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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
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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 year ended December 31, 2004 |
Commission File Number: 333-115328
PeopleSupport, Inc.
(Exact name of Registrant as specified in its charter)
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Delaware
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95-4695021 |
(State or other jurisdiction
of incorporation or organization) |
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(I.R.S. Employer Identification No.) |
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1100 Glendon Ave., Suite 1250
Los Angeles, California
(Address of principal executive offices) |
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90024
(Zip Code) |
Registrant’s telephone number, including area code
(310) 824-6200
Securities registered pursuant to Section 12(b) of the
Act:
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Name of Each Exchange on Which Registered |
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Common Stock, par value $0.001 per share
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Nasdaq National Market |
Securities registered pursuant to Section 12(g) of the
Act: None
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 o No þ
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not
contained herein, and will not be contained, to the best of
Registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this
Form 10-K or any amendment to this
Form 10-K. o
Indicate by check mark whether the Registrant is an accelerated
filer (as defined in Rule 12b-2 of the Exchange
Act). Yes o No þ
The aggregate market value of the common equity held by
non-affiliates computed by reference to the price at which the
common equity was last sold, as of the last business day of the
Registrant’s most recently completed fourth quarter was
$179,609,660.
As of March 24, 2005, 18,050,543 shares of common
stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s Proxy Statement to be filed
with the Securities and Exchange Commission are incorporated by
reference into Part III, Items 10, 11, 12, 13 and
14 of this Form 10-K.
PeopleSupport, Inc. and Subsidiaries
FORM 10-K
For the Fiscal Year Ended December 31, 2004
INDEX
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Many of the statements included in this Annual Report on
Form 10-K contain forward-looking statements and
information relating to our company. We generally identify
forward-looking statements by the use of terminology such 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 our beliefs as well as
assumptions we made using information currently available to us.
Such statements are subject to risks, uncertainties and
assumptions, including those identified in “Risk
Factors,” as well as other matters not currently considered
material by us. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions
prove incorrect, actual results may vary materially from those
anticipated, estimated or projected. Important factors that may
affect these projections or expectations include, but are not
limited to those discussed in “Risk Factors.”
Given such risks and uncertainties, prospective investors are
cautioned not to place undue reliance on such forward-looking
statements. Forward-looking statements do not guarantee future
performance and should not be considered as statements of fact.
These forward-looking statements speak only as of the date of
this report and, unless required by law, we undertake no
obligation to publicly update or revise any forward-looking
statements to reflect new information or future events or
otherwise. You should, however, review the factors and risks we
describe in other reports and documents we will file with the
SEC after the date of this annual report. See “Available
Information” under Item 1 of Part I of this
report.
PART I
All references to “we,” “our,” and
“us” in this Annual Report on Form 10-K refer to
PeopleSupport, Inc and its subsidiaries.
Overview
We provide business process outsourcing, or BPO, services from
our facilities in the Philippines. We believe we are one of the
largest outsourced service providers in the Philippines based on
the size of our workforce, which consists of over 3,500 college
educated, fluent English speaking Philippine personnel. From our
Philippine facilities, we provide customer management services
for U.S.-based clients who wish to outsource this function to a
high quality, lower cost provider. We currently service 28
U.S.-based clients in a variety of industries, including travel
and hospitality, technology, telecommunications, retail,
consumer products and financial services. We primarily provide
inbound customer management services, which includes handling
calls and e-mails from our clients’ customers to order
goods and services, make and change travel reservations, address
billing questions, submit warranty claims and obtain technical
support. We manage over two million customer communications per
month, including inbound calls, e-mails, and web chats. Our
largest clients in 2004 were Expedia, EarthLink and
ConsumerInfo.com, which accounted for 69% of our 2004 revenues.
Expedia, our largest client, and EarthLink, our second largest
client, together accounted for 57% of our 2004 revenues. In
2003, our largest clients were Expedia, Network Solutions and
EarthLink which accounted for 88% of our 2003 revenues. Expedia
and Network Solutions were our largest clients in 2002. In July
2003, we began providing accounts receivable management services
in which we use specially trained Philippine personnel to
collect overdue consumer receivables from U.S. debtors.
Our revenues and net income for the year ended December 31,
2004 were $44.5 million and $8.3 million,
respectively, as compared with revenues of $30.0 million
and a net income of $8.0 million for the year ended
December 31, 2003. Substantially all of our revenues in
2004 and 2003 was derived from our customer management business,
and less than 1.5% percent was derived from our accounts
receivable management business. At December 31, 2004 we had
an accumulated deficit of $53.0 million as the result of
net losses in prior years.
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We have developed an integrated offshore platform that includes
four outsourcing centers and two data centers in the
Philippines, as well as two data centers in the United States.
Through our operations in the Philippines, we believe we provide
significant value to our clients by offering high quality
services at a substantially lower cost than services provided
through U.S. outsourcing centers. We believe the
Philippines offers significant cultural and language advantages
over other offshore outsourcing locations such as India. The
Philippines has the third largest English-speaking population in
the world and has long-standing ties to the United States. It
has modeled many of its government, banking, accounting and
education systems after the United States. The Philippines has a
large pool of skilled college graduates who are attuned to
U.S. culture and speak fluent English with minimal accents.
In 2004, we received 78,000 applications for employment and
added just over 1,789 net new employees to our workforce,
which represents the difference between the number of employees
we had at the end of the year and the number with which we
started at the beginning of the year. The Philippine BPO
services market is relatively new and we believe that our early
leadership position will provide us with an opportunity for
continued growth.
We provide seamless communications between customers in the
United States and our professionals in the Philippines by using
communications capacity dedicated to our use that is leased from
major fiber optic network providers. We securely route inbound,
multi-channel communications to the optimal location in the
Philippines based on our professionals’ skill sets and
availability. We also use a uniform “hub and spoke”
information technology platform that is highly scalable.
Applications and data are stored at our redundant
“hub” in Los Angeles, and deployed to our
“spokes” in the Philippines. This architecture allows
us to expand to meet the needs of our existing and new clients,
optimize our seat and workforce utilization and add additional
locations.
We focus on developing long-term strategic outsourcing
relationships with clients that have complex customer management
requirements. We work closely with our clients to enhance
customer satisfaction by jointly developing outsourcing
solutions that meet our clients’ unique business needs.
These solutions often require extensive customized training and
technical integration with our clients, which we believe will
foster long-term client relationships. In addition to customer
service, our training emphasizes revenue generation for our
clients by encouraging customers to purchase higher value,
additional or complementary products or services offered by our
clients, which we believe distinguishes us from many of our
competitors.
In addition to growing our customer management and accounts
receivable management businesses, we are exploring opportunities
to offer other outsourced services, including back office
functions such as credit application processing, document
processing, travel related and finance and accounting services.
We have been in discussions with our clients to assess their
demand for these types of back office services and we are in the
process of reviewing the feasibility of providing these
additional services. Based on our preliminary review of the
requirements for providing these types of services, we would
need to hire additional personnel with appropriate skills and
qualifications, and may be required to acquire or develop
additional applications and systems necessary to deliver such
services. We have not completed our review of the requirements
and costs for providing these types of services.
Corporate Background and History
We were incorporated in 1998 under Delaware law. We began
providing outsourced customer management services in 1998 from
an outsourcing center location in Los Angeles. Through 1999, we
employed close to 362 customer care professionals in Los Angeles
and developed a client base consisting of more than 51 providers
of Internet-based services. In 2000, due to the downturn in the
Internet services industry, many of our clients went out of
business or were unable to continue using our services and
terminated their engagement with us. In an effort to reduce
operating costs and gain a competitive advantage, in 2000 and
2001, we restructured our business by relocating our outsourcing
operations first to St. Louis, Missouri, and then to the
Philippines. In connection with our relocation to the
Philippines in 2000, we purchased the assets of a
Philippine-based outsourcing company and formed PeopleSupport
(Philippines), Inc. to function as our operating subsidiary in
the Philippines. The restructuring of our operations resulted in
significant cost savings due to reductions in labor and lease
expenses. We benefited from substantially lower wage rates in
the Philippines and gained access to a large pool of skilled,
college-educated English speaking professionals. We
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also benefited from abundant and cost-effective
telecommunications capacity linking the Philippines with our
data centers in the United States. As the demand for our
offshore outsourced services grew, we expanded our outsourcing
operations in the Philippines. We currently maintain four
outsourcing facilities and employ more than 3,500 personnel in
the Philippines. In 2003, we completed the migration of our
outsourcing operations in the Philippines and closed our
facility in St. Louis.
In July 2003, we began providing accounts receivable management
services. We provide these services through our wholly-owned
operating subsidiary, STC Solutions, Inc., which is a Delaware
corporation formed in October 2002. In May 2003, we formed
ProArm Management, Inc., a Delaware corporation, to engage in
the business of acquiring debt portfolios on an opportunistic
basis. Through the date of this Annual Report on Form 10-K,
we have expended approximately $0.7 million to purchase
debt portfolios, and we do not expect these activities to
constitute a material portion of our business.
Industry Background
Business process outsourcing involves contracting with an
external organization to take primary responsibility for
providing a business process or function. Companies initially
used outsourcing to achieve cost savings in
transaction-intensive, back office business processes. Today, in
addition to cost savings, outsourcing adoption is driven by
opportunities to improve a wide range of business processes and
quality of service with a desire to outsource non-core
activities so that management can focus on its core products and
services.
The BPO market includes several functionally-oriented
submarkets, such as customer management, accounts receivable
management, processing services, human resources, procurement,
logistics, finance and accounting, sales and marketing,
engineering, facilities management and training. Demand for
business process outsourcing services has experienced strong
growth in recent years.
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Current Trends in Customer Management Services |
The scope of outsourced customer interaction has expanded from
outbound telemarketing calls to a broad spectrum of customer
management services, including customer care, technical support
and sales and marketing. The delivery platform has evolved from
single facility, low technology call centers to large, high
volume customer care centers that use advanced technology.
Companies are now focused on optimizing their brands through
improved customer care and increasing the value of their
customer relationships by encouraging the purchase of higher
value, additional or complementary products and services. At the
same time, global competition, pricing pressures and rapid
changes in technology make it increasingly difficult for
companies to cost-effectively maintain the in-house personnel
and infrastructure necessary to handle all of their customer
management needs. We believe these trends, combined with rapidly
expanding consumer use of alternative communications, such as
the Internet and e-mail, have resulted in increased demand for
outsourced customer management services.
We believe the factors that influence companies to outsource
customer management services include:
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significant cost benefits; |
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best practices in leveraging learned experiences across multiple
clients in an efficient and effective manner; |
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the importance of professionally managed customer communications
to retain and grow customer relationships; |
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the ability to free available resources and management to focus
on developing core products and services; |
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increasing capital requirements for sophisticated communications
technology needed to provide timely technical support and
customer care; and |
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extensive and ongoing staff training and associated costs
required for maintaining in-house technical support and customer
care solutions. |
We expect the market for outsourced customer management services
to benefit as corporations continue to shift business processes
from internal operations to outsourced partners.
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Trend Toward Offshore Delivery of BPO Services |
We believe that to attain high quality BPO services at a lower
cost, many companies are moving selected front and back office
processes to providers with offshore delivery capabilities. In
recent years, fiber optic telecommunications facilities have
become widely available at affordable rates. At the same time,
we believe offshore providers have become more accepted by
businesses and continue to grow in recognition and
sophistication. As a result, a large number of BPO services
companies have established offshore operations or operate
exclusively offshore. Potential clients, in requests for
proposals, frequently require significant detail about offshore
delivery capabilities.
India currently accounts for the largest share of the offshore
BPO market. However, offshore capacity is expanding beyond India
to countries such as the Philippines, China and Russia. Several
high profile U.S. companies have reduced or discontinued
their use of offshore customer management services in India due
to dissatisfaction with the quality of service. We believe the
Philippines is emerging as an attractive alternative to India as
a destination for offshore outsourcing services, particularly in
BPO services that require complex voice interaction in English.
Our Competitive Strengths
We believe our competitive strengths have allowed us to
successfully create a sustainable and scalable position as a
leading offshore customer management services provider.
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Philippine-Based Delivery Model |
The Philippines is an attractive and growing market for offshore
business process outsourcing services and, as an early entrant,
we have successfully established ourselves as one of the market
leaders. With the third largest English speaking population in
the world, the Philippines has a large pool of skilled,
college-educated professionals who speak fluent American English
with minimal accents. Many Filipinos are familiar with Western
business practices and have an affinity for U.S. culture,
which we believe offers a particular advantage in interacting
with U.S. consumers and processing U.S. business
transactions. In addition, the Philippines has a well-developed
telecommunications and utility infrastructure and an attractive
business environment for BPO companies. We have direct fiber
optic based lines to all of our locations in the Philippines,
and the Philippine government has encouraged foreign investment
and provided significant assistance to the BPO industry through
the abatement of corporate income taxes, changes to the
country’s educational curriculum and relaxation of certain
regulatory restrictions. The personnel and infrastructure
available in the Philippines enables us to provide outsourcing
services at a substantially lower cost than
U.S. outsourcing providers and, we believe, at generally
comparable or superior quality levels. We believe our English
speaking workforce enables us to provide consistently high
quality outsourcing services at costs generally comparable to
other offshore locations and substantially lower than the United
States.
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Strong Industry Expertise |
We have developed substantial expertise in several industries
that have a high demand for complex customer management
services, such as travel and hospitality, technology,
telecommunications, retail and financial services. This industry
focus allows us to acquire a thorough understanding of our
clients’ business issues and customer needs. This approach
enables us to provide customized, high quality customer
management services in these industries quickly and efficiently
and we believe enhances our ability to attract major clients.
For example, our experience in the travel and hospitality
industry recently contributed to the successful engagement of
four business units within a Fortune 500 company. It also
helps us leverage our
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relationship with our clients, and to become experts in
processes other than customer management, such as back office
processes.
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Collaborative Client Relationships |
We collaborate with each client to understand its outsourcing
needs and jointly create solutions. We work closely with our
clients to train our professionals so that they have extensive
knowledge of our clients’ products and services. Our major
clients often visit our facilities in the Philippines to
participate directly in the training of our professionals. Our
clients also invest resources to integrate their processes and
technologies with ours to make our services transparent to their
customers and provide reciprocal access to data and reports. We
believe our close training and systems integration with our
clients will foster strategic long-term relationships.
We employ a business approach that focuses on revenue generation
for our clients. In our recruiting, we target employees with a
sales orientation and personality. Additionally, we provide
sales training to our professionals, including how to encourage
customers to purchase higher value, additional or complementary
products and services offered by our clients. By emphasizing
revenue generation, we seek to strengthen our clients’
relationships with their customers, improve sales of our
clients’ products and services and increase the likelihood
of repeat sales to those customers. We believe our ability to
provide comprehensive services focused on revenue generation for
our clients differentiates us from many of our competitors.
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Attractive Employment Culture |
We believe we have established a corporate culture that enables
us to attract and retain talented professionals. We have
developed an extensive recruiting network to attract high
quality talent, primarily from universities, throughout the
Philippines. Our reputation allows us to attract high quality
candidates and be highly selective in our recruiting. In 2004,
we received approximately 78,000 applications for employment and
added just over 1,789 net new professionals to our
workforce, which represents the difference between the number of
employees we had at the end of the year and the number with
which we started at the beginning of the year. We also offer a
broad range of programs for enhancing employee retention and
encouraging career development, including creating rewards and
recognition for performance, stressing professional development
through continuing education and our management trainee program,
offering attractive compensation and comprehensive benefits
packages and encouraging open communication between employees
and management. In 2004, we achieved an annual voluntary
turnover rate after a six-month probationary period of
approximately 13%, which reflects the percentage of our total
workforce that left during 2004 on a voluntary basis after
completing their six-month probationary period. Our total
turnover rate for 2004 was higher. We believe that our employee
retention enables us to retain valuable institutional knowledge,
lower our recruiting costs, grow and nurture a strong base of
managers and provide tangible benefits to our clients, such as
employee continuity and consistent quality.
Our Growth Strategy
In order to build on our position as a leading offshore business
process outsourcing services provider, we are focusing on the
following strategies.
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Attract Additional Large Customer Management
Clients |
We have established strong relationships with our major clients
and believe we have developed a reputation as a provider of high
quality, cost-effective offshore customer management services.
We plan to build on these relationships and our reputation to
attract additional major clients with large customer bases and
complex customer management needs. One of the key elements in
attracting new clients has been positive references from
existing clients. We continually identify potential engagements
and educate potential clients about our services through our
sales directors in the United States and our lead generation
team in the Philippines. We have developed a highly targeted
marketing strategy for future client acquisition involving
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direct calls, Internet based advertising, trade shows and
industry publications. Our client development efforts are
expanding from our historical focus on U.S.-based companies to
potential clients in other English speaking countries.
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Expand Accounts Receivable Management Services |
In 2003, we began providing accounts receivable management
services. The accounts receivable management industry is highly
fragmented with approximately 6,500 providers in the United
States. We believe there are a limited number of accounts
receivable management providers outside of North America serving
U.S. credit originators and that most domestic providers do
not presently have the resources or experience to establish
operations offshore. We have expanded our accounts receivable
management operations to collect defaulted consumer receivables
on behalf of national credit originators, such as credit card
companies and banks, and on behalf of telecommunications and
utility companies. We believe our lower cost structure in the
Philippines will give us a competitive advantage in our
collections efforts because we can devote more time to live
interaction with the debtor. In particular, we believe we can
collect lower balance accounts which cannot profitably be
collected using live voice interaction in the United States.
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Broaden Service Offerings |
We are exploring opportunities to provide additional BPO
services to our clients, which may involve new service offerings
we do not currently provide. We believe we can leverage our
skilled professionals and use our existing infrastructure to
provide additional BPO services including back office functions
such as credit application processing, document processing,
systems maintenance and other areas of travel, finance and
accounting. In particular, we will focus on services that we can
provide during off-peak hours that do not require live customer
interaction to use our existing infrastructure to provide
services during the daytime in the Philippines. We currently
provide the majority of our services during Philippine nighttime
hours (U.S. daytime hours). We generally seek to enhance
our portfolio of services by focusing on client requirements,
emerging trends and new technologies that will create the need
for additional BPO services.
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Continue to Attract and Retain Top Professional
Talent |
Our goal is to continue to attract, develop and retain highly
skilled professionals. We intend to continue to use a variety of
recruiting methods to attract our high quality workforce through
nationwide recruiting, including joint programs with major
universities, an employee referral program and regular
participation in job fairs. We also have developed and will
continue to use programs to enhance employee retention and
encourage career development, including offering competitive
compensation and comprehensive benefits packages, creating
rewards and recognition for performance, and stressing
professional development through continuing education and our
management trainee program.
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Expand to Additional Countries |
Currently, we conduct all of our outsourcing services through
our facilities in the Philippines. We believe that the
Philippines is an attractive offshore BPO services market in
which we have a strong competitive position, but we will
continue to evaluate expansion into new geographic markets. This
decision will be driven by multiple factors, including our
clients’ interests in geographic diversification, and our
expansion into new services and markets. We believe that regions
and countries that have an educated, English speaking workforce
at reasonable wage rates, such as parts of Latin America,
Malaysia, South Africa and Caribbean countries, would be the
most likely areas for geographic diversification of our
operations. However, we are still assessing these opportunities
and have not identified any specific location for expanding our
outsourcing operations. We believe that our technology and
operations platform will allow us to add new outsourcing centers
in many locations.
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Pursue Selective Strategic Acquisitions |
We believe that pursuing selective acquisitions of BPO services
companies could expand our breadth of services, facilitate
expansion into new markets and locations and increase our client
base. We will evaluate opportunities to add new outsourcing
center facilities, new skill sets and additional offshore
operations. We will consider acquiring complementary BPO
businesses or assets, such as companies focused on back office
processing services, companies located in new geographic
regions, or client contracts of distressed domestic outsourcing
companies. We currently have no agreement or commitment relating
to any acquisitions.
Our Services
We specialize in providing high quality, inbound customer
management services to companies that seek to enhance customer
satisfaction and loyalty and reduce costs. We combine our
industry expertise and advanced technology to provide a range of
integrated and seamless customer management services. In 2003,
we also began providing accounts receivable management services,
in which we collect overdue receivables on consumer debt.
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Customer Management Services |
We offer a wide range of customer management services to our
clients and their customers. We have a consulting services group
dedicated to designing and customizing these services for each
client. Our consulting services group collaborates with each
client on an ongoing basis and coordinates our internal
resources to design, deploy and maintain efficient, integrated
services between our technology infrastructure and our
clients’ systems. We address our clients’ service
strategies, anticipated volume and service levels, reporting and
analytical requirements, networking and security, back-end
system integration, and training and staffing needs.
Our fee arrangements are generally customized for each client on
a case-by-case basis. Our fee arrangements depend on a variety
of factors, including the types and complexity of services we
render for the client, service level requirements, the number of
personnel assigned to provide the services, the complexity of
training our personnel to provide the services, and the
information technology and telecommunications requirements
necessary to render the services. Our customer management fees
generally consist of time-delineated or session-based fees,
including hourly or per-minute charges and charges per
interaction, and implementation fees, including charges for
installing and integrating new clients into our
telecommunications, information technology and client reporting
structure.
We provide the following types of customer management services
through multiple integrated communications channels, including
telephone, e-mail, live web chat and Internet self-help
applications.
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Customer care. Our customer care services are initiated
by inbound calls and e-mail from customers with a wide range of
questions regarding their account billing, changes in services,
reservation changes, delivery updates on goods or services,
complaint and issue resolution and general product or services
inquiries. |
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Inbound sales. We handle inbound calls from customers
purchasing products and services from our clients, including
travel reservations, telecommunications services, Internet
services and consumer products and services. Our professionals
are specifically trained to identify opportunities to sell other
products and services offered by our clients. For some clients,
an important aspect of our sales activity includes seeking to
retain customers who call to cancel our clients’ services. |
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Technical support. Our technical support services include
handling troubleshooting calls, responding to software and
hardware problems, providing support for Internet service
problems, managing corporate help desks and providing warranty
or post-warranty support. |
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Direct response sales services. Our direct response
services involve handling inbound telephone orders or inquiries
for clients in the direct marketing industry, including those
calls received in response to print advertisements, infomercials
and other electronic media. Our professionals answer questions
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process orders for the purchase of our clients’ products or
services and identify opportunities to sell other products and
services. |
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Hosting. On a limited basis, we host and maintain the
customer interaction section of our clients’ websites,
including e-mail, live web chat and Internet self-help
applications. |
Our reporting and analytical systems also play an important role
in the customer management services we provide. Our system
captures and analyzes data received through our multiple
communications channels and generates client-specific
interaction reports on an hourly, daily, weekly and monthly
basis. These reports are accessible to our clients through our
web-based and secured reporting portal, Intellicenter.
Intellicenter offers our clients access to data generated
through customer management interactions and allows them to
analyze the customer interaction database, which includes all
e-mail and live web chat transcripts for feedback on the types
of questions raised by customers. The system also provides
historical trend information to help clients monitor the volume
and effectiveness of our interactions with their customers,
including revenue generation.
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Accounts Receivable Management Services |
In 2003, we began offering accounts receivable management
services through our wholly-owned subsidiary, STC Solutions,
Inc. Our accounts receivable management professionals are
trained in collecting consumer receivables for clients in the
financial services, telecommunications and utilities industries.
We believe our accounts receivable management professionals have
the customer interaction skills needed to perform successfully
in the debt collection area, which often involves unscripted
dialog, negotiations and settlement with debtors. We structure
our accounts receivable management services in a variety of
ways. We manage receivables that have been already written off
by the lender by making outbound calls to recover the debt on a
contingency fee basis. We also manage receivables that are in
default but have not yet been written off by our clients by
charging primarily for time spent making outbound calls to
collect outstanding debts in the early stage of collections. Our
objective is to achieve a higher collection rate, or
“netback,” in relation to overall cost by combining
accounts receivable management best practices with the advantage
of locating our accounts receivable management professionals in
the Philippines. We also assist clients with skip tracing by
collecting research and data to track debtors that are difficult
to locate. With consumer debt at record levels, we believe there
is ample opportunity to expand our accounts receivable
management services particularly if we enter a rising interest
rate environment.
Our Delivery Platform
We have developed and deployed a customized information
technology infrastructure to efficiently and securely deliver
our services. Our redundant systems reduce the risk of data loss
and transmission failure and allow us to quickly scale to meet
increased demand. Key components of our infrastructure include
the following.
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“Hub and spoke” architecture. Our data centers
located in the United States and the Philippines use a technical
infrastructure designed to facilitate rapid expansion and
consistency in delivering services to and from any of our
outsourcing centers. Our data centers are connected to each
other using multiple, redundant communication lines. Our
“hub and spoke” operating model allows us to provide
consistent and scalable business processes across multiple
outsourcing centers. Applications and data are stored at our
redundant “hub” in Los Angeles and deployed at our
“spokes” in the Philippines. This allows us to quickly
and efficiently handle additional volume and services for our
new and existing clients and to expand our outsourcing network
by establishing new “spokes” virtually anywhere in the
world that is accessible by fiber optic networks. |
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Dedicated telecommunications network. We have designed
and deployed a secure, dedicated telecommunications system that
allows us to securely route multi-channel communications between
the United States and our outsourcing centers in the
Philippines. Our system, which is redundant and highly scalable,
transmits communications traffic with minimal delay and high
transmission quality over a private network leased from major
telecommunications providers. Our lease agreements with these
providers generally provide for annual terms and fixed fees
based on the levels of capacity |
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dedicated to us. Customer traffic is initially received by our
redundant data center in Los Angeles where we apply voice
compression technologies and then seamlessly route calls to the
optimal location in the Philippines based on our
professionals’ skill sets and availability. In most cases,
these communications between the United States and the
Philippines are indistinguishable from domestic communications
between points within the United States. |
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Integrated customer communications channels. We provide
customer management services through multiple communications
channels, including telephone, e-mail, live web chat and
Internet self-help applications. Our customer management
professionals are trained to offer services in each of these
communications channels. Our customer interaction systems are
also integrated with our workforce management system, which is
used to manage optimal staffing and service levels. These
systems are also integrated with a proprietary reporting system
that is populated daily for all interactions occurring in our
outsourcing centers. This provides our clients with a single
view of all interactions between our professionals and their
customers. |
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Robust data security. We use several layers of
information security protection, including applications and
devices designed to prevent unauthorized access to data residing
in our systems and aggressive monitoring of audit trails at
application and network layers. All outside connections to our
network must pass through a sophisticated security system that
is supported by multiple firewalls. Data access to client
back-end systems is also protected by these security measures.
We constantly monitor the network for attacks by potential
hackers. As required by our clients, we prevent our
professionals from copying or transmitting customer data. |
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Proprietary integrated “Intellicenter” feedback
system. Intellicenter is our proprietary reporting and
analytical system that generates client-specific interaction
reports. These reports are accessible to our clients on an
hourly, daily, weekly and monthly basis. Intellicenter also
provides access to customer contact transcripts and allows our
clients to review the customer interaction database of all
e-mail and web chat transcripts. The system provides historical
trend information to help clients monitor the volume and
effectiveness of our interactions with customers. |
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24/7 client helpdesk. We have a helpdesk staffed 24/7,
which offers our clients complete coverage in the event of any
system issues. We have established standardized procedures to
identify and track inquiries, and we categorize and prioritize
inquiries by order of importance to our clients. We also operate
an information technology calling tree which allows us to
escalate issues up the personnel chain of command as the
situation warrants. |
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Proprietary self-help software. As part of our customer
management services, we offer clients use of our self-help
technology, RightResponse. RightResponse uses a proprietary
natural language search engine to match customer inquiries with
relevant information contained in a database updated by our
knowledge engineers. Web- based reports and analytical tools
allow clients to evaluate the effectiveness of our self-help
services and provide statistics on their self-help functions. |
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Quality assurance. Our quality assurance analysts use our
quality management software to monitor service level compliance
and randomly sample customer interactions. The system is
configured for voice, data and computer screen capture to record
the total customer experience and provide live monitoring and
playback via a web browser from any location. |
Our Clients
We provide our services to companies in a variety of industries,
including travel and hospitality, technology,
telecommunications, retail, consumer products and financial
services. We are focused on developing long-term strategic
outsourcing relationships with clients in these industries
because of the volume of customer interactions, complexity of
services, anticipated growth of their market segments and
increasing need for high quality and cost-effective, customer
management services. Our clients benefit from our customer
management experience, industry expertise, technical
infrastructure and trained professionals. By outsourcing their
business processes services to us, our clients entrust us with
an important aspect of their business.
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For the year ended December 31, 2004, our top three
clients, Expedia, EarthLink and ConsumerInfo.com, accounted for
69% of our revenues, and each accounted for over 10% of our
revenues for the year. Expedia, our largest client, and
EarthLink, our second largest client, together accounted for 57%
of our revenues for the year ended December 31, 2004.
Expedia has been a client since 2000 and it was our largest
client in 2002 and 2003. EarthLink first engaged our services in
2002, and ConsumerInfo.com first engaged our services in 2003.
We continued to build our client base in 2004, adding several
clients including four business units of a Fortune 500 travel
and hospitality company. Typically, our clients first engage our
services on a pilot basis and then expand the engagement by
increasing the number of professionals to handle their service
needs.
The following are examples of relationships with major clients.
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We were engaged by a large travel services provider that decided
to expand its outsourced customer management services in order
to achieve vendor diversity and scalability as it entered an
aggressive growth phase. The client also experienced seasonal
patterns in its business that required dynamic staffing to
respond to customer needs. The initial phase of our engagement
involved collaborating with the client to integrate multiple
back-end systems and to conduct an intensive four week training
program for our professionals. Within three months, we began
providing limited customer management services to test the
processes we jointly developed and adjust our service as
appropriate. During the next six months, we increased the volume
and scope of our services for this client and have continued to
adapt our services to meet the client’s needs. We handle a
significant amount of this client’s overall customer
management needs and a majority of their outsourced customer
management services. The services we provide include hotel and
travel reservation sales, schedule changes, customer inquiries
and issue resolution. Our services are conducted via voice and
e-mail interactions. |
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We were engaged by a client in the technology sector that was
facing downward pricing pressure and needed to reduce internal
costs. The client had limited exposure to offshore BPO services
through an outsourced e-mail support arrangement with an
India-based company and agreed to test our e-mail response
capabilities. The client informed us that we achieved
consistently strong performance in the first few weeks and
decided to expand our relationship and test the viability of our
offshore voice support. As a result, we agreed to expand our
services by adding a small group of our professionals to handle
inbound telephone calls. The client monitored our performance
and customer satisfaction feedback to determine whether a
potential widespread change in support strategy would be
accepted by its customers. Over the next few months, the client
asked us to expand our voice team to handle multiple service
lines. We also were asked to be a part of our client’s
planning for its entire offshore strategy. Currently, we have a
team of several hundred professionals dedicated to this client
over multiple facilities. |
Employees
At December 31, 2004, we had a total of 3,602 employees,
with 42 employees at our headquarters in Los Angeles,
five field sales representatives in the United States and 3,555
employees in the Philippines. We had 3,402 employees in
operations, 16 employees in sales and marketing, 65
employees in information technology and 119 employees in
administration and executive management. None of our employees
are covered by a collective bargaining agreement. All of our
employees sign confidentiality agreements. In addition, our
employees in the Philippines sign employment agreements
containing non-compete provisions. We consider our relations
with our employees to be good.
We recognize that our professionals are critical to the success
of our business as a majority of our support and service efforts
involve direct interaction with customers. We believe the tenure
and productivity of our professionals are directly related.
Attracting, hiring, training and retaining our professionals is
one of our major areas of focus. Nearly all of our
Philippine-based professionals are college educated. We pay our
professionals competitive wages and offer a benefits program
which includes comprehensive medical, dental and life
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insurance, meal allowance, overtime pay and paid time off, as
well as a variety of employee incentives. Additionally, in a
compensation component uncommon for the Philippine labor market,
we award stock options to most of our tenured professionals,
which are subject to vesting based on continued service. In
2004, we achieved an annual voluntary turnover rate for
regularized employees of approximately 13%, which reflects the
percentage of our total workforce that left during 2004 on a
voluntary basis after completing their six-month probationary
period. Our total turnover rate for 2004 was higher This figure
reflects the percentage of our total workforce that left during
2004 on a voluntary basis after being trained by us and after
completing their six month probationary period.
We believe we have developed effective strategies and a strong
track record in recruiting. We created software and processes,
known as our Applicant Information Management System, to receive
applications through the Internet and track the progress of our
applicants. Successful candidates must undergo numerous tests
and interviews before we extend offers for employment. In 2004,
we received approximately 78,000 applications for employment and
added just over 1,789 net new professionals to our
workforce, which represents the difference between the number of
employees we had at the end of the 2004 and the number with
which we started at the beginning of the year. We also have an
active employee referral program that provides us with a
cost-effective way of accessing qualified potential employees.
We maintain a 24/7 workforce management team responsible for
managing optimal staffing and service levels. This department is
equipped with workforce management software and staffed by
skilled operations analysts and a manager responsible for
forecasting, analyzing, scheduling and monitoring our adherence
to required service and staffing levels. We use trend analysis
and client forecasts to staff appropriately in anticipation of
volume variations. Depending on the level of service required by
our clients, our customer management professionals may be
assigned to a single client or may work for multiple clients.
Our workforce management system has the following features:
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full integration with our voice, e-mail and live web chat
systems; |
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analytics and scenario-based forecasting and scheduling; |
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schedule adherence and event monitoring; |
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real-time reporting; and |
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online work schedule management. |
Competition
We believe that the principal competitive factors in our
business include the ability to:
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provide high quality professionals with strong customer
interaction skills, including English language fluency with
minimal accents; |
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offer cost-effective pricing of services; |
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deliver value-added and reliable solutions to clients; |
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provide industry specific knowledge and expertise; |
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generate revenues for clients; and |
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provide a technology platform that offers a seamless customer
experience. |
We believe that we compete effectively on all of these factors.
In providing outsourcing services to U.S.-based clients, we
believe the location from which services are performed is also a
competitive factor. However, concerns over political or public
relations consequences from offshore outsourcing in the United
States may result in a reversal or slowing of industry trends
toward offshore outsourcing and impair our ability to compete in
our markets. U.S. companies may use domestic providers of
outsourcing services or keep
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additional work in-house, despite the additional cost savings
available through offshore providers of these services.
The global BPO services companies with whom we compete include
offshore BPO companies and U.S.-based outsourcing companies.
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There are numerous BPO companies based in offshore locations
such as India, the Philippines, China, Latin America, the
Caribbean, Africa and Eastern Europe. Some of these companies
offer services such as data entry, transcription and e-mail
response that require minimal customer interaction by voice and
therefore reduce the importance of English language skills and
U.S. cultural affinity. These companies also may have
greater financial, personnel and other resources, longer
operating histories, more recognizable brand names and more
established client relationships. Most of these companies
compete with us primarily on price and are often able to offer
lower costs to potential clients. We seek to position ourselves
as a service-focused company, with a workforce attuned to
U.S. culture and a focus on revenue generation for our
clients. |
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We compete with several broad-based domestic outsourcing
companies. These companies often have greater financial,
personnel and other resources, longer operating histories, more
recognizable brand names and more established client
relationships. Although many of these companies have
established, or are establishing, offshore operations, they
generally have a large base of higher cost domestic operations.
We position ourselves as a Philippine-based outsourcing
provider, with high quality service offerings and a
college-educated workforce. We also emphasize our significantly
lower cost structure and our focus on client revenue generation. |
In customer management services, our principal competitors with
operations in the Philippines include Sykes Enterprises,
Convergys Corporation and TeleTech Holdings, each publicly
traded U.S. companies, and eTelecare International,
ClientLogic and Ambergris Solutions, each privately held
companies. We expect that these outsourcing companies will
expand their Philippine operations and that other companies will
enter the Philippine outsourcing services market. We anticipate
that this will increase the competition for outsourcing center
professionals, particularly qualified middle and upper
management candidates, and therefore increase the wages we must
pay these professionals. In addition, increased outsourcing
company activities in the Philippines may lead to price
competition and put pressure on us to reduce our prices.
In addition to our direct competitors, many companies choose to
perform some or all of their customer care, technical support,
collections and back office processes internally. Their
employees provide these services as part of their regular
business operations. Some companies have moved portions of their
in-house customer management functions offshore, including to
offshore affiliates. We believe our key advantage over in-house
business processes is that we give companies the opportunity to
focus on their core products and services while we focus on the
specialized function of managing their customer relationships.
Sales and Marketing
We market our services through our sales and marketing
organization, which is divided into sales and marketing support,
client development and client services.
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Sales and Marketing Support |
Our sales and marketing support group is primarily responsible
for increasing the awareness of our services in the marketplace
and generating meetings with prospective clients through lead
generation, sales calls, membership in industry associations,
web-based marketing, public relations activity, attendance at
trade shows and participation in industry conferences and
events. Our sales and marketing support group also maintains
contact with industry analysts and tracks competitor and
industry information. These efforts allow us to stay abreast of
trends in our target vertical industries. The sales and
marketing support group also maintains a prospective client
database, which is updated and used throughout the sales cycle
from qualification of a prospective client to the execution of a
negotiated contract. This group also pre-qualifies sales
opportunities to increase the efficiency of our sales directors.
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Our client development group consists of experienced sales
directors responsible for initiating relationships and closing
engagements with the prospective clients identified by our sales
and marketing support group. This group uses specific industry
expertise and knowledge of our service delivery capabilities to:
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develop client relationships; |
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finalize sales proposals and assist in the negotiation and
closing of new client engagements; and |
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develop and deliver pricing estimates for proposed client
contracts. |
Sales directors work with our consulting services group to
define the scope, deliverables, assumptions and execution
strategies for a proposed client relationship and to build
estimates, prepare pricing and margin analysis and finalize the
sales proposal.
After our sales directors have successfully closed an engagement
with a new client, an account manager from our client services
group is assigned to the client. Sales directors maintain high
level client relationships. Account managers are primarily
responsible for managing the day-to-day aspects of our client
relationships, as well as expanding the existing relationships
and assuring client satisfaction. They also develop a strong
understanding of our clients’ business models and needs.
Account managers work with our clients to identify potential new
business opportunities, based on their assessment of the client
and trends in their specific industry. Our sales directors and
account managers work together as a team to understand and
communicate our clients’ strategic business needs, to align
our offerings and services to meet our clients’ long-term
objectives and to help grow our relationships at multiple levels
within our clients’ organizations.
Proprietary Rights
Our principal intellectual property consists of the trademarks
“PeopleSupport, Inc.”, “The Power of
Experience,” and “Recovery with Respect” which
are registered with the United States Patent and Trademark
Office. We do not hold any patents and we do not have any other
registered trademarks or copyrights. We do rely on proprietary
software, including our “Intellicenter” reporting
portal and the know-how of our management. To establish and
protect our other intellectual property rights, we rely on
common law protection of copyrights, trademarks, and trade
secrets, as well as confidentiality agreements used during the
course of business. We consider our business processes and
implementation methodologies confidential, proprietary
information constituting trade secrets. Customers and business
partners sign a nondisclosure agreement requiring confidential
treatment of our information. Our employees are also required to
sign confidentiality agreements as a condition to their
employment. We have non-compete agreements with our employees in
the Philippines.
Regulation
Our corporate legal department manages general corporate legal
matters, including litigation management, contract and document
preparation and review, regulatory and statutory compliance,
collections, obtaining and maintaining multi-state licensing,
bonding and insurance, and dispute and complaint resolution. We
have attorneys based in Los Angeles and Manila, qualified in
U.S. and Philippine law, respectively.
Federal, state and international laws and regulations impose a
number of requirements and restrictions on our business. For
example, we are subject to the Fair Debt Collection Practices
Act, which imposes numerous restrictions and obligations on our
debt collection practices. Additionally, many states require a
debt collector to apply for, be granted and maintain a license
to engage in debt collection activities within the state. There
are state and federal consumer protection laws that apply to our
business, such as laws limiting telephonic sales or mandating
special disclosures, and laws that apply to information that may
be captured, used, shared and/or retained when sales are made
and/or collections are attempted. State and federal laws also
impose limits on credit account interest rates and fees, and
their disclosure, as well as the time frame in which judicial
13
actions may be initiated to enforce the collection of consumer
accounts. There are numerous other federal, state, local and
even international laws and regulations related to, among other
things, privacy, identity theft, telephonic and electronic
communications, sharing and use of consumer information, that
apply to our business and to our employee’s interactions
and communications with others. For example, the Federal Trade
Commission’s Telemarketing Sales Rule applies a number of
limitations and restrictions on our ability to make outbound
calls on behalf of our clients and our ability to encourage
customers to purchase higher value products and services on
inbound calls. Similarly, the Telephone Consumer Protection Act
of 1991, which among other things governs the use of certain
automated calling technology, applies to calls to customers.
Many states also have telemarketing laws that may apply to our
business, even if the call originates from outside the state.
Additionally, some of the laws directed toward credit
originators, such as the Truth in Lending Act and the Fair
Credit Billing Act, can affect our operations because our
receivables were originated through credit transactions. These
laws, among others, may give consumers a legal cause of action
against us or may limit our ability to recover amounts owed with
respect to the receivables.
Federal and state regulators are empowered to examine and take
enforcement actions for violations of these laws and regulations
or for practices, policies or procedures they deem
non-compliant, unfair, unsafe or unsound. Moreover, lawsuits may
be brought by appropriate regulatory agencies, attorneys general
and private parties for non-compliance with these laws and
regulations. Accordingly, a failure to comply with the laws and
regulations applicable to our business could have a material
adverse effect on us.
New consumer protection and privacy protection laws or
regulations are likely to impose additional requirements on the
enforcement of and recovery on consumer credit card or
installment accounts, telephonic sales, Internet communications
and other portions of our business. We cannot ensure that some
of the receivables were not established as a result of identity
theft or unauthorized use of credit and, accordingly, we will
not be able to recover the amount of these and other defaulted
consumer receivables. As a purchaser of defaulted consumer
receivables, we may acquire receivables subject to legitimate
defenses on the part of the consumer. In general, our account
purchase contracts allow us to return to the debt seller certain
defaulted consumer receivables that may not be collectible, due
to these and other circumstances. Upon return, the debt sellers
are required to replace the receivables with similar receivables
or repurchase the receivables. These provisions limit, to some
extent, our potential losses on such accounts.
Available Information
Copies of this Annual Report on Form 10-K and each of our
other periodic and current reports, and amendments to all such
reports, that we file or furnish pursuant to Section 13(a)
or 15(d) of the Securities Exchange Act of 1934 are available
free of charge on our website (www.peoplesupport.com) as soon as
reasonably practicable after the material is electronically
filed with, or furnished to, the Securities and Exchange
Commission, or SEC. The information contained on our website is
not incorporated by reference into this Annual Report on
Form 10-K and should not be considered part of this Annual
Report on Form 10-K.
In addition, you may read and copy any document we file with the
SEC at the SEC’s Public Reference Room at 450 Fifth
Street, N.W., Washington, D.C. 20549. Please call the SEC
at 1-800-SEC-0330 for further information on the Public
Reference Room. Our SEC filings are also available to the public
at the SEC’s web site at http://www.sec.gov. Refer to our
current report on Form 8-K filed with the SEC on
January 11, 2005 and the Introductory Note to our amended
quarterly report on Form 10-Q/ A for the period ended
September 30, 2004, which was filed with the SEC on
February 25, 2005, for information concerning our
previously filed financial statements and quarterly report for
the third quarter of 2004 on which you should not rely.
14
Risk Factors
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Risks Related to Our Business |
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Our revenues are highly dependent on three major clients that
collectively accounted for 69% of our revenues in 2004, and any
loss of business from our major clients would reduce our
revenues and seriously harm us. |
In recent years, we have generated, and expect that at least for
the near term we will continue to generate, almost all of our
revenues from a limited number of clients. Expedia, EarthLink
and ConsumerInfo.com were our largest clients in 2004 and
accounted for 69% of our revenues for the year ended
December 31, 2004. Expedia, our largest client, and
EarthLink, our second largest client, together accounted for 57%
of our revenues for the year. Our contract with Expedia expires
in May 2007. Our contract with EarthLink expires in January
2006, but will automatically renew each year for a one year
period unless terminated by EarthLink or us prior to the end of
the term. Our contract with ConsumerInfo.com expires in July
2006, but will automatically renew each year for a one year
period unless terminated by ConsumerInfo.com or us prior to the
end of the term. 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 have no obligation to purchase
services from us.
The loss of, or any significant decline in business from, one or
more of these clients likely would lead to a significant decline
in our revenues and operating margins, particularly if we are
unable to make corresponding reductions in our expenses in the
event of any such loss or decline. We may not be able to retain
our major clients or, if we were to lose any of our major
clients, we may not be able to timely replace the revenue
generated by the lost clients. In addition, the revenue we
generate from our major clients may decline or grow at a slower
rate in future periods than it has in the past. If we lose any
of our major clients, or if they reduce their volume with us, we
may suffer from the costs of underutilized capacity because of
our inability to eliminate all of the costs associated with
conducting business with them, which could exacerbate the harm
that any such loss or reduction would have on our operating
results and financial condition.
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Our clients may adopt technologies that decrease the demand
for our services, which could reduce our revenues and seriously
harm our business. |
We target clients with a high need for our customer management
services and we depend on their continued need of our services,
especially our major clients who generate the substantial
majority of our revenues. However, over time, our clients may
adopt new technologies that decrease the need for live customer
interactions, such as interactive voice response, web-based
self-help and other technologies used to automate interactions
with customers. The adoption of such technologies could reduce
the demand for our services, pressure our pricing, cause a
reduction in our revenues and harm our business. For example, in
2003 and 2004, one of our major clients, Network Solutions,
which accounted for over 10% of our 2003 revenues, improved its
web-based self-help technology and automated its telephone
inquiry system, which we believe was a contributing factor
behind a reduction in revenues of 55% from this client for the
year ended December 31, 2004 as compared with the year
ended December 31, 2003.
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Our revenues are highly dependent on a few industries and any
decrease in demand for outsourced services in these industries
could reduce our revenues and seriously harm our business. |
Our major clients are concentrated in the travel and
hospitality, technology and telecommunications industries. Our
business and growth largely depends on continued demand for our
services from clients in these industries and other industries
we may target in the future and on trends in these industries to
purchase outsourced business process services. A downturn in any
of our targeted industries, particularly the travel and
hospitality or Internet service provider industry, or a slowdown
or reversal of the trend in any of these industries to outsource
business processes could result in a decrease in the demand for
our services. Rapid change in and competition between technology
clients, particularly Internet service providers, could result
in a decrease in demand for our services within the technology
industry.
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Other adverse changes also may lead to a decline in the demand
for our services in these industries. For example, consolidation
in any of these industries, particularly involving our clients,
may decrease the potential number of buyers of our services. Any
significant reduction in or the elimination of the use of the
services we provide within any of these industries would result
in reduced revenues and harm our business. Our clients,
particularly those in the technology and telecommunications
industries, have frequently experienced rapid changes in their
prospects, substantial price competition and pressure on their
profitability. Although such pressures can encourage outsourcing
as a cost reduction measure, they may also result in increasing
pressure on us from clients in these key industries to lower our
prices, which could negatively affect our operating results and
harm our business.
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We serve markets that are highly competitive and we may be
unable to compete with businesses that have greater resources
than we do. |
We currently face significant competition for outsourced
business process services and expect that competition will
increase. We believe that, in addition to prices, the principal
competitive factors in our markets are service quality, sales
and marketing skills, the ability to develop customized
solutions and technological and industry expertise. While
numerous companies provide a range of outsourced business
process services, we believe our principal competitors include
our clients’ own in-house customer service groups,
including, in some cases, in-house groups operating offshore,
offshore outsourcing companies and U.S.-based outsourcing
companies. In customer management services, our principal
competitors with operations in the Philippines include Sykes
Enterprises, Convergys Corporation and TeleTech Holdings, each
publicly traded U.S. companies, and eTelecare
International, ClientLogic, and Ambergris Solutions, each
privately held companies. Wipro LTD, a large publicly held
outsourcer of IT and IT related services based in India,
recently announced plans to expand its operations into the
Philippines. The trend towards offshore outsourcing,
international expansion by foreign and domestic competitors and
continuing technological changes will result in new and
different competitors entering our markets. These competitors
may include entrants from the communications, software and data
networking industries or entrants in geographic locations with
lower costs than those in which we operate.
We have existing competitors, and may in the future have new
competitors, with greater financial, personnel and other
resources, longer operating histories, more technological
expertise, more recognizable brand names and more established
relationships in industries that we currently serve or may serve
in the future. Increased competition, our inability to compete
successfully against current or future competitors, pricing
pressures or loss of market share could result in increased
costs and reduced operating margins, which could harm our
business, operating results, financial condition, and future
prospects.
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A reversal of industry trends toward offshore outsourcing due
to negative public reaction in the United States and recently
proposed legislation may adversely affect demand for our
services. |
Our customer management and accounts receivable management
services and our growth depend in large part on
U.S. industry trends towards outsourcing these business
processes offshore. The trend to outsource business processes
may not continue and could reverse. There has been recent
publicity about the negative experience of certain companies
that use offshore outsourcing, particularly in India. Current or
prospective clients may elect to perform such services
themselves or may be discouraged from transferring these
services to offshore providers to avoid any negative perception
that may be associated with using an offshore provider. Any
slowdown or reversal of existing industry trends would harm our
ability to compete effectively with competitors that operate out
of facilities located in the United States. Estimates of the
growth in the offshore outsourcing market in this Annual Report
on Form 10-K do not assume any such slowdown or reversal of
recent trends.
A variety of federal and state legislation has been proposed
that could restrict or discourage U.S. companies from
outsourcing their services to companies outside the United
States. For example, legislation has been proposed that would
require offshore providers to identify where they are located
and in certain cases to obtain consent to handling calls or
sending customer information offshore. It is also possible that
legislation could be adopted that would restrict
U.S. private sector companies that have federal or state
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government contracts from outsourcing their services to offshore
service providers. In addition, various federal tax changes that
could adversely impact the competitive position of offshore
outsourcing services are also under consideration. Any expansion
of existing laws or the enactment of new legislation directly or
indirectly restricting offshore outsourcing may adversely impact
our ability to do business with U.S. clients, particularly
if these changes are widespread.
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Many of our contracts can be terminated by our clients on
short notice and in many cases without penalty. We also
generally do not have exclusive arrangements with our clients or
a minimum revenue commitment from our clients, which creates
uncertainty about the volume of services we will provide and the
amount of revenues we will generate from any of our clients. |
We typically enter into written agreements with each client for
our services. We seek to sign multi-year contracts with our
clients, but many of our contracts permit our clients to
terminate the contracts upon short notice. The volume and type
of services we perform for specific clients may vary from year
to year, particularly since in many cases we are not the
exclusive provider of outsourcing services to our clients. A
client in one year may not provide the same level of revenues in
a subsequent year. Many of our clients may terminate their
contracts with us before their expiration with no penalties or
limited penalties.
Many of our clients could terminate their relationship with us
or reduce their demand for our services due to a variety of
factors, including factors that are unpredictable and outside of
our control. The services we provide to a client could be
reduced if the client were to change its outsourcing strategy.
Clients may move more customer management functions in-house, to
an affiliated outsourcing provider or to one of our competitors.
Clients may reduce spending on outsourcing services due to
changing economic conditions or financial challenges or
political or public relations pressures to reduce or eliminate
offshore outsourcing of business processes. If our clients are
not successful or if they experience any significant decrease in
their businesses, the amount of business they outsource and the
prices that they are willing to pay for such services may be
diminished and likely would result in reduced revenues for us.
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.
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We often encounter a long sales and implementation cycle
requiring significant resource commitments by our clients, which
they may be unwilling or unable to make. |
The implementation of our customer management service involves
significant resource commitments by us and our clients.
Potential clients require that we expend substantial time and
money educating them as to the value of our services and
assessing the feasibility of integrating our systems and
processes with theirs. Decisions relating to outsourcing
business processes generally involve the evaluation of the
service by our clients’ senior management and a significant
number of client personnel in various functional areas, each
having specific and often conflicting requirements. We may
expend significant funds and management resources during the
sales cycle and ultimately the client may not engage our
services. Our sales cycle generally ranges up to six to twelve
months or longer. Our sales cycle for all of our services is
subject to significant risks and delays over which we have
little or no control, including:
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Our clients’ alternatives to our services, including their
willingness to replace their internal solutions or existing
vendors; |
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Our clients’ budgetary constraints, and the timing of our
clients’ budget cycles and approval process; |
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Our clients’ willingness to expend the time and resources
necessary to integrate their systems with our systems and
network; and |
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The timing and expiration of our clients’ current
outsourcing agreements for similar services. |
If we are unsuccessful in closing sales after expending
significant funds and management resources, or if we experience
delays in the sales cycle, it could have a negative impact on
our revenues and margins. This occupies important personnel
resources that could otherwise be assisting other new clients.
When we are engaged by a client after the sales process,
typically it takes from four to six weeks to integrate the
client’s systems with ours, and up to six months thereafter
to ramp-up our services to the client’s requirements.
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We have incurred substantial losses in the past and may not
be profitable in the future. |
We did not become profitable until 2003 and incurred significant
losses in each of the five fiscal years through 2002. This was
mainly the result of excess capacity and high costs of our
former U.S. outsourcing centers. We found it necessary to
restructure our operations and move to the Philippines in order
to become profitable. We may incur significant operating losses
in the future. As a result of our operating losses, we had an
accumulated deficit of $53.0 million at December 31,
2004. We expect our marketing, sales and other operating
expenses to increase in the future as we seek to expand our
business. If our revenues do not grow at a faster rate than
these expected increases in our expenses or if our operating
expenses are higher than we anticipate, we may not be profitable
and we may incur additional losses.
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We have a limited operating history and our business and
future prospects are difficult to evaluate. |
Due to our limited operating history, especially in the
Philippines where we consolidated our operations in 2002 and
2003, and in our accounts receivable management services, which
we commenced in July 2003, our business and future prospects are
difficult to evaluate. We have limited experience providing
accounts receivable management services and we are exploring
opportunities to provide other outsourced services that we have
not provided to date. You should consider the challenges, risks,
and uncertainties frequently encountered by early-stage
companies using new and unproven business models in rapidly
evolving markets. These challenges include our ability to:
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Attract and retain clients; |
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Attract and retain key personnel and customer management
professionals; |
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Generate sufficient revenues and manage costs to maintain
profitability; |
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Manage growth in our operations; and |
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Access additional capital when required and on reasonable terms. |
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Our operating results may fluctuate significantly and could
cause the market price of our common stock to fall rapidly and
without notice. |
Our revenues and operating results are difficult to predict and
may fluctuate significantly from quarter to quarter due to a
number of factors, including:
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The addition or loss of a major client and the volume of
services provided to our major clients; |
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The extent to which our services achieve or maintain market
acceptance, which may be affected by political and public
relations reactions to offshore outsourcing; |
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Our ability to introduce new or enhanced services to our
existing and prospective clients and to attract and retain new
clients; |
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Long sales cycles and fluctuations in sales cycles; |
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The extent to which we incur expenses in a given period in
anticipation of increased demand in future periods, and the
extent to which that demand materializes; |
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Changes in our pricing policies or those of our competitors, as
well as increased price competition in general; |
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Variation in demand for our services and services or products of
our major clients, particularly clients in the travel and
hospitality industry; and |
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The introduction of new or enhanced services by other outsourced
service providers. |
Results of operations in any quarterly period should not be
considered indicative of the results to be expected for any
future period. In addition, our future quarterly operating
results may fluctuate and may not
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meet the expectations of securities analysts or investors. If
this occurs, the trading price of our common stock could fall
substantially, either suddenly or over time.
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If we fail to manage our growth effectively, our business may
not succeed. |
We have expanded significantly since our formation and intend to
maintain our growth focus. However, our growth will place
demands on our resources and we cannot be sure that we will be
able to manage our growth effectively. In order to manage our
growth successfully, we must:
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Maintain the hiring, training and management necessary to ensure
the quality and responsiveness of our services; |
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Expand and enhance our administrative and technical
infrastructure, facilities, and capacities to accommodate
increased call volume and other customer management
demands; and |
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Continue to improve our management, financial and information
systems and controls. |
Continued growth could place a strain on our management,
operations, and financial resources. Our infrastructure,
facilities and personnel may not be adequate to support our
future operations or to adapt effectively to future growth. As a
result, we may be unable to manage our growth effectively, in
which case our operating costs may increase at a faster rate
than the growth in our revenues, our margins may decline and we
may incur losses.
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We may experience significant employee turnover rates in the
future and we may be unable to hire and retain enough
sufficiently trained employees to support our operations, which
could harm our business. |
The business process outsourcing industry is very labor
intensive and our success depends on our ability to attract,
hire, and retain qualified employees. We compete for qualified
personnel with companies in our industry and in other industries
and this competition is increasing in the Philippines as the BPO
industry expands. Our growth requires that we continually hire
and train new personnel. The BPO industry, including the
customer management services industry, has traditionally
experienced high employee turnover. A significant increase in
the turnover rate among our employees would increase our
recruiting and training costs and decrease operating efficiency
and productivity, and could lead to a decline in demand for our
services. If this were to occur, we would be unable to service
our clients effectively and this would reduce our ability to
continue our growth and operate profitably. We may be unable to
continue to recruit, hire, train, and retain a sufficient labor
force of qualified employees to execute our growth strategy or
meet the needs of our business.
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Our senior management team is important to our continued
success and the loss of members of senior management could
negatively affect our operations. |
The loss of the services of Lance Rosenzweig, our Chief
Executive Officer; Caroline Rook, our Chief Financial Officer;
Rainerio Borja, our President of PeopleSupport (Philippines); or
Parham Farahnik, our Vice President of Sales and Marketing,
could seriously impair our ability to continue to manage and
expand our business. Our success depends on the continued
service and performance of our executive officers, and we cannot
guarantee that we will be able to retain these individuals. Our
executive officers are “at-will” employees who are not
subject to employment agreements providing for any specified
term of employment. We do not have “key man”
insurance, nor are our U.S.-based executive officers subject to
non-compete restrictions.
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The planned move of our operations to our new facility in
Manila could result in interruptions in service, which could
reduce our revenues and harm our business. |
We plan to relocate our regional headquarters in the Philippines
and at least one of our outsourcing locations to a facility
recently built in Manila, which we expect to be operational
during the third quarter of 2005. The relocation of our
operations to this new facility will involve a number of
logistical and technical challenges. We may encounter
complications associated with the migration of our systems and
computing equipment to our new facility, which could result in
interruptions of our services. If such interruptions occur,
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they could result in financial or other damages to our clients,
for which we could incur claims and liabilities and which could
damage our reputation and cause us to lose significant business
from one or more of our major clients. This would harm our
business and operating performance.
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Our facilities are at risk of damage by earthquakes and other
natural disasters. |
We currently rely on the availability and condition of our
leased Los Angeles, Manila, and Cebu facilities to provide
service and support to our clients. These facilities are located
in regions that are susceptible to earthquakes and other natural
disasters, which may increase the risk of disruption of
information systems and telephone service for sustained periods.
Damage or destruction that interrupts our provision of
outsourcing services could damage our relationship with our
clients and may cause us to incur substantial additional expense
to repair or replace damaged equipment or facilities. While we
currently have commercial liability insurance, our insurance
coverage may not be sufficient. Furthermore, we may be unable to
secure such insurance coverage or to secure such insurance
coverage at premiums acceptable to us in the future. Prolonged
disruption of our services as a result of natural disasters may
entitle our clients to terminate their contracts with us.
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Our operations could suffer from telecommunications or
technology downtime, disruptions or increased costs. |
We are highly dependent on our computer and telecommunications
equipment and software systems. In the normal course of our
business, we must record and process significant amounts of data
quickly and accurately to access, maintain and expand the
databases we use for our services. We are also dependent on
continuous availability of voice and electronic communication
with customers. If we experience interruptions of our
telecommunications network with our clients, we may experience
data loss or a reduction in revenues. These disruptions could be
the result of errors by our vendors, clients, or third parties,
electronic or physical attacks by persons seeking to disrupt our
operations, or the operations of our vendors, clients, or
others. For example, we currently depend on two significant
vendors for facility storage and related maintenance of our main
technology equipment and data at our U.S. data centers. Any
failure of these vendors to perform these services could result
in business disruptions and impede our ability to provide
services to our clients. We also may be required to pay
penalties to our clients. A significant interruption of service
could have a negative impact on our reputation and could lead
our present and potential clients not to use our services. The
temporary or permanent loss of equipment or systems through
casualty or operating malfunction could reduce our revenues and
harm our business.
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We could cause disruptions to our clients’ business from
inadequate service, and our insurance coverage may be inadequate
to cover this risk. |
Most of our contracts with our clients contain service level and
performance requirements, including requirements relating to the
timing and quality of responses to customer inquiries. The
quality of services that we provide is measured by quality
assurance ratings, which are based in part on the results of
customer satisfaction surveys and direct monitoring of
interactions between our professionals and customers. Failures
to meet service requirements of a client could disrupt the
client’s business and result in a reduction in revenues or
a claim for substantial damages against us. For example, some of
our agreements have standards for service that, if not met by
us, result in lower payments to us. In addition, because many of
our projects are business-critical projects for our clients, a
failure or inability to meet a client’s expectations could
seriously damage our reputation and affect our ability to
attract new business. Under our contracts with major clients and
many of our contracts with other clients, our liability for
breaching our obligations is generally limited to actual damages
up to a portion of the fees paid to us. To the extent that our
contracts contain limitations on liability, such contracts may
be unenforceable or otherwise may not protect us from liability
for damages. While we maintain general liability insurance
coverage, including coverage for errors and omissions, this
coverage may be inadequate to cover one or more large claims,
and our insurer may deny coverage.
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Unauthorized disclosure of sensitive or confidential client
and customer data, whether through breach of our computer
systems or otherwise, could expose us to protracted and costly
litigation and cause us to lose clients. |
We are typically required to collect and store sensitive data in
connection with our services, including names, addresses, social
security numbers, credit card account numbers, checking and
savings account numbers and payment history records, such as
account closures and returned checks. If any person, including
any of our employees, penetrates our network security or
otherwise misappropriates sensitive data, we could be subject to
liability for breaching contractual confidentiality provisions
or privacy laws. Penetration of the network security of our data
centers could have a negative impact on our reputation and could
lead our present and potential clients to choose other service
providers.
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Our ability to use net operating loss carryforwards in the
United States may be limited. |
We intend to use our U.S. net operating loss carryforwards
to reduce the U.S. corporate income tax liability
associated with our operations. Section 382 of the
U.S. Internal Revenue Code of 1986 generally imposes an
annual limitation on the amount of net operating loss
carryforwards that may be used to offset taxable income when a
corporation has undergone significant changes in stock
ownership. Based on our analysis, which includes assumptions
regarding the respective values of classes of our stock, we do
not believe our net operating losses are currently subject to
Section 382 limitations and will not become subject to such
limitations solely as a result of our recent initial public
offering. However, no assurance can be given that future events
(including, but not limited to, significant increases during the
applicable testing period in the percentage of our stock owned
directly or constructively by (i) any stockholder who owns
5% or more of our stocks or (ii) some or all of the group
of stockholders who individually own less than 5% of our stock)
will not trigger Section 382 limitations and, as a result,
adversely affect our ability to use our net operating loss
carryforwards. To the extent our use of net operating loss
carryforwards is significantly limited, our income could be
subject to U.S. corporate income tax earlier than it would
if we were able to use net operating loss carryforwards, which
could result in lower profits.
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The current tax holidays in the Philippines will expire
within the next several years. |
We currently benefit from income tax holiday incentives in the
Philippines pursuant to our Philippine subsidiary’s
registrations with the Board of Investments and Philippine
Economic Zone Authority, which provide that we pay no income tax
in the Philippines for four years pursuant to our Board of
Investments non-pioneer status and Philippine Economic Zone
Authority registrations, and six years pursuant to our Board of
Investments pioneer status registration. Our current income tax
holidays expire at staggered dates beginning in 2006 and ending
in 2008, and we intend to apply for extensions. However, these
tax holidays may or may not be extended. We believe that as our
Philippine tax holidays expire, (i) gross income (defined
for this purpose to mean the amount of our cost-plus transfer
payments to our Philippine subsidiary in excess of certain
allowable deductions) attributable to activities covered by our
Philippine Economic Zone Authority registrations will be taxed
at a 5% preferential rate, and (ii) our Philippine net
income attributable to all other activities (including
activities previously covered by our Board of Investments
registrations) will be taxed at the regular Philippine corporate
income tax rates of 32%. Our effective overall Philippine income
tax rate will vary as the revenue generating activity at each
outsourcing center becomes taxable upon expiration of the income
tax holiday applicable to that center.
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We may choose to expand operations outside of the Philippines
and may not be successful. |
We may consider expanding to countries other than the
Philippines. We cannot predict the extent of government support,
availability of qualified workers, or monetary and economic
conditions in other countries. Although some of these factors
may influence our decision to establish operations in another
country, there are inherent risks beyond our control, including
exposure to currency fluctuations, political uncertainties,
foreign exchange restrictions and foreign regulatory
restrictions. One or more of these factors or other factors
relating to international operations could result in increased
operating expenses and make it more difficult for us to manage
our costs and operations, which could harm our business and
negatively impact our operating results.
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We may make acquisitions that prove unsuccessful or divert
our resources. |
We intend to consider acquisitions of other companies in our
industry that could complement our business, including the
acquisition of companies with expertise in other businesses and
clients that we do not currently serve. We have little
experience in completing acquisitions of other businesses, and
we may be unable to successfully complete an acquisition. If we
acquire other businesses, we may be unable to successfully
integrate these businesses with our own and maintain our
standards, controls and policies. Acquisitions may place
additional constraints on our resources by diverting the
attention of our management from existing operations. Through
acquisitions, we may enter markets in which we have little or no
experience. Any acquisition may result in a potentially dilutive
issuance of equity securities, the incurrence of debt and
amortization of expenses related to intangible assets, all of
which could lower our margins and harm our business.
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We are subject to extensive laws and regulations that could
limit or restrict our activities and impose financial
requirements or limitations on the conduct of our business. |
The BPO industry has become subject to an increasing amount of
federal and state regulation in the past five years. Despite our
focus on inbound customer management, we are subject to
regulations governing communications with consumers due to the
activities we undertake on behalf of our clients to encourage
customers to purchase higher value, additional or complementary
products and services offered by our clients. For example, the
Federal Telemarketing and Consumer Fraud and Abuse Prevention
Act of 1994 broadly authorizes the Federal Trade Commission to
issue regulations prohibiting misrepresentations in telephone
sales. In addition, limits on the transport of personal
information across international borders such as those now in
place in the European Union (and proposed elsewhere) may limit
our ability to obtain customer data.
We are also subject to significant federal and state laws and
regulations applicable to our accounts receivable management
services, including the Fair Debt Collection Practices Act,
which imposes significant limitations and restrictions on our
debt collection practices including licensing requirements.
These laws and regulations may limit our ability to recover and
enforce defaulted consumer receivables regardless of any act or
omission on our part. Some laws and regulations applicable to
credit cards, debit cards, checks and other negotiable items may
preclude us from collecting on defaulted consumer receivables we
purchase or obtain through contingency placements from
originators if they or others failed to comply with applicable
law in generating or servicing those receivables. Additional
federal, state, local or international legislation, or changes
in regulatory implementation, could further limit our activities
or those of our clients in the future or significantly increase
the cost of regulatory compliance.
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Our ability to raise capital in the future, if and when
needed, may be limited, and could prevent us from executing our
business strategy. The sale of additional equity securities
would result in further dilution to our stockholders. |
We believe that our existing cash and cash equivalents, together
with the net proceeds from our recently completed offering, will
be sufficient to support our anticipated cash needs at least
through 2005. However, the timing and amount of our working
capital and capital expenditure requirements may vary
significantly depending on numerous factors, including:
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Market acceptance of and demand for our offshore outsourced
services which may be affected by political and public relations
reactions to offshore outsourcing; |
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Access to and availability to sufficient management, technical,
marketing, and financial personnel; |
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The need to enhance our operating infrastructure; |
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The continued development of new or enhanced services and hosted
solutions; |
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The need to adapt to changing technologies and technical
requirements; |
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Increasing costs, particularly in the Philippines; |
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The existence of opportunities to acquire businesses or
technologies, or opportunities for expansion; and |
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Increased competition and competitive pressures. |
If our capital resources are insufficient to satisfy our
liquidity requirements, we may seek to sell additional equity or
debt securities or obtain other debt financing. The sale of
additional equity securities or convertible debt securities
would result in additional dilution to our stockholders.
Additional debt would result in increased expenses and could
result in covenants that restrict our operations. We may be
unable to secure financing in sufficient amounts or on terms
acceptable to us, if at all, in which case we may not have the
funds necessary to finance our ongoing capital requirements or
execute our business strategy.
We
failed to register our securities under the Securities and
Exchange Act of 1934 and, as a result, we may incur liability to
repurchase certain stock options and shares, and may face
potential claims under federal and state securities laws.
On December 31, 2002, options granted under our 1998 stock
incentive plan were held by more than 500 holders. As a result,
we became subject to the registration requirements under
Section 12(g) of the Securities Exchange Act of 1934. We
were required to file periodic reports, such as 10-Ks and 10-Qs,
under Section 13(a) of the Exchange Act beginning in 2003.
We did not file any such reports until we filed a Form 10
registration statement in June 2004.
As a result of our failure to file the reports, grants of
certain options under our 1998 stock plan between
January 1, 2003 and April 28, 2004 may not have been
exempt from registration or qualification under federal and
state securities laws, and we did not obtain any required
registration or qualification. To address this matter, we intend
to make a rescission offer to the holders of these options and
shares issued upon the exercise of certain of these options.
Under the rescission offer, we intend to offer to repurchase the
options at 20% of the option exercise price multiplied by the
number of shares underlying the option, plus interest at an
annual rate of 7% from the grant date. We intend to offer to
repurchase the shares at the full exercise price we received for
the shares plus interest at an annual rate of 7% from the date
of exercise. We would be required to pay approximately
$0.1 million, plus statutory interest at an annual rate of
7% if all persons currently entitled to have their options and
shares repurchased elect to do so. We could be required to pay a
higher amount if more options are exercised. Federal securities
laws do not expressly provide that a repurchase offer will
terminate a purchaser’s right to rescind a sale of stock
that was not registered as required. If any or all of the
offerees reject our offer to repurchase the options and shares,
we may continue to be liable under federal securities laws.
In addition, our failure to file required Exchange Act reports
could conceivably give rise to potential claims by present or
former stockholders based on the theory that such holders were
harmed by the absence of such public reports. If any such claim
is asserted, we could incur expenses and divert
management’s attention in defending them, even if we have
no liability.
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Risks Related to Doing Business in the Philippines |
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We may face wage inflation and additional competition in the
Philippines for our professionals, which could increase the cost
of qualified employees and the amount of employee turnover. |
Wages for our employees in the Philippines are increasing at a
faster rate than for our U.S. employees, which could result
in increased costs to employ our outsourcing center
professionals. We also are faced with competition in the
Philippines for outsourcing center professionals, and we expect
this competition to increase as additional outsourcing companies
enter the market and expand their operations. In particular,
there may be limited availability of qualified middle and upper
management candidates. We have benefited from an excess of
supply over demand for college graduates in the Philippines. If
this favorable imbalance changes due to increased competition,
it could affect the availability or cost of qualified
professionals, who are critical to our performance. This could
increase our costs and turnover rates.
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The Philippines may experience economic instability, which
could increase our costs and harm our business. |
The Philippines continues to experience low growth in its gross
domestic product, significant inflation, currency declines and
shortages of foreign exchange. We are exposed to the risk of
rental and other cost increases due to inflation in the
Philippines, which has historically been at a much higher rate
than in the United States. These conditions could create
economic instability that could harm businesses operating in the
Philippines.
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Currency fluctuations in the Philippine peso relative to the
U.S. dollar could increase our expenses. |
All of our revenues are denominated in U.S. dollars, and a
substantial portion of our costs are incurred and paid in
Philippine pesos. We are therefore exposed to the risk of an
increase in the value of the Philippine peso relative to the
U.S. dollar, which would increase our expenses. We do not
currently engage in any transactions as a hedge against risk of
loss due to foreign currency fluctuations.
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Terrorist attacks could adversely affect the Philippine
economy, disrupt our operations and cause our business to
suffer. |
The Philippines periodically experiences civil unrest and
terrorism and U.S. companies in particular may experience
greater risks. We are not insured against terrorism risks.
Terrorist attacks, such as the attacks of September 11,
2001 in the United States, have the potential to directly impact
our clients and the Philippine economy by making travel more
difficult, interrupting lines of communication and curtailing
our ability to deliver our services to our clients. These
obstacles may increase our expenses and harm our business.
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We benefit from Philippine laws granting preferential tax
treatment which, if eliminated, could result in increased
operating expenses. |
We have benefited from significant government assistance in the
Philippines, including the grant of income tax holidays and
preferential tax treatments under our registrations with the
Philippine Board of Investments and Philippine Economic Zone
Authority, and changes to the country’s educational
curriculum in order to attract foreign investment in specified
sectors including the outsourcing industry. Despite these
benefits, the Philippine national and local governments could
alter one or more of these beneficial policies and the
Philippine legislature could amend the laws granting
preferential tax treatment. The elimination of any of the
benefits realized by us from our Philippine operations,
including tax incentives, could result in increased operating
expenses and impair our competitive advantages over BPO
companies based outside of the Philippines.
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Other Risks Related to Us |
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Our stock price may be volatile, and you may not be able to
resell shares of our common stock at or above the price you
paid, or at all. |
Before our recently completed initial public offering, our
common stock was not traded in a public market. Since the
completion of our initial public offering, our stock price has
been and may continue to be volatile. We cannot predict the
extent to which the trading market will continue to develop or
how liquid that market might become. Prices for our common stock
could be influenced by a variety of factors, including the depth
and liquidity of the market for our common stock, investor
perception of us, our business and our industry, the consumer
credit and outsourcing industries, and general economic and
market conditions. The trading price of our common stock could
be subject to wide fluctuations due to the factors discussed in
this risk factors section and elsewhere in this report. In
addition, the stock market in general and the Nasdaq National
Market have experienced extreme price and volume fluctuations.
Trading prices and valuations may not be sustainable. Broad
market and industry factors may decrease the market price of our
common stock, regardless of our actual operating performance. In
addition, following periods of volatility in the overall market
and a decline in the market price of a company’s stock,
securities class action litigation has often been
24
instituted. This litigation, if instituted against us, could
result in substantial costs and a diversion of our
management’s attention and resources.
|
|
|
If securities or industry analysts cease publishing research
or reports about our business or if they change negatively their
recommendations regarding our stock, our stock price and trading
volume could decline. |
The trading market for our common stock is influenced by the
research and reports that industry or securities analysts
publish about us or our business. If one or more of the analysts
who cover us publishes negative research on us or our industry,
or downgrades our stock, our stock price would likely decline.
If one or more of these analysts cease or limit coverage of us
or our industry, or fail to regularly publish reports on us, we
could lose visibility in the financial markets, which in turn
could cause our stock price or trading volume to decline.
|
|
|
Substantial future sales of our common stock in the public
market could cause our stock price to fall. |
Substantial future sales of our 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
December 31, 2004, 18,015,011 shares of common stock
were outstanding and 1,379,535 shares were to be issued
upon the exercise of outstanding warrants and options. The
shares sold in our initial public offering are freely
transferable without restriction or additional registration
under the U.S. Securities Act of 1933, as amended, or the
Securities Act. The remaining shares of common stock outstanding
after our initial public offering are available for sale,
subject to volume and other restrictions as applicable under
Rules 144 and 701 under the Securities Act. Additionally,
our directors, executive officers and certain principal
stockholders entered into “lock up” agreements with
the underwriters in connection with our initial public offering,
in which they agreed to refrain from selling their shares for a
period of 180 days after our initial public offering.
Approximately 9,890,910 of these shares will become available
for sale at various times upon the expiration of holding periods
and lock-up agreements. We also may be required to issue
additional shares upon the exercise of previously granted
options or warrants that are currently outstanding.
Increased sales of our common stock in the market 180 days
after the date of our final prospectus could exert significant
downward pressure on our stock price. These sales also may make
it more difficult for us to sell equity or equity-related
securities in the future at a time and price we deem appropriate.
|
|
|
We will incur increased costs as a result of being a public
company. |
As a public company, we will incur significant legal, accounting
and other expenses that we did not incur as a private company.
We estimate that these costs will be approximately
$3.0 million for 2005, but they could be higher. The
Sarbanes-Oxley Act of 2002, as well as new rules subsequently
implemented by the Securities and Exchange Commission and the
Nasdaq National Market, have required changes in corporate
governance practices of public companies. We expect these new
rules and regulations to increase our legal and financial
compliance costs and to make some activities more time-consuming
and costly. For example, as a result of becoming a public
company, we created additional board committees and adopted
policies regarding internal controls and disclosure controls and
procedures. In addition, we will incur additional costs
associated with our public company reporting requirements. We
also expect these new rules and regulations to make it more
difficult and more expensive for us to obtain director and
officer liability insurance and we may be required to accept
reduced policy limits and coverage or incur substantially higher
costs to obtain the same or similar coverage. As a result, it
may be more difficult for us to attract and retain qualified
candidates to serve on our board of directors or as executive
officers. We are currently evaluating and monitoring
developments with respect to these new rules, which may result
in additional costs in the future.
25
|
|
|
Delaware law and our amended and restated certificate of
incorporation and bylaws contain anti-takeover provisions that
could delay or discourage business combinations and takeover
attempts that stockholders may consider favorable. |
Our certificate of incorporation and bylaws contain provisions
that may make it more difficult, expensive or otherwise
discourage a tender offer or a change in control or takeover
attempt by a third-party that is opposed by our board of
directors. These provisions may have the effect of delaying or
preventing a change of control or changes in management that
stockholders consider favorable. In particular, our certificate
of incorporation and bylaws include provisions that:
|
|
|
| |
• |
Classify our board of directors into three groups, each of
which, after an initial transition period, will serve for
staggered three-year terms; |
| |
| |
• |
Permit the board of directors to elect a director to fill a
vacancy created by the expansion of the board of directors; |
| |
| |
• |
Permit stockholders to remove our directors only for cause; |
| |
| |
• |
Permit a special stockholders’ meeting to be called only by
our chairman of the board of directors, president, or chief
executive officer, a majority of our board of directors or
two-thirds of the independent directors; |
| |
| |
• |
Require stockholders to give us advance notice to nominate
candidates for election to our board of directors or to make
stockholder proposals at a stockholders’ meeting; |
| |
| |
• |
Permit our board of directors to issue, without approval of our
stockholders, up to 4,000,000 shares of preferred stock
with terms that our board of directors may determine and that
may be senior to the terms of our common stock; |
| |
| |
• |
Prohibit cumulative voting in the election of directors that
would otherwise allow less than a majority of stockholders to
elect directors; |
| |
| |
• |
Permit the board of directors to alter certain provisions of our
amended and restated bylaws without obtaining stockholder
approval; |
| |
| |
• |
Require approval of at least 75% of the shares entitled to vote
at an election of directors to adopt, amend or repeal our
amended and restated bylaws or amend or repeal the provisions of
our amended and restated certificate of incorporation regarding
the election and removal of directors and the ability of
stockholders to take action; and |
| |
| |
• |
Eliminate the right of stockholders to call a special meeting of
stockholders and to take action by written consent. |
Additionally, because we are incorporated in Delaware, we are
subject to Section 203 of the Delaware General Corporation
Law. These provisions may prohibit large stockholders, in
particular those owning 15% or more of our outstanding voting
stock, from merging or combining with us. These provisions in
our amended and restated certificate of incorporation and
amended and restated bylaws and under Delaware law could
discourage potential takeover attempts and could reduce the
price that investors might be willing to pay for shares of our
common stock in the future and result in the market price being
lower than it would be without these provisions.
|
|
|
Our corporate actions are substantially influenced by
officers, directors, principal stockholders and affiliated
entities. |
Our directors, executive officers and their affiliated entities
beneficially own approximately 25.4% of our outstanding common
stock. These stockholders, if they were to act together, could
exert substantial influence over matters requiring approval by
our stockholders, including electing directors and approving
mergers and acquisitions. This concentration of ownership may
also discourage, delay or prevent a change in control of our
company, which could deprive our stockholders of an opportunity
to receive a premium for their stock as part
26
of a sale of our company and might reduce our stock price. These
actions may be taken even if they are opposed by our other
stockholders.
Our corporate headquarters are located at 1100 Glendon Ave.,
Suite 1250, Los Angeles, California 90024, where we lease
approximately 11,007 square feet. This lease was renewed on
January 13, 2005 and will expire on July 31, 2008.
We also lease several facilities in Manila, including
approximately 43,594 square feet of office space under a
lease that expires on July 31, 2005; 57,421 square
feet of office space under a lease that expires on
April 15, 2007; and 27,478 square feet under a lease
that expires on January 31, 2006. Additionally, we lease
43,852 square feet of office space in Cebu under leases
that expire on November 30, 2008. In 2003, we signed a
lease agreement relating to the PeopleSupport Center, a newly
built-to-suit facility located in Makati City in Manila that is
scheduled to commence operations in the third quarter of 2005.
The leased facility consists of approximately
162,000 rentable square feet of office space and 146
parking spaces. The facility will serve as PeopleSupport’s
regional headquarters in the Philippines and its principal
outsourcing facility. We do not expect any interruption of our
services in connection with the migration of our systems to our
new facility. We believe these facilities and additional or
alternative space available to us will be adequate to meet our
needs in the near term.
|
|
| Item 3. |
Legal Proceedings |
From time to time, we are involved in various legal proceedings,
which are incidental to the ordinary course of our business. We
do not believe that these routine matters represent a
substantial volume of our accounts or that, individually or in
the aggregate, they are material to our business or financial
condition.
|
|
| Item 4. |
Submission of Matters to a Vote of Security Holders |
There were no matters submitted to a vote of security holders
during the fourth quarter of 2004.
PART II
|
|
| Item 5. |
Market for Registrant’s Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity
Securities |
Price Range of Common Stock
Our common stock is traded on the Nasdaq National Market System
under the symbol “PSPT.” The following table sets
forth the range of high and low closing prices for our common
stock for the fourth quarter of 2004 and the first quarter of
2005:
| |
|
|
|
|
|
|
|
|
| Quarter Ended |
|
Low | |
|
High | |
| |
|
| |
|
| |
|
December 31, 2004
|
|
$ |
6.50 |
|
|
$ |
10.15 |
|
|
March 31, 2005 (through March 30, 2005)
|
|
|
8.29 |
|
|
|
11.59 |
|
As of December 31, 2004, there were 230 stockholders of
record and 18,015,011 outstanding shares of the Company. Based
on information provided by our transfer agent and registrar, we
believe that there are approximately 1,900 beneficial owners of
our common stock.
Dividend Policy
We have not declared or paid cash dividends on our common stock
and do not anticipate paying any cash dividends in the
foreseeable future. We expect to retain future earnings, if any,
to fund the growth and expansion of our business. Our board of
directors will determine future dividends, if any.
27
Recent Sales of Unregistered Securities
From January 1, 2003 through April 28, 2004, we
granted options to purchase an aggregate of 637,157 shares
of common stock at exercise prices ranging from $0.41 to
$6.85 per share to employees and non-employee directors.
The options were granted under our 1998 Stock Incentive Plan. At
the time these options were granted under the 1998 Stock
Incentive Plan, we believed that each of the grants was exempt
from the registration requirements of the Securities Act of 1933
by virtue of a “no-sale” theory under Section 5
of the Securities Act of 1933, since none of the option
recipients provided any consideration for the grants (the sale
of the underlying option shares will occur only when the option
is exercised and the purchase price is paid to us). In addition,
for certain option grants covering 157,595 shares, which
options were granted to individuals residing and located in the
Philippines, we believed that each of these grants was exempt
under Regulation S under the Securities Act for sale of
securities to non-U.S. persons in offshore transactions.
Each of the option recipients was a non-U.S. person at the
time the options were granted. In addition, we have obtained
appropriate representations and covenants to ensure compliance
with the requirements of Regulation S.
From January 1, 2003 through May 14, 2004, we issued
147,341 shares of common stock upon exercise of certain
options and payment of the exercise prices per share ranging
from $0.41 to $6.85 per share. We believe that at the time
of the transaction, the transaction was exempt from the
registration requirements of the Securities Act by virtue of
Section 4(2) thereof as transactions by an issuer not
involving any public offering. The recipients in each such
transaction represented their intention to acquire the
securities for investment only and not with a view to or for
sale in connection with any distribution thereof, and
appropriate legends were affixed to the share certificates and
instruments, as applicable, issued in such transactions. All
recipients had adequate access, through their relationships with
our company, to information about us.
Use of Initial Public Offering Proceeds
On September 30, 2004, the SEC declared effective the
Company’s Registration Statement on Form S-1 (File
No. 333-115328) (“Registration Statement”) for
our initial public offering. Under the Registration Statement,
we registered 7,840,909 shares of our common stock for an
aggregate offering size of $54.9 million.
5,348,727 shares (including 603,000 shares sold by us
upon exercise of the underwriters’ over-allotment option)
were sold by us and 2,072,455 shares were sold by certain
selling stockholders. All of the 7,421,182 shares sold in
this offering were sold at $7.00 per share. The offering
closed on October 6, 2004 (and the sale of the 603,000
additional shares pursuant to the exercise of the over-allotment
option closed on October 25, 2004). The managing
underwriters were SG Cowen & Co., Piper
Jaffray & Co., A.G. Edwards & Sons and JMP
Securities.
The aggregate gross proceeds from the sale of
5,348,727 shares of common stock sold by us (including the
603,000 shares sold in the over-allotment) was $37,441,089.
The aggregate gross proceeds from the sale of
2,072,455 shares sold by the selling stockholders was
$14,507,185. The aggregate net proceeds to us after the offering
were $31,570,213, after deducting an aggregate of $2,620,876 in
underwriting discounts and commissions paid to the underwriters
and an estimated $3,250,000 in other expenses incurred in
connection with this offering. The aggregate net proceeds to the
selling stockholders were $13,491,682 after deducting an
aggregate of $1,015,503 in underwriting discounts and
commissions paid to the underwriters.
On October 6, 2004, we invested all of our net proceeds in
short-term, interest-bearing instruments. We intend to use the
net proceeds from the offering for the purposes outlined in the
prospectus relating to the offering. At December 31, 2004,
all of the $31,570,213 proceeds from the offering were invested
in short-term interest bearing instruments.
28
Repurchase of Securities
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
(a) | |
|
(b) | |
|
(c) | |
|
(d) | |
| |
|
|
|
|
|
Total Number of | |
|
|
| |
|
|
|
|
|
Shares Purchased | |
|
Maximum Number of | |
| |
|
|
|
|
|
as Part of Publicly | |
|
Shares that May Yet | |
| |
|
Total Number of | |
|
Average Price Paid | |
|
Announced Plans or | |
|
be Purchased Under | |
| Period |
|
Shares Purchased | |
|
per Share | |
|
Programs(1) | |
|
Plans or Programs | |
| |
|
| |
|
| |
|
| |
|
| |
|
April 2004
|
|
|
547,445 |
|
|
$ |
2.47 |
|
|
|
— |
|
|
|
— |
|
|
|
| (1) |
In April 2004, the Board of Directors approved the repurchase of
547,445 shares from David Nash, one of our founders, for
$1,350,000. No other shares were approved by the Board of
Directors for repurchase during 2004. |
|
|
| Item 6. |
Selected Financial Data |
The following table presents selected historical consolidated
financial data as of, and for the years ended, December 31,
2000, 2001, 2002, 2003 and 2004, which has been derived from our
audited consolidated financial statements. Our consolidated
financial statements as of, and for the years ended,
December 31, 2002, 2003 and 2004 were audited by BDO
Seidman, LLP and our consolidated financial statements as of,
and for the years ended, December 31, 2000 and 2001 were
audited by another auditor. You should read this information
together with “Summary Historical Consolidated Financial
Data,” “Management’s Discussion and Analysis of
Financial Condition and Results of Operations,” and our
consolidated financial statements and related notes for the
years ended December 31, 2002, 2003 and 2004 which are
included elsewhere in this Annual Report on Form 10-K.
Historical results are not necessarily indicative of the results
to be expected in the future.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, | |
| |
|
| |
| |
|
2000 | |
|
2001 | |
|
2002 | |
|
2003 | |
|
2004 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands, except per share data) | |
|
Consolidated Statements of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
10,979 |
|
|
$ |
19,733 |
|
|
$ |
19,780 |
|
|
$ |
30,013 |
|
|
$ |
44,511 |
|
|
Cost of revenues (exclusive of management incentive plan and
depreciation expense shown below)(1)
|
|
|
15,020 |
|
|
|
12,573 |
|
|
|
11,188 |
|
|
|
12,921 |
|
|
|
24,483 |
|
| |
Management incentive plan — cost of revenues(2)
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
788 |
|
|
Selling, general & administrative (exclusive of
management incentive plan expense shown below)(1)
|
|
|
37,759 |
|
|
|
15,128 |
|
|
|
5,587 |
|
|
|
6,134 |
|
|
|
9,721 |
|
| |
Management incentive plan — selling,
general & administrative(2)
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
4,549 |
|
|
Depreciation and amortization
|
|
|
1,957 |
|
|
|
3,795 |
|
|
|
4,065 |
|
|
|
3,166 |
|
|
|
3,927 |
|
|
Gain on sale of receivable portfolios(3)
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(172 |
) |
|
Restructuring charges(4)
|
|
|
3,038 |
|
|
|
— |
|
|
|
3,824 |
|
|
|
(345 |
) |
|
|
(22 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Income (loss) from operations
|
|
|
(46,795 |
) |
|
|
(11,763 |
) |
|
|
(4,884 |
) |
|
|
8,137 |
|
|
|
1,237 |
|
|
Interest expense
|
|
|
(716 |
) |
|
|
(790 |
) |
|
|
(506 |
) |
|
|
(3 |
) |
|
|
— |
|
29
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, | |
| |
|
| |
| |
|
2000 | |
|
2001 | |
|
2002 | |
|
2003 | |
|
2004 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands, except per share data) | |
|
Interest income
|
|
|
1,484 |
|
|
|
895 |
|
|
|
90 |
|
|
|
75 |
|
|
|
231 |
|
|
Gain on the extinguishment of debt(5)
|
|
|
— |
|
|
|
— |
|
|
|
2,430 |
|
|
|
— |
|
|
|
— |
|
|
Other income (expense)
|
|
|
— |
|
|
|
1 |
|
|
|
(9 |
) |
|
|
8 |
|
|
|
(7 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before provision (benefit) for income taxes
|
|
|
(46,027 |
) |
|
|
(11,657 |
) |
|
|
(2,879 |
) |
|
|
8,217 |
|
|
|
1,461 |
|
|
Provision (benefit) for income taxes(6)
|
|
|
— |
|
|
|
13 |
|
|
|
13 |
|
|
|
231 |
|
|
|
(6,863 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)(7)
|
|
$ |
(46,027 |
) |
|
$ |
(11,670 |
) |
|
$ |
(2,892 |
) |
|
$ |
7,986 |
|
|
$ |
8,324 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share of common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic(8)
|
|
$ |
(19.24 |
) |
|
$ |
(4.65 |
) |
|
$ |
(1.14 |
) |
|
$ |
3.15 |
|
|
$ |
1.39 |
|
| |
Diluted(8)
|
|
$ |
(19.24 |
) |
|
$ |
(4.65 |
) |
|
$ |
(1.14 |
) |
|
$ |
0.64 |
|
|
$ |
0.55 |
|
|
Weighted average number of common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic(8)
|
|
|
2,392 |
|
|
|
2,512 |
|
|
|
2,533 |
|
|
|
2,533 |
|
|
|
5,996 |
|
| |
Diluted(8)
|
|
|
2,392 |
|
|
|
2,512 |
|
|
|
2,533 |
|
|
|
12,560 |
|
|
|
15,012 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
As of December 31, | |
| |
|
| |
| |
|
2000 | |
|
2001 | |
|
2002 | |
|
2003 | |
|
2004 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Consolidated Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and short-term investments
|
|
$ |
21,998 |
|
|
$ |
8,613 |
|
|
$ |
5,179 |
|
|
$ |
12,151 |
|
|
$ |
41,583 |
|
|
Working capital
|
|
|
15,165 |
|
|
|
5,179 |
|
|
|
4,124 |
|
|
|
11,798 |
|
|
|
43,664 |
|
|
Total assets
|
|
|
36,187 |
|
|
|
22,715 |
|
|
|
15,259 |
|
|
|
22,535 |
|
|
|
65,080 |
|
|
Long term liabilities, less current portion
|
|
|
2,970 |
|
|
|
3,011 |
|
|
|
176 |
|
|
|
267 |
|
|
|
936 |
|
|
Redeemable convertible preferred stock
|
|
|
74,110 |
|
|
|
74,110 |
|
|
|
74,110 |
|
|
|
74,110 |
|
|
|
— |
|
|
Total stockholders’ equity (deficit)
|
|
$ |
(50,974 |
) |
|
$ |
(61,777 |
) |
|
$ |
(64,714 |
) |
|
$ |
(56,611 |
) |
|
$ |
57,935 |
|
|
|
| (1) |
Included in expenses above are non-cash stock based compensation
charges of: |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, | |
| |
|
| |
| |
|
2000 | |
|
2001 | |
|
2002 |
|
2003 | |
|
2004 | |
| |
|
| |
|
| |
|
|
|
| |
|
| |
| |
|
(In thousands) | |
|
Cost of revenues
|
|
$ |
94 |
|
|
$ |
25 |
|
|
$ |
— |
|
|
$ |
61 |
|
|
$ |
566 |
|
| |
Selling, general & administrative
|
|
|
2,342 |
|
|
|
633 |
|
|
|
— |
|
|
|
58 |
|
|
|
1,208 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
$ |
2,436 |
|
|
$ |
658 |
|
|
$ |
— |
|
|
$ |
119 |
|
|
$ |
1,774 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (2) |
Under our management incentive compensation plan, we made
payments of $4.8 million to senior management and key
employees based on a formula calculated as a fraction of the net
proceeds received by us and selling stockholders upon completion
of our initial public offering. These payments resulted in a
charge to earnings in the fourth quarter ended December 31,
2004. Under the terms of our management incentive compensation
plan, we also are obligated to make payments of
$0.8 million to key employees and personnel based on
continued service or other performance criteria. This amount was
recorded as deferred compensation expense in the fourth quarter
ended December 31, 2004 and will be amortized over future
periods. In addition, under the terms of our management
incentive compensation plan, we made a further payment of
$0.5 million in connection with the sale of 603,000
additional shares on October 25, 2004, pursuant to the
exercise of an over-allotment option granted to the underwriters
of our initial public offering. These payments also resulted in
a charge to earnings in the fourth quarter ended |
30
|
|
|
December 31, 2004. In connection with the sale of these
shares, we also are obligated to make payments of
$0.2 million to key employees and personnel based on
continued service or other performance criteria. This amount was
recorded as deferred compensation expense in the fourth quarter
ended December 31, 2004 and will be amortized over future
periods. |
| |
| (3) |
Gain on sale of receivable portfolios is the net amount the
Company earned on the sale of two accounts receivable portfolios
by its ProArm subsidiary during 2004. |
| |
| (4) |
Restructuring charges are comprised of estimated and actual
obligations for various non-cancelable leases, the write-down of
abandoned leasehold improvements and fixed assets at customer
care centers in the United States where we terminated
operations, and severance and other U.S. employee-related
costs in connection with the movement of our operations, first
to St. Louis, and then to the Philippines. |
| |
| (5) |
Gain on the extinguishment of debt relates to the extinguishment
of an equipment loan. |
| |
| (6) |
See “Management’s Discussion and Analysis of Financial
Condition and Results of Operations — Accounting for
Income Taxes” for additional information. |
| |
| (7) |
See “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” for a comparison of
quarterly net income (loss) for 2003 and 2004. |
| |
| (8) |
For information regarding the computation of per share amounts,
refer to Note 2 of the notes to our consolidated financial
statements included elsewhere in this Annual Report on
Form 10-K. The basic and diluted share and per share
amounts in the consolidated statement of operations table above
have been restated to give retroactive effect to the 1 for 2.74
reverse stock split that was effected on August 5, 2004. |
|
|
| Item 7. |
Management’s Discussion and Analysis of Financial
Condition and Results of Operations |
Future Uncertainties
The following discussion should be read in conjunction with
the consolidated financial statements and accompanying notes,
which appear elsewhere in this Annual Report on Form 10-K.
It contains forward-looking statements 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 and
elsewhere in this Annual Report on Form 10-K, particularly
under the heading “Risk Factors.”
Overview
We provide offshore BPO services from our facilities in the
Philippines. We provide customer management services for
U.S.-based clients who wish to outsource this function. We
currently service 28 U.S.-based clients in a variety of
industries. Our three largest customer management service
clients in 2004 were Expedia, EarthLink and ConsumerInfo.com,
which collectively accounted for 69% of our 2004 revenues.
Expedia, our largest client, and EarthLink, our second largest
client, together accounted for 57% of our revenues for the year
ended December 31, 2004. Expedia has been a client since
2000 and was our largest client in 2002, 2003 and 2004.
EarthLink first engaged our services in 2002, and
ConsumerInfo.com first engaged our services in 2003.
In July 2003, we also began providing accounts receivable
management services for past-due receivables, which consist of
defaulted accounts that our clients have written off their
books, and accounts that are in default but have not yet been
written off by our clients. We are focusing our accounts
receivable management services on collecting defaulted consumer
receivables that have been written off by the creditor on a
contingent basis. We are also focusing on performing early-stage
accounts receivable collection services on defaulted consumer
accounts that have not been written off on an hourly fixed-fee
basis by managing collection of accounts receivables of at-risk
customers for our clients and quickly restoring their
relationship to a current payment status.
We were formed in 1998. Our revenues have grown from
$1.9 million in 1999 to $44.5 million in 2004. During
the same period our net income grew from losses of
$8.3 million in 1999 and $46.0 million in 2000 to a
profit of $8.3 million in 2004. Net income for 2004
included a $5.3 million charge related to payments made or
accrued under our management incentive plan and a
$6.8 million income tax benefit associated with a deferred
31
tax valuation allowance adjustment. The growth in net income was
primarily attributable to the improvement in the quality of the
client base in our customer management business, which enabled
us to build revenues, and our move to the Philippines, which
allowed us to reduce our operating costs, improve our margins
and offer cost savings to our clients.
|
|
|
Quarterly Results of Operations and Performance
Trends |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2003 | |
| |
|
| |
| |
|
1st | |
|
2nd | |
|
3rd | |
|
4th | |
| |
|
Quarter | |
|
Quarter | |
|
Quarter(1) | |
|
Quarter(2) | |
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands, except per share data) | |
|
Revenues
|
|
$ |
6,409 |
|
|
$ |
7,320 |
|
|
$ |
7,720 |
|
|
$ |
8,564 |
|
|
Income from operations
|
|
|
1,148 |
|
|
|
1,739 |
|
|
|
2,085 |
|
|
|
3,165 |
|
|
Net income
|
|
|
1,130 |
|
|
|
1,719 |
|
|
|
2,042 |
|
|
|
3,095 |
|
|
Basic income per share(3)
|
|
$ |
0.45 |
|
|
$ |
0.68 |
|
|
$ |
0.81 |
|
|
$ |
1.22 |
|
|
Diluted income per share(3)
|
|
$ |
0.09 |
|
|
$ |
0.14 |
|
|
$ |
0.16 |
|
|
$ |
0.23 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
| |
|
| |
| |
|
1st | |
|
2nd | |
|
3rd | |
|
4th | |
| |
|
Quarter | |
|
Quarter | |
|
Quarter(4) | |
|
Quarter(5) | |
| |
|
| |
|
| |
|
| |
|
| |
|
Revenues
|
|
$ |
9,551 |
|
|
$ |
10,445 |
|
|
$ |
11,936 |
|
|
$ |
12,579 |
|
|
Income (loss) from operations
|
|
|
1,881 |
|
|
|
1,323 |
|
|
|
1,975 |
|
|
|
(3,942 |
) |
|
Net income
|
|
|
1,839 |
|
|
|
1,290 |
|
|
|
1,932 |
|
|
|
3,263 |
|
|
Basic income per share(3)
|
|
$ |
0.71 |
|
|
$ |
0.57 |
|
|
$ |
0.90 |
|
|
$ |
0.19 |
|
|
Diluted income per share(3)
|
|
$ |
0.13 |
|
|
$ |
0.09 |
|
|
$ |
0.14 |
|
|
$ |
0.18 |
|
|
|
| (1) |
In the quarter ended September 30, 2003, we recorded a loss
on disposal of assets in the amount of $1.1 million related
to the final closure of our St. Louis operation, and we
released a portion of the prior year’s excess accrual for
restructuring charges in an amount of $0.7 million. |
| |
| (2) |
In the quarter ended December 31, 2003, we released a
portion of the prior year’s excess accrual for
restructuring charges in the amount of $1.2 million, based
on lower than anticipated actual expense for severance
obligations, which was partially offset by charges of
$0.5 million for severance-related and facilities costs in
St. Louis. |
| |
| (3) |
The basic and diluted per share amounts have been restated to
give retroactive effect to a 1 for 2.74 reverse stock split of
our stock that occurred on August 5, 2004. |
| |
| (4) |
On February 25, 2005, we restated our results for the three
and nine months ended September 30, 2004 to exclude a
charge related to payment obligations of $4.8 million under
the management incentive plan in connection with our initial
public offering and to make other adjustments related to
obligations under the plan. During the initial preparation of
our financial statements for the quarter ended
September 30, 2004, the $4.8 million paid under the
incentive plan was recorded as of September 30 because by
September 30 the registration statement for the offering
had been declared effective by the SEC, the offering had priced
and the management payments were highly probable. Subsequently,
we concluded that the event triggering the payment obligations
was the closing of, and the receipt of funds from, the offering,
and the |
32
|
|
|
charge should have been recorded at that time. As a result of
the adjustments, the restated results of operations for the
quarter ended September 30, 2004 were as follows: |
| |
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
For the Quarter Ended | |
| |
|
|
|
September 30, 2004 | |
| |
|
|
|
| |
| |
|
|
|
As Reported | |
|
As Restated | |
| |
|
|
|
| |
|
| |
| |
|
|
|
(In thousands, | |
| |
|
|
|
except per share data) | |
| |
|
Revenues |
|
$ |
11,936 |
|
|
$ |
11,936 |
|
| |
|
Income (loss) from operations |
|
|
(2,811 |
) |
|
|
1,975 |
|
| |
|
Net income (loss) |
|
|
(2,730 |
) |
|
|
1,932 |
|
| |
|
Basic income (loss) per share(3) |
|
$ |
(1.28 |
) |
|
$ |
0.90 |
|
| |
|
Diluted income (loss) per share(3) |
|
$ |
(1.28 |
) |
|
$ |
0.14 |
|
The restatement did not have any effect on the results for the
year.
|
|
| (5) |
In the quarter ended December 31, 2004, we released a
portion of the deferred tax valuation allowances as we
determined that it is more likely than not that a portion of the
deferred tax assets will be realized. We recorded a benefit for
income taxes of $6.8 million associated with the release of
certain valuation allowances. In addition, we recorded a charge
of $5.3 million resulting from our obligation to make
payments to key employees under our 2002 management incentive
plan in connection with our IPO. |
Quarterly and year-to-date computations of earnings per share
amounts are made independently. Therefore, the sum of the per
share amounts for the quarters may not agree with the per share
amounts for the year.
We have derived our revenues primarily from customer management
fees, which include:
|
|
|
| |
• |
time-delineated or session based fees, including hourly or per
minute charges and charges per interaction, which are separately
negotiated on an individual client basis; and |
| |
| |
• |
implementation fees, including revenues associated with the
installation and integration of new clients into our
telecommunications, information technology and client reporting
structures. |
During the six fiscal years ended December 31, 2004,
substantially all of our revenues were derived from customer
management fees. Also, substantially all of our revenues have
consisted of time-delineated or session based fees.
Implementation and training fees have accounted for a small
portion of our revenues. We expect that for the foreseeable
future our revenues will continue to be comprised primarily of
customer management fees, even as we seek to grow revenues in
other business areas. Aggregate revenues generated from our
accounts receivable management business, which we initiated in
July 2003, represented less than 1% of our total revenues in
2003 and 1.5% of our total revenues in 2004.
In addition, during the same six year period ended
December 31, 2004, all of our revenues were derived from
U.S.-based clients. We conduct financial due diligence and
credit reviews of our clients prior to entering into contractual
relationships. In 2004, our top three clients, Expedia,
EarthLink and ConsumerInfo.com, accounted for approximately 69%
of our revenues. Each of these clients also accounted for more
than 10% of our revenues for the year. Expedia, our largest
client, and EarthLink, our second largest client, together
account for 57% of our revenues for 2004. Our contract with
Expedia expires in May 2007. Our contract with EarthLink expires
in January 2006, but will automatically renew each year for a
one year period unless terminated by EarthLink or us before the
end of the term. Our contract with ConsumerInfo.com expires in
July 2006 but will automatically renew for a one year period
unless terminated by ConsumerInfo.com or us before the end of
the term. Many of our clients may terminate their contracts with
us before their expiration with no penalties or limited
penalties or they may refuse to extend their contracts after the
contracts expire.
33
Cost of revenues. Cost of revenues consists primarily of
salaries, payroll taxes and employee benefit costs of our
professionals in the Philippines. Our cost of revenues is
impacted by prevailing salary levels and our ability to
efficiently manage and utilize our employees. Our workforce
management group continuously monitors service levels and
staffing requirements to ensure efficient use of our employees
and workstations. Although we generally have been able to
reallocate our professionals as client demand has fluctuated, an
unanticipated termination or significant reduction by a major
client may cause us to experience a higher-than-expected number
of unassigned professionals, which would cause cost of revenues
to increase as a percentage of revenues. As a percentage of
revenues, cost of revenues is also affected by the productivity
of our workforce, and productivity is in turn affected by
training and experience. We therefore emphasize recruitment,
training and retention to maintain and improve productivity.
Additionally, cost of revenues includes: telecommunications
costs; information technology costs; rent expense, facilities
support and customer management support costs related to the
operation of outsourcing and data centers; and consulting
services related to our customer management consulting group in
the United States. Cost of revenues does not include
depreciation of assets used in the production of revenues.
In certain periods we strategically invest in expanding our
outsourcing delivery capabilities to meet anticipated increases
in demand from new and existing clients. The costs of expansion
primarily include compensation and training of additional
outsourcing and support personnel, including middle and upper
management, rental of facilities and expenses related to
facilities, information technology, telecommunications and
transmission rights. Our strategic investment in expanded client
service capacity will generally occur ahead of anticipated
increases in client demand. We believe this is necessary in
order for us to be prepared to quickly provide additional high
quality services when demand increases, even though we generally
do not have specific commitments from existing or prospective
clients for increased volume. As a result, we have experienced,
and expect in the future to experience, periods of overcapacity
and higher costs of revenues, which we intend will be followed
by lower costs of revenues as increases in demand enable us to
utilize our expanded capacity. Although our investment in
developing client service capacity may result in near term
overcapacity and reduced operating margins, we believe the
investment is essential to attract and retain additional
clients. The success of this approach depends on our ability to
correctly anticipate and continue building demand for our
services.
Selling, general and administrative. Selling, general and
administrative expenses consist primarily of expenses incurred
at our U.S.-based corporate headquarters, including sales and
administrative employee-related expenses, sales commissions,
professional fees, information technology costs, travel,
marketing programs (which include product marketing expenses,
corporate communications, conferences, other brand building and
advertising) and other corporate expenses. We expect to incur
increased expenses for legal, insurance, auditing, investor
relations, shareholders meetings, printing and filing fees, as
well as employee-related expenses for regulatory compliance and
other costs, of approximately $3 million in 2005, including
$1.3 million of expenses for compliance with the
requirements of Section 404 of the Sarbanes Oxley Act of
2002. We also expect selling, general and administrative
expenses to increase as we add personnel and incur additional
fees and costs related to the growth of our business and
operations.
Depreciation and amortization. We currently 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 one to five 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 any 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.
Restructuring charges. In March 2002, we initiated a
reorganization plan in an effort to further reduce future
operating costs by streamlining operations into our lower-cost
operating centers in Manila. Operating costs in our Manila
locations were significantly lower than those in our Los Angeles
and St. Louis locations and was the primary reason for the
reorganization. As a result of this reorganization, we recorded
a charge of approximately $3.9 million with respect to
staffing reductions at our Los Angeles and St. Louis
facilities. The
34
charge was comprised of approximately $1.5 million for the
write-down of assets, $1.2 million of lease termination
costs, and $1.1 million for severance and related costs in
connection with the elimination of approximately 45 positions
from our Los Angeles and St. Louis outsourcing centers.
In 2003, we initiated a restructuring plan to further reduce
future operating costs by completely closing our St. Louis
outsourcing center and transferring those functions to our
lower-cost outsourcing centers in Manila. As a result of this
reorganization and the closure of this facility, we recorded a
charge of approximately $0.6 million with respect to
staffing reductions, asset impairments, and lease termination
costs. The charge was comprised of approximately
$0.3 million for the write-down of abandoned leasehold
improvements, $0.3 million of lease termination costs, and
$0.1 million for severance and related costs in connection
with the elimination of approximately 22 positions from our
St. Louis outsourcing center. We also released
approximately $1.0 million of the 2002 accrued
restructuring liability based on lower than anticipated actual
expenses for the 2002 lease termination and severance costs.
This amount was comprised of $0.3 million of lease
termination costs and $0.6 million of severance related
costs. As a result of the release of the 2002 accrual, we
recorded a net restructuring credit in the amount of
$0.3 million in 2003. See Note 9 of the Notes to
Consolidated Financial Statements included elsewhere in this
Annual Report on Form 10-K.
During the year ended December 31, 2004, the Company made
cash payments of $3,000 and released the remaining $22,000 of
restructuring reserves.
|
|
|
Certain Charges and Gains |
Gain on extinguishment of debt. In 2002, we recorded a
gain on the extinguishment of an equipment loan. We paid off the
debt at less than the remaining committed balance and retained
the equipment.
Compensation obligations. Under our management incentive
compensation plan, we made payments of $4.8 million from
cash on hand to senior executives and other key employees in
connection with the closing of our initial public offering on
October 6, 2004. These payments resulted in a charge to
earnings in the fourth quarter ended December 31, 2004.
Additionally, we recorded deferred compensation expense of
$0.8 million related to payments we are obligated to make
over time to our key employees and personnel based on continued
service or other performance criteria. Under the terms of our
management incentive compensation plan, we made a further
payment of $0.5 million in connection with the sale of
603,000 additional shares on October 25, 2004, pursuant to
the exercise of an over-allotment option granted to the
underwriters of our initial public offering. These payments also
resulted in a charge to earnings in the fourth quarter ended
December 31, 2004. In connection with the sale of these
shares, we also are obligated to make payments of
$0.2 million to key employees and personnel based on
continued service or other performance criteria. These payments
will be recorded as deferred compensation expense and amortized
in future periods.
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. On an ongoing basis,
we evaluate our estimates and assumptions. Our actual results
may differ from these estimates. We believe that, of our
significant accounting policies described in Note 2 of the
notes to our consolidated financial statements, the following
accounting policies involve a greater degree of judgment and
complexity. Accordingly, these are the policies 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 Securities and Exchange Commission Staff
Accounting Bulletin No. 101, “Revenue Recognition
in Financial Statements,” or SAB 101, and Staff
Accounting Bulletin 104, “Revenue Recognition,”
or SAB 104. SAB 101, as amended, and SAB 104
summarize certain of the Securities and Exchange Commission, or
SEC, staff’s views in applying generally accepted
accounting principles to revenue recognition in financial
statements and provide
35
guidance on revenue recognition issues in the absence of
authoritative literature addressing a specific arrangement or a
specific industry.
We primarily recognize our revenues from services as those
services are performed under a signed contract. We recognize:
|
|
|
| |
• |
customer management fees, excluding implementation fees, as
those services are performed; |
| |
| |
• |
implementation fees ratably over the life of the
contract; and |
| |
| |
• |
commission revenues for contingent accounts receivable
management contracts upon receipt of collected funds. |
For purchased accounts receivable portfolios, due to the
Company’s limited experience in assessing its collection
trends, the Company only recognizes revenue to the extent of
cash collected in excess of the portfolio’s purchase price.
The Company periodically assesses the collections experience
trend curve to determine if a change in revenue recognition
treatment is appropriate.
Deferred revenue represents amounts billed or cash received in
advance of revenue recognition. As of December 31, 2003 and
2004 our balance sheets reflect $1.2 and $1.9 million in
deferred revenues, respectively.
|
|
|
Accounting for Stock-based Awards |
We have adopted the disclosure-only provisions of Statement of
Financial Accounting Standards, or SFAS, No. 123,
Accounting for Stock-Based Compensation. Under
SFAS No. 123, companies have the option to measure
compensation costs for stock options using the intrinsic value
method prescribed by Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees, or
APB No. 25. Under APB No. 25, compensation expense is
generally not recognized when both the exercise price is the
same as the market price and the number of shares to be issued
is set on the date the employee stock option is granted. We have
chosen to use the intrinsic value method to measure our
compensation costs. The impact of recording employee stock-based
awards at fair value is further described in Note 2 of the
notes to our consolidated financial statements.
In the past, we awarded a limited number of stock options to
employees and non-employees at exercise prices that were
subsequently determined to have been below fair market value.
For these options, we record deferred stock-based compensation
charges in the amount by which the exercise price of an option
is less than the deemed fair value of our common stock at the
date of grant. We amortize the deferred compensation charges on
an accelerated method over the vesting period of the underlying
option awards.
For the years ended December 31, 2003 and 2004, we recorded
$0.1 million and $1.8 million, respectively, in
non-cash, stock-based compensation expense. There was no
deferred stock-based compensation required to be amortized in
2002.
We issue both incentive and nonqualified stock options. Most of
the options granted to date have been incentive stock options.
We receive a tax deduction at exercise of nonqualified stock
options for the excess of market value over the exercise price,
the tax benefit of which is recorded directly as an increase to
stockholders equity. The exercise of incentive stock options
does not create any tax deductions for us, unless the option
holder does not meet certain required holding periods under the
income tax laws.
|
|
|
Accounting for Income Taxes |
In connection with preparing our financial statements, we are
required to estimate our income taxes in each of the
jurisdictions in which we operate. This process involves the
assessment of our net operating loss carryforwards, as well as
estimating the actual current tax liability together with
assessing temporary differences resulting from differing
treatment of items, such as reserve and accrued liabilities, for
tax and accounting purposes. We then assess the likelihood that
deferred tax assets, consisting primarily of our net operating
loss carryforwards, will be realized or recovered from future
taxable income. In assessing the
36
realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of
the deferred tax assets will be realized. Management considers
projected future taxable income, customer contract terms and
customer concentrations in making this assessment. Management
reassesses the realizability of deferred tax assets on a
periodic basis. At such times as we determine that the
recoverability of any remaining portion of deferred tax assets
is more likely realizable than not, we will further release a
portion of the deferred tax valuation allowances, record an
income tax benefit and subsequently record a provision for
income taxes for financial statement purposes based on the
amount of taxable net income. To the extent we believe that
recoverability of our deferred tax assets is not likely, we are
required to establish a valuation allowance.
Our deferred tax assets as of December 31, 2003 and 2004
were $20.6 and $23.6 million, respectively. Based on our
recent history of pretax profits and projected profitability, in
the fourth quarter of 2004, we reduced our valuation allowance
by $6.8 million to record net deferred tax assets of
$6.8 million.
At December 31, 2004, we had U.S. and California net
operating loss carryforwards of approximately $57.1 and
$42.9 million, respectively, which may be used to offset
future taxable income. Our carryforwards expire through 2023 and
are subject to review and possible adjustment by tax
authorities. The utilization of net operating loss carryforwards
may be limited under the provisions of Internal Revenue Code
Section 382 and similar state provisions. Section 382
of the Internal Revenue Code of 1986 generally imposes an annual
limitation on the amount of net operating loss carryforwards
that may be used to offset taxable income where a corporation
has undergone significant changes in its stock ownership. In
2004, we completed an analysis to determine the potential
applicability of any annual limitations imposed by
Section 382 using assumptions regarding the respective
values of classes of our stock. Based on our analysis, we do not
believe our net operating losses are currently subject to
Section 382 limitations. Under Section 382, however,
future ownership changes (including, but not limited to,
significant increases during the applicable testing period in
the percentage of our stock owned directly or constructively by
(i) any stockholder who owns 5% or more of our stock or
(ii) some or all of the group of stockholders who
individually own less than 5% of our stock) may affect our
ability to use our net operating loss carryforwards. To the
extent our use of net operating loss carryforwards is
significantly limited, our income could be subject to tax
earlier than it would if we were able to use net operating loss
carryforwards, which could result in lower profits.
We are currently the beneficiary of income tax holiday
incentives granted by two governing agencies of the Philippines,
the Board of Investments and Philippine Economic Zone Authority.
A majority of our current facilities in Manila are covered by
the Board of Investments, and our Cebu facilities are covered by
the Philippine Economic Zone Authority. An application has been
made for the PeopleSupport Center to be covered by the
Philippine Economic Zone Authority. Both agencies have granted
us income tax holidays with durations of four to six years, with
the possibility of two to three year extensions. Our current
income tax holidays expire at staggered dates beginning in 2006
and ending in 2008, and we intend to apply for an extension.
While no assurance can be given at present, we understand it is
the current practice of both the Board of Investments and
Philippine Economic Zone Authority to grant extensions on such
tax holidays as a means of attracting foreign investment in
specified sectors, including the outsourcing industry.
We believe that as our Philippine tax holidays expire,
(i) gross income (defined for this purpose to mean the
amount of our cost-plus transfer payments to our Philippine
subsidiary in excess of certain allowable deductions)
attributable to activities covered by our Philippine Economic
Zone Authority registrations will be taxed at a 5% preferential
rate, and (ii) our Philippine net income attributable to
all other activities (including activities covered by our Board
of Investments registrations) will be taxed at the regular
Philippine corporate income tax rates of 32%. Our effective
overall Philippine income tax rate will vary as the revenue
generating activity at each outsourcing center becomes taxable
upon expiration of the income tax holiday applicable to that
center.
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Restructuring Charges and Exit Costs |
In 2002, we recorded restructuring charges pursuant to Emerging
Issues Task Force, or EITF, 94-3, “Liability Recognition
for Costs to Exit an Activity (Including Certain Costs Incurred
in a Restructuring),”
37
which states exit costs should be treated as a liability if the
commitment date has been established, if the costs are true exit
costs and if the costs can be accepted for recognition at the
commitment date. EITF 94-3 likewise addresses recognition
of costs related to the involuntary termination of employees as
liabilities. These costs are estimated and reviewed annually
and, if revised, may result in changes to our restructuring
expense should different conditions prevail than were
anticipated in our original estimates. In 2003, we recorded
restructuring charges pursuant to SFAS No. 146,
“Accounting for Costs Associated with Exit or Disposal
Activities,” which addresses financial accounting and
reporting for costs associated with exit or disposal activities
and superseded EITF Issue No. 94-3. Under
SFAS No. 146 a liability is recognized at fair value
in the period incurred rather than at the date of commitment to
a restructuring plan.
Long-lived asset impairment. Long-lived assets, including
fixed assets and intangibles, are reviewed for impairment as
events or changes in circumstances occur indicating that the
carrying amounts may not be recoverable. When these events or
changes in circumstances indicate that the carrying amount could
be impaired, undiscounted cash flow analyses would be used to
assess impairment. The estimation of future cash flows involves
considerable management judgment. Included in the restructuring
charges for the years 2002 and 2003 are charges for the
write-down of long-lived assets in the amounts of
$1.5 million and $0.3 million, respectively.
Results of Operations
The following table shows the listed items from our consolidated
statements of operations as a percentage of revenues for the
periods presented (percentages may not aggregate due to
rounding).
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Years Ended | |
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December 31, | |
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2002 | |
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2003 | |
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2004 | |
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Consolidated Statements of Operations Data:
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Revenues
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100 |
% |
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% |
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100 |
% |
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Cost of revenues (exclusive of management incentive plan and
depreciation expense shown below)
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57 |
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43 |
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55 |
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Management incentive plan — cost of revenues
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— |
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— |
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2 |
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Selling, general and administrative (exclusive of management
incentive plan expense shown below)
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28 |
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20 |
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22 |
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Management incentive plan — selling, general and
administrative
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— |
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— |
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10 |
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Depreciation and amortization
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21 |
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11 |
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9 |
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Gain on sale of receivable portfolios
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— |
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— |
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— |
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Restructuring charges
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19 |
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(1 |
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— |
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Income (loss) from operations
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(25 |
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27 |
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3 |
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Interest income (expense)
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(2 |
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— |
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1 |
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Gain on the extinguishment of debt
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12 |
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— |
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— |
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Provision (benefit) for income taxes
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— |
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— |
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(15 |
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Net income (loss)
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(15 |
)% |
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27 |
% |
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19 |
% |
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Year Ended December 31, 2003 Compared with Year Ended
December 31, 2004 |
Our revenues increased by $14.5 million, or 48% from
$30.0 million for the year ended December 31, 2003 to
$44.5 million for the year ended December 31, 2004.
The increase was primarily attributable to $3.8 million of
customer management fees associated with services provided to
fifteen new clients. The increase was also attributable to an
increase of $10.2 million in customer management fees
primarily associated with a higher volume of services rendered
to existing clients. We believe this increase resulted from
38
our ability to capture a larger share of our clients’
outsourcing needs, as well as a general increase in our
clients’ demand for outsourced services. The increase in
2004 revenues was partially offset by a 55% decline in revenues
from Network Solutions for the year ended December 31,
2004, as compared with the year ended December 31, 2003. We
believe this decline was primarily due to Network
Solutions’ improvement of its web-based, self-help
technology, automation of its telephone inquiry system and
expansion of its in-house customer management operations, which
resulted in reduced demand for our services.
Our cost of revenues increased by $12.4 million, or 96%,
from $12.9 million for the year ended December 31,
2003 to $25.3 million for the year ended December 31,
2004. The increase was primarily due to increased costs
associated with the expansion of our outsourcing operations in
the Philippines to meet increased demand from new and existing
customers during the fiscal year ended 2004, and to add capacity
for anticipated future increases in demand. For the year ended
December 31, 2004, we strategically invested in expanding
our outsourcing delivery capabilities. The costs of expansion
primarily include $5.7 million of compensation associated
with additional outsourcing and support personnel, including
middle and upper management, $3.9 million of expenses
associated with the rental of facilities and related facilities
expense, $1.2 million of expenses associated with
information technology, and increased telecommunications and
transmission capacity, $0.6 million related to non-cash
stock based compensation and $0.8 million of cash payments
made or accrued related to the management incentive plan. Other
investments in capitalized infrastructure expansion, including
build out of facilities, purchase of computers, information
technology and telecommunications equipment have been
capitalized and will be expensed over time as depreciation and
amortization, which is classified separately from cost of
revenues.
Our cost of revenues as a percentage of revenues increased from
43% for the year ended December 31, 2003 to 57% for the
year ended December 31, 2004 (including $0.6 million,
or 1% of revenue, of non-cash, stock based compensation expense
and $0.8 million, or 2% of revenue, associated with the
management incentive plan). This increase was primarily due to
the increase in expenses associated with the expansion of our
outsourcing capacity. Although our strategic investment in
developing client service capacity may result in near term
overcapacity and increased cost of revenues, we believe the
investment is essential to attract and retain additional
clients. The success of this approach depends on our ability to
correctly anticipate and continue building demand for our
services. We plan to continue investing to expand our capacity
into 2005 when we commence operations at the PeopleSupport
Center; a new build-to-suit 162,000 square feet leased
facility that is scheduled to commence operations in the third
quarter of 2005. We also intend that increases in demand for our
services from new and existing clients will enable us to utilize
our 2004 capacity enhancements in 2005. We do not anticipate
moving costs to the PeopleSupport Center to be material.
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Selling, General and Administrative |
Selling, general and administrative expense (SG&A) increased
$8.2 million, or 134%, from $6.1 million for the year
ended December 31, 2003 to $14.3 million for the year
ended December 31, 2004. The increase was primarily due to
the following increased or additional expenses in 2004:
$4.5 million of expense (or 10% of revenue) related to
payments made or accrued related to the management incentive
plan, $1.2 million of expense (or 3% of revenue) related to
non-cash stock based compensation, the recognition of
$0.7 million of
39
commission expense attributed to increased revenues, the
recognition of $0.5 million of salary expense between
various departments, and $0.5 million of public company
costs. Our SG&A expense as a percentage of revenues was 20%
for the year ended December 31, 2003 and 32% for the year
ended December 31, 2004.
In 2004, we incurred no television or magazine advertising
expenses. We do not expect to incur material advertising
expenses in future periods, as we seek to increase sales through
direct marketing and sales efforts.
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Depreciation and Amortization |
Depreciation and amortization increased by $0.7 million, or
22%, from $3.2 million in 2003 to $3.9 million in
2004. Depreciation related to our Philippines operations
increased by $1.3 million as a result of our build-out
during the current year. However, this increase was offset by a
decrease in depreciation of approximately $0.4 million
related to the relocation of our U.S. operations to the
Philippines in 2003.
Restructuring charges decreased from a credit of
$0.3 million in 2003 to less than $0.1 million in
2004. In 2004, we released the restructuring reserves for lower
than anticipated costs to transition operations from the
U.S. to the Philippines, which resulted in $0 accrual at
December 31, 2004.
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Interest Income (Expense) |
We did not incur any interest expense in 2004, as we had no debt
throughout the entire year. In 2003, we incurred interest
expense of less than $0.1 million. We do not expect to
incur any debt in the near future.
Interest income increased by $0.1 million, or 100%, from
$0.1 million in 2003 to $0.2 million in 2004. The
increase is primarily attributable to the increase in cash on
hand related to the funds raised from the Initial Public
Offering which closed on October 6, 2004.
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Provision (Benefit) for Income Taxes |
Our benefit for income taxes was approximately
$(6.9) million in 2004, as compared with a
$0.2 million provision for income taxes in 2003. In the
fourth quarter of 2004, we released a portion of the deferred
tax valuation allowances as the company determined that it is
more likely than not that a portion of the deferred tax assets
will be realized. We recorded a benefit for income taxes of
$(6.8) million associated with the release of certain
valuation allowances. In assessing the realizability of deferred
tax assets, management considers whether it is more likely than
not that some portion or all of the deferred tax assets will be
realized. Management considers projected future taxable income,
customer contract terms and customer concentrations in making
this assessment. Management reassesses the realizability of
deferred tax assets on a periodic basis. At such times as we
determine that the recoverability of any remaining portion of
deferred tax assets is more likely realizable than not, we will
further release a portion of the deferred tax valuation
allowances, record an income tax benefit and subsequently record
a provision for income taxes for financial statement purposes
based on the amount of taxable net income. The company’s
effective tax rate for 2004 was (469.7%) as compared with 2.8%
for 2003.
We expect our future U.S. profits to be subject to an
alternative minimum tax rate of approximately 2% until our
remaining net operating loss carryforwards are fully utilized or
become limited by Section 382 of the Internal Revenue Code
of 1986, as discussed above. To the extent that we continue to
believe the realizable portion of our deferred tax assets
remains at $6.8 million, our U.S. tax provision should
remain at approximately 2% until such time that our net
operating losses are fully benefited. Any adjustment to the
realizable portion of our deferred tax assets will result in an
adjustment of our provision for income taxes at the time they
are determined to be realizable.
40
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Year Ended December 31, 2002 Compared with Year Ended
December 31, 2003 |
Our revenues increased by $10.2 million, or 52%, from
$19.8 million in 2002 to $30.0 million in 2003. The
increase was primarily attributable to increased customer
management fees associated with a higher volume of customer
management services rendered to new and existing clients. This
increase was primarily attributable to an increase of
$7.6 million in customer management fees associated with a
higher volume of services rendered to existing clients. We
believe this increase resulted from our ability to capture a
larger share of our clients’ outsourcing needs, as well as
a general increase in our clients’ demand for outsourcing
services, particularly in the travel and hospitality industry.
The increase in revenues also resulted, in part, from an
increase of $2.6 million in customer management fees
associated with services rendered to six new clients in the
financial, telecommunications and technology industries.
Our cost of revenues increased by $1.7 million, or 15%,
from $11.2 million in 2002 to $12.9 million in 2003.
The increase was primarily attributable to increased costs of
approximately $3.6 million associated with the expansion of
our outsourcing operations in the Philippines and an increase in
the number of customer management professionals. The increased
costs in the Philippines were partially offset by a
$2.6 million reduction in information technology,
telecommunications and employee-related costs associated with
our move to the Philippines. Our entire staff of customer
management and accounts receivable management professionals was
located in the Philippines at December 31, 2003, as
compared with 93% at December 31, 2002. Due to the cost
savings described above resulting from our move to the
Philippines, our cost of revenues as a percentage of revenues
decreased from 57% in 2002 to 43% in 2003.
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Selling, General and Administrative |
Selling, general and administrative expenses (SG&A)
increased by $0.5 million, or 9%, from $5.6 million in
2002, to $6.1 million in 2003. The increase is primarily
attributable to operating expenses associated with our start up
accounts receivable management business in the amount of
$0.4 million. Our SG&A as a percentage of revenues
decreased from 28% in 2002 to 20% in 2003. This decrease was due
to a reduction in headcount related to the closure of our
customer management operations in St. Louis.
In 2002 and 2003, we incurred no television or magazine
advertising expenses.
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Depreciation and Amortization |
Depreciation and amortization decreased by $0.9 million, or
22%, from $4.1 million in 2002 to $3.2 million in
2003. Depreciation related to hardware, software and other
assets purchased to support additional personnel in the
Philippines increased by over $0.2 million. However, this
increase was more than offset by a decrease of $0.5 million
due to software licenses reaching the end of their depreciation
period and a $0.6 million charge related to the disposal of
leasehold improvements and fixed assets in our former
St. Louis facilities in 2002.
Restructuring charges decreased from $3.8 million in 2002
to a credit of $0.3 million in 2003. In 2002, we recorded
restructuring charges related to the closure of some of our
customer management operations in St. Louis, Missouri.
$1.2 million of the restructuring charges recorded in 2002
were attributable to lease termination costs, $1.5 million
related to the write-down of assets and $1.1 million of
these charges were attributable to severance and related costs.
These charges included our estimated costs for the write-down of
assets, obligations for abandoned space in St. Louis,
accounts payable restructuring, severance and other related
costs. In 2003, we incurred restructuring expenses of
approximately $0.4 million associated with the final
closure of the remaining portion of our customer management
operations in St. Louis, which primarily consisted of lease
termination costs. This expense was more than offset by the
reversal of approximately
41
$0.7 million of the 2002 accrued restructuring liability,
based on lower than anticipated actual expenses. As of
December 31, 2003, we maintained a minor restructuring
accrual balance of less than $0.1 million.
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Interest Income (Expense) |
Interest expense was nominal in 2003, as compared with interest
expense of $0.5 million in 2002. The decrease in interest
expense resulted from the extinguishment of an outstanding
equipment loan. As of December 31, 2003, we had no debt.
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Gain on Extinguishment of Debt |
The gain in 2002 related to the extinguishment of a long term
liability associated with an equipment loan in the amount of
$2.4 million. Our outstanding loan balance as of
November 1, 2002 was $4.1 million. We extinguished the
loan by paying $1.7 million to the vendor and recorded a
gain in the amount of $2.4 million. There were no similar
gains or losses for 2003.
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Provision for Income Taxes |
Our provision for income taxes was approximately
$0.2 million in 2003, as compared with minimal provision
for income taxes in 2002. Our effective tax rate for 2003 was
approximately 3%, as compared with 0% in 2002. The 2003
provision represents income taxes payable in the state of
California due to the moratorium imposed on the use of loss
carryforwards effective for the years 2002 and 2003, and federal
alternative minimum tax.
Liquidity and Capital Resources
We have historically financed our operations primarily through
cash flows from operations, sales of equity securities,
equipment financings, and interest income earned on cash, cash
equivalents and investments. As of December 31, 2004, we
have working capital of $43.7 million including cash and
cash equivalents totaling $41.6 million (excluding a
restricted cash equivalent) and accounts receivable of
$5.6 million.
Net cash provided by operating activities was $4.8 million
for the year ended December 31, 2004, which was less than
our net income of $8.3 million for the same period. The
difference is primarily due to $3.9 million of depreciation
and amortization, and $1.8 million of non-cash stock based
compensation expense, offset by $6.8 million in deferred
income taxes, and an aggregate decrease in working capital of
$2.5 million. Net cash provided by operating activities was
$10.8 million for the year ended December 31, 2003,
which was greater than our net income of $8.0 million for
the same period. The difference is primarily attributable to
$3.2 million of depreciation and amortization, partially
offset by aggregate decreases in working capital of
$0.2 million. Net cash provided by operating activities was
$0.5 million for the year ended December 31, 2002,
which was greater than the net loss of $2.9 million. The
difference is primarily attributed to $4.1 million of
depreciation and amortization and a $1.5 million write-down
of leasehold improvements related to restructuring, partially
offset by a gain of $2.4 million associated with the
extinguishment of debt.
Net cash used in investing activities for the year ended
December 31, 2002, 2003 and 2004 was $1.0 million,
$3.6 million and $5.9 million, respectively. For the
years ended December 31, 2004, we incurred
$7.0 million of capital expenditures associated with the
expansion of the Philippine operations which was offset by
$0.5 million of receivable portfolio collections and
$0.4 million proceeds from sale of receivable portfolios.
Cash used in investing activities for the year ended
December 31, 2003 was primarily comprised of
$3.4 million of capital expenditures associated with the
continuing expansion of the Philippine operating facilities, and
$0.7 million related to the purchase of receivable
portfolios partially offset by a $0.3 reduction in restricted
cash equivalents. Cash used in investing activities for the year
ended December 31, 2002 was
42
comprised of $0.8 million of capital expenditures and
$1.0 million investment in restricted cash equivalent,
offset by $0.8 million provided by the sale of short term
investments.
Our capital expenditures in 2004 were approximately
$7.0 million, primarily for telecommunications equipment,
leasehold improvements, computer hardware and software, and
furniture and fixtures in support of expanding our
infrastructure. In the second half of 2005, we expect to move
into a build-to-suit leased data and outsourcing center in
Manila, Philippines (the PeopleSupport Center). We estimate
potential build out costs for this facility of $7.4 million
for telecommunications equipment, leasehold improvements,
computer hardware and software, and furniture and fixtures. We
currently intend to build out approximately 60% of the
PeopleSupport Center for use in 2005 and the remaining portion
in early 2006. The estimated capital expenditure for 2005
reflects the 60% build out of the PeopleSupport Center. In
addition to the PeopleSupport Center, we estimate further build
out costs in 2005 of our infrastructure of $1.6 million to
$2.6 million primarily for telecommunications equipment,
leasehold improvements, computer hardware and software, and
furniture and fixtures in support of expanding our
infrastructure, which we may adjust based on trends in revenue
and personnel in the Philippines. We anticipate using cash on
hand and the net proceeds from our recently completed offering
to fund these expenditures.
Net cash used in financing activities for the years ended
December 31, 2002 and 2003 was $2.1 million and
$0.2 million, respectively, and net cash provided by
financing activities for the year ended December 31, 2004
was $30.5 million. The increase in cash provided by
financing activities for the year ended December 31, 2004
was primarily attributable to $34.8 million of initial
public offering proceeds, partially offset by $3.3 million
of public offering costs and the $1.4 million repurchase of
common stock from one of our founders.
Net cash used in financing activities for the year ended
December 31, 2002 includes $1.7 million of note
payable repayments, $0.2 million of payments associated
with capital lease obligations and $0.2 million of payments
on line of credit borrowings.
In May 2003, we renewed standby letters of credit in the
aggregate amount of $0.7 million related to the lease of
one of our offices in the Philippines and the lease of our
headquarters in Los Angeles. In connection with these renewals,
we granted a security interest in a certificate of deposit with
a commercial bank to secure performance of our obligations under
the standby letters of credit. Pursuant to the terms of the
letters of credit, approximately $0.1 million of our
security interest was released in August 2004 and approximately
$0.4 million will be released in 2005.
At December 31, 2004, we had a restricted cash equivalent
in the amount of approximately $0.4 million, held in a
certificate of deposit as collateral for our lending facilities,
which will be released as discussed above.
Based on our current level of operations, we expect that our
cash flow from operations, together with the current working
capital and the proceeds from our recently completed public
offering in October 2004, will be adequate to meet our
anticipated cash needs at least through 2005. Although we
currently have no specific plans to do so, to the extent we
decide to pursue one or more significant strategic acquisitions,
we will likely incur debt or sell additional equity to finance
those acquisitions.
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Rescission Offer and Reporting Obligations |
For the first time at the end of any fiscal year, on
December 31, 2002, options granted under our 1998 stock
plan were held by more than 500 holders. As a result, we became
subject to the registration requirements under
section 12(g) of the Securities Exchange Act of 1934, as
amended, which requires every issuer having total assets of more
than $10 million, and a class of equity security held of
record by more than 500 or more persons, to register that class
of equity security under the Exchange Act. We were required to
comply with the registration requirements within 120 days
after the end of the first fiscal year when we first met these
assets and holder tests, and were required pursuant to
Section 12 of the Exchange Act to file periodic and other
reports under Section 13(a) of the Exchange Act.
43
As a result of not having registered our securities under
Section 12 and not having filed reports under
Section 13(a) of the Exchange Act beginning in 2003, grants
of certain options under our 1998 plan between January 1,
2003 through April 28, 2004 may not have been exempt from
registration or qualification under federal and state securities
laws, and we did not obtain any required registration or
qualification. In order to comply with California securities
law, we intend to make a rescission offer to the
U.S. holders of these options. Before the completion of its
initial public offering, the Company applied to the California
Department of Corporations for approval of the terms of the
repurchase offer. By order dated October 28, 2004, the
California Department of Corporations approved the
Company’s repurchase application as to form pursuant to
section 25507(b) of the California Corporations Code.
Following approval of our repurchase application, we issued
shares upon exercise of certain of these options granted between
January 1, 2003 through April 28, 2004. Accordingly,
we plan to re-apply to the California Department of Corporations
for expanded approval to repurchase both options and these
shares issued upon exercise of options. We also intend to file a
registration statement on Form S-1 to register the offer to
repurchase the options and shares. Pursuant to the terms of our
previously approved repurchase application, we intend to offer
to repurchase the options at 20% of the option exercise price
multiplied by the number of shares underlying the option, plus
interest at an annual rate of 7% from the grant date. We intend
to offer to repurchase shares issued upon exercise of options at
the full exercise price paid for the shares, plus interest at an
annual rate of 7% from the date of exercise of the underlying
options. Under these terms, we would be required to pay
approximately $0.1 million, plus statutory interest at an
annual rate of 7% if all persons entitled to have their options
repurchased elect to do so. Federal securities laws do not
expressly provide that a rescission offer will terminate a
purchaser’s right to rescind a sale of stock that was not
registered as required. If any or all of the offerees reject our
offer to repurchase the options, we may continue to be liable
under federal and state securities laws. We do not believe that
this rescission offer will have a material effect on our results
of operations, cash flows or financial positions.
In addition, our failure to file past required reports under the
Exchange Act of 1934 could conceivably give rise to potential
claims by present or former stockholders based on the theory
that such holders were harmed by the absence of such public
reports. If any such claim is asserted, we could incur expenses
and divert management’s attention in defending them, even
if we have no liability.
On November 1, 2004, we filed a registration statement on
Form S-8 under the Securities Act covering shares of common
stock under outstanding options under our stock incentive plans.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements, investments
in special purpose entities or undisclosed borrowings or debt.
In addition, we have not entered into any derivative contracts
or synthetic leases.
Contractual Obligations
We currently have no debt. The numbers in the table below do not
include any adjustment that may result from increases in certain
contractual obligations in the event inflation in the
Philippines exceeds contractually negotiated levels. This
obligation is not included in the chart below. We generally do
not enter into binding purchase commitments. Our principal
commitments consist of obligations under leases for office space
and equipment.
On January 13, 2005, we exercised a three year renewal
option associated with the lease of our corporate headquarters.
44
The following summarizes our contractual obligations at
December 31, 2004, all of which represent operating lease
payment obligations, and includes lease obligations of
$1.0 million associated with our exercise of a three year
renewal option associated with our corporate headquarters:
| |
|
|
|
|
| Years Ending December 31, |
|
(In thousands) | |
| |
|
| |
|
2005
|
|
$ |
2,073 |
|
|
2006
|
|
|
2,638 |
|
|
2007
|
|
|
2,331 |
|
|
2008
|
|
|
2,124 |
|
|
2009
|
|
|
1,712 |
|
|
Thereafter
|
|
|
12,028 |
|
| |
|
|
|
|
Total minimum payments
|
|
$ |
22,906 |
|
| |
|
|
|
We have the option to renew two leases under various terms,
ranging from five to six years, at various rates as specified
within each lease agreement. The table above does not assume any
such renewals.
Our obligations under four of our outsourcing center leases may
change due to inflation in the Philippines or fluctuations in
the value of the Philippine peso relative to the value of the
U.S. dollar. These leases provide for increases in lease
payments in the case of extraordinary inflation. Two of these
contracts provide that an event of extraordinary inflation will
be conclusively presumed to have occurred if the specified
exchange rate of the Philippine peso relative to the
U.S. dollar increases by more than 25% over a short period,
or if the purchasing power of the Philippine peso decreases by
more than 25% over the same period. The third of these contracts
provides for an increase in our lease obligations if the local
consumer price index increases by 16% or more over a
12 month period. Another one of our leases provides that in
the case of an extraordinary reduction in the value of the
currency used to make payments under the lease, the value of the
currency at the time we entered into the obligation will be the
basis of payment. In the event of extraordinary inflation, our
obligations under this agreement could increase by 16% to 25% or
more. Based on recent historical inflation rates in the
Philippines, we do not believe it is likely that inflation will
trigger an increase in our payment obligations. In each of the
last two years, the Philippines has recorded an annual inflation
rate of approximately four percent. Rulings by the Philippine
Supreme Court indicate that the Philippines has not experienced
any period of inflation in the past that would qualify as
extraordinary inflation under our contracts.
|
|
|
Recent Accounting Pronouncements |
In October 2003, the American Institute of Certified Public
Accountants issued Statement of Position (“SOP”)
03-03, “Accounting for Loans or Certain Securities Acquired
in a Transfer.” This SOP provides standards for accounting
for differences between contractual and expected cash flows from
an investor’s initial investment in loans or debt
securities acquired in a transfer if those differences are
attributable, at least in part, to credit quality. This SOP is
effective for loans acquired in fiscal years beginning after
December 15, 2004. The SOP would limit the revenue that may
be accrued to the excess of the estimate of expected future cash
flows over a portfolio’s initial cost of accounts
receivable acquired. The SOP would require that the excess of
the contractual cash flows over expected cash flows not be
recognized as an adjustment of revenue, expense, or on the
balance sheet. The SOP would freeze the internal rate of return,
referred to as IRR, originally estimated when the accounts
receivable are purchased for subsequent impairment testing.
Rather than lower the estimated IRR if the original collection
estimates are not received, the carrying value of a portfolio
would be written down to maintain the original IRR. Increases in
expected future cash flows would be recognized prospectively
through adjustment of the IRR over a portfolio’s remaining
life. The SOP provides that previously issued annual financial
statements would not need to be restated. Historically, we have
applied the guidance of Practice Bulletin 6, whereby we
only recognize revenue to the extent of cash collected in excess
of the portfolio’s purchase price. The adoption of SOP
03-03 will not have a material impact on our results of
operations or financial position.
45
In December 2003, the Financial Accounting Standards Board
(FASB) issued Interpretation No. (FIN) 46R, “a
revision to FIN 46, Consolidation of Variable Interest
Entities.” FIN 46R clarifies some of the provisions of
FIN 46 and exempts certain entities from its requirements.
FIN 46R was effective at the end of the first interim
period ending after March 15, 2004. The adoption of
FIN 46R did not have a material impact on our results of
operations or financial position.
In December 2003, the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 104
(SAB No. 104), “Revenue Recognition,” which
codifies, revises and rescinds certain sections of
SAB No. 101, “Revenue Recognition,” in order
to make this interpretive guidance consistent with current
authoritative accounting and auditing guidance and SEC rules and
regulations. The changes noted in SAB No. 104 did not
have a material effect on our results of operations or financial
position.
On March 31, 2004, the FASB ratified the consensus reached
by the Task Force on EITF Issue No. 03-1, “The Meaning
of Other-Than-Temporary Impairment and Its Application to
Certain Investments (“Issue No. 03-1”), but
delayed the recognition and measurements provisions of
EITF 03-01 in September 2004. For reporting periods
beginning after June 15, 2004, only the disclosure
requirements for available-for-sale securities and cost method
investments are required. The adoption of Issue No. 03-1 is
not expected to have a material impact on our financial position
or results of operations.
FASB Staff Position (“FSP”) No. 109-2,
“Accounting and Disclosure Guidance for the Foreign
Earnings Repatriation Provision within the American Jobs
Creation Act of 2004” (“FSP 109-2”), provides
guidance under FASB Statement No. 109, “Accounting for
Income Taxes,” with respect to recording the potential
impact of the repatriation provisions of the American Jobs
Creation Act of 2004 (the “Jobs Act”) on
enterprises’ income tax expense and deferred tax liability.
The Jobs Act was enacted on October 22, 2004. FSP
109-2 states that an enterprise is allowed time beyond the
financial reporting period of enactment to evaluate the effect
of the Jobs Act on its plan for reinvestment or repatriation of
foreign earnings for purposes of applying FASB Statement
No. 109. We have not yet completed evaluating the impact of
the repatriation provisions. Accordingly, as provided for in FSP
109-2, we have not adjusted our tax expense or deferred tax
liability to reflect the repatriation provisions of the Jobs Act.
In December 2004, the FASB issued SFAS No. 123R,
“Share-Based Payment.” This statement is a revision to
SFAS No. 123, “Accounting for Stock-Based
Compensation” and APB Opinion No. 25, “Accounting
for Stock Issued to Employees.” This statement establishes
standards for the accounting for transactions in which an entity
exchanges its equity instruments for goods or services,
primarily focusing on the accounting for transactions in which
an entity obtains employee services in share-based payment
transactions. Entities will be required to measure the cost of
employee services received in exchange for an award of equity
instruments based on the grant-date fair value of the award
(with limited exceptions). That cost will be recognized over the
period during which an employee is required to provide service,
the requisite service period (usually the vesting period), in
exchange for the award. The grant-date fair value of employee
share options and similar instruments will be estimated using
option-pricing models. If an equity award is modified after the
grant date, incremental compensation cost will be recognized in
an amount equal to the excess of the fair value of the modified
award over the fair value of the original award immediately
before the modification. This statement is effective as of the
beginning of the first interim or annual reporting period that
begins after June 15, 2005. In accordance with the
standard, we will adopt SFAS No. 123R effective
July 1, 2005. We are currently assessing the impact of this
statement.
|
|
| Item 7A. |
Quantitative and Qualitative Disclosures about Market
Risk |
Foreign Currency Exchange Risk
Our 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 years ended
December 31, 2003 and 2004, approximately 51% and 57%,
respectively, of our expenses were generated in the Philippines.
We derive all of our revenues in U.S. dollars. A 10%
increase in the value of the U.S. dollar relative to the
Philippine peso would reduce the expenses associated with the
operations of our overseas operation by approximately
$2.2 million, whereas a 10% decrease in the relative value
of the dollar would increase the cost associated with
46
these operations by approximately $2.2 million. Expenses
relating to our operations outside the United States increased
for the year ended December 31, 2004 when compared with the
year ended December 31, 2003 due to increased costs
associated with higher revenue generation and customer
management services, partially offset by the increase in the
value of the U.S. dollar relative to the Philippine peso.
We fund our Philippine subsidiary on a bi-monthly basis through
U.S. dollar denominated accounts held in the Philippines.
Payments for employee-related costs, facilities management,
other operational expenses and capital expenditures are
converted into Philippine pesos on an as-needed basis. To date,
we have not entered into any hedging contracts. Historically, we
have benefited from the ongoing decline in the Philippine peso
against the U.S. dollar.
Interest Rate Sensitivity
We had cash, cash equivalents and restricted cash equivalents
totaling $41.6 million at December 31, 2004. These
amounts were invested primarily in money market funds,
certificates of deposit, municipal bonds and federal agency
securities. The unrestricted cash and cash equivalents are held
for potential acquisitions of complementary businesses or
assets, working capital requirements and general corporate
purposes. We do not enter into investments for trading or
speculative purposes. We believe that we have no material
exposure to changes in the fair value of our investment
portfolio as a result of changes in interest rates. Declines in
interest rates, however, would reduce future investment income.
A 1% decrease in short term rates would reduce our interest
income for the year ended December 31, 2004 by
approximately $0.2 million. Substantially all of our
interest income recognized during 2004 was earned from the
investment of proceeds from our initial public offering, which
was completed on October 6, 2004. The interest income from
these funds will be subject to fluctuations due to changes in
interest rates.
Inflation Rate Sensitivity
For the years ended December 31, 2003 and 2004,
approximately 51% and 57%, 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 year ended December 31,
2004 inflation averaging 5.5% kept prices generally stable.
However, the company is currently experiencing higher inflation
and expects this trend to continue in 2005. Inflation in the
Philippines has not affected our operating results because the
Philippines has historically experienced deflationary pressure
on wages due to a fast growing population, high unemployment
(10.9% as of October 2004) and a high number of college
graduates a year entering a market that cannot absorb all of
them. A reversal of this trend, increased wage pressure due to
increased competition as the BPO industry expands or higher
rates of inflation in the Philippines could result in increased
costs and harm our operating results. A number of our leases in
the Philippines have escalation clauses triggered by Philippine
inflation above negotiated thresholds, as discussed above.
|
|
| Item 8. |
Financial Statements and Supplementary Data |
The consolidated financial statements and supplementary data
required by this item are set forth at the pages indicated in
Item 15.
|
|
| Item 9. |
Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure |
On January 29, 2003, upon the authorization of our board of
directors, we dismissed PricewaterhouseCoopers LLP and engaged
BDO Seidman, LLP as our independent auditors.
During the years ended December 31, 2000 and 2001, and the
subsequent period from January 1, 2002 to January 29,
2003, PricewaterhouseCoopers LLP did not have any disagreement
with us on any matter of accounting principles or practices,
financial statement disclosure or auditing scope or procedure,
which disagreements, if not resolved to the satisfaction of
PricewaterhouseCoopers LLP, would have caused them to make
reference to the subject matter of the disagreement in
connection with their reports on our financial statements for
such years. The reports of PricewaterhouseCoopers LLP on
financial statements for the years ended December 31, 2000
and 2001 did not contain an adverse opinion or disclaimer of
opinion, and were not
47
qualified or modified as to uncertainty, audit scope or
accounting principles. We did not consult with BDO Seidman, LLP
on any financial or accounting reporting matters before its
appointment.
|
|
| Item 9A. |
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 Securities and
Exchange Commission 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. In designing and evaluating our disclosure controls
and procedures, management recognized that disclosure controls
and procedures, no matter how well conceived and operated, can
provide only reasonable, not absolute, assurance that the
objectives of the disclosure controls and procedures are met.
Additionally, in designing disclosure controls and procedures,
our management necessarily was required to apply its judgment in
evaluating the cost-benefit relationship of possible disclosure
controls and procedures. The design of any disclosure controls
and procedures also is based in part on certain assumptions
about the likelihood of future events, and there can be no
assurance that any design will succeed in achieving its stated
goals under all potential future conditions.
Based on their evaluation as of the end of the period covered by
this annual report on Form 10-K, our Chief Executive
Officer and Chief Financial Officer have concluded that, subject
to the limitations noted above, our disclosure controls and
procedures were effective.
In January 2005, we decided to restate our financial statements
for the quarter ended September 30, 2004 to exclude payment
obligations of $4.8 million under our management incentive
plan in connection with the company’s initial public
offering and make other adjustments related to obligations under
the plan. The obligations and corresponding payments were
instead reflected in the fourth quarter of 2004 and included in
our 2004 year-end results. Management believes that the
accounting adjustments resulting in the restatement were due to
an interpretation of the timing of the event that triggered the
contractual obligation and do not reflect a material weakness in
our disclosure controls or procedures.
(b) Changes in internal control over financial
reporting. There were no 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 annual report on
Form 10-K 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 our disclosure controls and procedures and
internal controls over financial reporting on an ongoing basis
and to improve these controls and procedures over time and to
correct any significant deficiencies that we may discover in the
future. While we believe the present design of our disclosure
controls and procedures and internal controls over financial
reporting are effective, future events affecting our business
may cause us to modify these controls and procedures in the
future.
Item 9B. Other
Information
None
PART III
|
|
| Item 10. |
Directors and Executive Officers of the Registrant |
The information required by item is incorporated by reference
from the information contained in our Proxy Statement to be
filed with the SEC no later than April 30, 2005.
48
The information required by Items 401, 405 and 406 of
Regulation S-K is incorporated by reference contained in
our Proxy Statement to be filed with the SEC no later than
April 30, 2005.
|
|
| Item 11. |
Executive Compensation |
The information required by this item is incorporated by
reference from the information under the captions
“Executive Compensation” and “Director
Compensation,” contained in our Proxy Statement to be filed
with the SEC no later than April 30, 2005.
|
|
| Item 12. |
Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters |
The information required by Items 201(d) and 403 of
Regulation S-K is incorporated by reference from the
information under the captions “Related Stockholder
Matters” and “Security Ownership of Certain Beneficial
Owners and Management” contained in our Proxy Statement to
be filed with the SEC no later than April 30, 2005.
|
|
| Item 13. |
Certain Relationships and Related Transactions |
The information required by this item is incorporated by
reference from the information under the captions “Sale of
Common and Preferred Stock,” “Transactions with
Management and Our Five Percent Stockholders” and
“Registration Rights” contained in our Proxy Statement
to be filed with the SEC no later than April 30, 2005.
|
|
| Item 14. |
Principal Accountant Fees and Services |
The information required by this item is incorporated by
reference from the information under the caption
“Independent Public Accountants” contained in our
Proxy Statement to be filed with the SEC no later than
April 30, 2005.
PART IV
|
|
| Item 15. |
Exhibits and Financial Statement Schedules |
The following documents are filed as part of this Form 10-K:
|
|
| |
(a) |
| |
| |
(1) Financial Statements |
The consolidated financial statements required by this item are
submitted in a separate section beginning on page F-1 of this
Report.
Consolidated Financial Statements of PeopleSupport, Inc.
|
|
| |
(2) Financial Statement Schedule |
49
The following financial statement schedule is a part of this
Form 10-K and should be read in conjunction with our
consolidated financial statements:
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders PeopleSupport, Inc. Los
Angeles, California
The audits referred to in our report dated February 22,
2005 relating to the consolidated financial statements of
PeopleSupport, Inc., which is presented on the page set forth in
Item 15 of this Form 10-K, included the audit of the
financial statement schedule presented below. This financial
statement schedule is the responsibility of the Company’s
management. Our responsibility is to express an opinion on this
financial statement schedule based upon our audits.
In our opinion, such financial statement schedule presents
fairly, in all material respects, the information set forth
therein.
Los Angeles, California
February 22, 2005
50
Schedule II — Valuation and Qualifying
Accounts
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, 2002, 2003 and 2004 | |
|
|
| |
|
| |
|
|
| |
|
Balance at | |
|
Charged to Costs | |
|
|
|
Balance at | |
|
|
| Description |
|
Beginning of Year | |
|
and Expenses | |
|
Deduction | |
|
End of Year | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
| |
|
(In thousands) | |
|
|
|
Valuation allowance for accounts receivable 2002:
|
|
$ |
186 |
|
|
$ |
351 |
|
|
$ |
(300 |
) |
|
$ |
237 |
|
|
|
|
|
|
Valuation allowance for accounts receivable 2003:
|
|
|
237 |
|
|
|
293 |
|
|
|
23 |
|
|
|
553 |
|
|
|
|
|
|
Valuation allowance for accounts receivable 2004:
|
|
$ |
553 |
|
|
$ |
(51 |
) |
|
$ |
(51 |
) |
|
$ |
451 |
|
|
|
|
|
Schedules not listed above have been omitted because the
information required to be set forth therein is not applicable
or is shown in the financial statements or notes thereto.
|
|
| |
(b) Exhibits with each management contract or
compensatory plan or arrangement required to be filed
identified. See below. |
Exhibits
| |
|
|
|
|
| Number |
|
Description |
| |
|
|
| |
3 |
.1** |
|
Amended and Restated Certificate of Incorporation of the
Registrant |
| |
3 |
.1.1** |
|
Certificate of Amendment to Amended and Restated Certificate of
Incorporation |
| |
3 |
.1.2** |
|
Certificate of Amendment to Amended and Restated Certificate of
Incorporation |
| |
3 |
.1.3** |
|
Certificate of Correction of Certificate of Amendment to Amended
and Restated Certificate of Incorporation |
| |
3 |
.1.4** |
|
Certificate of Amendment to Amended and Restated Certificate of
Incorporation |
| |
3 |
.2** |
|
Form of Amended and Restated Certificate of Incorporation of the
Registrant |
| |
3 |
.3** |
|
Amended and Restated Bylaws |
| |
3 |
.4** |
|
Form of Amended and Restated Bylaws of the Registrant |
| |
4 |
.1** |
|
Specimen Common Stock Certificate |
| |
4 |
.2** |
|
Amended and Restated Investor Rights Agreement |
| |
*10 |
.1** |
|
PeopleSupport, Inc. 1998 Stock Incentive Plan |
| |
*10 |
.2.1** |
|
Form of PeopleSupport, Inc. Stock Option Agreement (no
acceleration on change of control) |
| |
*10 |
.2.2** |
|
Form of PeopleSupport, Inc. 1998 Stock Option Agreement
(includes acceleration on change of control) |
| |
*10 |
.3** |
|
PeopleSupport, Inc. 2002 Management Incentive Plan |
| |
*10 |
.3.1** |
|
Amendment to PeopleSupport, Inc. 2002 Management Incentive Plan |
| |
10 |
.4†** |
|
Amended and Restated Customer Support Services Agreement dated
July 1, 2004 between PeopleSupport, Inc. and Expedia, Inc. |
| |
10 |
.5** |
|
Memorandum of Agreement dated December 15, 2003 between
PeopleSupport, Inc. and Ayala Land, Inc. |
| |
10 |
.5.1† |
|
Definitive Contract of Lease with Ayal |
| |
*10 |
.6** |
|
Letter Agreement dated May 20, 2002 between PeopleSupport,
Inc. and Caroline Rook |
| |
10 |
.7†** |
|
Master Services Agreement dated January 2, 2003 between
PeopleSupport, Inc. and EarthLink, Inc. |
| |
10 |
.8†** |
|
Professional Services Contract dated December 4, 2000
between PeopleSupport, Inc. and Network Solutions, Inc. |
| |
*10 |
.9** |
|
Form of 2004 Stock Incentive Plan |
51
| |
|
|
|
|
| Number | |
|
Description |
| | |
|
|
| |
*10 |
.10** |
|
Form of 2004 Employee Stock Purchase Plan |
| |
*10 |
.11** |
|
Form of Indemnification Agreement between the Registrant and its
officers and directors |
| |
*10 |
.12** |
|
Form of PeopleSupport, Inc. 2004 Stock Incentive Plan Stock
Option Agreement |
| |
10 |
.13† |
|
Master Services Agreement dated June 11, 2003 between
PeopleSupport, Inc. and ConsumerInfo.comb |
| |
16 |
.1** |
|
Letter from PricewaterhouseCoopers LLP |
| |
21 |
.1** |
|
List of Subsidiaries |
| |
23 |
.2 |
|
Consent of BDO Seidman, LLP |
| |
24 |
.1 |
|
Power of Attorney (included in signature page) |
| |
31 |
.1 |
|
Certification by Chief Executive Officer of Registrant pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002 |
| |
31 |
.2 |
|
Certification by Chief Financial Officer of Registrant pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002 |
| |
32 |
.1*** |
|
Certification by Chief Executive Officer of Registrant pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 |
| |
32 |
.2*** |
|
Certification by Chief Financial Officer of Registrant pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 |
|
|
| * |
Indicates management employment contract or compensatory plans
or arrangements. |
| |
| ** |
Incorporated by reference to the same numbered exhibit to the
Registrant’s Registration Statement on Form S-1, File
No. 333-115328, originally filed with the Securities and
Exchange Commission on May 10, 2004, as amended. |
| |
| *** |
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. |
| |
| † |
Confidential treatment has been requested for portions of this
exhibit. These portions have been omitted from the Registration
Statement and submitted separately to the Securities and
Exchange Commission. |
52
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
PeopleSupport, Inc.
Los Angeles, California
We have audited the accompanying consolidated balance sheets of
PeopleSupport, Inc. and subsidiaries as of December 31,
2003 and 2004 and the related consolidated statements of
operations and other comprehensive income (loss),
stockholders’ equity (deficit) and cash flows for each
of the three years in the period ended December 31, 2004.
These financial statements are the responsibility of the
Company’s management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included
consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Company’s internal control over
financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of PeopleSupport, Inc. and subsidiaries as of
December 31, 2003 and 2004 and the results of their
operations and their cash flows for each of the three years in
the period ended December 31, 2004 in conformity with
accounting principles generally accepted in the United States.
|
|
| |
/s/ BDO Seidman, LLP
|
| |
|
| |
BDO Seidman, LLP |
Los Angeles, California
February 22, 2005
F-1
PEOPLESUPPORT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
| |
|
|
|
|
|
|
|
|
|
|
| |
|
As of December 31, | |
| |
|
| |
| |
|
2003 | |
|
2004 | |
| |
|
| |
|
| |
|
ASSETS |
|
Current assets:
|
|
|
|
|
|
|
|
|
| |
|
Cash and cash equivalents
|
|
$ |
12,151 |
|
|
$ |
41,583 |
|
| |
|
Restricted short-term cash equivalent
|
|
|
101 |
|
|
|
422 |
|
| |
|
Accounts receivable, net of allowance for doubtful accounts of
$553 and $451
|
|
|
2,476 |
|
|
|
5,560 |
|
| |
|
Investment in receivable portfolios
|
|
|
622 |
|
|
|
7 |
|
| |
|
Deferred tax assets
|
|
|
— |
|
|
|
668 |
|
| |
|
Prepaid expenses and other current assets
|
|
|
1,217 |
|
|
|
1,633 |
|
| |
|
|
|
|
|
|
|
Total current assets
|
|
|
16,567 |
|
|
|
49,873 |
|
|
Property and equipment, net
|
|
|
4,829 |
|
|
|
7,407 |
|
|
Restricted long-term cash equivalent
|
|
|
550 |
|
|
|
— |
|
|
Deferred management incentive plan compensation
|
|
|
— |
|
|
|
940 |
|
|
Deferred tax assets
|
|
|
— |
|
|
|
6,161 |
|
|
Other long-term assets
|
|
|
589 |
|
|
|
699 |
|
| |
|
|
|
|
|
|
|
Total assets
|
|
$ |
22,535 |
|
|
$ |
65,080 |
|
| |
|
|
|
|
|
|
|
LIABILITIES, PREFERRED STOCK AND STOCKHOLDERS’ EQUITY
(DEFICIT) |
|
Current liabilities:
|
|
|
|
|
|
|
|
|
| |
|
Accounts payable
|
|
$ |
1,031 |
|
|
$ |
1,346 |
|
| |
|
Accrued liabilities
|
|
|
2,478 |
|
|
|
2,527 |
|
| |
|
Management incentive plan obligation
|
|
|
— |
|
|
|
342 |
|
| |
|
Deferred revenue
|
|
|
1,235 |
|
|
|
1,888 |
|
| |
|
Reserve for restructuring
|
|
|
25 |
|
|
|
— |
|
| |
|
Other current liabilities
|
|
|
— |
|
|
|
106 |
|
| |
|
|
|
|
|
|
|
Total current liabilities
|
|
|
4,769 |
|
|
|
6,209 |
|
|
Management incentive plan obligation
|
|
|
— |
|
|
|
684 |
|
|
Deferred rent
|
|
|
267 |
|
|
|
117 |
|
|
Other long-term liabilities
|
|
|
— |
|
|
|
135 |
|
| |
|
|
|
|
|
|
|
Total liabilities
|
|
|
5,036 |
|
|
|
7,145 |
|
| |
|
|
|
|
|
|
|
Commitments and contingencies (Note 5)
|
|
|
|
|
|
|
|
|
|
Redeemable convertible preferred stock, $.001 par value;
authorized 4,000 shares:
|
|
|
|
|
|
|
|
|
| |
Convertible Series A preferred stock —
$.001 par value; designated 712 and 0 shares at
December 31, 2003 and 2004; 712 shares issued and
outstanding at December 31, 2003; 0 shares issued and
outstanding at December 31, 2004; liquidation preference
over common stockholders of $1,302
|
|
|
1,286 |
|
|
|
— |
|
| |
Convertible Series B preferred stock —
$.001 par value; designated 3,848 and 0 shares at
December 31, 2003 and 2004; 2,239 shares issued and
outstanding at December 31, 2003, 0 shares issued and
outstanding at December 31, 2004; liquidation preference
over common stockholders of $6,134
|
|
|
6,098 |
|
|
|
— |
|
| |
Convertible Series C preferred stock —
$.001 par value; designated 3,289 and 0 shares at
December 31, 2003 and 2004; 3,289 shares issued and
outstanding at December 31, 2003, 0 shares issued and
outstanding at December 31, 2004; liquidation preference
over common stockholders of $17,571
|
|
|
17,515 |
|
|
|
— |
|
| |
Convertible Series D preferred stock —
$.001 par value; designated 3,378 and 0 shares at
December 31, 2003 and 2004; 3,149 shares issued and
outstanding at December 31, 2003, 0 shares issued and
outstanding at December 31, 2004; liquidation preference
over common stockholders of $49,268
|
|
|
49,211 |
|
|
|
— |
|
|
Stockholders’ equity (deficit)
|
|
|
|
|
|
|
|
|
| |
Common stock, $.001 par value; authorized
87,000 shares; 2,536 and 18,015 shares issued and
outstanding at December 31, 2003 and 2004, respectively
|
|
|
3 |
|
|
|
18 |
|
| |
Additional paid-in capital
|
|
|
6,403 |
|
|
|
112,514 |
|
| |
Accumulated deficit
|
|
|
(61,367 |
) |
|
|
(53,043 |
) |
| |
Accumulated other comprehensive income
|
|
|
224 |
|
|
|
80 |
|
| |
Deferred stock compensation
|
|
|
(1,874 |
) |
|
|
(1,634 |
) |
| |
|
|
|
|
|
|
|
Total stockholders’ equity (deficit)
|
|
|
(56,611 |
) |
|
|
57,935 |
|
| |
|
|
|
|
|
|
|
Total liabilities, preferred stock and stockholders’ equity
(deficit)
|
|
$ |
22,535 |
|
|
$ |
65,080 |
|
| |
|
|
|
|
|
|
See accompanying notes to consolidated financial
statements.
F-2
PEOPLESUPPORT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
AND OTHER COMPREHENSIVE INCOME (LOSS)
(In thousands, except per share data)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, | |
| |
|
| |
| |
|
2002 | |
|
2003 | |
|
2004 | |
| |
|
| |
|
| |
|
| |
|
Revenues
|
|
$ |
19,780 |
|
|
$ |
30,013 |
|
|
$ |
44,511 |
|
|
Cost of revenues (exclusive of management incentive plan and
depreciation expense shown below)
|
|
|
11,188 |
|
|
|
12,921 |
|
|
|
24,483 |
|
| |
Management incentive plan — cost of revenues
|
|
|
— |
|
|
|
— |
|
|
|
788 |
|
|
Selling, general and administrative (exclusive of management
incentive plan expense shown below)
|
|
|
5,587 |
|
|
|
6,134 |
|
|
|
9,721 |
|
| |
Management incentive plan — selling, general and
administrative
|
|
|
— |
|
|
|
— |
|
|
|
4,549 |
|
|
Depreciation and amortization
|
|
|
4,065 |
|
|
|
3,166 |
|
|
|
3,927 |
|
|
Gain on sale of receivable portfolios
|
|
|
— |
|
|
|
— |
|
|
|
(172 |
) |
|
Restructuring charges
|
|
|
3,824 |
|
|
|
(345 |
) |
|
|
(22 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
Income (loss) from operations
|
|
|
(4,884 |
) |
|
|
8,137 |
|
|
|
1,237 |
|
|
Interest expense
|
|
|
506 |
|
|
|
3 |
|
|
|
— |
|
|
Interest income
|
|
|
(90 |
) |
|
|
(75 |
) |
|
|
(231 |
) |
|
Gain on the extinguishment of debt
|
|
|
(2,430 |
) |
|
|
— |
|
|
|
— |
|
|
Other expense (income)
|
|
|
9 |
|
|
|
(8 |
) |
|
|
7 |
|
| |
|
|
|
|
|
|
|
|
|
|
Income (loss) before provision for income taxes
|
|
|
(2,879 |
) |
|
|
8,217 |
|
|
|
1,461 |
|
|
Provision (benefit) for income taxes
|
|
|
13 |
|
|
|
231 |
|
|
|
(6,863 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(2,892 |
) |
|
|
7,986 |
|
|
|
8,324 |
|
|
Foreign currency translation adjustment
|
|
|
(46 |
) |
|
|
(3 |
) |
|
|
(140 |
) |
|
Unrealized loss on securities
|
|
|
— |
|
|
|
— |
|
|
|
(4 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
$ |
(2,938 |
) |
|
$ |
7,983 |
|
|
$ |
8,180 |
|
| |
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share
|
|
$ |
(1.14 |
) |
|
$ |
3.15 |
|
|
$ |
1.39 |
|
|
Diluted earnings (loss) per share
|
|
$ |
(1.14 |
) |
|
$ |
0.64 |
|
|
$ |
0.55 |
|
|
Basic weighted average shares outstanding
|
|
|
2,533 |
|
|
|
2,533 |
|
|
|
5,996 |
|
|
Diluted weighted average shares outstanding
|
|
|
2,533 |
|
|
|
12,560 |
|
|
|
15,012 |
|
See accompanying notes to consolidated financial
statements.
F-3
PEOPLESUPPORT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(DEFICIT)
Years Ended December 31, 2002, 2003 and 2004
(In thousands)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
Accumulated | |
|
|
|
Total | |
| |
|
Common Stock | |
|
Additional | |
|
|
|
Other | |
|
Deferred | |
|
Stockholders’ | |
| |
|
| |
|
Paid-In | |
|
Accumulated | |
|
Comprehensive | |
|
Stock | |
|
Equity | |
| |
|
Shares | |
|
Amount | |
|
Capital | |
|
Deficit | |
|
Income | |
|
Compensation | |
|
(Deficit) | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Balance, at December 31, 2001
|
|
|
2,532 |
|
|
$ |
3 |
|
|
$ |
4,408 |
|
|
$ |
(66,461 |
) |
|
$ |
273 |
|
|
$ |
— |
|
|
$ |
(61,777 |
) |
|
Exercise of stock options
|
|
|
1 |
|
|
|
— |
|
|
|
1 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1 |
|
|
Comprehensive loss
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(2,892 |
) |
|
|
(46 |
) |
|
|
— |
|
|
|
(2,938 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, at December 31, 2002
|
|
|
2,533 |
|
|
|
3 |
|
|
|
4,409 |
|
|
|
(69,353 |
) |
|
|
227 |
|
|
|
— |
|
|
|
(64,714 |
) |
|
Exercise of stock options
|
|
|
3 |
|
|
|
— |
|
|
|
1 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1 |
|
|
Comprehensive income (loss)
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
7,986 |
|
|
|
(3 |
) |
|
|
— |
|
|
|
7,983 |
|
|
Deferred stock compensation
|
|
|
— |
|
|
|
— |
|
|
|
1,998 |
|
|
|
— |
|
|
|
— |
|
|
|
(1,998 |
) |
|
|
— |
|
|
Amortization of deferred stock compensation
|
|
|
— |
|
|
|
— |
|
|
|
(5 |
) |
|
|
— |
|
|
|
— |
|
|
|
124 |
|
|
|
119 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, at December 31, 2003
|
|
|
2,536 |
|
|
|
3 |
|
|
|
6,403 |
|
|
|
(61,367 |
) |
|
|
224 |
|
|
|
(1,874 |
) |
|
|
(56,611 |
) |
|
Exercise of stock options
|
|
|
209 |
|
|
|
— |
|
|
|
104 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
104 |
|
|
Initial public offering
|
|
|
5,349 |
|
|
|
5 |
|
|
|
31,565 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
31,570 |
|
|
Conversion of preferred shares
|
|
|
10,461 |
|
|
|
11 |
|
|
|
74,257 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
74,268 |
|
|
Warrant conversion
|
|
|
7 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Repurchase of common stock
|
|
|
(547 |
) |
|
|
(1 |
) |
|
|
(1,349 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(1,350 |
) |
|
Comprehensive income (loss)
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
8,324 |
|
|
|
(144 |
) |
|
|
— |
|
|
|
8,180 |
|
|
Deferred stock compensation
|
|
|
— |
|
|
|
— |
|
|
|
1,728 |
|
|
|
— |
|
|
|
— |
|
|
|
(1,728 |
) |
|
|
— |
|
|
Amortization of deferred stock compensation
|
|
|
— |
|
|
|
— |
|
|
|
(194 |
) |
|
|
— |
|
|
|
— |
|
|
|
1,968 |
|
|
|
1,774 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, at December 31, 2004
|
|
|
18,015 |
|
|
$ |
18 |
|
|
$ |
112,514 |
|
|
$ |
(53,043 |
) |
|
$ |
80 |
|
|
$ |
(1,634 |
) |
|
$ |
57,935 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial
statements.
F-4
PEOPLESUPPORT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, | |
| |
|
| |
| |
|
2002 | |
|
2003 | |
|
2004 | |
| |
|
| |
|
| |
|
| |
|
OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
(2,892 |
) |
|
$ |
7,986 |
|
|
$ |
8,324 |
|
|
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Depreciation and amortization
|
|
|
4,065 |
|
|
|
3,166 |
|
|
|
3,927 |
|
| |
Amortization of debt discount
|
|
|
194 |
|
|
|
— |
|
|
|
— |
|
| |
Provision for doubtful accounts
|
|
|
351 |
|
|
|
293 |
|
|
|
(51 |
) |
| |
Stock-based compensation
|
|
|
— |
|
|
|
119 |
|
|
|
1,774 |
|
| |
Amortization of deferred compensation costs
|
|
|
— |
|
|
|
— |
|
|
|
85 |
|
| |
Gain on sale of receivable portfolio
|
|
|
— |
|
|
|
— |
|
|
|
(172 |
) |
| |
Gain on extinguishment of debt
|
|
|
(2,430 |
) |
|
|
— |
|
|
|
— |
|
| |
Non-cash restructuring charges
|
|
|
1,548 |
|
|
|
427 |
|
|
|
— |
|
| |
Reduction of excess accrual for restructuring
|
|
|
(59 |
) |
|
|
(974 |
) |
|
|
(22 |
) |
| |
Loss on disposal of property and equipment
|
|
|
— |
|
|
|
— |
|
|
|
313 |
|
| |
Deferred income taxes
|
|
|
— |
|
|
|
— |
|
|
|
(6,829 |
) |
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Accounts receivable
|
|
|
(306 |
) |
|
|
270 |
|
|
|
(3,032 |
) |
| |
Prepaid expenses and other assets
|
|
|
(59 |
) |
|
|
(624 |
) |
|
|
(404 |
) |
| |
Other long-term assets
|
|
|
(21 |
) |
|
|
(49 |
) |
|
|
(118 |
) |
| |
Accounts payable and accrued liabilities
|
|
|
(1,799 |
) |
|
|
765 |
|
|
|
370 |
|
| |
Deferred revenue
|
|
|
965 |
|
|
|
163 |
|
|
|
652 |
|
| |
Reserve for restructuring
|
|
|
2,336 |
|
|
|
58 |
|
|
|
— |
|
| |
Cash payments on restructuring reserve
|
|
|
(1,384 |
) |
|
|
(758 |
) |
|
|
(3 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
509 |
|
|
|
10,842 |
|
|
|
4,814 |
|
|
INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of receivable portfolios
|
|
|
— |
|
|
|
(723 |
) |
|
|
— |
|
|
Collections applied to principal of receivable portfolios
|
|
|
— |
|
|
|
101 |
|
|
|
510 |
|
|
Proceeds from sale of receivable portfolios
|
|
|
— |
|
|
|
— |
|
|
|
355 |
|
|
Purchases of property and equipment
|
|
|
(752 |
) |
|
|
(3,370 |
) |
|
|
(6,950 |
) |
|
Sales of short-term investments
|
|
|
771 |
|
|
|
— |
|
|
|
— |
|
|
Restricted cash equivalent
|
|
|
(1,000 |
) |
|
|
349 |
|
|
|
228 |
|
| |
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(981 |
) |
|
|
(3,643 |
) |
|
|
(5,857 |
) |
|
FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments of capital lease obligation
|
|
|
(224 |
) |
|
|
(59 |
) |
|
|
— |
|
|
Repayments of note payable
|
|
|
(1,725 |
) |
|
|
— |
|
|
|
— |
|
|
Payments on line of credit borrowings
|
|
|
(198 |
) |
|
|
(166 |
) |
|
|
— |
|
|
Repurchase of common stock
|
|
|
— |
|
|
|
— |
|
|
|
(1,350 |
) |
|
Proceeds from the exercise of warrants to purchase redeemable
preferred stock
|
|
|
— |
|
|
|
— |
|
|
|
157 |
|
|
Proceeds from initial public offering
|
|
|
— |
|
|
|
— |
|
|
|
34,820 |
|
|
Public offering costs
|
|
|
— |
|
|
|
— |
|
|
|
(3,250 |
) |
|
Proceeds from the exercise of stock options
|
|
|
1 |
|
|
|
1 |
|
|
|
104 |
|
| |
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
(2,146 |
) |
|
|
(224 |
) |
|
|
30,481 |
|
|
Effect of exchange rate changes on cash
|
|
|
(46 |
) |
|
|
(3 |
) |
|
|
(6 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(2,664 |
) |
|
|
6,972 |
|
|
|
29,432 |
|
|
Cash and cash equivalents, beginning of period
|
|
|
7,843 |
|
|
|
5,179 |
|
|
|
12,151 |
|
| |
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$ |
5,179 |
|
|
$ |
12,151 |
|
|
$ |
41,583 |
|
| |
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Interest paid for the period
|
|
$ |
296 |
|
|
$ |
3 |
|
|
$ |
— |
|
| |
Taxes paid for the period
|
|
|
8 |
|
|
|
15 |
|
|
|
392 |
|
| |
|
|
|
|
|
|
|
|
|
|
NON-CASH INVESTING AND FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Conversion of preferred to common stock
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
74,268 |
|
| |
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial
statements.
F-5
PEOPLESUPPORT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
|
|
| 1 |
— Description of the Company |
PeopleSupport, Inc. (the “Company”) was incorporated
in the State of Delaware on July 2, 1998 and is a provider
of offshore business process outsourcing services, including
customer management and accounts receivable management services.
|
|
| 2 |
— Summary of Significant Accounting Policies |
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities, and reported
amounts of revenues and expenses. Actual results could differ
from those estimates.
Financial instruments that potentially subject the Company to
concentration of credit risk consist of cash and cash
equivalents and accounts receivable. Cash and cash equivalents
are deposited or managed by major financial institutions and at
times are in excess of FDIC insurance limits.
The Company performs ongoing credit evaluations of its
customers’ financial condition and limits the amount of
credit extended when deemed necessary, but generally does not
require collateral. The Company maintains an allowance for
potential credit losses and write-offs of accounts receivable,
which amounted to $553 and $451 at December 31, 2003 and
2004, respectively.
Revenue and accounts receivable from significant customers were
as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
As of and for the Years Ended December 31, | |
| |
|
| |
| |
|
2002 | |
|
2003 | |
|
2004 | |
| |
|
| |
|
| |
|
| |
| |
|
% of | |
|
% of A/R, | |
|
% of | |
|
% of A/R, | |
|
% of | |
|
% of A/R, | |
| |
|
Revenue | |
|
Net | |
|
Revenue | |
|
Net | |
|
Revenue | |
|
Net | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Company A
|
|
|
53 |
% |
|
|
36 |
% |
|
|
49 |
% |
|
|
— |
% |
|
|
31 |
% |
|
|
19 |
% |
|
Company B
|
|
|
36 |
|
|
|
50 |
|
|
|
26 |
|
|
|
17 |
|
|
|
8 |
|
|
|
5 |
|
|
Company C
|
|
|
— |
|
|
|
— |
|
|
|
13 |
|
|
|
75 |
|
|
|
26 |
|
|
|
31 |
|
|
Company D
|
|
|
— |
|
|
|
— |
|
|
|
4 |
|
|
|
4 |
|
|
|
12 |
|
|
|
3 |
|
The Company maintains operational and technical facilities for
its global operations, including maintaining a relationship with
two significant vendors that provide the facility storage and
related maintenance of the Company’s main technology
equipment and data. Any significant events leading to systems
and operations unavailability before the Company’s
contingency plans are deployed could potentially lead to a
disruption of service and associated financial impact.
The Company’s revenues are dependent on clients in the
travel, hospitality, technology and communications industries,
and a material decrease in demand for outsourced services in
these industries could result in decreased revenues.
Additionally, the Company has significant operations in the
Philippines, and is subject to risks associated with operating
in the Philippines including political, social and economic
instability and increased security concerns, fluctuation in
currency exchange rates and exposure to different legal
standards. Total carrying amounts of assets used in our
Philippine operations were $4,719 and $7,903 at
December 31, 2003 and 2004, respectively.
F-6
PEOPLESUPPORT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
Continued
|
|
|
Principles of Consolidation |
The consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. All intercompany
transactions and balances have been eliminated.
|
|
|
Cash, Cash Equivalents and Restricted Cash
Equivalent |
Cash and cash equivalents consist of cash on hand and short-term
investments with original maturities of three months or less.
Cash equivalents at December 31, 2003 and 2004 consist of
money-market funds, certificates of deposit, municipal bonds and
federal agency securities. The restricted cash equivalent is
invested in a certificate of deposit, which matures every
90 days (see Note 5). At times, cash balances held at
financial institutions are in excess of federally insured
limits. The Company believes no significant concentration of
credit risk exists with respect to the Company’s short term
investments.
Property and equipment are stated at cost and depreciated using
the straight-line method over the following period for each
category:
| |
|
|
|
|
|
Furniture and fixtures
|
|
|
5 years |
|
|
Computer equipment
|
|
|
3 years |
|
|
Software
|
|
|
1 to 3 years |
|
Leasehold improvements are amortized over the shorter of the
useful life or the remaining lease term.
|
|
|
Impairment of Long-lived Assets |
Long-lived assets, including fixed assets and intangibles, are
reviewed for impairment as events or changes in circumstances
occur indicating that the carrying amounts may not be
recoverable. When these events or changes in circumstances
indicate that the carrying amount might be impaired,
undiscounted cash flow analyses would be used to assess whether
an impairment had occurred. In that case, the asset would be
written down to its estimated fair value. The estimation of
future cash flows and fair values involves considerable
management judgment.
Certain reclassifications have been made to prior year amounts
to conform with the current presentation.
Implementation fees include revenues associated with new
customers, which are deferred and recognized ratably over the
life of the contract. Recurring session fees, which include
revenues associated with voice, email and live help transactions
and with hosting and maintaining software applications for
customer care, are recognized as these services are provided.
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.
For purchased accounts receivable portfolios, due to the
Company’s limited experience in assessing its collection
trends, the Company only recognizes revenue to the extent of
cash collected in excess of the portfolio’s purchase price.
The Company periodically assesses the collections experience
trend curve to determine if a change in revenue recognition
treatment is appropriate.
Commission revenues for contingent accounts receivable
management contracts are recognized upon receipt of the
collected funds.
F-7
PEOPLESUPPORT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
Continued
Cost of revenues 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 services, facilities support and
customer management support costs related to the operation of
outsourcing and data centers and consultant services.
|
|
|
Net Income (Loss) Per Share |
Basic earnings (loss) per share (EPS) excludes dilution and
is computed by dividing net income or loss by the weighted
average of common shares outstanding for the period. Diluted EPS
reflects the potential dilution that could occur if securities
or other contracts to issue common stock (i.e., convertible
preferred stock, warrants to purchase common stock and common
stock options using the treasury stock method) were exercised or
converted into common stock.
The following is a summary of the number of shares or securities
outstanding during the respective periods that have been
excluded from the calculations because the effect on net income
(loss) per share would have been antidilutive (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, | |
| |
|
| |
| |
|
2002 | |
|
2003 | |
|
2004 | |
| |
|
| |
|
| |
|
| |
|
Convertible preferred stock
|
|
|
9,388 |
|
|
|
— |
|
|
|
— |
|
|
Options
|
|
|
847 |
|
|
|
136 |
|
|
|
15 |
|
|
Preferred stock warrants
|
|
|
1,604 |
|
|
|
1,211 |
|
|
|
— |
|
|
Common stock warrants
|
|
|
96 |
|
|
|
72 |
|
|
|
127 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
11,935 |
|
|
|
1,419 |
|
|
|
142 |
|
| |
|
|
|
|
|
|
|
|
|
The following is a reconciliation of the numerators and
denominators of the basic and diluted earnings per share
computations:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, | |
| |
|
| |
| |
|
2002 | |
|
2003 | |
|
2004 | |
| |
|
| |
|
| |
|
| |
| |
|
Loss | |
|
Shares | |
|
Per Share | |
|
Income | |
|
Shares | |
|
Per Share | |
|
Income | |
|
Shares | |
|
Per Share | |
| |
|
(Numerator) | |
|
(Denominator) | |
|
Amount | |
|
(Numerator) | |
|
(Denominator) | |
|
Amount | |
|
(Numerator) | |
|
(Denominator) | |
|
Amount | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Basic earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
(Loss) income to common stockholders
|
|
$ |
(2,892 |
) |
|
|
2,533 |
|
|
$ |
(1.14 |
) |
|
$ |
7,986 |
|
|
|
2,533 |
|
|
$ |
3.15 |
|
|
$ |
8,324 |
|
|
|
5,996 |
|
|
$ |
1.39 |
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Options
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
438 |
|
|
|
|
|
|
|
— |
|
|
|
945 |
|
|
|
|
|
| |
Warrants
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
201 |
|
|
|
|
|
|
|
— |
|
|
|
604 |
|
|
|
|
|
| |
Convertible preferred stock
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
9,388 |
|
|
|
|
|
|
|
— |
|
|
|
7,467 |
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income available to common stockholders
|
|
$ |
(2,892 |
) |
|
|
2,533 |
|
|
$ |
(1.14 |
) |
|
$ |
7,986 |
|
|
|
12,560 |
|
|
$ |
0.64 |
|
|
$ |
8,324 |
|
|
|
15,012 |
|
|
$ |
0.55 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segments of an Enterprise |
The Company reports segment information in accordance with
SFAS No. 131, “Disclosures about Segments of an
Enterprise and Related Information”
(“SFAS 131”). Under SFAS 131, all publicly
traded companies are required to report certain information
about the operating segments, products, services and
geographical areas in which they operate and their major
customers. The Company operates as two business segments:
customer management services and accounts receivable management
services; however, our accounts receivable management segment is
not separately presented as it currently represents substantially
F-8
PEOPLESUPPORT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
Continued
less than 10 percent of the combined revenues, profit and
assets of the total reported operating segments (Note 11).
The Company uses the liability method to account for income
taxes. Under this method, deferred taxes are determined based on
the differences between the financial statement and tax bases of
assets and liabilities and are measured at the enacted tax rates
that will be in effect when those differences are expected to
reverse. Valuation allowances are established, when necessary,
to reduce deferred tax assets to the amount expected to be
realized.
|
|
|
Fair Value of Financial Instruments |
The Company’s financial instruments, including cash,
restricted cash equivalents, accounts receivable, accounts
payable and accrued liabilities, are carried at cost, which
approximates their fair value. The Company carries cash
equivalents, consisting primarily of short term investments in
money-market funds, certificates of deposit, municipal bonds and
federal agency securities, at market value.
The Company’s foreign subsidiary uses its local currency as
its functional currency. Assets and liabilities are translated
into U.S. dollars at exchange rates prevailing at the
balance sheet dates. Revenues and expenses are translated into
U.S. dollars at average exchange rates for the period. The
resultant cumulative translation adjustments are included in
accumulated other comprehensive income or loss, which is a
separate component of stockholders’ deficit. Gains and
losses from foreign currency transactions are recognized as a
component of net income or loss as incurred and were not
material for any of the years presented.
The Company accounts for stock-based employee compensation
arrangements in accordance with provisions of Accounting
Principles Board Opinion No. 25 (“APB 25”),
“Accounting for Stock Issued to Employees,” and
related interpretations and complies with the disclosure
provisions of Statement of Financial Accounting Standards
No. 123, “Accounting for Stock-Based
Compensation” (“SFAS 123”). Compensation
expense is based on the difference, if any, on the date of
grant, between the fair value of the Company’s stock price
and the exercise price. The Company accounts for stock issued to
non-employees in accordance with the provisions of
SFAS No. 123 and related interpretations.
F-9
PEOPLESUPPORT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
Continued
The stock-based compensation cost associated with the
Company’s Stock Incentive Plans, determined using the
Black-Scholes valuation model prescribed by
SFAS No. 123, did not result in a material difference
from the reported net loss or income for the years ended
December 31, 2002, 2003 and 2004.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, | |
| |
|
| |
| |
|
2002 | |
|
2003 | |
|
2004 | |
| |
|
| |
|
| |
|
| |
|
Net income (loss), as reported
|
|
$ |
(2,892 |
) |
|
$ |
7,986 |
|
|
$ |
8,324 |
|
|
Add: Stock-based compensation expense included in reported net
income, net of related tax effects
|
|
|
— |
|
|
|
119 |
|
|
|
1,774 |
|
|
Deduct: Total stock-based compensation expense determined under
fair value based methods for all awards, net of related tax
effects
|
|
|
(416 |
) |
|
|
(332 |
) |
|
|
(2,153 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Pro forma net income (loss)
|
|
$ |
(3,308 |
) |
|
$ |
7,773 |
|
|
$ |
7,945 |
|
| |
|
|
|
|
|
|
|
|
|
|
Basic (loss) earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
As reported
|
|
$ |
(1.14 |
) |
|
$ |
3.15 |
|
|
$ |
1.39 |
|
| |
Pro forma
|
|
$ |
(1.31 |
) |
|
$ |
3.07 |
|
|
$ |
1.33 |
|
|
Diluted (loss) earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
As reported
|
|
$ |
(1.14 |
) |
|
$ |
0.64 |
|
|
$ |
0.55 |
|
| |
Pro forma
|
|
$ |
(1.31 |
) |
|
$ |
0.62 |
|
|
$ |
0.53 |
|
The estimated weighted average fair value of options granted
during the years ended December 31, 2002, 2003 and 2004 was
$0.52, $5.15 and $5.31, respectively. The fair value of each
option was estimated on the date of grant using the following
weighted average assumptions used for grants for the years ended
December 31, 2002, 2003 and 2004:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended | |
| |
|
December 31, | |
| |
|
| |
| |
|
2002 | |
|
2003 | |
|
2004 | |
| |
|
| |
|
| |
|
| |
|
Risk free interest rate
|
|
|
2.71 |
% |
|
|
2.71 |
% |
|
|
3.73 |
% |
|
Expected life (years)
|
|
|
5.0 |
|
|
|
5.0 |
|
|
|
4.0 |
|
|
Dividend yield
|
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
Expected volatility
|
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
30.9 |
% |
The Company follows the reporting and disclosure requirements of
SFAS 130, “Reporting Comprehensive Income.”
SFAS 130 requires the disclosure of total non-stockholder
changes in equity and its components, which would include all
changes in equity during a period except those resulting from
investments by and distributions to stockholders. The components
of other comprehensive income (loss) applicable to the Company
are translation gains and losses on foreign currency and
unrealized gains and losses on securities.
F-10
PEOPLESUPPORT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
Continued
The components of accumulated other comprehensive income are as
follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Foreign Currency | |
|
Unrealized Loss on | |
|
|
| |
|
Items | |
|
Securities | |
|
Total | |
| |
|
| |
|
| |
|
| |
|
Balance, December 31, 2002
|
|
$ |
227 |
|
|
$ |
— |
|
|
$ |
227 |
|
| |
2003 change
|
|
|
(3 |
) |
|
|
— |
|
|
|
(3 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2003
|
|
|
224 |
|
|
|
— |
|
|
|
224 |
|
| |
2004 change
|
|
|
(140 |
) |
|
|
(4 |
) |
|
|
(144 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2004
|
|
$ |
84 |
|
|
$ |
(4 |
) |
|
$ |
80 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
Gain on extinguishment of debt |
In 2002, the Company settled an equipment loan for less than the
outstanding balance and recorded a gain on the difference
between the outstanding balance and the amount paid.
|
|
|
Recent Accounting Pronouncements |
In October 2003, the American Institute of Certified Public
Accountants issued Statement of Position (“SOP”)
03-03, “Accounting for Loans or Certain Securities Acquired
in a Transfer.” This SOP provides standards for accounting
for differences between contractual and expected cash flows from
an investor’s initial investment in loans or debt
securities acquired in a transfer if those differences are
attributable, at least in part, to credit quality. This SOP is
effective for loans acquired in fiscal years beginning after
December 15, 2004. The SOP would limit the revenue that may
be accrued to the excess of the estimate of expected future cash
flows over a portfolio’s initial cost of accounts
receivable acquired. The SOP would require that the excess of
the contractual cash flows over expected cash flows not be
recognized as an adjustment of revenue, expense, or on the
balance sheet. The SOP would freeze the internal rate of return,
referred to as IRR, originally estimated when the accounts
receivable are purchased for subsequent impairment testing.
Rather than lower the estimated IRR if the original collection
estimates are not received, the carrying value of a portfolio
would be written down to maintain the original IRR. Increases in
expected future cash flows would be recognized prospectively
through adjustment of the IRR over a portfolio’s remaining
life. The SOP provides that previously issued annual financial
statements would not need to be restated. Historically, the
Company has applied the guidance of Practice Bulletin 6,
whereby the Company only recognizes revenue to the extent of
cash collected in excess of the portfolio’s purchase price.
The adoption of SOP 03-03 will not have a material impact on the
Company’s results of operations or financial position.
In December 2003, the Financial Accounting Standards Board
(FASB) issued Interpretation No. (FIN) 46R, “a
revision to FIN 46, Consolidation of Variable Interest
Entities.” FIN 46R clarifies some of the provisions of
FIN 46 and exempts certain entities from its requirements.
FIN 46R was effective at the end of the first interim
period ending after March 15, 2004. The adoption of
FIN 46R did not have a material impact on the
Company’s results of operations or financial position.
In December 2003, the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 104
(SAB No. 104), “Revenue Recognition,” which
codifies, revises and rescinds certain sections of
SAB No. 101, “Revenue Recognition,” in order
to make this interpretive guidance consistent with current
authoritative accounting and auditing guidance and SEC rules and
regulations. The changes noted in SAB No. 104 did not
have a material effect on the Company’s results of
operations or financial position.
On March 31, 2004, the FASB ratified the consensus reached
by the Task Force on EITF Issue No. 03-1, “The Meaning
of Other-Than-Temporary Impairment and Its Application to
Certain Investments (“Issue No. 03-1”), but
delayed the recognition and measurements provisions of
EITF 03-01 in September 2004. For reporting periods
beginning after June 15, 2004, only the disclosure
requirements for available-for-sale
F-11
PEOPLESUPPORT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
Continued
securities and cost method investments are required. The
adoption of Issue No. 03-1 is not expected to have a
material impact on the Company’s financial position or
results of operations.
FASB Staff Position (“FSP”) No. 109-2,
“Accounting and Disclosure Guidance for the Foreign
Earnings Repatriation Provision within the American Jobs
Creation Act of 2004” (“FSP 109-2”), provides
guidance under FASB Statement No. 109, “Accounting for
Income Taxes,” with respect to recording the potential
impact of the repatriation provisions of the American Jobs
Creation Act of 2004 (the “Jobs Act”) on
enterprises’ income tax expense and deferred tax liability.
The Jobs Act was enacted on October 22, 2004. FSP
109-2 states that an enterprise is allowed time beyond the
financial reporting period of enactment to evaluate the effect
of the Jobs Act on its plan for reinvestment or repatriation of
foreign earnings for purposes of applying FASB Statement
No. 109. The Company has not yet completed evaluating the
impact of the repatriation provisions. Accordingly, as provided
for in FSP 109-2, the Company has not adjusted its tax expense
or deferred tax liability to reflect the repatriation provisions
of the Jobs Act.
In December 2004, the FASB issued SFAS No. 123R,
“Share-Based Payment.” This statement is a revision to
SFAS No. 123, “Accounting for Stock-Based
Compensation” and APB Opinion No. 25, “Accounting
for Stock Issued to Employees.” This statement establishes
standards for the accounting for transactions in which an entity
exchanges its equity instruments for goods or services,
primarily focusing on the accounting for transactions in which
an entity obtains employee services in share-based payment
transactions. Entities will be required to measure the cost of
employee services received in exchange for an award of equity
instruments based on the grant-date fair value of the award
(with limited exceptions). That cost will be recognized over the
period during which an employee is required to provide service,
the requisite service period (usually the vesting period), in
exchange for the award. The grant-date fair value of employee
share options and similar instruments will be estimated using
option-pricing models. If an equity award is modified after the
grant date, incremental compensation cost will be recognized in
an amount equal to the excess of the fair value of the modified
award over the fair value of the original award immediately
before the modification. This statement is effective as of the
beginning of the first interim or annual reporting period that
begins after June 15, 2005. The Company is currently
assessing the impact of this accounting standard on the
Company’s results of operations or financial position.
|
|
| 3 |
— Property and Equipment |
Property and equipment consist of the following at
December 31:
| |
|
|
|
|
|
|
|
|
| |
|
2003 | |
|
2004 | |
| |
|
| |
|
| |
|
Furniture and fixtures
|
|
$ |
2,709 |
|
|
$ |
2,724 |
|
|
Computer equipment
|
|
|
6,525 |
|
|
|
7,931 |
|
|
Software
|
|
|
3,963 |
|
|
|
930 |
|
|
Leasehold improvements
|
|
|
2,616 |
|
|
|
3,636 |
|
| |
|
|
|
|
|
|
| |
|
|
15,813 |
|
|
|
15,221 |
|
|
Less: Accumulated depreciation and amortization
|
|
|
(10,984 |
) |
|
|
(7,814 |
) |
| |
|
|
|
|
|
|
|
Total property and equipment
|
|
$ |
4,829 |
|
|
$ |
7,407 |
|
| |
|
|
|
|
|
|
Assets acquired under capital lease totaled $1,405 at
December 31, 2003 and 2004 and accumulated amortization
amounted to $1,405 at December 31, 2003 and 2004.
In July 2003, the Company entered into a Revolving Note in the
original principal sum of $3,000. The Revolving Note was fully
secured by a certificate of deposit in the same amount held at
the lending institution.
F-12
PEOPLESUPPORT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
Continued
The Revolving Note carried a rate of LIBOR plus 1.5% per
annum. As of December 31, 2003, there were no outstanding
balances, and in April 2004, the Company retired this unused
facility.
|
|
|
5 — Commitments and Contingencies |
The Company leases its office facilities and miscellaneous
office equipment under operating leases expiring at various
times through 2015. In November 2002, the Company entered into a
settlement agreement with a creditor relating to an operating
lease. The parties agreed to settle the balance due for a
one-time payment of $1,300. As a result of the settlement, the
Company obtained title to all equipment under the lease and
there are no further payments or obligations due from either
party as a result of this settlement.
On January 13, 2005, we exercised a three year renewal
option associated with the lease of our corporate headquarters.
The following summarizes our contractual obligations at
December 31, 2004, and includes the lease obligation of
$1.0 million associated with the three year renewal of our
corporate headquarters:
| |
|
|
|
|
| |
|
Operating | |
| Years Ending December 31, |
|
Lease | |
| |
|
| |
|
2005
|
|
$ |
2,073 |
|
|
2006
|
|
|
2,638 |
|
|
2007
|
|
|
2,331 |
|
|
2008
|
|
|
2,124 |
|
|
2009
|
|
|
1,712 |
|
|
Thereafter
|
|
|
12,028 |
|
| |
|
|
|
|
Total
|
|
$ |
22,906 |
|
| |
|
|
|
In May 2003, the Company renewed two Standby Letters of Credit
related to lease obligations in Los Angeles and Manila and
adjusted the pledged collateral to $650. Pursuant to the terms
of the letters of credit, $138 of the security interest was
released in August 2004, and $90 was released in December 2004.
The remaining balance of $422 is scheduled to be released in
August 2005.
Interest expense for capital lease obligations was $15, $0 and
$0 for the years ended December 31, 2002, 2003 and 2004,
respectively. The Company records rental expense on a
straight-line basis over the base, non-cancelable lease terms.
Any difference between the calculated expense and the amount
actually paid are reflected as a liability in the accompanying
consolidated balance sheet and totaled $267 and $223 at
December 31, 2003 and 2004, respectively. Rent expense for
the years ended December 31, 2002, 2003 and 2004 was
$2,617, $2,159 and $1,943, respectively.
The Company currently has four outsourcing center leases which
stipulate changes in lease payments due to inflation or
deflation in the Philippines or fluctuations in the value of the
Philippine peso relative to the value of the U.S. dollar.
These leases provide for increases in lease payments in the case
of extraordinary inflation. Two of these contracts provide that
an event of extraordinary inflation will be conclusively
presumed to have occurred if the specified exchange rate of the
Philippine peso relative to the U.S. dollar increases by
more than 25% over a short period, or if the purchasing power of
the Philippine peso decreases by more than 25% over the same
period. The third of these contracts provides for an increase in
our lease obligations if the local consumer price index
increases by 16% or more over a 12 month period. Another
one of the Company’s leases provides that in the case of an
extraordinary reduction in the value of the currency used to
make payments under the lease, the value of the currency at the
time the Company entered into the obligation will be the basis
of payment. In the event of extraordinary inflation, the Company
obligations under this agreement could increase by 16% to 25% or
more. In each of the last two years, the Philippines has
recorded an annual inflation rate of approximately four percent.
Rulings by the Philippine Supreme Court indicate that the
F-13
PEOPLESUPPORT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
Continued
Philippines has not experienced any period of inflation in the
past that would be construed as extraordinary inflation under
the Company’s contracts.
The Company has the option to renew two leases under various
terms, ranging from five to six years, at various rates as
specified with each lease agreement.
|
|
|
Contractual Compensation Obligation |
Effective July 1, 2002, the Company adopted its 2002
Management Incentive Plan (the “Plan”) under which the
Company is obligated to make payments to senior management and
key employees upon completion of certain significant
transactions, including the sale of the Company or an initial
public offering pursuant to the Securities Act of 1933. Under
the Plan, certain key employees designated by the Company’s
board of directors received cash payments based on the aggregate
net proceeds received by the Company and selling stockholders
from the offering. The Company was obligated to pay
$5.6 million under the Plan upon the closing of our initial
public offering on October 6, 2004, of which we paid
$4.8 million to senior management and other key employees
and the Company is obligated to pay $0.8 million over time
to key employees and personnel based on continued service or
other performance criteria. The Company made further payments of
$0.5 million under the Plan to senior management and other
key employees in connection with the sale of 603 additional
shares on October 25, 2004 pursuant to the exercise of an
over-allotment option granted to the underwriters of the initial
public offering. The Company is obligated to make further
payments of $0.2 million over time to key employees and
personnel based on continued service or other performance
criteria in connection with the sale of these additional shares.
No other payments will be made under our management incentive
compensation plan. The deferred obligation under the management
incentive plan has been recorded in the accompanying balance
sheet, $0.3 million as a current liability and
$0.7 million as a long term liability.
In July 2002, a former executive filed a claim against the
Company. The Company accrued legal fees and other costs in
connection with this claim, which were included in the reserve
for restructuring on the accompanying balance sheet as of
December 31, 2002. In 2003, the Company settled this
litigation and the restructuring reserve was reduced by the
difference between the amount previously accrued for and the
settlement.
The Company is, from time to time, a defendant or plaintiff in
litigation related to claims arising out of its operations in
the ordinary course of business. The Company believes that no
such claims should have a material adverse impact on its
financial condition or results of operations.
|
|
|
6 — Convertible Preferred Stock |
From August 1998 through April 2000, the Company issued shares
of convertible preferred stock, which were issued and
outstanding immediately before the completion of the initial
public offering of the Company’s common shares. The
Company’s certificate of incorporation, as previously in
effect, provided for conversion of the preferred stock, on a
one-for-one basis, upon the closing of an underwritten public
offering of the Company’s common shares at a price of not
less than $9.59 per share that would generate gross
proceeds to the Company and/or selling stockholders of no less
than $40 million. On September 28, 2004, the Company
amended its certificate of incorporation to reduce the minimum
price per share for converting the preferred shares from $9.59
to $6.95. Upon the closing of the Company’s initial public
offering on October 6, 2004, 10,461 preferred shares
automatically converted to common shares on a one-for-one basis.
F-14
PEOPLESUPPORT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
Continued
In June 1999, as issuance costs for the Series B preferred
stock financing, the Company issued a fully vested warrant to
purchase 62 shares of Series B preferred stock.
The warrant entitles the holder to purchase Series B
preferred stock at $2.74 per share. The fair value was
determined to be $117 and was recorded as additional paid in
capital.
Additionally, the Company issued warrants to
purchase 1,536 shares of Series B convertible
preferred stock to Series B investors. The warrants entitle
the holders to purchase one share of Series B preferred
stock at $2.74 per share. The fair value assigned to the
warrants was determined to be $1,968 and was recorded as
additional paid in capital. The warrants vested upon issuance
with respect to 766 shares of Series B preferred stock
and upon an agreed-upon investment by the warrant holders in the
Company’s 1999 Series C preferred stock financing with
respect to the remaining 766 shares of Series B
preferred stock. In 2000, the right to purchase 36 shares
of Series B warrants did not vest and was therefore
canceled. As of December 31, 2002, all of the warrants were
fully vested.
During 2004, seven holders of Series B warrants exercised
their right to purchase 1,554 shares. Of the seven warrant
holders who exercised during the year ended December 31,
2004, three holders elected a cashless exercise resulting in the
net issuance of 1,073 shares of Series B convertible
preferred stock. Upon closing of the Company’s initial
public offering on October 6, 2004, all outstanding
preferred shares were converted to common shares on a
one-for-one basis.
In October 1999, in connection with a line of credit borrowing,
which expired in 2000, the Company issued a fully vested warrant
to purchase 11 shares of Series B preferred stock at
$2.74 per share. The warrant was exercised on a cashless
basis in October 2004, resulting in the net issuance of seven
shares of common stock. The fair value was determined to be $21
and was fully amortized as additional interest expense as of
December 31, 2000.
In April 2000, in connection with the original line of credit
borrowing, the Company issued a warrant to purchase
27 shares of Series D preferred stock at
$15.65 per share. The warrant was issued in April 2000 and
expires in April 2005. The fair value was determined to be $299
and was amortized over the life of the line of credit as
additional interest expense. Additional interest expense related
to this warrant was $87 for the year ended December 31,
2001. As of December 31, 2004, the warrant had not been
exercised.
In May 2000, in connection with a credit agreement, the Company
issued a warrant to purchase 96 shares of common stock at
$15.65 per share. The warrant was issued in May 2000 and
expires five years from the issuance date in May 2005. The fair
value was determined to be $416 and was amortized over the life
of the credit agreement as additional interest expense. During
2001 and 2002, the Company recorded $139 and $174 additional
interest expense. As of December 31, 2004, the warrant had
not been exercised.
In June 2001, in connection with the renewal of the line of
credit borrowing, the Company issued a warrant to purchase four
shares of Series D preferred stock at $15.65 per
share. The warrant expires five years from the issuance date in
June 2006. The fair value was determined to be $41 and was
amortized over the life of the line of credit as additional
interest expense. Additional interest expense related to this
warrant was $21 for each of the years ended December 31,
2001 and 2002. As of December 31, 2004, the warrant had not
been exercised.
|
|
|
2004 Stock Incentive Plan |
The 2004 stock incentive plan was adopted by the Company’s
board of directors in July 2004, and following stockholder
approval became effective upon the completion of the
Company’s initial public offering. The 2004 stock incentive
plan is administered by the board of directors or the
compensation committee of the
F-15
PEOPLESUPPORT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
Continued
board. The 2004 stock incentive plan provides for the grant of
options to purchase shares of common stock, restricted stock,
stock appreciation rights and stock units. Incentive stock
options may be granted only to employees. Nonstatutory stock
options and other stock-based awards may be granted to
employees, non-employee directors, advisors and consultants. The
board of directors can amend or modify the 2004 stock incentive
plan at any time, with stockholder approval, as required.
900 shares of common stock are authorized for issuance
under the 2004 stock incentive plan. However, no participant in
the 2004 stock incentive plan can receive option grants,
restricted shares, stock units, or stock appreciation rights for
more than 180 shares total in any calendar year, or for
more than 720 shares total in the first year of service.
The number of shares reserved for issuance under the 2004 stock
incentive plan will be increased on the first day of each fiscal
year during the term of the plan, beginning January 1, 2006
by the lesser of 1,100 shares, 4% of our outstanding common
stock on the last day of the immediately preceding fiscal year,
or a number of shares determined by the board of directors.
In addition, all shares available for issuance under our 1998
stock incentive plan that ceased to be available for future
grant under that plan upon completion of the Company’s
initial public offering instead became available for issuance
under the 2004 stock incentive plan. This includes shares
subject to outstanding options under our 1998 stock incentive
plan that expire, terminate or are cancelled before being
exercised, and unvested shares that are forfeited pursuant to
that plan.
|
|
|
2004 Employee Stock Purchase Plan |
The 2004 employee stock purchase plan was adopted by our board
of directors in July 2004. A total of 225 shares of common
stock have been reserved for issuance under our employee stock
purchase plan. The number of shares reserved for issuance under
the employee stock purchase plan will be increased on the first
day of each of our fiscal years from 2006 through 2014 by the
lesser of 400 shares, 1.25% of our outstanding common stock
on the last day of the immediately preceding fiscal year, or a
number of shares determined by the board of directors.
Our 2004 employee stock purchase plan, which is intended to
qualify under Section 423 of the Internal Revenue Code,
will be administered by our board of directors or by the
compensation committee of the board. Employees, including
officers and employee directors but excluding 5% or greater
stockholders, are eligible to participate if they are
customarily employed for more than 20 hours per week and
for more than five months in any calendar year. The 2004
employee stock purchase plan permits eligible employees to
purchase common stock through payroll deductions, which may not
exceed 15% of an employee’s total compensation. The maximum
number of shares a participant may purchase during a single
purchase period is 1 share.
The 2004 employee stock purchase plan will be implemented by a
series of overlapping offering periods of 24 months’
duration, with new offering periods, other than the first
offering period, beginning in May and November of each year,
except as otherwise determined by our board of directors.
Purchase periods for our 2004 employee stock purchase plan will
each have a duration of six months, unless otherwise determined
by our board of directors. During each purchase period, payroll
deductions will accumulate without interest. On the last day of
each purchase period, accumulated payroll deductions will be
used to purchase common stock. The Company is currently
determining the timing of the initial purchase period.
The purchase price will be equal to the fair market value less a
determined percentage per share of common stock on either the
first trading day of the offering period or on the last trading
day of the purchase period, whichever is less. Employees may
withdraw their accumulated payroll deductions at any time.
Participation in the 2004 employee stock purchase plan ends
automatically on termination of employment with us. Immediately
before an acquisition of our company or similar change of
control, the offering period and purchase period then in
progress shall terminate and stock will be purchased with the
accumulated payroll deductions, unless the 2004 employee stock
purchase plan is assumed by the surviving corporation or its
parent
F-16
PEOPLESUPPORT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
Continued
corporation under the acquisition or other change of control
arrangement. There has been no stock option activity to date
associated with the 2004 employee stock purchase plan.
Stock option activity for the years ended December 31,
2002, 2003 and 2004 is summarized as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Weighted | |
|
|
| |
|
Number of | |
|
Average Exercise | |
|
Shares | |
| |
|
Shares | |
|
Price | |
|
Exercisable | |
| |
|
| |
|
| |
|
| |
|
Balance, at December 31, 2001
|
|
|
1,286 |
|
|
$ |
3.97 |
|
|
|
311 |
|
| |
Granted
|
|
|
465 |
|
|
|
0.52 |
|
|
|
|
|
| |
Canceled
|
|
|
(903 |
) |
|
|
4.69 |
|
|
|
|
|
| |
Exercised
|
|
|
(1 |
) |
|
|
0.41 |
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
Balance, at December 31, 2002
|
|
|
847 |
|
|
|
1.32 |
|
|
|
326 |
|
| |
Granted
|
|
|
422 |
|
|
|
0.41 |
|
|
|
|
|
| |
Canceled
|
|
|
(162 |
) |
|
|
1.17 |
|
|
|
|
|
| |
Exercised
|
|
|
(3 |
) |
|
|
0.41 |
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
Balance, at December 31, 2003
|
|
|
1,104 |
|
|
|
1.01 |
|
|
|
495 |
|
| |
Granted
|
|
|
460 |
|
|
|
5.59 |
|
|
|
|
|
| |
Canceled
|
|
|
(103 |
) |
|
|
3.44 |
|
|
|
|
|
| |
Exercised
|
|
|
(209 |
) |
|
|
0.50 |
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
Balance, at December 31, 2004
|
|
|
1,252 |
|
|
$ |
2.57 |
|
|
|
450 |
|
| |
|
|
|
|
|
|
|
|
|
The Company’s 2004 Stock Incentive Plan, (the
“Plan”) provides for the issuance by the board of
directors of stock options at prices not less than 85% (110% if
the award is issued to a 10% stockholder) of the fair market
value at the date of issue. An aggregate of 2,759 options were
reserved under the Plan, of which 1,507 options were available
for future grant by the board of directors at December 31,
2004.
The Plan provides for the grant of nonstatutory and incentive
stock options to employees, officers, directors and consultants
of the Company. Options granted generally vest 25% after one
year of service and ratably over 36 months thereafter.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Outstanding Weighted Average | |
|
Exercisable | |
| |
|
| |
|
Weighted Average | |
| |
|
|
|
Remaining | |
|
|
|
| |
| |
|
|
|
Contractual | |
|
Exercise | |
|
|
|
Exercise | |
| Exercise Price Per Share |
|
Shares | |
|
Life (Years) | |
|
Price | |
|
Shares | |
|
Price | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
$0.03
|
|
|
33 |
|
|
|
3.54 |
|
|
$ |
0.03 |
|
|
|
33 |
|
|
$ |
0.03 |
|
|
0.19
|
|
|
100 |
|
|
|
3.89 |
|
|
|
0.19 |
|
|
|
100 |
|
|
|
0.19 |
|
|
0.41
|
|
|
666 |
|
|
|
8.49 |
|
|
|
0.41 |
|
|
|
179 |
|
|
|
0.41 |
|
|
1.15
|
|
|
16 |
|
|
|
5.05 |
|
|
|
1.15 |
|
|
|
16 |
|
|
|
1.15 |
|
|
1.89
|
|
|
32 |
|
|
|
5.15 |
|
|
|
1.89 |
|
|
|
32 |
|
|
|
1.89 |
|
|
5.15
|
|
|
90 |
|
|
|
5.82 |
|
|
|
5.15 |
|
|
|
88 |
|
|
|
5.15 |
|
|
6.80
|
|
|
120 |
|
|
|
9.77 |
|
|
|
6.80 |
|
|
|
— |
|
|
|
6.80 |
|
|
6.85
|
|
|
74 |
|
|
|
9.24 |
|
|
|
6.85 |
|
|
|
— |
|
|
|
6.85 |
|
|
8.15
|
|
|
39 |
|
|
|
9.94 |
|
|
|
8.15 |
|
|
|
— |
|
|
|
8.15 |
|
|
9.09
|
|
|
82 |
|
|
|
9.82 |
|
|
|
9.09 |
|
|
|
2 |
|
|
|
9.09 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
1,252 |
|
|
|
7.97 |
|
|
$ |
2.57 |
|
|
|
450 |
|
|
$ |
1.42 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-17
PEOPLESUPPORT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
Continued
Deferred compensation represents the difference between the
deemed fair value of the Company’s common stock for
financial accounting purposes and the exercise price of these
options at the date of grant. Deferred compensation expense is
amortized ratably using an accelerated method over the vesting
period. Options granted during the years ended December 31,
2003 and 2004 resulted in deferred compensation of $1,998 and
$1,728 respectively, which was included in deferred compensation
in the consolidated statement of stockholders’ equity
(deficit). During the years ended December 31, 2003 and
2004, such stock-based compensation expense included in the
consolidated statement of operations amounted to $119 and
$1,774, respectively.
Stock based compensation expense was classified in the statement
of operations as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, | |
| |
|
| |
| |
|
2002 |
|
2003 | |
|
2004 | |
| |
|
|
|
| |
|
| |
|
Cost of revenues
|
|
$ |
— |
|
|
$ |
61 |
|
|
$ |
566 |
|
|
Selling, general & administrative
|
|
|
— |
|
|
|
58 |
|
|
|
1,208 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
$ |
— |
|
|
$ |
119 |
|
|
$ |
1,774 |
|
| |
|
|
|
|
|
|
|
|
|
Grants of certain unexercised options under the Company’s
1998 Stock Incentive Plan between January 1, 2003 through
April 28, 2004, may not have been exempt from registration
or qualification under federal and state securities laws and the
Company did not obtain any required registration or
qualification. In order to comply with California securities
law, the Company intends to make a rescission offer to the
U.S. holders of these options. Before the completion of its
initial public offering, the Company applied to the California
Department of Corporations for approval of the terms of the
repurchase offer. By order dated October 28, 2004, the
California Department of Corporations approved the
Company’s repurchase application as to form pursuant to
section 25507(b) of the California Corporations Code.
Following approval of our repurchase application, the Company
issued shares upon exercise of certain of these options granted
between January 1, 2003 through April 28, 2004.
Accordingly, the Company plans to re-apply to the California
Department of Corporations for expanded approval to repurchase
both options and these shares issued upon exercise of options.
The Company also intends to file a registration statement on
Form S-1 to register the offer to repurchase the options
and shares. Pursuant to the terms of the previously approved
repurchase application, the Company intends to offer to
repurchase the options at 20% of the option exercise price
multiplied by the number of shares underlying the option, plus
interest at an annual rate of 7% from the grant date. The
Company intends to offer to repurchase shares issued upon
exercise of options at the full exercise price paid for the
shares, plus interest at an annual rate of 7% from the date of
exercise of the underlying options. Under these terms, the
Company would be required to pay approximately
$0.1 million, plus statutory interest at an annual rate of
7% if all persons entitled to have their options repurchased
elect to do so. Federal securities laws do not expressly provide
that a rescission offer will terminate a purchaser’s right
to rescind a sale of stock that was not registered as required.
If any or all of the offerees reject the Company’s offer to
repurchase the options, the Company may continue to be liable
under federal and state securities laws. The Company does not
believe that this rescission offer will have a material effect
on the results of operations, cash flows or financial positions.
|
|
|
9 — Restructuring Charges |
In March 2002, the Company initiated a reorganization plan in an
effort to further reduce future operating costs by streamlining
operations into its lower-cost operating centers in Manila. As a
result of this restructuring plan, there were significant
staffing reductions at the Los Angeles and St. Louis
facilities. The Company incurred a charge of approximately
$3,884. The charge was comprised of approximately $1,548 for the
write-down of assets, $1,241 for lease termination costs, and
$1,095 for severance and related costs in connection with the
elimination of approximately 45 positions from the Los Angeles
and St. Louis locations.
F-18
PEOPLESUPPORT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
Continued
In 2003, the Company initiated a separate restructuring plan to
further reduce future operating costs by completely closing its
St. Louis facility and transferring those functions to its
lower-cost operating center in Manila. The activity related to
this plan was completed during 2003. As a result of this
reorganization and the closure of this facility, the Company
recorded a charge of approximately $629 with respect to staffing
reductions, asset impairments, and lease termination costs. The
charge was comprised of approximately $283 for the write-down of
abandoned leasehold improvements, $267 of lease termination
costs, and $79 for severance and related costs in connection
with the elimination of approximately 22 positions from its
St. Louis facility. The Company also released approximately
$974 of the 2002 accrued restructuring liability based on lower
than anticipated actual expenses related to the 2002 lease
termination and severance costs. This amount was comprised of
$337 of lease termination costs and $637 of severance related
costs, both of which were the result of negotiated settlement
amounts that were lower than the originally estimated or
contractual amounts. As a result of the release of the 2002
accrual, the Company recorded a net restructuring credit in the
amount of $345 in 2003, as shown on the accompanying
consolidated statement of operations and comprehensive income
(loss).
In 2004, the Company made cash payments of $3 and released the
final $22 of the 2002 accrued restructuring liability which
reduced the reserve to zero.
The following table summarizes the Company’s activities
related to these charges for the years ended December 31,
2002, 2003 and 2004:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Severance | |
|
|
|
|
|
|
| |
|
and | |
|
|
|
Asset | |
|
|
| |
|
Related | |
|
Lease | |
|
Write- | |
|
|
| |
|
Cost | |
|
Termination | |
|
Down | |
|
Total | |
| |
|
| |
|
| |
|
| |
|
| |
|
Reserve for restructuring, at December 31, 2001
|
|
$ |
— |
|
|
$ |
662 |
|
|
$ |
— |
|
|
$ |
662 |
|
|
2002 restructuring charges
|
|
|
1,095 |
|
|
|
1,241 |
|
|
|
1,548 |
|
|
|
3,884 |
|
|
Cash payments
|
|
|
(342 |
) |
|
|
(1,042 |
) |
|
|
— |
|
|
|
(1,384 |
) |
|
Reduction of excess accrual
|
|
|
— |
|
|
|
(59 |
) |
|
|
— |
|
|
|
(59 |
) |
|
Non cash charges
|
|
|
|
|
|
|
— |
|
|
|
(1,548 |
) |
|
|
(1,548 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve for restructuring, at December 31, 2002
|
|
|
753 |
|
|
|
802 |
|
|
|
— |
|
|
|
1,555 |
|
|
2003 restructuring charges
|
|
|
79 |
|
|
|
267 |
|
|
|
283 |
|
|
|
629 |
|
|
Cash payments
|
|
|
(170 |
) |
|
|
(588 |
) |
|
|
— |
|
|
|
(758 |
) |
|
Reduction of excess accrual
|
|
|
(637 |
) |
|
|
(337 |
) |
|
|
— |
|
|
|
(974 |
) |
|
Non cash charges
|
|
|
— |
|
|
|
(144 |
) |
|
|
(283 |
) |
|
|
(427 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve for restructuring, at December 31, 2003
|
|
|
25 |
|
|
|
— |
|
|
|
— |
|
|
|
25 |
|
|
Cash payments
|
|
|
(3 |
) |
|
|
— |
|
|
|
— |
|
|
|
(3 |
) |
|
Reduction of excess accrual
|
|
|
(22 |
) |
|
|
— |
|
|
|
— |
|
|
|
(22 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve for restructuring, at December 31, 2004
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
F-19
PEOPLESUPPORT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
Continued
The components of the income tax expense are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, | |
| |
|
| |
| |
|
2002 | |
|
2003 | |
|
2004 | |
| |
|
| |
|
| |
|
| |
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Federal
|
|
$ |
— |
|
|
$ |
120 |
|
|
$ |
(23 |
) |
| |
State
|
|
|
13 |
|
|
|
111 |
|
|
|
(11 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
|
$ |
13 |
|
|
$ |
231 |
|
|
$ |
(34 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Federal
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
(6,529 |
) |
| |
State
|
|
|
— |
|
|
|
— |
|
|
|
(300 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
|
|
— |
|
|
|
— |
|
|
|
(6,829 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Total provision (benefit)
|
|
$ |
13 |
|
|
$ |
231 |
|
|
$ |
(6,863 |
) |
| |
|
|
|
|
|
|
|
|
|
A reconciliation of the statutory federal income tax rate with
the Company’s effective income tax rate is as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, | |
| |
|
| |
| |
|
2002 | |
|
2003 | |
|
2004 | |
| |
|
| |
|
| |
|
| |
|
Federal statutory rate
|
|
|
35.0 |
% |
|
|
35.0 |
% |
|
|
35.0 |
% |
|
State taxes net of federal benefit
|
|
|
(0.4 |
) |
|
|
1.3 |
|
|
|
(0.8 |
) |
|
Difference between foreign tax rates and U.S. tax rates
|
|
|
2.9 |
|
|
|
(1.9 |
) |
|
|
(86.6 |
) |
|
Other
|
|
|
(0.9 |
) |
|
|
0.1 |
|
|
|
7.6 |
|
|
Deferred stock compensation (ISOs)
|
|
|
— |
|
|
|
— |
|
|
|
42.5 |
|
|
Change in valuation allowance
|
|
|
(37.0 |
) |
|
|
(31.7 |
) |
|
|
(467.4 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
|
|
(0.4 |
)% |
|
|
2.8 |
% |
|
|
(469.7 |
)% |
| |
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes is as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, | |
| |
|
| |
| |
|
2002 | |
|
2003 | |
|
2004 | |
| |
|
| |
|
| |
|
| |
|
Domestic
|
|
$ |
(3,121 |
) |
|
$ |
7,773 |
|
|
$ |
(2,156 |
) |
|
Foreign
|
|
|
242 |
|
|
|
444 |
|
|
|
3,617 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
$ |
(2,879 |
) |
|
$ |
8,217 |
|
|
$ |
1,461 |
|
| |
|
|
|
|
|
|
|
|
|
F-20
PEOPLESUPPORT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
Continued
The primary components of temporary differences which give rise
to the Company’s deferred tax assets and deferred tax
liabilities are as follows:
| |
|
|
|
|
|
|
|
|
|
| |
|
Years Ended | |
| |
|
December 31, | |
| |
|
| |
| |
|
2003 | |
|
2004 | |
| |
|
| |
|
| |
|
Net deferred tax asset:
|
|
|
|
|
|
|
|
|
| |
Net operating loss and credit carryforwards
|
|
$ |
19,823 |
|
|
$ |
23,779 |
|
| |
Reserves and allowances
|
|
|
381 |
|
|
|
103 |
|
| |
Other
|
|
|
436 |
|
|
|
(255 |
) |
|
Less: valuation allowance
|
|
|
(20,640 |
) |
|
|
(16,798 |
) |
| |
|
|
|
|
|
|
| |
|
$ |
— |
|
|
$ |
6,829 |
|
| |
|
|
|
|
|
|
As of December 31, 2004, the Company had net operating loss
carryforwards for federal and state tax purposes of
approximately $57,100 and $42,900, respectively. Federal and
state net operating loss carryforwards begin to expire in the
years 2018 and 2008, respectively. The Company’s ability to
realize net operating loss carry-forwards may be limited in the
event that a change in ownership occurs, as defined by the
Internal Revenue Code. In the fourth quarter of 2004, the
Company released a portion of the deferred tax valuation
allowances as the Company determined that it is more likely than
not that a portion of the deferred tax assets will be realized.
In assessing the realizability of deferred tax assets,
management considers whether it is more likely than not that
some portion or all of the deferred tax assets will be realized.
Management considers projected future taxable income, customer
contract terms and customer concentrations in making this
assessment. Management reassesses the realizability of deferred
tax assets on a periodic basis. At such times as we determine
that the recoverability of any remaining portion of deferred tax
assets is more likely realizable than not, we will further
release a portion of the deferred tax valuation allowances,
record an income tax benefit and subsequently record a provision
for income taxes for financial statement purposes based on the
amount of taxable net income.
The Company is currently the beneficiary of tax holiday
incentives granted by two governing agencies in the Philippines.
Both agencies have granted the Company income tax holidays with
durations of four to six years, with the possibility of two to
three year extensions. The tax holidays expire at staggered
dates beginning in 2006 and ending in 2008, unless extended.
Philippine tax rates will then apply to the income earned by the
Company’s Philippines subsidiary. The estimated effective
income tax rate in the Philippines for the year ended
December 31, 2004 was 32%, or 5% on gross income with
respect to income derived from activities covered by our
registration with the Philippines Export Zone Authority.
No deferred tax liabilities have been provided for the earnings
of the Philippine subsidiary as the Company plans to permanently
invest these earnings in operations of the subsidiary. At
December 31, 2004, the permanently invested earnings
amounted to $3,810. If such earnings are repatriated in the
future, or are no longer deemed to be indefinitely reinvested,
the Company would accrue the applicable amounts of taxes
associated with such earnings using the effective federal tax
rate at the time of repatriation.
FASB Staff Position (“FSP”) No. 109-2,
“Accounting and Disclosure Guidance for the Foreign
Earnings Repatriation Provision within the American Jobs
Creation Act of 2004” (“FSP 109-2”), provides
guidance under FASB Statement No. 109, “Accounting for
Income Taxes,” with respect to recording the potential
impact of the repatriation provisions of the American Jobs
Creation Act of 2004 (the “Jobs Act”) on
enterprises’ income tax expense and deferred tax liability.
The Jobs Act was enacted on October 22, 2004. FSP
109-2 states that the Company is allowed time beyond the
financial reporting period of enactment to evaluate the effect
of the Jobs Act on its plan for reinvestment or repatriation of
foreign earnings for purposes
F-21
PEOPLESUPPORT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
Continued
of applying FASB Statement No. 109. The Company has not yet
completed evaluating the impact of the repatriation provisions.
Accordingly, as provided for in FSP 109-2, the Company has not
adjusted its tax expense or deferred tax liability to reflect
the repatriation provisions of the Jobs Act. Once the evaluation
is complete, the Company will reassess the current plans to
continue to permanently invest earnings in operations of the
Company’s Philippine subsidiary.
11 — Geographic and Product Data
All of the Company’s revenue was derived from U.S.-based
companies. Through 2004, substantially all of the Company’s
revenues have been derived from the sale of customer management
services.
The composition of the Company’s long-lived assets and
depreciation and amortization between those in the United States
and the Philippines is set forth below.
| |
|
|
|
|
|
|
|
|
|
| |
|
As of December 31, | |
| |
|
| |
| |
|
2003 | |
|
2004 | |
| |
|
| |
|
| |
|
Long-lived assets:
|
|
|
|
|
|
|
|
|
| |
U.S.
|
|
$ |
1,540 |
|
|
$ |
1,797 |
|
| |
Philippines
|
|
|
3,289 |
|
|
|
5,610 |
|
| |
|
|
|
|
|
|
|
Total
|
|
$ |
4,829 |
|
|
$ |
7,407 |
|
| |
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, | |
| |
|
| |
| |
|
2002 | |
|
2003 | |
|
2004 | |
| |
|
| |
|
| |
|
| |
|
Depreciation and amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
U.S.
|
|
$ |
3,022 |
|
|
$ |
1,896 |
|
|
$ |
1,376 |
|
| |
Philippines
|
|
|
1,043 |
|
|
|
1,270 |
|
|
|
2,551 |
|
| |
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
4,065 |
|
|
$ |
3,166 |
|
|
$ |
3,927 |
|
| |
|
|
|
|
|
|
|
|
|
On August 5, 2004, the Company’s Board of Directors
effected a 1 for 2.74 reverse stock split of the Company’s
common and preferred stock. The financial statements have been
retroactively restated for the effects of the reverse stock
split.
|
|
| 13 |
— Initial Public Offering |
The registration statement relating to the Company’s
initial public offering was declared effective by the Securities
and Exchange Commission on September 30, 2004. On
October 6, 2004, the Company completed the initial public
offering whereby 4,746 shares of common stock were sold by
the Company and 2,072 shares were sold by existing
shareholders at $7.00 per share. The Company generated
approximately $27.6 million of net proceeds (net of
underwriting discounts and approximately $3.3 million of
offering expenses). Existing shareholders generated
approximately $13.5 million of net proceeds (net of
underwriting discounts).
Pursuant to the preferred conversion rights, as discussed in
Note 6, 10,461 preferred shares converted, on a one-to-one
basis, to common shares upon the closing of the initial public
offering.
In connection with the Company’s initial public offering,
the Company amended and restated its Certificate of
Incorporation to increase the Company’s authorized
capitalization, reduce the par value per share of common and
preferred stock from $0.003 to $0.001, and make certain other
changes. Under the Company’s Amended and Restated
Certificate of Incorporation, as filed with the Delaware
Secretary of State on October 6, 2004, the Company is
authorized to issue 91,000 shares of capital stock,
including 87,000 shares of common stock, par value
$0.001 per share, and 4,000 shares of preferred stock,
par value $0.001 per share.
F-22
PEOPLESUPPORT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
Continued
On October 19, 2004, the Company was notified that,
pursuant to section 3 of the Underwriting Agreement, the
Underwriters exercised their over-allotment option in the amount
of 603 additional shares. On October 25, 2004, the Company
completed the sale of the 603 additional shares, and generated
approximately $3.9 million of net proceeds.
On January 13, 2005, the Company exercised a three year
renewal option related to the Company’s corporate
headquarters located in Los Angeles, California.
On January 14, 2005, the Company and Ayala Land, Inc.
entered into a definitive contract to lease the PeopleSupport
Center, pursuant to the terms of the binding agreement
previously signed in December 2003. The definitive contract
signed in January 2005 contains the final terms of the agreement
between the parties. The definitive lease contract provides for
a term of 10 years, commencing on August 2005.
The obligations under these leases have been included in the
Company’s contractual obligations as described in
Note 5.
|
|
| 15 |
— Quarterly Financial Data (Unaudited) |
Summary unaudited quarterly financial data for fiscal 2003 and
2004 is as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2003 | |
| |
|
| |
| |
|
1st Qtr. | |
|
2nd Qtr. | |
|
3rd Qtr.(1) | |
|
4th Qtr.(2) | |
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands, except per share data) | |
|
Revenues
|
|
$ |
6,409 |
|
|
$ |
7,320 |
|
|
$ |
7,720 |
|
|
$ |
8,564 |
|
|
Income from operations
|
|
|
1,148 |
|
|
|
1,739 |
|
|
|
2,085 |
|
|
|
3,165 |
|
|
Net income
|
|
|
1,130 |
|
|
|
1,719 |
|
|
|
2,042 |
|
|
|
3,095 |
|
|
Basic income per share(3)
|
|
$ |
0.45 |
|
|
$ |
0.68 |
|
|
$ |
0.81 |
|
|
$ |
1.22 |
|
|
Diluted income per share(3)
|
|
$ |
0.09 |
|
|
$ |
0.14 |
|
|
$ |
0.16 |
|
|
$ |
0.23 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
| |
|
| |
| |
|
1st Qtr. | |
|
2nd Qtr. | |
|
3rd Qtr.(4) | |
|
4th Qtr.(5) | |
| |
|
| |
|
| |
|
| |
|
| |
|
Revenues
|
|
$ |
9,551 |
|
|
$ |
10,445 |
|
|
$ |
11,936 |
|
|
$ |
12,579 |
|
|
Income from operations
|
|
|
1,881 |
|
|
|
1,323 |
|
|
|
1,975 |
|
|
|
(3,942 |
) |
|
Net income
|
|
|
1,839 |
|
|
|
1,290 |
|
|
|
1,932 |
|
|
|
3,263 |
|
|
Basic income per share(3)
|
|
$ |
0.71 |
|
|
$ |
0.57 |
|
|
$ |
0.90 |
|
|
$ |
0.19 |
|
|
Diluted income per share(3)
|
|
$ |
0.13 |
|
|
$ |
0.09 |
|
|
$ |
0.14 |
|
|
$ |
0.18 |
|
|
|
| (1) |
In the quarter ended September 30, 2003, the Company
recorded a loss on disposal of assets in the amount of
$1.1 million related to the final closure of our
St. Louis operation, and the Company released a portion of
the prior year’s excess accrual for restructuring charges
in an amount of $0.7 million. |
| |
| (2) |
In the quarter ended December 31, 2003, the Company
released a portion of the prior year’s excess accrual for
restructuring charges in the amount of $1.2 million, based
on lower than anticipated actual expense for severance
obligations, which was partially offset by charges of
$0.5 million for severance-related and facilities costs in
St. Louis. |
| |
| (3) |
The basic and diluted per share amounts have been restated to
give retroactive effect to a 1 for 2.74 reverse stock split of
our stock that occurred on August 5, 2004. |
| |
| (4) |
On February 25, 2005, the Company restated its results for
the three and nine months ended September 30, 2004 to
exclude a charge related to payment obligations of
$4.8 million under the management incentive plan in
connection with the Company’s initial public offering and
to make other |
F-23
PEOPLESUPPORT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
Continued
|
|
|
adjustments related to obligations under the plan. During the
initial preparation of the Company’s financial statements
for the quarter ended September 30, 2004, the
$4.8 million paid under the incentive plan was recorded as
of September 30 because by September 30 the
registration statement for the offering had been declared
effective by the SEC, the offering had priced and the management
payments were highly probable. Subsequently, the Company
concluded that the event triggering the payment obligations was
the closing of, and the receipt of funds from, the offering, and
the charge should have been recorded at that time. As a result
of the adjustments, the restated results of operations for the
quarter ended September 30, 2004 were as follows: |
| |
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
For the quarter ended | |
| |
|
|
|
September 30, 2004 | |
| |
|
|
|
| |
| |
|
|
|
As reported | |
|
As restated | |
| |
|
|
|
| |
|
| |
| |
|
Revenues |
|
$ |
11,936 |
|
|
$ |
11,936 |
|
| |
|
Income (loss) from operations |
|
|
(2,811 |
) |
|
|
1,975 |
|
| |
|
Net income (loss) |
|
|
(2,730 |
) |
|
|
1,932 |
|
| |
|
Basic income (loss) per share(3) |
|
$ |
(1.28 |
) |
|
$ |
0.90 |
|
| |
|
Diluted income (loss) per share(3) |
|
$ |
(1.28 |
) |
|
$ |
0.14 |
|
The restatement did not have any effect on the results for the
year.
|
|
| (5) |
In the quarter ended December 31, 2004, the Company
recorded a total charge of $5.3 million related to the
management incentive plan. In addition, the Company released a
portion of the deferred tax valuation allowances in the amount
of $6.8 million, as the Company determined that it is more
likely than not that a portion of the deferred tax assets will
be realizable (see Note 10). |
Quarterly and year-to-date computations of loss per share
amounts are made independently. Therefore, the sum of the per
share amounts for the quarters may not agree with the per share
amounts for the year.
F-24
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
|
|
| |
|
| |
Lance Rosenzweig |
| |
Chief Executive Officer, and |
| |
Chairman of the Board of Directors |
Pursuant to the requirements of the Securities Exchange Act of
1934, this Report has been signed below by the following persons
on behalf of the Registrant and in the capacities and on the
date indicated.
| |
|
|
|
|
|
|
| |
/s/ LANCE ROSENZWEIG
Lance
Rosenzweig |
|
President, Chief Executive Officer (Principal Executive
Officer), Secretary and Chairman of the Board of Directors |
|
March 31, 2005 |
| |
/s/ CAROLINE ROOK
Caroline
Rook |
|
Chief Financial Officer (Principal Financial and Accounting
Officer) |
|
March 31, 2005 |
| |
/s/ ADAM BERGER
Adam
Berger |
|
Director |
|
March 31, 2005 |
| |
/s/ C. LARRY BRADFORD
C.
Larry Bradford |
|
Director |
|
March 31, 2005 |
| |
/s/ MICHAEL EDELL
Michael
Edell |
|
Director |
|
March 31, 2005 |
| |
/s/ WILLIAM QUIGLEY
William
Quigley |
|
Director |
|
March 31, 2005 |
| |
/s/ MICHAEL SONG
Michael
Song |
|
Director |
|
March 31, 2005 |
| |
/s/ GEORGE ELLIS
George
Ellis |
|
Director |
|
March 31, 2005 |