UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-Q
|
|
|
(Mark One)
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|
þ
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|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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|
|
For the quarterly period ended
June 30, 2008
|
OR
|
o
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|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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|
|
For the transition period
from to
|
Commission File
No. 001-33362
eTelecare Global Solutions,
Inc.
(Exact Name of Registrant as
Specified in Its Charter)
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|
Philippines
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|
98-0467478
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(State or Other Jurisdiction
of
Incorporation or Organization)
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|
(I.R.S. Employer
Identification No.)
|
31
st
Floor CyberOne Building, Eastwood City, Cyberpark
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|
|
Libis, Quezon City
Philippines
(Address of Principal
Executive Offices)
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|
1110
(Zip
Code)
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Registrants telephone number, including area code:
63 (2) 916 5670
Indicate by check mark whether the registrant: (1) has
filed all reports required to be filed by Section 13 or
15 (d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the
past
90 days. Yes
þ
No
o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in Rule
12b-2
of the
Exchange Act. (Check one):
|
|
|
|
Large
accelerated
filer
o
|
Accelerated
filer
o
|
Non-accelerated
filer
þ
|
Smaller
reporting
company
o
|
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act.): Yes
o
No
þ
On August 12, 2008, 29,616,339 shares of the
Registrants common shares par value 2 Philippine Pesos
($0.04 U.S.) per share, were outstanding.
PART I.
FINANCIAL INFORMATION
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|
ITEM 1:
|
FINANCIAL
STATEMENTS.
|
eTelecare
Global Solutions, Inc. and Subsidiaries
(In thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(Unaudited)
|
|
|
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
34,273
|
|
|
$
|
35,129
|
|
Trade and other receivables, net
|
|
|
56,599
|
|
|
|
47,092
|
|
Fair value of derivatives
|
|
|
|
|
|
|
3,529
|
|
Prepaid expenses and other current assets
|
|
|
4,801
|
|
|
|
4,646
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
95,673
|
|
|
|
90,396
|
|
Non-current assets:
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
57,715
|
|
|
|
55,666
|
|
Goodwill
|
|
|
14,425
|
|
|
|
14,425
|
|
Other intangible assets, net
|
|
|
454
|
|
|
|
1,139
|
|
Other non-current assets
|
|
|
5,512
|
|
|
|
4,933
|
|
|
|
|
|
|
|
|
|
|
Total non-current assets
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|
|
78,106
|
|
|
|
76,163
|
|
|
|
|
|
|
|
|
|
|
Total assets
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|
$
|
173,779
|
|
|
$
|
166,559
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Trade accounts payable
|
|
$
|
7,289
|
|
|
$
|
6,672
|
|
Accrued and other expenses
|
|
|
25,532
|
|
|
|
21,935
|
|
Fair value of derivatives
|
|
|
7,626
|
|
|
|
|
|
Current portion of:
|
|
|
|
|
|
|
|
|
Obligations under capital lease
|
|
|
4
|
|
|
|
145
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
40,451
|
|
|
|
28,752
|
|
Non-current liabilities:
|
|
|
|
|
|
|
|
|
Asset retirement obligations
|
|
|
1,967
|
|
|
|
2,019
|
|
Other non-current liabilities
|
|
|
2,636
|
|
|
|
2,749
|
|
|
|
|
|
|
|
|
|
|
Total non-current liabilities
|
|
|
4,603
|
|
|
|
4,768
|
|
Commitments and contingencies (Note 7)
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Capital stock, 2 Philippine Peso ($0.04 U.S.) par value,
65,000,000 shares authorized, 29,114,464 shares
outstanding at June 30, 2008 and 28,979,218 outstanding at
December 31, 2007
|
|
|
1,135
|
|
|
|
1,129
|
|
Additional paid-in capital
|
|
|
103,203
|
|
|
|
100,702
|
|
Retained earnings
|
|
|
31,674
|
|
|
|
29,158
|
|
Accumulated other comprehensive income (loss)
|
|
|
(7,287
|
)
|
|
|
2,050
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
128,725
|
|
|
|
133,039
|
|
|
|
|
|
|
|
|
|
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Total liabilities and stockholders equity
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|
$
|
173,779
|
|
|
$
|
166,559
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to unaudited consolidated financial
statements.
1
eTelecare
Global Solutions, Inc. and Subsidiaries
(In
thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(Unaudited)
|
|
|
Service revenue
|
|
$
|
75,392
|
|
|
$
|
61,426
|
|
|
$
|
148,639
|
|
|
$
|
123,536
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Cost and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of services (exclusive of depreciation shown separately
below)
|
|
|
57,491
|
|
|
|
43,242
|
|
|
|
111,651
|
|
|
|
85,777
|
|
Selling and administrative expenses
|
|
|
11,324
|
|
|
|
8,115
|
|
|
|
22,893
|
|
|
|
16,829
|
|
Depreciation and amortization
|
|
|
5,679
|
|
|
|
3,494
|
|
|
|
11,194
|
|
|
|
7,037
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
74,494
|
|
|
|
54,851
|
|
|
|
145,738
|
|
|
|
109,643
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
898
|
|
|
|
6,575
|
|
|
|
2,901
|
|
|
|
13,893
|
|
Other income (expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense and financing charges
|
|
|
(130
|
)
|
|
|
(121
|
)
|
|
|
(219
|
)
|
|
|
(1,755
|
)
|
Interest income
|
|
|
227
|
|
|
|
427
|
|
|
|
411
|
|
|
|
427
|
|
Foreign exchange gain (loss)
|
|
|
29
|
|
|
|
(422
|
)
|
|
|
65
|
|
|
|
(684
|
)
|
Other
|
|
|
(90
|
)
|
|
|
(35
|
)
|
|
|
(96
|
)
|
|
|
148
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net other income (expenses)
|
|
|
36
|
|
|
|
(151
|
)
|
|
|
161
|
|
|
|
(1,864
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax provision
|
|
|
934
|
|
|
|
6,424
|
|
|
|
3,062
|
|
|
|
12,029
|
|
Income tax provision
|
|
|
289
|
|
|
|
450
|
|
|
|
546
|
|
|
|
842
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
645
|
|
|
$
|
5,974
|
|
|
$
|
2,516
|
|
|
$
|
11,187
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share basic
|
|
$
|
0.02
|
|
|
$
|
0.21
|
|
|
$
|
0.09
|
|
|
$
|
0.44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share diluted
|
|
$
|
0.02
|
|
|
$
|
0.19
|
|
|
$
|
0.08
|
|
|
$
|
0.39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to unaudited consolidated financial
statements.
2
eTelecare
Global Solutions, Inc. and Subsidiaries
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
Net income
|
|
$
|
645
|
|
|
$
|
5,974
|
|
|
$
|
2,516
|
|
|
$
|
11,187
|
|
Other comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair values of derivatives qualifying as cash flow
hedges, net of tax of $0
|
|
|
(6,119
|
)
|
|
|
|
|
|
|
(9,337
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
$
|
(5,474
|
)
|
|
$
|
5,974
|
|
|
$
|
(6,821
|
)
|
|
$
|
11,187
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to unaudited consolidated financial
statements.
3
eTelecare
Global Solutions, Inc. and Subsidiaries
(In
thousands, except number of shares)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
Capital Stock
|
|
|
Paid-in-
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Earnings
|
|
|
Income (Loss)
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
Balances, December 31, 2007
|
|
|
28,979,218
|
|
|
$
|
1,129
|
|
|
$
|
100,702
|
|
|
$
|
29,158
|
|
|
$
|
2,050
|
|
|
$
|
133,039
|
|
Stock option exercises
|
|
|
135,246
|
|
|
|
6
|
|
|
|
370
|
|
|
|
|
|
|
|
|
|
|
|
376
|
|
Stock compensation expense
|
|
|
|
|
|
|
|
|
|
|
1,694
|
|
|
|
|
|
|
|
|
|
|
|
1,694
|
|
Net tax benefit of stock option exercise
|
|
|
|
|
|
|
|
|
|
|
437
|
|
|
|
|
|
|
|
|
|
|
|
437
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,516
|
|
|
|
|
|
|
|
2,516
|
|
Other comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,337
|
)
|
|
|
(9,337
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, June 30, 2008
|
|
|
29,114,464
|
|
|
$
|
1,135
|
|
|
$
|
103,203
|
|
|
$
|
31,674
|
|
|
$
|
(7,287
|
)
|
|
$
|
128,725
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to unaudited consolidated financial
statements.
4
eTelecare
Global Solutions, Inc. and Subsidiaries
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(Unaudited)
|
|
|
Cash Flows from Operating Activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2,516
|
|
|
$
|
11,187
|
|
Adjustments for:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
11,194
|
|
|
|
7,037
|
|
Provisions for:
|
|
|
|
|
|
|
|
|
Doubtful accounts
|
|
|
22
|
|
|
|
151
|
|
Deferred taxes
|
|
|
(488
|
)
|
|
|
|
|
Stock compensation costs
|
|
|
1,694
|
|
|
|
938
|
|
Accretion of interest on asset retirement obligations
|
|
|
(52
|
)
|
|
|
117
|
|
Loss on disposal of assets
|
|
|
61
|
|
|
|
429
|
|
Excess tax benefits from share-based payment arrangements
|
|
|
(556
|
)
|
|
|
|
|
Change in:
|
|
|
|
|
|
|
|
|
Trade and other receivables
|
|
|
(9,529
|
)
|
|
|
(9,753
|
)
|
Prepaid expenses and other current assets
|
|
|
(353
|
)
|
|
|
(1,854
|
)
|
Trade accounts payable
|
|
|
6
|
|
|
|
(5,602
|
)
|
Accrued and other expenses
|
|
|
4,701
|
|
|
|
2,178
|
|
Fair Value of Derivatives
|
|
|
714
|
|
|
|
|
|
Other non-current assets
|
|
|
94
|
|
|
|
(1,404
|
)
|
Other non-current liabilities
|
|
|
324
|
|
|
|
293
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
10,348
|
|
|
|
3,717
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities:
|
|
|
|
|
|
|
|
|
Acquisition of property and equipment
|
|
|
(12,008
|
)
|
|
|
(13,888
|
)
|
Change in:
|
|
|
|
|
|
|
|
|
Refundable deposits
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(11,995
|
)
|
|
|
(13,888
|
)
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
Proceeds from:
|
|
|
|
|
|
|
|
|
Revolving line of credit
|
|
|
|
|
|
|
157,342
|
|
Payments for:
|
|
|
|
|
|
|
|
|
Revolving line of credit
|
|
|
|
|
|
|
(158,907
|
)
|
Long-term debt
|
|
|
|
|
|
|
(28,500
|
)
|
Obligations under capital lease
|
|
|
(141
|
)
|
|
|
(368
|
)
|
Offering costs
|
|
|
|
|
|
|
(354
|
)
|
Proceeds from stock option and warrant exercises
|
|
|
376
|
|
|
|
539
|
|
Excess tax benefits from share-based payment arrangements
|
|
|
556
|
|
|
|
|
|
Proceeds from public offering
|
|
|
|
|
|
|
79,414
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
791
|
|
|
|
49,166
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(856
|
)
|
|
|
38,995
|
|
Cash and cash equivalents at beginning of period
|
|
|
35,129
|
|
|
|
690
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
34,273
|
|
|
$
|
39,685
|
|
|
|
|
|
|
|
|
|
|
Supplemental Cash Flow Information
|
|
|
|
|
|
|
|
|
Supplemental information for non-cash investing activity:
|
|
|
|
|
|
|
|
|
Accrued capital expenditures in accounts payable
|
|
$
|
3,745
|
|
|
$
|
4,908
|
|
Asset retirement obligation recognized
|
|
|
|
|
|
|
163
|
|
See accompanying notes to unaudited consolidated financial
statements.
5
eTelecare
Global Solutions, Inc. and Subsidiaries
Notes to
Unaudited Consolidated Financial Statements
(In thousands, except per share data)
Interim
Financial Information
The accompanying consolidated financial statements as of
June 30, 2008 and for each of the three and six months
ended June 30, 2008 and 2007 are unaudited. The unaudited
consolidated financial statements include all adjustments,
consisting of normal recurring accruals, which eTelecare Global
Solutions, Inc. and Subsidiaries (the Company)
considers necessary for a fair presentation of the financial
position and the results of operations for those periods. The
consolidated balance sheet information as of December 31,
2007 has been derived from the audited financial statements at
that date but does not include all of the financial information
and footnotes required by accounting principles generally
accepted in the United States for complete financial statements.
Certain information and footnote disclosures normally included
in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America
have been omitted. These financial statements should be read in
conjunction with the consolidated financial statements and notes
thereto included in the Companys December 31, 2007
audited financial statements filed with the annual report on
Form 10-K
on March 14, 2008 with the Securities and Exchange
Commission. Operating results for the three and six months ended
June 30, 2008 are not necessarily indicative of the results
that may be expected for the entire year ending
December 31, 2008.
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make certain estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
For the three and six months ended June 30, 2008, the
Company had three clients that each contributed more than 10% of
revenue, including AT & T, representing 27% and 26%,
respectively, of revenue, Sprint, representing 22% and 21%,
respectively, of revenue, and Dell, representing 19% and 19% of
revenue. For the three and six months ended June 30, 2007,
the Company had three clients that each contributed more than
10% of revenue, including AT & T, representing 29% and
30%, respectively, of revenue, Dell, representing 23% and 24%,
respectively, of revenue, and Vonage, representing 15% and 14%
of revenue.
We are registered with the Philippine Export Zone Authority
(PEZA) as an Economic Export Enterprise under RA No. 7916,
otherwise known as the Special Economic Zone Act of 1995, to
develop and operate a call center business that services
overseas clients by providing customer relationship management
services. As a registered enterprise, we are entitled to certain
tax and nontax incentives which include, among others, tax and
duty-free importations, exemptions from local taxes and income
tax holiday (ITH) for three, four, or six years (duration
depends on the type of holiday granted) from start of commercial
operations with the possibility of one or two-year extensions.
Our current income tax holidays expire at staggered dates
through 2012. Our next anticipated expiring income tax holidays
are in the second half of 2008 for two of our delivery center
sites. We intend to apply for an extension or conversion to
Pioneer holiday status prior to expiration. Although our
estimated annual effective tax rate does not assume that the
extension or conversion will be approved, we understand it is
the current practice of the Philippine government to grant
extensions on such tax holidays as a means of attracting foreign
investment in specified sectors, including the outsourcing
industry. If the extensions or conversion to Pioneer holiday
status of the two expiring tax holidays are approved before
their expiration in the second half of 2008, our estimated
annual effective tax rate for 2008 would decrease approximately
2% at the time of Philippine governmental approval.
As of June 30, 2008, we had unrecognized tax benefits of
approximately $1,531. The entire amount of unrecognized tax
benefits at June 30, 2008 would, if recognized, reduce our
annual tax expense. The Company
6
eTelecare
Global Solutions, Inc. and Subsidiaries
Notes to
Unaudited Consolidated Financial
Statements (Continued)
anticipates approximately $791 of the June 30, 2008 balance
will be recognized in the next 12 months due to expiration
of the statute of limitations. Of this amount, $724 is
anticipated to be recognized during the second half of 2008 upon
the expected close of certain tax returns statute of limitations.
We recognize interest and penalties relating to unrecognized tax
benefits in income tax expense. As of June 30, 2008, we
have accrued approximately $195 of accrued interest and
penalties related to uncertain tax positions at June 30,
2008 which are included as a component of the total unrecognized
tax benefit of approximately $1,531.
The Company operates in and files income tax returns in various
jurisdictions in the Philippines and the United States
which are subject to examination by tax authorities. With few
exceptions, the Company is no longer subject to US federal and
state or Philippine income tax examinations before 2004. As of
June 30, 2008, the Company was under income tax audit in
the State of Arizona for our
2004-2006 years.
Although there can be no assurance as to the ultimate
disposition, we believe that the outcome of this audit will not
have a material effect on our financial position, results of
operation or cash flows.
Although substantially all of the Companys revenue is
derived principally from client contracts that are invoiced and
collected in U.S. dollars, a significant portion of the
Companys cost of services and selling and administrative
expenses is incurred and paid in Philippine pesos. Accordingly,
the Companys results of operations and cash flows are
affected by an increase in the value of the Philippine peso
relative to the U.S. dollar, the functional and reporting
currency of eTelecare and its subsidiaries. To partially hedge
against currency changes between the Philippine peso and the
U.S. dollar, eTelecare has implemented a hedging strategy,
beginning in August 2007. This strategy consists of a rolling
hedge program that entails contracting with third-party
financial institutions to acquire zero cost, non-deliverable
forward contracts that are expected to cover approximately 80%
of Philippine peso-denominated forecasted expenses for the
current quarter, 60% of the forecasted peso expenses for the
next quarter, 40% of the forecasted peso expenses for two
quarters out and finally, 20% of forecasted peso expenses for
three quarters out. For 2008, however, the Company modified the
application of this strategy to hedge approximately 90% of
forecasted Philippine peso-denominated expenses. For 2009
forecasted Philippine peso-denominated expenses, the Company has
resumed the rolling hedge program and, as of June 30, 2008,
approximately 40% and 20% of the first quarter and second
quarter 2009 forecasted peso expenses, respectively, have been
hedged.
The foreign currency forward contracts that are used to hedge
this exposure are designated as cash flow hedges in accordance
with the criteria established in Statement of Financial
Accounting Standards No. 133 Accounting for
Derivative Instruments and Hedging Activities
(SFAS 133). SFAS 133 requires that a
company must formally document, designate and assess the
effectiveness of transactions that receive hedge accounting
treatment. For accounting purposes, effectiveness refers to the
cumulative changes in the fair value of the derivative
instrument being highly correlated to the inverse changes in the
fair value of the hedged item. Based on the criteria established
by SFAS 133, all of the Companys cash flow hedge
contracts are deemed effective. If any ineffectiveness arises,
it will be recorded within Foreign Exchange Gain (Loss) on the
Consolidated Statement of Operations. The derivative instrument
is recorded in the Companys Consolidated Balance Sheets as
either an asset or liability measured at its fair value, with
changes in the fair value of qualifying hedges recorded in
Accumulated Other Comprehensive Income (Loss), a component of
Stockholders Equity. The settlement of these derivatives
will result in reclassifications from Accumulated Other
Comprehensive Income (Loss) to earnings in the period during
which the hedge transaction affects earnings. While the Company
expects that its derivative instruments will continue to meet
the conditions for hedge accounting, if the hedges did not
qualify as highly effective or if the Company did not believe
that forecasted transactions would occur, the changes in the
fair value of the derivatives used as hedges would be reflected
currently in earnings.
7
eTelecare
Global Solutions, Inc. and Subsidiaries
Notes to
Unaudited Consolidated Financial
Statements (Continued)
As of June 30, 2008, the notional amount of the outstanding
derivative instruments designated for hedge accounting is
summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Local
|
|
|
|
|
|
Dates
|
|
|
|
Currency
|
|
|
U.S. Dollar
|
|
|
Contracts are
|
|
|
|
Amount
|
|
|
Amount
|
|
|
Through
|
|
|
Philippine Peso
|
|
|
3,525,300
|
|
|
$
|
83,650
|
|
|
|
June-2009
|
|
These derivatives are classified as Fair Value of Derivatives of
($7,287) and $3,153 as of June 30, 2008, and
December 31, 2007, respectively, in the accompanying
Consolidated Balance Sheets.
A total of ($7,287) of deferred losses, net of tax of $0, on
derivative instruments as of June 30, 2008, was recorded in
Accumulated Other Comprehensive Income (Loss) in the
accompanying Consolidated Balance Sheets. The Company expects
that all of this deferred loss will be reclassified into
earnings within the next 12 months.
For the three months ended June 30, 2008 and 2007, the
Company recorded a loss of ($32) and $0, respectively, for
settled hedge contracts. For the six months ended June 30,
2008 and 2007, the Company recorded a gain of $1,759 and $0,
respectively, for settled hedge contracts. These gains and
losses are reflected in Costs and Expenses in the accompanying
Consolidated Statements of Operations.
The Company also entered into foreign exchange forward contracts
to reduce the short-term effect of foreign currency fluctuations
related to approximately $15 million of accrued liabilities
that are denominated in Philippine peso. The gains and losses on
these forward contracts are intended to offset the transaction
gains and losses on the Philippine peso obligations. These gains
and losses are recognized in earnings as the Company elected not
to classify the contracts for hedge accounting treatment. The
value of these contracts was ($339) and $376 as of June 30,
2008 and December 31, 2007, respectively, and is recorded
as a component of Fair Value of Derivatives in the accompanying
Consolidated Balance Sheets. For the three months ended
June 30, 2008 and 2007, the Company realized ($1,029) and
$0 of losses, respectively, on these contracts. For the six
months ended June 30, 2008 and 2007, the Company realized
($1,264) and $0, respectively, of losses on these contracts. The
gains and losses on these contracts are recorded within Foreign
Exchange Gain (Loss) on the accompanying Consolidated Statements
of Operations.
|
|
4.
|
Fair
Value Measurements
|
The Company adopted Statement of Financial Accounting Standards
No. 157, Fair Value Measurements
(SFAS 157) on January 1, 2008 for all
financial assets and liabilities and non-financial assets and
liabilities that are recognized or disclosed at fair value in
the financial statements on a recurring basis. SFAS 157
defines fair value, establishes a consistent framework for
measuring fair value and expands disclosure requirements about
fair value measurements. SFAS 157 does not change the
accounting for those instruments that were, under previous GAAP,
accounted for at cost or contract value. In February 2008, the
FASB issued staff position
No. 157-2
(FSP 157-2),
which delays the effective date of SFAS 157 one year for
all non-financial assets and non-financial liabilities, except
those recognized or disclosed at fair value in the financial
statements on a recurring basis. The company has no
non-financial assets and liabilities that are required to be
measured at fair value on a recurring basis as of June 30,
2008.
The Company holds derivatives, which must be measured using the
SFAS 157 prescribed fair value hierarchy and related
valuation methodologies. SFAS 157 specifies a hierarchy of
valuation techniques based on whether the inputs to each
measurement are observable or unobservable. Observable inputs
reflect market data obtained from independent sources, while
unobservable inputs reflect the Companys assumptions about
current market conditions. The prescribed fair value hierarchy
and related valuation methodologies are as follows:
8
eTelecare
Global Solutions, Inc. and Subsidiaries
Notes to
Unaudited Consolidated Financial
Statements (Continued)
Level 1
Quoted prices for identical
instruments in active markets.
Level 2
Quoted prices for similar
instruments in active markets, quoted prices for identical or
similar instruments in markets that are not active and
model-derived valuations, in which all significant inputs are
observable in active markets.
Level 3
Valuations derived from
valuation techniques, in which one or more significant inputs
are unobservable.
As of June 30, 2008, the fair value of the Companys
financial assets and liabilities was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative assets
|
|
|
|
|
|
$
|
14
|
|
|
|
|
|
|
$
|
14
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities
|
|
|
|
|
|
$
|
(7,640
|
)
|
|
|
|
|
|
$
|
(7,640
|
)
|
Valuation
Methodologies
In determining the fair value of the Companys foreign
currency derivatives, the Company uses forward contract and
option valuation models employing market observable inputs, such
as spot and forward currency rates, and time value. Since the
Company only uses observable inputs in its valuation of its
derivative assets and liabilities, they are considered
Level 2.
The computation of basic and diluted earnings per share is as
follows (in thousands except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Net income
|
|
$
|
645
|
|
|
$
|
5,974
|
|
|
$
|
2,516
|
|
|
$
|
11,187
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares outstanding for basic earnings per share
|
|
|
29,085
|
|
|
|
28,547
|
|
|
|
29,063
|
|
|
|
25,535
|
|
Potential common shares issuable upon exercise of stock options
|
|
|
1,058
|
|
|
|
3,416
|
|
|
|
1,199
|
|
|
|
3,427
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average diluted shares
|
|
|
30,143
|
|
|
|
31,963
|
|
|
|
30,262
|
|
|
|
28,962
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
0.02
|
|
|
$
|
0.21
|
|
|
$
|
0.09
|
|
|
$
|
0.44
|
|
Diluted earnings per share
|
|
$
|
0.02
|
|
|
$
|
0.19
|
|
|
$
|
0.08
|
|
|
$
|
0.39
|
|
Potential common shares issuable upon exercise of stock options
excluded 1.1 million shares for the three and six months
ended June 30, 2008 and 0.9 million and
0.8 million for the three and six months ended
June 30, 2007, respectively, as the effect was antidilutive.
On September 3, 2007 (the Effective Date), the
Company amended its Articles of Incorporation to reflect a
change in the number of its authorized common shares from
130,000,000 common shares to 65,000,000 common shares to enable
us to effect a two-for-one reverse split of the outstanding
common shares.
On the Effective Date, every two outstanding common shares of
the Company were reconstituted into one common share of the
Company. This modification to the authorized and outstanding
common shares did not affect the rights or the number of the
Companys outstanding American Depositary Shares
(ADSs), except that each
9
eTelecare
Global Solutions, Inc. and Subsidiaries
Notes to
Unaudited Consolidated Financial
Statements (Continued)
outstanding ADS now represents one common share, resulting in an
ADS-to-common shares ratio of one-to-one instead of the prior
ADS-to-common shares ratio of one-to-two.
All references contained in these financial statements to
amounts of outstanding shares of common stock or ADSs give
effect to this two-for-one reverse stock split.
The Company is a defendant in the employment matter of James
Dreyfuss vs. ETelecare Global Solutions-US, Inc. filed in
the United States District Court, Southern District of New York
on February 4, 2008. In the matter, James Dreyfuss, who
served as our Regional Vice President of Sales, has asserted the
following claims against the company: (1) two counts of
breach of contract; (2) violation of New York Labor Law
Sections 190 et seq. (3) quantum merit;
(4) unjust enrichment; (5) breach of covenant of good
faith and fair dealing; and (6) promissory estoppel.
Mr. Dreyfuss seeks compensatory damages in an amount to be
proven at trial, penalties under New York Labor Law
Section 198, pre- and post-judgment interest and costs and
expenses for such suit, including attorneys fees. We filed
a motion to compel arbitration on April 7, 2008 and filed a
brief in support of such motion on July 16, 2008 and are
now in the early stages of discovery. While we cannot predict
with certainty the outcome of the litigation, the Company does
not believe a liability is probable; therefore, no liability has
been recorded in the financial statements.
The Company is subject to other legal proceedings and claims,
which have arisen in the ordinary course of its business.
Although there can be no assurance as to the ultimate
disposition of these matters and the proceedings disclosed
above, it is the opinion of the Companys management, based
upon the information available at this time, that the expected
outcome of these matters, individually or in the aggregate, will
not have a material adverse effect on the Companys results
of operations or financial position.
On August 12, 2008, the Company entered into a share
purchase agreement (the SPA) and a shareholders
agreement (the SA) with Almori BPO Services, Inc., a
Texas corporation (Almori) for the purchase of a 70%
interest in eTelecare Global Solutions Nicaragua, S.A.
(eTelecare Nicaragua) which will operate as a call
center based in Nicaragua. In aggregate the Company will make an
investment of $2.1 million for the purchase of the interest
and as a capital contribution to eTelecare Nicaragua. Almori
will own the remaining 30% interest in consideration for an
initial capital contribution of $0.9 million. In addition,
the Company will make a $5.0 million line of credit
available to eTelecare Nicaragua for the initial build-out of
the facility and
ramp-up
of
operations.
On August 13, 2008, the Company received a complaint styled
Peter Mikhalev v. eTelecare Global Solutions, Inc. et al
filed on August 7, 2008 in the Los Angeles County Superior
Court. The complaint alleges that the Company delayed in
allowing Mikhalev to convert common shares then owned by him
into ADSs resulting in a diminution in value of such
shares. The complaint seeks damages for conversion, interest,
punitive damages and costs. The Company has not had the
opportunity to evaluate the complaint or consult with legal
counsel as of the date of this filing.
10
|
|
ITEM 2:
|
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
|
This Managements Discussion and Analysis of Financial
Condition and Results of Operations should be read together with
the unaudited consolidated financial statements and related
notes appearing in Item 1 of this report on
Form 10-Q
and the section entitled Managements Discussion and
Analysis of Financial Condition and Results of Operations
and our audited financial statements for the year-ended
December 31, 2007 included in our annual report on
Form 10-K
previously filed with the Securities and Exchange Commission on
March 14, 2008.
This report on
Form 10-Q
contains forward-looking statements. These statements include
but are not limited to our expectations that clients are
increasingly looking for vendors that provide business process
outsourcing, or BPO, services from multiple locations, our
anticipated growth in our business, anticipated increase in our
selling and administrative expenses, our anticipated effective
tax rate for 2008, the potential to obtain extensions on
Philippine tax holidays, our anticipated capital expenditures in
2008, and our belief regarding the adequacy of our capital
resources over the next 12 months. Forward-looking
statements are subject to risks and uncertainties that could
cause actual results to differ materially from those discussed
in these forward-looking statements. These risks and
uncertainties include, but are not limited to, our ability to
attract and retain enough sufficiently trained customer service
associates and other personnel, our ability to maintain our
pricing, utilize our employees and assets efficiently and
maintain and improve the current mix of services that we deliver
from our offshore locations, our ability to compete effectively
with onshore and offshore BPO companies and with information
technology companies that also offer BPO services and our
ability to manage our growth effectively and maintain effective
internal processes. Additional risks and uncertainties include
those listed under Item 1A, Risk Factors and
those that are contained in our quarterly report on Form 10-Q
for the three months ended March 31, 2008. eTelecare Global
Solutions, Inc. expressly disclaims any obligation or
undertaking to release publicly any updates or revisions to any
forward-looking statements contained in this report to conform
these statements to actual results or changes in our
expectations or in events, conditions or circumstances on which
any such statement is based. You should not place undue reliance
on these forward-looking statements, which apply only as of the
date hereof.
Introduction
Our Managements Discussion and Analysis is intended to
facilitate an understanding of our business and results of
operations and consists of the following sections:
|
|
|
|
|
Overview: a summary of our business;
|
|
|
|
Results of Operations: a discussion of our operating results;
|
|
|
|
Liquidity and Capital Resources: an analysis of our cash flows,
sources and uses of cash and financial position;
|
Overview
We are a leading provider of business process outsourcing, or
BPO, services focusing on the complex, voice-based segment of
customer care services delivered from both onshore and offshore
locations. We provide a range of services including technical
support, financial advisory services, warranty support, customer
service, sales and customer retention. Our services are
delivered from seven delivery centers in the Philippines and
seven delivery centers in the United States, with approximately
10,200 employees in the Philippines and approximately
3,000 employees in the United States as of June 30,
2008.
We completed our initial public offering in the United States on
April 2, 2007 in the form of 5,500,000 American Depositary
Shares, or ADS. Our ADS are listed on the NASDAQ Global
Market. Our initial public offering raised $69.1 million,
net of underwriting discounts and commissions and offering
costs. On April 5, 2007, we received additional proceeds of
$10.3 million, net of underwriting discounts and
commissions and offering costs of $844,000, as a result of the
exercise by our underwriters of their over-allotment option to
purchase an additional 825,000 ADSs from us. In April 2007, we
used an aggregate of $36.3 million from these proceeds to
repay outstanding debt. In late November 2007, we completed our
listing by way of introduction on the Philippine Stock Exchange.
We currently are a foreign private issuer under the applicable
rules and regulations in the United States.
11
However, we voluntarily elect to file our periodic and current
company reports under the Exchange Act in accordance with the
rules and regulations applicable to a U.S. issuer.
Results
of Operations for the Three and Six Months Ended June 30,
2008 and 2007
The following table sets forth our unaudited historical
operating results, as a percentage of revenue for the periods
indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Six Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Consolidated Statements of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service revenue
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Cost and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of services (exclusive of depreciation shown separately
below)
|
|
|
76.3
|
|
|
|
70.4
|
|
|
|
75.1
|
|
|
|
69.4
|
|
Selling and administrative expenses
|
|
|
15.0
|
|
|
|
13.2
|
|
|
|
15.4
|
|
|
|
13.6
|
|
Depreciation and amortization
|
|
|
7.5
|
|
|
|
5.7
|
|
|
|
7.5
|
|
|
|
5.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost and expenses
|
|
|
98.8
|
|
|
|
89.3
|
|
|
|
98.0
|
|
|
|
88.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
1.2
|
|
|
|
10.7
|
|
|
|
2.0
|
|
|
|
11.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense and financing charges
|
|
|
(0.2
|
)
|
|
|
(0.2
|
)
|
|
|
(0.1
|
)
|
|
|
(1.4
|
)
|
Interest income
|
|
|
0.3
|
|
|
|
0.7
|
|
|
|
0.3
|
|
|
|
0.3
|
|
Foreign exchange gain
|
|
|
|
|
|
|
(0.7
|
)
|
|
|
|
|
|
|
(0.6
|
)
|
Other
|
|
|
(0.1
|
)
|
|
|
(0.1
|
)
|
|
|
(0.1
|
)
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net other income (expenses)
|
|
|
|
|
|
|
(0.3
|
)
|
|
|
0.1
|
|
|
|
(1.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax provision
|
|
|
1.2
|
|
|
|
10.4
|
|
|
|
2.1
|
|
|
|
9.7
|
|
Income tax provision
|
|
|
0.3
|
|
|
|
0.7
|
|
|
|
0.4
|
|
|
|
0.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
0.9
|
%
|
|
|
9.7
|
%
|
|
|
1.7
|
%
|
|
|
9.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service Revenue.
We generate revenue from the
customer care and other BPO programs we administer for our
clients. We provide our services to clients under contracts that
typically consist of a master services agreement, which contains
the general terms and conditions of our client relationship, and
a statement of work, which describes in detail the terms and
conditions of each program we administer for a client. Our
contracts with our clients typically have a term of one year and
can be terminated earlier by our clients or us without cause,
typically upon 30 to 90 days notice. Although the
contractual commitments from our clients are short, our client
relationships tend to be longer-term given the scale and
complexity of the services we provide coupled with the risk and
costs to our clients associated with bringing business processes
in-house or outsourcing them to another provider. For the same
reasons, our sales cycle tends to range from six to
12 months.
The outsourcing industry is extremely competitive, and
outsourcers have historically competed based on pricing terms.
Accordingly, we could be subject to pricing pressure and may
experience a decline in our average selling prices for our
services. We attempt to mitigate this pricing pressure by
differentiating ourselves from our competition based on the
value we bring to our clients through the quality of our
services and our ability to provide quantifiable results that
our clients can measure against our competitors. We provide a
sales proposition to a client based on quantifiable value per
dollar spent by the client on our services. For example, we work
with the client to quantify the costs to the client of
activities such as the time it takes to handle a call, repeat
calls, parts dispatches and cancelled sales. We similarly work
with a client to quantify the value from initial product sales,
sales of products complimentary or more expensive than the
products in which a customer is originally interested and repeat
purchasing based on customer satisfaction. This information on
costs and value created is combined to develop a
12
value created per dollar spent model on which both the client
and we agree in order to set the price for our services in our
contract. We then assess our performance against this model on a
quarterly basis and share our results measured by these metrics
with our client on a quantified scorecard. This gives our client
a means of comparing the value we created per dollar spent on us
to the same metrics for our clients internal business
process centers or other outsourcers.
We derive our revenue primarily through time-delineated or
session-based fees, including hourly or per-minute charges and
charges per interaction, which are separately negotiated on a
client-by-client
basis. In some contracts, we are paid higher rates if we meet
specified performance criteria, which are based on objective
performance metrics that our client agrees would add
quantifiable value to their operations. These payment
arrangements can take many forms, including additional payments
to us based on the number of confirmed sale transactions we make
on behalf of a client or based on meeting customer satisfaction
targets. Bonuses are typically 5% to 10% of revenue for a
program. Conversely, some of our contracts include provisions
that provide for downward revision of our prices under certain
circumstances, such as if the average speed required to answer a
call is longer than agreed to with the client. Downward
revisions are typically limited to a maximum of 5% of revenue
for a program. All of our bonus and downward revision provisions
are negotiated at the time that we sign a statement of work with
a client and our revenue from our contracts is thus fixed and
determinable at the end of each month.
We currently derive substantially all of our revenue from
U.S.-based
clients. We receive most of our revenue from a small number of
clients, with an aggregate of approximately 81% and 84%,
respectively, of our revenue from our five largest clients for
the six months ended June 30, 2008 and 2007. For the three
and six months ended June 30, 2008, the Company had three
clients that each contributed more than 10% of revenue,
including AT & T, representing 27% and 26%,
respectively, of revenue, Sprint, representing 22% and 21%,
respectively, of revenue, and Dell, representing 19% and 19% of
revenue. We often administer multiple programs for a single
client with separate contracts or statements of work that
sometimes are negotiated with separate parts of the client
organization, which we view as being different clients for
practical purposes. For example, we perform four separate
programs for AT & T for two separate AT & T
business units.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
|
|
|
Ended
|
|
|
|
|
|
|
June 30,
|
|
|
Increase (Decrease)
|
|
|
|
2008
|
|
|
2007
|
|
|
$
|
|
|
%
|
|
|
Service revenue
|
|
$
|
75,392
|
|
|
$
|
61,426
|
|
|
$
|
13,966
|
|
|
|
23
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
|
|
|
|
Ended
|
|
|
|
|
|
|
June 30,
|
|
|
Increase (Decrease)
|
|
|
|
2008
|
|
|
2007
|
|
|
$
|
|
|
%
|
|
|
Service revenue
|
|
$
|
148,639
|
|
|
$
|
123,536
|
|
|
$
|
25,103
|
|
|
|
20
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our revenue growth was primarily driven by an expansion of work
with existing clients delivered from both our Philippine and
U.S. locations.
Cost of services.
Cost of services consists
primarily of the salaries, payroll taxes and employee benefit
costs of our customer service associates and other operations
personnel. Cost of services also includes direct communications
costs, rent expense, information technology costs, facilities
support and customer management support costs related to the
operation of our delivery centers. We expense these costs as
incurred.
Our cost of services is most heavily impacted by prevailing
salary levels. Although we have not been subject to significant
wage inflation in the Philippines or the United States, any
significant increase in the market rate for wages could harm our
operating results and our operating margin.
We often incur significant costs in the early stages of
implementation or in anticipation of meeting a current
clients forecasted demand for our services, with the
expectation that these costs will be recouped over the life of
the program, thereby enabling us to achieve our targeted
returns. Similarly, we may also be required to increase
recruiting and training costs to prepare our customer service
associates for a specific type of service. Such costs are
13
expensed as incurred. If we undertake additional recruiting and
training programs and our client terminates a program early or
does not meet its forecasted demand, our operating margin could
decline.
Our cost of services is also impacted by our ability to manage
and employ our customer service associates efficiently. Our
workforce management group continuously monitors staffing
requirements in an effort to ensure efficient use of these
employees. Although we generally have been able to reallocate
our customer service associates as client demand has fluctuated,
an unanticipated termination or significant reduction of a
program by a major client may cause us to experience a
higher-than-expected number of unassigned customer service
associates.
Our efficient use of customer service associates is also
impacted by seasonal changes in the operations of our clients,
which impact the level of services our clients require. For
example, the amount of technical support and financial services
we provide has traditionally been greater during the fourth
quarter of each year driven by increased customer spending
during the holiday season. This demand trends down slightly
during the first quarter of each year with demand for these same
services typically declining significantly during the second
quarter of each year. As a result, the fourth quarter of each
year is typically our period of highest demand, while the second
quarter of each year is typically our period of lowest demand.
We believe that our clients are increasingly looking for vendors
that provide BPO services from multiple geographic locations.
This allows clients to manage fewer vendors while minimizing
geopolitical risk and risk to operations from natural disasters.
Moreover, clients ultimately willing to have service operations
offshore may not be willing to do so initially or at any time
completely. To address this demand we have service operations in
both the U.S and the Philippines. An important element of our
multi-shore service offering is our ability to migrate clients
offshore over time. This allows clients to gain confidence in
the quality of our services before shifting services to our
offshore delivery locations. This migration strategy both lowers
costs for our clients and improves our financial performance.
Our costs associated with our U.S. operations are higher
than those we experience in the Philippines. If we fail to
migrate our clients to our offshore delivery locations or if our
offshore growth rates decline compared to our onshore growth
rates, our operating margin could decline.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
|
|
|
Ended
|
|
|
|
|
|
|
June 30,
|
|
|
Increase (Decrease)
|
|
|
|
2008
|
|
|
2007
|
|
|
$
|
|
|
%
|
|
|
Cost of services (exclusive of depreciation and amortization
shown separately below)
|
|
$
|
57,491
|
|
|
$
|
43,242
|
|
|
$
|
14,249
|
|
|
|
33
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of revenue
|
|
|
76
|
%
|
|
|
70
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
|
|
|
|
Ended
|
|
|
|
|
|
|
June 30,
|
|
|
Increase (Decrease)
|
|
|
|
2008
|
|
|
2007
|
|
|
$
|
|
|
%
|
|
|
Cost of services (exclusive of depreciation and amortization
shown separately below)
|
|
$
|
111,651
|
|
|
$
|
85,777
|
|
|
$
|
25,874
|
|
|
|
30
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of revenue
|
|
|
75
|
%
|
|
|
69
|
%
|
|
|
|
|
|
|
|
|
The absolute dollar increase in cost of services in the three
and six months ended June 30, 2008 compared to the three
and six months ended June 30, 2007 was primarily related to
the increase in service revenue of 23% and 20% in each
comparative period. The increase in cost of services as a
percentage of revenue was primarily due to the significant
strengthening of the Philippine peso compared to the
U.S. dollar which resulted in an increase of approximately
5% of our total operating expenses in the three and six months
ended June 30, 2008 compared to the same periods in the
prior year primarily impacting our cost of services. Because
substantially all of our service revenue is denominated in
U.S. dollars and 54% and 47% of our cost of services in the
three months ended June 30, 2008 and 2007, respectively,
and 54% and 43% of our cost of services in the six months ended
June 30, 2008 and 2007, respectively, were generated in the
Philippines substantially all of which were paid in Philippine
pesos, the effective net costs of our services has increased as
the peso strengthens against the U.S. dollar. This increase
was
14
partially offset by the expanded use of our lower-cost
Philippine operations, which despite the strengthening peso
continues to show significant cost advantages over our
U.S. operations. To a lesser extent, other increases
included:
|
|
|
|
|
investment in our global information technology resources; and,
|
|
|
|
site expansion in the Philippines to support our revenue growth.
|
Selling and administrative expenses.
Selling
and administrative expenses consist primarily of our sales and
administrative employee-related expenses, sales commissions,
professional fees, travel costs, marketing programs and other
corporate expenses. Substantially all of our share-based
compensation expense is included in selling and administrative
expenses. We expect selling and administrative expenses to
increase as we add personnel and incur additional fees and costs
related to the growth of our business and our operation as a
publicly traded company in the United States and the Philippines.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
|
|
|
Ended
|
|
|
|
|
|
|
June 30,
|
|
|
Increase (Decrease)
|
|
|
|
2008
|
|
|
2007
|
|
|
$
|
|
|
%
|
|
|
Selling and administrative expenses
|
|
$
|
11,324
|
|
|
$
|
8,115
|
|
|
$
|
3,209
|
|
|
|
40
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of revenue
|
|
|
15
|
%
|
|
|
13
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
|
|
|
|
Ended
|
|
|
|
|
|
|
June 30,
|
|
|
Increase (Decrease)
|
|
|
|
2008
|
|
|
2007
|
|
|
$
|
|
|
%
|
|
|
Selling and administrative expenses
|
|
$
|
22,893
|
|
|
$
|
16,829
|
|
|
$
|
6,064
|
|
|
|
36
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of revenue
|
|
|
15
|
%
|
|
|
14
|
%
|
|
|
|
|
|
|
|
|
The absolute dollar increase in selling and administrative
expenses in three and six months ended June 30, 2008
compared to the comparative periods in 2007 was primarily due to
additional salaries, wages and benefits, consulting fees, travel
expenses, and equity compensation expenses. We hired additional
personnel to support our growth and to enhance our executive
team and professional staff as we expanded our Philippine
operations and became a publicly traded company in the United
States and the Philippines. Share-based compensation included in
selling and administrative expenses was $0.9 million and
$0.5 million in the three months ended June 30, 2008
and 2007, respectively, and $1.7 million and
$0.9 million for the six months ended June 30, 2008
and 2007, respectively, which represented 1% of revenue in each
period. Also included in selling and administrative costs in the
three and six months ended June 30, 2008 was
$1.2 million associated with due diligence expenditures
related to a potential business acquisition that we decided not
to pursue to conclusion.
Selling and administrative costs increased as a percentage of
revenue due to increases in our service delivery administrative
expenses as we invested in the management teams of our centers
and finance functions as we began operations as a publicly
traded company in the U.S. We expect selling and
administrative expenses to increase slightly in the remainder of
2008 in absolute dollars compared to the second quarter 2008
excluding due diligence related costs as we add personnel to
support our growth and incur additional costs related to our
operation as a publicly traded company in the United States.
Impact of Foreign Currency.
As a result of our
multi-shore delivery model, 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. Substantially all of our revenue is denominated in
U.S. dollars, but a significant amount of our expenses is
denominated in Philippine pesos. In the three month ended
June 30, 2008 and 2007, 52% and 45%, respectively, and in
the six months ended June 30, 2008 and 2007, 51% and 41%,
respectively, of our cost of services and selling and
administrative expenses were generated in the Philippines
substantially all of which were paid in Philippine pesos.
Prior to our initial public offering, our outstanding debt
included covenants that prohibited the Company from entering
foreign currency hedging transactions. Upon completion of the
initial public offering in the first quarter of 2007, the
Company used a portion of the proceeds to pay off the
outstanding debt and negotiated terms that allowed
15
foreign currency hedging. As a result, in the third quarter of
2007, we initiated a strategy to hedge against short-term
foreign currency fluctuations. This strategy consists of a
rolling hedge program that entails contracting with third-party
financial institutions to acquire zero cost, non-deliverable
forward contracts.
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 our
assets, which generally range from three 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 asset is less than
its estimated depreciable life, we would record additional
depreciation expense or a loss on disposal to the extent the net
book value of the asset is not recovered upon sale.
Our depreciation is primarily driven by large investments in
capital equipment required for our continued expansion,
including the build-out of seats, which we define as
workstations where customer service associates generate revenue.
These expenditures include tenant improvements to new
facilities, furniture, information technology infrastructure,
computers and software licenses and generally range from $8,000
to $12,000 per seat depending on specific client requirements.
These costs are generally depreciated over a period of three to
five years and are substantially the same in the United States
and the Philippines. The effect of our depreciation and
amortization on our operating margin is impacted by our ability
to manage and utilize our seats efficiently. We seek to expand
our seat capacity only after receiving contractual commitments
from our clients. However, we have in the past increased our
seat capacity based on forecasted demand projections from our
clients, which are not contractual commitments. This has
resulted in a surplus of seats, which has increased our
depreciation and, to a limited extent, reduced our operating
margin. As a general matter, the efficiency of our use of seats
has had less of an impact on our operating margin than the
efficiency of our deployment of our customer service associates.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
|
|
|
Ended
|
|
|
|
|
|
|
June 30,
|
|
|
Increase (Decrease)
|
|
|
|
2008
|
|
|
2007
|
|
|
$
|
|
|
%
|
|
|
Depreciation and amortization
|
|
$
|
5,679
|
|
|
$
|
3,494
|
|
|
$
|
2,185
|
|
|
|
63
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of revenue
|
|
|
8
|
%
|
|
|
6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
|
|
|
|
Ended
|
|
|
|
|
|
|
June 30,
|
|
|
Increase (Decrease)
|
|
|
|
2008
|
|
|
2007
|
|
|
$
|
|
|
%
|
|
|
Depreciation and amortization
|
|
$
|
11,194
|
|
|
$
|
7,037
|
|
|
$
|
4,157
|
|
|
|
59
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of revenue
|
|
|
8
|
%
|
|
|
6
|
%
|
|
|
|
|
|
|
|
|
The increase in depreciation and amortization was due to
continued expansion of our facilities and infrastructure to
support the growth of our operations.
Income
from operations; operating margin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
|
|
|
Ended
|
|
|
|
|
|
|
June 30,
|
|
|
Increase (Decrease)
|
|
|
|
2008
|
|
|
2007
|
|
|
$
|
|
|
%
|
|
|
Income from operations
|
|
$
|
898
|
|
|
$
|
6,575
|
|
|
$
|
(5,677
|
)
|
|
|
(86
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating margin
|
|
|
1
|
%
|
|
|
11
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
|
|
|
|
Ended
|
|
|
|
|
|
|
June 30,
|
|
|
Increase (Decrease)
|
|
|
|
2008
|
|
|
2007
|
|
|
$
|
|
|
%
|
|
|
Income from operations
|
|
$
|
2,901
|
|
|
$
|
13,893
|
|
|
$
|
(10,992
|
)
|
|
|
(79
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating margin
|
|
|
2
|
%
|
|
|
11
|
%
|
|
|
|
|
|
|
|
|
16
The decrease in operating margin in the three and six month
ended June 30, 2008 compared to the comparative periods in
the prior year was principally the result of an increase in our
cost of services, which increased at a faster rate than did
revenues. The operating margin was primarily impacted by the
increase in cost of services due to the significant
strengthening of the Philippine peso compared to the
U.S. dollar when comparing the three and six months ending
June 30, 2008 to the comparable periods in the prior year.
Other decreases to the operating margin were due to:
|
|
|
|
|
the investment in our global information technology resources;
|
|
|
|
upgrades and site expansion in the Philippines to support our
revenue growth; and,
|
|
|
|
due diligence expenditures of $1.2 million related to a
potential business acquisition that we decided not to pursue to
conclusion.
|
These decreases to our operating margin were partially offset by
the expanded use of our lower-cost Philippine operations, which
despite the strengthening peso continues to show significant
cost advantages over our U.S. operations.
Other Income (Expenses).
Interest and other
income (expense), net includes mainly interest income, interest
expense and gains and losses on foreign currency transactions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
|
|
|
Ended
|
|
|
|
|
|
|
June 30,
|
|
|
Increase (Decrease)
|
|
|
|
2008
|
|
|
2007
|
|
|
$
|
|
|
%
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense and financing charges
|
|
$
|
(130
|
)
|
|
$
|
(121
|
)
|
|
$
|
(9
|
)
|
|
|
(7
|
)%
|
Interest income
|
|
|
227
|
|
|
|
427
|
|
|
|
(150
|
)
|
|
|
(35
|
)%
|
Foreign exchange gain (loss)
|
|
|
29
|
|
|
|
(422
|
)
|
|
|
451
|
|
|
|
107
|
%
|
Other
|
|
|
(90
|
)
|
|
|
(35
|
)
|
|
|
(55
|
)
|
|
|
(157
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net other income (expense)
|
|
$
|
36
|
|
|
$
|
(151
|
)
|
|
$
|
237
|
|
|
|
157
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of revenue
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
|
|
|
|
Ended
|
|
|
|
|
|
|
June 30,
|
|
|
Increase (Decrease)
|
|
|
|
2008
|
|
|
2007
|
|
|
$
|
|
|
%
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense and financing charges
|
|
$
|
(219
|
)
|
|
$
|
(1,755
|
)
|
|
$
|
1,536
|
|
|
|
(88
|
)%
|
Interest income
|
|
|
411
|
|
|
|
427
|
|
|
|
(16
|
)
|
|
|
(4
|
)%
|
Foreign exchange gain (loss)
|
|
|
65
|
|
|
|
(684
|
)
|
|
|
749
|
|
|
|
(110
|
)%
|
Other
|
|
|
(96
|
)
|
|
|
148
|
|
|
|
(244
|
)
|
|
|
(165
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net other income (expense)
|
|
$
|
161
|
|
|
$
|
(1,864
|
)
|
|
$
|
2,025
|
|
|
|
109
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of revenue
|
|
|
0
|
%
|
|
|
(2
|
)%
|
|
|
|
|
|
|
|
|
Interest expense and financing charges decreased significantly
in the six months ended June 30, 2008 compared to the
comparative period in the prior year because of the repayment of
our debt using the proceeds of our initial public offering.
We are exposed to short-term currency fluctuations with respect
to Philippine peso-denominated accrued liabilities on our
balance sheet. The volatility of our foreign exchange (loss)
gain relating to these fluctuations was reduced in the three and
six months ended June 30, 2008 due to our hedging strategy
which we initiated in the third quarter of 2007.
17
Provision for income taxes.
For the second
quarter of 2008, our effective tax rate was 31%, compared to 7%
for the second quarter of 2007. The effective tax rate for the
second quarter of 2008 included a favorable impact for one-time
discrete benefits totaling $127, or 14%. These discrete benefits
recognized in the second quarter of 2008 related to the
recognition of previously unrecognized income tax benefits due
to the close of 2004 Philippines statute of limitations and the
reduction of our 2007 Philippines tax liability due to a
favorable tax ruling received. The increase in the effective tax
rate compared to the second quarter of 2007 resulted primarily
from a decline in Philippine profitability year-over-year. This
decline in Philippine profitability, due primarily to higher
costs in 2008 driven from a stronger Philippine peso versus the
US dollar, created a lower mix of profits subject to the
Philippine tax holidays and a higher mix of profits subject to
U.S. federal and state taxes. This mix shift of taxable
profits between jurisdictions, combined with tax benefits
received in 2007 for the one quarter of interest expense
deductions incurred prior to the payoff of debt with the
proceeds of our initial public offering, resulted in a higher
effective tax rate for the second quarter of 2008 and a higher
expected annual effective tax rate for the full year 2008.
For the six months ending June 30, 2008, our effective tax
rate was 18%, compared to 7% for the first six months of 2007.
The effective tax rate for the six months ended June 30,
2008 included a favorable impact for one-time discrete benefits
totaling $127, or 4%. These discrete benefits recognized during
the six months ended June 30, 2008 related to the
recognition of previously unrecognized income tax benefits due
to the close of 2004 Philippines statute of limitations and the
reduction of our 2007 Philippines tax liability due to a
favorable tax ruling received. The increase in the effective tax
rate compared to the six months ended June 30, 2007
resulted primarily from a decline in Philippine profitability
year-over-year. This decline in Philippine profitability, due
primarily to higher costs in 2008 driven from a stronger
Philippine peso versus the US dollar, created a lower mix of
profits subject to the Philippine tax holidays and a higher mix
of profits subject to U.S. federal and state taxes. This
mix shift of taxable profits between jurisdictions, combined
with tax benefits received in 2007 for the one quarter of
interest expense deductions incurred prior to the payoff of debt
with the proceeds of our initial public offering, resulted in a
higher effective tax rate for the second quarter of 2008 and a
higher expected annual effective tax rate for the full year 2008.
Liquidity
and Capital Resources
We have financed our operations primarily with cash from
operations, proceeds from our initial public offering in the
United States, proceeds from our loan agreements.
Net cash provided by our operating activities was
$10.3 million and $3.7 million during the six months
ended June 30, 2008 and 2007, respectively. Cash flows from
our operating activities in the six month ended June 30,
2008 increased compared to the same period in the prior year.
The change is primarily attributable to increases in
depreciation and amortization expenses and stock compensation
costs and changes in trade accounts payable and accrued and
other expenses offset by the decrease in net income in 2008.
Net cash used in our investing activities was $12.0 million
and $13.9 million during the six months ended June 30,
2008 and 2007, respectively. The primary use of cash in our
investing activities for each year is for our purchase of
equipment, including information technology equipment,
furniture, fixtures and leasehold improvements for expansion of
available seats.
Net cash provided by our financing activities was
$0.8 million in the six months ended June 30, 2008
compared to $49.2 million in the six months ended
June 30, 2007. The change is a result of the proceeds from
our public offering being included in the 2007 period.
We expect to incur $30 to $32 million in expenditures
related to property and equipment for the full year 2008 for
facilities improvements and expansion based on our current
estimates of our facilities requirements necessary to support
the anticipated growth in our business. We believe that we will
be able to finance our working capital needs and currently
planned facilities improvements and expansion for at least the
next 12 months from cash balances, cash generated from
operations, and borrowings under our revolving line of credit.
Our available line of credit as of June 30, 2008 was
$25.0 million.
18
Our long-term future capital requirements will depend on many
factors, including our level of revenue, the timing and extent
of our spending to support the maintenance and growth of our
operations, the expansion of our sales and marketing activities,
continued market acceptance of our services, and potential
merger and acquisition activities. We expect to continue to have
significant capital requirements associated with the maintenance
and growth of our operations, including the lease and build-out
of additional facilities primarily to support an increase in the
number of our customer service associates and the purchase of
computer equipment and software, telecommunications equipment
and furniture, fixtures and office equipment to support our
operations. These additional long-term expenses may require us
to seek other sources of financing, such as additional
borrowings or public or private equity or debt capital. The
availability of these other sources of financing will depend
upon our financial condition and results of operations as well
as prevailing market conditions, and may not be available on
terms reasonably acceptable to us or at all.
Recent
Accounting Pronouncements
The Company adopted Statement of Financial Accounting Standards
(SFAS) No. 157, Fair Value
Measurements (SFAS 157) on
January 1, 2008 for financial assets and liabilities, and
non-financial assets and liabilities that are recognized or
disclosed at fair value in the financial statements on a
recurring basis. SFAS 157 defines fair value, establishes a
framework for measuring fair value as required by other
accounting pronouncements and expands fair value measurement
disclosures. The provisions of SFAS 157 are applied
prospectively upon adoption and did not have a material impact
on the Companys condensed consolidated financial
statements. In February 2008, the FASB issued staff position
No. 157-2
(FSP 157-2),
which delays the effective date of SFAS 157 one year for
all non-financial assets and non-financial liabilities, except
those recognized or disclosed at fair value in the financial
statements on a recurring basis. Following
FSP 157-2,
the Company is assessing the impact of SFAS 157 for
non-financial assets and non-financial liabilities on its
consolidated financial statements and will measure such assets
and liabilities no later than the first quarter of 2009. The
disclosures required by SFAS 157 are included in
Note 4, Fair Value Measurements, to the
Companys condensed consolidated financial statements.
In April 2008, the FASB issued FASB Staff Position Financial
Accounting Standard
142-3
(FSP
FAS 142-3),
Determination of the Useful Life of Intangible
Assets. FSP
FAS 142-3
amends the factors that should be considered in developing
renewal or extension assumptions used to determine the useful
life of a recognized intangible asset under
SFAS No. 142, Goodwill and Other Intangible
Assets (SFAS 142). The intent of the FSP
is to improve the consistency between the useful life of a
recognized intangible asset under SFAS 142 and the period
of expected cash flows used to measure the fair value of the
asset under SFAS No. 141, Business
Combinations. We are required to adopt FSP
FAS 142-3
in the first quarter of 2009 and will apply it prospectively to
intangible assets acquired after the effective date.
In March 2008, the FASB issued Statement of Financial Accounting
Standards No. 161 (SFAS 161),
Disclosures about Derivative Instruments and Hedging
Activities, which amends and expands Statement of
Financial Accounting Standards No. 133, Accounting
for Derivative Instruments and Hedging Activities.
SFAS 161 requires tabular disclosure of the fair value of
derivative instruments and their gains and losses. This
Statement also requires disclosure regarding the credit-risk
related contingent features in derivative agreements,
counterparty credit risk, and strategies and objectives for
using derivative instruments. We are required to adopt
SFAS 161 in the first quarter of 2009. We are currently
evaluating the additional disclosures required by SFAS 161.
In December 2007, the FASB issued Statement of Financial
Accounting Standards No. 160 (SFAS 160),
Noncontrolling Interests in Consolidated Financial
Statements an amendment of ARB No. 51.
SFAS 160 amends Accounting Research
Bulletin No. 51, Consolidated Financial
Statements to establish accounting and reporting standards
for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. It clarifies that a
noncontrolling interest in a subsidiary, which is sometimes
referred to as minority interest, is an ownership interest in
the consolidated entity that should be reported as equity. Among
other requirements, this Statement requires that the
consolidated net income attributable to the parent and the
noncontrolling interest be clearly identified and presented on
the face of the consolidated income statement. SFAS 160 is
effective for the first fiscal period beginning on or after
December 15, 2008. We are required to adopt SFAS 160
in the first quarter of 2009. We are currently evaluating the
impact of adopting SFAS 160.
19
In December 2007, the FASB issued Statement of Financial
Accounting Standards No. 141 (revised 2007)
(SFAS 141R), Business Combinations.
SFAS 141R establishes principles and requirements for how
an acquirer recognizes and measures in its financial statements
the identifiable assets acquired, the liabilities assumed, any
noncontrolling interest in an acquiree and the goodwill
acquired. SFAS 141R applies to business combinations for
which the acquisition date is on or after the first fiscal
period beginning on or after December 15, 2008.
|
|
ITEM 3:
|
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. In the three month
ended June 30, 2008 and 2007, 52% and 45%, respectively,
and in the six months ended June 30, 2008 and 2007, 51% and
41%, respectively, of our cost of services and selling and
administrative expenses were generated in the Philippines
substantially all of which were paid in Philippine pesos. We
bill substantially all of our revenue in U.S. dollars. The
average exchange rate excluding the impact of our foreign
currency hedges used to translate pesos to U.S. dollars was
42.56 during the second quarter of 2008. Calculated based on our
Philippines related expense during the three months ended
June 30, 2008 annualized, if we did not hedge our foreign
currency exposure, a 10% increase in the value of the
U.S. dollar relative to the Philippine peso would reduce
our annual expenses associated with our offshore operations by
approximately $13.0 million, whereas a 10% decrease in the
relative value of the U.S. dollar would increase the annual
cost associated with these operations by approximately
$15.9 million.
Payments for employee-related costs, facilities management,
other operational expenses and capital expenditures are incurred
in Philippine pesos on a monthly basis. Based upon prior credit
agreements, we were not allowed to enter into hedging contracts.
Therefore, when our loans were paid off, we initiated in the
third quarter of 2007 a strategy to hedge against short-term
foreign currency fluctuations. This strategy consists of a
rolling hedge program that entails contracting with third-party
financial institutions to acquire zero cost, non-deliverable
forward contracts. For 2008, we have hedged approximately 90% of
our forecasted 2008 Philippine peso denominated expenses. For
2009 forecasted Philippine peso-denominated expenses, we have
resumed our rolling hedge program and, as of June 30, 2008,
approximately 40% and 20% of the first quarter and second
quarter 2009 forecasted peso expenses, respectively, have been
hedged.
Interest
Rate Sensitivity
We have interest rate exposure arising from borrowings under our
revolving line of credit, which has variable interest rates.
These variable interest rates are affected by changes in
short-term interest rates. Assuming the current level of
borrowings, a hypothetical one-percentage point increase in
interest rates would not increase our annual interest expense as
we repaid the entire March 31, 2007 balance of our term
loans and line of credit on April 3, 2007 and have not
borrowed on our existing line of credit.
Inflation
Rate Sensitivity
In the three month ended June 30, 2008 and 2007, 52% and
45%, respectively, and in the six months ended June 30,
2008 and 2007, 51% and 41%, respectively of our cost of services
and selling and administrative expenses were generated in the
Philippines. Although the Philippines has historically
experienced periods of high inflation, the inflation rate has
been below 10% since 1999. For the year ended December 31,
2007, inflation averaging 2.8% kept prices generally stable.
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
and high unemployment. A reversal of these trends, increased
wage pressure due to increased competition as our 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.
20
|
|
ITEM 4:
|
CONTROLS
AND PROCEDURES.
|
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.
Our disclosure controls and procedures have been designed to
meet reasonable assurance standards. 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 upon 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 Quarterly Report on
Form 10-Q,
our chief executive officer and chief financial officer have
concluded that, as of such date, our disclosure controls and
procedures were effective at the reasonable assurance level.
Changes
in internal control over financial reporting.
There was no change in our internal control over financial
reporting (as defined in
Rule 13a-15(f)
under the Exchange Act) that occurred during the period covered
by this quarterly report on
Form 10-Q
that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
21
PART II:
OTHER INFORMATION
|
|
ITEM 1.
|
LEGAL
PROCEEDINGS.
|
We are the defendant in the employment matter of James Dreyfuss
vs. ETelecare Global Solutions-US, Inc. filed in the United
States District Court, Southern District of New York on
February 4, 2008. In the matter, James Dreyfuss, who
served as our Regional Vice President of Sales, has asserted the
following claims against the company: (1) two counts of
breach of contract; (2) violation of New York Labor Law
Sections 190 et seq. (3) quantum merit;
(4) unjust enrichment; (5) breach of covenant of good
faith and fair dealing; and (6) promissory estoppel.
Mr. Dreyfuss seeks compensatory damages in an amount to be
proven at trial, penalties under New York Labor Law
Section 198, pre- and post-judgment interest and costs and
expenses for such suit, including attorneys fees. We filed
a motion to compel arbitration on April 7, 2008 and filed a
brief in support of such motion on July 16, 2008 and are
now in the early stages of discovery. While we cannot predict
with certainty the outcome of the litigation, we believe the
ultimate outcome of this matter will not have a material adverse
impact on the financial position or our results of operations.
Set forth below, elsewhere in this
Form 10-Q
and in other documents we file with the SEC are important risks
and uncertainties that could cause our actual results of
operations, business and financial condition to differ
materially from the results contemplated by the forward-looking
statements contained in this
Form 10-Q.
Other than as set forth below, there are no material changes
from the risk factors previously disclosed in Item 1A of
Part II of the Quarterly Report on
Form 10-Q
for the three months ended March 31, 2008. You should not
construe the following cautionary statements as an exhaustive
list. The risk factors contained in this report reflect only
changes from or additions to the risks stated in the Quarterly
Report on
Form 10-Q
for the three months ended March 31, 2008, and these risks
must be read in conjunction with those in the Quarterly Report
on
Form 10-Q
for the three months ended March 31, 2008.
Risks
Related to Our Business
One of
our major clients is Vonage, who has been and may in the future
be, subject to damaging and disruptive intellectual property
litigation that could adversely affect its business and its
continued viability, which, in turn, could harm our business,
results of operations and financial condition.
For the six months ended June 30, 2008 and 2007, we derived
9% and 14%, respectively, of our revenue from Vonage. Vonage has
been named as a defendant in several lawsuits that relate to
alleged patent infringement and may be subject to infringement
claims in the future. In October 2007, Vonage entered into an
agreement to settle its patent infringement litigation with each
of Sprint, Verizon Services Corp. and AT & T which
included aggregate cash payments by Vonage of approximately
$240 million over specified terms. The recent agreements to
pay up to an aggregate of $240 million combined with the
potential impact of future patent litigation could materially
and adversely affect Vonages business, results of
operations and financial condition, as well as the continued
viability of Vonage. In addition, Vonage has $253 million
in convertible debt which can be put to Vonage in December 2008
if the terms of this debt are not otherwise amended prior to
this time. On July 22, 2008, Vonage announced that it had
entered into a commitment letter for $215 million in
financing to replace this debt. The financing has a number of
conditions precedent to closing including, among other things,
syndication of the financing, a successful tender offer for the
outstanding convertible debt and other customary conditions to
close. Vonage has commenced the tender offer but has not
indicated that other conditions to close have been fulfilled to
date. As a result of our significant client relationship with
Vonage, any determination against Vonage in patent litigation,
the agreement by Vonage to make large settlement payments and
the maturity of its outstanding debt obligations and possible
failure of its current financing efforts could, in turn, harm
our business, results of operations and financial condition.
|
|
ITEM 2.
|
UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
|
None.
22
|
|
ITEM 3.
|
DEFAULTS
UPON SENIOR SECURITIES.
|
None.
|
|
ITEM 4.
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
|
None.
|
|
ITEM 5.
|
OTHER
INFORMATION.
|
None.
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
31
|
.1*
|
|
Rule 13a 14(a) Certification of Chief Executive
Officer.
|
|
31
|
.2*
|
|
Rule 13a 14(a) Certification of the Chief
Financial Officer.
|
|
32
|
.1**
|
|
Statement of the Chief Executive Officer under Section 906
of the Sarbanes-Oxley Act of 2002 (18 U.S.C.
Section 1350).
|
|
32
|
.2**
|
|
Statement of the Chief Financial Officer under Section 906
of the Sarbanes-Oxley Act of 2002 (18 U.S.C.
Section 1350).
|
|
99
|
.1
|
|
Press release dated August 13, 2008 related to eTelecare
Global Solutions, Incs Earnings for the three and six
months ended June 30, 2008.
|
|
99
|
.2
|
|
Press release dated August 13, 2008 related to eTelecare
Global Solutions, Incs new delivery center in Nicaragua.
|
|
|
|
*
|
|
Filed herewith
|
|
**
|
|
In accordance with Item 601(b)(32)(ii) of
Regulation S-K
and SEC Release Nos.
33-8238
and
34-47986,
Final Rule: Managements Reports on Internal Control Over
Financial Reporting and Certification of Disclosure in Exchange
Act Periodic Reports, the certifications furnished in
Exhibits 32.1 and 32.2 hereto are deemed to accompany this
Form 10-Q
and will not be deemed filed for purposes of
Section 18 of the Exchange Act. Such certifications will
not be deemed to be incorporated by reference into any filing
under the Securities Act or the Exchange Act, except to the
extent that the Company specifically incorporates it by
reference.
|
23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
eTELECARE GLOBAL SOLUTIONS, INC.
John R. Harris
President, Chief Executive Officer and Director
(Principal Executive Officer)
|
|
|
|
By:
|
/s/ J.
Michael Dodson
|
J. Michael Dodson
Chief Financial Officer
(Principal Financial Officer)
|
|
|
|
By:
|
/s/ Lewis
W. Moorehead
|
Lewis W. Moorehead
Corporate Controller and Chief Accounting Officer
(Principal Accounting Officer)
DATED: August 13, 2008
24
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