~five ~~plan is~~to 11fifteen years.~~8 million~~ In addition, ofgoodwill ~~which~~totaling $1.28 million ~~shares~~was generated ~~are~~from ~~available~~the ~~for future grants at April 3, 2011~~acquisition.

~~Total~~The ~~stock-based~~preliminary ~~compensation~~valuation ~~expense~~of ~~was~~the ~~$0.4 million~~assets acquired and ~~$0.5 million~~liabilities ~~for~~assumed ~~the~~was ~~thirteen~~determined ~~weeks~~using the ~~ended~~income ~~April 3,~~approach. ~~2011~~The ~~and~~fair ~~April 4,~~value ~~2010,~~measurement ~~respectively.~~related Asto ofthe ~~April 3,~~contingent ~~2011~~consideration liability, customer ~~there~~relationship ~~was~~intangible ~~$5.3 million of~~asset ~~unrecognized~~and ~~compensation~~non-competition ~~cost~~agreement ~~related~~is tobased ~~unvested~~upon ~~awards~~significant inputs ~~that~~not isobservable ~~expected~~in tothe bemarket ~~recognized~~and ~~over~~ thus represents a ~~weighted-average~~Level ~~period~~3 ofmeasurement ~~approximately~~as 3defined in ASC Topic 820, Fair Value Measurement.~~2 years.~~

AThe ~~summary~~results of the ~~Company’s~~Fargo ~~non-vested~~operations ~~common~~have ~~share~~been ~~grant~~included ~~activity~~in ~~during~~ the ~~thirteen~~unaudited ~~weeks~~condensed ~~ended~~consolidated ~~April~~financial statements since the date of the acquisition resulting in revenue of $1.9 3,million. Pro-forma ~~2011~~disclosures ishave ~~presented~~not ~~below:~~been included as they are not material.

	Number of Shares
Outstanding on January 2, 2011		250,000
Granted		—
Issued		—
Cancelled		—
Outstanding on April 3, 2011		250,000

The Company did not award non-vested common shares during the thirteen weeks ended April 3, 2011 and April 4, 2010.

APAC CUSTOMER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share data)

A4. ~~summary~~Accrued ~~of the Company’s stock option grant activity during the thirteen weeks ended April 3,~~Liabilities ~~2011 is presented below:~~

									Weighted Average		Aggregate
	Number of			Grant Price Range Per					Exercise Price Per		Intrinsic
	Options			Share					Share		Value
Outstanding on January 2, 2011		5,644,478		$	0.79	–	$	6.43	$	3.09
Granted		119,875			5.86	–		6.12		5.90
Exercised		(58,210	)		1.10	–		5.13		1.81
Forfeited		(186,000	)		1.49	–		5.86		5.26
Expired		(4,250	)		2.81	–		5.31		3.75
Outstanding on April 3, 2011		5,515,893		$	0.79	–	$	6.43	$	3.09	$	16,065
Exercisable on April 3, 2011		2,745,621		$	0.79	–	$	6.05	$	2.31	$	10,128

The components of other current accrued liabilities included in the unaudited condensed consolidated balance sheets are as follows:

Substantially all of the options become exercisable between one to five years after the grant date and generally expire ten years from the grant date.


	July 3,		January 2,
	2011		2011
Non-qualified retirement plan obligation	$	2,335	$	2,375
Contingent consideration obligation — SEI		2,184		—
Accrued professional fees		828		654
Deferred rent		652		473
Accrued capital expenditures		633		1,901
Accrued severance		449		536
Accrued telecom		405		424
Accrued workers’ compensation		364		431
Other accrued liabilities		2,555		2,406

Total	$	10,405	$	9,200

5. ~~Comprehensive~~Accounting ~~Income~~for Stock-Based Compensation

~~Comprehensive~~The ~~income~~Company has a share-based incentive compensation plan for employees and non-employee directors, which authorizes the ~~thirteen~~granting ~~weeks~~of ~~ended~~various ~~April 3~~equity-based incentive awards, ~~2011~~including stock options and non-vested ~~April~~common shares. The total number of common shares authorized for issuance under the plan is 11.8 4million, ~~2010~~of iswhich as1.0 million ~~follows:~~shares are available for future grants at July 3, 2011.

	Thirteen Weeks Ended
	April 3,		April 4,
	2011		2010
Net income	$	7,021	$	6,560
Foreign currency translation adjustment		262		190
Unrealized gain on derivative contracts		81		270
Total comprehensive income	$	7,364	$	7,020

Total stock-based compensation expense was $0.5 million and $0.7 million for the thirteen weeks ended July 3, 2011 and July 4, 2010, respectively. For the twenty-six weeks ended July 3, 2011 and July 4, 2010, total stock-based compensation expense was $0.8 million and $1.2 million, respectively. As of July 3, 2011, there was $5.5 million of unrecognized compensation cost related to unvested awards that is expected to be recognized over a weighted-average period of approximately 3.22 years.

6.A ~~Legal~~summary ~~Proceedings~~of the Company’s non-vested common share grant activity during the twenty-six weeks ended July 3, 2011 is presented below:

The Company is subject to other lawsuits, claims and governmental investigations arising out of the normal conduct of its business. Management does not believe that the outcome of any pending proceedings will have a material adverse effect on the Company’s business, results of operations, liquidity, or financial condition. Although management does not believe that any such proceeding will result in a material adverse effect, no assurance to that effect can be given.


	Number of Shares
Outstanding on January 2, 2011		250,000
Granted		36,000
Issued		—
Cancelled		—

Outstanding on July 3, 2011		286,000

OnThe ~~May 27,~~Company ~~2009,~~awarded ~~a purported collective/class action complaint captioned Tiffany Sharpe~~36,000 ~~et al. v. APAC Customer Services, Inc. was filed in the United States District Court for the Western District of Wisconsin. On behalf of the named plaintiff, a~~ non-~~exempt~~vested ~~call~~common ~~center~~shares ~~employee,~~during ~~and other similarly situated individuals,~~ the ~~complaint~~thirteen ~~asserted~~weeks ~~violations~~ended ~~under the Federal Fair Labor Standards Act (FLSA)~~July ~~related~~3, ~~to overtime compensation and wage records~~2011. The ~~complaint~~Company ~~also asserted~~did ~~violations~~not ~~under~~award ~~Wisconsin~~non-vested ~~Wage~~common ~~Payment~~shares ~~and~~during ~~Overtime Compensation Laws based upon~~ the ~~same alleged~~thirteen ~~facts.~~weeks ~~The~~ended complaint purported to allege claims as a nationwide collective action under federal law, as well as a class action under Wisconsin state law. The complaint sought various forms of relief, including injunctive relief, unpaid overtime wages, liquidated damages, interest, and attorneys’ fees and costs. On JanuaryJuly 84, 2010~~, the court entered an order which conditionally certified the case as a collective action under the FLSA~~.

APAC CUSTOMER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share data)

A summary of the Company’s stock option grant activity during the twenty-six weeks ended July 3, 2011 is presented below:


									Weighted Average
	Number of			Grant Price Range Per					Exercise Price Per		Aggregate
	Options			Share					Share		Intrinsic Value
Outstanding on January 2, 2011		5,644,478		$	0.79	—	$	6.43	$	3.09
Granted		287,755			5.33	—		6.12		5.83
Exercised		(124,177	)		0.92	—		5.31		2.47
Forfeited		(212,500	)		1.10	—		5.86		4.77
Expired		(11,875	)		1.55	—		5.31		3.85

Outstanding on July 3, 2011		5,583,681		$	0.79	—	$	6.43	$	3.18	$	12,381

Exercisable on July 3, 2011		2,902,085		$	0.79	—	$	6.43	$	2.32	$	8,819

Substantially all of the options become exercisable between one to five years after the grant date and generally expire ten years from the grant date.

6. Goodwill and Other Intangible Assets

As of July 3, 2011, the Company had $15.1 million of goodwill, which included $1.8 million of goodwill resulting from the April 2011 acquisition of the Fargo operations from SEI. For more information regarding the April 2011 acquisition, see Note 3. As of January 2, 2011, the Company had $13.3 million of goodwill.

The identifiable intangible assets of the Company include acquired customer relationships and internally developed software. The acquired customer relationships have a gross carrying value of $33.3 million and $28.5 million as of July 3, 2011 and January 2, 2011, respectively, and accumulated amortization of $28.6 million and $28.5 million as of July 3, 2011 and January 2, 2011, respectively. The internally developed software has a gross carrying value of $1.0 million and $0.7 million as of July 3, 2011 and January 2, 2011, respectively, and accumulated amortization of $0.3 million and $0.2 million as of July 3, 2011 and January 2, 2011, respectively. Total amortization expense related to intangible assets was $0.1 million and $0.3 million for the thirteen weeks ended July 3, 2011 and July 4, 2010, respectively, and $0.1 million and $0.9 million for the twenty-six weeks ended July 3, 2011 and July 4, 2010, respectively.

7. Comprehensive Income

Comprehensive income for the thirteen and twenty-six weeks ended July 3, 2011 and July 4, 2010 is as follows:


	Thirteen Weeks Ended						Twenty-Six Weeks Ended
	July 3,			July 4,			July 3,			July 4,
	2011			2010			2011			2010
Net income	$	5,447		$	5,329		$	12,468		$	11,889
Foreign currency translation adjustment		102			(167	)		364			23
Unrealized gain on derivative contracts		(284	)		(636	)		(203	)		(366	)

Total comprehensive income	$	5,265		$	4,526		$	12,629		$	11,546

APAC CUSTOMER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share data)

8. Legal Proceedings

On May 27, 2009, a purported collective/class action complaint captioned Tiffany Sharpe, et al. v. APAC Customer Services, Inc. was filed in the United States District Court for the Western District of Wisconsin. On behalf of the named plaintiff, a non-exempt call center employee, and other similarly situated individuals, the complaint asserted violations under the Federal Fair Labor Standards Act (FLSA) related to overtime compensation and wage records. The complaint also asserted violations under Wisconsin Wage Payment and Overtime Compensation Laws based upon the same alleged facts. The complaint purported to allege claims as a nationwide collective action under federal law, as well as a class action under Wisconsin state law. The complaint sought various forms of relief, including injunctive relief, unpaid overtime wages, liquidated damages, interest, and attorneys’ fees and costs. On January 8, 2010, the court entered an order which conditionally certified the case as a collective action under the FLSA.

In March 2010, the Company entered into an agreement to resolve the collective action. On June 16, 2010, the Court entered an order approving the resolution of all claims under the FLSA collective action. Under the terms of the agreement, the Company agreed to pay a maximum amount of $4.0 million to resolve claims by eligible class members, including payments to class members and payments for plaintiff attorneys’ fees. As a result, the Company recorded a liability of $2.4 million for the thirteen weeks ended April 4, 2010 which represented its estimate at the time of the costs to be incurred for attorneys’ fees and claims, based on expected opt-in rates for claimants in similar actions. Based on the court’s final order approving the agreement, (including setting the amount of plaintiffs’ attorneys fees) and a revised estimated rate of participation from eligible class members, the Company reduced the previously recorded liability by $0.5 million during the thirteen weeks ended October 3, 2010 to an adjusted recorded liability of $1.8 million which reflected its revised expectation of the final amount which would ultimately be paid.

On December 21, 2010, a final order of dismissal was entered by the Court triggering the Company’s payment obligations under the agreement to resolve the collective action. The final amount paid to class members who participated in the action and to plaintiff’s attorney was approximately $1.8 million.

The Company denied and continues to deny the allegations in the complaint and contends that its policies and practices regarding compensation were proper and in compliance with the law at all times. The Company denies all liability and wrongdoing in this case, but decided to settle this lawsuit in order to avoid the distraction and additional legal expenses that would otherwise be incurred.

79. Debt

AsThe ofCompany is party to a Revolving Credit and Security Agreement, as amended, (the “Credit Agreement”) with PNC Bank National Association (“PNC”), as agent, and the financial institutions from time to time parties thereto as lenders. The Credit Agreement provides the Company with a $40.0 million revolving loan facility which was originally set to expire in May 2011. On April 327, 2011, ~~there~~the ~~were~~Company noentered ~~outstanding~~into ~~borrowings~~the ~~under~~Second ~~the~~Amendment to Revolving ~~Loan~~Credit and Security Agreement (the “Second Amendment”) which amended the Credit Agreement among the Company, Agent and Lenders dated May 5, 2008. The Second Amendment extended the term of the Credit Agreement to September 30, 2011. The Company ~~had~~is ~~cash~~evaluating ~~and~~its ~~cash~~options ~~equivalents~~for a further extension of ~~$51~~the Credit Agreement.3 See “Bank Financing” under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources” in Item ~~million~~2 of this Quarterly Report on Form 10-Q.

~~As of January 3, 2011, the Company was party to a Revolving Credit and Security Agreement, as~~12 amended, (Revolving Loan Agreement) with PNC Bank National Association (PNC), as agent, and the financial institutions from time to time parties thereto as lenders. The Revolving Loan Agreement provides the Company with a $40.0 million revolving loan facility which expires in May 2011. On April 27, 2011, the Company entered into the Second Amendment to Revolving Credit and Security Agreement (Second Amendment) which amends the Revolving Credit and Security Agreement (Credit Agreement) among the Company, Agent and Lenders dated May 5, 2008. The Second Amendment extends the term of the Credit Agreement to September 30, 2011. The Company is evaluating various financing alternatives and intends to obtain a replacement facility prior to the expiration of the extended term. The Company anticipates favorable terms for a new facility; however, there can be no assurance that the Company will enter into such an arrangement.

The Company’s ability to borrow under the Revolving Loan Agreement depends on the amount of eligible accounts receivable from its clients. The Revolving Loan Agreement contains certain financial covenants including limits on the amount of capital expenditures and maintenance of a minimum fixed charge coverage ratio. Other covenants in the Revolving Loan Agreement prohibit (with limited exceptions) the Company from incurring additional indebtedness, repurchasing outstanding common shares, permitting liens, acquiring, selling or disposing of certain assets, engaging in certain mergers and acquisitions, paying dividends or making certain restricted payments. The Company obtained a waiver from PNC permitting it to repurchase common shares under the program approved by the Company’s Board of Directors.

Borrowings under the Revolving Loan Agreement incur a floating interest rate based on the LIBOR index rate or an alternate base rate which approximates the prime rate defined in the Revolving Loan Agreement subjecting the Company to interest rate risk and requires a $5.0 million interest rate hedge.

APAC CUSTOMER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share data)

The ~~Revolving~~Company’s ~~Loan~~ability to borrow under the Credit Agreement isdepends ~~secured~~on ~~principally~~the byamount aof ~~grant~~eligible accounts receivable from its clients. The Credit Agreement contains certain financial covenants including limits on the amount of capital expenditures and maintenance of a ~~first~~minimum ~~priority~~fixed ~~security~~charge ~~interest~~coverage inratio. ~~all~~Other ofcovenants in the Credit Agreement prohibit (with limited exceptions) the Company’s ~~personal~~from ~~property~~incurring additional indebtedness, ~~including~~repurchasing ~~its~~outstanding ~~accounts~~common ~~receivable.~~shares, Inpermitting ~~addition~~liens, ~~the~~acquiring, ~~Company~~selling ~~pays~~or adisposing ~~commitment~~of ~~fee~~certain onassets, ~~the~~engaging ~~unused~~in ~~portion~~certain ofmergers ~~the~~and acquisitions, ~~Revolving~~paying ~~Loan~~dividends ~~Agreement~~or making certain restricted payments. The Company obtained a aswaiver ~~well~~from asPNC ~~fees~~permitting onit ~~outstanding~~to ~~letters~~repurchase common shares under the program approved by the Company’s Board of ~~credit~~Directors.

~~The~~Borrowings ~~Company~~under ~~was~~the inCredit ~~compliance~~Agreement ~~with~~incur ~~its~~a ~~financial~~floating ~~covenants~~interest asrate ofbased ~~April 3,~~on ~~2011.~~the AtLIBOR ~~April 3,~~index ~~2011,~~rate ~~the~~or ~~Company~~an ~~had~~alternate ~~approximately~~base ~~$36.9 million~~rate inwhich ~~undrawn~~approximates ~~borrowing~~the ~~capacity~~prime ~~under~~rate ~~its~~defined ~~Revolving~~in ~~Loan~~ the Credit Agreement, subjecting ~~based~~the ~~upon~~Company ~~borrowing~~to ~~base~~interest ~~calculations~~rate risk and requires a $5.0 million interest rate hedge.

8.As ~~Severance~~of July 3, 2011, there were no outstanding borrowings under the Credit Agreement and ~~Other~~the ~~Charges~~Company had cash and cash equivalents of $49.7 million.

The ~~Company~~Credit ~~recorded~~Agreement ~~$0.4 million~~is insecured ~~severance~~principally ~~and~~by ~~other~~a ~~charges~~grant ~~for~~of ~~the~~a ~~thirteen~~first ~~weeks~~priority ~~ended~~security ~~April 3,~~interest ~~2011~~in ~~related~~all of to the ~~elimination~~Company’s ofpersonal ~~certain~~property, ~~management~~including ~~and~~its ~~administrative~~accounts ~~positions~~receivable. ~~Cash payments~~In ofaddition, ~~$0.1 million~~the ~~for~~Company pays ~~these~~a ~~severance~~commitment ~~and~~fee ~~other~~on ~~charges~~the ~~have~~unused ~~been~~portion ~~made~~of ~~through~~the ~~April 3,~~Credit ~~2011 and~~Agreement ~~remaining~~as ~~cash~~well ~~payments~~as offees ~~$0.3 million~~on ~~are~~outstanding letters ~~payable~~of ~~through August 2011~~credit.

~~Cash~~The ~~payments~~Company ofwas ~~$0.2 million~~in ~~for~~compliance ~~severance~~with ~~and~~its ~~other~~financial ~~charges~~covenants ~~related~~as toof ~~the September~~July ~~2010 resignation~~3, of2011. ~~Michael~~At ~~Marrow~~July 3, 2011, the Company’s ~~former~~had ~~President~~approximately ~~and~~$37.8 million ~~Chief Executive Officer and other positions~~ in ~~2010~~undrawn ~~have~~borrowing ~~been~~capacity ~~made~~under ~~through~~its ~~April 3~~Credit Agreement, ~~2011~~based ~~and~~upon ~~remaining~~borrowing ~~cash~~base ~~payments of $0~~calculations.~~7 million~~ ~~are payable through December 2012.~~

910. ~~Income~~Severance ~~Taxes~~and Other Charges

The Company recorded less than $0.1 million and $0.5 million in severance and other charges for the thirteen and twenty-six weeks ended July 3, 2011, respectively, related to the elimination of certain management and administrative positions. Cash payments of $0.4 million for these severance and other charges have been made through July 3, 2011 and remaining cash payments of $0.1 million are payable through August 2011.

Cash payments of $0.8 million for severance and other charges related to the September 2010 resignation of Michael Marrow, the Company’s former President and Chief Executive Officer and other positions in 2010 have been made through July 3, 2011 and remaining cash payments of $0.6 million are payable through December 2012.

11. Income Taxes

The Company accounts for income taxes using the asset and liability method. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. A valuation allowance is recorded when management believes it is more likely than not that some portion or all of the deferred tax assets will not be realized in the future. The Company records a reserve for tax contingencies unless it believes it is more likely than not that the deductions giving rise to these contingencies will be sustained if challenged by taxing authorities. Tax contingencies are not material to the financial statements.

Income tax expense for the thirteen and twenty-six weeks ended ~~April~~July 3, 2011 was $32.79 million and $6.6 million, respectively. This results in a 34.5% effective income tax rate for the thirteen and twenty-six weeks ended ~~April~~July 3, 2011, which is lower than the statutory rate due to the generation of tax credits. Income tax expense for the thirteen and twenty-six weeks ended ~~April~~July 4, 2010 was $2.8 million and $36.53 million, ~~which~~respectively. This results in a 34.5% effective income tax rate for ~~the~~ the thirteen and twenty-six weeks ended ~~April~~July 4, 2010, which is lower than the statutory rate due to the generation of tax credits.

1213

APAC CUSTOMER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share data)

1012. Earnings Per Share

Basic earnings per share are computed by dividing the Company’s net income by the weighted average number of common shares outstanding. Diluted earnings per share are computed by dividing the Company’s net income by the weighted average number of shares plus the effect of dilutive potential common shares outstanding and non-vested common shares using the treasury stock method. The following table sets forth the computation of basic and diluted earnings per share for the thirteen and twenty-six weeks ended ~~April~~July 3, 2011 and ~~April~~July 4, 2010:

	Thirteen Weeks Ended				Twenty-Six Weeks Ended
	April 3,		April 4,
	July 3,		July 4,		July 3,		July 4,
	2011		2010		2011		2010
Net income	$	7,021	$	6,560
	(In thousands, except earnings per share)
Shares used in basic per share calculation		51,797		52,309
Net income	$	5,447	$	5,329	$	12,468	$	11,889
Effects of dilutive securities:
Shares used in basic per share calculation		51,052		52,476		51,425		52,393
Stock options		1,695		2,312
Effects of dilutive securities
Non-vested stock		36		9
Stock options		1,639		2,355		1,666		2,348
Shares used in diluted per share calculation		53,528		54,630
Non-vested stock		44		—		40		4
Net income per share:
Shares used in diluted per share calculation		52,735		54,831		53,131		54,745
Basic	$	0.14	$	0.13
Net income per share:
Diluted	$	0.13	$	0.12
Basic	$	0.11	$	0.10	$	0.24	$	0.23
Diluted	$	0.10	$	0.10	$	0.23	$	0.22

For the thirteen and twenty-six weeks ended ~~April~~July 3, 2011, options to purchase 1.89 million and 1.8 million shares of common stock , respectively, were outstanding, but not included in the computation of diluted net income per share because the effect would have been anti-dilutive. For the thirteen and twenty-six weeks ended ~~April~~July 4, 2010, options to purchase 01.92 million and 1.0 million shares of common stock, respectively, were outstanding, but not included in the computation of diluted net income per share because the effect would have been anti-dilutive.

1113. Fair Value Measurements

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. The accounting standards establish a fair value hierarchy, which prioritizes the inputs used in measuring fair value into three broad levels as follows:

• 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.

~~• Level 2 — Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly.~~14

• Level 3 — Unobservable inputs based on the Company’s own assumptions.

APAC CUSTOMER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share data)

The following table presents the fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis as of ~~April~~July 3, 2011:

	Fair Value Measurements as of April 3, 2011
	Fair Value Measurements as of
	July 3, 2011
	Level 1		Level 2		Level 3
Assets:
Cash equivalents(1)	$	5143,~~073~~203	$	—	$	—
Non-qualified retirement plan(2)		2,~~260~~335		—		—
Foreign currency contracts(3)		—		1,234		—
Foreign currency(3)		—		815		—
Non-current investments(4)		1,~~199~~215		—		—
Liabilities:
Non-qualified retirement plan obligation(2)	$	2,260	$	—	$	—
Contingent consideration obligation — SEI (5)	$	—	$	—	$	4,237
Non-qualified retirement plan obligation(2)		2,335		—		—
Foreign currency contracts(3)		—		38		—

(1)		Cash equivalents: The carrying amount of these items approximates fair value at period end.
(2)		Non-qualified retirement plan: The Company maintains a non-qualified retirement plan (“Select Plan”) for highly compensated employees who are limited in the amount of contributions that they can make in the Company’s 401K plan. As of April 3, 2011, the fair value of investments in the Select Plan totaled $2.3 million and is reflected on the Company’s balance sheet in other current assets. The offsetting obligation to employees participating in the Select Plan, which will always equal the fair value of the investments, are recorded on the Company’s balance sheet in other current liabilities.
(3)		Foreign currency contracts: The carrying amount of these items is based on the market valuation approach which is provided by the counter-party institutions and uses the closing or mid-market rate and forward points obtained from external sources on the date of valuation. There are no guaranteed selling prices for these forward currency contracts.
(4)		Non-current investments: The carrying amount of these items, which represent Philippine treasury bills, approximates fair value as of April 3, 2011 and is recorded as a component of other assets on the Company’s balance sheet.

(1) Cash equivalents: The carrying amount of these items approximates fair value at period end.

(2) Non-qualified retirement plan: The Company maintains a non-qualified retirement plan (“Select Plan”) for highly compensated employees who are limited in the amount of contributions that they can make in the Company’s 401K plan. As of July 3, 2011, the fair value of investments in the Select Plan totaled $2.3 million and is reflected on the Company’s balance sheet in other current assets. The offsetting obligation to employees participating in the Select Plan, which will always equal the fair value of the investments, are recorded on the Company’s balance sheet in other current liabilities.

(3) Foreign currency contracts: The carrying amount of these items is based on the market valuation approach which is provided by the counter-party institutions and uses the closing or mid-market rate and forward points obtained from external sources on the date of valuation. There are no guaranteed selling prices for these forward currency contracts.

(4) Non-current investments: The carrying amount of these items, which represent Philippine treasury bills, approximates fair value as of July 3, 2011 and is recorded as a component of other assets on the Company’s balance sheet.

(5) Contingent consideration obligation — SEI: The carrying amount of this item represents estimated future payments related to the Company’s acquisition of the Fargo operations from SEI. The fair value was determined using the income approach. The contingent consideration for the Fargo acquisition was preliminarily recorded at $4.2 million at the acquisition date and the liability did not change by a material amount from the date of acquisition to July 3, 2011.

The carrying amounts of accounts receivable, accounts payable and short-term debt approximate fair value.

There were no transfers of assets or liabilities between Level 1 and Level 2 during the thirteen weeks ended ~~April~~July 3, 2011.

~~12. Derivative Instruments~~15

APAC CUSTOMER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share data)

14. Derivative Instruments

The Company uses forward contracts to mitigate foreign currency risk. The derivatives are designated as cash flow hedges to the extent that the instruments qualify for accounting as a hedging instrument; therefore, the effective portion of gains and losses that result from changes in fair value of the derivative instruments are recorded in accumulated other comprehensive income (OCI) until the hedged transaction affects income, at which time gains and/or losses are realized. The Company expects these amounts to be reclassified into earnings over the next eighteen months. If the instrument does not qualify for accounting as a hedge, the change in the value of the instrument during the reporting period is recorded immediately to earnings. The Company assesses hedge effectiveness each reporting period.

The objective of the foreign currency hedge contract is to mitigate the variability in cash flows and expenses over the period of the hedge contracts due to the foreign currency risk associated with the repayment of the intercompany accounts payable from the U.S. operations to the Philippines representing the Philippine’s share of revenue. The Company currently engages in forward contracts with three major financial credit institutions. Forward contracts to purchase 1,~~613~~503 million Philippine pesos at a U.S. dollar notional of $3633.07 million were outstanding as of ~~April~~July 3, 2011.

14Each contract is designated to a hedged item which is settled periodically. The hedged item represents the change in the U.S. dollar cash flow necessary to settle the accounts payable balance at periodic intervals over the next 18 months. The settlement timing corresponds with the payroll and rent cycles in the Philippines. No ineffectiveness is anticipated because the notional amount of the contracts is no more than 95% of the anticipated payable balance and declines steadily over the course of the next eighteen months. Also, the maturity date of the forward contract coincides with the timing of the effective repayment of the intercompany payable. The Company had no gain or loss recognized in income related to the ineffectiveness for the thirteen and twenty-six weeks ended July 3, 2011 and July 4, 2010.

At July 3, 2011 and January 2, 2011, the fair value carrying amount of the Company’s derivative instruments was recorded as follows:


	Asset Derivatives
		Fair Value
	Balance Sheet	July 3,		January 2,
	Location	2011		2011
Derivatives designated as hedging instruments :
Foreign currency contracts	Other Current Assets	$	815	$	1,109

Total derivatives		$	815	$	1,109


	Liability Derivatives
		Fair Value
	Balance Sheet	July 3,		January 2,
	Location	2011		2011
Derivatives designated as hedging instruments :
Foreign currency contracts	Accrued Liabilities	$	38	$	22

Total derivatives		$	38	$	22

APAC CUSTOMER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share data)

~~Each contract is designated to a hedged item which is settled periodically.~~ The ~~hedged~~effect item represents the change in the U.S. dollar cash flow necessary to settle the accounts payable balance at periodic intervals over the next 18 months. The settlement timing corresponds with the payroll and rent cycles in the Philippines. No ineffectiveness is anticipated because the notional amount of ~~the~~derivative ~~contracts~~instruments ison ~~no more than 95% of~~ the ~~anticipated~~unaudited ~~payable~~condensed ~~balance~~consolidated ~~and~~statement ~~declines steadily over the course~~ of ~~the next eighteen months. Also, the maturity date of the forward contract coincides~~ ~~with~~operations ~~the timing of the effective repayment of the intercompany payable. The Company had no gain or loss recognized in income related to the ineffectiveness~~ for the thirteen and twenty-six weeks ended ~~April~~July 3, 2011 and ~~April~~July 4, 2010. was as follows:

At April 3, 2011 and January 2, 2011, the fair value carrying amount of the Company’s derivative instruments was recorded as follows:

Amount of Gain

Gain (Loss) Recognized in Income on

(Loss) Recognized in

Gain (Loss) Reclassified from

Derivatives (Ineffective Portion and

Derivatives

OCI on Derivatives

Accumulated OCI into Income

Amount Excluded from Effectiveness

Designated as

(Effective Portion)

Testing)

Cash Flow

Thirteen Weeks Ended

Hedging

July 3,

July 4,

July 3,

July 4,

July 3,

July 4,

Instruments

2011

2010

Location

2011

2010

Location

2011

2010

Foreign currency contracts

(284

)

(636

)

Cost of Services

415

392

—

	Asset Derivatives
	Amount of Gain													Gain (Loss) Recognized in Income on
			Fair Value
	(Loss) Recognized in								Gain (Loss) Reclassified from					Derivatives (Ineffective Portion and
	Balance Sheet		April 3,				January 2,
Derivatives	OCI on Derivatives								Accumulated OCI into Income					Amount Excluded from Effectiveness
	Location		2011				2011
Designated as	(Effective Portion)								(Effective Portion)					Testing)
Derivatives designated as hedging instruments :
Cash Flow	Twenty-Six Weeks Ended
Foreign currency contracts	Other Current Assets		$	1,234			$	1,109
Hedging	July 3,				July 4,					July 3,		July 4,			July 3,		July 4,
Total derivatives			$	1,234			$	1,109
Instruments	2011				2010				Location	2011		2010		Location	2011		2010
	Liability Derivatives
Foreign currency contracts	$	(203	)		$	(366	)		Cost of Services	$	664	$	642	na	$	—	$	—
			Fair Value
	Balance Sheet		April 3,				January 2,
	Location		2011				2011
Derivatives designated as hedging instruments :
Foreign currency contracts	Accrued Liabilities		$	—			$	22
Total derivatives			$	—			$	22

~~The~~As ~~effect~~ of ~~derivative~~July 3, ~~instruments~~2011, on$0.7 million ~~the~~of ~~unaudited~~unrealized ~~condensed~~gains ~~consolidated~~included ~~statement~~in ~~of operations~~accumulated ~~for~~OCI ~~the~~relate ~~thirteen~~to contracts ~~weeks~~that ~~ended~~may ~~April 3,~~impact ~~2011~~earnings ~~and~~during ~~April 4,~~the ~~2010~~next ~~was as follows:~~12 months.

Amount of Gain (Loss)

Recognized in OCI on

Gain (Loss) Reclassified from

Derivatives Designated

Derivatives (Effective

Accumulated OCI into Income

Portion)

(Effective Portion)

Cash Flow

Thirteen Weeks Ended

Hedging

April 3,

April 4,

April 3,

April 4,

Instruments

2011

2010

Location

2011

2010

Foreign currency contracts

270

Cost of Services

249

251

15. Subsequent Events

AsOn ~~of April~~July 36, 2011, the Company and One Equity Partners (“One Equity”) the private investment arm of JPMorgan Chase & Co, entered into a definitive merger agreement under which Blackhawk Acquisition Parent, LLC, (“Blackhawk”), an affiliate of One Equity will acquire 100% of the outstanding shares of the Company, through an all-cash transaction with an aggregate equity value of approximately $~~1.1~~470 million. The agreement provides for the merger of ~~unrealized~~the ~~gains~~Company ~~included~~with inBlackhawk ~~accumulated~~Merger ~~OCI~~Sub, ~~relate~~Inc. (“Merger toSub”), a wholly owned subsidiary of Blackhawk. On July 29, 2011, the Company received ~~contracts~~notice ~~that~~of ~~may~~early ~~impact~~termination ~~earnings~~of ~~during~~the waiting period under the ~~next~~Hart-Scott-Rodino ~~12 months~~Act of 1976 (as amended). The transaction is expected to close prior to the end of 2011, subject to the satisfaction of customary closing conditions, including, without limitation, approval of the Company’s shareholders.

13On or about July 15, 2011, a purported class action complaint was filed against the Company. ~~Subsequent~~The Complaint ~~Events~~was filed in the Circuit Court of the Nineteenth Judicial Circuit, Lake County, Illinois against the Company, all of its directors and One Equity, Blackhawk and Merger Sub. The complaint alleges that the directors breached their fiduciary duties as it relates to the Merger. The complaint also alleges that One Equity, Blackhawk and Merger Sub aided and abetted the directors in breaching their fiduciary duties. The Company believes that the complaint is wholly without merit and intends to vigorously defend this action.

~~On May 1, 2011, the Company acquired a portion of the tele-sales services business unit of SEI,~~17 ~~LLC. The acquisition includes the contracts and related services which SEI has historically delivered to one of the world’s leading technology companies.~~


Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations

Our management’s discussion and analysis of financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and related notes thereto appearing elsewhere in this report and our audited consolidated financial statements which appear in Item 8 of Part II of our Annual Report on Form 10-K for the fiscal year ended January 2, 2011. Our management’s discussion and analysis contains “forward-looking statements”. All forward-looking statements are inherently uncertain as they are based on various expectations and assumptions about future events and are subject to known and unknown risks and uncertainties, and other factors that may cause our actual results, performance, or achievements to be materially different from those expressed or implied by the forward-looking statements. See “Forward Looking Statements and Factors That May Affect Future Results” on page 3 and page 4 of this Quarterly Report on Form 10-Q and Item 1A in Part II of this Quarterly Report on Form 10-Q.

Overview

We are a leading provider of customer care services and solutions to market leaders in the healthcare, communications, business services, media & publishing, travel & entertainment, technology and financial services industries. Our services are provided through customer care centers staffed with skilled customer service representatives in domestic, international, and client-owned locations. As of ~~April~~July 3, 2011, we operated 1517 customer care centers; eight domestic, two domestic client-owned facilities, ~~four~~five international centers located in the Philippines, ~~and~~ one international ~~facility~~center located in the Dominican Republic. ~~The~~and ~~lease~~one ~~for~~international ~~our~~ center inlocated ~~Montevideo,~~in Uruguay. ~~was~~Additionally, ~~signed in 2010 and~~ we ~~expect~~provide services to ~~begin~~one ~~operations in the second quarter~~ of ~~2011. The lease for~~ our ~~newest~~clients ~~center~~through ina ~~the Philippines was signed in April 2011 and we expect to begin~~co-location ~~operations~~arrangement ~~late~~at inone of the ~~second~~client’s ~~quarter~~domestic ~~of 2011~~facilities. As of ~~April~~July 3, 2011, our domestic ~~operations~~ operations consisted of approximately 6,~~300~~500 workstations and our international operations consisted of of approximately 4,700 workstations.

During 2008, we restructured our operations resulting in the reduction of overhead costs and headcount, refinanced our debt, and took steps to improve our operating efficiencies. We realized an immediate impact from these and other cost savings initiatives resulting in us being profitable on a full year basis for fiscal year 2008. In 2009, we expanded the sales organization and focused on expanding our service offerings and client base. In 2010, we continued to expand our service offerings in off-shore locations and increased our capital spending positioning us for future growth.

In September 2010, Kevin Keleghan joined the Company as President and Chief Executive Officer after serving on our Board of Directors during the previous year. Mr. Keleghan brings broad-based experience and strong strategic capabilities to lead us into the future. He has more than 25 years of experience in financial and business services, call center management, and outsourcing, along with a strong track record of operational leadership and of strategically building businesses.

In ~~the~~April 2011, ~~first~~we ~~quarter~~acquired certain assets and assumed certain liabilities of ~~2011~~the Fargo, ~~our~~North Dakota ~~revenue~~tele-sales ~~increased~~services ~~3.3%~~business tounit ~~$88.0 million~~(“Fargo”) asof ~~compared~~Shields toEnterprises ~~$85.3~~International LLC ~~million~~(“SEI”). ~~for~~The acquisition includes the ~~first~~contracts ~~fiscal~~and ~~quarter~~related services which SEI has historically delivered to one of ~~2010~~the world’s leading technology companies. ~~Our~~The ~~gross~~acquisition ~~profit~~date preliminary fair value of the consideration transferred totaled $196.54 million, ~~generating~~which aconsisted of the following: ~~margin~~cash of 22$2.~~1%.~~2 million ~~Net~~and ~~income~~contingent ~~rose~~consideration toof $74.02 million. For more information regarding the acquisition, asee ~~7.0%~~Note ~~increase~~3 asof ~~compared~~the Notes to ~~$6.6 million~~Condensed Consolidated Financial Statements in Item 1 ~~the~~of ~~prior~~this ~~year~~Quarterly ~~fiscal~~Report ~~quarter~~on Form 10-Q.

16In the first six months of 2011, our revenue increased 4.9% to $170.5 million as compared to $162.6 million for the first six months of 2010. Our gross profit totaled $36.0 million, generating a margin of 21.1%. Net income rose to $12.5 million, a 4.9% increase as compared to $11.9 million in the comparable prior year period.

The results of the Fargo operations have been included in the unaudited condensed consolidated financial statements since the date of the acquisition resulting in revenue of $1.9 million.

On July 6, 2011, the Company and One Equity Partners (“One Equity”) the private investment arm of JPMorgan Chase & Co, entered into a definitive merger agreement under which Blackhawk Acquisition Parent, LLC, (“Blackhawk”), an affiliate of One Equity will acquire 100% of the outstanding shares of the Company, through an all-cash transaction with an aggregate equity value of approximately $470 million. The agreement provides for the merger of the Company with Blackhawk Merger Sub, Inc. (“Merger Sub”), a wholly owned subsidiary of Blackhawk. On July 29, 2011, the Company received notice of early termination of the waiting period under the Hart-Scott-Rodino Act of 1976 (as amended). The transaction is expected to close prior to the end of 2011, subject to the satisfaction of customary closing conditions, including, without limitation, approval of the Company’s shareholders.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires us to make estimates and judgments that affect the amounts reported in the unaudited condensed consolidated financial statements and accompanying notes. Certain of our accounting policies are considered critical, due to the level of subjectivity and judgment necessary in applying these policies and because the impact of these estimates and assumptions on our financial condition and operating performance may be material. On an ongoing basis, we evaluate our estimates and judgments in these areas based on historic experience and other relevant factors. The estimates as of the date of the financial statements reflect our best judgment giving consideration to all currently available facts and circumstances. We believe our estimates and judgments are reasonable, however, actual results and the timing of the recognition of such amounts could differ from those estimates.

We have used methodologies that are consistent from year to year in all material respects. We have identified the following accounting policies and estimates that we believe are most critical in the preparation of our unaudited condensed consolidated financial statements: accounting for derivatives, allowance for doubtful accounts, accounting for employee benefits, revenue recognition, intangible assets, accounting for stock-based compensation and income taxes. For details concerning these critical accounting policies and estimates see Item 7 of Part II of our Annual Report on Form 10-K for the fiscal year ended January 2, 2011, under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates” and Note 3 to our audited consolidated financial statements which appears in Item 8 of Part II of our Annual Report on Form 10-K for the fiscal year ended January 2, 2011. Any deviation from these policies or estimates could have a material impact on our unaudited condensed consolidated financial statements.

1719

Results of Operations

The following table sets forth selected information about our results of operations for the thirteen and twenty-six weeks ended ~~April~~July 3, 2011 and ~~April~~July 4, 2010, respectively. Certain additional components of cost of services have been included as we believe they would enhance an understanding of our results of operations. All amounts in the table below are presented in thousands.

	Thirteen Weeks Ended									Twenty-Six Weeks Ended
	April 3,			April 4,			Fav (Unfav)
	July 3,			July 4,			Fav (Unfav)			July 3,			July 4,			Fav (Unfav)
	2011			2010%			% Change			2011			2010%			Change
Net Revenue	$	8882,~~043~~494		$	8577,~~254~~386			36.36	%	$	170,537		$	162,640			4.9	%
Cost of Services:
Direct labor		4643,~~171~~558			4541,~~202~~170			(25.18	)		89,729			86,372			(3.9	)
Other facility expenses		22,~~373~~400			19,~~606~~839			(1412.19	)		44,773			39,445			(13.5	)
Total cost of services		6865,~~544~~958			6461,~~808~~009			(5.8.1	)		134,502			125,817			(6.9	)
Percentage of revenue		7780.90	%		7678.08	%		—			78.9	%		77.4	%		—
Gross profit		1916,~~499~~536			2016,~~446~~377			(41.60	)		36,035			36,823			(2.1	)
Gross profit margin		2220.10	%		2421.02	%		—			21.1	%		22.6	%		—
Operating Expenses:
Selling, general and administrative expenses		8,301			8,146			(1.9	)
Selling, general & administrative expenses		8,086			8,116			0.4			16,387			16,262			(0.8	)
Legal settlement		21			~~2,400~~7			*85.7			3			2,407			*
Severance and other charges		425			1			*
Severance and other charges (reversals)		71			(13	)		*			496			(12	)		*
Total operating expenses		8,~~728~~158			108,~~547~~110			17(0.26	)		16,886			18,657			9.5
Operating income		108,~~771~~378			98,~~899~~267			81.83			19,149			18,166			5.4
Other (income) expense, net		20			(109	)		*
Other expense, net		34			139			75.5			54			30			(80.0	)
Interest (income) expense, net		3228			(87	)		*(500.0	)		60			(15	)		(500.0	)
Income before income taxes		108,~~719~~316			108,~~016~~135			72.02			19,035			18,151			4.9
Income tax expense		32,~~698~~869			32,~~456~~806			(72.02	)		6,567			6,262			(4.9	)
Net income	$	75,~~021~~447		$	65,~~560~~329			72.02	%	$	12,468		$	11,889			4.9	%


*		Means that the percentage change is not meaningful

Non-GAAP Financial Measures

To supplement our unaudited condensed consolidated financial statements presented in accordance with GAAP, we present EBITDA and adjusted EBITDA, which are defined as non-GAAP financial measures. The presentation of these non-GAAP financial measures is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. The items excluded from these non-GAAP financial measures are significant components of our financial statements and must be considered in performing a comprehensive analysis of our overall financial results.

We believe these non-GAAP financial measures provide meaningful supplemental information and are useful in understanding our results of operations and analyzing trends because they excludes certain charges that are not part of our ordinary business operations.

EBITDA and adjusted EBITDA are measures used by our lenders, investors and analysts to evaluate our financial performance and our ability to pay interest and repay debt. These measures are also indicative of our ability to fund the capital investments necessary for our continued growth. We use these measures, together with our GAAP financial metrics, to assess our financial performance, allocate resources, measure our performance against debt covenants and evaluate our overall progress towards meeting our long-term financial objectives.

1820

We believe that these non-GAAP financial measures are useful to investors and analysts in allowing for greater transparency with respect to the supplemental information used by us in our financial and operational decision making. In addition, we believe investors, analysts and lenders benefit from referring to EBITDA and adjusted EBITDA when assessing our performance and expectations of our future performance. However, this information should not be used as a substitute for our GAAP financial information; rather it should be used in conjunction with financial statement information contained in our unaudited condensed consolidated financial statements presented in accordance with GAAP.

Our calculation of EBITDA and adjusted EBITDA may not be consistent with calculations of similar measures used by other companies. The accompanying notes have more details on the GAAP financial measure that is most directly comparable to our non-GAAP financial measure and the related reconciliation between these financial measures.

	Thirteen Weeks Ended (1)							Twenty-Six Weeks Ended
	April 3,		April 4,		Fav (Unfav)
	July 3,		July 4,		Fav (Unfav)			July 3,		July 4,		Fav (Unfav)
	2011		2010%		% Change			2011		2010%		Change
	(Dollars in thousands except statistical data and
	(Dollars in thousands except statistical data and notes)
	notes)
EBITDA (2)	$	11,323	$	11,087		2.1	%	$	24,995	$	24,207		3.3	%
EBITDA (2)	$	13,672	$	13,120		4.2	%
Adjusted EBITDA (2)	$	11,912	$	11,387		4.6	%	$	26,011	$	26,908		(3.3	)%
Adjusted EBITDA (2)	$	14,099	$	15,521		(9.2	)%
Statistical information:
Statistical information:
Number of customer care centers:
Number of customer care centers:
Domestic (3)		10		10					10		10
Domestic		10		10
International		7		5					7		5
International		5		5
Total		17		15					17		15
Total		15		15
Number of workstations, end of period:
Number of workstations, end of period:
Domestic		6,510		6,267					6,510		6,267
Domestic		6,296		6,260
International		4,710		4,222					4,710		4,222
International		4,680		4,201
Total		11,220		10,489					11,220		10,489
Total		10,976		10,461

Notes to Non-GAAP Financial Measures
(1)		We operate on a thirteen-week fiscal quarter that ends on the Sunday closest to March 31.
(2)		We define EBITDA as net income plus income tax expense, depreciation and amortization, and interest expense. We define adjusted EBITDA as EBITDA adjusted for legal settlement expense and severance and other charges.

Notes to Non-GAAP Financial Measures

(1) We operate on a thirteen-week fiscal quarter that ends on the Sunday closest to June 30.

(2) We define EBITDA as net income plus income tax expense, depreciation and amortization, and interest expense. We define adjusted EBITDA as EBITDA adjusted for legal settlement expense, severance and other charges, transaction-related costs and accelerated stock compensation expense.

EBITDA and adjusted EBITDA are not intended to be considered in isolation or used as a substitute for net income or cash flow from operations data presented in accordance with GAAP or as a measure of liquidity. The items excluded from EBITDA and adjusted EBITDA are significant components of our statements of operations and must be considered in performing a comprehensive assessment of our overall financial results.

1921

EBITDA and adjusted EBITDA can be reconciled to net income, which we believe to be the most directly comparable financial measure calculated and presented in accordance with GAAP, as follows:

	Thirteen Weeks Ended					Twenty-Six Weeks Ended
	April 3,		April 4,
	July 3,		July 4,			July 3,		July 4,
	2011		2010			2011		2010
	(Dollars in thousands)
Net income	$	75,~~021~~447	$	65,~~560~~329		$	12,468	$	11,889
Interest (income) expense, net		3228		(87	)		60		(15	)
Income tax expense		32,~~698~~869		32,~~456~~806			6,567		6,262
Depreciation and amortization		2,~~921~~979		32,~~112~~959			5,900		6,071
EBITDA	$	1311,~~672~~323	$	1311,~~120~~087		$	24,995	$	24,207
Legal Settlement		21		~~2,400~~7			3		2,407
Severance and other charges		425		1
Severance and other charges (reversals)		71		(13	)		496		(12	)
Adjusted EBITDA	$	14,099	$	15,521
Transaction-related costs		517		—			517		—
Accelerated stock compensation expense		—		306			—		306
Adjusted EBITDA	$	11,912	$	11,387		$	26,011	$	26,908

20 (3) We provide services to one of our clients through a co-location arrangement at one of the client’s domestic facilities.

Comparison of Results of Operations for the Thirteen Weeks Ended ~~April~~July 3, 2011 and ~~April~~July 4, 2010

Net revenue increased 36.36% to $8882.05 million for the thirteen weeks ended ~~April~~July 3, 2011, as compared to $8577.34 million for the thirteen weeks ended ~~April~~July 4, 2010. The increase in revenue of $25.71 million is primarily driven by growth from new and existing clients of $75.37 million in the media & publishing vertical, $23.01 million in the technology vertical, of which $1.79 million relates to the Fargo operations, $1.6 million in the business services vertical and $01.94 million of other services, partially offset by a $76.17 million decrease in the communications vertical ~~and a $2~~.~~1 million decrease in the healthcare vertical associated with a~~ ~~client who exited this vertical in the fourth quarter of 2010.~~

Cost of services increased $35.70 million, or 5.8.1%, to $6866.50 million for the thirteen weeks ended ~~April~~July 3, 2011, from $6461.80 million for the thirteen weeks ended ~~April~~July 4, 2010. Direct labor ~~increased~~ increased $12.04 million, or 25.18%, primarily driven by increased volume in the off-shore media & ~~publishing~~ publishing vertical, increased volume in the domestic technology vertical, due in part to the addition of the Fargo operations and increased volume in the domestic business services verticals, partially offset ~~and~~by decreased volume in the domestic telecommunications vertical and decreased international efficiencies. Total facility and other costs increased $2.76 million, or 14 12.19%, ~~primarily~~ due to $12.31 million of increased facility costs associated with increased growth at our customer care ~~center~~centers in the Philippines and the Dominican Republic, ~~expansion at our Leyte, Philippines facility and~~ the build-out of our customer care center in ~~Montevideo~~Uruguay, ~~Uruguay~~the addition of the Fargo operations and increased domestic maintenance costs. Other facility expenses increased $10.45 million due to $0.43 million of increased technology costs, $0.31 million of salaries and wages associated with increased operations support and $0.71 million of other facility expenses. Cost of services as a percentage of revenue increased to 7780.90% for the thirteen weeks ended ~~April~~July 3, 2011, as compared to 7678.08% for the thirteen weeks ended ~~April~~July 4, 2010, primarily due to decreased ~~increased~~volume ~~facility~~in ~~and~~the ~~other~~domestic ~~costs~~telecommunications vertical, an increase in domestic wage rates and benefits, the build-out of the Uruguay customer care center, decreased ~~domestic~~international efficiencies and increased domestic maintenance costs.

Gross profit ~~decreased~~increased $0.91 million, or ~~4.6~~1%, to $1916.5 million for the thirteen weeks ended ~~April~~ July 3, 2011, as compared to $2016.4 million for the thirteen weeks ended ~~April~~July 4, 2010., ~~Increased~~as ~~volume in~~a ~~the~~result ~~off-shore~~of ~~media & publishing vertical and increased volume in~~ the ~~domestic technology and~~ ~~business~~increased ~~services~~revenue ~~verticals~~being ~~was more than~~ offset by increased ~~facility~~direct ~~and~~labor ~~other costs related to growth~~ and ~~expansion~~facility ~~in our off-shore facilities and decreased domestic efficiencies~~costs. Gross profit ~~margin~~ margin decreased from 2421.02% for the thirteen weeks ended ~~April~~July 4, 2010, ~~as compared~~ to 2220.10% for the thirteen weeks ended ~~April~~July 3, 2011, driven by ~~increased~~decreased ~~facility~~volume in the domestic telecommunications vertical, an increase in domestic wage rates and ~~other~~benefits, the build-out of the Uruguay customer care center, decreased international efficiencies and increased domestic maintenance costs.

Selling, general and administrative expenses were flat at $8.31 million for the thirteen weeks ended ~~April~~ July 3, 2011, aas ~~$0.2 million~~compared ~~increase~~to ~~from $8.1 million for~~ the thirteen weeks ended ~~April~~July 4, 2010., ~~The increase~~as isincreases ~~primarily~~in ~~associated~~professional fees ~~with~~of a $0.25 million ~~increase~~associated inwith ~~compensation~~the ~~and~~Fargo ~~benefits,~~acquisition ~~a $0.2 million increase in travel~~ and ~~entertainment~~pending ~~expense,~~merger awith ~~$0.2 million~~Blackhawk ~~increase in technology expense~~are ~~and~~offset by a $0.2 million ~~increase~~decrease in other ~~operating~~professional ~~expenses,~~fees ~~partially~~and ~~offset by~~ a $0.63 million decrease in costs associated with the final amortization of intangible assets recorded in 2010.

~~Legal~~Severance ~~settlement~~and ~~expense~~other ~~was~~charges were $20.41 million for the thirteen weeks ended ~~April~~July 43, ~~2010~~2011, ~~related~~as compared to a ~~proposed~~ ~~litigation~~slight ~~settlement~~reversal of ~~the~~severance ~~Tiffany~~and ~~Sharpe,~~other etcharges ~~al. v. APAC Customer Services, Inc. suit. The $2.4 million recorded~~ for the thirteen weeks ended ~~April~~July 4, 2010 ~~represented~~and ~~our~~related ~~estimate at that time of the costs~~ to ~~be incurred for attorneys’ fees and claims, based on expected opt-in rates for claimants in similar actions. For more information regarding~~ the ~~2010~~elimination ~~legal settlement, see Note 6~~ of ~~the~~certain ~~Notes~~management toand ~~Condensed~~administrative ~~Consolidated Financial Statements in Item 1 of this Quarterly Report on Form 10-Q~~positions.

~~Severance~~Operating ~~and~~income ~~other~~was ~~charges were~~ $08.4 million for the thirteen weeks ended ~~April~~July 3, 2011, ~~and~~as ~~relate~~ compared to $8.3 million for the ~~elimination~~thirteen weeks ended July 4, 2010. The $0.1 million increase is the result of ~~certain~~an increase ~~management~~in ~~and~~gross ~~administrative~~profit, ~~positions~~as noted above.

~~Operating~~Net ~~income~~interest ~~was~~expense of less than $100.81 million for the thirteen weeks ended ~~April~~July 3, 2011, aswas primarily ~~compared~~related to $90.9 1 million ~~for~~of fees associated with the ~~thirteen~~Revolving ~~weeks~~Loan ~~ended~~Facility ~~April 4~~with PNC, partially ~~2010.~~offset ~~The~~by $0.91 million ~~increase~~from ~~was~~ the ~~result~~amortization of apoints on forward contracts. Net interest income of less than $20.41 million ~~decrease~~for inthe ~~legal~~thirteen ~~settlement~~weeks ~~expense~~ended July 4, ~~partially~~2010 ~~offset~~was byprimarily related ~~decreased~~to ~~gross~~$0.1 million ~~profit~~from the amortization of points on forward contracts, asoffset by $0.1 ~~noted~~million ~~above~~of ~~and~~fees ~~increased~~associated ~~severance~~with ~~and~~the ~~other~~Revolving ~~charges~~Loan Facility with PNC.

~~Net~~EBITDA ~~interest~~was ~~expense of less than~~ $011.13 million for the thirteen weeks ended ~~April~~July 3, 2011, ~~was primarily~~a ~~related~~$0.2 million toincrease from $011.1 million ~~from~~for the ~~amortization~~thirteen ofweeks ~~points~~ended onJuly 4, ~~forward~~2010. ~~contracts,~~Adjusting ~~partially~~for legal settlement expense, ~~offset~~severance byand ~~$0.1 million~~other ofcharges, ~~fees~~transaction-related ~~associated~~costs ~~with~~and ~~the~~accelerated ~~Revolving~~stock ~~Loan~~compensation ~~Facility~~expense, adjusted ~~with~~EBITDA ~~PNC~~was $11.9 million ~~Net~~for ~~interest income~~the ofthirteen ~~less~~weeks ~~than~~ended July 3, 2011, as compared to $011.1 4 million for the thirteen weeks ended ~~April~~July 4, 2010. ~~was~~More ~~primarily~~information ~~related~~concerning these non-GAAP tofinancial ~~$0.1 million~~measures, ~~from~~including the ~~amortization~~definition of ~~points~~EBITDA onand ~~forward~~adjusted ~~contracts,~~EBITDA ~~partially~~and ~~offset~~a byreconciliation ~~$0.1~~of ~~million~~these ofmeasures ~~fees~~to ~~associated~~the most directly comparable financial measures calculated and presented in accordance with GAAP, can be found under the ~~Revolving~~heading ~~Loan~~“Non-GAAP ~~Facility~~Financial ~~with~~Measures” ~~PNC~~and the accompanying notes thereto appearing elsewhere in this Management’s Discussion and Analysis of Financial Condition and Results of Operations.

2123

~~EBITDA~~Income ~~was~~tax ~~$13.7 million~~expense for the thirteen weeks ended ~~April~~July 3, 2011, awas $02.69 million ~~increase from $13~~.~~1 million~~ ~~for~~This ~~the~~results ~~thirteen~~in ~~weeks ended April 4, 2010~~a 34.5% ~~Adjusting~~effective ~~for~~income ~~legal~~tax ~~settlement~~rate ~~and severance and other charges, adjusted EBITDA decreased $1.4 million to $14.1 million~~ for the thirteen weeks ended ~~April~~July 3, 2011, aswhich ~~compared~~is tolower ~~$15.5 million~~than ~~for~~ the ~~thirteen weeks ended April~~ 4,statutory ~~2010,~~rate ~~primarily~~ due to the ~~decrease~~generation inof ~~gross~~tax ~~profit, as noted above~~credits. ~~More~~Income ~~information concerning~~tax ~~these~~expense ~~non-GAAP~~for ~~financial measures, including~~ the ~~definition~~thirteen ~~of EBITDA and adjusted~~weeks ~~EBITDA~~ended ~~and a reconciliation of these measures to the most directly comparable financial measures calculated and presented in accordance with GAAP~~July 4, ~~can~~2010 bewas ~~found~~$2.8 million ~~under~~which ~~the~~represents ~~heading~~an ~~“Non-GAAP Financial~~effective ~~Measures”~~rate ~~and the accompanying notes thereto appearing elsewhere in this Management’s Discussion and Analysis~~ of ~~Financial Condition and Results of Operations~~34.5%.

~~Income~~Net ~~tax~~income ~~expense~~ for the thirteen weeks ended ~~April~~July 3, 2011 was $35.74 million., ~~This~~as ~~results~~compared into ~~a 34.~~$5~~% effective income tax rate~~ .3 million for the thirteen weeks ended ~~April~~July 34, ~~2011, which is lower than the statutory rate due to the generation of tax credits~~2010. ~~Due~~The ~~to the utilization of net operating loss carryforwards and tax credits, our estimated cash taxes paid for fiscal year 2011 will be approximately 10-15% of income before taxes~~$0.1 million ~~Income~~increase ~~tax~~is ~~expense~~driven ~~for~~by the ~~thirteen~~increase ~~weeks ended April~~in 4gross profit, ~~2010~~as ~~was~~noted $3above.~~5 million which represents an effective rate of 34.5%.~~

~~Net~~Comparison ~~income~~of Results of Operations for the ~~thirteen~~Twenty-six ~~weeks~~Weeks ~~ended~~Ended ~~April~~July 3, 2011 ~~was~~and ~~$7.0~~July ~~million, as compared to $6.6 million for the thirteen weeks ended April~~ 4, 2010~~. The $0.4 million increase was primarily due to the~~ ~~$2.4 million decrease in legal settlement expense, partially offset by decreased gross profit, increased severance and other charges and increased income tax expense.~~

Net revenue increased 4.9% to $170.5 million for the twenty-six weeks ended July 3, 2011, as compared to $162.6 million for the twenty-six weeks ended July 4, 2010. The increase in revenue of $7.9 million is primarily driven by growth from new and existing clients of $12.9 million in the media & publishing vertical, $5.1 million in the technology vertical, of which $1.9 million relates to the Fargo operations, $3.3 million in the business services vertical and $2.4 million of other services, partially offset by a $13.8 million decrease in the telecommunications vertical and a $2.0 million decrease in the healthcare vertical associated with a customer who existed this vertical in the fourth quarter of 2010.

Cost of services increased $8.7 million, or 6.9%, to $134.5 million for the twenty-six weeks ended July 3, 2011, from $125.8 million for the twenty-six weeks ended July 4, 2010. Direct labor increased $3.4 million, or 3.9%, primarily driven by increased international volume and expansion, increased volume in the domestic business services vertical and increased volume in the domestic technology vertical, due in part to the addition of the Fargo operations, partially offset by lower domestic wages due to the decline in volume in the telecommunications vertical. Total facility and other costs increased $5.3 million, or 13.5%, due to $3.4 million of increased facility costs associated with increased growth at our customer care centers in the Philippines and the Dominican Republic, the build-out of our customer care center in Uruguay, the addition of the Fargo operations and increased domestic maintenance costs. Other facility expenses increased $1.9 million due to $0.7 million of increased technology costs, $0.4 million of salaries and wages associated with increased operations support and $0.8 million of other facility costs. Cost of services as a percentage of revenue increased to 78.9% for the twenty-six weeks ended July 3, 2011, as compared to 77.4% for the twenty-six weeks ended July 4, 2010, as a result of decreased domestic and international efficiencies, and the build-out of the Uruguay customer care center.

Gross profit was $36.0 million for the twenty-six weeks ended July 3, 2011, as compared to $36.8 million for the twenty-six weeks ended July 4, 2010. The $0.8 million decrease is primarily due to decreased volumes in the domestic technology vertical and increased facility costs related to the build-out of the Uruguay customer care center, partially offset by increased international volume in the media & publishing vertical. Gross profit margin decreased from 22.6% for the twenty-six weeks ended July 4, 2010 to 21.1% for the twenty-six weeks ended July 3, 2011 driven by decreased domestic and international efficiencies, and the build-out of the Uruguay customer care center.

Selling, general and administrative expenses were $16.4 million for the twenty-six weeks ended July 3, 2011, as compared to $16.3 million for the twenty-six weeks ended July 4, 2010. The $0.1 million increase is primarily associated with a $0.5 million increase in professional fees resulting from the acquisition of the Fargo operations and the pending merger with Blackhawk, a $0.3 million increase in compensation and benefits and a $0.3 million increase in technology expense, partially offset by a $0.8 million decrease in costs associated with the final amortization on intangible assets recorded in 2010 and a $0.2 million decrease in other professional fees.

Legal settlement expense was $2.4 million for the twenty-six weeks ended July 4, 2010 related to a proposed litigation settlement of the Tiffany Sharpe, et al. v. APAC Customer Services, Inc. suit. The $2.4 million recorded for the thirteen weeks ended April 4, 2010 represented our estimate at that time of the costs to be incurred for attorneys’ fees and claims, based on expected opt-in rates for claimants in similar actions. For more information regarding the 2010 legal settlement, see Note 8 of the Notes to Condensed Consolidated Financial Statements in Item 1 of this Quarterly Report on Form 10-Q.

Severance and other charges were $0.5 million for the twenty-six weeks ended July 3, 2011, as compared to a slight reversal of severance and other charges for the twenty-six weeks ended July 4, 2010. The $0.5 million increase related to the elimination of certain management and administrative positions.

Operating income was $19.2 million for the twenty-six weeks ended July 3, 2011, as compared to $18.2 million for the twenty-six weeks ended July 4, 2010. The $1.0 million increase was the result of a decrease in legal settlement expense of $2.4 million, partially offset by an $0.8 million decrease in gross profit, a $0.5 million increase in severance and other charges and a $0.1 million increase in selling, general and administrative expenses.

Net interest expense of $0.1 million for the twenty-six weeks ended July 3, 2011 was primarily related to $0.3 million of fees associated with the Revolving Loan Facility with PNC, partially offset by $0.2 million from the amortization of points on forward contracts. Net interest income of less than $0.1 million for the twenty-six weeks ended July 4, 2010 was primarily related to $0.2 million from the amortization of points on forward contracts, partially offset by $0.2 million of fees associated with the Revolving Loan Facility with PNC.

EBITDA was $25.0 million for the twenty-six weeks ended July 3, 2011, a $0.8 million increase from $24.2 million for the twenty-six weeks ended July 4, 2010. Adjusting for legal settlement expense, severance and other charges, transaction-related costs and accelerated stock compensation expense, adjusted EBITDA was $26.0 million for the twenty-six weeks ended July 3, 2011, as compared to $26.9 million for the twenty-six weeks ended July 4, 2010. The $0.9 million decrease was primarily due to the decrease in legal settlement expense and accelerated stock compensation expense, partially offset by a decrease in gross profit and an increase in severance and other charges and transaction-related costs, as noted above. More information concerning these non-GAAP financial measures, including the definition of EBITDA and adjusted EBITDA and a reconciliation of these measures to the most directly comparable financial measures calculated and presented in accordance with GAAP, can be found under the heading “Non-GAAP Financial Measures” and the accompanying notes thereto appearing elsewhere in this Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Income tax expense for the twenty-six weeks ended July 3, 2011 was $6.6 million. This results in a 34.5% effective income tax rate for the twenty-six weeks ended July 3, 2011, which is lower than the statutory rate due to the generation of tax credits. Due to the utilization of net operating loss carryforwards and tax credits, our estimated cash taxes paid for fiscal year 2011 will be approximately 10-15% of income before taxes. Income tax expense for the twenty-six weeks ended July 4, 2010 was $6.3 million which represents an effective rate of 34.5%.

Net income for the twenty-six weeks ended July 3, 2011 was $12.5 million, as compared to $11.9 million for the twenty-six weeks ended July 4, 2010.

Liquidity and Capital Resources

The following table sets forth our unaudited condensed consolidated statements of cash flow data for the ~~thirteen~~twenty-six weeks ended ~~April~~July 3, 2011 and ~~April~~July 4, 2010, respectively.

	Thirteen Weeks Ended
	Twenty-Six Weeks Ended
	April 3,			April 4,
	July 3,			July 4,
	2011			2010
	(Dollars in thousands)
Net cash provided by operating activities	$	1725,~~686~~609		$	2228,~~243~~961
Net cash used in investing activities		(28,~~408~~985	)		(23,~~230~~967	)
Net cash used in financing activities		(5,610	)		(113	)
Net cash (used in) provided by financing activities		(8,239	)		201
Effect of exchange rate changes on cash		~~201~~(43	)		~~209~~(336	)
Net increase in cash and cash equivalents	$	98,~~869~~342		$	2024,~~109~~859

Operating Activities

Net cash provided by operating activities was $1725.76 million for the ~~thirteen~~twenty-six weeks ended ~~April~~July 3, 2011, as compared to $2229.20 million for the ~~thirteen~~twenty-six weeks ended ~~April~~July 4, 2010. The $43.54 million decrease inwas ~~cash is~~ primarily ~~related~~the toresult of a $32.80 million change in accounts receivable due to the ~~timing~~ timing of cash receipts, ~~and~~ a $21.46 million ~~accrual~~decrease in ~~2010~~deferred ~~for~~income ~~legal~~taxes ~~settlement~~driven ~~expense, partially offset~~ by athe ~~$1.6 million~~utilization ~~decrease~~of innet operating ~~accrued~~loss ~~payroll~~carryforwards ~~primarily related to incentive compensation~~ and net changes in prepaid expenses and other assets and liabilities of $0.9 million, partially offset by a $1.2 million decrease in accrued payroll primarily related to incentive compensation.

Investing Activities

Net cash used in investing activities of $9.0 million for the ~~thirteen~~twenty-six weeks ended ~~April~~July 3, 2011 consisted primarily of $12.6 million in capital expenditures related to client implementations, $2.4 million infor ~~continued~~the ~~investment~~build-out inof ~~site~~new ~~operational~~facilities, ~~and~~$2.2 million ~~information~~for ~~technology~~the ~~equipment~~acquisition of the Fargo operations and $1.0 8 million in ~~capital~~continued ~~expenditures~~investment ~~related~~in tooperational ~~client~~and ~~implementations~~information technology equipment. Cash used in investing activities of $4.0 million for the ~~thirteen~~twenty-six weeks ended ~~April~~ July 4, 2010 consisted primarily of $12.58 million in continued investment in operational and information technology equipment and $01.72 million in capital expenditures related to client implementations.

Financing Activities

Net cash used in financing activities of $58.62 million for the ~~thirteen~~twenty-six weeks ended ~~April~~July 3, 2011 is is primarily the result of aan $58.40 million repurchase of our common stock and $0.35 million of ~~payments~~ payments against capital lease obligations, partially offset by $0.13 million of cash received from ~~the~~ the exercise of stock options. Net cash ~~used~~provided inby financing activities of $0.12 million for the ~~thirteen~~ twenty-six weeks ended ~~April~~July 4, 2010 relates to ~~payments~~$0.5 million ~~made~~in oncash ~~capital~~received ~~leases~~from the exercise of stock options, ~~slightly~~partially offset by ~~cash received~~$0.3 million ~~from~~in ~~the~~payments ~~exercise~~on ofcapital ~~stock options~~leases.

Bank Financing

AsWe ofare party to a Revolving Credit and Security Agreement, as amended, (the “Credit Agreement”) with PNC Bank National Association (“PNC”), as agent, and the financial institutions from time to time parties thereto as lenders. The Credit Agreement provides us with up to a $40.0 million revolving loan facility which was originally set to expire in May 2011. On April 327, 2011, ~~there~~we entered ~~were~~into nothe ~~outstanding~~Second ~~borrowings~~Amendment ~~under~~to Revolving Credit and Security Agreement (the ~~Revolving~~“Second Amendment”) ~~Loan~~which amended the Credit Agreement among the Company, Agent and Lenders dated May 5, 2008. The Second Amendment extended the term of the Credit Agreement to September 30, 2011. We are uncertain as to whether the Merger will be completed before the expiration of the current Credit Agreement and are currently evaluating our options with respect to a further extension of the Credit Agreement. We expect that we will be able to obtain an extension of the Credit ~~had~~Agreement under similar terms to the current extension of the Credit Agreement. In the event an extension of the Credit Agreement cannot be obtained, we believe cash balances and cash ~~equivalents~~flows offrom operations ~~$51~~will be sufficient to meet projected operating needs and fund any planned capital expenditures for the next twelve months.~~3 million.~~

During the thirteen weeks ended April 3, 2011, we were party to a Revolving Credit and Security Agreement, as amended, (Revolving Loan Agreement) with PNC Bank National Association (PNC), as agent, and the financial institutions from time to time parties thereto as lenders. The ~~Revolving Loan Agreement provides us with up to a $40.0 million revolving loan facility which expires in May 2011. On April 27, 2011, we entered into the Second Amendment to Revolving~~ Credit ~~and Security~~ Agreement (Second Amendment) which amends the Revolving Credit and Security Agreement (Credit Agreement) among the Company, Agent and Lenders dated May 5, 2008. The Second Amendment extends the term of the Credit Agreement to September 30, 2011. We are evaluating various financing alternatives and intend to obtain a replacement facility prior to the expiration of the extended term. We anticipate favorable terms for a new facility; however, there can be no assurance that we will enter into such an arrangement. The Revolving Loan Agreement contains certain financial covenants including limits on the amount of capital expenditures and maintenance of a minimum fixed charge coverage ratio. Other covenants in the Credit ~~Revolving Loan~~ Agreement prohibit us (with limited exceptions) from incurring additional indebtedness, repurchasing outstanding common shares, permitting liens, acquiring, selling or disposing of certain assets, engaging in certain mergers and acquisitions, paying dividends or making certain restricted payments. We obtained a waiver from ~~our~~PNC ~~current lender~~ permitting us to execute our stock repurchase program as approved by our Board of Directors. Our ability to borrow under the ~~Revolving~~Credit ~~Loan~~ Agreement depends on the amount of eligible accounts receivable from our clients.

As of July 3, 2011, there were no outstanding borrowings under the Credit Agreement and we had cash and cash equivalents of $49.7 million. We had approximately $3637.98 million of undrawn borrowing capacity under the ~~Revolving~~Credit ~~Loan~~ Agreement as of ~~April~~July 3, 2011, based upon borrowing base calculations. We were in compliance with our financial covenants as of ~~April~~July 3, 2011.

Future Liquidity

We expect that our cash balances of $5149.37 million, cash flows from operations and available borrowings of $3637.98 million under our ~~Revolving~~Credit ~~Loan~~ Agreement will be sufficient to meet projected operating needs, fund any planned capital expenditures and repay debt obligations for the next twelve months.

We are not aware of any issues with our lenders which might cause funds not to be available for us to draw upon under the terms of our ~~Revolving~~Credit ~~Loan~~ Agreement.

2327


Item 3.		Quantitative and Qualitative Disclosures About Market Risk

We are exposed to the impact of U.S. interest rate changes directly related to our normal operating and funding activities and foreign currency exchange risk related to our operating costs in international locations. Our Revolving Loan Agreement bears interest at floating rates, subjecting us to interest rate risk. To date, the impact from interest rate fluctuations has not been material.

The impact from foreign currency exchange rates has become significant due to the change in the U.S. dollar relative to the Philippine peso and the increase in cost of services due to our expanded operations in international locations. We maintain a currency rate hedging program with the objective of mitigating the impact of significant fluctuations in the U.S. dollar / Philippine peso exchange rate. The objective of the hedge transaction is to mitigate the variability in cash flows and expenses over the period of the hedge contracts due to the foreign currency risk associated with the repayment of the intercompany accounts payable from the U.S. operations to the Philippines representing the Philippines’ share of revenue. Forward contracts to purchase 1,~~613~~503 million Philippine pesos at a U.S. dollar notional of $3633.07 million were outstanding as of ~~April~~July 3, 2011.

As we continue to expand operations in the Dominican Republic and Uruguay, the impact from foreign currency exchange rates will become more significant. We will evaluate the use of derivatives to mitigate this exposure as deemed necessary.


Item 4.		Controls and Procedures

Disclosure Controls and Procedures

As of ~~April~~July 3, 2011, under the direction of our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of our disclosure controls and procedures. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) under the Securities Exchange Act of 1934, as amended, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Securities Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation, of our disclosure controls and procedures as of ~~April~~July 3, 2011, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

Internal Control Over Financial Reporting

There have been no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the thirteen weeks ended ~~April~~July 3, 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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Part II. Other Information


Item 1A.		Risk Factors

For a detailed discussion of the risks and uncertainties associated with our business see Item 1A of Part I of our Annual Report on Form 10-K for the fiscal year ended January 2, 2011. ~~There~~Except ~~have~~as set forth below, there have been no material changes to these risk factors since that report.

Our inability to complete the Merger with an affiliate of One Equity Partners (“One Equity”) or if the Merger Agreement is otherwise terminated may result in adverse consequences to the Company.

We signed a merger agreement with an affiliate of One Equity on July 6, 2011. The Merger Agreement includes a number of closing conditions which must be met to close the merger, some of which are beyond our control. In addition, One Equity has rights to terminate the Merger Agreement due to certain events, changes or other circumstances. If for any reason, we are unable to obtain the necessary approvals (including, without limitation shareholder approval), meet the required closing conditions or we do not complete the Merger, there could be negative consequences to the Company, including, but not limited to a decline in our stock price.

The impact of the Merger on our business relationships, operating results and business generally is unknown and may negatively impact our business.

Our client relationships are critical to the operating and financial results of the Company. It is unclear what, if any, impact the Merger may have on our client relationships. The loss of one or more significant clients or the inability to continue operating under existing client contracts with terms favorable to us could materially and adversely affect our financial results and our business.

The costs, delay and management time and attention associated with litigation related to the Merger could negatively affect the Merger or result in a negative impact to our financial results.

Current legal proceedings have been brought against the Company or other actions may be subsequently initiated relating to the pending Merger. Such litigation could result in significant potential costs, diversion of management’s attention from ongoing business concerns and delay the completion of the Merger. Additionally, as is the case with any such litigation, we cannot predict the outcome of such proceedings.

There is the possibility that competing offers will be made which could result in the termination of the Merger Agreement as well as additional cost, delay and potential diversion of management’s attention.

If we receive competing offers, the Board of Directors of the Company, consistent with its duties and the Merger Agreement, may need to consider such competing offers which could result in the termination of the Merger Agreement as well as additional cost, delay and potential diversion of management’s attention from the business during the pendency or consummation of a proposed transaction. Any such delays and increased costs may harm our business and operations.


Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds

The following table provides information about our purchase of our common stock during the ~~first~~second fiscal quarter of 2011:

Issuer Purchases of Equity Securities


Issuer Purchases of Equity Securities
					Total Number of		Maximum Number
	Total Number				Shares Purchased		of Shares that May
	of Shares (or		Average Price		as Part of Publicly		Yet Be Purchased
	Units)		Paid per Share		Announced Plans		Under the Plans or
Period	Purchased		(or Unit)		or Programs (1)		Programs (1)
Beg Balance 4/03/2011		1,791,325	$	5.75		1,791,325		3,208,675
4/04/2011 - 5/01/2011		306,940		5.94		306,940		2,901,735
5/02/2011 - 5/29/2011		135,350		5.65		135,350		2,766,385
5/30/2011 - 7/03/2011				—		—		2,766,385

Total		2,233,615	$	5.77		2,233,615		2,766,385

					Total Number of		Maximum Number
	Total Number				Shares Purchased		of Shares that May
	of Shares (or		Average Price		as Part of Publicly		Yet Be Purchased
	Units)		Paid per Share		Announced Plans		Under the Plans or
Period	Purchased		(or Unit)		or Programs (1)		Programs (1)
Beg Balance 1/02/2011		870,633	$	5.60		870,633		4,129,367
1/03/2011 – 1/30/2011		261,438		5.96		261,438		3,867,929
1/31/2011 – 2/27/2011		331,657		5.79		331,657		3,536,272
2/28/2011 – 4/03/2011		327,597		5.96		327,597		3,208,675
Total		1,791,325	$	5.75		1,791,325		3,208,675


(1)		On August 18, 2010, we announced that our Board of Directors had authorized the repurchase of up to an aggregate of five million shares of our common stock. Under the stock repurchase program, purchases will be made from time to time on the open market at prevailing market prices or in negotiated transactions off the market. We are not obligated to acquire any particular amount of common stock as a result of the plan, which may be suspended at any time at our discretion. In light of the pending acquisition of the Company by Blackhawk, as described above, we do not currently intend to make any further repurchases of our common stock.

(1) On August 18, 2010, we announced that our Board of Directors had authorized the repurchase of up to an aggregate of five million shares of our common stock. Under the stock repurchase program, purchases will be made from time to time on the open market at prevailing market prices or in negotiated transactions off the market. The repurchase program is expected to continue over the next 12 months unless extended or shortened by the Board of Directors. We are not obligated to acquire any particular amount of common stock as a result of the plan, which may be suspended at any time at our discretion.


Item 6.		Exhibits

The exhibits required by Item 601 of Regulation S-K are listed in the Exhibit Index attached hereto.

2530

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 the undersigned, thereunto duly authorized.

	APAC Customer Services, Inc.
Date: May 12, 2011	By:	/s/ Kevin T. Keleghan
Date: August 3, 2011	By:	/s/ Kevin T. Keleghan
		Kevin T. Keleghan
		President and Chief Executive Officer (Principal Executive Officer)
Date: May 12, 2011	By:	/s/ Andrew B. Szafran
Date: August 3, 2011	By:	/s/ Andrew B. Szafran
		Andrew B. Szafran
		Senior Vice President and Chief Financial Officer (Principal Financial Officer)
Date: May 12, 2011	By:	/s/ Joseph R. Doolan
Date: August 3, 2011	By:	/s/ Joseph R. Doolan
		Joseph R. Doolan
		Vice President and Controller (Principal Accounting Officer)

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Exhibit Index

Exhibit
Number		Description
	3.1	Amended and Restated 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 January 1, 2006.
	3.2	Second Amended and Restated Bylaws of APAC Customer Services, Inc., dated August 20, 2007, incorporated by reference to APAC Customer Services, Inc.’s Current Report on Form 8-K, dated August 22, 2007.
	4.1	Specimen Common Stock Certificate, incorporated by reference to APAC Customer Services, Inc.’s Annual Report on Form 10-K for the fiscal year ended December 28, 2008.
	10.1	Second Amendment to Revolving Credit and Security Agreement, dated April 27, 2011, incorporated by reference to APAC Customer Services, Inc.’s Current Report on Form 8-K, filed on May 3, 2011.
	10.2	Employment Agreement with Gregory M. Carr, dated May 31, 2011, incorporated by reference to APAC Customer Services, Inc.’s Current Report on Form 8-K, dated June 6, 2011.
	10.3	Agreement Protecting Company Interests with Gregory M. Carr, dated May 31, 2011, incorporated by reference to APAC Customer Services, Inc.’s Current Report on Form 8K, dated June 6, 2011.
	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.

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Filing Compare · APAC CUSTOMER SERVICES, INC