Pre-Effective Amendment to Registration Statement (General Form) — Form S-1 Filing Table of Contents
Document/ExhibitDescriptionPagesSize 1: S-1/A Peoplesupport, Inc. - Reg. No. 333-125775 HTML 1.11M
2: EX-8.1 Opinion re: Tax Matters HTML 8K
3: EX-23.2 Consent of Experts or Counsel HTML 6K
4: EX-99.1 Miscellaneous Exhibit HTML 34K
Approximate date of commencement of proposed sale to the
public: As soon as practicable after the effective date of
this Registration Statement.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to
Rule 415 under the Securities Act of 1933, check the
following
box. o
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act,
please check the following box and list the Securities Act
registration statement number of the earlier effective
registration statement for the same
offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
If delivery of the prospectus is expected to be made pursuant to
Rule 434, check the following
box. o
The Registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective
date until the Registrant shall file a further amendment which
specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a)
of the Securities Act of 1933 or until the Registration
Statement shall become effective on such date as the Commission,
acting pursuant to said Section 8(a), may determine.
OPTIONS TO PURCHASE 373,618 SHARES OF COMMON STOCK
Before our initial public offering, we granted options to
purchase shares of our common stock to certain of our employees
and directors and to certain employees of our subsidiaries,
pursuant to our 1998 Stock Incentive Plan. We are offering to
repurchase outstanding options to
purchase 373,618 shares of our common stock granted
and 65,061 shares of common stock purchased upon exercise
of options granted from January 1, 2003 through
April 28, 2004. We are making this repurchase offer only to
directors, current and certain former employees of PeopleSupport
and its subsidiaries who resided in California at the time the
options were granted to them and current employees residing in
the Philippines who received options in California.
The Rescission Offer
•
We are offering to repurchase 65,061 shares of our
common stock from certain former and current employees. These
persons purchased those shares upon exercise of options we
granted to them pursuant to our 1998 Stock Incentive Plan
between January 1, 2003 and April 28, 2004.
•
We are offering to repurchase unexercised options to
purchase 373,618 shares of our common stock from
directors and current and certain former employees of
PeopleSupport and its subsidiaries.
•
The repurchase price for the shares of our common stock subject
to the rescission offer ranges from $0.41 to $6.85 per
share, and is equal to the price paid by those persons who
purchased these shares. The repurchase price for unexercised
options to purchase shares of our common stock subject to the
rescission offer is 20% of the per share exercise price
multiplied by the number of shares subject to the options. In
each case, if you accept our rescission offer and surrender your
shares or options, or both, as the case may be, you will receive
interest at the rate of 7% per year, based on the
repurchase price noted above and calculated from the date you
purchased the shares or the date the option was granted to you,
as the case may be, through the date that the rescission offer
expires.
We are making this offer on the terms and conditions set forth
in this offering circular and the accompanying letter of offer
to repurchase securities. Our rescission offer will remain open
until 5:00 p.m. California time on October 24, 2005,
33 days from the date of this offering circular.
The registration statement relating to our initial public
offering was declared effective by the U.S. Securities and
Exchange Commission on September 30, 2004. At the closing
of our initial public offering on October 6, 2004,
6,818,182 shares of our common stock were sold to the
public at $7.00 per share, including 4,745,727 shares
sold by us and 2,072,455 sold by selling stockholders. The
underwriters subsequently exercised their over-allotment option
to purchase 603,000 additional shares from us.
Our common stock is quoted on The Nasdaq National Market under
the symbol “PSPT.” The range of closing prices for our
common stock, as quoted on The Nasdaq National Market from
September 30, 2004 to September 19, 2005, was $6.50 to
$11.59 per share. On September 19, 2005, the last
reported sale price of our common stock on The Nasdaq National
Market was $8.25 per share.
See “Risk Factors” beginning on page 5 for a
discussion of certain matters that you should consider before
accepting or rejecting this rescission offer.
The Securities and Exchange Commission and state securities
regulators have not approved or disapproved of these securities
or determined if this offering circular is truthful or complete.
It is illegal for any person to tell you otherwise.
This rescission offer is not an unexpected development. Our
intention to make this rescission offer and its details were
disclosed in the registration statement relating to our initial
public offering originally filed in May 2004.
•
Because we expanded our operations and the size of our workforce
rapidly from our inception through December 31, 2002, we
granted stock options to a large number of employees and
non-employee participants under our 1998 Stock Incentive Plan.
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 and
were no longer eligible to rely on the exemption from
registration under Rule 701 of the Securities Act of 1933
or the corresponding exemption from qualification under
California securities laws that is available to the extent the
requirements of Rule 701 are satisfied. Due to the
unavailability of these exemptions and our failure to register
under Section 12(g) following the end of our 2002 fiscal
year, certain options granted between January 1, 2003
through April 28, 2004 may not have been exempt from
registration under Rule 701 or exempt from qualification
under the California securities laws. We did not qualify the
option grants in California and these options may have been
granted in violation of the California securities laws.
Companies commonly make rescission offers for such potential
violations in these situations.
•
We intend to commence the rescission offer on September 21,2005. We filed a registration statement relating to the
rescission offer, which is a normal part of the rescission offer
process.
•
The rescission offer is merely an offer to repurchase options
and shares of common stock. You are not required to accept our
rescission offer.
You should rely only on the information contained in this
offering circular. We have not authorized anyone to provide you
with additional information or information different from that
contained in this offering circular. We are making this
rescission offer only in jurisdictions where it is permitted.
The information contained in this offering circular is accurate
only as of the date of this offering circular, regardless of the
time of delivery of this offering circular or of any sale of our
common stock.
Before our initial public offering, from August 1998 through
April 28, 2004, we granted options to purchase shares of
our common stock to our officers, directors, employees and
employees of our subsidiaries, pursuant to our 1998 Stock
Incentive Plan. These options were granted in reliance on
certain exemptions from registration and qualification under
federal and applicable state securities laws, including the
exemption available under Rule 701 of the Securities Act of
1933, as amended, or the Securities Act.
For the first time at the end of any fiscal year, on
December 31, 2002, options granted by us 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, or the Exchange
Act. In general, Section 12(g) of the Exchange Act (as
supplemented by rules adopted by the Securities and Exchange
Commission) requires every issuer having total assets of more
than $10 million and a class of equity security held of
record by 500 or more persons to register that class of equity
security under the Exchange Act. An issuer is required to comply
with the registration requirements within 120 days after
the end of the first fiscal year when it first meets the
above-described total asset and record holder test.
We failed to register under Section 12(g) of the Exchange
Act following the end of our 2002 fiscal year, when we first
became subject to the registration requirements under
Section 12(g) of the Exchange Act. Also, once we became
subject to the registration requirements under the Exchange Act,
we were no longer eligible to rely on the exemption from
registration under Rule 701 of the Securities Act of 1933
or the corresponding exemption from qualification under
California law that is available to the extent the requirements
of Rule 701 are satisfied. Due to the unavailability of
these exemptions and our failure to comply with the registration
requirements under Section 12(g), we believe grants of
certain unexercised options and issuance of common stock upon
exercise of certain options granted under our 1998 Stock
Incentive Plan between January 1, 2003 through
April 28, 2004, did not comply with the requirements of
Rule 701 and also may not have qualified for any exemption
from qualification under the securities laws of California. We
also did not obtain any required registration or qualification
under federal or state securities laws. We are offering to
repurchase options and common stock to address these compliance
issues under the California securities laws by allowing holders
of options and common stock covered by the rescission offer to
sell those securities back to us and to reduce our contingent
liability with respect to options and common stock that may not
have been granted or issued in compliance with these laws.
Q:
Am I required to accept the rescission offer?
A:
No. You are not required to accept our offer.
Q:
Can I accept the rescission offer in part?
A:
If you accept the rescission offer, you must accept the
rescission offer with respect to an entire option grant or all
of the shares of common stock acquired upon exercise of an
option grant covered by the rescission offer. You can accept the
rescission offer in part to the extent you have received
multiple option grants or acquired common stock upon exercise of
multiple option grants. For example, you can accept the
rescission offer with respect to one grant by returning a
completed signed notice of election form with respect to that
option grant, together with the option grant notice evidencing
that grant. However, you must make one determination with
respect to an individual grant represented by one option grant
notice.
Q:
What will I receive if I accept the rescission offer?
A:
If you accept our rescission offer, we will:
• Repurchase the unexercised option held by you and
granted on or before April 28, 2004, regardless of whether
these options are vested, at 20% of the option exercise price
per share multiplied by the number of shares subject to such
option, plus interest at the rate of 7% per year from the
date of grant through the date the rescission offer expires. For
example, if you elect to rescind an unexercised option to
purchase 10,000 shares of our common stock at a per
share exercise price of $6.85 that was granted on
April 28, 2004 and the rescission offer period expires on
October 24, 2005, you will receive (subject to applicable
taxes and tax withholding requirements):
20% of the exercise price for the total option = 20% multiplied
by (10,000 × $6.85) = $13,700.
Plus simple interest at 7% per year = $1,429.30.
For a total of $15,129.30.
• Repurchase the common stock held by you which were
purchased upon exercise of an option granted on or before
April 28, 2004 at the per share purchase price multiplied
by the number of shares purchased and held by you, plus interest
at the rate of 7% per year from the date of purchase
through the date the rescission offer expires. For example, if
you elect to rescind shares of common stock purchased upon
exercise of an option to purchase 10,000 shares of
common stock at a per share purchase price of $6.85 that was
issued on April 28, 2004 and the rescission offer period
expires on October 24, 2005, you will receive (subject to
applicable taxes and tax withholding requirements):
100% of the per share purchase price for the total number of
shares acquired upon exercise of the option = $6.85 ×
10,000 = $68,500.
Plus simple interest at 7% per year = $7,146.52.
For a total of $75,646.52.
You will not have any right, title or interest to any option or
common stock you will be surrendering upon the closing of the
rescission offer, and you will only be entitled to receive the
proceeds from our repurchase of the options and common stock.
Q:
Have any officers, directors or 5% stockholders advised
PeopleSupport whether they will participate in the rescission
offer?
A:
Six of our executive officers and directors are eligible to
participate in the rescission offer with respect to options to
purchase 161,695 shares of our common stock at
exercise prices per share of $0.41. We have been advised that
none of these officers or directors intends to accept the
rescission offer. If our eligible officers and directors do not
participate in the rescission offer but all other eligible
persons accept the rescission offer in full, our officers and
directors will not materially increase their respective
ownership interests in our company.
Q:
Are employees and other persons expected to accept the
rescission offer in an amount that would be material?
A:
We do not believe the rescission offer will be accepted by our
current employees or directors or other persons in an amount
that would represent a material expenditure by us. We base this
belief on the fact that our rescission offer will offer to
repurchase options at a weighted average price of $1.24 and
shares at a weighted average price of $0.41, while the range of
closing prices for our common stock, as quoted on The Nasdaq
National Market, from September 30, 2004 through
September 19, 2005 has been $6.50 to $11.59 per share.
On September 19, 2005 the last business day before the date
of this offering circular, the last reported sale price of our
common stock on The Nasdaq National Market was $8.25 per
share. We cannot give you any assurance as to the price at which
our common stock will trade in the future.
Q:
If I affirmatively reject or fail to accept the rescission
offer before the expiration date, can I sell shares underlying
my options?
A:
If you affirmatively reject or fail to accept the rescission
offer, you will retain ownership of the options and shares you
received and will not receive any cash for those options or
shares of common stock. We have filed a registration statement
under the Securities Act covering the issuance of shares upon
the exercise of your currently unexercised options. In addition,
the shares of common stock acquired upon exercise of options are
being covered by this rescission offer are being registered on
this Registration Statement. These shares will be freely
tradeable under the Securities Act (unless you are an
“affiliate” of PeopleSupport within the meaning of
Rule 144 of the Securities Act), but will remain subject to
any market standoff agreements, lockup agreements,
PeopleSupport’s Statement of Company Policy on Securities
Trades by Company Personnel and Confidential Information
requirements and any other transfer restrictions and
other applicable terms and conditions of the original option
agreement and plan under which the options were granted.
Q:
What remedies or rights do I have now that I will not have
after the rescission offer?
A:
It is unclear whether or not you will have a right of rescission
under federal securities laws after the rescission offer. The
staff of the Securities and Exchange Commission takes the
position that a person’s right of rescission under the
Securities Act may survive the rescission offer. Generally, the
federal statute of limitations for non-compliance with the
requirement to register securities under the Securities Act is
one year from the date of the violation upon which the action to
enforce liability is based. The California statute of
limitations for non-compliance with the requirement to register
or qualify securities under the California Corporate Securities
Law of 1968 is the earlier of two years after the non-compliance
occurred, or one year after discovery of the facts constituting
such non-compliance. However, you will no longer have any right
of rescission or repurchase with respect to these securities
under Section 25503 of the California Corporate Securities
Law after expiration of the rescission offer.
Q:
When does the rescission offer expire?
A:
Our rescission offer expires October 24, 2005, thirty days
after the effective date of the registration statement filed
with this offering circular.
Q:
What do I need to do now to accept or reject the rescission
offer?
A:
To accept or reject the rescission offer, you should complete,
sign and date the notice of election attached to the
accompanying letter of offer to purchase securities and return
it in the enclosed return envelope to PeopleSupport, to the
attention of Peter Phan, Esq., Corporate Counsel,
1100 Glendon Ave., Suite 1250, Los Angeles, California90024, as soon as practical but in no event later than
October 24, 2005. If you are accepting the rescission
offer, please also include in your return envelope the following:
• Common Stock. With respect to any shares of
common stock that you want us to repurchase, (i) a
completed and signed election form and (ii) a stock power
representing the shares you are surrendering for repurchase.
• Options. With respect to any options that you
are surrendering for repurchase, a completed and signed election
form. Please indicate on your election form the grant date of
the option that you are surrendering for repurchase and the
number of shares underlying the option.
Q:
What happens if I do not return my notice of election
form?
A:
If you do not return a properly completed notice of election
form before the expiration date of our rescission offer, you
will be deemed to have rejected our rescission offer.
Q:
How will the rescission offer be funded?
A:
The rescission offer will be funded from our existing cash
balances. If all persons eligible to participate in the
rescission offer accept our offer in full, our results of
operations, cash balances and financial condition will not be
affected materially.
Q:
Can I change my mind after I have mailed my signed notice of
election form?
A:
Yes. You can change your decision about accepting or rejecting
our rescission offer at any time before the expiration date. You
can do this by completing and submitting a new notice of
election form that must be received by us before the expiration
of our rescission offer, which notice of election form will
supersede all prior letters of offer to purchase securities in
full, or by submitting a letter of withdrawal that must be
received by us before the expiration of the rescission offer and
clearly specifies your name, the grant date or date of the stock
certificate, as the case may be, the exercise price and number
of shares underlying the option or shares of common stock to be
withdrawn. If you submit multiple letters of offer to repurchase
securities, you will not be deemed to have elected to rescind
your election as to a particular option grant or share issuance
unless you have indicated this election in the latest dated and
effective notice of election form.
If I accept the rescission offer, will PeopleSupport withhold
any taxes?
A:
We will withhold a portion of your payment at the applicable tax
withholding rate for options subject to the rescission offer
that were granted to you in connection with your employment as a
PeopleSupport employee or employee of one of our subsidiaries.
We strongly urge you to consult with your tax advisor as to the
tax consequences of accepting or rejecting the rescission offer.
Q:
Who can help answer my questions?
A:
We suggest that you consult your legal counsel and tax advisor
before making your decision about accepting or rejecting our
rescission offer. In addition, you can call Peter
Phan, Esq. of PeopleSupport at (310) 824-6200 with any
questions about the rescission offer. However, PeopleSupport
cannot offer you any personal legal advice.
Q:
Where can I get more information about PeopleSupport?
A:
You can obtain more information about PeopleSupport from the
filings we make from time to time with the Securities and
Exchange Commission. These filings are available on the
Securities and Exchange Commission’s website at
www.sec.gov.
This summary highlights selected information contained
elsewhere in this offering circular, including a description of
the material terms of the offering. You should carefully read
the entire offering circular, including the material risks
associated with our business and this rescission offer, and the
consolidated financial statements and the related notes, before
making an investment decision.
Our Business
We provide business process outsourcing, or “BPO,”
services from our facilities in the Philippines. We believe that
we are one of the largest outsourced service providers in the
Philippines based on the size of our workforce, which consists
of over 3,900 college educated, fluent English-speaking
Philippine personnel. From our Philippine facilities, we provide
customer management services for primarily U.S.-based clients
who wish to outsource this function to a high quality, lower
cost provider. We currently service 31 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. Our three largest
clients for the six months ended June 30, 2005 together
accounted for 61% of our revenues. Expedia, our largest client,
and EarthLink, our second largest client, together accounted for
approximately 48% of our revenues for the six months ended
June 30, 2005. 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. Our revenues and net income for the six
months ended June 30, 2005 were $28.8 million and
$5.0 million, respectively. Substantially all of our
revenues in 2003, 2004 and the first six months of 2005 were
derived from our customer management business, and less than
5.0% was derived from our accounts receivable management
business. At June 30, 2005, we had an accumulated deficit
of $48.0 million as the result of net losses in prior years.
PeopleSupport was incorporated in Delaware in July 1998. We
began providing outsourced customer management services in 1998
from our outsourcing center location in Los Angeles. In March
2002, we restructured our operations to relocate our existing
outsourcing centers to the Philippines. We completed the
migration of our outsourcing operations to the Philippines in
2003. The restructuring of our operations resulted in
significant cost savings due to reductions in labor and lease
expenses. As demand for our offshore outsourced services grew,
we expanded our outsourcing operations in the Philippines. We
currently maintain three outsourcing facilities and employ more
than 3,900 personnel in the Philippines.
Our principal executive office is located at 1100 Glendon Ave.,
Suite 1250, Los Angeles, California90024, and our
telephone number is (310) 824-6200. Our website is
www.peoplesupport.com. Information on our website is not part of
this offering circular. All references to “we,”“us,”“our” and “our company”
refer to PeopleSupport, Inc. and its subsidiaries.
gives retroactive effect to a 1 for 2.74 reverse stock split of
our common and previously outstanding preferred stock that
occurred on August 5, 2004;
•
excludes 3,835 shares of common stock issuable upon the
exercise of warrants at a weighted average exercise price of
$15.65 per share;
•
excludes 1,162,023 shares of common stock issuable upon the
exercise of options outstanding under our stock option plans,
including options that are subject to our rescission offer, at a
weighted average exercise price of $4.13 per share;
•
excludes 1,382,866 shares of common stock available for
future grants under our stock option and stock purchase
plans; and
•
assumes that, except as expressly stated herein, no person
accepts the rescission offer.
As a result of our failure to register under Section 12(g)
of the Securities Exchange Act of 1934 following the end of our
2002 fiscal year, when we first became subject to the
requirements under this section, we may have violated the
California state securities law because we did not qualify
options granted from January 1, 2003 through April 28,2004. We are offering to repurchase outstanding options to
purchase shares of our common stock and shares of common stock
that were granted or acquired upon exercise of an option granted
during this period to persons who resided in California at the
time of the grant and to persons residing in the Philippines who
received their options in California for the purposes of
California law. A total of 373,618 shares of our common
stock underlie options and 65,061 shares of our common
stock were acquired upon exercise of options granted to these
option recipients during the period from January 1, 2003
through April 28, 2004.
The repurchase price for each unexercised option subject to our
rescission offer will be 20% of the option exercise price per
share multiplied by the number of shares subject to such option,
plus interest at the rate of 7% per year from the date of
grant until the rescission offer expires. The repurchase price
for each share of common stock acquired upon exercise of an
option subject to our rescission offer will be at the per share
purchase price of the shares of common stock purchased
multiplied by the number of shares acquired upon exercise of
such option, plus interest at a rate of 7% per year from
the date the shares of common stock were acquired until the
rescission offer expires. This rescission offer will expire at
5:00 p.m. California time on October 24, 2005,
33 days after the date of this offering circular.
As of the date of this offering circular, we are not aware of
any claims for rescission against us.
See “Risk Factors” beginning on page 5 for a
discussion of factors you should carefully consider before
deciding to accept our rescission offer.
The following table presents historical 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. The consolidated statements
of operations data for each of the six month periods ended
June 30, 2004 and 2005, and the consolidated balance sheet
data as of June 30, 2005, are derived from our unaudited
consolidated financial statements. You should read this
information together with “Selected Historical Consolidated
Financial Data” and “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 and the
six months ended June 30, 2004 and 2005, which are included
elsewhere in this offering circular.
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
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 we
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
net income for the six months ended June 30, 2004 and 2005.
(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 offering circular. 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.
You should carefully consider the risks described below
before making a decision to accept or reject our rescission
offer. As a result of any of the following risks, our business,
financial condition and results of operations could be harmed.
In that case, the trading price of our common stock could
decline. You should also refer to the other information set
forth in this offering circular, including our consolidated
financial statements and the related notes and
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations.”
Risks Related to the Rescission Offer
Your federal right of rescission may not survive if you
affirmatively reject or fail to accept the rescission
offer.
If you affirmatively reject or fail to accept the rescission
offer, it is unclear whether or not you will have a right of
rescission under federal securities laws after the expiration of
the rescission offer. The staff of the Securities and Exchange
Commission is of the opinion that a person’s right of
rescission created under the Securities Act may survive the
rescission offer.
We cannot predict whether the amounts you would receive in
the rescission offer would be higher than the fair market value
of our securities.
The amount you would receive in the rescission offer is fixed
and is not tied to the fair market value of the shares of common
stock you hold, your options or the value of the underlying
shares of common stock. If you accept the rescission offer, you
may receive less than the fair market value of the shares of
common stock and/or options you would be surrendering.
We may continue to have potential liability and face
potential claims for violations of securities laws even after we
complete this rescission offer.
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. 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 and issuance of common stock upon exercise of
certain options granted 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 are
making this rescission offer to holders of these options and
common stock who resided in California at the time the options
were granted and/or common stock was acquired and to certain
executive officers and management personnel to whom the options
were granted and/or common stock was acquired in California.
Under the rescission offer, we are offering 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, and shares of common
stock acquired upon exercise of an option subject to our
rescission offer at the per share purchase price of the shares
of common stock purchased multiplied by the number of shares of
common stock acquired upon exercise of such option, plus
interest at a rate of 7% per year from the date the shares
of common stock were acquired. We would be required to pay
approximately $0.1 million, plus interest at an annual rate
of 7%, if all persons entitled to have their options and common
stock repurchased elect to do so. We could be required to pay a
higher amount if more options that are subject to rescission are
exercised. However, the federal securities laws do not provide
that a rescission offer will extinguish a holder’s right to
rescind the grant of an option or the issuance of shares that
were not registered or exempt from the registration requirements
under the federal securities laws. It is also possible that a
holder of options and/or common stock could argue that the
amount offered to rescind his or her option and/or common stock
is inadequate, and if a court were to impose a greater remedy
for our potential violations of securities laws, our liability
to the holder could be higher. If any or all
offerees reject or fail to accept our offer to repurchase the
options and common stock, we may continue to have potential
liability for violations of 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, or to actions by
federal regulators. If any such claim or action is asserted, we
could incur expenses and management’s attention would be
diverted in defending the claim or action, even if we have no
liability.
If you reject or fail to accept the rescission offer, the
shares you receive from the exercise of your options may still
remain subject to limitation on resales.
If you affirmatively reject the rescission offer or fail to
accept the rescission offer before the expiration of the
rescission offer, you will retain ownership of the options and
common stock you received. The issuance of shares upon exercise
of options you retain will be registered under Securities Act of
1933, as amended, or the Securities Act, pursuant to a
registration statement that we previously filed. In addition,
the shares of common stock acquired upon exercise of options are
being registered on this Registration Statement. These shares
will be freely tradeable, subject to any applicable limitations
set forth in Rule 144 or Rule 145 under the Securities
Act and any other transfer restrictions and other applicable
terms and conditions of the original option agreement and plan
under which the options were granted or the shares were
acquired. You will also remain subject to any market standoff
agreement, lockup agreements, requirements under the
PeopleSupport Statement of Company Policy on Securities Trades
by Company Personnel and Confidential Information and any other
transfer restrictions entered into with respect to your options,
the underlying shares or common stock acquired upon exercise of
options.
Risks Related to Our Stock and Our Stock Price
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 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 offering circular. 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 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 to publish
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
June 30, 2005, 18,204,383 shares of common stock were
outstanding and 1,166,446 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 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. We also may be required to
issue additional shares upon the exercise of previously granted
options or warrants that are currently outstanding.
Increased future sales of our common stock 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.
Risks Related to Our Business
Our revenues are highly dependent on three major clients
that collectively accounted for 61% of our revenues in the first
six months of 2005, 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 the first six
months of 2005 and accounted for 61% of our revenues for the
first six months of 2005. Expedia, our largest client, and
EarthLink, our second largest client, together accounted for 48%
of our revenues during the period. 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.
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.
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.
Some of 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.
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.
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.
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 offering circular 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
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.
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.
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:
•
Our clients’ alternatives to our services, including their
willingness to replace their internal solutions or existing
vendors;
Our clients’ budgetary constraints, and the timing of our
clients’ budget cycles and approval process;
•
Our clients’ willingness to expend the time and resources
necessary to integrate their systems with our systems and
network; and
•
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.
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 $48.0 million at June 30, 2005.
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.
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:
•
Attract and retain clients;
•
Attract and retain key personnel and customer management
professionals;
•
Generate sufficient revenues and manage costs to maintain
profitability;
•
Manage growth in our operations; and
•
Access additional capital when required and on reasonable terms.
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:
•
The addition or loss of a major client and the volume of
services provided to our major clients;
•
The extent to which our services achieve or maintain market
acceptance, which may be affected by political and public
relations reactions to offshore outsourcing;
•
Our ability to introduce new or enhanced services to our
existing and prospective clients and to attract and retain new
clients;
•
Long sales cycles and fluctuations in sales cycles;
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;
•
Changes in our pricing policies or those of our competitors, as
well as increased price competition in general;
•
Variation in demand for our services and services or products of
our major clients, particularly clients in the travel and
hospitality industry; and
•
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 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.
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:
•
Maintain the hiring, training and management necessary to ensure
the quality and responsiveness of our services;
•
Expand and enhance our administrative and technical
infrastructure, facilities, and capacities to accommodate
increased call volume and other customer management
demands; and
•
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.
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.
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 Senior Vice President of Global 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.
The 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 recently relocated our regional headquarters in the
Philippines and certain of our outsourcing operations to a newly
built facility in Manila, which became operational in June 2005.
The relocation of our operations to this new facility involved a
number of logistical and technical challenges. Some of the work
associated with the relocation is ongoing and we may encounter
logistical and technical complications relating to this
remaining work. For example, we may encounter complications
associated with the installation and implementation of our
systems and computing equipment in our new facility, which could
result in interruptions of our services. If such interruptions
occur, 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.
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.
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.
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.
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.
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.
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 2009, 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.
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.
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.
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.
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 2006. However, the
timing and amount of our working capital and capital expenditure
requirements may vary significantly depending on numerous
factors, including:
•
Market acceptance of and demand for our offshore outsourced
services which may be affected by political and public relations
reactions to offshore outsourcing;
•
Access to and availability to sufficient management, technical,
marketing, and financial personnel;
•
The need to enhance our operating infrastructure;
•
The continued development of new or enhanced services and hosted
solutions;
•
The need to adapt to changing technologies and technical
requirements;
•
Increasing costs, particularly in the Philippines;
•
The existence of opportunities to acquire businesses or
technologies, or opportunities for expansion; and
•
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 are incurring increased costs as a result of being a
public company.
As a public company, we are incurring 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 fiscal 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. These new rules and
regulations increased our legal and financial compliance costs.
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 are and will be incurring additional
costs associated with our public company reporting requirements.
These new rules and regulations have made 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.
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 and their affiliated entities.
Our directors, executive officers and their affiliated entities
beneficially own approximately 8.3% 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 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.
Risks Related to Doing Business in the Philippines
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.
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. In addition, the Philippines continues to
experience periods of civil and political unrest. Recently,
government opposition leaders filed an impeachment complaint
against President Gloria Macapagal Arroyo on charges of
electoral fraud, corruption and betrayal of public trust in
relation to the 2004 presidential election that kept her in
power, which complaint was dismissed by the Justice Committee of
the House of Representatives. Government officials are also
debating the possibility of switching from a constitutional
government to a European-style parliamentary system. The impact
of these developments on offshore companies is uncertain at this
time and could result in adverse changes to tax, regulatory and
other legal requirements. Political instability and adverse
changes in the political environment in the Philippines could
increase our operating costs, increase our exposure to legal and
business risks and make it more difficult for us to operate our
business in the Philippines.
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.
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.
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.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Many of the statements included in this offering circular
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 yet known
to us or 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:
•
our revenues are highly dependent on a limited number of clients;
•
negative public reaction in the United States to offshore
outsourcing and recently proposed legislation may adversely
affect demand for our services;
•
our clients may adopt technologies that decrease the demand for
our services;
•
our revenues are highly dependent on a few industries;
•
we serve markets that are highly competitive;
•
our contracts can be terminated by our clients on short notice
and we generally do not have exclusive arrangements with our
clients or require minimum revenue commitments;
•
we may not be able to grow our business or effectively manage
growth;
•
our failure to hire and retain enough sufficiently trained
employees to support our operations;
•
our operations could suffer from telecommunications or
technology disruptions;
•
our operations could suffer in connection with the ongoing work
related to our relocation to our new PeopleSupport Center;
•
unauthorized disclosure of confidential client and customer data
could expose us to litigation and cause us to lose clients;
•
our ability to use net operating loss carryforwards in the
United States may be limited;
•
current tax holidays in the Philippines will expire within the
next several years;
•
we are subject to laws and regulations that could limit or
restrict our activities and impose financial limitations on the
conduct of our business;
•
we are subject to risks associated with operating in the
Philippines; and
•
potential terrorist activities and the responses of the United
States and other nations to such activities may disrupt our
operations and cause our business to suffer.
Given these 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 offering circular 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 our annual, quarterly and other reports we will file
with the SEC after the date of this offering circular. See
“Where You Can Find Additional Information.”
RESCISSION OFFER
Background
Since our inception in 1998 through April 28, 2004, we
granted options to purchase shares of common stock and issued
shares of common stock upon exercise of options granted pursuant
to our 1998 Stock Incentive Plan. Except as to option grants and
common stock covered by this rescission offer, all such options
were granted and common stock was issued in reliance on the
exemption from registration available under Rule 701 of the
Securities Act of 1933, as amended, and the exemption from
qualification available under a
corresponding exemption under the California Corporate
Securities Law of 1968 that is available to the extent the
requirements under Rule 701 are satisfied.
Because we expanded our operations and the size of our workforce
rapidly from our inception through December 31, 2002, we
granted stock options to a large number of employees and
non-employee participants under our 1998 Stock Incentive Plan.
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, or the Exchange Act. In general, Section 12(g) of
the Exchange Act (as supplemented by rules adopted by the
Securities and Exchange Commission) requires every issuer having
total assets of more than $10 million and a class of equity
security held of record by 500 or more persons to register that
class of equity security under the Exchange Act. An issuer is
required to comply with the registration requirements within
120 days after the end of the first fiscal year when it
first meets the above-described total asset and record holder
test.
We failed to register under Section 12(g) of the Exchange
Act following the end of our 2002 fiscal year, when we first
became subject to the registration requirements under
Section 12(g). Also, once we became subject to these
registration requirements, we were no longer eligible to rely on
the exemption from registration under Rule 701 of the
Securities Act of 1933 or the corresponding exemption from
qualification under California securities laws that requires
compliance with Rule 701. Due to the unavailability of
these exemptions and our failure to register under
Section 12(g) following the end of our 2002 fiscal year,
certain options granted and common stock issued upon exercise of
certain options granted between January 1, 2003 through
April 28, 2004 may not have been exempt from registration
under Rule 701 or exempt from qualification under the
California securities laws, and these options and common stock
may have been granted or issued in violation of the California
securities laws.
To the extent that the exemptions under Rule 701 and the
corresponding California exemption became unavailable to us
after December 31, 2002, the offer or grant of options and
issuance of common stock in California during the period from
January 1, 2003 through April 28, 2004 might have been
in violation of the qualification requirements under the
California Corporate Securities Law of 1968. We are offering to
repurchase options and common stock to address these compliance
issues under the California securities laws by allowing holders
of options and common stock covered by the rescission offer to
sell those securities back to us and to reduce our contingent
liability with respect to options and common stock that may not
have been granted or issued in compliance with these laws.
Rescission Offer And Price
We are offering to rescind certain option grants and repurchase
common stock issued upon exercise of certain option grants
pursuant to our 1998 Stock Incentive Plan. By making this
rescission offer, we are not waiving any applicable statutes of
limitations or any other defenses available to us.
More specifically, we are offering to rescind certain grants of
options and repurchase certain shares of common stock, which
remain outstanding and are currently held by 36 persons. These
consist of options to purchase 373,618 shares of our
common stock at exercise prices per share ranging from $0.41 to
$6.85 and 65,061 shares issued upon the exercise of options
that were acquired at a purchase price per share ranging from
$0.41 to $6.85. This offer will be made to directors, current
employees and certain former employees who received options and
common stock pursuant to the 1998 Stock Incentive Plan that are
subject to the rescission offer between January 1, 2003 and
April 28, 2004 and who are, or were at the time of issuance
or grant, residents of California, and employees residing in the
Philippines who received options and acquired common stock
during this period in California for the purposes of California
law.
If you accept our rescission offer with respect to common stock
and unexercised options to acquire our common stock, we will:
•
Repurchase all unexercised options granted to you at 20% of the
per share exercise price multiplied by the number of shares
subject to such options, plus interest at the rate of
7% per year, from the date of grant through the date that
the rescission offer expires.
Repurchase shares of common stock acquired upon exercise of an
option at the per share purchase price multiplied by the number
of shares of common stock acquired upon exercise of such option,
plus interest at a rate of 7% per year from the date the
shares of common stock were acquired through the date the
rescission offer expires.
You will not be entitled to any payments for interest or
otherwise unless you affirmatively elect to participate in the
rescission offer.
Acceptance
You may accept the rescission offer by completing and signing
the notice of election form attached to the accompanying letter
of offer to purchase securities, indicating the options and
common stock to be repurchased on or before 5:00 p.m. Los
Angeles time, on October 24, 2005, which is the expiration
date of the rescission offer. All acceptances of the rescission
offer will be deemed to be effective on the expiration date and
the right to accept and participate in the rescission offer will
terminate on the expiration date. Acceptances or rejections may
be revoked in a written notice to us, to the attention of Peter
Phan, Esq., 1100 Glendon Ave., Suite 1250, LosAngeles, California90024. Any such revocation is effective only
if it is received before the expiration date of the rescission
offer. Within fifteen business days after the expiration date of
the rescission offer, we will pay for any securities as to which
the rescission offer has been validly accepted. If you are
accepting the rescission offer, please also include in your
return envelope the following:
•
Common Stock. With respect to any shares of common stock
that you want us to repurchase, (i) a completed and signed
election form and (ii) a stock power representing the
shares you are surrendering for repurchase.
•
Options. With respect to any options that you are
surrendering for repurchase, a completed and signed election
form. Please indicate on your election form the grant date of
the option that you are surrendering for repurchase and the
number of shares underlying the option.
The rescission offer will expire at 5:00 p.m., Pacific
Daylight Time, on October 24, 2005. If you submit a notice
of election form after the expiration time, regardless of
whether your form is otherwise complete, your election will not
be accepted, and you will be deemed to have rejected our
rescission offer.
Neither we nor our officers and directors make any
recommendations to you with respect to the rescission offer
contained herein. You are urged to read the rescission offer
carefully and to make an independent evaluation with respect to
its terms.
Rejection or Failure to Affirmatively Accept
If you fail to accept, or if you affirmatively reject, the
rescission offer by so indicating on the notice of election form
attached to the accompanying letter of offer to purchase
securities, you will retain ownership of the common stock and
options in accordance with the terms of our stock plans and you
will not receive any cash for those securities in connection
with the rescission offer. The common stock and any shares
issuable upon the exercise of options will be registered and
freely tradeable under the Securities Act of 1933, unless you
are an affiliate of PeopleSupport within the meaning of
Rule 144 or Rule 145, as the case may be. Any such
shares will remain subject to any applicable terms and
conditions of the original agreement under which the
corresponding options were issued and common stock was acquired
and any subsequent agreement relating to such shares and
options. In addition, you will remain subject to any market
standoff agreements, lockup arrangements, vesting restrictions,
PeopleSupport’s Statement of Company Policy on Securities
Trades by Company Personnel and Confidential Information
requirements and any other transfer restrictions entered into
with respect to your shares.
Solicitation
We have not retained, nor do we intend to retain, any person to
make solicitations or recommendations to you in connection with
the rescission offer.
It is unclear whether the rescission offer will terminate our
liability, if any, for failure to register or qualify the
issuance of the securities under federal or state securities
laws. Accordingly, should the rescission offer be rejected by
any or all offerees, we may continue to be potentially liable
under the Securities Act of 1933 and California securities laws
for the value of the options up to an aggregate amount of
approximately $0.1 million, which includes statutory
interest. It is possible that an option holder or stockholder
could argue that the offer to rescind the issuance of
outstanding options for an amount equal to 20% of the aggregate
exercise price, plus interest and the common stock for an amount
equal to the aggregate purchase price, plus interest, does not
represent an adequate remedy for the potential violation of the
applicable securities laws in connection with the issuance of
the option. If a court were to impose a greater remedy, our
liability as a result of the potential securities violations
would be higher.
Our common stock and grants of options covered by this
rescission offer may have violated the California securities
laws. California has different laws with respect to rights under
common law and fraud. The following discussion of California law
does not relate to the antifraud provisions of California
securities laws or rights under common law or equity. In
addition, while certain holders of our options and shares who
are residents of California and certain other holders to whom
options were granted and shares were issued in California may
have a right of rescission under California securities laws, we
believe that the options granted and common stock issued by us
in California were granted and issued pursuant to an exemption
from registration available to us under federal securities laws.
California
Under California law, an issuer is civilly liable to a purchaser
of its securities sold in violation of the registration or
qualification requirements of the California Corporate
Securities Law of 1968. The purchaser may sue to recover the
consideration paid for such securities with interest at
7% per year, less the amount of any income received from
ownership of the securities, upon the tender of such securities
at any time before the earlier of the two year anniversary of
the noncompliance with the registration or qualification
requirements or the one year anniversary of the discovery by the
purchaser of the facts constituting such noncompliance.
However, we may terminate the rights of the purchasers to seek
additional remedies under the California Corporate Securities
Law of 1968 by making a written rescission offer before suit is
commenced by the purchaser, which is approved as to form by the
California Commissioner of Corporations where the offer:
•
states how liability under the registration or qualification
requirements may have arisen;
•
offers to repurchase the securities for a cash price payable
upon delivery of the securities, offers to pay the purchaser an
amount in cash equal in either case to the amount recoverable by
the purchaser, or offers to rescind the transaction by putting
the parties back in the same position as before the transaction;
•
provides that such offer may be accepted by the purchaser at any
time within a specified period of not less than 33 days
after the date of receipt of the offer, unless rejected earlier
during such period by the purchaser;
•
sets forth the provisions of the rescission offer requirements
under the California Corporate Securities Law of 1968; and
•
contains such other information as the California Commissioner
of Corporations may require by rule or order.
If the purchaser fails to accept such offer in writing within
the specified time period, of not less than 33 days after
the date of receipt of the offer, that purchaser will no longer
have any right of rescission under California law.
We must also file with the California Commissioner of
Corporations, in such form as the California Commissioner of
Corporations prescribes by rule, an irrevocable consent
appointing the Commissioner of
Corporations or its successor in office to be our attorney to
receive services of any lawful process in any noncriminal suit,
action or proceeding against us or our successor, which arises
under California law after the consent has been filed with the
same force and validity as if served personally on us.
We believe this rescission offer complies in all material
respects with the rescission offer requirements of the
California Corporate Securities Law of 1968.
Funding the Rescission Offer
The rescission offer will be funded from our existing cash
balances. If all persons eligible to participate accept our
offer to repurchase options in full, our results of operations,
cash balances and financial condition will not be affected
materially.
Directors and Officers
Six of our officers and directors hold 161,695 unexercised
options and issued shares of common stock that are subject to
the rescission offer. We have been advised that none of these
officers or directors intend to accept the rescission offer. If
our eligible officers and directors do not participate in the
rescission offer but all other eligible persons accept the
rescission offer in full, our officers and directors would not
materially increase their respective ownership interests in
PeopleSupport.
MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of the material United States
federal income tax consequences of the proposed rescission offer
to holders of common stock and options who accept such offer. It
is the opinion of our counsel, Pillsbury Winthrop Shaw Pittman
LLP. This summary is based on the provisions of the Internal
Revenue Code of 1986, as amended, Treasury regulations
promulgated thereunder, administrative rulings and judicial
decisions, all as of the date hereof. These authorities are
subject to change (possibly retroactively), and to differing
interpretations, and as a result the United States federal
income tax consequences may be different from those set forth
below. In addition, this discussion does not purport to be a
complete analysis of all the potential tax considerations that
may be applicable to you in light of your individual
circumstances, including those that may be relevant if you
(i) hold shares of our common stock that are unvested or
that are subject to hedging, conversion or constructive sale
transactions, (ii) are subject to the alternative minimum
tax provisions of the Internal Revenue Code, (iii) are a
foreign person, or (iv) are not an employee of
PeopleSupport or one of our subsidiaries.
We have not sought, and will not seek, a ruling from the
Internal Revenue Service regarding the federal income tax
consequences of the rescission offer. The following summary does
not address the tax considerations arising under the laws of any
foreign, state or local jurisdiction. Accordingly, each
holder of common stock and options subject to the rescission
offer should consult with such stockholder’s or
optionholder’s tax advisor with respect to the particular
tax consequences that may result as a consequence of accepting
the rescission offer.
Redemption of Common Stock
The amount you receive for any common stock that is repurchased
as a result of the rescission offer (including both the
redemption price itself plus interest) should be treated for
United States federal income tax purposes as proceeds from a
taxable redemption of such stock. The amount and character of
any gain or loss that you recognize as a result of such a
taxable redemption will depend both upon your holding period for
such stock and upon whether your common stock was acquired
pursuant to the exercise of an incentive stock option or the
exercise of a nonstatutory stock option.
Redemption of Shares Received Upon Exercise of Incentive
Stock Options
If common stock was issued to you pursuant to the exercise of an
incentive stock option, and if the redemption does not result in
a “disqualifying disposition” of the shares by you
(that is, the redemption does not occur within two years after
the date of grant or within one year after the issuance of such
shares to you),
then the redemption rules of section 302 of the Internal
Revenue Code should apply to determine whether you recognize
capital gain, capital loss, or dividend income. Under
section 302 of the Internal Revenue Code, a stock
redemption will be treated as a sale or exchange of the redeemed
stock if such redemption (i) completely terminates your
entire actual and constructive stock interest in our equity,
(ii) is “substantially disproportionate” or
(iii) is “not essentially equivalent to a
dividend.” In determining whether any of these tests is
satisfied, you must take into account the shares of stock
actually owned by you as well as the shares of stock
constructively owned by you under the constructive ownership
rules of section 318 of the Code. Under these constructive
ownership rules, you may be deemed to own any shares of our
capital stock that are owned, actually and in some cases
constructively, by certain related individuals or entities, as
well as any shares of our capital stock that you have a right to
acquire by exercise of any option or by conversion or exchange
of a security.
A redemption of your common stock pursuant to the rescission
offer will be treated as “substantially
disproportionate” if (i) your percentage ownership of
our outstanding voting stock (including all classes of stock
that have voting rights) is reduced immediately after the
redemption to less than 80% of your percentage interest in such
stock immediately before the redemption, (ii) your
percentage ownership of our outstanding common stock (both
voting and non-voting) immediately after the redemption is
reduced to less than 80% of such percentage ownership
immediately before the redemption, and (iii) you own,
immediately after the redemption, less than 50% of the total
combined voting power of all classes of our stock entitled to
vote.
A redemption of your common stock pursuant to the rescission
offer will be treated as “not essentially equivalent to a
dividend” if you experience a “meaningful
reduction” in your percentage interest in our equity as a
result of the redemption. Depending on your particular
circumstances, taking into account whether you are part of our
management or a member of our Board of Directors, even a small
reduction in your stock ownership interest in us may satisfy
this test.
Each of these three tests is applied on a person-by-person
basis. As a result, it is possible that some stockholders who
accept the rescission offer will be able to satisfy at least one
these tests while others will not.
If the redemption of your common stock is treated as a sale or
exchange under the foregoing rules, you will recognize gain or
loss equal to the difference between the amount received in the
redemption and your tax basis in the redeemed common stock. Such
gain or loss will be treated as capital gain or loss so long as
you hold your shares of common stock as capital assets, and
furthermore will be treated as long-term capital gain or loss if
you have held the redeemed common stock for more than one year.
Capital gains are grouped and netted by holding periods. Net
capital gain on assets held for one year or less is taxed
currently at your highest marginal income tax rate. Net capital
gain of individuals on assets held for more than one year is
taxed currently at a maximum federal rate of 15%. Capital losses
are first allowed in full against capital gains and then up to
$3,000 ($1,500 for married individuals filing separate returns)
against other income.
If the redemption does not constitute a sale or exchange under
the rules described above, then your gross redemption proceeds
will be treated as a taxable dividend distribution to the extent
of our current and accumulated earnings and profits, on a pro
rata basis with other persons whose sales fail to so qualify.
Under current law, so long as certain holding period
requirements are satisfied, the maximum tax rate on most
dividends received by individuals before January 1, 2009 is
generally 15%. Any redemption proceeds in excess of the amount
treated as a dividend will be treated first as a non-taxable
return of capital to the extent of your tax basis in the
redeemed common stock, and then as a gain from a sale or
exchange. You should be able to transfer any unrecovered tax
basis in redeemed common stock shares to any retained (and
possibly constructively owned) PeopleSupport stock.
If the redemption of common stock acquired upon the exercise of
an incentive stock option results in a disqualifying disposition
(that is, the redemption occurs before the expiration of two
years from the date of grant or one year from the date of
exercise), you will recognize ordinary income in the year of
disposition in an amount equal to the excess, if any, of the
fair market value of the shares at exercise (or, if less, the
amount realized on the disposition of the shares) over the
option exercise price paid for such shares, and we will be
entitled to a tax deduction in the same amount. Any further gain
or loss that you recognize will be taxed as
short-term or long-term capital gain or loss, as the case may
be, assuming that you hold your shares of common stock as
capital assets.
Redemption of Shares Received Upon Exercise of Nonstatutory
Stock Options
If common stock was issued to you pursuant to the exercise of a
nonstatutory stock option, you will generally have recognized
ordinary income on exercise in an amount equal to the difference
between the option exercise price paid for the shares and the
fair market value of the shares on the date of exercise, and we
would generally have been entitled to a tax deduction in the
same amount. A subsequent sale by you of such stock pursuant to
the rescission offer should cause you to recognize gain or loss
in an amount equal to the difference between the amount received
in the redemption and your tax basis in the redeemed common
stock. Such gain or loss will be treated as described above
under “Redemption of Shares Received Upon Exercise of
Incentive Stock Options” with respect to stock as to which
no disqualifying disposition has occurred.
If an option designated as an incentive stock option first
becomes exercisable in any calendar year for shares the
aggregate fair market value of which (determined on the date the
option is granted) exceeds $100,000, such excess shares will be
treated for income tax purposes as having been acquired by you
pursuant to a nonstatutory stock option. For purposes of this
rule all incentive stock options we have granted to you would be
aggregated and options would be taken into account in the order
in which they are granted.
Redemption of Unexercised Options
If you accept the rescission offer with respect to your
unexercised options, any amounts paid to you will treated as
taxable compensation income for United States income and
employment tax purposes in the year received. We will withhold
certain income and payroll taxes from any payment made to you as
required by law, including FICA and Medicare taxes, and other
applicable employment taxes. For United States federal income
tax withholding purposes, we will treat any payment as a
“supplemental wage payment,” and withhold at a flat
rate of 25%. To the extent that you recognize ordinary income as
a result of amounts paid to you in connection with the
rescission of your unexercised options, we will generally be
entitled to a corresponding federal income tax deduction.
You are urged to consult your tax advisor with respect to the
application of the United States federal income tax laws to your
particular situation, as well as any tax consequences of the
rescission of your unexercised options and/or shares issued upon
the exercise of options under the laws of any state, local,
foreign or other taxing jurisdiction or under any applicable tax
treaty.
DIVIDEND POLICY
We have never declared or paid cash dividends on our common
stock and do not expect to pay any cash dividends in the
foreseeable future. We anticipate that we will retain any future
earnings to finance the operation and expansion of our business.
Any future determination to declare and pay dividends will
depend on a number of factors, including our future earnings,
financial condition, results of operations, capital
requirements, business prospects and other factors that our
board of directors may deem relevant, including any contractual
or statutory restrictions on our ability to pay dividends.
Our common stock commenced trading on the Nasdaq National Market
under the symbol PSPT on October 1, 2004. The following
table sets forth the high and low closing sale prices of our
common stock as reported by the Nasdaq National Market for the
period from October 1, 2004 through September 19, 2005.
On September 19, 2005, the last reported sale price of our
common stock on the Nasdaq National Market was $8.25 per
share. As of September 1, 2005, there were approximately
250 holders of record of our common stock. Based on information
provided by our transfer agent and registrar, we believe that
there are approximately 3,000 owners of our common stock.
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. The consolidated
statements of operations data for each of the six month periods
ended June 30, 2004 and 2005, and the consolidated balance
sheet data as of June 30, 2005 are derived from our
unaudited 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 and the six
months ended June 30, 2004 and 2005, which are included
elsewhere in this offering circular. Historical results are not
necessarily indicative of the results to be expected in the
future.
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
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 we
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
net income for the six months ended June 30, 2004 and 2005.
(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 offering circular. 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.
The following discussion should be read in conjunction with
the consolidated financial statements and accompanying notes,
which appear elsewhere in this offering circular. 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 offering circular, particularly under the heading
“Risk Factors.”
Overview
We provide offshore BPO services from our facilities in the
Philippines. We provide customer management services for
primarily U.S.-based clients who wish to outsource this
function. We currently service 31 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. Our three largest customer
management service clients during the six months ended
June 30, 2005 collectively accounted for more than 61% of
our revenues. Expedia, our largest client, and EarthLink, our
second largest client, together accounted for approximately 48%
of our revenues for the six months ended June 30, 2005.
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 grew 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 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.
Background
We began providing outsourced customer management services in
1998 from our 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
wholly-owned 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 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 three outsourcing facilities and employ more than 3,900
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 offering circular, 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.
Quarterly Results of Operations and Performance
Trends
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 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)
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.
(4)
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.
(5)
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.
(6)
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 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:
The restatement did not have any effect on the results for the
year.
(7)
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.
Sources of Revenues
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, 1.5% of our total revenues in 2004 and less than 5% of our
total revenues for the six months ended June 30th, 2005.
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 three largest
customer management service clients for the six months ended
June 30, 2005 collectively accounted for more than 61% of
our revenues. Expedia, our largest client, and EarthLink, our
second largest client, together accounted for approximately 48%
of our revenues for the six months ended June 30, 2005. 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.
Key Expense Categories
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 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 10 of the Notes to
Consolidated Financial Statements included elsewhere in this
offering circular.
During the year ended December 31, 2004, we 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 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 our limited
experience in assessing its collection trends, we only recognize
revenue to the extent of cash collected in excess of the
portfolio’s purchase price. We periodically assess 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, 2004 and
June 30, 2005 our balance sheets reflect $1.9 and
$4.0 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. For the six months ended June 30, 2005, we recorded
$0.5 million in stock based compensation expense.
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 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
and June 30, 2005 were $20.6, $23.6 and $22.5 million,
respectively prior to valuation allowances. 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 2009, 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.
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),”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.
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).
Our revenues increased by $8.8 million, or 44%, from
$20.0 million for the six months ended June 30, 2004
to $28.8 million for the six months ended June 30,2005. This increase was primarily attributable to an increase of
$4.4 million in customer management fees associated with
services provided to 13 new clients in the financial,
telecommunications and technology industries and an increase of
$4.4 million in customer management fees associated with a
higher volume of services 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.
Cost of Revenues
Our cost of revenues increased by $5.8 million, or 55%,
from $10.5 million for the six months ended June 30,2004 to $16.3 million for the six months ended
June 30, 2005. The increase was primarily attributable to
increased costs of approximately $5.9 million (or 20% of
revenue) associated with the expansion of our outsourcing
operations in the Philippines and an increase in the number of
customer management professionals, $0.3 million (or 1% of
revenue) of expense associated with the early migration to the
PeopleSupport Center, $0.1 million (less than 1% of revenue) of
expense related to amortization of the management incentive
plan, partially offset by a decrease of $0.2 million (or 1%
of revenue) of stock-based compensation expense. We anticipate
that these costs will continue to increase in quarters when we
expand our operations and increase the volume of customer
management services we provide. We believe this trend of
expansion will continue due to increased demand for our
outsourced services by our existing clients, and our ability to
attract new clients. Our cost of revenues as a percentage of
revenues increased from 53% for the six months ended
June 30, 2004 to 57% for the six months ended June 30,2005.
Selling, general and administrative expenses (SG&A)
increased by $1.4 million, or 32%, from $4.4 million
for the six months ended June 30, 2004, to
$5.8 million for the six months ended June 30, 2005.
The increase was primarily attributable to $1.1 million (or
4% of revenue) related to public company costs, which include
but are not limited to outside professional fees,
Sarbanes-Oxley 404 compliance costs and increased insurance
premiums, $0.6 million (or 2% of revenue) related to
salaries and wages, $0.2 million (or 1% of revenue) of
value added tax in the Philippines, partially offset by a
decrease of $0.3 million (or 1% of revenue) of stock-based
compensation expense and a decrease of $0.2 million (or 1%
of revenue) related to adjustments to our allowance for doubtful
accounts. Our SG&A as a percentage of revenues decreased
from 22% for the six months ended June 30, 2004 to 20% for
the six months ended June 30, 2005.
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 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.
Cost of Revenues
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
at the PeopleSupport Center; a new build-to-suit
162,000 square feet leased facility where we recently
commenced 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.
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 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.
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
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.
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 our initial public
offering which closed on October 6, 2004.
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. Our 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.
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.
Cost of Revenues
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.
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.
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
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
$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.
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.
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.
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 financed our operations from inception primarily through
cash flows from operations, sales of equity securities,
equipment financings, and interest income earned on cash, cash
equivalents and investments. To date, inflation has not had a
material effect on our business for two reasons. First, the
Philippines has historically experienced deflationary pressure
on wages due to a fast growing population, high unemployment
(11.3% in the first quarter of 2005) and 385,000 college
graduates a year entering a market that cannot absorb all of
them. Second, our peso denominated expenses have decreased in
dollar terms due to the decline in the value of the peso
relative to the dollar, as discussed below.
As of June 30, 2005, we had working capital of
$45.5 million including cash and cash equivalents totaling
$21.8 million (excluding a restricted cash equivalent),
marketable securities of $24.0 million and accounts
receivable of $7.7 million.
At December 31, 2002, we became subject to the registration
requirements under Section 12(g) of the Exchange Act
because we had over 500 holders of stock options. We filed on
June 13, 2005 a registration statement to register shares
of our common stock under the Exchange Act, to become a publicly
reporting entity. We estimate that we will incur additional
annualized expenses of approximately $3.0 million as a
public company, primarily due to increased expenses that we will
incur to comply with the requirements of the Sarbanes-Oxley Act
of 2002, as well as costs related to accounting and tax
services, directors and officers insurance, legal expenses, and
investor and shareholder-related expenses.
Operating Activities
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 provided by operating activities was $7.7 million
for the six months ended June 30, 2004, which was greater
than our net income of $3.1 million for the same period.
The difference is primarily due to $1.8 million of
depreciation and amortization, $0.9 million of non-cash
stock-based compensation expense, and an aggregate change in
operating assets and liabilities of $1.8 million. Net cash
provided by operating activities was $8.6 million for the
six months ended June 30, 2005, which was greater than our
net income of $5.0 million for the same period. The
difference is primarily due to $2.1 million of depreciation
and amortization, $0.5 million of non-cash stock-based
compensation expense, $0.3 million reduction to our
provision for doubtful accounts, $0.2 million of deferred
compensation cost amortization and an aggregate change in
operating assets and liabilities of $1.1 million.
Investing Activities
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
year 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 million reduction in restricted cash equivalents. Cash
used in investing activities for the year ended
December 31, 2002 was 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.
Net cash used in investing activities during the six months
ended June 30, 2004 and 2005 was $5.3 million and
$28.6 million, respectively. During the six months ended
June 30, 2004 we incurred $5.7 million of capital
expenditures associated with the expansion of the Philippine
operations which was offset by $0.4 million of receivable
portfolio collections. Cash used in investing activities for the
six months ended June 30, 2005 was primarily comprised of
$24.3 million related to the purchase of marketable
securities and $4.6 million of capital expenditures
associated with the continuing expansion of the Philippine
operating facilities, offset by $0.3 million of maturity of
marketable securities. We used proceeds from our initial public
offering to purchase the $24.0 million of marketable
securities.
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. Our capital expenditures during the six months
ended June 30, 2005 were approximately $4.6 million,
primarily for telecommunications equipment, leasehold
improvements, computer hardware and software, and furniture and
fixtures in support of expanding our infrastructure. In June
2005, we moved 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 have built out approximately 60% of the
PeopleSupport Center’s total production capacity for use in
2005 and intend to build out the remaining portion in early
2006. During the six months ended June 30, 2005, build
out costs for this facility (both paid and unpaid) were
$5.3 million for telecommunication equipment, leasehold
improvements, computer hardware and software, and furniture and
fixtures. We estimate additional build out costs in 2005 of
the PeopleSupport Center of approximately $1.0 million. In
addition to the PeopleSupport Center, we estimate further build
out costs in 2005 of our infrastructure of $2.5 million to
$3.5 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, cash
equivalents and marketable securities 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.
Net cash used in financing activities during the six months
ended June 30, 2004 was $1.6 million and net cash
provided by financing activities was $0.2 million for the
six months ended June 30, 2005. Net cash used in
financing activities for the six months ended June 30, 2004
was comprised of $0.5 million of public offering costs and
the $1.3 million repurchase of common stock from one of our
founders, offset by $0.2 million of proceeds from the
exercise of stock options and warrants. Net cash provided by
financing activities for the six months ended June 30, 2005 was
comprised of $0.2 million of proceeds from the exercise of
stock options.
At June 30, 2005 we had restricted cash equivalents in the
amount of approximately $0.4, held in a certificate of deposit
as collateral for our lending facilities, which will be released
in second half of 2005.
Based on our current level of operations, we expect that our
cash flow from operations, together with the proceeds of the
current working capital and cash, cash equivalents and
marketable securities, will be adequate to meet our anticipated
cash needs at least through 2006. 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.
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.
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 are making a rescission offer to the U.S. holders
of these options. Before the completion of its initial public
offering, we 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 our 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 are filing
this 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 are
offering 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
are offering 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 and shares 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 and shares,
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
Securities 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 issuable upon exercise of 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.
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.
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.
On December 16, 2004, the FASB issued
SFAS No. 123 (revised 2004), “Share-Based
Payment”, which is a revision of SFAS No. 123,
“Accounting for Stock-Based Compensation.”
SFAS No. 123(R) supersedes APB No. 25,
“Accounting for Stock Issued to Employees”, and amends
SFAS No. 95, “Statement of Cash Flows.”
Generally the approach in SFAS No. 123(R) is similar
to the approach described in SFAS No. 123. However,
SFAS No. 123(R) requires all share-based payments to
employees, including grants of employee stock options, to be
recognized in the income statement based on their fair values.
Public companies may adopt SFAS No. 123(R) requirements
using one of two methods:
1. A “modified prospective” method in which
compensation cost is recognized beginning with the effective
date (a) based on the requirements of
SFAS No. 123(R) for all share-based payments granted
after the effective date and (b) based on the requirements
of SFAS No. 123 for all awards granted to employees
prior to the effective date of SFAS No. 123(R) that
remain unvested on the effective date.
2. A “modified retrospective” method which
includes the requirements of the modified prospective method
described above, but also permits entities to restate based on
the amounts previously recognized under SFAS No. 123
for purposes of pro forma disclosures either (a) all prior
periods presented or (b) prior interim periods of the year
of adoption.
We plan to adopt SFAS No. 123(R) beginning in fiscal
year 2006.
As permitted by SFAS No. 123, we currently accounts
for share-based payments to employees using APB Opinion
25’s intrinsic value method. Accordingly, the adoption of
SFAS No. 123(R)’s fair value method will have a
significant impact on our reported results of operations. The
impact of adopting SFAS No. 123(R) cannot be predicted
at this time because it will depend on levels of share-based
payments granted in the future. Had we adopted
SFAS No. 123(R) in prior periods, the impact of that
standard could reasonably be expected to have approximated the
impact of SFAS No. 123 as described in the disclosure
of pro forma net income and earnings per share in Note 1
“Accounting Policies” in this report.
SFAS No. 123(R) also requires the benefits of tax
deductions in excess of recognized compensation cost to be
reported as a financial cash flow, rather than as an operating
cash flow as required under current literature. This requirement
will reduce net operating cash flows and increase net financing
cash flows in periods after adoption. While we can not estimate
what those amounts will be in the future, the amount of such
excess tax deductions from option exercises were less than
$0.1 million for the first half of 2005.
We are currently evaluating our business practices regarding the
magnitude or form of share-based compensation to employees and
the choice of the option-pricing model in the future.
In March 2005, the SEC issued SAB No. 107, which
expresses views of the SEC staff regarding the interaction
between SFAS No. 123(R) and certain SEC rules and
regulations. Additionally, SAB No. 107 provides the
staff’s view regarding the valuation of share-based payment
arrangements for public companies and interpretive guidance in
implementation of SFAS No. 123(R) and disclosures in
MD&A subsequent to adoption of SFAS No. 123(R).
SAB No. 107 does not change the accounting required by
SFAS No. 123(R).
The FASB required SFAS No. 123(R) be adopted in the
first interim or annual period beginning after June 15,2005. On April 14, 2005, the SEC issued a press release
amending compliance dates for SFAS No. 123(R). Under
the SEC’s new rule, SFAS No. 123(R) will become
effective for us beginning in fiscal year 2006.
In December 2004, the FASB issued SFAS No. 153,
Exchanges of Nonmonetary Assets, which eliminates the
exception for nonmonetary exchanges of similar productive assets
and replaces it with a general exception for exchanges of
nonmonetary assets that do not have commercial substance. SFAS
No. 153 will be effective for nonmonetary asset exchanges
occurring in fiscal periods beginning after June 15, 2005.
We do not
believe the adoption of SFAS No. 153 will have a material
impact on our results of operations or financial condition.
In May 2005, the FASB issued SFAS No. 154, “Accounting
Changes and Error Corrections.” SFAS No. 154
requires retrospective application to prior periods’
financial statements of a voluntary change in accounting
principle and that a change in method of depreciation,
amortization, or depletion for long-lived, nonfinancial assets
be accounted for as a change in accounting estimate that is
effected by a change in accounting principle. SFAS No. 154 is
effective for accounting changes and corrections or errors made
in fiscal years beginning after December 15, 2005. We do not
believe the adoption of SFAS No. 154 will have a material impact
on our results of operations or financial condition.
On July 19, 2005, the FASB issued proposed FASB Staff Position
(FSP) FAS 13-b, “Accounting for Rental Costs Incurred
during a Construction Period.” The FASB is proposing in
this FSP that rental costs associated with ground or building
operating leases that are incurred during a construction period
be expensed. FASB Technical Bulletin (FTB) No. 88-1,
“Issues Relating to Accounting for Leases”, requires
that rental costs associated with operating leases be allocated
on a straight-line basis in accordance with FASB Statement
No. 13, “Accounting for Leases”, and
FTB 85-3, “Accounting for Operating Leases with
Scheduled Rent Increases”, starting with the beginning of
the lease term. The FASB believes there is no distinction
between the right to use a leased asset during the construction
period and the right to use that asset after the construction
period. As proposed, companies would be required to apply the
guidance in the FSP to the first reporting period beginning
after September 15, 2005. We believe that the impact of
this proposed position will increase our rent expense associated
with the PeopleSupport Center, which is recorded in cost of
revenues, by approximately $0.2 million per quarter until
all floors of the PeopleSupport Center are built-out, which is
anticipated to occur by the end of 2006.
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 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.
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, we are currently experiencing higher inflation and
expect 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
(9.8% in the first two quarters of 2005) 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.
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 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.
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 3,900 college
educated, fluent English-speaking Philippine personnel. From our
Philippine facilities, we provide customer management services
for primarily U.S.-based clients who wish to outsource this
function to a high quality, lower cost provider. We currently
service 31 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 include 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. Our
three largest customer management service clients for the six
months ended June 30, 2005 collectively accounted for more
than 61% of our revenues. Expedia, our largest client, and
EarthLink, our second largest client, together accounted for
approximately 48% of our revenues for the six months ended
June 30, 2005. 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. Our revenues increased by
$8.8 million, or 44%, from $20.0 million for the six
months ended June 30, 2004 to $28.8 million for the
six months ended June 30, 2005. Substantially all of our
revenues in the first six months of 2005 and all of 2004 and
2003 was derived from our customer management business, and less
than 3.0% percent was derived from our accounts receivable
management business. At June 30, 2005 we had an accumulated
deficit of $48.0 million as the result of net losses in
prior years.
We have developed an integrated offshore platform that includes
three 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 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.
Industry Background
Overview
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.
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:
•
significant cost benefits;
•
best practices in leveraging learned experiences across multiple
clients in an efficient and effective manner;
•
the importance of professionally managed customer communications
to retain and grow customer relationships;
the ability to free available resources and management to focus
on developing core products and services;
•
increasing capital requirements for sophisticated communications
technology needed to provide timely technical support and
customer care; and
•
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.
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.
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.
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 relationship
with our clients, and to become experts in processes other than
customer management, such as back office processes.
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.
Sales Centric Focus
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.
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.
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
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.
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.
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.
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.
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.
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.
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.
•
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.
•
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.
•
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.
•
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
and process orders for the purchase of our clients’
products or services and identify opportunities to sell other
products and services.
Hosting. On a limited basis, we host and maintain the
customer interaction section of our clients’ websites,
including e-mail and live web chat 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.
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.
•
“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.
•
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 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.
•
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.
•
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.
•
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.
•
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.
•
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.
•
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.
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. Our three
largest customer management service clients for the six months
ended June 30, 2005 collectively accounted for more than
61% of our revenues. Expedia, our largest client, and EarthLink,
our second largest client, together accounted for approximately
48% of our revenues for the six months ended June 30, 2005.
Expedia has been a client since 2000 and 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.
•
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.
•
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
On September 1, 2005, we had a total of 3,970 employees,
with 43 employees at our headquarters in Los Angeles, five
field sales representatives in the United States and 3,922
employees in the Philippines. We had 3,654 employees in
operations, 114 employees in sales and marketing,
74 employees in information technology and
128 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.
Hiring and Recruiting
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
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.
Workforce Management
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:
•
full integration with our voice, e-mail and live web chat
systems;
•
analytics and scenario-based forecasting and scheduling;
•
schedule adherence and event monitoring;
•
real-time reporting; and
•
online work schedule management.
Competition
We believe that the principal competitive factors in our
business include the ability to:
•
provide high quality professionals with strong customer
interaction skills, including English language fluency with
minimal accents;
•
offer cost-effective pricing of services;
•
deliver value-added and reliable solutions to clients;
•
provide industry specific knowledge and expertise;
•
generate revenues for clients; and
•
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
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.
•
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.
•
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. Wipro LTD, a
large publicly held outsourcer of IT and IT related services
based on India, recently announced plans to expand its
operations into the Philippines. 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.
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.
Client Development
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:
•
develop client relationships;
•
finalize sales proposals and assist in the negotiation and
closing of new client engagements; and
•
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.
Client services
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 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.
Properties
Our corporate headquarters are located at 1100 Glendon Ave.,
Suite 1250, Los Angeles, California90024, 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 24,232 square feet under a lease that expires
on January 31, 2006; and 57,421 square feet of office
space under a lease that expires on April 15, 2007.
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 commenced operations in June 2005. The leased
facility consists of approximately 162,000 rentable square
feet of office space and 146 parking spaces. The facility serves
as PeopleSupport’s regional headquarters in the Philippines
and its principal outsourcing facility. We believe these
facilities and additional or alternative space available to us
will be adequate to meet our needs in the near term.
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, individually or in
the aggregate, are material to our business or financial
condition.
President of PeopleSupport (Philippines) and Vice President of
Global Operations
Parham Farahnik
37
Senior Vice President of Global Sales and Marketing
Rowena Ricafrente
36
Vice President of Global Human Resources
Adam Berger(2)(3)
42
Director
C. Larry Bradford(1)(2)(3)
69
Director
Michael Edell(1)(2)
42
Director
George Ellis(1)
56
Director
Joe Rose(3)
54
Director
(1)
Member of the Audit Committee
(2)
Member of the Compensation Committee
(3)
Member of the Nominating and Corporate Governance Committee
Lance Rosenzweig, one of our founders, has served as our
Chairman of the Board of Directors since our inception in 1998.
He has also served as our Chief Executive Officer since March
2002. Prior to joining us, from 1993 to 1997,
Mr. Rosenzweig was a founder, Chairman and President of
Newcastle Group, a privately held plastics manufacturing
company. In 1993, Mr. Rosenzweig was a founder of Unisite,
a privately held wireless cell site management company, which
was acquired by American Tower in 2000 for over
$200 million. Prior to 1993, Mr. Rosenzweig was a
divisional Vice President at GE Capital, a Vice President in the
investment banking group of Dean Witter (now Morgan Stanley), a
Vice President in the investment banking group of Capel Court
Pacific, an Australian investment banking firm, and a corporate
planning manager of Jefferson Smurfit Corp., a multinational
packaging company. Mr. Rosenzweig has 17 years of
executive leadership experience with start up and established
companies. Mr. Rosenzweig has an M.B.A. in marketing,
finance and information technology from Northwestern
University’s Kellogg School of Management and a Bachelor of
Science degree in Industrial Engineering, with Tau Beta Pi
honors, from Northwestern University.
Caroline Rookhas served as our Chief Financial Officer
since June 2002. Prior to joining us, from June 2000 to June
2002, Ms. Rook was Corporate Leader Financial Operations of
Acxiom Corporation, a publicly traded technology company based
in Little Rock, Arkansas that provides information management
solutions. Prior to joining Acxiom, Ms. Rook was at
Sterling Software, Inc., where she served as Vice President of
Finance in the Business Intelligence Group and for two
divisions. Ms. Rook has over 20 years of financial
experience. Ms. Rook has a Bachelor of Science degree in
Computation from the University of Manchester Institute of
Science and Technology (England) and is a Fellow of the
Institute of Chartered Accountants in England and Wales.
Rainerio Borja has served as our President of
PeopleSupport Philippines since May 2000 and Vice President of
Global Operations since March 2003. Prior to joining us, from
August 1999 to April 2000, Mr. Borja was the Director of
Professional Services and Support — Asia/ Pacific, for
Epicor Corporation, a publicly traded software company. Prior to
joining Epicor Corporation, from March 1998 to May 1999,
Mr. Borja was Regional Services Director for Danka
Corporation, a publicly traded digital imaging company. Prior to
joining Danka Corporation, Mr. Borja held several
management positions with Unisys Corporation
throughout the Asia/ Pacific region for over 10 years where
he was responsible for running the Asia/ Pacific Training
Center, the Advanced Systems Support Group and its Regional
Consulting Organization. Mr. Borja’s last position
with Unisys was as Director of Services and Support, Global
Customer Services. Mr. Borja has over 14 years of
experience managing large-scale customer service, IT support and
consulting organizations within the Asia/ Pacific region.
Mr. Borja has a Bachelor of Science in Commerce from De
La Salle University.
Parham Farahnik has served as our Senior Vice President
of Global Sales and Marketing since September 2005. From January
2003 to September 2005, Mr. Farahnik served as our Vice
President of Sales and Marketing. From December 1998 to 2003,
Mr. Farahnik served as our National Accounts Manager
and Director of Sales. Prior to joining us, from February 1997
to November 1998, Mr. Farahnik was a Sales Executive for a
privately held packaging manufacturing company based in Los
Angeles, where he was also a founder and Vice President of Sales
from January 1991 to February 1997. Mr. Farahnik has over
10 years of sales and management experience and a Bachelor
of Science degree from California State University, Northridge
with an emphasis in Business Marketing.
Rowena Ricafrente, PeopleSupport’s Vice President of
Global Human Resources since April 2005, has over 11 years
of human resource experience. She joined PeopleSupport as
Manager of Human Resources when the company started its
Philippine operations in 2000. Prior to PeopleSupport, from June
1997 to March 2000, Ms. Ricafrente was a consultant for ZMG
Signium Ward Howell, Philippines, where she engaged in executive
searches and human resource consulting.
Ms. Ricafrente’s other assignments included US
management positions in the Human Resources department at the
Good Guys, a consumer electronics retail chain, from June 1996
to April 1997, and at the University of California at
San Francisco, from February 1994 to May 1996.
Ms. Ricafrente graduated cum laude from the University of
Philippines with a Bachelor of Science degree in Psychology.
Adam Berger has served as one of our directors since
January 2003. Since June 1999, Mr. Berger has been
President and Chief Executive Officer of WeddingChannel.com, a
privately held company. Prior to joining WeddingChannel.com,
from August 1994 to November 1998, Mr. Berger was President
of The Franklin Mint, a global direct marketer and retailer of
collectibles. Prior to joining The Franklin Mint, from August
1991 to July 1994, Mr. Berger was a consultant with Boston
Consulting Group. Mr. Berger began his career with The
Procter and Gamble Company in Cincinnati, holding various line
management positions in product development and brand
management. Mr. Berger has an M.B.A. with distinction from
the Harvard Business School and a Bachelor of Science in
Chemical Engineering from the University of California at
Berkeley.
C. Larry Bradford has served as one of our directors
since May 1999. Prior to joining us, from November 1992 to
November 1994, Mr. Bradford was Vice President of Sales and
Marketing for Jefferson Smurfit Group, a multinational packaging
company. From February 1991 to October 1992, Mr. Bradford
served as Vice President of the Container Division at Jefferson
Smurfit and, from January 1983 to January 1991, he was Vice
President of the Folding Carton and Boxboard Mill Division.
Prior to joining Jefferson Smurfit, Mr. Bradford was a Vice
President at Potlatch Corporation, a publicly traded forest
products company. Mr. Bradford has a Bachelors of Science
degree from St. Louis University with an emphasis in
Electrical Engineering and served as a Lieutenant in the Air
Force National Guard.
Michael Edell has served as one of our directors since
June 2002. Mr. Edell is currently the President and Chief
Executive Officer of Warehouse Auction Centers, Inc., a
privately held online e-commerce site for collectible items, and
is General Partner of Warp Nine Partners, LLC, a real estate
partnership. From September 1983 to February 2003,
Mr. Edell was the President and Chief Executive Officer of
eLabor.com, a privately held technology company that developed
workforce management software and was acquired by ADP in 2003.
George H. Ellis joined our board of directors in October
2004, following our initial public offering. Since October 2001,
Mr. Ellis has been Chairman and Chief Executive Officer of
SoftBrands, Inc., a global supplier of enterprise-wide software,
and its predecessor, AremisSoft Corporation, which was
reorganized under Chapter 11 of the U.S. Bankruptcy
Code in August 2002. Mr. Ellis joined AremisSoft as Chief
Executive
Officer to facilitate its reorganization. Mr. Ellis also
served on the board of directors of AremisSoft from April 1999
to February 2001. Prior to his appointment as Chairman and Chief
Executive Officer of AremisSoft, from February 2000 to October
2001, Mr. Ellis was Executive Vice President and Chief
Operating Officer of the Communities Foundation of Texas. Prior
to joining the Communities Foundation of Texas, Mr. Ellis
was a founder and Managing Director of Chaparral Ventures, Ltd.,
a Dallas based venture capital firm focused on electronic
commerce investments. Prior to joining Chaparral Ventures,
Mr. Ellis was Chief Financial Officer of Sterling Software,
Inc. Mr. Ellis is a Certified Public Accountant and an
attorney in the State of Texas. Mr. Ellis has a Bachelor of
Science in Accounting from Texas Tech University and a Juris
Doctor from Southern Methodist University. Mr. Ellis serves
on the boards of directors of Neon Systems, Inc. and New
Systems, Inc., each of which is a publicly traded company.
Joe Rose has served as our director since June, 2005.
Mr. Rose also serves on the Board of Directors for Captiva
Software, Inc. (NASDAQ: CPTV) and is a member of Captiva’s
Compensation Committee and chairs the Nomination and Corporate
Governance Committee. From 1997 to 2003, Mr. Rose served as
Executive Vice President and Chief Operating Officer at
SourceCorp., Inc., where he was responsible for the operations
of four different operating divisions. These business units
provide imaging, microfilm, data capture and related services to
a range of customers. During this time, Mr. Rose also
served on the company’s Board of Directors and was
responsible for acquisitions of complementary businesses. Before
joining SourceCorp., Inc., Mr. Rose was CEO and a member of
the Board of Directors of FormMaker Software, which merged with
Image Sciences to eventually become Docucorp International.
Prior to FormMaker, Mr. Rose held various senior executive
management positions with the Harland Company and National Data
Corporation.
Board of Directors
Our board of directors currently consists of six members. The
board of directors is divided into three classes, each serving
staggered three-year terms:
•
Our Class I directors include Joe Rose, and his term will
expire at the annual meeting of stockholders to be held in 2008;
•
Our Class II directors include Adam Berger and George
Ellis, and their term will expire at the annual meeting of
stockholders to be held in 2006; and
•
Our Class III directors include C. Larry Bradford, Michael
Edell and Lance Rosenzweig, and their term will expire at the
annual meeting of stockholders to be held in 2007.
As a result, only one class of directors will be elected at each
annual meeting of our stockholders, with the other classes
continuing for the remainder of their respective terms. There
are no family relationships among any of our directors or
executive officers.
Committees of the Board of Directors
Our Board of Directors has appointed an Audit Committee, a
Compensation Committee and a Nominating and Corporate Governance
Committee. The Board has determined that each director who
serves on these committees is “independent,” as that
term is defined by applicable listing standards of The Nasdaq
Stock Market and SEC rules.
Audit Committee
The members of the audit committee are C. Larry Bradford,
Michael Edell, and George Ellis (Chairman). The audit committee
provides assistance to the board of directors in fulfilling its
legal and fiduciary obligations in matters involving our
accounting, auditing, financial reporting, internal control and
legal compliance functions by approving the services performed
by our independent accountants and reviewing
their reports regarding our accounting practices and systems of
internal accounting controls. The audit committee oversees the
audit efforts of our independent accountants and takes those
actions as it deems necessary to satisfy it that the accountants
are independent of management. The audit committee held two
meetings in 2004. The Board of Directors adopted a written Audit
Committee charter, a copy of which is attached as
Appendix B to the proxy statement filed with the SEC on
April 29, 2005.
Compensation Committee
The members of the compensation committee are Adam Berger,
Michael Edell (Chairman), and Larry Bradford. The compensation
committee determines our general compensation policies and the
compensation provided to our directors and officers. The
compensation committee reviews and determines bonuses for our
officers and other employees. In addition, the compensation
committee reviews and determines equity-based compensation for
our directors, officers, employees and consultants and
administers our stock option plans and employee stock purchase
plan. The compensation committee held one meeting in 2004.
Nominating and Corporate Governance Committee
The members of the nominating and corporate governance committee
are Adam Berger, Joe Rose and C. Larry Bradford (Chairman). The
nominating and corporate governance committee makes
recommendations to the board of directors regarding candidates
for directorships and the size and composition of the board. In
addition, the nominating and corporate governance committee
oversees our corporate governance guidelines and report and
makes recommendations to the board concerning corporate
governance matters. The nominating and corporate governance
committee held two meetings in 2004. The written Nomination and
Corporate Governance Committee charter is attached as
Appendix A to the proxy statement filed with the SEC on
April 29, 2005.
Compensation Committee Interlocks and Insider
Participation
None of our executive officers serves as a member of the board
of directors or the compensation committee of any other company
that has one or more executive officers serving as a member of
our board of directors or compensation committee. None of our
employees or current or former officers are members of our
compensation committee.
Director Compensation
All of our directors are reimbursed for reasonable out-of-pocket
expenses incurred in connection with attendance at board and
committee meetings. Our non-employee, or outside, directors are
entitled to receive an annual cash fee of $15,000. In addition,
the chair of our audit committee receives $10,000, the chairs of
our compensation committee and nominating and corporate
governance committee receive $5,000, and all other committee
members receive $2,500. All cash payments to directors are made
quarterly in arrears.
Our non-employee directors also received options to acquire
20,000 shares of our common stock that were granted upon
the closing of our initial public offering, which options vest
quarterly over three years. The per share exercise price of
these options is $6.80. In addition, each non-employee director
will receive an automatic grant of options to acquire
5,000 shares of our common stock on the first business day
following each anniversary of the completion of our initial
public offering on October 6, 2004. The annual automatic
grant will vest quarterly, in equal installments, over a one
year period.
The following table sets forth information regarding the
compensation we paid to our chief executive officer and each of
our other four most highly compensated executive officers whose
total annual salary and bonus exceeded $100,000 for services
rendered in all capacities to us in 2002, 2003 and 2004. We
refer to these individuals as our “named executive
officers.”
In accordance with the rules of the SEC, the compensation
described in this table does not include medical, group life
insurance or other benefits received by the named executive
officers that are available generally to all of our salaried
employees and certain perquisites and other personal benefits
received by the named executive officers that do not exceed the
lesser of $50,000 or 10% of any such named executive
officer’s total annual compensation.
(2)
For Mr. Borja, other annual compensation represents
transportation and housing perquisites, and amounts reimbursed
during the fiscal year for payment of taxes. For
Mr. Farahnik, other annual compensation represents sales
commissions. For Mr. Rosenzweig, other annual compensation
represents fringe benefits.
(3)
In accordance with the terms of our management incentive
compensation plan, senior management and other key employees
received one-time payments based on a formula determined by the
net proceeds received by us and selling stockholders in
connection with our initial public offering. Under the terms of
our management incentive compensation plan, our executive
officers received the following payments during October 2004,
respectively: Lance Rosenzweig, $2,824,760; Caroline Rook,
$627,725; Parham Farahnik, $376,635; Rainerio Borja, $313,852
and Vahid Shariat $251,090.
(4)
Mr. Hossein served as our Chief Information Officer until
he resigned in December 2003. Following Mr. Hossein’s
resignation, Mr. Shariat, our Vice President of Information
Technology, assumed the responsibilities previously held by
Mr. Hossein.
(5)
Mr. Shariat served as our Vice President of Information
Technology until he resigned in April 2005.
The following table presents all individual grants of stock
options during the year ended December 31, 2004 to each of
the named executive officers. We have not granted any stock
appreciation rights.
Represents options we granted to our named executive officers
under our 1998 Stock Option Plan.
(2)
Based on options to purchase an aggregate of 460,201 shares
of common stock granted during the fiscal year ended
December 31, 2004.
(3)
The options were granted prior to our initial public offering
under our 1998 Stock Option Plan at exercise prices, as
determined by our board of directors. Prior to our initial
public offering, the board considered various factors in
determining the value of our common stock. The primary factors
the board considered included our financial condition and
business prospects, operating results, the senior rights,
preferences and privileges of our preferred stock, the absence
of a market for our common stock and the risks normally
associated with investments in companies engaged in similar
businesses.
(4)
The potential realizable value is calculated based on the term
of the option at its time of grant, which is ten years. This
value is net of exercise prices and before taxes, and is based
on our adjusted closing stock price of $9.97 per share on
December 31, 2004 and the assumption that our common stock
appreciates at the annual rate shown, compounded annually, from
the date of grant until their expiration date. These numbers are
calculated based on SEC requirements and do not reflect our
projection or estimate of future stock price growth. Actual
gains, if any, on stock option exercises will depend on the
future performance of the common stock and the date on which the
options are exercised.
Option Exercises and Year-End Option Values
The following table sets forth, with respect to the named
executive officers, the number of shares acquired and the value
realized, if any, upon exercise of stock options during fiscal
2004 and the exercisable and unexercisable options held by them
as of December 31, 2004. The value of unexercised
in-the-money options represents the total gain which would be
realized if all in-the-money options held at December 31,2004 were exercised, and is determined by multiplying the number
of shares underlying the options by the difference between our
adjusted closing stock price of $9.97 on December 31, 2004
and the per share option exercise price.
Value realized is calculated by subtracting the aggregate
exercise price of the options exercised from the aggregate
market value of the shares of common stock acquired on the date
of exercise. For options
exercised prior to our initial public offering, the market value
of shares has been calculated on the basis of the price at which
our common stock was sold in our initial public offering
($7.00 per share).
(2)
The value of unexercised options is calculated by subtracting
the aggregate exercise price of the options from the aggregate
market value of the shares of common stock subject thereto as of
December 31, 2004.
(3)
On March 1, 2005, Vahid Shariat exercised options to
purchase 24,038 shares of common stock at a weighted
average exercise price of $1.20. The value realized from this
exercise, using the closing stock price on March 1, 2005,
was $225,562.
(4)
On April 5, 2005, Caroline Rook exercised options to
purchase 7,984 shares of common stock at an average
exercise price of $0.41. The value realized from this exercise,
using the closing stock price on April 5, 2005, was $63,792.
(5)
On April 19, 2005, Parham Farahnik exercised options to
purchase 5,170 shares of common stock at an average
exercise price of $0.41. The value realized from this exercise,
using the closing stock price on April 19, 2005, was
$40,274.
(6)
On April 22, 2005, Caroline Rook exercised options to
purchase 2,661 shares of common stock at an average
exercise price of $0.41. The value realized from this exercise,
using the closing stock price on April 22, 2005, was
$21,820.
(7)
On April 25, 2005, Rainerio Borja exercised options to
purchase 33,302 shares of common stock at an average
exercise price of $0.41. The value realized from this exercise,
using the closing stock price on April 25, 2005, was
$273,409.
(8)
On April 27, 2005, Lance Rosenzweig exercised options to
purchase 15,967 shares of common stock at an average
exercise price of $0.41. The value realized from this exercise,
using the closing stock price on April 27, 2005, was
$129,971.
(9)
On May 6, 2005, Vahid Shariat exercised options to purchase
1,738 shares of common stock at an average exercise price of
$0.41. The value realized from this exercise, using the closing
stock price on May 6, 2005 was $17,293.
(10)
On May 20, 2005, Vahid Shariat exercised options to
purchase 1,550 shares of common stock at an average exercise
price of $5.15. The value realized from this exercise, using the
closing stock price on May 20, 2005 was $16,275.
(11)
On June 29, 2005, Caroline Rook exercised options to
purchase 5,322 shares of common stock at an average exercise
price of $0.41. The value realized from this exercise, using the
closing stock price on June 29, 2005 was $47,206.
(12)
On August 10, 2005, Caroline Rook exercised options to
purchase 3,422 shares of common stock at an average
exercise price of $0.41. The value realized from this exercise,
using the closing stock price on August 10, 2005 was
$29,840.
(13)
On September 12, 2005, Caroline Rook exercised options to
purchase 2,661 shares of common stock at an average
exercise price of $0.41. The value realized from this exercise,
using the closing stock price on September 12, 2005 was
$22,752.
Employee Benefit Plans
1998 Stock Option Plan
Our board of directors and stockholders adopted our 1998 stock
option plan in August 1998.
As of September 1, 2005, no shares of common stock remained
available for future issuance under our 1998 stock option plan.
As of September 1, 2005, options to purchase a total of
737,457 shares of common stock that were granted under the
1998 stock option plan remained outstanding and were exercisable
at a weighted average exercise price of $1.34 per share.
We last granted options under our 1998 stock option plan in
April 2004, and no shares of our common stock remain available
for future issuance under the 1998 stock option plan. Shares
that are subject to options
that expire, terminate or are cancelled, that are forfeited or
as to which options have not been granted under the 1998 stock
option plan became or will become available for issuance under
our 2004 stock incentive plan.
The 1998 stock option plan provides for the granting of
incentive stock options within the meaning of Section 422
of the Internal Revenue Code of 1986, as amended, to employees
(including officers and employee directors) and the granting of
non-qualified stock options to employees, officers, directors
(including non-employee directors) and consultants. Our 1998
stock option plan has been administered by our board of
directors and our compensation committee. The plan provides the
administrator with the authority to determine the term of option
(which may not exceed 10 years, or five years in the case
of an incentive stock option granted to a stockholder holding
more than 10% of the voting shares of our company). To the
extent an optionee would have the right in any calendar year to
exercise for the first time one or more incentive stock options
for shares having an aggregate fair market value in excess of
$100,000, any such excess options would be treated as
non-qualified stock options.
No option may be transferred by the optionee other than by will
or laws of descent or distribution. Each option may be exercised
during the lifetime of the optionee only by such optionee or the
optionee’s guardian or legal representative. The plan
provides that in the event of a change in control, 25% of the
unvested shares covered by each outstanding option granted under
the plan will immediately vest in full and become exercisable.
The 1998 and 2004 stock option plans provide that in the event
of a recapitalization, stock split or similar capital
transaction, we will make appropriate adjustments in the number
of shares covered by outstanding options and the exercise price
of outstanding options. If we are a party to a merger or
reorganization, outstanding options granted under the plan will
be subject to the agreement of merger or reorganization.
2004 Stock Incentive Plan
Our 2004 stock incentive plan was adopted by our board of
directors in July 2004, and following stockholder approval
became effective upon the completion of our initial public
offering. The 2004 stock incentive plan is administered by our
board of directors or the compensation committee of the 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 will be able to amend or modify the 2004 stock
incentive plan at any time, with stockholder approval, if
required.
900,000 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 180,000 shares total in any calendar year, or for
more than 720,000 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 1,100,000 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. As of September 1,2005, options to purchase a total of 424,566 shares of our
common stock were outstanding under our 2004 stock option plan
at a weighted average exercise price of $8.96 per share.
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 our 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.
As of September 1, 2005, options to purchase a total of
1,382,866 shares of our common stock were authorized for
future grants, including options that were previously available
for grant under our 1998 plan.
We expect that options granted to optionees other than outside
directors will generally vest over four years, with 25% of the
shares vesting one year after the date of grant if the optionee
is then in service to the company, and as to the remaining 75%
of the shares each month thereafter in equal monthly
installments for 36 months, upon the optionee’s
completion of each month of service.
•
Nondiscretionary, automatic grants of nonstatutory stock options
will be made to outside directors. An outside director will be
granted automatically an initial option to
purchase 20,000 shares upon first becoming a member of
our board of directors. The initial option vests quarterly over
three years. Each outside director who was a member of the board
of directors upon completion of our initial public offering
received a nonstatutory option to
purchase 20,000 shares upon completion of our initial
public offering. These options vest quarterly over a three year
period. On the first business day following each anniversary of
the completion of our initial public offering, each outside
director will be automatically granted a nonstatutory option to
purchase 5,000 shares of our common stock, provided
the director has served on our board for at least nine months.
Each annual option to outside directors shall vest and become
exercisable quarterly, in equal quarterly installments, over a
one year period. The options granted to outside directors have a
per share exercise price equal to 100% of the fair market value
of the underlying shares on the date of grant, and will become
fully vested if we are subject to an acquisition or similar
change of control.
•
Generally, if we merge with or into another corporation, we may
accelerate the vesting or exercisability of outstanding options
and terminate any unexercised options unless they are assumed or
substituted for by any surviving entity or a parent or
subsidiary of the surviving entity.
•
The plan terminates ten years after its initial adoption, unless
earlier terminated by the board. The board of directors may
amend or terminate the plan at any time, subject to stockholder
approval where required by applicable law. Any amendment or
termination may not impair the rights of holders of outstanding
awards without their consent.
2004 Employee Stock Purchase Plan
Our 2004 employee stock purchase plan was adopted by our board
of directors in July 2004. A total of 225,000 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 400,000 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 our
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. Our 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 1,000 shares.
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 nine 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 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 corporation under the acquisition or other change of
control arrangement. There has been no activity to date
associated with the 2004 employee stock purchase plan.
401(k) Plan
We have a Section 401(k) Retirement Savings Plan. The
401(k) plan is a tax-qualified retirement plan limited to our
regular U.S. employees, which constitute a small percentage
of our overall workforce. Under the 401(k) plan, participants
may elect to defer a portion of their compensation on a pre-tax
basis and have it contributed to the plan. In addition, at the
discretion of our board of directors, we may make employer
contributions into the 401(k) plan for all eligible employees
which would be allocated on the basis of compensation.
Other Compensation Plan
Effective July 2002, our board of directors and stockholders
approved a plan under which we are obligated to make payments to
senior management and other key employees upon completion of
certain significant transactions, including an initial public
offering of our common stock. At the time we adopted this plan,
we were experiencing continuing operating losses and were
engaged in ongoing expense reduction efforts including
completing our move to the Philippines. We did not believe
common stock options provided sufficient incentive for
management due to the nominal value of our common stock relative
to the preferred stock held by our investors.
We adopted the plan in order to incentivize management to
reverse our losses and build stockholder value and to attract
new management talent. Under the plan, we were obligated to make
payments to senior management and other key employees based on a
formula calculated as a fraction of the net offering proceeds
received by us and selling stockholders in our initial public
offering. We made payments of $4.8 million to senior
management and other key employees upon the closing of our
initial public offering on October 6, 2004. We intend to
make payments of $0.8 million over time to key employees
and personnel based on continued service or other performance
criteria. Additionally, we made payments of $0.5 million
under the plan to senior management and other key employees 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. We also intend to pay to key employees and
personnel $0.2 million over time 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.
Employment Contracts, Termination of Employment and Change in
Control Arrangements
We entered into an agreement with Ms. Caroline Rook, under
which Ms. Rook is entitled to receive severance payments
equal to six months’ base salary in the event we undergo a
change in control and Ms. Rook’s employment is
terminated without cause within six months of the change in
control.
Our 1998 and 2004 stock option plans provide that our directors,
officers and key employees will be able to purchase the lesser
of 25% of the shares subject to their option grant or the number
of shares subject to their option grant that are then unvested,
upon certain changes in control or upon termination without
cause within
six months after a change in control. Changes in control include
any of the following: the merger, consolidation, other
reorganization, with or into, or the sale of all or
substantially all of our assets.
Limitation on Liability and Indemnification of Directors and
Officers
Our amended and restated certificate of incorporation contains
provisions that limit or eliminate the personal liability of
directors to us or our stockholders for monetary damages for
breach of fiduciary duties, except liability for any of the
following acts:
•
breach of the director’s duty of loyalty to us or our
stockholders;
•
acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
•
unlawful payments of dividends or unlawful stock repurchase or
redemptions; or
•
any transaction from which the director derived an improper
personal benefit.
Our amended and restated bylaws also provide that:
•
we will indemnify our directors and officers to the fullest
extent permitted by Delaware law;
•
we may advance expenses to our directors and officers in
connection with a legal proceeding before its final disposition,
subject to the requirements of Delaware law; and
•
the rights provided in our bylaws are not exclusive.
Our bylaws also permit us to purchase and maintain insurance on
behalf of any officer, director, employee or other agent for any
liability arising out of his or her actions in connection with
his or her service to us.
In October and November 2004, we entered into separate
indemnification agreements with each of our directors and
certain of our officers. These indemnification agreements may
require us, among other things, to indemnify our directors and
certain of our officers for related expenses, including
attorneys’ fees, judgments, fines and settlement amounts
incurred by a director or officer in any action or proceeding
arising out of his or her service as one of our directors,
officers or employees or any of our subsidiaries. We believe
that these provisions and agreements are necessary to attract
and retain qualified individuals to serve as directors and
officers. We are not aware of any pending or threatened
litigation or proceeding that might result in a claim for such
indemnification. We also maintain directors’ and
officers’ liability insurance.
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Sale of Preferred Stock
Since January 1, 2004, we have issued and sold the
securities listed below in connection with the following private
financing transactions:
•
In April 2004, we issued 24,635 shares of Series B
convertible preferred stock upon exercise of a warrant held by
C. Larry Bradford, one of our board of directors, for aggregate
consideration of $67,500. Based on an initial offering price of
$7.00 per share, the aggregate value of the shares sold to
Mr. Bradford was $172,445.
•
In June 2004, we issued 1,015,205 shares of Series B
convertible preferred stock upon exercise of warrants, including
495,223 shares to Rustic Canyon Partners, L.P., a five
percent stockholder, for aggregate consideration of
$2.0 million paid in the form of a cashless exchange of
shares underlying warrants valued at $8.52 per share; and
495,222 shares to Clearstone Venture Partners, a five
percent stockholder, for aggregate consideration of
$2.0 million paid in the form of a cashless exchange of
shares underlying warrants valued at $8.52 per share. Based
on an initial offering price of $7.00 per share, the
aggregate value of all such shares issued in June 2004 was
$7,106,435. The aggregate value of the shares issued to Rustic
Canyon was $3,466,561 and the aggregate value of the shares
issued to Clearstone Venture Partners was $3,466,554.
All shares of our previously issued preferred stock were
converted into an equal number of common stock upon completion
of our initial public offering.
Transactions with Management and Our Principal
Stockholders
In April 2004, we repurchased 547,445 shares of our common
stock from David Nash, one of our founders, for $2.47 per
share for a total purchase price of $1.35 million.
Mr. Nash left our employ in April 2000 and has not served
with us as an officer, director, consultant or in any other
capacity since his departure. The repurchase was a privately
negotiated transaction between the parties. Before the sale of
these shares to us, Mr. Nash owned more than five percent
of our outstanding common stock.
We became obligated to pay $5.6 million under our
management incentive compensation plan to senior management and
other key employees in connection with our initial public
offering, of which amount we paid $4.8 million (or 85%)
upon completion of the offering and we intend to pay
$0.8 million (or 15%) over time after the offering based on
continued service or other performance criteria. The
$0.8 million is reflected as a long-term liability, offset
by an asset for the deferred compensation costs.
Our executive officers received one-time payments based on a
formula determined by the net proceeds received by us and the
selling stockholders in our initial public offering. The
executive officers received the following payments: Lance
Rosenzweig, $2,824,760; Caroline Rook, $627,725; Parham
Farahnik, $376,635; Rainerio Borja, $313,852; Vahid Shariat,
$251,090; and Patricia Sarro, $125,545.
We have entered into indemnification agreements with each of our
current directors and officers. These agreements will require us
to indemnify these individuals to the fullest extent permitted
under Delaware law against liabilities that may arise by reason
of their service to us, and to advance expenses incurred as a
result of any proceeding against them as to which they could be
indemnified. We also intend to enter into indemnification
agreements with our future directors and executive officers.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and
persons controlling us pursuant to the foregoing provisions, we
have been informed that in the opinion of the Securities and
Exchange Commission, this indemnification is against public
policy as expressed in the Securities Act and is therefore
unenforceable.
Registration Rights
We have entered into an investors’ rights agreement with
each of the purchasers of preferred stock listed above. Under
this agreement, these and other stockholders are entitled to
registration rights with respect to their shares of common stock
issuable upon the conversion of their convertible preferred
stock. For additional information, see “Description of
Capital Stock — Registration Rights.”
The following table sets forth certain information as of
September 1, 2005, as to shares of our common stock
beneficially owned by: (i) each person who is known by us
to own beneficially more than 5% of our common stock,
(ii) each of our named executive officers listed in the
Summary Compensation Table, (iii) each of our directors and
(iv) all our directors and executive officers as a group.
Unless otherwise stated below, the address of each beneficial
owner listed on the table is c/o PeopleSupport, Inc., 1100
Glendon Avenue, Suite 1250, Los Angeles, California90024.
We have determined beneficial ownership in accordance with the
rules of the Securities and Exchange Commission. Except as
indicated by the footnotes below, we believe, based on the
information furnished to us, that the persons and entities named
in the table below have sole voting and investment power with
respect to all shares of common stock that they beneficially
own, subject to applicable community property laws.
The percentage of common stock beneficially owned is based on
18,228,372 shares outstanding as of September 1, 2005.
In computing the number of shares of common stock beneficially
owned by a person and the percentage ownership of that person,
we deemed outstanding shares of common stock subject to options
held by that person that are currently exercisable or
exercisable within 60 days after September 1, 2005. We
did not deem these shares outstanding, however, for the purpose
of computing the percentage ownership of any other person.
All directors and officers as a group (10 persons)(15)
1,519,298
8.33
%
*
Less than 1.0%
(1)
Represents shares held by Rustic Canyon Ventures, LP. As a
partner of Rustic Canyon Ventures, LP, Michael Song exercises
voting and/or investment powers for the shares held by Rustic
Canyon Ventures, LP. Although Mr. Song may be deemed to be
the beneficial owner, Mr. Song disclaims beneficial
ownership of the shares owned by the above entity. The address
for Rustic Canyon Ventures, LP is 2425 Olympic Boulevard,
Suite 6050 West, Santa Monica, CA90404.
(2)
The address for Deephaven Capital Management, LLC is 130
Cheshire Lane, Suite 102, Minnetonka, MN55305.
(3)
The address for Wasatch Advisors, Inc. is 150 Social Hall
Avenue, Suite 400, Salt Lake City, UT84111.
The address for FMR Corporation is 82 Devonshire Street, Boston
MA 02109.
(5)
Includes 27,372 shares of our previously outstanding
Series A convertible preferred stock which were converted
into an equal number of shares of common stock on
October 6, 2004. Includes 170,459 shares of common
stock held by the Rosenzweig 2004 Irrevocable Trust 1 of
which Mr. Rosenzweig is a trustee, and 3,649 shares of
common stock held by C/ F Rebecca Rosenzweig CA UGMA, of which
Mr. Rosenzweig is a trustee. Includes options to
purchase 7,984 shares of our common stock that are
exercisable immediately or within 60 days of
September 1, 2005.
(6)
Includes options to purchase 10,213 shares of our
common stock that are exercisable immediately or within
60 days of September 1, 2005.
(7)
Includes 188,866 shares of our previously outstanding
Series A convertible preferred stock and Series B
convertible preferred stock that were converted into an equal
number of shares of common stock on October 6, 2004. Also
includes options to purchase 107,081 shares of our
common stock that are exercisable immediately or within
60 days of September 1, 2005.
(8)
Represents options to purchase 21,494 shares of our
common stock that are exercisable immediately or within
60 days of September 1, 2005.
(9)
Includes options to purchase 6,667 shares of our
common stock that are exercisable immediately or within
60 days of September 1, 2005.
(10)
Includes options to purchase 4,563 shares of our
common stock that are exercisable immediately or within
60 days of September 1, 2005.
(11)
Represents options to purchase 31,478 shares of our
common stock that are exercisable immediately or within
60 days of September 1, 2005.
(12)
Includes 5,474 shares of our Series B convertible
preferred stock which were converted into an equal number of
shares of common stock on October 6, 2004. Also includes
options to purchase 7,756 shares of our common stock
that are exercisable immediately or within 60 days of
September 1, 2005.
(13)
Includes options to purchase 2,835 shares of our
common stock that are exercisable immediately or within
60 days of September 1, 2005.
(14)
Includes options to purchase 1,667 shares of our common
stock that are exercisable immediately or within 60 days of
September 1, 2005.
(15)
These 10 individuals include all directors and named executive
officers detailed in notes 5 through 14 above.
DESCRIPTION OF CAPITAL STOCK
General
Our authorized capital stock consists of 87,000,000 shares
of common stock, par value $0.001 per share, and
4,000,000 shares of preferred stock, par value
$0.001 per share.
As of September 1, 2005, there were 18,228,372 shares
of common stock outstanding held by approximately
250 stockholders of record. All outstanding shares of
common stock are fully paid and nonassessable.
Common Stock
Dividend Rights
Subject to preferences that may apply to shares of preferred
stock outstanding at the time, the holders of outstanding shares
of our common stock are entitled to receive dividends out of
assets legally available at the times and in the amounts that
our board of directors may determine from time to time.
Each holder of common stock is entitled to one vote for each
share of common stock held on all matters submitted to a vote of
stockholders. We have not provided for cumulative voting for the
election of directors in our certificate of incorporation. In
addition, our certificate of incorporation and bylaws provide
that certain actions require the approval of two-thirds, rather
than a majority, of the shares entitled to vote. For a
description of these actions, see
“— Anti-takeover effects of Delaware law and our
amended and restated certificate of incorporation and
bylaws.”
No Preemptive, Conversion or Redemption Rights
Our common stock is not entitled to preemptive rights and is not
subject to conversion or redemption.
Right to Receive Liquidation Distributions
Upon our liquidation, dissolution or winding-up, the holders of
common stock are entitled to share in all assets remaining after
payment of all liabilities and the liquidation preferences of
any outstanding preferred stock. Each outstanding share of
common stock is fully paid and nonassessable.
Preferred Stock
Upon completion of our initial public offering, each outstanding
share of our previously outstanding preferred stock was
converted into one share of our common stock. Under our amended
and restated certificate of incorporation, which became
effective upon completion of our initial public offering, our
board of directors is authorized, subject to limitations imposed
by Delaware law, to issue up to a total of 4,000,000 shares
of preferred stock in one or more series, without stockholder
approval. Our board of directors will be authorized to establish
from time to time the number of shares to be included in each
series, and to fix the rights, preferences and privileges of the
shares of each wholly unissued series and any of its
qualifications, limitations or restrictions. Our board of
directors is authorized to increase or decrease the number of
shares of any series, but not below the number of shares of that
series then outstanding, without any further vote or action by
the stockholders.
The board of directors may authorize the issuance of preferred
stock with voting or conversion rights that could adversely
effect the voting power or other rights of the holders of the
common stock. The issuance of preferred stock, while providing
flexibility in connection with possible acquisitions and other
corporate purposes, could, among other things, have the effect
of delaying, deferring or preventing a change in control of us
and might harm the market price of our common stock and the
voting and other rights of the holders of common stock. We have
no current plans to issue any shares of preferred stock.
warrants that will expire June 5, 2006 to purchase an
aggregate of 3,835 shares of our common stock at a weighted
average exercise price of $15.65 per share.
Registration Rights
The holders of approximately [zero] shares of common stock
issued upon conversion of our previously outstanding preferred
stock are entitled to certain rights with respect to the
registration of their shares under the Securities Act as
described below.
•
Demand registration rights. At any time beginning nine
months following an initial public offering, the holders of at
least 50% of the shares of common stock issuable upon the
conversion of the shares of preferred stock are entitled to
certain demand registration rights pursuant to which they may
require us to file a registration statement under the Securities
Act at our expense with respect to their shares of common stock
so long as aggregate proceeds to us will be greater than
$5,000,000. We are required to
use our best efforts to effect any such registration, but are
not required to effect more than two of these demand
registrations.
•
Piggyback registration rights. If we propose to register
any of our securities under the Securities Act for our own
account, the holders of preferred stock are entitled to notice
of such registration and we must use our best efforts to include
their shares in the registration. If the registration is our
first initiated registered offering to the general public, the
underwriters may limit or exclude such securities from the
registration. If the registration is our second or any
subsequent initiated registered offering to the general public,
the underwriters may limit the amount of securities to be
registered. However, the aggregate value of securities to be
included by such holders in the second or subsequent
registration may not be reduced to less than 20% of the total
value of all securities included in the registration.
•
S-3 registration rights. The holders of preferred stock
are entitled to demand registration rights pursuant to which
they may require us to file a registration statement under the
Securities Act on Form S-3 at our expense with respect to
their shares of common stock and we are required to use our best
efforts to effect that registration. We are not required to
effect such a registration if: (i) the aggregate price to
the public is less than $1,000,000; (ii) we have completed
one such registration in the last twelve-month period; or
(iii) the demand is made more than four years following a
qualified public offering.
All of these registration rights are subject to conditions and
limitations, including the right of the underwriters of an
offering to limit the number of shares included in such
registration and our right not to effect a requested
registration within nine months following any offering of our
securities. These registration rights will terminate on
October 5, 2008, the fourth anniversary of the closing of
our initial public offering.
The provisions of Delaware law, our amended and restated
certificate of incorporation and our bylaws described below may
have the effect of delaying, deferring or discouraging another
party from acquiring control of us.
Delaware Law
We are subject to the provisions of Section 203 of the
Delaware General Corporation Law regulating corporate takeovers.
In general, those provisions prohibit a Delaware corporation
from engaging in any business combination with any interested
stockholder for a period of three years following the date that
the stockholder became an interested stockholder, unless:
•
the transaction is approved by the board before the date the
interested stockholder attained that status;
•
upon consummation of the transaction that resulted in the
stockholder becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the
corporation outstanding at the time the transaction
commenced; or
•
on or after the date the business combination is approved by the
board and authorized at a meeting of stockholders by at least
two-thirds of the outstanding voting stock that is not owned by
the interested stockholder.
Section 203 defines “business combination” to
include the following:
•
any merger or consolidation involving the corporation and the
interested stockholder;
•
any sale, transfer, pledge or other disposition of 10% or more
of the assets of the corporation involving the interested
stockholder;
•
subject to certain exceptions, any transaction that results in
the issuance or transfer by the corporation of any stock of the
corporation to the interested stockholder;
any transaction involving the corporation that has the effect of
increasing the proportionate share of the stock of any class or
series of the corporation beneficially owned by the interested
stockholder; or
•
the receipt by the interested stockholder of the benefit of any
loans, advances, guarantees, pledges or other financial benefits
provided by or through the corporation.
In general, Section 203 defines an interested stockholder
as any entity or person beneficially owning 15% or more of the
outstanding voting stock of the corporation and any entity or
person affiliated with or controlling or controlled by any of
these entities or persons.
A Delaware corporation may opt out of this provision either with
an express provision in its original certificate of
incorporation or in an amendment to its certificate of
incorporation or bylaws approved by its stockholders. However,
we have not opted out, and do not currently intend to opt out,
of this provision. The statute could prohibit or delay mergers
or other takeover or change in control attempts and,
accordingly, may discourage attempts to acquire us.
In addition, some provisions of our amended and restated
certificate of incorporation and bylaws may be deemed to have an
anti-takeover effect and may delay, defer or prevent a tender
offer or takeover attempt that a stockholder might deem to be in
his or her best interest. The existence of these provisions
could limit the price that investors might be willing to pay in
the future for shares of our common stock. These provisions
include:
•
Stockholder action; special meeting of stockholders. The
amended and restated certificate of incorporation provides that
stockholders may not take action by written consent. Action may
be taken only at a duly called annual or special meeting of
stockholders. The amended and restated certificate of
incorporation further provides that special meetings of our
stockholders may be called only by the president, chief
executive officer, chairman of the board of directors, a
majority of our directors or two-thirds of the independent
directors, and in no event may the stockholders call or force us
to call a special meeting. Thus, without approval by the board
of directors, president, chief executive officer or chairman,
stockholders may take no action between meetings.
•
Advance notice requirements for stockholder proposals and
director nominations. The amended and restated bylaws
provide that a stockholder seeking to bring business before an
annual meeting of stockholders, or to nominate candidates for
election as directors at an annual meeting of stockholders, must
provide timely notice of this intention in writing. To be
timely, a stockholder’s notice must be delivered to or
mailed and received at our principal executive offices not less
than 120 days or more than 150 days prior to the first
anniversary of the date of our notice of annual meeting provided
with respect to the previous year’s annual meeting of
stockholders. However, if no annual meeting of stockholders was
held in the previous year or the date of the annual meeting of
stockholders has been changed to be more than 30 calendar days
before or 60 days after the anniversary date of the
preceding year’s annual meeting, then a proposal shall be
received no later than the close of business on the tenth day
following the date on which notice of the date of the meeting
was mailed or a public announcement was made, whichever first
occurs. The amended and restated bylaws also include a similar
requirement for making nominations at special meetings and
specify requirements as to the form and content of a
stockholder’s notice. These provisions may preclude
stockholders from bringing matters before an annual meeting of
stockholders or from making nominations for directors at an
annual or special meeting of stockholders.
•
Authorized but unissued shares. The authorized but
unissued shares of common stock and preferred stock are
available for future issuance without stockholder approval,
subject to certain limitations imposed by the Nasdaq National
Market. These additional shares may be utilized for a variety of
corporate acquisitions and employee benefit plans. The existence
of authorized but unissued and unreserved common stock and
preferred stock could render more difficult or discourage an
attempt to obtain control of us by means of a proxy contest,
tender offer, merger or otherwise.
Super-majority voting. Delaware law provides generally
that the affirmative vote of a majority of the shares entitled
to vote on any matter is required to amend a corporation’s
certificate of incorporation or bylaws, unless a
corporation’s certificate of incorporation or bylaws, as
the case may be, require a greater percentage. We have
provisions in our amended and restated certificate of
incorporation and bylaws which require an affirmative vote of
stockholders holding at least 75% of our outstanding shares of
common stock to amend, revise or repeal our bylaws and certain
anti-takeover provisions in our certificate of incorporation.
•
Staggered board. The amended and restated bylaws provide
that our board of directors will be divided into three classes,
each serving staggered three year terms. As a result, only one
class of directors will be elected at each annual meeting of
stockholders, with the other classes continuing for the
remainder of their respective terms.
Limitation of Liability and Indemnification Matters
Our amended and restated certificate of incorporation provides
that, to the extent permitted by Delaware law, our directors
shall not be personally liable to us or our stockholders for
monetary damages for any breach of fiduciary duty as a director.
Under Delaware law, the directors have a fiduciary duty to us
that is not eliminated by this provision of the certificate of
incorporation and, in appropriate circumstances, equitable
remedies such as injunctive or other forms of nonmonetary relief
will remain available. In addition, each director will continue
to be subject to liability under Delaware law for breach of the
director’s duty of loyalty to us or our stockholders, for
acts or omissions which are found by a court of competent
jurisdiction to be not in good faith or that involve intentional
misconduct or knowing violations of law, for action leading to
improper personal benefit to the director and for payment of
dividends or approval of stock repurchases or redemptions that
are prohibited by Delaware law. This provision also does not
affect the directors’ responsibilities under any other
laws, such as the federal securities laws.
Our amended and restated certificate of incorporation further
provides for the indemnification of our directors and officers
to the fullest extent permitted by Section 145 of the
Delaware General Corporation Law.
We have entered into indemnification agreements with our
directors and certain of our officers containing provisions that
are, in some respects, broader than the specific indemnification
provisions contained in Delaware law. The indemnification
agreements require us to indemnify our officers and directors
against liabilities that may arise by reason of their status or
service as officers and directors and to advance their expenses
incurred as a result of any proceeding against them as to which
they could be indemnified. We believe that the limitation of
liability provision in our amended and restated certificate of
incorporation and the indemnification agreements will facilitate
our ability to continue to attract and retain qualified
individuals to serve as directors and officers.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is the
Registrar and Transfer Company.
Nasdaq National Market Quotation
Our common stock is quoted on the Nasdaq National Market under
the trading symbol “PSPT”.
SHARES ELIGIBLE FOR FUTURE SALE
Before completion of our initial public offering, there was no
public market for our common stock. We cannot predict the
effect, if any, that market sales of shares or the availability
of shares for sale will have on the market price prevailing from
time to time. Sales of our common stock in the public market
after the restrictions lapse, or the perception that those sales
may occur, could cause the prevailing market price to decrease
or to be lower than it might be in the absence of those sales or
perceptions.
At September 1, 2005, 18,228,372 shares of our common
stock were outstanding. The shares of common stock sold in our
initial public offering, other than shares sold in our directed
share program, are freely tradable, other than by any of our
“affiliates” as defined in Rule 144(a) under the
Securities Act, without restriction or registration under the
Securities Act. All remaining shares were issued and sold by us
in private transactions and are eligible for public sale if
registered under the Securities Act or sold in accordance with
Rule 144 or Rule 701 under the Securities Act. These
remaining shares are “restricted securities” within
the meaning of Rule 144 under the Securities Act.
Restricted securities may be sold in the public market only if
registered or if they qualify for an exemption from registration
under Rule 144 or Rule 701 under the Securities Act,
as summarized below.
Rule 144
In general, under Rule 144 as currently in effect,
beginning 90 days after the date of our initial public
offering, a person who has beneficially owned shares of our
common stock for at least one year from the later of the date
those shares of common stock were acquired from us or one of our
affiliates would be entitled to sell within any three-month
period a number of shares that does not exceed the greater of:
•
1% of the then outstanding shares of common stock, or
approximately 182,047 shares; or
•
the average weekly trading volume of the common stock during the
four calendar weeks preceding the date on which notice of the
sale is filed with the Securities and Exchange Commission.
Sales under Rule 144 are subject to requirements relating
to manner of sale, notice and availability of current public
information about us.
Rule 144(k)
A person, or persons whose shares are aggregated, who is not
deemed to have been our affiliate at any time during the
90 days immediately preceding the sale, and who
beneficially owned the shares proposed to be sold for at least
two years, including the holding period of any prior owner who
is not an affiliate, may sell restricted securities under
Rule 144(k) without complying with the volume limitations,
manner of sale provisions, public information or notice
requirements of Rule 144.
Rule 701
Subject to various limitations on the aggregate offering price
of a transaction and other conditions, Rule 701 may be
relied upon with respect to the resale of securities that were
originally purchased from us by our employees, directors,
officers, consultants or advisers before the closing of our
initial public offering, pursuant to written compensatory
benefit plans or written contracts relating to the compensation
of such persons. Securities issued in reliance on Rule 701
are deemed to be restricted securities and, unless subject to
the contractual restrictions described above, may be sold by
persons other than affiliates subject only to the manner of sale
provisions of Rule 144 and by affiliates under
Rule 144 without compliance with the minimum holding period
requirements.
Stock Options
We filed a registration statement on Form S-8 under the
Securities Act covering shares of common stock under outstanding
options under our 1998 stock option plan and options under our
2004 stock plan. This registration statement automatically
became effective upon filing.
Registration Rights
Holders of approximately 0 shares of common stock are
entitled to rights to cause us to register the sale of those
shares under the Securities Act. Registration of these shares
under the Securities Act would result in these shares, other
than shares purchased by our affiliates, becoming freely
tradable without restriction under
the Securities Act immediately upon the effectiveness of the
registration. See “Description of Capital Stock —
Registration Rights.”
LEGAL MATTERS
The validity of the shares of common stock underlying options
that we are offering to repurchase will be passed upon for us by
Pillsbury Winthrop Shaw Pittman LLP, Los Angeles, California.
EXPERTS
The financial statements and schedule included in this offering
circular and in the registration statement have been audited by
BDO Seidman, LLP, an independent registered public accounting
firm, to the extent and for the periods set forth in their
reports appearing elsewhere herein and in the registration
statement, and are included in reliance on such reports given
upon the authority of said firm as experts in auditing and
accounting.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the SEC a registration statement under the
Securities Act of 1933 with respect to our rescission offer by
this offering circular. This offering circular does not contain
all of the information set forth in the registration statement
and the exhibits and schedules to the registration statement.
Please refer to the registration statement, exhibits and
schedules for further information with respect to the rescission
offer described in this offering circular. Statements contained
in this offering circular regarding the contents of any contract
or other document are only summaries. With respect to any
contract or document filed as an exhibit to the registration
statement, you should refer to the exhibit for a copy of the
contract or document, and each statement in this offering
circular regarding that contract or document is qualified by
reference to the exhibit. A copy of the registration statement
and its exhibits and schedules may be inspected without charge
at the SEC’s public reference room, located 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 from the SEC’s website at http://www.sec.gov.
We are subject to the information reporting requirements of the
Securities Exchange Act of 1934, and we file reports, proxy
statements and other information with the SEC.
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.
Accounts receivable, net of allowance for doubtful accounts of
$553, $451 and $177 (unaudited)
2,476
5,560
7,657
Investment in receivable portfolios
622
7
—
Deferred tax assets
—
668
655
Prepaid expenses and other current assets
1,217
1,633
1,462
Total current assets
16,567
49,873
55,948
Property and equipment, net
4,829
7,407
11,552
Restricted long-term cash equivalent
550
—
—
Deferred management incentive plan compensation
—
940
770
Deferred tax assets
—
6,161
6,174
Other long-term assets
589
699
999
Total assets
$
22,535
$
65,080
$
75,443
LIABILITIES, PREFERRED STOCK AND STOCKHOLDERS’ EQUITY
(DEFICIT)
Current liabilities:
Accounts payable
$
1,031
$
1,346
$
3,046
Accrued payroll and payroll related
864
1,218
1,859
Accrued liabilities
1,614
1,309
1,189
Management incentive plan obligation
—
342
342
Deferred revenue
1,235
1,888
3,987
Reserve for restructuring
25
—
—
Other current liabilities
—
106
73
Total current liabilities
4,769
6,209
10,496
Management incentive plan obligation
—
684
684
Deferred rent
267
117
465
Other long-term liabilities
—
135
233
Total liabilities
5,036
7,145
11,878
Commitments and contingencies (Note 6)
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 and June 30, 2005;
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 and June 30, 2005;
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 and June 30, 2005;
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 and June 30, 2005;
liquidation preference over common stockholders of $49,268
49,211
—
—
Stockholders’ equity (deficit):
Common stock, $.001 par value; authorized
87,000 shares; 2,536, 18,015 and 18,204 shares issued
and outstanding at December 31, 2003 and 2004 and
June 30, 2005, respectively
3
18
18
Additional paid-in capital
6,403
112,514
112,594
Accumulated deficit
(61,367
)
(53,043
)
(48,048
)
Accumulated other comprehensive income
224
80
64
Deferred stock compensation
(1,874
)
(1,634
)
(1,063
)
Total stockholders’ equity (deficit):
(56,611
)
57,935
63,565
Total liabilities, preferred stock and stockholders’ equity
(deficit)
$
22,535
$
65,080
$
75,443
See accompanying notes to consolidated financial statements.
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 solutions and accounts receivable management
services.
2 — Summary of Significant Accounting Policies
Unaudited Interim Results
The accompanying consolidated balance sheet as of June 30,2005, the consolidated statements of operations and other
comprehensive income (loss) and the consolidated statements of
cash flows for the six months ended June 30, 2004 and 2005,
and the consolidated statement of changes in stockholders’
deficit for the six months ended June 30, 2005, are
unaudited. The unaudited interim financial statements have been
prepared on the same basis as the annual financial statements
and, in the opinion of management, reflect all adjustments,
consisting only of normal, recurring adjustments, necessary to
present fairly the Company’s financial position, results of
operations and other comprehensive income (loss) and cash flows
for the six months ended June 30, 2004 and 2005. The
financial data and other information disclosed in these notes to
the consolidated financial statements related to the six months
ended June 30, 2004 and 2005 are unaudited. The results for
the six months ended June 30, 2005 are not necessarily
indicative of the results to be expected for the year ended
December 31, 2005 or for any other interim period or for
any future year.
Use of Estimates
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.
Concentrations of Risk
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, $451 and $177 at December 31, 2003
and 2004 and June 30, 2005, respectively.
Revenue and accounts receivable from significant customers were
as follows:
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
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, $7,903 and $15,014 at
December 31, 2003 and 2004 and June 30, 2005,
respectively.
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 6). 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
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.
Reclassifications
Certain reclassifications have been made to prior year amounts
to conform with the current presentation.
Revenue Recognition
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,
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
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.
Cost of Revenues
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):
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 less than 10 percent of the combined
revenues, profit and assets of the total reported operating
segments (Note 12).
Income Taxes
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.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
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.
Foreign Currency
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.
Stock-Based Compensation
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.
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.
Add: Stock-based compensation expense included in reported net
income, net of related tax effects
—
119
1,774
910
464
Deduct: Total stock-based compensation expense determined under
fair value based methods for all awards, net of related tax
effects
(416
)
(332
)
(2,153
)
(933
)
(669
)
Pro forma net income (loss)
$
(3,308
)
$
7,773
$
7,945
$
3,106
$
4,790
Basic (loss) earnings per share
As reported
$
(1.14
)
$
3.15
$
1.39
$
1.29
$
0.28
Pro forma
$
(1.31
)
$
3.07
$
1.33
$
1.28
$
0.26
Diluted (loss) earnings per share
As reported
$
(1.14
)
$
0.64
$
0.55
$
0.22
$
0.26
Pro forma
$
(1.31
)
$
0.62
$
0.53
$
0.22
$
0.25
The estimated weighted average fair value of options granted
during the years ended December 31, 2002, 2003 and 2004 and
six months ended June 30, 2005 was $0.52, $5.15, $5.31, and
$3.24, respectively. The fair
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
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:
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.
The components of accumulated other comprehensive income are as
follows:
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
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
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 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.
On December 16, 2004, the FASB issued
SFAS No. 123 (revised 2004), “Share-Based
Payment”, which is a revision of SFAS No. 123,
“Accounting for Stock-Based Compensation.”
SFAS No. 123(R) supersedes APB No. 25,
“Accounting for Stock Issued to Employees”, and amends
SFAS No. 95, “Statement of Cash Flows.”
Generally the approach in SFAS No. 123(R) is similar
to the approach described in SFAS No. 123. However,
SFAS No. 123(R) requires all share-based payments to
employees, including grants of employee stock options, to be
recognized in the income statement based on their fair values.
Public companies may adopt SFAS No. 123(R)
requirements using one of two methods:
1. A “modified prospective” method in which
compensation cost is recognized beginning with the effective
date (a) based on the requirements of
SFAS No. 123(R) for all share-based payments granted
after the effective date and (b) based on the requirements
of SFAS No. 123 for all awards granted to employees
prior to the effective date of SFAS No. 123(R) that
remain unvested on the effective date.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
2. A “modified retrospective” method which
includes the requirements of the modified prospective method
described above, but also permits entities to restate based on
the amounts previously recognized under SFAS No. 123
for purposes of pro forma disclosures either (a) all prior
periods presented or (b) prior interim periods of the year
of adoption.
The Company plans to adopt SFAS No. 123(R) beginning
in fiscal year 2006.
As permitted by SFAS No. 123, the Company currently
accounts for share-based payments to employees using APB Opinion
25’s intrinsic value method. Accordingly, the adoption of
SFAS No. 123(R)’s fair value method will have a
significant impact on our reported results of operations. The
impact of adopting SFAS No. 123(R) cannot be predicted
at this time because it will depend on levels of share-based
payments granted in the future. Had the Company adopted
SFAS No. 123(R) in prior periods, the impact of that
standard could reasonably be expected to have approximated the
impact of SFAS No. 123 as described in the disclosure
of pro forma net income and earnings per share in Note 1
“Accounting Policies”. SFAS No. 123(R) also
requires the benefits of tax deductions in excess of recognized
compensation cost to be reported as a financial cash flow,
rather than as an operating cash flow as required under current
literature. This requirement will reduce net operating cash
flows and increase net financing cash flows in periods after
adoption. While the Company can not estimate what those amounts
will be in the future, the amount of such excess tax deductions
from option exercises were less than $0.1 million for the
first half of 2005.
The Company is currently evaluating the business practices
regarding the magnitude or form of share-based compensation to
employees and the choice of the option-pricing model in the
future.
In March 2005, the SEC issued SAB No. 107, which
expresses views of the SEC staff regarding the interaction
between SFAS No. 123(R) and certain SEC rules and
regulations. Additionally, SAB No. 107 provides the
staff’s view regarding the valuation of share-based payment
arrangements for public companies and interpretive guidance in
implementation of SFAS No. 123(R) and disclosures in
MD&A subsequent to adoption of SFAS No. 123(R).
SAB No. 107 does not change the accounting required by
SFAS No. 123(R).
The FASB required SFAS No. 123(R) be adopted in the
first interim or annual period beginning after June 15,2005. On April 14, 2005, the SEC issued a final rule
amending compliance dates for SFAS No. 123(R). Under
the SEC’s new rule, SFAS No. 123(R) will become
effective for the Company beginning in fiscal year 2006.
In December 2004, the FASB issued SFAS No. 153,
“Exchanges of Nonmonetary Assets”, which eliminates
the exception for nonmonetary exchanges of similar productive
assets and replaces it with a general exception for exchanges of
nonmonetary assets that do not have commercial substance.
SFAS No. 153 will be effective for nonmonetary asset
exchanges occurring in fiscal periods beginning after
June 15, 2005. The Company believes the adoption of
SFAS No. 153 will not have a material impact on our
results of operations or financial condition.
In May 2005, the FASB issued SFAS No. 154,
“Accounting Changes and Error Corrections.”
SFAS No. 154 requires retrospective application to
prior periods’ financial statements of a voluntary change
in accounting principle and that a change in method of
depreciation, amortization, or depletion for long-lived,
nonfinancial assets be accounted for as a change in accounting
estimate that is effected by a change in accounting principle.
SFAS No. 154 is effective for accounting changes and
corrections or errors made in fiscal years beginning after
December 15, 2005. The Company believes the adoption of
SFAS No. 154 will not have a material impact on the
Company’s results of operations or financial condition.
On July 19, 2005, the FASB issued proposed FASB Staff
Position (FSP) FAS 13-b, “Accounting for Rental Costs
Incurred during a Construction Period.” The FASB is
proposing in this FSP that rental costs associated with ground
or building operating leases that are incurred during a
construction period be expensed. FASB Technical Bulletin
(FTB) No. 88-1, “Issues Relating to Accounting
for Leases”, requires that rental costs associated with
operating leases be allocated on a straight-line basis in
accordance with FASB Statement No. 13, “Accounting for
Leases”, and FTB 85-3, “Accounting for Operating
Leases with Scheduled Rent
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Increases”, starting with the beginning of the lease term.
The FASB believes there is no distinction between the right to
use a leased asset during the construction period and the right
to use that asset after the construction period. As proposed,
companies would be required to apply the guidance in the FSP to
the first reporting period beginning after September 15,2005. The Company believes that the impact of this proposed
position will increase rent expense associated with the
PeopleSupport Center, which is recorded in cost of revenues, by
approximately $0.2 million per quarter until all floors of
the PeopleSupport Center are built-out, which is anticipated to
occur by the end of 2006.
3 — Cash, Cash Equivalents and Marketable
Securities
The following table summarizes the fair value of the
Company’s cash and available-for-sale securities held in
its investment portfolio, recorded as cash, cash equivalents or
marketable securities as of December 31, 2004 and
June 30, 2005:
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. 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.
6 — Commitments and Contingencies
Leases
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,
the Company 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.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
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 is 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
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.
Litigation
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.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
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.
7 — 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.
8 — Warrants
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
expired 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
expired in June 2005. The fair value was determined to be $416
and was amortized over the life of the credit agreement as
additional interest
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
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.
9 — Stock options
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 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.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
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 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:
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.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
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.
Exercisable
Outstanding Weighted Average
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
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:
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 has re-applied to the California
Department of Corporations for expanded approval to repurchase
both options and these shares issued upon exercise of options.
The Company has filed 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 is offering to repurchase the options
at 20% of the option exercise price multiplied by the
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
number of shares underlying the option, plus interest at an
annual rate of 7% from the grant date. The Company is offering
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.
10 — 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.
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.
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 carryforwards 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 2009, 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.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
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 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.
12 —
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.
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.
14 —
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 7, 10,461 preferred shares converted, on a one-to-one
basis, to common shares upon the closing of the initial public
offering.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
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.
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.
15 —
Subsequent Events
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 6.
16 —
Quarterly Financial Data (Unaudited)
Summary unaudited quarterly financial data for fiscal 2003 and
2004 and the first two quarters of 2005 is as follows:
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
2005
2005
1st Qtr.
2nd Qtr.
Revenues
$
14,056
$
14,739
Income from operations
2,568
1,952
Net income
2,796
2,239
Basic income per share(3)
$
0.15
$
0.12
Diluted income per share(3)
$
0.15
$
0.12
(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 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:
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 11).
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.
The following table sets forth the various expenses expected to
be incurred by the Registrant in connection with the sale and
distribution of the securities being registered hereby, other
than underwriting discounts and commissions. All amounts are
estimates except the Securities and Exchange Commission
registration fee, the National Association of Securities
Dealers, Inc. filing fee and the Nasdaq National Market listing
fee.
Securities and Exchange Commission registration fee
$
64
Blue Sky fees and expenses
5,000
Accounting fees and expenses
15,000
Legal fees and expenses
150,000
Printing and engraving expenses
30,000
Miscellaneous expenses
5,000
Total
$
205,064
Item 14.
Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law
provides for the indemnification of officers, directors and
other corporate agents in terms sufficiently broad to indemnify
such persons under certain circumstances for liabilities
(including reimbursement for expenses incurred) arising under
the Securities Act of 1933, as amended (the “Act”).
Article VIII. of the Registrant’s Amended and Restated
Certificate of Incorporation (Exhibit 3.2 hereto) and
Article 5 of the Registrant’s Amended and Restated
Bylaws (Exhibit 3.4 hereto) provide for indemnification of
the Registrant’s directors, officers, employees and other
agents to the extent and under the circumstances permitted by
the Delaware General Corporation Law. The Registrant entered
into agreements with its directors and officers that will
require the Registrant, among other things, to indemnify them
against certain liabilities that may arise by reason of their
status or service as directors or officers to the fullest extent
allowed. The Underwriting Agreement (Exhibit 1.1) provides
for indemnification by the underwriters of the Registrant, its
directors and officers, and by the Registrant of the
underwriters, for certain liabilities, including liabilities
arising under the Act and affords certain rights of contribution
with respect thereto.
Item 15.
Recent Sales of Unregistered Securities
1. From January 25, 2001 through December 18,2002, the Registrant granted options to purchase an aggregate of
1,361,821 shares of common stock at exercise prices ranging
from $0.41 to $5.15 per share to employees, consultants and
non-employee directors.
2. From January 29, 2003 through April 28, 2004,
the Registrant granted options to purchase an aggregate of
639,493 shares of common stock at exercise prices ranging
from $0.41 to $6.85 per share to employees, consultants and
non-employee directors.
3. From January 2001 through May 14, 2004, the
Registrant issued 204,664 shares of common stock upon
exercise of options described above in paragraph 1 and
payment of the exercise prices per share ranging from $0.41 to
$5.15 per share.
4. On June 5, 2001, the Registrant granted warrants to
purchase an aggregate of 3,835 shares of preferred stock at
an exercise price of $15.65 per share to Imperial Bank.
The options described in paragraphs 1 and 2 above were
granted under the Registrant’s 1998 Stock Incentive Plan.
At the time these options described in paragraph 1 were
granted under the 1998 Stock
Incentive Plan, the Registrant believed that each of the grants
was exempt from the registration requirements of the Securities
Act of 1933, as amended, by virtue of the exemption available
under Rule 701 of the Securities Act of 1933 for securities
offered under compensatory plans.
At the time the options described in paragraph 2 were
granted under the 1998 Stock Incentive Plan, the Registrant
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 the Registrant). In
addition, for option grants described in paragraph 2 that
covered 160,478 shares, which were granted to individuals
residing and located in the Philippines, the Registrant 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, the Registrant has obtained
appropriate representations and covenants to ensure compliance
with the requirements of Regulation S.
The shares described in paragraph 3 were issued upon
exercise of certain options described in paragraph 1. The
Registrant believes 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
the Registrant, to information about the Registrant.
The Registrant believes that the issuance of the warrants
described in paragraph 4 was exempt from the registration
requirements by virtue of Section 4(2) of the Securities
Act and Regulation D promulgated thereunder as transactions
by an issuer not involving any public offering. The recipient of
securities in such transaction represented its 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
other instruments issued in such transactions. The sale of these
securities were made without general solicitation or
advertising. The recipient had adequate access, through its
relationship with the Registrant, to information about the
Registrant.
Certificate of Amendment to Amended and Restated Certificate of
Incorporation
3
.2**
Form of Amended and Restated Certificate of Incorporation of the
Registrant, to be filed upon the closing of the offering to
which this Registration Statement relates
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.
†
Confidential treatment was granted for portions of this exhibit.
These portions have been omitted from the Registration Statement
and submitted separately to the Securities and Exchange
Commission.
††
Confidential treatment was requested for portions of this
exhibit. These portions have been omitted from the Registration
Statement and submitted separately to the Securities and
Exchange Commission.
The following financial statement schedule is a part of this
registration statement and should be read in conjunction with
our consolidated financial statements:
Independent Registered Public Accounting Firm Report on
Schedule II
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 contained in the offering circular
constituting part of this registration statement, included the
related financial statement schedule shown below as of
December 31, 2002, 2003 and 2004, and for the years then
ended. 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.
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.
Item 17.
Undertakings
The undersigned registrant hereby undertakes to provide to the
underwriters at the closing specified in the underwriting
agreement certificates in such denominations and registered in
such names as required by the underwriters to permit prompt
delivery to each purchaser.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers
and controlling persons of the registrant pursuant to the
foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities
(other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the
registrant in the successful defense of any
action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities
being registered, the registrant will, unless in the opinion of
its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the
Securities Act of 1933, the information omitted from the form of
prospectus filed as part of this registration statement in
reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities
Act of 1933 shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that
contains a form of prospectus shall be deemed to be a new
registration statement relating to the securities offered
therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Registration Statement to be
signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Los Angeles, in the State of
California, on September 20, 2005.
KNOW ALL PEOPLE BY THESE PRESENTS, that each of the undersigned
whose signature appears below constitutes and appoints Lance
Rosenzweig and Caroline Rook, his or her true and lawful
attorneys-in-fact, with full power of substitution and
resubstitution for him or her and on his or her behalf, and in
his or her name, place and stead, in any and all capacities to
execute and sign any and all amendments or post-effective
amendments to this registration statement, and to file the same,
with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that said attorneys-in-fact or any
of them or their or his substitute or substitutes, may lawfully
do or cause to be done by virtue hereof and the Registrant
hereby confers like authority on its behalf.
Pursuant to the requirements of the Securities Act, this
Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated:
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.
†
Confidential treatment was granted for portions of this exhibit.
These portions have been omitted from the Registration Statement
and submitted separately to the Securities and Exchange
Commission.
††
Confidential treatment was requested for portions of this
exhibit. These portions have been omitted from the Registration
Statement and submitted separately to the Securities and
Exchange Commission.
Dates Referenced Herein and Documents Incorporated by Reference