UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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For the quarterly period ended June 30, 2008
or
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period from
to
Commission File Number: 001-33679
PeopleSupport, Inc.
(Exact name of Registrant as specified in its charter)
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Delaware
(State or other jurisdiction of
incorporation or organization)
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95-4695021
(I.R.S. Employer
Identification No.)
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1100 Glendon Ave., Suite 1250, Los Angeles, California 90024
(Address of principal executive offices)
(310) 824-6200
(Registrant’s telephone number, including area code)
Indicate by check mark whether the 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 period 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 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.
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Large accelerated filer
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Accelerated Filer
þ
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Non-accelerated filer
o
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Smaller reporting company
o
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(Do not check if a smaller reporting company)
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2
of the Act). Yes
o
No
þ
The
number of shares of the registrant’s common stock outstanding as
of July 30, 2008 was 19,166,638 shares.
PEOPLESUPPORT, INC.
FORM 10-Q
FOR THE QUARTER ENDED
June 30, 2008
INDEX
PART I — FINANCIAL INFORMATION
Item 1.
Financial Statements
PEOPLESUPPORT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited, in thousands, except per share data)
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June 30,
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December 31,
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2008
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2007
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ASSETS
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Current assets:
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Cash and cash equivalents
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$
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84,269
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$
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78,403
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Marketable securities
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5,813
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19,996
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Accounts receivable, net of allowance for doubtful accounts of $375 and $329
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18,446
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19,206
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Land held for sale
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6,948
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—
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Prepaid expenses and other current assets
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4,417
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17,149
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Total current assets
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119,893
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134,754
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Property and equipment, net
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24,085
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33,761
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Marketable securities
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24,028
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23,326
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Deferred tax assets
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3,292
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23,366
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Goodwill and other intangible assets, net
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8,182
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8,267
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Other non-current assets
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2,425
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9,736
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Total assets
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$
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181,905
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$
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233,210
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LIABILITIES AND STOCKHOLDERS’ EQUITY
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Current liabilities:
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Accounts payable
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$
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1,933
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$
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2,446
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Accrued compensation
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5,128
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4,218
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Accrued liabilities
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5,626
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6,965
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Deferred revenue
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2,797
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5,252
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Deferred tax liabilities
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850
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4,205
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Derivative liabilities
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4,647
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—
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Other current liabilities
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23
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66
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Total current liabilities
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21,004
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23,152
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Deferred rent
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3,028
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2,580
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Other non-current liabilities
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38
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47
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Total liabilities
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24,070
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25,779
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Commitments and contingencies
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Stockholders’ equity:
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Common stock; $0.001 par value; authorized 87,000 shares; 19,034 and
21,599 shares issued and outstanding at June 30, 2008 and
December 31, 2007, respectively
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19
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22
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Additional paid-in capital
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175,031
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195,472
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Retained (deficit) earnings
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(13,433
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10,700
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Accumulated other comprehensive (loss) income
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(3,782
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1,237
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Total stockholders’ equity
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157,835
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207,431
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Total liabilities and stockholders’ equity
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$
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181,905
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$
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233,210
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The accompanying notes are integral part of these consolidated financial statements.
1
PEOPLESUPPORT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands, except per share data)
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Three Months Ended June 30,
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Six Months Ended June 30,
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2008
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2007
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2008
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2007
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Revenues
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$
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36,375
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$
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34,328
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$
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72,095
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$
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67,925
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Cost of revenues
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25,269
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23,985
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49,103
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45,679
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Selling, general and administrative
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9,234
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7,491
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17,599
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15,849
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Depreciation and amortization
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2,582
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2,334
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5,197
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4,795
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(Loss) income from operations
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(710
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518
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196
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1,602
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Interest income, net
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881
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1,530
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2,113
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3,003
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Other (expense) income
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(1,239
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2,115
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(7,701
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3,238
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(Loss) income before provision for income taxes
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(1,068
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4,163
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(5,392
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7,843
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Income tax provision
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(203
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(256
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(17,712
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(72
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Net (loss) income
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$
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(1,271
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$
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3,907
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$
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(23,104
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$
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7,771
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Basic (loss) earnings per share
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$
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(0.06
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$
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0.17
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$
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(1.11
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$
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0.33
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Diluted (loss) earnings per share
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$
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(0.06
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$
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0.16
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$
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(1.11
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$
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0.32
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Basic weighted average shares outstanding
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20,219
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23,561
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20,878
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23,531
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Diluted weighted average shares outstanding
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20,219
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24,025
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20,878
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24,197
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The accompanying notes are integral part of these consolidated financial statements.
2
PEOPLESUPPORT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
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Six Months Ended June 30,
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2008
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2007
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OPERATING ACTIVITIES
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Net (loss) income
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$
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(23,104
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$
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7,771
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Adjustments to reconcile net (loss) income to net cash provided by operating activities:
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Depreciation and amortization
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5,197
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4,795
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Allowance for doubtful accounts
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27
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588
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Stock-based compensation expense
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3,315
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2,515
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Amortization of deferred compensation costs
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—
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171
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Unrealized loss on derivatives
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5,868
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—
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Deferred income taxes
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16,718
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(612
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Tax benefits from employee stock option exercises
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—
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(37
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)
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Changes in operating assets and liabilities:
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Accounts receivable
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734
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(2,643
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)
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Prepaid expenses and other assets
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13,952
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(1,187
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Accounts payable and accrued liabilities
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(1,066
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)
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(1,352
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Deferred rent
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416
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467
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Deferred revenue
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(2,462
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)
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1,623
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Net cash provided by operating activities
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19,595
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12,099
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INVESTING ACTIVITIES
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Proceeds from sale/maturities of marketable securities
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24,726
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58,951
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Purchases of marketable securities
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(11,475
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(62,411
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Purchases of property and equipment
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(2,181
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)
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(17,434
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)
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Net cash provided by (used for) investing activities
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11,070
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(20,894
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)
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FINANCING ACTIVITIES
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Payments of capital lease obligation
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(10
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(29
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Tax benefits from employee stock option exercises
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—
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37
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Proceeds from the exercise of stock options
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355
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361
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Repurchase of common stock
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(25,144
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)
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—
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Public offering costs
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—
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(168
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)
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Net cash (used for) provided by financing activities
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(24,799
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)
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201
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Effect of exchange rate changes on cash
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—
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(4
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Net increase (decrease) in cash and cash equivalents
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5,866
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(8,598
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)
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Cash and cash equivalents, beginning of period
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78,403
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80,880
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Cash and cash equivalents, end of period
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$
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84,269
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$
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72,282
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NON-CASH ACTIVITIES
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Unrealized
holding losses on marketable securities
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$
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(230
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$
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(525
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)
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Non-cash
other comprehensive (loss) income adjustment for pension liabilities
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(163
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$
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(26
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)
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The accompanying notes are integral part of these consolidated financial statements.
3
PEOPLESUPPORT, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Description of Business
PeopleSupport, Inc. (“PeopleSupport” or the “Company”) is a leading offshore business
process outsourcing (“BPO”) provider offering customer management, transcription and captioning
and additional BPO services from its centers in the Philippines, Costa Rica and the United
States. The Company provides outsourced services to a wide range of
primarily U.S.-based clients that operate predominantly in banking and financial services,
travel and hospitality, healthcare and insurance, and emerging
markets which we currently define as including, but not limited to,
technology, telecom, publications and consumer products and services. The Company’s services
are designed to reduce costs, improve performance and increase revenues by delivering high
quality, value-added, multilingual voice and text services.
In this report, all references to “us,” “we,” “our” and “the Company” refer to PeopleSupport,
Inc. and its subsidiaries.
Note 2. Basis of Presentation
Basis of Presentation
The accompanying unaudited interim consolidated financial statements of the Company have
been prepared in accordance with Article 10 of Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by accounting principles generally accepted in the
United States (“GAAP”) for complete financial statements. In the opinion of management, all
adjustments considered necessary for a fair presentation (consisting of normal recurring
accruals) have been included. Operating results for the three and six month periods ended June
30, 2008 are not necessarily indicative of the results that may be expected for the year ending
December 31, 2008.
Reclassifications
Certain reclassifications have been made to prior year amounts to conform to the current
presentation. Historically, the Company had classified all expenses incurred in the Philippines
and Costa Rica to cost of revenues as these operations were small and without significant
administrative support functions. As the Company has expanded, the foreign operations have become
increasingly independent of corporate office administrative support. Part of this growth in
administrative support occurred in late 2007 when the Company realigned along industry verticals
to better serve its clients. With this recent change in business structure, the Company
determined that it was a more appropriate presentation to reclassify certain expenses, from cost
of revenues to selling, general and administrative expenses.
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during the reporting
period. Significant estimates include valuation reserves for accounts receivable, income taxes,
and valuation of marketable securities and goodwill and recoverability of long-term assets.
Actual results could differ from those estimates.
Concentrations of Risk
The Company is exposed to concentrations of risk in the normal course of business,
primarily related to cash and cash equivalents, accounts receivable and derivative instruments.
Cash and cash equivalents are maintained with major financial institutions and at times are
in excess of FDIC insurance limits of $100,000. Based on the financial historical strength of
these institutions, the Company believes it is not exposed to any significant credit risk on
cash and cash equivalents.
The Company maintains an allowance for doubtful accounts for estimated losses resulting
from the inability of its customers to make required payments. Additions to the allowance result
in a provision for bad debt expense. The Company determines the adequacy of this allowance by
evaluating individual customer accounts receivable, through consideration of the customer’s
financial condition, credit history, and current economic conditions. If the financial condition
of a customer deteriorates, resulting in an impairment of the customer’s ability to make
payments, additional allowances may be required.
4
The Company derives a significant portion of its revenues and accounts receivable from a
limited number of clients as described below:
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Three Months Ended
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Six Months Ended
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June 30,
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June 30,
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As of June 30,
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% of Revenue
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% of Revenue
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% of A/R, net
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Clients
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2008
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2007
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2008
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2007
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2008
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2007
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Client A
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21
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%
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25
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%
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21
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%
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21
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%
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7
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%
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28
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%
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Client B
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19
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%
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14
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%
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18
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%
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15
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%
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25
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%
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11
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%
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Client C
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|
14
|
%
|
|
|
7
|
%
|
|
|
14
|
%
|
|
|
5
|
%
|
|
|
12
|
%
|
|
|
9
|
%
|
|
Client D
|
|
|
5
|
%
|
|
|
15
|
%
|
|
|
6
|
%
|
|
|
15
|
%
|
|
|
6
|
%
|
|
|
16
|
%
|
|
Client E
|
|
|
9
|
%
|
|
|
9
|
%
|
|
|
9
|
%
|
|
|
9
|
%
|
|
|
13
|
%
|
|
|
9
|
%
|
Revenue Recognition
Session fees, including revenues associated with voice, email and live help transactions
and with hosting and maintaining software applications for customer service, are recognized as
these services are provided. Session fees represent more than 90% of revenues for the three and
six months ended June 30, 2008 and 2007. Implementation fees, including revenues associated with
the installation and integration of new customers into our telecommunications, information
technology and client reporting structures, are deferred and recognized ratably over the life of
the contract. Revenues are recognized when there are no significant Company obligations
remaining, fees are fixed and determinable and collection of the related receivable is
reasonably assured.
Cost of Revenues
Cost of revenues excludes depreciation and amortization expenses and consists primarily of
employee-related costs associated with the services rendered on behalf of a client, as well as
telecommunications costs, information technology costs associated with providing customer
management services and facility support costs related to the operation of outsourcing and data
centers.
Marketable Securities
Investments in marketable securities consist primarily of government bonds, corporate
bonds, mortgage/asset backed securities, and preferred stock. Investments in debt and equity
securities are accounted for under SFAS No. 115,
“Accounting for Certain Investments in Debt and
Equity Securities"
, or SFAS 115. Marketable securities are classified as available-for-sale
securities and are accounted for at their fair value. Under SFAS 115, unrealized holding gains
and losses are excluded from earnings and reported net of the related tax effect in other
comprehensive income (OCI) as a separate component of shareholders’ equity. When the fair value
of an investment declines below its original cost, the Company evaluates the investment in
accordance with FASB Staff Position (“FSP”) 115-1 and 124-1 “
The Meaning of Other-Than-Temporary
Impairment and Its Applications to Certain Investments
” which addresses the determination as to
when an investment is considered impaired, whether that impairment is
other-than-temporary, and
the measurement of an impairment loss. The Company considers all available evidence to evaluate
whether the decline is other-than-temporary. Among other things, the Company considers the
duration and extent of the decline and economic factors influencing the markets. If a decline in
fair value is judged to be other-than-temporary, the cost basis of the individual security is
written down to fair value as a new cost basis and the amount of the write-down is included in
earnings. The new cost basis is not to be changed for subsequent recoveries in fair value.
Subsequent increases in the fair value of available-for-sale securities are included in OCI. The
determination of whether a loss is other-than-temporary is highly judgmental and may have a
material impact on the Company’s results of operations.
5
Impairment of Long-lived Assets
Long-lived assets, including fixed assets and purchased intangibles subject to
amortization, are reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of the asset may not be recoverable. An undiscounted cash flow analysis
is utilized to determine whether impairment has occurred. If impairment is determined, the asset
is written down to its estimated fair value. The estimation of future cash flows and fair values
involves considerable management judgment. This analysis is performed in the fourth quarter of
each year unless indicators of impairment become evident at an earlier date.
The Company’s Costa Rica operations are dependent on a single client, Washington Mutual.
Washington Mutual may acquire the Company’s Costa Rica operations with 30 days notice at any
time prior to the expiration of the contract with the Company by paying a termination fee. This
termination fee is a set amount in the contract that decreases each month. As of June 30, 2008
the amount of net fixed assets in Costa Rica in excess of the termination fee is approximately
$0.6 million before any potential negotiated adjustments. The Company has not received any
indication that Washington Mutual will exercise its option to acquire the Costa Rica operations.
Goodwill and Other Intangible Assets
Goodwill and other intangibles with indefinite lives are reviewed for impairment annually
in the fourth quarter or whenever events or changes in circumstances indicate the carrying
amount of the asset may not be recoverable. An impairment loss is recognized to the extent that
the carrying amount exceeds the asset’s fair value. This determination is made at the reporting
unit level and consists of two steps. First, the Company determines the fair value of a
reporting unit and compares it to its carrying amount. Second, if the carrying amount of a
reporting unit exceeds its fair value, an impairment loss is recognized for any excess of the
carrying amount of the reporting unit’s goodwill and other intangibles over the implied fair
value.
Share-Based Compensation Expense
The Company’s stock incentive plans provide for grants of options to purchase shares of its
common stock, awards of restricted stock, stock appreciation rights and restricted stock units.
Incentive stock options and restricted stock units are generally granted to employees and Board
members. All options have been issued with a strike price equal to the fair market value of the
Company’s common stock on the day of grant. All grants and awards are settled through the
issuance of shares that have been authorized and are previously unissued.
The Company accounts for share-based compensation in accordance with SFAS No. 123R,
“
Share-Based Payment
”, or SFAS 123R. Under the fair value recognition provisions of this
statement, share-based compensation cost is measured at the grant date based on the value of the
award and is recognized as expense over the vesting period. Determining the fair value of
share-based awards at the grant date requires judgment, including estimating the Company’s stock
price volatility and employee stock award exercise behaviors. The Company’s expected volatility
is primarily based upon the historical volatility of the Company’s common stock and, due to the
limited period of public trading data for its common stock, it is also validated against the
volatility of a company peer group. The expected life of awards is based on observed historical
exercise patterns, which can vary over time. As share-based compensation expense is based on
awards ultimately expected to vest, the amount of expense has been reduced for estimated
forfeitures. SFAS 123R requires forfeitures to be estimated at the time of grant and revised,
if necessary, in subsequent periods if actual forfeitures differ from those estimates.
Forfeitures were estimated based on historical experience.
Derivative Instruments
During
the quarter, the Company purchased foreign currency forward contracts
that were designated as cash-flow hedges. All of these derivatives were Philippine peso contracts maturing
within 12 months. The Company accounts for financial derivative instruments in accordance with
SFAS No. 133, “
Accounting for Derivative Instruments and Hedging Activities
”, (SFAS 133) as
amended. The Company uses these contracts to reduce its foreign currency exposure due to
exchange rate fluctuations on forecasted cash flows denominated in the Philippine peso. Upon
proper qualification, these contracts are accounted for as cash-flow hedges, as defined by SFAS
133.
6
All derivatives are recognized in the balance sheet at fair value. Changes in the fair
value of derivatives that are highly effective and designated as cash flow hedges are recorded
in accumulated other comprehensive income, until the forecasted underlying transactions occur.
Any realized gains or losses resulting from the cash flow hedges are recognized together with
the hedged transaction within earnings. Cash flows from the derivative contracts are classified
within cash flows from operating activities. Ineffectiveness is measured based on the change in
fair value of the forward contracts and the fair value of the hypothetical derivatives with
terms that match the critical terms of the risk being hedged. Hedge ineffectiveness is
recognized within earnings.
The Company formally assesses, both at the hedge’s inception and on an ongoing basis,
whether the derivatives that are used in hedging transactions are highly effective in offsetting
changes in cash flows of hedged items on a prospective and retrospective basis. When it is
determined that a derivative is not highly effective as a hedge or that it ceased to be a highly
effective hedge or if a forecasted hedge is no longer probable to
occur, the Company
discontinues hedge accounting prospectively.
At June 30, 2008, all hedges were determined to be highly effective. For additional
information, see Note 9 — Derivative Instruments.
Fair Value of Financial Instruments
On January 1, 2008, the Company adopted FAS 157
, “Fair Value Measurements"
, and FAS 159
,
“The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of
FASB Statement No. 115"
. The adoption of FAS 157 and 159 had no impact on the Company’s
financial statements at the date of adoption. During the six months ended June 30, 2008, the
Company has not elected to use the fair value option permitted under SFAS 159 for any of its
financial assets that are recorded at fair value under other guidance.
Fair values of cash and cash equivalents, accounts receivable, accounts payable and accrued
liabilities approximate their carrying amounts because of their short-term nature. Marketable
securities are recognized in the balance sheet at their fair values based on third party quotes
and management’s estimates of the fair value. Derivative instruments are recognized in the
balance sheet at fair values based on third party quotes. For additional information, see Note
4 — Fair Value Disclosures.
The Company has deferred the adoption of FAS 157 for nonfinancial assets and liabilities as
permitted by FASB Staff Position FAS 157-2, to the first fiscal year beginning after November 15, 2008.
Note 3. Marketable Securities
The following tables summarize the market value of the marketable securities held in the
Company’s investment portfolio as of June 30, 2008 and December 31, 2007 (in thousands):
As of June 30, 2008, the Company’s holdings were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Market
|
|
|
|
|
Cost
|
|
|
Gain (Loss)
|
|
|
Value
|
|
|
Government bonds
|
|
$
|
21,627
|
|
|
$
|
(83
|
)
|
|
$
|
21,544
|
|
|
Corporate bonds
|
|
|
2,167
|
|
|
|
(310
|
)
|
|
|
1,857
|
|
|
Mortgage/asset backed securities
|
|
|
4,771
|
|
|
|
(247
|
)
|
|
|
4,524
|
|
|
Preferred stock
|
|
|
2,675
|
|
|
|
(759
|
)
|
|
|
1,916
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
31,240
|
|
|
$
|
(1,399
|
)
|
|
$
|
29,841
|
|
|
|
|
|
|
|
|
|
|
|
|
7
As of June 30, 2008, the Company’s investments were classified into short-term and
long-term as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-Term
|
|
|
Long-Term
|
|
|
Total
|
|
|
|
|
Marketable
|
|
|
Marketable
|
|
|
Marketable
|
|
|
|
|
Securities
|
|
|
Securities
|
|
|
Securities
|
|
|
Government bonds
|
|
$
|
5,482
|
|
|
$
|
16,062
|
|
|
$
|
21,544
|
|
|
Corporate bonds
|
|
|
—
|
|
|
|
1,857
|
|
|
|
1,857
|
|
|
Mortgage/asset backed securities
|
|
|
331
|
|
|
|
4,193
|
|
|
|
4,524
|
|
|
Preferred stock
|
|
|
—
|
|
|
|
1,916
|
|
|
|
1,916
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
5,813
|
|
|
$
|
24,028
|
|
|
$
|
29,841
|
|
|
|
|
|
|
|
|
|
|
|
|
At June 30, 2008, the Company held cash and cash equivalents and marketable
securities of $63.1 million in the Philippines.
As of June 30, 2008, the Company’s holdings are scheduled to mature as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/Asset
|
|
|
|
|
|
|
Total
|
|
|
|
|
Corporate
|
|
|
Government
|
|
|
Backed
|
|
|
Preferred
|
|
|
Marketable
|
|
|
Maturities
|
|
Bonds
|
|
|
Bonds
|
|
|
Securities
|
|
|
Stock
|
|
|
Securities
|
|
|
1 year
|
|
$
|
—
|
|
|
$
|
5,482
|
|
|
$
|
331
|
|
|
$
|
—
|
|
|
$
|
5,813
|
|
|
1 to 5 years
|
|
|
1,220
|
|
|
|
15,591
|
|
|
|
—
|
|
|
|
1,916
|
|
|
$
|
18,727
|
|
|
5 to 10 years
|
|
|
637
|
|
|
|
471
|
|
|
|
316
|
|
|
|
—
|
|
|
$
|
1,424
|
|
|
10+ years
|
|
|
—
|
|
|
|
—
|
|
|
|
3,877
|
|
|
|
—
|
|
|
$
|
3,877
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,857
|
|
|
$
|
21,544
|
|
|
$
|
4,524
|
|
|
$
|
1,916
|
|
|
$
|
29,841
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2007, the Company’s holdings were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Market
|
|
|
|
|
Cost
|
|
|
Gain (Loss)
|
|
|
Value
|
|
|
Government bonds
|
|
$
|
19,102
|
|
|
$
|
31
|
|
|
$
|
19,133
|
|
|
Corporate bonds
|
|
|
3,394
|
|
|
|
(367
|
)
|
|
|
3,027
|
|
|
Mortgage/asset backed securities
|
|
|
18,656
|
|
|
|
(143
|
)
|
|
|
18,513
|
|
|
Preferred stocks
|
|
|
3,343
|
|
|
|
(694
|
)
|
|
|
2,649
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
44,495
|
|
|
$
|
(1,173
|
)
|
|
$
|
43,322
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2007, the Company’s investments were classified into short-term and
long-term as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-Term
|
|
|
Long-Term
|
|
|
Total
|
|
|
|
|
Marketable
|
|
|
Marketable
|
|
|
Marketable
|
|
|
|
|
Securities
|
|
|
Securities
|
|
|
Securities
|
|
|
Government bonds
|
|
$
|
18,021
|
|
|
$
|
1,112
|
|
|
$
|
19,133
|
|
|
Corporate bonds
|
|
|
—
|
|
|
|
3,027
|
|
|
|
3,027
|
|
|
Mortgage/asset backed securities
|
|
|
1,975
|
|
|
|
16,538
|
|
|
|
18,513
|
|
|
Preferred stocks
|
|
|
—
|
|
|
|
2,649
|
|
|
|
2,649
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
19,996
|
|
|
$
|
23,326
|
|
|
$
|
43,322
|
|
|
|
|
|
|
|
|
|
|
|
|
8
Note 4. Fair Value Disclosures
In accordance with FAS 157, the Company’s financial assets and liabilities measured at fair
value are grouped in three levels, based on the markets that the assets and liabilities are
traded and the reliability of the assumptions used to determine fair value. The levels are:
Level 1 — Quoted prices in active markets for identical assets or liabilities.
Level 2 — Quoted prices for similar assets or liabilities; quoted prices in markets that are
not active; or other inputs that are observable or can be corroborated by observable market
data for substantially the full term of the assets or liabilities.
Level 3 — Values are determined using pricing models, discounted cash flow methodologies or
similar techniques and at least one significant model assumption or input is unobservable
and when determination of the fair value requires significant management judgment or
estimation.
The following table presents the balances of assets and liabilities measured at fair
value on a recurring basis.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
as of June 30,
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
2008
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable securities
— short term
|
|
$
|
—
|
|
|
$
|
5,813
|
|
|
$
|
—
|
|
|
$
|
5,813
|
|
|
Marketable securities
— long term
|
|
|
—
|
|
|
|
9,028
|
|
|
|
15,000
|
|
|
|
24,028
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
—
|
|
|
$
|
14,841
|
|
|
$
|
15,000
|
|
|
$
|
29,841
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities
|
|
$
|
—
|
|
|
$
|
4,647
|
|
|
$
|
—
|
|
|
$
|
4,647
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
—
|
|
|
$
|
4,647
|
|
|
$
|
—
|
|
|
$
|
4,647
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There have been no changes to the balance of level 3 assets measured at fair value on
a recurring basis since December 31, 2007.
At June 30, 2008, the Company held $15.0 million of securities, included in
government bonds, with an auction reset feature (“auction rate securities”). These
securities are collateralized by higher education funded student loans, and supported by
the Department of Education as part of the Federal Family Education Loan Program (FFELP).
The Dutch auction process that resets the applicable interest rate at predetermined
calendar intervals is intended to provide liquidity to the holder of auction rate
securities by matching buyers and sellers within a market context enabling the holder to
gain immediate liquidity by selling such interests at par or rolling over their
investment. If there is an imbalance between buyers and sellers, the risk of a failed
auction exists. As of June 30, 2008, the Company experienced three failed issues at
auction with a par value of $15.0 million.
At June 30, 2008 the Company’s best estimate of the fair values of these securities
approximate their par values. The Company will continue to assess the fair value of these
securities for substantive changes in relevant market conditions, changes in financial
condition or other changes in these investments. The Company may be required to record
unrealized losses for impairment if it determines that there are declines in fair value
that are other-than-temporary. Given the uncertainty in the market, there can be no
assurance as to when the Company would be able to liquidate a particular issue. In such
case of a failure, the Company would not be able to access those funds until a further
auction of these investments is successful, the security is called by the issuer or a
buyer is found outside the auction process, or the
securities mature. Contractual maturities for these securities range from 25 years to
37 years. The Company has reclassified all auction rate securities from short term to long
term to reflect the current illiquidity of these securities.
9
After consideration of the potential risks mentioned above, the Company determined
that no impairment charge was necessary as it believes the underlying creditworthiness of
these securities is stable, and that these securities will eventually be liquidated. As of
June 30, 2008, there were no downgrades in the agency ratings of
these securities. All of the Company’s auction
rate securities were rated Moody’s “AAA” and are highly collateralized. In addition, the
Company continued to receive interest payments as scheduled. Based on the Company’s
expected operating cash flows, and other sources of cash, it does not expect the potential
lack of liquidity in these investments to affect its ability to execute its current
business plan.
The Company currently does not have financial assets that are required to be measured at
fair value on a nonrecurring basis.
Note 5. Stockholders’ Equity and Accumulated Comprehensive Income (Loss)
The
components of accumulated comprehensive (loss) income are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Net (loss) income
|
|
$
|
(1,271
|
)
|
|
$
|
3,907
|
|
|
$
|
(23,104
|
)
|
|
$
|
7,771
|
|
|
Other comprehensive (loss) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in foreign currency translation
adjustment
|
|
|
(58
|
)
|
|
|
5
|
|
|
|
(45
|
)
|
|
|
372
|
|
|
Change in
unrealized loss on securities
|
|
|
(293
|
)
|
|
|
(636
|
)
|
|
|
(230
|
)
|
|
|
(525
|
)
|
|
Change in minimum pension liability adjustment
|
|
|
(80
|
)
|
|
|
(35
|
)
|
|
|
(163
|
)
|
|
|
(26
|
)
|
|
Change in unrealized gain (loss) on
derivative instruments
|
|
|
(4,581
|
)
|
|
|
—
|
|
|
|
(4,581
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive (loss) income
|
|
$
|
(6,283
|
)
|
|
$
|
3,241
|
|
|
$
|
(28,123
|
)
|
|
$
|
7,592
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 6. Computation of Earnings Per Share
Basic earnings per share represents net income for the period divided by the weighted
average number of common shares outstanding for the period. Diluted earnings per share
represents net income divided by the weighted average number of common shares outstanding,
inclusive of the effect of dilutive securities. Diluted earnings per
share reflects the potential dilution that
could occur if securities or other contracts to issue common stock were exercised or converted
into common stocks.
10
The following tables reconcile the basic and diluted earnings per share computation (in
thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income available to common stockholders
|
|
$
|
(1,271
|
)
|
|
$
|
3,907
|
|
|
$
|
(23,104
|
)
|
|
$
|
7,771
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
for basic net (loss) income per share — weighted average shares
|
|
|
20,219
|
|
|
|
23,561
|
|
|
|
20,878
|
|
|
|
23,531
|
|
|
Dilutive common stock options
|
|
|
—
|
|
|
|
425
|
|
|
|
—
|
|
|
|
616
|
|
|
Dilutive restricted stock units
|
|
|
—
|
|
|
|
39
|
|
|
|
—
|
|
|
|
50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted net (loss) income per share —
adjusted weighted average shares
|
|
|
20,219
|
|
|
|
24,025
|
|
|
|
20,878
|
|
|
|
24,197
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net (loss) income per share
|
|
$
|
(0.06
|
)
|
|
$
|
0.17
|
|
|
$
|
(1.11
|
)
|
|
$
|
0.33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net (loss) income per share
|
|
$
|
(0.06
|
)
|
|
$
|
0.16
|
|
|
$
|
(1.11
|
)
|
|
$
|
0.32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following is a summary of the number of shares of securities outstanding during the
respective periods that have been excluded from the calculation because the effect on net income
per share would have been antidilutive (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Options
|
|
|
1,139
|
|
|
|
885
|
|
|
|
1,035
|
|
|
|
531
|
|
|
Warrants and restricted stock units
|
|
|
80
|
|
|
|
119
|
|
|
|
76
|
|
|
|
33
|
|
Note 7. Share-based Compensation
Share-based
compensation expense included in the Company’s statement of
operations is as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Cost of revenues
|
|
$
|
219
|
|
|
$
|
460
|
|
|
$
|
520
|
|
|
$
|
862
|
|
|
Selling, general & administrative
|
|
|
1,404
|
|
|
|
898
|
|
|
|
2,795
|
|
|
|
1,653
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,623
|
|
|
$
|
1,358
|
|
|
$
|
3,315
|
|
|
$
|
2,515
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options
The Company has issued share-based compensation under two stock option plans, the 1998
Stock Incentive Plan as amended, and the Amended and Restated 2004
Stock Incentive Plan, which authorizes the issuance of stock
options, restricted stock and other share-based instruments to employees and Board members. The
plans are described in further detail in Note 6 to the consolidated financial statements of the
Company’s Annual Report on Form 10-K for the year ended December 31, 2007. Effective January 1,
2006, the Company adopted the fair value recognition provisions of SFAS No. 123 (revised 2004),
“Share-Based Payment”,
or SFAS 123R, using the modified prospective transition method.
11
The fair values of each award granted under the Company’s stock option plans during the
three and six months ended June 30, 2008 and 2007 were estimated at the date of the grant using
the Black-Scholes option pricing model and the following weighted average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Expected volatility
|
|
|
65
|
%
|
|
|
66
|
%
|
|
|
65
|
%
|
|
|
58
|
%
|
|
Dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
Expected term
|
|
|
3.2
|
|
|
|
4.0
|
|
|
|
4.1
|
|
|
|
4.3
|
|
|
Risk free interest rate
|
|
|
3.3
|
%
|
|
|
4.6
|
%
|
|
|
2.8
|
%
|
|
|
4.5
|
%
|
During the three and six months ended June 30, 2008, the Company issued 44,000 and 122,000
options with an average exercise price of $8.50 and $10.48, respectively. The weighted average
estimated grant date fair values of options granted for the three and six months ended June 30,
2008 and 2007 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average fair value
|
|
$
|
3.97
|
|
|
$
|
6.62
|
|
|
$
|
4.46
|
|
|
$
|
8.08
|
|
As of June 30, 2008, the Company had $3.3 million of total unrecognized compensation
expense, net of estimated forfeitures, related to stock option grants, which will be recognized
over the remaining weighted average period of 1.3 years.
Restricted Stock Units
As of June 30, 2008, the Company had $6.1 million of total unrecognized compensation
expense, net of estimated forfeitures, related to restricted stock units, which will be
recognized over the remaining weighted average vesting period of 1.9 years. For the six months
ended June 30, 2008, 66,000 restricted stock units were granted.
Note 8. Pension Plan
On December 7, 2006 a retiree benefit pension plan (“the Plan”) was adopted for the
Company’s wholly owned subsidiary, PeopleSupport (Philippines), Inc. (“PSPI”). The components of
net periodic benefit cost for the Company’s statutory Philippine pension plan are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
|
2008
|
|
|
2008
|
|
|
Service cost
|
|
$
|
12
|
|
|
$
|
24
|
|
|
Interest cost
|
|
|
2
|
|
|
|
5
|
|
|
Expected return on plan assets
|
|
|
(13
|
)
|
|
|
(27
|
)
|
|
Amortization of net transition obligation
|
|
|
—
|
|
|
|
1
|
|
|
Amortization of net actuarial loss
|
|
|
(80
|
)
|
|
|
(164
|
)
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
(79
|
)
|
|
$
|
(161
|
)
|
|
|
|
|
|
|
|
|
For the six months ended June 30, 2007, the Company made cash contributions of $0.6 million
to the PSPI pension plan. The Company did not make any contributions during 2008.
Under FAS 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement
Plans – an amendment of FASB Statements No. 87, 88, 106 and 132(R)”, the Company was required to
recognize the funded status of its defined benefit plan in its statement of financial position
as of the end of 2007. FAS 158 requires changes in the funded status due to gains and losses to
be reflected in comprehensive income, and transactions that result in settlement of the plan to
be recognized in earnings.
12
Note 9. Derivative Instruments
In March 2008, the Company sold foreign currency forward contracts, not designated as
hedges, between the U.S dollar and the Philippine peso. These contracts were classified as other
current assets and other non-current assets depending on their expiry dates. Derivative assets
of $12.2 million and $6.8 million were included as part of other current assets and other
non-current assets as of December 31, 2007. A loss on sale of
these contracts was recorded in
other income.
During the three months ended June 30, 2008, the Company purchased foreign currency forward
contracts that were designated as cash flow hedges. The Company had derivative liabilities
related to these contracts maturing within 12 months, consisting of Philippine peso contracts
with a notional value of $50.3 million at June 30, 2008. As of June 30, 2008, the Company had
$4.6 million of derivative liabilities. A total of $4.6 million of deferred losses on the
derivative instruments as of June 30, 2008 were included in accumulated other comprehensive
income, a component of shareholders’ equity. The deferred loss expected to be reclassified to
earnings from accumulated other comprehensive income during the next 12 months is $4.6 million.
However this amount and other future reclassifications from accumulated other comprehensive
income will fluctuate with movements in the underlying market price of the forward contracts.
Net losses of $547,000 from settled hedge contracts were reclassified from accumulated
other comprehensive income to earnings during the three and six months ended June 30, 2008.
During the three and six months ended June 30, 2008, there were no recognized losses
related to hedge ineffectiveness.
Note 10. Income Taxes
In the first quarter of 2008, the Company established a full valuation allowance against
its Federal deferred tax asset. Under FAS 109, the Company believes
its recent Federal cumulative
loss represents a significant item of objectively verifiable evidence which must be given
greater weighting than subjective evidence, such as forecasted Federal income, when evaluating
the need for a valuation allowance under FAS 109. Accordingly, under FAS 109, management has
concluded that based on all available information, and proper weighting of objective and
subjective evidence, as of June 30, 2008, it is more likely than
not that its Federal deferred tax
assets will not be realized and a valuation allowance of $23.9 million was recorded. The Company
maintained its California deferred tax asset at the same level as December 31, 2007 based on the
Company’s expectations about the realization of California deferred tax assets, which are based
on the ability to generate worldwide income within the California net operating loss
carryforward period. Each quarter, management considers whether it is more likely than not that
some portion or all of the deferred tax assets will be realized. Management considers its
recent cumulative income within the relevant tax jurisdiction, its projected future taxable
income, customer contract terms and customer concentrations, and applies more weighting to
objective evidence than subjective evidence in making this assessment.
Through the second quarter of 2008, the Company incurred a worldwide pretax loss of $5.4
million, mainly due to the U.S. losses of $19.8 million while generating a profit of $14.4
million in the foreign jurisdictions. A portion of its foreign income is not covered by the
Company’s income tax holiday. Accordingly, the Company recorded tax expense of approximately
$0.2 million in the three months ending June 30, 2008. For the six month period ended June 30,
2008, the Company recorded tax expense of $17.7 million, of which $17.6 million relates to the
establishment of the U.S. valuation allowance.
Accounting for Uncertainty in Income Taxes
The Company adopted the provisions of Financial Accounting Standards Board (“FASB”)
Interpretation No. 48,
Accounting for Uncertainty in Income Taxes — an Interpretation of FASB
Statement No. 109
, or FIN 48, on January 1, 2007. FIN 48 contains a two-step approach to
recognizing and measuring uncertain tax positions accounted for in accordance with
FASB Statement 109,
Accounting for Income Taxes
. The first step is to evaluate the tax
position for recognition by determining if the weight of available evidence indicates that it is
more likely than not that the position will be sustained on audit, including resolution of any
related appeals or litigation processes. The second step is to measure the tax benefit as the
largest amount that is more than 50% likely of being realized upon ultimate settlement.
13
The implementation of FIN 48 did not have a material affect on the Company’s financial
statements at adoption and as of June 30, 2008. The Company’s evaluation was performed for the
tax years ended December 31, 2005, 2006 and 2007. The Company has received notices from certain
agencies within the Philippine government raising technical issues or providing interpretations
of the Company’s tax incentive agreements with respect to its facilities in Manila, which might
place limits on its protection from taxation of income generated from operations or investments
under the tax incentive agreements for these locations. The Company believes it has
substantially complied with the requirements and objectives of the each of the tax incentive
agreements in question but has received conflicting opinions from Philippine officials regarding
the ultimate outcomes of these matters. The Company believes that it has valid arguments to
protect the tax incentives it has received but may not prevail in all of these matters. Based
on its evaluation of the issues in accordance with FIN 48 and the information currently
available, including the Company’s knowledge of past practices and precedents, no liability or
related expense is recordable as of June 30, 2008.
The Company may from time to time be assessed interest or penalties by major tax
jurisdictions. In the event the Company receives an assessment for interest and/or penalties, it
will be classified in the financial statements as tax expense.
Note 11. Segment and Geographic Information
The Company operates as two business segments: customer management services and
transcription and captioning services. The Company’s transcription and captioning service
segment is not separately presented as it currently represents less than ten percent of the
consolidated revenues, assets and profit of the Company. Substantially all of the Company’s
revenue was derived from U.S.-based companies and is denominated in U.S. dollars.
The following tables present certain geographic information regarding the Company’s operations
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
$
|
33,411
|
|
|
$
|
33,186
|
|
|
$
|
66,679
|
|
|
$
|
66,660
|
|
|
Foreign
|
|
|
2,964
|
|
|
|
1,142
|
|
|
|
5,416
|
|
|
|
1,265
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
36,375
|
|
|
$
|
34,328
|
|
|
$
|
72,095
|
|
|
$
|
67,925
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
As of
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Total assets:
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
$
|
96,962
|
|
|
$
|
159,511
|
|
|
Philippines
|
|
|
81,790
|
|
|
|
71,998
|
|
|
Costa Rica
|
|
|
3,153
|
|
|
|
1,701
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
181,905
|
|
|
$
|
233,210
|
|
|
|
|
|
|
|
|
|
Note 12. Contingencies
The Company is subject to legal proceedings and claims which arise in the ordinary course
of business. Although occasional adverse decisions or settlements may occur, the potential
loss, if any, cannot be reasonably estimated. However, management believes that the final
disposition of current matters will not have a material adverse effect on the financial
position, results of operations or cash flow of the Company. The Company maintains various
liability insurance coverages to protect its assets from losses arising out of or involving
activities associated with ongoing and normal business operations.
The Company acquired PeopleSupport RapidText, Inc. (formerly RapidText, Inc.) and its
subsidiary, The Transcription Company (collectively, the “Subsidiaries”) in January 2006. The
Subsidiaries were parties to an on-going arbitration proceeding and the arbitrator issued an
award in the amount of $946,000 against the Subsidiaries, which was confirmed by the Los Angeles
Superior Court. The Subsidiaries have appealed the judgment confirming the arbitration award.
The Company is entitled to indemnification from the selling stockholders of the subsidiaries
under the purchase agreement with such selling stockholders and believes that the final
disposition of such matter will not have a material adverse effect on the Company. A cash bond
has been posted with the Los Angeles Superior Court by certain Selling Stockholders.
14
Note 13. Commitments
The lease for the facility housing the Company’s corporate headquarters in Los Angeles,
California expires on July 31, 2008. The Company will continue to occupy the facility after the
expiration by paying a premium on the lease on a month to month basis. The Company has entered
into a long-term lease for another facility in Los Angeles that will eventually house its
corporate headquarters. The lease commences on August 1, 2008 and the scheduled expiration date
is May 31, 2017. Base rent under the new lease is $31,500 per month increasing to $43,110 per
month by the end of the lease agreement. The Company has the option to terminate the lease
anytime from July 31, 2011 through May 31, 2014, subject to a nine month notice period and
payment of certain expenses.
The lease for the facility housing the Company’s RapidText subsidiary expired on July 15,
2008. RapidText operations have been moved to a new facility under a lease that commenced on
July 15, 2008 and expires on September 14, 2013. Base rent under the new lease is $10,565 per
month until expiration.
Note 14. Property Company
In the first quarter of 2007, PeopleSupport Properties Philippines, Inc. (“PeopleSupport
Properties”), a Philippine corporation owned 40% by
PeopleSupport Philippines Inc. (“PSPI”) and 60% by a statutorily required
pension trust established for the benefit of PSPI’s employees, acquired two undeveloped
properties, one in Manila and one in Cebu, for a total of $8.8 million. PSPI loaned the money to
PeopleSupport Properties to purchase the land. The fully owned subsidiaries established to
hold the Manila and Cebu properties were Real Property Innovative Solutions Inc. (“RPISI”) and
Innovative Land Development Solutions Inc (“ILDSI”), respectively. Since the Company has
controlling interest in PeopleSupport Properties, the balance sheet and results of operations
for PeopleSupport Properties and its fully owned subsidiaries are consolidated into the
Company’s financial statements. To the extent PeopleSupport Properties and its subsidiaries
operate at a loss, no minority interest will be shown in the financial statements. As of June
30, 2008, PeopleSupport Properties and its subsidiaries had recorded cumulative net losses of
less than $0.1 million related to purchasing and holding the property.
In July 2008, RPISI, the Company holding the Manila property, was sold. Total proceeds to
PeopleSupport Properties, under the sales agreement are expected to be approximately $13
million with $3 million collected in July 2008. The remaining balance is currently held in
escrow and is expected to be collected upon completion of certain tax and title related filings.
Approximately $0.7 million of the proceeds will be restricted until January 2009. The gain on
sale recorded by PeopleSupport Properties in connection with the transaction is expected to be
approximately $5 million net of taxes and transaction fees.
Note 15. Line of Credit
In July 2006, the Company entered into an agreement with Citibank that provides a revolving
line of credit for general corporate purposes and allows the Company to borrow up to $25.0
million. The line of credit expired on July 28, 2008. As of June 30, 2008, the Company did not
have any borrowings under the agreement and does not intend to renew the line.
Note 16. New Accounting Pronouncements
In June 2008, the FASB issued Staff Position EITF 03-6-1, “
Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating Securities”
, or FSP EITF 03-6-1.
FSP EITF 03-6-1 addresses whether instruments granted in share-based payment transactions are
participating securities prior to vesting and, therefore, need to be included in the earnings
allocation in computing earnings per share (EPS) under the two-class method described in
paragraphs 60 and 61 of FASB Statement No. 128, “
Earnings per Share”.
FSP EITF 03-6-1 shall be
effective for financial statements issued for fiscal
years beginning after December 15, 2008, and interim periods within those years. All
prior-period EPS data presented shall be adjusted retrospectively (including interim financial
statements, summaries of earnings, and selected financial data) to conform with the provisions
of this FSP. Early application is not permitted. The Company is currently assessing the effect
of FSP EITF 03-6-1 on its financial condition, results of operations and cash flows.
15
In May 2008, the FASB issued SFAS No. 162, “
The Hierarchy of Generally Accepted Accounting
Principles”,
or SFAS 162. The new standard is intended to improve financial reporting by
identifying a consistent framework, or hierarchy, for selecting accounting principles to be used
in preparing financial statements that are presented in conformity with U.S. generally accepted
accounting principles (GAAP) for non governmental entities. Prior to the issuance of SFAS 162,
GAAP hierarchy was defined in the American Institute of Certified Public Accountants (AICPA)
Statement on Auditing Standards (SAS) No. 69, “
The Meaning of Present Fairly in Conformity With
Generally Accepted Accounting Principles”
. SAS 69 has been criticized because it is directed to
the auditor rather than the entity. SFAS 162 addresses these issues by establishing that the
GAAP hierarchy should be directed to entities because it is the entity (not its auditor) that is
responsible for selecting accounting principles for financial statements that are presented in
conformity with GAAP. SFAS 162 is effective 60 days following the SEC’s approval of the Public
Company Accounting Oversight Board Auditing amendments to AU Section 411, “
The Meaning of
Present Fairly in Conformity with Generally Accepted Accounting Principles”
. SFAS 162 is only
effective for nongovernmental entities; therefore, the GAAP hierarchy will remain in SAS 69 for
state and local governmental entities and federal governmental entities. The Company is
currently assessing the effect of SFAS 162 on its financial condition, results of operations and
cash flows.
In April 2008, the FASB issued Staff Position FAS 142-3, “
Determination of the Useful Life
of Intangible Assets”,
or FSP FAS 142-3. FSP FAS 142-3 amends the factors that should be
considered in developing renewal or extension assumptions used to determine the useful life of a
recognized intangible asset under SFAS 142, “
Goodwill and Other Intangible Assets”
. The intent
of this FSP is to improve the consistency between the useful life of a recognized intangible
asset under SFAS 142 and the period of expected cash flows used to measure the fair value of the
asset under SFAS 141R, “
Business Combinations”,
and other U.S. generally accepted accounting
principles (GAAP). FSP FAS 142-3 is effective for fiscal years beginning after December 15,
2008, and interim periods within those fiscal years. Early adoption is prohibited. The guidance
for determining the useful life of a recognized intangible asset in this FSP shall be applied
prospectively to intangible assets acquired after the effective date. The disclosure
requirements shall be applied prospectively to all intangible assets recognized as of, and
subsequent to, the effective date. The Company is currently assessing the effect of FSP FAS
142-3 on its financial condition, results of operations and cash flows.
In March 2008, the FASB issued SFAS No. 161, “
Disclosures about Derivative Instruments and
Hedging Activities”,
or SFAS 161
,
an amendment of SFAS No. 133. SFAS 161 changes the disclosure
requirements for derivative instruments and hedging activities. Entities are required to provide
enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how
derivative instruments and related hedged items are accounted for under SFAS No. 133, and its
related interpretations, and (c) how derivative instruments and related hedged items affect an
entity’s financial position, financial performance, and cash flows. The Statement encourages,
but does not require, presenting disclosures for earlier periods for comparative purposes at
initial adoption. SFAS 161 is effective for financial statements issued for fiscal years and
interim periods beginning after November 15, 2008, with early application encouraged. The
Company expects to adopt SFAS 161 on January 1, 2009. Because FAS 161 amends only the disclosure
requirements for derivative instruments and hedged items, the adoption of FAS 161 will not
affect the Company’s consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), “
Business Combinations”
, or
SFAS 141R. This Statement replaces SFAS No. 141, “
Business Combinations
”, and requires an
acquirer in a business combination to recognize the assets acquired, the liabilities assumed,
including those arising from contractual contingencies, any contingent consideration, and any
non-controlling interest in the acquiree at the acquisition date, measured at their fair values
as of that date, with limited exceptions specified in the Statement. SFAS 141R also requires the
acquirer in a business combination achieved in stages (sometimes referred to as a step
acquisition) to recognize the identifiable assets and liabilities, as well as the
non-controlling interest in the acquiree, at the full amounts of their fair values (or other
amounts determined in accordance with SFAS 141R). In addition, SFAS 141R’s requirement to
measure the non-controlling interest in the acquiree at fair value will result in recognizing
the goodwill attributable to the non-controlling interest in addition to that attributable to
the acquirer. SFAS 141R amends SFAS No. 109, “
Accounting for Income Taxes”
, to require the
acquirer to recognize changes in the amount of its deferred tax benefits that are recognizable
because of a business combination either in income from continuing operations in the period of
the combination, or directly in contributed capital, depending on the circumstances. It also
amends SFAS 142,
“
Goodwill and Other Intangible Assets”
, to provide guidance on the impairment testing of
acquired research and development intangible assets and assets that the acquirer intends not to
use. SFAS 141R applies prospectively to business combinations for which the acquisition date is
on or after the beginning of the first annual reporting period beginning on or after December
15, 2008 (The Company’s fiscal year commencing January 1, 2009). Accordingly, SFAS 141R will be
applied by the Company to business combinations occurring on or after January 1, 2009.
16
In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160,
“
Non-controlling Interests in Consolidated Financial Statements”
, or SFAS 160. SFAS 160 amends
Accounting Research Bulletin 51, “
Consolidated Financial Statements”
, to establish accounting
and reporting standards for the non-controlling interest in a subsidiary and for the
deconsolidation of a subsidiary. It also clarifies that a non-controlling interest in a
subsidiary is an ownership interest in the consolidated entity that should be reported as equity
in the consolidated financial statements. SFAS 160 also changes the way the consolidated income
statement is presented by requiring consolidated net income to be reported at amounts that
include the amounts attributable to both the parent and the non-controlling interest. It also
requires disclosure, on the face of the consolidated statement of income, of the amounts of
consolidated net income attributable to the parent and to the non-controlling interest. SFAS 160
requires that a parent recognize a gain or loss in net income when a subsidiary is
deconsolidated and requires expanded disclosures in the consolidated financial statements that
clearly identify and distinguish between the interests of the parent owners and the interests of
the non-controlling owners of a subsidiary. SFAS 160 is effective for fiscal periods, and
interim periods within those fiscal years, beginning on or after December 15, 2008 (the
Company’s fiscal year commencing January 1, 2009). The Company does not currently expect the
adoption of the provisions of SFAS No. 160 to have a material effect on its financial condition,
results of operations or cash flows.
Note 17. Stock Repurchase Program
On August 9, 2007, the Board of Directors authorized a stock repurchase program to
repurchase up to $25.0 million of the Company’s outstanding shares of common stock on the open
market over a one-year period. The program was completed in November, 2007 and the shares were
retired upon purchase.
On March 5, 2008, the Board of Directors authorized a second stock repurchase program to
repurchase up to $25.0 million of the Company’s outstanding shares of common stock on the open
market. The program was completed in June, 2008. The Company acquired 2.6 million shares at an
average price of $9.47, and the shares were retired upon repurchase.
Note 18. Related Party Transactions
Upon acquisition of RapidText, the Company entered into a three-year lease agreement with
the founder of RapidText, who was an officer of the Company until August 7, 2007. The Company
continued to lease the office space in the building owned by him and one of the Company’s
employees. Under the agreement, the Company pays rent of approximately $12,000 per month. The
lease expired in July 2008. As noted in note 13 above,
RapidText operations have been moved to a new facility under a new
lease.
Note 19. Stockholder Rights Plan
On August 27, 2007, the Board of Directors of the Company adopted a stockholder rights plan
and declared a dividend distribution of one preferred stock purchase right (a “Right”) for each
outstanding share of the Company’s Common Stock to certain shareholders of record under certain
circumstances where one or more acquirers have purchased 10% or more of the Common Stock. Each
Right, when it becomes exercisable, entitles the registered holder to purchase from the Company
one one-hundredth of a Preferred Share, at a per-share purchase price of $65.00 in cash, subject
to adjustment (as so adjusted, the “Purchase Price”). A Right entitles the holder to receive
that number of shares of Common Stock which equals such Purchase Price divided by one-half of
the current market price of the Common Stock. The Company may at any time redeem the Rights in
whole but not in part, at a redemption price of $0.001 (as adjusted) per Right.
Note 20. Subsequent Event
On
August 3, 2008, the Company entered into a definitive agreement
with Essar Services, Mauritius (“Essar”), and Easter Merger
Sub, Inc., a wholly owned subsidiary of Essar (“Merger
Sub”) pursuant to which Merger Sub will merge with and into the
Company, with the Company as the surviving corporation and a
wholly-owned subsidiary of Essar. Under the terms of the agreement,
each issued and outstanding share of the Company’s common stock
will be cancelled and will be automatically converted into the right
to receive a merger consideration of $12.25 in cash. In connection with the Merger, all of PeopleSupport’s outstanding stock options and restricted stock units outstanding
and unexercised, as the case may be, immediately prior to the effective time of the Merger, whether or not vested, will be
cancelled and converted into the right to receive the merger consideration. All previously unrecognized share-based
compensation expense will be recognized upon the conversion of the equity instruments in connection with the transaction.
The merger is subject to customary closing conditions, including
obtaining PeopleSupport stockholder approval, regulatory approval and
the absence of any order or injunction prohibiting the consummation
of the Merger. As a result of these conditions, no assurances can be
provided that the transaction will close in the time frame indicated,
if at all. If the Company is not able to close the transaction, under
certain circumstances, it may be liable to Essar for a break up fee
of approximately $8.7 million.
17
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
This report on Form 10-Q contains forward-looking statements within the meaning of the federal
securities laws that involve material risks and uncertainties, including, without limitation,
statements regarding the benefits of our services, our business
model, our competitive strengths, our growth, profitability and
long-term value, our tax incentive in the Philippines, our critical
account policies, recent accounting pronouncements, our expectations
regarding our revenues, clients, expenses,
anticipated cash needs, estimates regarding its capital requirements
and our needs for
additional financing or debt, our forward contracts, our internal
controls, and our legal proceedings. We generally identify forward-looking statements by using such
terms as “may,” “will,” “could,” “should,” “potential,” “continue,” “expect,” “intend,” “plan,”
“estimate,” “anticipate,” “believe” or
similar phrases or the negatives of such terms. We base these
statements on beliefs as well as assumptions we make using
information currently available. These forward-looking statements are subject to risks,
uncertainties and assumptions, including those identified below in “Management’s Discussion and
Analysis of Financial Condition and Results of Operations — Risk Factors,” as well as other
matters not yet known or not currently considered material. Should one or more of the
circumstances described in our risk factors materialize, or should underlying assumptions prove
incorrect, actual results may vary materially from those anticipated, estimated or projected.
These risks, uncertainties and assumptions include, but are not
limited to, our dependence on a limited number of clients, negative public reaction to offshore outsourcing and
the effect of recently proposed legislation, competitive conditions
in the markets we serve, our ability to manage our growth, the risks associated with operations in the
Philippines and Costa Rica, and other risks discussed in “Management’s Discussion and Analysis
of Financial Condition and Results of Operations — Risk Factors” in this report and in the
latest report on Form 10-K filed with the Securities and Exchange Commission (“SEC”). These
forward-looking statements represent our estimates and assumptions only as of the date
of this report and, unless required by law, we do not undertake any obligation to
update or revise these forward-looking statements. You should, however, review the factors and
risks we describe in other reports and registration statements that it files from time
to time with the SEC.
All references to “PeopleSupport”, “we,” “our,” or the “Company” mean PeopleSupport, Inc.
and its subsidiaries, except where it is clear from the context that
such terms mean PeopleSupport, Inc. and excludes subsidiaries.
The following discussion should be read in conjunction with the unaudited consolidated
financial statements and accompanying notes, which appear elsewhere in this report. This
discussion contains forward-looking statements based on current expectations that involve
risks and uncertainties. Our actual results could differ materially from those anticipated in
these forward-looking statements as a result of various factors, including those discussed
below in “Risk Factors” and elsewhere in this report.
Overview
We are an offshore business process outsourcing (BPO) provider offering customer
management, transcription and captioning, and additional BPO services from our centers in the
Philippines, Costa Rica and the United States. We provide outsourced services to a range of
primarily United States-based clients that operate predominantly within the financial
services, travel and hospitality, healthcare, insurance , technology, telecommunications, and
media industries. We offer a range of customer management services through multiple integrated
communications channels, such as customer service, inbound sales, direct response sales
services and accounts receivable management services. Our transcription services involve
transcribing voice recordings into customized client reports. Our captioning services include
both real-time and offline captioning. Our BPO services include credit application processing,
mortgage processing, title searches and data verification.
We
believe that our large scale offshore business model with an emphasis on industry
verticals has allowed us to successfully create a sustainable and scalable position as a
leading offshore BPO services provider. We believe that we have the following competitive
strengths:
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we have a low cost offshore delivery model;
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we offer industry expertise with a focus on collaborative client relationships;
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we offer sales and delivery effort focused on every step of the customer
interaction; and
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we provide scalable delivery and technology platform.
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Our objective is to drive growth, improve profitability and to build long term value by
pursuing the following strategic initiatives:
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increase organic growth, add new customers and expand geographies;
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deliver high quality, value-added multilingual services;
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diversify service offerings to leverage existing infrastructure;
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expand to additional countries;
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pursue selective strategic acquisitions; and
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improve operational efficiencies to partly mitigate unfavorable impact of
appreciating foreign currencies.
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Sources of Revenues
A majority of our revenues are derived from fees, which include:
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time-delineated or production-based fees, including hourly or per minute
charges and charges per interaction or transaction, and training fees, all of which
are separately negotiated on an individual client basis. Such fees represent greater
than 90% of our total revenues.
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implementation fees, including revenue associated with the installation and
integration of new clients into the Company’s telecommunications, information
technology and client reporting structures.
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For the three and six months ended June 30, 2008 and 2007, respectively, substantially
all of our revenues were derived from U.S.-based clients.
Historically, revenue has been concentrated among a few large clients. For the six
months ended June 30, 2008 our three largest clients accounted for 53% of our revenue,
compared to 51% for the corresponding period in 2007.
Key Expense Categories
Cost of revenues.
Cost of revenues consists primarily of salaries, payroll taxes and
employee benefit costs paid to the professionals that we employ in the Philippines, Costa Rica
and the United States and excludes depreciation and amortization expenses. Because our
employee related costs, which account for approximately two-thirds of our cost of revenues,
are paid in the local currency, we are exposed to the risk of foreign currency fluctuations.
In 2008, the Philippine peso strengthened against the U.S. dollar compared to the same period
in 2007, resulting in increased cost of revenue. In an effort to minimize the downside risk of
fluctuating currency rates, we enter into foreign exchange forward contracts from time to
time. Any gains or losses from the settled and outstanding forward contracts have been
historically recorded in other income.
The non-employee related costs include telecommunications costs, information technology
costs, rent expense, facilities support and customer management support costs related to the
operation of outsourcing and data centers. Costs of revenues does not include depreciation of
assets used in the production of revenue.
Selling, general and administrative.
Selling, general and administrative expenses
consist primarily of sales and administrative employee-related expenses, sales commissions,
professional fees, information technology costs, travel, costs associated with Sarbanes-Oxley
compliance, marketing programs (which include product marketing expenses, corporate
communications, conferences and other brand building and advertising) and other corporate
expenses.
Depreciation and amortization.
We purchase substantially all of our equipment. We record
property and equipment at cost and calculate depreciation using the straight-line method over
the estimated useful lives of assets, which range from four to seven years. We amortize
leasehold improvements on a straight-line basis over the shorter of the lease term or the
estimated useful life of the asset. If the actual useful life of such asset is less than the
estimated depreciable life, we would record additional depreciation expense or a loss on
disposal to the extent the net book value of such asset is not recovered upon sale.
19
Recent Transaction
On
August 3, 2008, we entered into a definitive agreement with
Essar Services, Mauritius, (“Essar”), and Easter Merger
Sub, Inc. (Merger Sub), pursuant to which Merger Sub will merge with
and into PeopleSupport, with PeopleSupport as the surviving
corporation and a wholly-owned subsidiary of Essar (“Merger Sub”). Under the terms of the
agreement, each issued and outstanding share of our common stock will
be cancelled and will be automatically converted into the right to
receive a merger consideration of $12.25 in cash. In connection with the Merger, all of our
outstanding stock options and restricted stock units outstanding and unexercised, as the case may be, immediately prior
to the effective time of the Merger, whether or not vested, will be cancelled and converted into the right to receive the
merger consideration. All previously unrecognized share-based compensation expense will be recognized upon the conversion of
the equity instruments in connection with the transaction. The merger
is subject to customary closing conditions, including obtaining PeopleSupport
stockholder approval, regulatory approval and the absence of any
order or injunction prohibiting the consummation of the Merger. As a
result of these conditions, no assurances can be provided that the
transaction will close in the time frame indicated, if at all. If we
are not able to close the transaction, under certain circumstances we
may be liable to Essar for a break up fee of approximately
$8.7 million.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with accounting
principles generally accepted in the United States. The preparation of these consolidated
financial statements requires us to make estimates and assumptions that affect the reported
amounts of assets, liabilities, revenues, costs and expenses and related disclosures. We
evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from
these estimates. The following accounting policies and estimates are those which we
believe are the most critical to assist investors in fully understanding and evaluating our
consolidated financial condition and results of operations.
Revenues and Deferred Revenue Recognition
Revenues are recognized pursuant to applicable accounting standards, including SEC Staff
Accounting Bulletin No. 101, “
Revenue Recognition in Financial Statements”
, or SAB 101, and
SEC Staff Accounting Bulletin 104, “
Revenue Recognition”
, or SAB 104. SAB 101, as amended, and
SAB 104 summarize certain of the SEC staff’s views in applying generally accepted accounting
principles to revenue recognition in financial statements and provide guidance on revenue
recognition issues in the absence of authoritative literature addressing a specific
arrangement or a specific industry.
We recognize revenues from customer management fees when services are performed under a
fully executed contractual agreement. Implementation fees received in connection with certain
contracts are deferred and recognized ratably over the service period of the respective
contracts. We also recognize revenue from the operating lease ratably over the life of the
lease.
Deferred revenue represents, primarily, amounts billed or cash received in advance from
two of our major customers and is earned when services are provided to these customers. As of
June 30, 2008 and December 31, 2007, we had deferred revenue of $2.8 million and $5.3 million,
respectively. The decrease in deferred revenue was due to renegotiation of prepayment terms
for one of our largest clients. The new agreement took effect in the second quarter 2008.
Accounting for Share-based Compensation
We issue both incentive and nonqualified stock options along with restricted stock units.
Since January 1, 2006, non-cash share-based compensation expense has been accounted for in
accordance with SFAS 123(R). We use the Black-Scholes-Merton model to estimate the fair value
of our share-based payment awards on the date of grant. The two key assumptions used in this
calculation are the expected term of the option and the volatility of our stock. Based upon a
third party analysis, we estimate the expected term of our options for the three and six
months ended June 30, 2008 to be 3.2 and 4.1 years, respectively. To estimate our volatility,
we use a combination of both a peer group and our historical volatility. Our expected
volatility for the three and six months ended June 30, 2008 was 65%.
We issue both incentive and nonqualified stock options along with restricted stock units.
Accounting for Income Taxes
We account for income taxes in accordance with SFAS 109,
Accounting for Income Taxes.
At
June 30, 2008, we had U.S. and California net operating loss carry-forwards of approximately
$83.0 million and $33.1 million, respectively. The U.S. carry forwards expire from 2020 to 2028
and the California carry forwards expire from 2012 through 2018. In the first quarter of 2008,
we determined that it is more likely than not that our U.S. deferred tax assets will not be
realized and we established a deferred tax asset valuation allowance of $23.9 million.
In assessing the realizability of deferred tax assets, we consider whether it is more
likely than not that some portion or all of the deferred tax assets will be realized after
considering all available information and properly weighting objectively
verifiable evidence, such as recent cumulative losses, more than subject evidence, such as
forecasted income. We consider recent cumulative income, projected future taxable income,
customer contract terms and customer concentrations in making this assessment. We reassess the
realizability of deferred tax assets on a quarterly basis.
20
In June 2006, the Financial Accounting Standards Board issued FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109,
or FIN
48. FIN 48 clarifies the accounting for uncertainty in income taxes in an enterprise’s financial
statements in accordance with FASB Statement No 109,
Accounting for Income Taxes
and prescribes
a recognition threshold and measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also
provides guidance on the classification, interest and penalties, accounting in interim periods,
disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15,
2006 and we adopted the provisions of FIN 48 effective January 1, 2007. At adoption, FIN 48 did
not have a material effect on our financial statements. We have received notices from
certain agencies within the Philippine government raising technical issues or providing
interpretations of our tax incentive agreements with respect to its facilities in
Manila, which might place limits on its protection from taxation of income generated from
operations or investments under the tax incentive agreements for
these locations. We have substantially complied with the requirements and objectives of the each of the tax incentive
agreements in question but has received conflicting opinions from Philippine officials regarding
the ultimate outcomes of these matters. We believe that we have valid arguments to
protect the tax incentives it has received but may not prevail in all of these matters. Based
on our evaluation of the issues in accordance with FIN 48 and the information currently
available, including our knowledge of past practices and precedents, no liability or
related expense is recordable as of June 30, 2008.
Marketable Securities
Our investments in marketable securities consist primarily of government bonds, corporate
bonds, mortgage/asset backed securities, and preferred stock. We account for our investments
in debt and equity securities under SFAS No. 115,
“Accounting for Certain Investments in Debt
and Equity Securities”
, or SFAS 115. Marketable securities are classified as
available-for-sale securities and are accounted for at their fair value. Under SFAS 115,
unrealized holding gains and losses are excluded from earnings and reported net of the related
tax effect in other comprehensive income (OCI) as a separate component of shareholders’
equity. When the fair value of an investment declines below its original cost, we evaluate the
investment in accordance with FASB Staff Position (“FSP”) 115-1 and 124-1 “
The Meaning of
Other-Than-Temporary Impairment and Its Applications to Certain Investments
” which addresses
the determination as to when an investment is considered impaired, whether that impairment is
other than temporary, and the measurement of an impairment loss. When the fair value of an
investment declines to below its original cost, we consider all available evidence to evaluate
whether the decline is other-than-temporary. Among other things, we consider the duration and
extent of the decline and economic factors influencing the markets. If a decline in fair value
is judged to be other-than-temporary, the cost basis of the individual security is written
down to fair value as a new cost basis and the amount of the write-down is included in
earnings. The new cost basis is not be changed for subsequent recoveries in fair value.
Subsequent increases in the fair value of available-for-sale securities are included in OCI.
The determination of whether a loss is other than temporary is highly judgmental and may have
a material impact on our results of operations.
At June 30, 2008, our investments included $15.0 million of securities, included in
government bonds, with an auction reset feature (“auction rate securities”). These securities
are collateralized by higher education funded student loans, and supported by the Department
of Education as part of the Federal Family Education Loan Program (FFELP). The Dutch auction
process that resets the applicable interest rate at predetermined calendar intervals is
intended to provide liquidity to the holder of auction rate securities by matching buyers and
sellers within a market context enabling the holder to gain immediate liquidity by selling
such interests at par or rolling over their investment. If there is an imbalance between
buyers and sellers, the risk of a failed auction exists. During the six months ended June 30,
2008, we experienced three failed issues at auction with a par value of $15.0 million. Given
the uncertainty in the market, there can be no assurance as to when we would be able to
liquidate a particular issue. In such case of a failure we would not be able to access those
funds until a further auction of these investments is successful, the security is called by
the issuer or a buyer is found outside the auction process, or the securities mature.
Contractual maturities for these securities range from 25 years to 37 years. After
consideration of the potential risks mentioned above, we did not record an impairment charge
as we believe that the underlying creditworthiness of these securities is stable, and that
these securities will eventually be liquidated. As of June 30, 2008, there were no downgrades
in agency ratings of these securities. All auction rate securities were rated Moody’s “AAA”,
and were highly collateralized. In addition, we continued to receive interest payments as
scheduled.
We have reclassified all auction rate securities from short term to long term to
reflect the current illiquidity of these securities. At June 30, 2008 our best estimate of
the fair values of these securities approximate their par values. We will continue to
assess the fair value of these securities for substantive changes in relevant market
conditions, changes in financial condition or other changes in these investments. We may
be required to an impairment charge if we determine that there are declines in fair value
that are other-than-temporary. Based on our expected operating cash flows, and other
sources of cash, we do not expect the potential lack of liquidity in these investments to
affect our ability to execute our current business plan.
21
Long-lived Asset Impairment
Depreciation of property and equipment is computed on a straight-line basis over the
estimated useful lives of the related assets. Leasehold improvements are amortized on a
straight-line basis over the life of the related asset or the term of the lease, whichever is
shorter.
Long-lived assets, including fixed assets and purchased intangibles subject to
amortization, are reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of the asset may not be recoverable. An undiscounted cash flow
analysis is utilized to determine whether impairment has occurred. If impairment is
determined, the asset is written down to its estimated fair value. The estimation of future
cash flows and fair values involves considerable management judgment.
Goodwill and intangible assets with indefinite lives are reviewed for impairment annually
in the fourth quarter or whenever events or changes in circumstances indicate the asset might
be impaired. An impairment loss is recognized to the extent that the carrying amount exceeds
the asset’s fair value. This determination is made at the reporting unit level and consists of
two steps. First we determine the fair value of a reporting unit and compare it to its
carrying amount. Second, if the carrying amount of a reporting unit exceeds its fair value, an
impairment loss is recognized for any excess of the carrying amount on the reporting unit’s
goodwill and other intangibles over the implied fair value. Based on the results of our annual
impairment reviews in the fourth quarter of 2007, there has been no impairment of goodwill.
Intangible assets with finite lives are amortized over their expected lives.
Derivative Instruments
During the quarter, we purchased foreign currency forward contracts which were designated
as cash-flow hedges. All of these derivatives were Philippine peso contracts maturing within
12 months. We account for financial derivative instruments in accordance with SFAS No. 133,
“
Accounting for Derivative Instruments and Hedging Activities
”, as amended. We use these
contracts to reduce our foreign currency exposure due to exchange rate fluctuations on
forecasted cash flows denominated in the Philippine peso. Upon proper qualification, these
contracts are accounted for as cash-flow hedges, as defined by SFAS 133.
All derivatives are recognized in the balance sheet at fair value. Changes in the fair
value of derivatives that are highly effective and designated as cash flow hedges are recorded
in accumulated other comprehensive income, until the forecasted underlying transactions occur.
Any realized gains or losses resulting from the cash flow hedges are recognized together with
the hedged transaction within earnings. Cash flows from the derivative contracts are
classified within cash flows from operating activities. Ineffectiveness is measured based on
the change in fair value of the forward contracts and the fair value of the hypothetical
derivatives with terms that match the critical terms of the risk being hedged. Hedge
ineffectiveness is recognized within earnings.
We formally assess, both at the hedge’s inception and on an ongoing basis, whether the
derivatives that are used in hedging transactions are highly effective in offsetting changes
in cash flows of hedged items on a prospective and retrospective basis. When it is determined
that a derivative is not highly effective as a hedge or that it has ceased to be a highly
effective hedge or if a forecasted hedge is no longer probable of occurring, we discontinue
hedge accounting prospectively.
At June 30, 2008, all hedges were determined to be highly effective. For additional
information, see Note 9 – Derivative Instruments.
Recent Accounting Pronouncements
In June 2008, the FASB issued Staff Position EITF 03-6-1, “
Determining Whether
Instruments Granted in Share-Based Payment Transactions Are Participating Securities”
, or FSP
EITF 03-6-1. FSP EITF 03-6-1 addresses whether instruments granted in share-based payment
transactions are participating securities prior to vesting and, therefore, need to be included
in the earnings allocation in computing earnings per share (EPS) under the two-class method
described in paragraphs 60 and 61 of FASB Statement No. 128, “
Earnings per Share”.
FSP EITF
03-6-1 shall be effective for financial statements issued for fiscal years beginning after
December 15, 2008, and interim periods within those years. All prior-period EPS data presented
shall be adjusted retrospectively (including interim financial statements, summaries of
earnings, and selected financial data) to conform with the provisions of this FSP. Early
application is not permitted. We are currently assessing the effect of FSP EITF 03-6-1 on our
financial condition, results of operations and cash flows.
22
In May 2008, the FASB issued Staff Position APB 14-1,
“
Accounting for Convertible Debt
Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)”,
or FSP APB 14-1. FSP APB 14-1 clarifies that convertible debt instruments that may be settled
in cash upon conversion (including partial cash settlement) are not addressed by paragraph 12
of APB Opinion No.14, “
Accounting for Convertible Debt and Debt Issued with Stock Purchase
Warrants”
. Additionally, this FSP specifies that issuers of such instruments should separately
account for the liability and equity components in a manner that will reflect the entity’s
nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. FSP
APB 14-1 is effective for financial statements issued for fiscal years beginning after
December 15, 2008, and interim periods within those fiscal years. Early adoption is not
permitted. We currently do not have instruments within the scope of FSP APB 14-1.
In May 2008, the FASB issued SFAS No. 162, “
The Hierarchy of Generally Accepted
Accounting Principles”,
or SFAS 162. The new standard is intended to improve financial
reporting by identifying a consistent framework, or hierarchy, for selecting accounting
principles to be used in preparing financial statements that are presented in conformity with
U.S. generally accepted accounting principles (GAAP) for non governmental entities. Prior to
the issuance of SFAS 162, GAAP hierarchy was defined in the American Institute of Certified
Public Accountants (AICPA) Statement on Auditing Standards (SAS) No. 69, “
The Meaning of
Present Fairly in Conformity With Generally Accepted Accounting Principles”
. SAS 69 has been
criticized because it is directed to the auditor rather than the entity. SFAS 162 addresses
these issues by establishing that the GAAP hierarchy should be directed to entities because it
is the entity (not its auditor) that is responsible for selecting accounting principles for
financial statements that are presented in conformity with GAAP. SFAS 162 is effective 60 days
following the SEC’s approval of the Public Company Accounting Oversight Board Auditing
amendments to AU Section 411, “
The Meaning of Present Fairly in Conformity with Generally
Accepted Accounting Principles”
. SFAS 162 is only effective for nongovernmental entities;
therefore, the GAAP hierarchy will remain in SAS 69 for state and local governmental entities
and federal governmental entities. We are currently assessing the effect of SFAS 162 on our
financial condition, results of operations and cash flows.
In April 2008, the FASB issued Staff Position FAS 142-3, “
Determination of the Useful
Life of Intangible Assets”,
or FSP FAS 142-3. FSP FAS 142-3 amends the factors that should be
considered in developing renewal or extension assumptions used to determine the useful life of
a recognized intangible asset under SFAS 142, “
Goodwill and Other Intangible Assets”
. The
intent of this FSP is to improve the consistency between the useful life of a recognized
intangible asset under SFAS 142 and the period of expected cash flows used to measure the fair
value of the asset under SFAS 141R, “
Business Combinations”,
and other U.S. generally accepted
accounting principles (GAAP). FSP FAS 142-3 is effective for fiscal years beginning after
December 15, 2008, and interim periods within those fiscal years. Early adoption is
prohibited. The guidance for determining the useful life of a recognized intangible asset in
this FSP shall be applied prospectively to intangible assets acquired after the effective
date. The disclosure requirements shall be applied prospectively to all intangible assets
recognized as of, and subsequent to, the effective date. We are currently assessing the effect
of FSP FAS 142-3 on our financial condition, results of operations and cash flows.
In March 2008, the FASB issued SFAS No. 161, “
Disclosures about Derivative Instruments
and Hedging Activities”,
or SFAS 161
,
an amendment of SFAS No. 133. SFAS 161 changes the
disclosure requirements for derivative instruments and hedging activities. Entities are
required to provide enhanced disclosures about (a) how and why an entity uses derivative
instruments, (b) how derivative instruments and related hedged items are accounted for under
SFAS No. 133, and its related interpretations, and (c) how derivative instruments and related
hedged items affect an entity’s financial position, financial
performance, and cash flows. The Statement encourages, but does not require, presenting
disclosures for earlier periods for comparative purposes at initial adoption. SFAS 161 is
effective for financial statements issued for fiscal years and interim periods beginning after
November 15, 2008, with early application encouraged. We expect to adopt SFAS 161 on January
1, 2009. Because FAS 161 amends only the disclosure requirements for derivative instruments
and hedged items, the adoption of FAS 161 will not affect our consolidated financial
statements.
23
In December 2007, the FASB issued SFAS No. 141 (revised 2007), “
Business Combinations”
,
or SFAS 141R. This Statement replaces SFAS No. 141, “
Business Combinations
”, and requires an
acquirer in a business combination to recognize the assets acquired, the liabilities assumed,
including those arising from contractual contingencies, any contingent consideration, and any
non-controlling interest in the acquiree at the acquisition date, measured at their fair
values as of that date, with limited exceptions specified in the Statement. SFAS 141R also
requires the acquirer in a business combination achieved in stages (sometimes referred to as a
step acquisition) to recognize the identifiable assets and liabilities, as well as the
non-controlling interest in the acquiree, at the full amounts of their fair values (or other
amounts determined in accordance with SFAS 141R). In addition, SFAS 141R’s requirement to
measure the non-controlling interest in the acquiree at fair value will result in recognizing
the goodwill attributable to the non-controlling interest in addition to that attributable to
the acquirer. SFAS 141R amends SFAS No. 109, “
Accounting for Income Taxes”
, to require the
acquirer to recognize changes in the amount of its deferred tax benefits that are recognizable
because of a business combination either in income from continuing operations in the period of
the combination, or directly in contributed capital, depending on the circumstances. It also
amends SFAS 142, “
Goodwill and Other Intangible Assets”
, to provide guidance on the impairment
testing of acquired research and development intangible assets and assets that the acquirer
intends not to use. SFAS 141R applies prospectively to business combinations for which the
acquisition date is on or after the beginning of the first annual reporting period beginning
on or after December 15, 2008 (our fiscal year commencing January 1, 2009). Accordingly, SFAS
141R will be applied by us to business combinations occurring on or after January 1, 2009.
In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160,
“
Non-controlling Interests in Consolidated Financial Statements”
, SFAS 160. SFAS 160 amends
Accounting Research Bulletin 51, “
Consolidated Financial Statements”
, to establish accounting
and reporting standards for the non-controlling interest in a subsidiary and for the
deconsolidation of a subsidiary. It also clarifies that a non-controlling interest in a
subsidiary is an ownership interest in the consolidated entity that should be reported as
equity in the consolidated financial statements. SFAS 160 also changes the way the
consolidated income statement is presented by requiring consolidated net income to be reported
at amounts that include the amounts attributable to both the parent and the non-controlling
interest. It also requires disclosure, on the face of the consolidated statement of income, of
the amounts of consolidated net income attributable to the parent and to the non-controlling
interest. SFAS 160 requires that a parent recognize a gain or loss in net income when a
subsidiary is deconsolidated and requires expanded disclosures in the consolidated financial
statements that clearly identify and distinguish between the interests of the parent owners
and the interests of the non-controlling owners of a subsidiary. SFAS 160 is effective for
fiscal periods, and interim periods within those fiscal years, beginning on or after December
15, 2008 (our fiscal year commencing January 1, 2009). We do not currently expect the adoption
of the provisions of SFAS No. 160 to have a material effect on our financial condition,
results of operations or cash flows.
Summary Financial Results
Revenues increased $2.1 million and $4.2 million, or 6.0% and 6.1% to $36.4 million and
$72.1 million, for the three and six months ended June 30, 2008 respectively, from $34.3
million and $67.9 million for the same periods in 2007. The increase was partly offset by a
decrease in revenues from our technology and telecommunication clients. Revenue growth and
relatively stable cost of revenues as a percent of revenues had a favorable impact on
earnings. For the three and six months ended June 30, 2008, revenues from customer management
services accounted for the majority of the increase in revenues as we captured a greater share
of our financial services clients outsourcing needs. On the other hand, the establishment of
a reserve against our deferred tax assets in March 2008, foreign exchange losses and increases
in selling general and administrative costs caused our net results to decline to a net loss of
$1.3 million and $23.1 million for the three and six month periods ended June 30, 2008,
respectively, from net income of $3.9 million and $7.8 million, respectively, for the same
periods of 2007.
We incurred a net loss of $1.3 million, or $0.06 per diluted share for the three months
ended June 30, 2008 and we earned net income of $3.9 million or $0.16 per diluted share for
the same period in 2007. The change of $5.2 million in our results was primarily due to the
following:
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•
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|
An increase in selling, general and administrative expenses of $1.7 million driven by
increases of $0.3 million in payroll related costs due primarily to growth in headcount,
annual merit increases and appreciation in the value of the Philippine peso against the
U.S. dollar, $0.5 million in share-based compensation expense, $0.3 million representing
fees for consulting services provided by independent third party legal firms and $0.4
million in rent expense as a result of the occupation of additional office space in the
Philippines
|
|
•
|
|
The Philippine peso fluctuation, which appreciated 8.4% compared to a year-ago and
depreciated 5.0% compared to the previous quarter, on average
|
24
We incurred a net loss of $23.1 million, or $1.11 per diluted share for the six months
ended June 30, 2008 and we earned net income of $7.8 million, or $0.32 per diluted share for
the same period in 2007. The change in our results of $30.9 million was primarily due to the
following:
|
•
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|
A $17.6 million non cash tax expense resulting from the establishment a deferred
income tax valuation allowance net of an additional federal tax benefits reflecting
management’s belief that it is more likely than not that the U.S. deferred tax asset will
not be realized.
|
|
•
|
|
An increase in selling, general and administrative expenses of $1.7 million driven by
increases of $0.3 million in payroll related costs due primarily to growth in headcount,
annual merit increases and fluctuations in the value of the Philippine peso against the
U.S. dollar, $1.1 million in share-based compensation expense and $0.3 million
representing employee travel, relocation and housing fees.
|
|
•
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|
A loss of $7.7 million during the six months ended June 30, 2008 primarily due to
the mark-to-market loss of $5.9 million from our Philippine peso forward contracts prior
to their sale at the end of March 2008 and the depreciation of
the Philippine peso.
|
Results of Operations
A summary of our consolidated results for the three and six months ended June 30, 2008
and 2007 is as follows:
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Three Months Ended June 30,
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Six Months Ended June 30,
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% of
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% of
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% of
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% of
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2008
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Revenue
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2007
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Revenue
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2008
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Revenue
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2007
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Revenue
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(Unaudited, dollar amounts in millions)
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Revenues
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$
|
36.4
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100.0
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$
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34.3
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100.0
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$
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72.1
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100.0
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$
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67.9
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100.0
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Cost of revenues
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25.3
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69.5
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24.0
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70.0
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49.1
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|
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68.1
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|
|
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45.7
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|
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67.3
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Selling, general, and administrative
|
|
|
9.2
|
|
|
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25.3
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|
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7.5
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|
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|
21.9
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|
|
|
17.6
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24.4
|
|
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15.9
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|
|
|
23.4
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Depreciation and amortization
|
|
|
2.6
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7.1
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|
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2.3
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6.7
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5.2
|
|
|
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7.2
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4.7
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6.9
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|
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Income (loss) from operations
|
|
|
(0.7
|
)
|
|
|
(1.9
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)
|
|
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0.5
|
|
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1.5
|
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|
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0.2
|
|
|
|
0.3
|
|
|
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1.6
|
|
|
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2.4
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|
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Interest income, net
|
|
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0.9
|
|
|
|
2.5
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|
|
|
1.5
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4.4
|
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2.1
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2.9
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|
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3.0
|
|
|
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4.4
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Other income (expense)
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|
|
(1.2
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)
|
|
|
(3.3
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)
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|
2.1
|
|
|
|
6.1
|
|
|
|
(7.7
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)
|
|
|
(10.7
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)
|
|
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3.2
|
|
|
|
4.8
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|
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|
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|
|
|
|
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|
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|
|
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Income (loss) before provision for
income taxes
|
|
|
(1.0
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)
|
|
|
(2.7
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)
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|
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4.1
|
|
|
|
12.1
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|
|
|
(5.4
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)
|
|
|
(7.5
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)
|
|
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7.8
|
|
|
|
11.5
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|
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Income tax provision
|
|
|
0.2
|
|
|
|
0.5
|
|
|
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0.3
|
|
|
|
0.9
|
|
|
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17.7
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|
|
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24.5
|
|
|
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0.1
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Net income (loss)
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|
$
|
(1.2
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)
|
|
|
(3.3
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)
|
|
$
|
3.8
|
|
|
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11.1
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|
|
$
|
(23.1
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)
|
|
|
(32.0
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)
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|
$
|
7.7
|
|
|
|
11.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Three Months Ended June 30, 2008 compared with Three Months Ended June 30, 2007
Revenues
The following table summarizes the components of our revenue for the three months ended
June 30, 2008 and 2007 (in thousands).
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|
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|
|
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Three Months Ended June 30,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Time-delineated or production-based fees
|
|
$
|
34,129
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|
|
$
|
31,869
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|
Set-up and training fees
|
|
|
1,424
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|
|
|
915
|
|
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Other
|
|
|
822
|
|
|
|
1,544
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
36,375
|
|
|
$
|
34,328
|
|
|
|
|
|
|
|
|
|
Our revenues are primarily derived from time-delineated or production-based fees, which
accounted for over 90% of our total revenues for the three months ended June 30, 2008.
Revenues increased $2.1 million, or 6.0%, to $36.4 million for the three month period ended
June 30, 2008 from $34.3 million for the same period in 2007. This increase was primarily
driven by higher demand for our outsourcing services from existing financial services clients
as we capture a greater share of their outsourcing needs. Fees from our three largest clients
increased $3.9 million compared to the same period in 2007. The increase was offset by lower
volumes of business from certain other clients, primarily technology and telecommunication
clients, who reduced their demand for outsourcing services in connection with a slowdown in
the economy.
25
Cost of Revenues
Cost of revenues for the three months ended June 30, 2008 consisted primarily of salaries
and benefits expenses, and technology and telecommunications expenses, which accounted for
approximately 60% and 10% of total cost of revenues, respectively. Other expenses include
facilities related, marketing, and travel and entertainment expenses.
Cost of revenues increased $1.3 million, or 5.4%, to $25.3 million for the three month
period ended June 30, 2008 from $24.0 million for the same period in 2007. Cost of revenues as
a percentage of revenues remained relatively stable, with a slight decrease to 69.5% for the
three month period ended June 30, 2008 from 70.0% for the three month period ended June 30,
2007. Payroll related costs rose by $0.6 million, as we increased our workforce to meet
higher demand for our services. The appreciation in the value of the Philippine peso against the
U.S. dollar also contributed to the increase in payroll costs. In addition, we allocated
approximately $0.5 million of our loss on cash flow hedges to cost of revenue. We have been
able to reduce volatility from exchange rate fluctuations by entering into foreign currency
cash flow hedges, which covers a substantial portion of our peso denominated costs for the
next 12 months. Our forward contracts are intended to minimize volatility from currency
movements by better matching the expense with the associated potential gain or loss from the
hedge.
Selling, General and Administrative
Selling, general, and administrative expenses for the three months ended June 30, 2008
consisted primarily of salaries and benefits expenses, and facilities related expenses, with
each contributing approximately 40% to total selling, general, and administrative expenses.
Other expenses include professional fees, and travel and entertainment expenses.
Selling, general and administrative expenses increased $1.7 million, or 23.3%, to $9.2
million for the three month period ended June 30, 2008 from $7.5 million for the same period
in 2007. As a percentage of revenues, selling, general and administrative expenses increased
to 25.3% during the three month period ended June 30, 2008 compared to 21.9% for the same
period in 2007. Share-based compensation rose by $0.5 million, payroll related costs by $0.3
million, rent expense by $0.4 million, and professional fees by $0.4 million. The increase in
share-based compensation was primarily due to the issuance of stock options and restricted
stock units. The increase in payroll costs was due primarily to growth in headcount, annual
merit increases and the appreciation in the value of the Philippine peso against the U.S. dollar.
The increase in rent expense was primarily driven by the occupation of additional office space in
the Philippines. The increase in professional fees was driven by accrual for legal fees of
approximately $0.3 million, for consulting services provided by independent third party legal
firms.
Depreciation and Amortization
Depreciation and amortization costs increased $0.2 million or 10.6% to $2.6 million for the
three month period ended June 30, 2008 from $2.3 million for the same period in 2007.
Depreciation and amortization expenses as a percentage of revenues increased to 7.1% for the
three month period ended June 30, 2008 compared to 6.7% for the same period in 2007. The
increase in depreciation expense was primarily due infrastructure, including information
technology increases during 2007 and the three months ended June 30, 2008, to support increased
operations as our revenues have increased.
Interest Income
Interest income decreased $0.6 million, or 42.4% to $0.9 million for the three month
period ended June 30, 2008 from $1.5 million for the same period in 2007. The decrease in
interest income is consistent with the decrease in the size of our investment portfolio, due
primarily to the liquidation of investments to fund the repurchase of $25.0 million of company
stock, and a general reduction in interest rates on our investments. Our portfolio risk
profile as of June 30, 2008 was substantially lower compared to the same period last year,
consisting predominantly of government and agency backed securities, which provide a lower
rate of return than the investments we held in previous periods.
26
Other Income (expense)
At June 30, 2008, we held cash and cash equivalents in Philippine Pesos. As the U.S.
dollar is our functional currency, our Philippine pesos are revalued into U.S. dollars. Thus
our other loss of $1.2 million during the three months ended June 30, 2008 is primarily due to
the depreciation of the Philippine peso upon translation. For the three month period ended
June 30, 2007, we recorded other income of $2.1 million. This was
primarily due to our foreign currency
forward contracts between the Philippine peso and the U.S. dollar. The peso appreciated,
resulting in a gain of $2.1 million on these contracts.
Provision for Income Taxes
During the second quarter of 2008, the Company incurred a worldwide pretax loss of $5.3
million, mainly due to the U.S. losses of $19.8 million while generating a profit of $14.4
million in the foreign jurisdictions. A portion of its foreign income
is not covered by our income tax holiday. Accordingly, in
applying our effective tax rate, we recorded tax expense of approximately $0.2 million in the three months ending June 30, 2008,
including $0.1 million of tax expense related to the reversal of a tax benefit recorded in the
first quarter of 2008. For the six month period ended June 30,
2008, we recorded tax
expense of $17.7 million, of which $17.6 million relates to the establishment of the U.S.
valuation allowance.
Six Months Ended June 30, 2008 compared with Six Months Ended June 30, 2007
Revenues
The following table summarizes the components of our revenue for the six months ended
June 30, 2008 and 2007 (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Time-delineated or production-based fees
|
|
$
|
67,916
|
|
|
$
|
63,653
|
|
|
Set-up and training fees
|
|
|
2,850
|
|
|
|
2,221
|
|
|
Other
|
|
|
1,329
|
|
|
|
2,051
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
72,095
|
|
|
$
|
67,925
|
|
|
|
|
|
|
|
|
|
Revenues increased $4.2 million, or 6.1%, to $72.1 million for the six month period ended
June 30, 2008 from $67.9 million for the same period in 2007. This increase was primarily
driven by higher demand for our outsourcing services from existing financial services clients
as we capture a greater share of their outsourcing needs. Fees from our three largest clients
increased $11.0 million compared to the same period in 2007. The increase was offset by lower
volumes of business from certain other clients, primarily technology and telecommunication
clients, who reduced their demand for outsourcing services in connection with a slowdown in
the economy.
Cost of Revenues
Cost of revenues increased $3.4 million, or 7.5%, to $49.1 million for the six month
period ended June 30, 2008 from $45.7 million for the same period in 2007. Payroll related
costs rose by $2.6 million, including a favorable adjustment to paid time off of $0.6 million,
as we increased our workforce to meet higher demand for our services, and we recognized a loss
on our cash flow hedges of $0.5 million. The appreciation in the value of the Philippine peso
against the U.S. dollar also contributed to the increase in payroll costs. Cost of revenues
as a percentage of revenues remained relatively stable with a slight increase to 68.1% for the
six month period ended June 30, 2008 from 67.3% for the same period in 2007.
27
Selling, General and Administrative
Selling, general and administrative expenses increased $1.7 million, or 11.0%, to $17.6
million for the six month period ended June 30, 2008 from $15.9 million for the same period in
2007. As a percentage of revenues, selling, general and administrative expenses increased to
24.4% during the six month period ended June 30, 2008 compared to 23.4% for the same period in
2007. Stock based compensation rose by $1.1 million, payroll related costs by $0.3 million,
and employee travel, relocation and housing fees by $0.3 million. The increase in stock based
compensation was primarily due to the issuance of stock options and restricted stock units.
The increase in payroll costs was due primarily to growth in headcount, annual merit increases
and the appreciation in the value of the Philippine peso against the U.S. dollar.
Depreciation and Amortization
Depreciation and amortization costs increased $0.4 million or 8.4% to $5.2 million for the
six month period ended June 30, 2008 from $4.8 million for the same period in 2007. Depreciation
and amortization expenses as a percentage of revenues increased to 7.2% for the six month period
ended June 30, 2008 compared to 6.9% for the same period in 2007. The increase in depreciation
expense was primarily due to infrastructure, including information technology equipment
increases during 2007 and the six months ended June 30, 2008, to support increased activity as
our revenues have increased.
Interest Income
Interest income decreased $0.9 million or 29.6% to $2.1 million for the six month period
ended June 30, 2008 from $3.0 million for the same period in 2007. The decrease in interest
income is consistent with the decrease in the size of our investment portfolio, due primarily
to the liquidation of investments to finance the repurchase of $25.0 million of company stock,
and a general reduction in interest rates on our investments. Our portfolio risk profile as of
June 30, 2008 was substantially lower compared to the same period last year, consisting
predominantly of government and agency backed securities which provide a lower rate of return
than the investments we held in previous periods.
Other Income (expense)
Our other loss of $7.7 million during the six months ended June 30, 2008 was primarily
due to the mark-to-market loss of $5.9 million from our Philippine peso forward contracts
prior to their sale at the end of March 2008. Although we incurred losses during the three
month period ended March 31, 2008, we generated substantial gains from these contracts in
2007, and received approximately $13 million in pre-tax cash when we
sold these contracts in March 2008. Under the contracts, we recorded
both realized and unrealized gains in other income as the Philippine
peso appreciated in that period at the end of March 2008. In addition, as
of June 30, 2008, we held cash and cash equivalents in Philippine pesos. As the U.S. dollar is
our functional currency, our Philippine pesos are revalued into U.S. dollars. Approximately
$1.7 million of our other loss during the six months ended June 30, 2008 is due to the
depreciation of the Philippine peso. For the six month period ended June 30, 2007, we recorded
other income of $3.2 million. This was due to our purchase of foreign currency forward
contracts between the Philippine peso and the U.S. dollar. The peso appreciated, resulting in
a gain of $3.1 million.
Provision for Income Taxes
For the six months period ended June 30, 2008, we recorded a tax expense of $17.7 million
related primarily to the net effect of the establishment of a valuation allowance against all
of our federal net deferred tax asset. The tax expense also includes the net effect of our
state tax expense and the portion of our income subject to tax in the Philippines. This
compares to a provision for income taxes of $0.1 for the six month period ended June 30, 2007.
Liquidity and Capital Resources
We have financed our operations primarily through cash flows from operations, sales of
equity securities and interest income earned on cash, cash equivalents and investments. As of
June 30, 2008, we had working capital of $98.9 million, including cash and cash equivalents
totaling $84.3 million, marketable securities of $29.8 million and net accounts receivable of
$18.4 million. We have not relied on debt financing for our operations, and did not hold any
long-term debt as of June 30, 2008.
28
Operating Activities
Our primary source of operating cash is receipts from our customers, who are billed for
the provision of customer management, transcription and captioning, and other BPO services.
Our primary uses of operating cash are payments made to our vendors and employees. Our net
income is not necessarily a representation of cash from our operations. The following table
represents a reconciliation of net income to cash from operations and analysis of the key
reconciling items:
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
Key Drivers of Cash Provided by Operations
|
|
2008
|
|
|
2007
|
|
|
|
|
(Unaudited, in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(23,104
|
)
|
|
$
|
7,771
|
|
|
Deferred income taxes
|
|
|
16,718
|
|
|
|
(612
|
)
|
|
Liquidation
(acquisition) of prepaid expenses and other assets
|
|
|
13,952
|
|
|
|
(1,187
|
)
|
|
Unrealized loss on derivatives
|
|
|
5,868
|
|
|
|
—
|
|
|
Share-based compensation expense
|
|
|
3,315
|
|
|
|
2,515
|
|
|
Net other activity
|
|
|
2,846
|
|
|
|
3,612
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
19,595
|
|
|
|
12,099
|
|
|
|
|
|
|
|
|
|
The reduction in deferred income tax assets represents the establishment of a valuation
allowance against our Federal deferred tax assets. In March 2008, we determined that it is
more likely than not that our federal deferred tax assets will not be realized. Accordingly, a
non-cash entry to record a full valuation allowance of $21.5 million was recorded.
Cash provided by the liquidation of prepaid and other assets of $14.0 million and the
effect of non-cash losses on derivatives of $5.9 million are primarily due to the sale of
foreign exchange forward contracts in March 2008. Prior to April 2008, we managed risks
associated with fluctuating currency rates by entering into foreign exchange forward
contracts. During the three months ended June 30, 2008, we entered into a series of new
foreign currency hedge contracts to minimize the future volatility from currency movements and
to match expenses with the associated potential gains or losses from hedges. In March 2008,
our then outstanding peso forward contracts were sold for approximately $13.1 million in cash.
The sale resulted in a book loss of $5.9 million.
Share-based compensation represents the non-cash effect of compensation expense recorded
in accordance with FAS 123R.
Investing Activities
Net
cash provided by (used for) investing activities during the six months ended June 30, 2008 and
2007 was $11.1 million and $(20.9) million, respectively. Investing activities consisted
primarily of purchases and sales of available-for-sale securities and capital expenditures.
Cash provided by (used for) investing activities of $13.2 million and $(3.5) million during
the six months ended June 30, 2008 and 2007, respectively, represented the net change in the
balance of investments due to purchases and sales of available-for-sale securities. Cash
provided from the net liquidation of investments was used to fund
repurchases of our common stock in accordance with our stock repurchase program.
Our portfolio risk profile as of June 30, 2008 was substantially lower compared to the
same period last year, consisting predominantly of government and agency backed securities.
Capital expenditures for the six months ended June 30, 2008 totaled $2.1 million and
represented primarily infrastructure, including information technology equipment increases.
Cash used in investing activities for the six months ended June 30, 2007 represented the
acquisition of two parcels of land in Cebu and Manila for a total of
$8.8 million and equipment of $8.4 million. We sold the subsidiary established to hold the
Manila land parcel in July 2008 for proceeds of approximately $13 million.
29
Financing Activities
Net cash provided by (used for) financing activities was $(24.8) million and $0.2
million, respectively, for the six months ended June 30, 2008 and 2007. During the six months
ended June 30, 2008 we repurchased 2.6 million shares of common stock through the open market
at an aggregate cost of $25.1 million, including commission and transaction fees. Other
activity during the six months ended June 30, 2008 and 2007 represented the collection of
proceeds from the exercise of stock options and the payment of residual offering costs during
the six months ended June 30, 2007.
Other than as described above, we currently have no material cash commitments, except our
normal recurring payables, expense accruals and operating leases, all of which are currently
expected to be funded through existing working capital and future cash flows from operations.
We expect that our working capital and cash, cash equivalents and marketable securities, will
be adequate to meet anticipated cash needs. Although we currently do not have any specific
plans to do so, to the extent management decides to pursue one or more significant strategic
acquisitions, we may incur debt, utilize our line of credit or sell debt or additional equity
to finance those acquisitions.
Off-Balance Sheet Arrangements
Line of Credit
In July 2006, we entered into an agreement that provides a revolving line of credit for
general corporate purposes and allowed us to borrow up to $25.0 million. The line of credit
expired on July 28, 2008. We did not have any borrowings under the agreement and we do not
intend to renew the line.
Contractual Obligations
The lease for the facility housing our Corporate headquarters in Los Angeles, California
expired on July 31, 2008. We will continue to occupy the facility, paying a
premium on the lease on a month to month basis. We have entered into a long-term lease for
another facility in Los Angeles which will eventually house our Corporate headquarters. The
lease commenced on August 1, 2008 and the scheduled expiration date is May 31, 2017. Base rent
under the new lease is $31,500 per month increasing to $43,110 per month by the end of the lease
agreement. We have the option to terminate the lease anytime from July 31, 2011 through
May 31, 2014, subject to a nine month notice period and payment of certain expenses.
The lease for the facility housing our RapidText subsidiary expired on July 15, 2008.
RapidText operations have been moved to a new facility under a lease that commenced on July 15,
2008 and expires on September 14, 2013. Base rent under the new lease is $10,565 per month until
expiration.
Derivative Instruments
During the quarter, we purchased foreign currency forward contracts which were designated
as cash flow hedges. We had derivative liabilities related to these contracts maturing within
12 months, consisting of Philippine peso contracts with a notional value of $50.3 million at
June 30, 2008. As of June 30, 2008, we had $4.6 million of derivative liabilities. A total of
$4.6 million of deferred losses on the derivative instruments as of June 30, 2008 were
included in accumulated other comprehensive income, a component of shareholders’ equity. Net
losses of $547,000 from settled derivative instruments for the three and six months ended June
30, 2008 were reclassified from accumulated other comprehensive income to earnings. The
deferred loss expected to be reclassified to earnings from accumulated other comprehensive
income during the next 12 months is $4.6 million. However this amount and other future
reclassifications from accumulated other comprehensive income will fluctuate with movements in
the underlying market price of the forward contracts.
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
Foreign Currency Exchange Risk
While the functional currency for all of our geographic areas is the U.S. dollar, the
results of operations and cash flows are subject to fluctuations due to changes in foreign
currency exchange rates, particularly changes in the Philippine peso. For the six months ended
June 30, 2008 and 2007, 57.7% and 56.5%, respectively, of our operating expenses were
generated in the Philippine local currency. We derive substantially all of our revenues in
U.S. dollars. A 10% change in the value of the U.S. dollar relative to the Philippine peso
would have affected our Philippine operating costs by $3.8 million for the six
months ended June 30, 2008. In accordance with our effort to mitigate the effect of
fluctuation in the value of the Philippine peso, we purchased foreign currency
forward contracts which were designated as cash-flow hedges. All of these instruments are
Philippine peso contracts maturing within 12 months. Expenses relating to operations outside
the United States increased in the six months ended June 30, 2008 compared to the six months
ended June 30, 2007, due to increased costs associated with higher revenue generation derived
from the provision of customer management services.
30
We fund our Costa Rican subsidiary through U.S. dollar denominated accounts. Payments for
employee-related costs, facilities management, other operational expenses and capital
expenditures are converted into Costa Rican colónes on an as-needed basis. To date, we have
not entered into any derivative contracts related to the Costa Rican colónes. A 10% change in
the value of the Costa Rican colónes relative to the U.S. dollar would have affected Costa
Rican costs by less than $0.1 million for the six month period ended June 30, 2008.
Interest Rate Sensitivity
We had cash and cash equivalents totaling $84.3 million and marketable securities
totaling $29.8 million at June 30, 2008. These amounts were invested primarily in government
bonds, corporate bonds, mortgage backed securities and preferred stock. Using the June 30,
2008 balances, a 1% (100 basis point) change in the interest rates on its investments would
not have a material effect on our interest income.
At June 30, 2008, we had no debt outstanding at variable interest rates. We have not
historically used derivative instruments to manage exposure to changes in interest rates.
Inflation Rate Sensitivity
For the six months ended June 30, 2008 and 2007, 57.7% and 72.9%, respectively, of our
expenses were generated in the Philippines. The Philippines has historically experienced
periods of high inflation but the inflation rate has been below 10% since 1999. For the six
months ended June 30, 2008, inflation averaged 7.6%. This is higher compared with 2.6%
inflation recorded in the six month period ended June 30, 2007 and the 2007 annual inflation
rate of 2.8%.
Item 4.
Controls and Procedures
(a)
Evaluation of disclosure controls and procedures.
We maintain “disclosure controls
and procedures,” as such term is defined in Rule 13a-15(e) under the Securities Exchange Act
of 1934 (the “Exchange Act”), that are designed to ensure that information required to be
disclosed by us in reports that we file or submit under the Exchange Act is recorded,
processed, summarized, and reported within the time periods specified in SEC rules and forms,
and that such information is accumulated and communicated to our management, including our
Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure. Based on their evaluation as of June 30, 2008, our Chief
Executive Officer and Chief Financial Officer have concluded that the disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) are effective
and that the financial statements included in this report fairly present in all material
respects the financial condition, results of operations and cash flows for the periods
presented.
(b)
Changes in internal control over financial reporting.
There were not any significant
changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under
the Exchange Act) identified in connection with the evaluation described in Item 4(a) above
that occurred during the period covered by this quarterly report on Form 10-Q and that have
materially affected, or are reasonably likely to materially affect, our internal control over
financial reporting. We intend to regularly review and evaluate the design and effectiveness
of its disclosure controls and procedures and internal controls over financial reporting on an
ongoing basis and to improve these controls and procedures over time.
PART II — OTHER INFORMATION
Item 1.
Legal Proceedings
We are subject to legal proceedings and claims which arise in the ordinary course of our
business. Although occasional adverse decisions or settlements may occur, the potential loss,
if any, cannot be reasonably estimated. However, we believe that the final disposition of such
matters will not have a material adverse effect on our financial position, results of
operations or cash flow. We maintain various liability insurance coverage to protect our
assets from losses arising out of or involving activities associated with ongoing and normal
business operations.
31
We acquired PeopleSupport RapidText, Inc. (formerly RapidText, Inc.) and its subsidiary,
The Transcription Company (collectively, the “Subsidiaries”) in January 2006. The Subsidiaries
were parties to an on-going arbitration proceeding and the arbitrator issued an award in the
amount of $946,000 against the Subsidiaries, which was confirmed by the Los Angeles Superior
Court. The Subsidiaries have appealed the judgment confirming the arbitration award. We are
entitled to indemnification from the selling stockholders of the subsidiaries under the
purchase agreement with such selling stockholders and we believe that the final disposition of
such matter will not have a material adverse effect on us. A cash bond has been posted with
the Los Angeles Superior Court by certain Selling Stockholders.
Item 1A.
Risk Factors
Set forth below, elsewhere in this Form 10-Q and in other documents we file with the SEC
are important risks and uncertainties that could cause our actual results of operations,
business and financial condition to differ materially from the results contemplated by the
forward-looking statements contained in this Form 10-Q. Other than as set forth below, there
are no material changes from the risk factors previously disclosed in Item 1A of Part I of the
Annual Report on Form 10-K for the year ended December 31, 2007. You should not construe the
following cautionary statements as an exhaustive list. The risk factors contained in this
report reflect only changes from or additions to the risks stated in the 10-K for the year
ended December 31, 2007, and these risks must be read in conjunction with those in the 10-K
for the year ended December 31, 2007.
Failure to complete, or delays in completing,
the merger with Essar could materially and adversely affect our
results of operations and reduce the price of our stock.
On
August 3, 2008, we signed a definitive agreement with Essar and Merger Sub, pursuant to which Essar offered to
acquire our common stock at a price of $12.25 per share. There can be no assurance that the necessary approvals will be
obtained, or that regulatory approvals will not subject us to additional regulatory obligations, or that we will be able to
consummate the merger as currently contemplated under the merger agreement or at what price. Risks related to the proposed merger
include the following:
|
•
|
|
We will remain liable for significant transaction costs, including legal, accounting,
financial advisory and other costs relating to the merger;
|
|
|
|
•
|
|
Under specified circumstances, we may have to pay a termination fee to Essar in the amount of $8,700,000;
|
|
|
|
•
|
|
The attention of our management and our employees has been and may continue to be diverted
from day-to-day operations;
|
|
|
|
•
|
|
Our sales may be disrupted by our current and potential clients’ uncertainty over when or if
the merger will be consummated;
|
|
|
|
•
|
|
Our current and potential clients may decide not to purchase services from us or may defer
purchasing decisions indefinitely; and
|
|
|
|
•
|
|
Our ability to attract new employees and retain existing employees may be difficult as a
result of the uncertainty about their future roles within PeopleSupport as an acquired business and
other uncertainties associated with the merger.
|
In addition, if the market perceives a transaction
as unlikely to close, our stock price may decline. The occurrence of any of these events individually
or in combination could reduce our revenues, increase our expenses,
and harm our stock price.
Our revenues are highly dependent on three major clients that collectively accounted for
53% of our revenues for the six months ended June 30, 2008, and any loss of business from our
major clients would reduce our revenues and seriously harm us.
For the six months ended June 30, 2008, our three largest customers, accounted for 53% of
our revenues. If we fail to renew or extend our contracts with our clients, or if these
contracts are terminated for cause or convenience, our clients will not have any obligation to
purchase services from us. A short term project with one of our major clients has a higher
margin, which may not be extended and the loss of this project may not be replaced with
equally profitable projects and would therefore depress our earnings. It is unlikely the lost
revenue would be entirely offset by corresponding reductions in expenses. Any reduction in
revenues would harm our business, negatively affect operating results and may lead to a
decline in the price of our common stock.
Our investments in marketable securities are subject to risks which may cause losses.
Our $4.5 million investment in mortgage/asset backed securities as of June 30, 2008, of
which $0.5 million is backed by Federal Government agencies, could be at risk of loss due to
the current downturn in the mortgage industry.
Our policy is to invest our cash balances in high-quality issuers and limit the amount of
credit exposures to any one issuer other than the United States government and its agencies.
Our investments in marketable securities at June 30, 2008 include $15.0 million of securities
with an auction reset feature. These investments are subject to risks such as recent systemic
failure of auctions for auction rate securities. This may result in a loss of liquidity,
substantial impairment to our investments, realization of substantial future losses, or a
complete loss of the investments in the long-term. Such a loss may have a material adverse
effect on our results of operations, liquidity, and financial condition.
32
Our current tax holidays in the Philippines may not be extended.
We currently benefit from certain income tax holiday incentives in the Philippines. Our
income tax holidays expire at staggered dates through 2009. While we plan to apply for
extensions of these holidays as they expire, it is possible that such requests for extensions
could be denied or approved with limitations. These holidays could also be reduced or removed
entirely. Should any of these events occur, our Philippine tax liability would increase. We have
received notices from certain agencies within the Philippine government raising technical issues
or providing interpretations of our tax incentive agreements with respect to its facilities in
Manila, which might place limits on our protection from taxation of income generated from
operations or investments under the tax incentive agreements for these locations. We have
substantially complied with the requirements and objectives of the each of the tax incentive
agreements in question but have received conflicting opinions from Philippine officials
regarding the ultimate outcomes of these matters. We believe that we have valid arguments to
protect the tax incentives we have received but may not prevail in all of these matters. Based
on our evaluation of the issues in accordance with FIN 48 and the information currently
available, including our knowledge of past practices and precedents, no liability or related
expense is recordable as of June 30, 2008.
Inability to maintain effective hedges may expose us to significant foreign currency
risk.
We recently entered into foreign currency cash flow hedges to mitigate the risk of
escalating operating expenses caused by appreciation of the Philippine peso against the U.S.
dollar. The effectiveness of our hedges depends on our ability to accurately forecast our
transactions over a period of time. Our hedges may decline in effectiveness over time as
future activities become more difficult to predict. Thus our ability to monitor the
effectiveness of our hedges on an ongoing basis is crucial in minimizing our exposure to
foreign currency risks and to volatility in our earnings resulting from such currency risks.
Substantial future sales of our common stock in the public market could cause our stock
price to fall. The sale of additional equity securities by us would result in further dilution
to our stockholders.
Substantial future sales of common stock in the public market, or the perception that
these sales could occur, could cause the market price of our common stock to decline. At June
30, 2008, 19.0 million shares of common stock were outstanding and 2.6 million shares could be
issued upon the exercise of outstanding restricted stock units and options, vested and
unvested. In addition, we may offer additional common stock in public or private offerings to
raise capital or may issue stock in connection with acquisitions, which may result in future
sales of stock in the public market. The sale of additional equity securities or convertible
debt securities would result in additional dilution to our stockholders.
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
|
|
(a)
|
|
None
|
|
|
|
|
(b)
|
|
None
|
|
|
|
|
(c)
|
|
On March 5, 2008, the Board of Directors authorized a stock repurchase program
to repurchase up to $25 million of the Company’s outstanding shares of common stock on
the open market over a two-year period that will end on March 4, 2010. The program was
completed in June 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Dollar Value of
|
|
|
|
|
|
|
|
|
Price Per
|
|
|
|
|
|
|
Remaining Shares
|
|
|
|
|
Number of
|
|
|
Share
|
|
|
|
|
|
|
That May Yet Be
|
|
|
|
|
Shares
|
|
|
(Excluding
|
|
|
|
|
|
|
Purchased Under
|
|
|
(In thousands, except per share data)
|
|
Purchased
|
|
|
Commissions)
|
|
|
Purchase Price
|
|
|
The Plan
|
|
|
Repurchased shares March 1 – March 31,
2008
|
|
|
370
|
|
|
$
|
8.75
|
|
|
$
|
3,241
|
|
|
$
|
21,759
|
|
|
Repurchased shares April 1 – April 30,
2008
|
|
|
516
|
|
|
$
|
10.13
|
|
|
$
|
5,228
|
|
|
$
|
16,531
|
|
|
Repurchased shares May 1 – May 31, 2008
|
|
|
976
|
|
|
$
|
9.55
|
|
|
$
|
9,327
|
|
|
$
|
7,204
|
|
|
Repurchased shares June 1 – June 30, 2008
|
|
|
776
|
|
|
$
|
9.29
|
|
|
$
|
7,204
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2,638
|
|
|
$
|
9.47
|
|
|
$
|
25,000
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33
Item 4.
Submission of Matters to a Vote of Security Holders
At
our Annual Stockholders’ Meeting on June 30, 2008, our stockholders elected the Class I directors to continue to serve as board members until 2011 and until their
respective successors are elected. Our stockholders also ratified the selection
of the independent registered public accounting firm. Our Class II directors, Adam Berger,
George Ellis, and Krish Panu, will serve until their terms expire at the Annual Meeting to be
held in 2009. Our Class III directors, Larry C. Bradford, Michael Edell, and Lance Rosenzweig
will serve until their terms expire at the Annual Meeting to be held in 2010.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
|
|
|
Voted For
|
|
|
Voted Against
|
|
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Withheld
|
|
|
Non Votes
|
|
|
1. To elect the
Class I directors
to hold office
until 2011 and
until their
respective
successors are
elected and
qualified
Frank Perna
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|
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8,468,288
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|
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|
—
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6,278,620
|
|
|
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—
|
|
|
Joe Rose
|
|
|
8,394,285
|
|
|
|
—
|
|
|
|
6,352,623
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2. To ratify the
appointment of
independent
registered public
accounting firm
|
|
|
14,700,736
|
|
|
|
37,917
|
|
|
|
8,255
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3. To approve the
amendment and
restatement of the
Company’s 2004
Stock Incentive
Plan, including
annual equity grant
limits to enable
the Company to
continue to deduct
the value of
certain grants from
the Company’s
taxable income
|
|
|
9,162,245
|
|
|
|
1,117,344
|
|
|
|
10,771
|
|
|
|
4,456,548
|
|
Item 6.
Exhibits
|
|
|
|
|
|
|
Exhibit
|
|
Number
|
|
|
|
|
|
|
|
|
31.1
|
|
|
Rule 13a-14(a) Certification of Chief Executive Officer of
the Company in accordance with Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
|
|
|
|
|
|
|
31.2
|
|
|
Rule 13a-14(a) Certification of Chief Financial Officer of
the Company in accordance with Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
|
|
|
|
|
|
|
32.1
|
*
|
|
Section 1350 Certification of Chief Executive Officer of
the Company in accordance with Section 906 of the
Sarbanes-Oxley Act of 2002
|
|
|
|
|
|
|
|
|
32.2
|
*
|
|
Section 1350 Certification of Chief Financial Officer of
the Company in accordance with Section 906 of the
Sarbanes-Oxley Act of 2002
|
|
|
|
|
|
*
|
|
The material contained in this exhibit is not deemed “filed” with
the SEC and is not to be incorporated by reference into any filing
of the Registrant under the Securities Act of 1933 or the
Securities Exchange Act of 1934, whether made before or after the
date hereof and irrespective of any general incorporation language
contained in such filing, except to the extent that the Registrant
specifically incorporates it by reference.
|
34
SIGNATURE
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, in the City of Los Angeles, in the State of California,
on August 6, 2008.
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|
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|
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|
|
PeopleSupport, Inc.
|
|
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|
By:
|
/s/ CAROLINE ROOK
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|
|
|
|
Caroline Rook
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|
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|
Chief Financial Officer
(Principal Financial and Accounting Officer)
|
|
35
EXHIBIT INDEX
|
|
|
|
|
|
|
Exhibit
|
|
Number
|
|
|
|
|
|
|
|
|
31.1
|
|
|
Rule 13a-14(a) Certification of Chief Executive Officer of
the Company in accordance with Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
|
|
|
|
|
|
|
31.2
|
|
|
Rule 13a-14(a) Certification of Chief Financial Officer of
the Company in accordance with Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
|
|
|
|
|
|
|
32.1
|
*
|
|
Section 1350 Certification of Chief Executive Officer of
the Company in accordance with Section 906 of the
Sarbanes-Oxley Act of 2002
|
|
|
|
|
|
|
|
|
32.2
|
*
|
|
Section 1350 Certification of Chief Financial Officer of
the Company in accordance with Section 906 of the
Sarbanes-Oxley Act of 2002
|
|
|
|
|
|
*
|
|
The material contained in this exhibit is not deemed “filed” with
the SEC and is not to be incorporated by reference into any filing
of the Registrant under the Securities Act of 1933 or the
Securities Exchange Act of 1934, whether made before or after the
date hereof and irrespective of any general incorporation language
contained in such filing, except to the extent that the Registrant
specifically incorporates it by reference.
|
36
Peoplesupport (MM) (NASDAQ:PSPT)
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