UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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For the quarterly period ended September 30, 2008
OR
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period from to
Commission File No. 001-33362
eTelecare Global Solutions, Inc.
(Exact Name of Registrant as Specified in Its Charter)
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Philippines
(State or Other Jurisdiction of
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98-0467478
(I.R.S. Employer
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Incorporation or Organization)
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Identification No.)
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31
st
Floor CyberOne Building, Eastwood City, Cyberpark
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Libis, Quezon City
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1110
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Philippines
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(Zip Code)
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(Address of Principal Executive Offices)
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Registrants telephone number, including area code:
63 (2) 916 5670
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed
by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes
þ
No
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
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Large accelerated filer
o
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Accelerated filer
o
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Non-accelerated filer
þ
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Smaller reporting company
o
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(Do not check if a smaller reporting company)
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act.): Yes
o
No
þ
On October 31, 2008, 29,659,539 shares of the Registrants common shares par value 2
Philippine Pesos ($0.04 U.S.) per share, were outstanding.
PART I. FINANCIAL INFORMATION
ITEM 1:
FINANCIAL STATEMENTS.
eTelecare Global Solutions, Inc. and Subsidiaries
Consolidated Balance Sheets
(In thousands, except share and per share data)
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September 30,
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December 31,
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2008
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2007
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(Unaudited)
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ASSETS
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Current assets:
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Cash and cash equivalents
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$
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42,122
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$
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35,129
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Trade and other receivables, net
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55,435
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47,092
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Fair value of derivatives
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3,529
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Prepaid expenses and other current assets
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5,101
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4,646
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Total current assets
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102,658
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90,396
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Non-current assets:
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Property and equipment, net
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59,017
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55,666
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Goodwill
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14,425
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14,425
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Other intangible assets, net
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299
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1,139
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Other non-current assets
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5,805
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4,933
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Total assets
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$
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182,204
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$
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166,559
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LIABILITIES, MINORITY INTEREST AND STOCKHOLDERS EQUITY
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Current liabilities:
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Trade accounts payable
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$
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7,366
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$
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6,672
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Accrued and other expenses
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26,748
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21,061
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Fair value of derivatives
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6,180
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Current portion of:
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Obligations under capital lease
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145
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Total current liabilities
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40,294
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27,878
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Non-current liabilities:
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Asset retirement obligations
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1,914
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2,019
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Other non-current liabilities
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5,311
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3,623
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Total liabilities
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47,519
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33,520
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Commitments and contingencies (Note 6)
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Minority interest in consolidated subsidiary
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786
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Stockholders equity:
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Capital stock, 2 Philippine Peso ($0.04 U.S.) par value, 65,000,000
shares authorized, 29,646,239 shares outstanding at September 30,
2008 and 28,979,218 outstanding at December 31, 2007
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1,156
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1,129
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Additional paid-in capital
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105,434
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100,702
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Retained earnings
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33,322
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29,158
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Accumulated other comprehensive income (loss)
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(6,013
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)
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2,050
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Total stockholders equity
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133,899
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133,039
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Total liabilities, minority interest and stockholders equity
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$
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182,204
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$
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166,559
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See accompanying notes to unaudited consolidated financial statements.
3
eTelecare Global Solutions, Inc. and Subsidiaries
Consolidated Statements of Operations
(In thousands, except per share data)
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Three Months Ended
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Nine Months Ended
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September 30,
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September 30,
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2008
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2007
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2008
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2007
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(Unaudited)
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(Unaudited)
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Service revenue
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$
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76,846
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$
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65,362
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$
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225,485
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$
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188,898
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Costs and expenses:
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Cost of services (exclusive of depreciation shown
separately below)
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57,136
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47,172
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168,787
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132,949
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Selling and administrative expenses
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12,417
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9,204
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35,310
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|
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26,033
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|
Depreciation and amortization
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5,692
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3,789
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16,886
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10,826
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Total costs and expenses
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75,245
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60,165
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220,983
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169,808
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Income from operations
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1,601
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5,197
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4,502
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19,090
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Other income (expense):
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Interest expense and financing charges
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(114
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)
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(77
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)
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(333
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)
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(1,832
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)
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Interest income
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260
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|
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|
434
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|
671
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|
861
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Foreign exchange gain (loss)
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73
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(165
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)
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138
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(849
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)
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Other
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12
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5
|
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(84
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)
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153
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|
|
|
|
|
|
|
|
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|
|
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Net other income (expense)
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231
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|
197
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|
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|
392
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(1,667
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)
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Income before income tax provision and minority interest
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1,832
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|
5,394
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4,894
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17,423
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Income tax provision
|
|
|
(315
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)
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(552
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)
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(861
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)
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(1,394
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)
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Minority interest
|
|
|
131
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|
|
|
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131
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|
|
|
|
|
|
|
|
|
|
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Net income
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$
|
1,648
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$
|
4,842
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$
|
4,164
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$
|
16,029
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|
|
|
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|
|
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Net income per share basic
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|
$
|
0.06
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|
$
|
0.17
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$
|
0.14
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$
|
0.60
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|
|
|
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|
|
|
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|
|
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Net income per share diluted
|
|
$
|
0.05
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|
|
$
|
0.15
|
|
|
$
|
0.14
|
|
|
$
|
0.54
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|
|
|
|
|
|
|
|
|
|
|
|
|
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See accompanying notes to unaudited consolidated financial statements.
4
eTelecare Global Solutions, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
(In thousands)
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2007
|
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2008
|
|
|
2007
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Net income
|
|
$
|
1,648
|
|
|
$
|
4,842
|
|
|
$
|
4,164
|
|
|
$
|
16,029
|
|
Other comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair values of
derivatives qualifying as
cash flow hedges, net of
tax of $0 in 2008 and $222
in 2007
|
|
|
1,274
|
|
|
|
414
|
|
|
|
(8,063
|
)
|
|
|
414
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
$
|
2,922
|
|
|
$
|
5,256
|
|
|
$
|
(3,899
|
)
|
|
$
|
16,443
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to unaudited consolidated financial statements.
5
eTelecare Global Solutions, Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders Equity
(In thousands, except number of shares)
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|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
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Other
|
|
|
|
|
|
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Capital Stock
|
|
|
Paid-in-
|
|
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Retained
|
|
|
Comprehensive
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Earnings
|
|
|
Income (Loss)
|
|
|
Total
|
|
|
|
(Unaudited)
|
|
Balances, December 31, 2007
|
|
|
28,979,218
|
|
|
$
|
1,129
|
|
|
$
|
100,702
|
|
|
$
|
29,158
|
|
|
$
|
2,050
|
|
|
$
|
133,039
|
|
Stock option exercises
|
|
|
667,021
|
|
|
|
27
|
|
|
|
1,681
|
|
|
|
|
|
|
|
|
|
|
|
1,708
|
|
Stock compensation expense
|
|
|
|
|
|
|
|
|
|
|
2,598
|
|
|
|
|
|
|
|
|
|
|
|
2,598
|
|
Net tax benefit of stock option exercise
|
|
|
|
|
|
|
|
|
|
|
453
|
|
|
|
|
|
|
|
|
|
|
|
453
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,164
|
|
|
|
|
|
|
|
4,164
|
|
Other comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,063
|
)
|
|
|
(8,063
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, September 30, 2008
|
|
|
29,646,239
|
|
|
$
|
1,156
|
|
|
$
|
105,434
|
|
|
$
|
33,322
|
|
|
$
|
(6,013
|
)
|
|
$
|
133,899
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to unaudited consolidated financial statements.
6
eTelecare Global Solutions, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
September 30,
|
|
|
2008
|
|
2007
|
|
|
(Unaudited)
|
Cash Flows from Operating Activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
4,164
|
|
|
$
|
16,029
|
|
Adjustments for:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
16,886
|
|
|
|
10,826
|
|
Minority interest
|
|
|
(131
|
)
|
|
|
|
|
Provisions for:
|
|
|
|
|
|
|
|
|
Doubtful accounts
|
|
|
22
|
|
|
|
143
|
|
Deferred taxes
|
|
|
(1,322
|
)
|
|
|
|
|
Stock compensation costs
|
|
|
2,598
|
|
|
|
1,683
|
|
Accretion on asset retirement obligations
|
|
|
(105
|
)
|
|
|
330
|
|
Loss on disposal of assets
|
|
|
62
|
|
|
|
752
|
|
Excess tax benefits from share-based payment arrangements
|
|
|
(590
|
)
|
|
|
|
|
Change in:
|
|
|
|
|
|
|
|
|
Trade and other receivables
|
|
|
(8,365
|
)
|
|
|
(17,082
|
)
|
Prepaid expenses and other current assets
|
|
|
142
|
|
|
|
(2,277
|
)
|
Trade accounts payable
|
|
|
(73
|
)
|
|
|
(1,317
|
)
|
Accrued and other expenses
|
|
|
6,791
|
|
|
|
4,824
|
|
Fair value of derivatives
|
|
|
542
|
|
|
|
(618
|
)
|
Other non-current assets
|
|
|
(161
|
)
|
|
|
123
|
|
Other non-current liabilities
|
|
|
2,141
|
|
|
|
50
|
|
|
|
|
Net cash provided by operating activities
|
|
|
22,601
|
|
|
|
13,466
|
|
|
|
|
Cash Flows from Investing Activities:
|
|
|
|
|
|
|
|
|
Acquisition of AOL Philippines, net of acquired cash
|
|
|
|
|
|
|
(1,597
|
)
|
Acquisitions of property and equipment
|
|
|
(18,692
|
)
|
|
|
(28,170
|
)
|
Refundable deposits
|
|
|
14
|
|
|
|
(1,783
|
)
|
|
|
|
Net cash used in investing activities
|
|
|
(18,678
|
)
|
|
|
(31,550
|
)
|
|
|
|
Cash Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
Proceeds from revolving line of credit
|
|
|
|
|
|
|
157,342
|
|
Payments for:
|
|
|
|
|
|
|
|
|
Revolving line of credit
|
|
|
|
|
|
|
(158,907
|
)
|
Long-term debt
|
|
|
|
|
|
|
(28,500
|
)
|
Obligations under capital lease
|
|
|
(145
|
)
|
|
|
(510
|
)
|
Offering costs
|
|
|
|
|
|
|
(354
|
)
|
Debt issuance costs
|
|
|
|
|
|
|
(455
|
)
|
Proceeds from stock option exercises
|
|
|
1,708
|
|
|
|
717
|
|
Excess tax benefits from share-based payment arrangements
|
|
|
590
|
|
|
|
|
|
Capital contribution from minority shareholder
|
|
|
917
|
|
|
|
|
|
Proceeds from public offering
|
|
|
|
|
|
|
79,414
|
|
|
|
|
Net cash provided by financing activities
|
|
|
3,070
|
|
|
|
48,747
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
6,993
|
|
|
|
30,663
|
|
Cash and cash equivalents at beginning of period
|
|
|
35,129
|
|
|
|
690
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
42,122
|
|
|
$
|
31,353
|
|
|
|
|
Supplemental Cash Flow Information:
|
|
|
|
|
|
|
|
|
Supplemental information for non-cash investing activity:
|
|
|
|
|
|
|
|
|
Accrued capital expenditures in accounts payable
|
|
$
|
3,901
|
|
|
$
|
1,069
|
|
|
|
|
Asset retirement obligation recognized
|
|
$
|
|
|
|
$
|
162
|
|
|
|
|
Acquisition:
|
|
|
|
|
|
|
|
|
Fair value of AOL Philippines assets acquired
|
|
$
|
|
|
|
$
|
8,962
|
|
Cash paid for capital stock
|
|
|
|
|
|
|
(7,297
|
)
|
Accrued purchase price
|
|
|
|
|
|
|
(454
|
)
|
|
|
|
Liabilities assumed
|
|
$
|
|
|
|
$
|
1,211
|
|
|
|
|
See accompanying notes to unaudited consolidated financial statements.
7
eTelecare Global Solutions, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(In thousands, except per share data)
1. Basis of Presentation
Interim Financial Information
The accompanying consolidated financial statements as of September 30, 2008 and for each of
the three and nine months ended September 30, 2008 and 2007 are unaudited. The unaudited
consolidated financial statements include all adjustments, consisting of normal recurring
adjustments, which eTelecare Global Solutions, Inc. and Subsidiaries (the Company or eTelecare)
considers necessary for a fair presentation of the financial position and the results of operations
for those periods. The consolidated balance sheet information as of December 31, 2007 has been
derived from the audited financial statements at that date but does not include all of the
financial information and footnotes required by accounting principles generally accepted in the
United States of America for complete financial statements. Certain reclassifications have been
made to prior year financial statements to conform with current year presentation.
Certain information and footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the United States of
America have been omitted. These financial statements should be read in conjunction with the
consolidated financial statements and notes thereto included in the Companys December 31, 2007
audited financial statements filed with the annual report on Form 10-K on March 14, 2008 with the
Securities and Exchange Commission. Operating results for the three and nine months ended September
30, 2008 are not necessarily indicative of the results that may be expected for the entire year
ending December 31, 2008.
The preparation of financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from those estimates.
For the three and nine months ended September 30, 2008, the Company had three clients that
each contributed more than 10% of revenue, including AT & T, representing 25% and 26%,
respectively, of revenue, Sprint, representing 21% and 21%, respectively, of revenue, and Dell,
representing 20% and 19% of revenue. For the three and nine months ended September 30, 2007, the
Company had four clients that each contributed more than 10% of revenue, including AT & T,
representing 32% and 30%, respectively, of revenue, Dell, representing 21% and 23%, respectively,
of revenue, Sprint, representing 15% and 12%, respectively, of revenue and Vonage, representing 13%
and 13%, respectively of revenue.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company, as
well as its wholly-owned and majority-owned subsidiaries.
2. Income Taxes
We are registered with the Philippine Export Zone Authority (PEZA) as an Economic Export
Enterprise under RA No. 7916, otherwise known as the Special Economic Zone Act of 1995, to develop
and operate a call center business that services overseas clients by providing customer
relationship management services. As a registered enterprise, we are entitled to certain tax and
non-tax incentives which include, among others, tax and duty-free importations, exemptions from
local taxes and income tax holiday (ITH) for three, four, or six years (duration depends on the
type of holiday granted) from start of commercial operations with the possibility of one or
two-year extensions. Our current income tax holidays expire at staggered dates through 2012. The
most recent expiring tax holidays for two of our delivery sites occurred on September 30, 2008 and
on October 31, 2008. We applied for an extension or conversion to Pioneer holiday status prior to
expiration. Although our estimated annual effective tax rate does not assume that the extension or
conversion will be approved, we understand it is the current practice of the Philippine government
to grant extensions on such tax holidays as a means of attracting foreign investment in specified
sectors, including the outsourcing industry. If the extensions or conversion to Pioneer holiday
status of the two expiring tax holidays are approved before the end of 2008, our estimated annual
effective tax rate for 2008 would decrease approximately 4% at the time of Philippine governmental
approval.
8
As of September 30, 2008, we had unrecognized tax benefits of approximately $1,048. The entire
amount of unrecognized tax benefits at September 30, 2008 would, if recognized, reduce our annual
tax expense. The Company anticipates approximately $207 of
the September 30, 2008 balance will be recognized in the next 12 months due to expiration of
the statute of limitations. Of this amount, $51 is anticipated to be recognized during the fourth
quarter of 2008 upon the expected close of certain tax return statute of limitations.
We recognize interest and penalties relating to unrecognized tax benefits in income tax
expense. As of September 30, 2008, we have approximately $122 of accrued interest and penalties
related to uncertain tax positions at September 30, 2008 which are included as a component of the
total unrecognized tax benefit of approximately $1,048.
The Company operates in and files income tax returns in various jurisdictions in the
Philippines and the United States which are subject to examination by tax authorities. With few
exceptions, the Company is no longer subject to U.S. federal and state or Philippine income tax
examinations before 2004. As of September 30, 2008, the Company was under income tax audit in the
State of Arizona for our 2004-2006 years. Although there can be no assurance as to the ultimate
disposition, we believe that the outcome of this audit will not have a material effect on our
financial position, results of operation or cash flows.
3. Derivatives
Although substantially all of the Companys revenue is derived principally from client
contracts that are invoiced and collected in U.S. dollars, a significant portion of the Companys
cost of services and selling and administrative expenses is incurred and paid in Philippine pesos.
Accordingly, the Companys results of operations and cash flows are affected by an increase in the
value of the Philippine peso relative to the U.S. dollar, the functional and reporting currency of
eTelecare and its subsidiaries. To partially hedge against currency changes between the Philippine
peso and the U.S. dollar, eTelecare implemented a hedging strategy, beginning in August 2007. This
strategy consists of a rolling hedge program that entails contracting with third-party financial
institutions to acquire zero cost, non-deliverable forward contracts that are expected to cover
approximately 80% of Philippine peso-denominated forecasted expenses for the current quarter, 60%
of the forecasted peso expenses for the next quarter, 40% of the forecasted peso expenses for two
quarters out and finally, 20% of forecasted peso expenses for three quarters out. For 2008,
however, the Company modified the application of this strategy to hedge approximately 90% of
forecasted Philippine peso-denominated expenses. For 2009 forecasted Philippine peso-denominated
expenses, the Company has resumed the rolling hedge program and, as of September 30, 2008,
approximately 60%, 40% and 20% of the first quarter, second quarter, and third quarter 2009
forecasted peso expenses, respectively, have been hedged. In October 2008, in light of the current
market environment and the substantial weakening of the Philippine peso, the Company re-evaluated
its hedge percentage coverage for 2009 and plans on adding new hedge contracts in Q4 2008 to cover
approximately 60% to 75% of total 2009 forecasted peso expenses.
The foreign currency forward contracts that are used to hedge this exposure are designated as
cash flow hedges in accordance with the criteria established in Statement of Financial Accounting
Standards No. 133 Accounting for Derivative Instruments and Hedging Activities (SFAS 133).
SFAS 133 requires that a company must formally document, designate and assess the effectiveness of
transactions that receive hedge accounting treatment. For accounting purposes, effectiveness refers
to the cumulative changes in the fair value of the derivative instrument being highly correlated to
the inverse changes in the fair value of the hedged item. Based on the criteria established by
SFAS 133, all of the Companys cash flow hedge contracts are deemed highly effective. If any
ineffectiveness arises, it will be recorded within Foreign Exchange Gain (Loss) on the Consolidated
Statement of Operations. The derivative instrument is recorded in the Companys Consolidated
Balance Sheets as either an asset or liability measured at its fair value, with changes in the fair
value of qualifying hedges recorded in Accumulated Other Comprehensive Income (Loss), a component
of Stockholders Equity. The settlement of these derivatives will result in reclassifications from
Accumulated Other Comprehensive Income (Loss) to earnings in the period during which the hedge
transaction affects earnings. While the Company expects that its derivative instruments will
continue to meet the conditions for hedge accounting, if the hedges did not qualify as highly
effective or if the Company did not believe that forecasted transactions would occur, the changes
in the fair value of the derivatives used as hedges would be reflected currently in earnings.
As of September 30, 2008, the notional amount of the outstanding derivative instruments
designated for hedge accounting is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Local
|
|
|
|
|
|
Dates
|
|
|
Currency
|
|
U.S. Dollar
|
|
Contracts are
|
|
|
Amount
|
|
Amount
|
|
Through
|
Philippine Peso
|
|
|
3,017,100
|
|
|
$
|
69,110
|
|
|
Sept-2009
|
9
These derivatives are classified as Fair Value of Derivatives of ($6,013) and $3,153 as of
September 30, 2008, and December 31, 2007, respectively, in the accompanying Consolidated Balance
Sheets.
A total of ($6,013) of deferred losses, net of tax of $0, on derivative instruments as of
September 30, 2008, was recorded in Accumulated Other Comprehensive Income (Loss) in the
accompanying Consolidated Balance Sheets. The Company expects that all of this deferred loss will
be reclassified into earnings within the next 12 months.
For the three months ended September 30, 2008 and 2007, the Company recorded a loss of
($2,183) and ($163), respectively, for settled hedge contracts. For the nine months ended
September 30, 2008 and 2007, the Company recorded a loss of ($424) and ($163), respectively, for
settled hedge contracts. These gains and losses are reflected in Cost and Expenses in the
accompanying Consolidated Statements of Operations.
The Company also entered into foreign exchange forward contracts to reduce the short-term
effect of foreign currency fluctuations related to approximately $8 million of net accrued
liabilities that are denominated in Philippine peso. The gains and losses on these forward
contracts are intended to offset the transaction gains and losses on the Philippine peso
obligations. These gains and losses are recognized in earnings as the Company elected not to
classify the contracts for hedge accounting treatment. The value of these contracts was ($167) and
$376 as of September 30, 2008 and December 31, 2007, respectively, and is recorded as a component
of Fair Value of Derivatives in the accompanying Consolidated Balance Sheets. For the three months
ended September 30, 2008 and 2007, the Company realized ($104) of losses and $93 of gains,
respectively, on these contracts. For the nine months ended September 30, 2008 and 2007, the
Company realized ($1,368) of losses and $93 of gains, respectively, on these contracts. The gains
and losses on these contracts are recorded within Foreign Exchange Gain (Loss) in the accompanying
Consolidated Statements of Operations.
4. Fair Value Measurements
The Company adopted Statement of Financial Accounting Standards No. 157, Fair Value
Measurements (SFAS 157) on January 1, 2008 for all financial assets and liabilities and
non-financial assets and liabilities that are recognized or disclosed at fair value in the
financial statements on a recurring basis. SFAS 157 defines fair value, establishes a consistent
framework for measuring fair value and expands disclosure requirements about fair value
measurements. SFAS 157 does not change the accounting for those instruments that were, under
previous GAAP, accounted for at cost or contract value. In February 2008, the FASB issued staff
position No. 157-2 (FSP 157-2), which delays the effective date of SFAS 157 one year for all
non-financial assets and non-financial liabilities, except those recognized or disclosed at fair
value in the financial statements on a recurring basis. The company has no non-financial assets and
liabilities that are required to be measured at fair value on a recurring basis as of September 30,
2008.
The Company holds derivatives, which must be measured using the SFAS 157 prescribed fair value
hierarchy and related valuation methodologies. SFAS 157 specifies a hierarchy of valuation
techniques based on whether the inputs to each measurement are observable or unobservable.
Observable inputs reflect market data obtained from independent sources, while unobservable inputs
reflect the Companys assumptions about current market conditions. The prescribed fair value
hierarchy and related valuation methodologies are as follows:
Level 1
Quoted prices for identical instruments in active markets.
Level 2
Quoted prices for similar instruments in active markets, quoted prices for identical
or similar instruments in markets that are not active and model-derived
valuations, in which all significant inputs are observable in active markets.
Level 3
Valuations derived from valuation techniques, in which one or more significant
inputs are unobservable.
As of September 30, 2008, the fair value of the Companys financial assets and liabilities was
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative assets
|
|
|
|
|
|
$
|
48
|
|
|
|
|
|
|
$
|
48
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities
|
|
|
|
|
|
$
|
(6,228
|
)
|
|
|
|
|
|
$
|
(6,228
|
)
|
10
Valuation Methodologies
In determining the fair value of the Companys foreign currency derivatives, the Company uses
forward contract and option valuation models employing market observable inputs, such as spot and
forward currency rates, and time value. Since the Company only uses observable inputs in its
valuation of its derivative assets and liabilities, they are considered Level 2.
5. Earnings Per Share
The computation of basic and diluted earnings per share is as follows (in thousands except per
share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Net income
|
|
$
|
1,648
|
|
|
$
|
4,842
|
|
|
$
|
4,164
|
|
|
$
|
16,029
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares outstanding for basic earnings per share
|
|
|
29,285
|
|
|
|
28,653
|
|
|
|
29,251
|
|
|
|
26,585
|
|
Potential common shares issuable upon exercise of stock options
|
|
|
705
|
|
|
|
3,042
|
|
|
|
1,106
|
|
|
|
3,154
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average diluted shares
|
|
|
29,990
|
|
|
|
31,695
|
|
|
|
30,357
|
|
|
|
29,739
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
0.06
|
|
|
$
|
0.17
|
|
|
$
|
0.14
|
|
|
$
|
0.60
|
|
Diluted earnings per share
|
|
$
|
0.05
|
|
|
$
|
0.15
|
|
|
$
|
0.14
|
|
|
$
|
0.54
|
|
Potential common shares issuable upon exercise of stock options excluded 3.1 million and 1.3
million shares for the three and nine months ended September 30, 2008, respectively and 0.5 million
and 0.5 million shares for the three and nine months ended September 30, 2007, respectively, as the
effect was antidilutive.
6. Contingencies
The Company is a defendant in the employment matter of James Dreyfuss vs. eTelecare Global
Solutions-US, Inc. filed in the United States District Court, Southern District of New York
on February 4, 2008. In the matter, James Dreyfuss, who served as our Regional Vice President of
Sales, has asserted the following claims against the company: (1) two counts of breach of contract;
(2) violation of New York Labor Law Sections 190 et seq. (3) quantum merit; (4) unjust enrichment;
(5) breach of covenant of good faith and fair dealing; and (6) promissory estoppel. Mr. Dreyfuss
seeks compensatory damages in an amount to be proven at trial, penalties under New York Labor Law
Section 198, pre- and post-judgment interest and costs and expenses for such suit, including
attorneys fees. We filed a motion to compel arbitration on April 7, 2008 and filed a brief in
support of such motion on July 16, 2008 and are now in the early stages of discovery. While we
cannot predict with certainty the outcome of the litigation, the Company does not believe a
liability is probable; therefore, no liability has been recorded in the financial statements.
On August 7, 2008, an action entitled
Peter Mikhalev v. eTelecare Global Solutions, Inc. et
al.
(Case No. BC 395919) was filed in the Los Angeles County Superior Court. The complaint alleges
that in July 2007 the Company refused to allow the plaintiff, a former employee of the Company, to
exchange common shares then owned by him into ADSs. The complaint seeks compensatory and punitive
damages for conversion. On September 8, 2008, the Company filed a general denial to the
complaint. On September 9, 2008, the Company filed a notice of removal of the case to the United
States District Court for the Central District of California. On September 12, 2008, the district
court issued an order to show cause regarding remand to state court, to which the Company responded
on September 26, 2008. Plaintiff did not file a motion to remand the case to state court. A
scheduling conference will take place in the district court on December 1, 2008. While we cannot
predict with certainty the outcome of the litigation, the Company does not believe a liability is
probable; therefore, no liability has been recorded in the financial statements.
The Company is subject to other legal proceedings and claims, which have arisen in the
ordinary course of its business. Although there can be no assurance as to the ultimate disposition
of these matters and the proceedings disclosed above, it is the opinion of the Companys
management, based upon the information available at this time, that the expected outcome of these
matters, individually or in the aggregate, will not have a material adverse effect on the Companys
results of operations or financial position.
7. eTelecare Global Solutions Nicaragua
On August 12, 2008, the Company entered into a share purchase agreement (the SPA) and a
shareholders agreement (the SA) with Almori BPO Services, Inc., a Texas corporation (Almori)
for the purchase of a 70% interest in eTelecare Global Solutions Nicaragua, S.A. (eTelecare
Nicaragua) which will operate as a call center based in Nicaragua. In aggregate the Company made
an
11
investment of $2.1 million for the purchase of the interest and as a capital contribution to
eTelecare Nicaragua. Almori will own the remaining 30% interest in consideration for an initial
capital contribution of $0.9 million. In addition, the Company will make a $5.0 million line of
credit available to eTelecare Nicaragua for the initial build-out of the facility and ramp-up of
operations.
8. Acquisition Agreement
On September 19, 2008, eTelecare entered into an Acquisition Agreement (the Acquisition
Agreement) with EGS Acquisition Co LLC, (EGS), pursuant to which EGS agreed, subject to the
terms and conditions of the Acquisition Agreement, to commence a tender offer (the Offer) to
purchase all of the Companys issued and outstanding common shares (Common Shares) listed on the
Philippine Stock Exchange, Inc. and all of Companys issued and outstanding American Depositary
Shares (ADSs and, together with the Common Shares, the Shares) traded on the Nasdaq Global
Market, at a price per Share of $9.00 (the Offer Price). On November 10, 2008, the Offer
commenced. The Offer Price is payable in cash, without interest thereon and less any required taxes
or costs EGS, the Company or any paying agent may be required to deduct or withhold in accordance
with applicable law or rules, including payment of any stock transaction taxes, brokers
commissions and other fees customarily for the account of a seller in connection with the
crossing of the Common Shares on the Philippine Stock Exchange, Inc. EGS is a Delaware limited
liability company, jointly owned by affiliates of Providence Equity Partners Inc. and Ayala
Corporation. References to Purchaser herein shall mean EGS and/or any corporation formed for the
purpose of purchasing the Shares tendered in the Offer and to whom EGS assigns its rights and
obligations under the Acquisition Agreement.
In connection with the Offer and immediately prior and subject to the time the Purchaser
accepts for payment all Shares validly tendered and not withdrawn pursuant to the terms of the
Offer, all of eTelecares outstanding stock options, whether vested or unvested, shall be
cancelled and exchanged for a cash payment for each Shares subject to each such stock option, equal
to the excess amount, if any, of the Offer Price less the per Share exercise price of such stock
option without interest thereon and less any required withholding or other taxes. Each restricted
stock unit of eTelecare outstanding immediately prior and subject to the time the Purchaser accepts
for payment all Shares validly tendered and not withdrawn pursuant to the terms of the Offer shall
be canceled and exchanged for a cash payment with respect to each Shares subject to each such
restricted stock unit equal to the Offer Price without interest thereon and less any required
withholding or other taxes. All previously unrecognized share-based compensation expense will be
recognized upon the conversion of the equity instruments in connection with the transaction.
eTelecare has made various representations and warranties and agreed to specified covenants in
the Acquisition Agreement, including covenants relating to the conduct of the Companys business
between the date of the Acquisition Agreement and the closing of the Offer, restrictions on
solicitation of proposals with respect to alternative transactions, governmental filings and
approvals, public disclosures and other matters. The consummation of the Offer is subject to
certain conditions, including the receipt by the Purchaser, prior to the expiration of the Offer,
of valid acceptances (which have not been validly withdrawn) in respect of Shares representing at
least 66.67% of the outstanding Shares (on a fully diluted basis, after giving effect to the
exercise, conversion or termination of all options, warrants, rights and securities exercisable or
convertible into or for Shares), the expiration or termination of any waiting period (and any
extension thereof) under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, or
any foreign statutes, and the obtainment of all approvals applicable to the Acquisition Agreement
or the Offer. Stockholders owning a total of 19,204,046 Shares, representing approximately 64.8%
of the Shares outstanding as of September 30, 2008, have agreed to tender their Shares pursuant to
support agreements entered into with the Purchaser, which includes 6,392,550 Shares beneficially
owned by NewBridge International Investment Ltd. (NewBridge), an indirect and wholly-owned
subsidiary of Ayala Corporation.
The Acquisition Agreement contains certain termination rights of EGS and eTelecare and
provides that, upon the termination of the Acquisition Agreement under specified circumstances, the
terminating party will be required to pay the non-terminating party a termination fee of $14.5
million. The Company has entered into limited guarantees with both Providence Equity Partners and
Ayala Corporation (each a Guarantor) whereby each Guarantor guarantees the payment of 50% of the
termination fee if such fee shall become payable by EGS under the terms of the Acquisition
Agreement.
The Company also entered into a Standstill Agreement with NewBridge dated September 19, 2008
(the Standstill Agreement), which would place certain restrictions on the actions of NewBridge
and its affiliates in the event that the Acquisition Agreement is terminated and the Offer has not
been completed. Depending upon the circumstances of the termination of the Acquisition Agreement,
the duration of the standstill ranges from 6 months to 18 months to three years. NewBridge at all
times during the standstill period would be permitted to vote or dispose of the 6,392,550 Shares it
currently owns in its sole discretion.
In connection with the announcement of the Offer, the Company was required to pay Morgan
Stanley $0.5 million in the third quarter of 2008 related to financial advisory services. The
Company will be required to pay and expense an additional $3.75 million related to Morgan Stanley
financial advisory services upon consummation of the transaction.
12
ITEM 2:
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
This Managements Discussion and Analysis of Financial Condition and Results of Operations
should be read together with the unaudited consolidated financial statements and related notes
appearing in Item 1 of this report on Form 10-Q and the section entitled Managements Discussion
and Analysis of Financial Condition and Results of Operations and our audited financial statements
for the year-ended December 31, 2007 included in our annual report on Form 10-K previously filed
with the Securities and Exchange Commission on March 14, 2008.
This report on Form 10-Q contains forward-looking statements. These statements include but are
not limited to our expectations that clients are increasingly looking for vendors that provide
business process outsourcing, or BPO, services from multiple locations, our anticipated growth in
our business, our anticipated effective tax rate for 2008, the potential to obtain extensions on
Philippine tax holidays, our anticipated capital expenditures in 2008, and our belief regarding the
adequacy of our capital resources over the next 12 months. Forward-looking statements are subject
to risks and uncertainties that could cause actual results to differ materially from those
discussed in these forward-looking statements. These risks and uncertainties include, but are not
limited to, our ability to attract and retain enough sufficiently trained customer service
associates and other personnel, our ability to maintain our pricing, utilize our employees and
assets efficiently and maintain and improve the current mix of services that we deliver from our
offshore locations, our ability to compete effectively with onshore and offshore BPO companies and
with information technology companies that also offer BPO services and our ability to manage our
growth effectively and maintain effective internal processes. Additional risks and uncertainties
include those listed under Item 1A, Risk Factors and those that are contained in our quarterly
reports on Form 10-Q for the three months ended March 31, 2008 and June 30, 2008. eTelecare Global
Solutions, Inc. expressly disclaims any obligation or undertaking to release publicly any updates
or revisions to any forward-looking statements contained in this report to conform these statements
to actual results or changes in our expectations or in events, conditions or circumstances on which
any such statement is based. You should not place undue reliance on these forward-looking
statements, which apply only as of the date hereof.
Introduction
Our Managements Discussion and Analysis is intended to facilitate an understanding of our
business and results of operations and consists of the following sections:
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Overview: a summary of our business;
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Results of Operations: a discussion of our operating results;
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Liquidity and Capital Resources: an analysis of our cash flows, sources and uses of cash
and financial position;
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Overview
We are a leading provider of business process outsourcing, or BPO, services focusing on the
complex, voice-based segment of customer care services delivered from both onshore and offshore
locations. We provide a range of services including technical support, financial advisory services,
warranty support, customer service, sales and customer retention. Our services are delivered from
seven delivery centers in the Philippines and six delivery centers in the United States, with
approximately 10,400 employees in the Philippines and approximately 3,100 employees in the United
States as of September 30, 2008.
We completed our initial public offering in the United States on April 2, 2007 in the form of
5,500,000 American Depositary Shares, or ADS. Our ADS are listed on the NASDAQ Global Market. Our
initial public offering raised $69.1 million, net of underwriting discounts and commissions and
offering costs. On April 5, 2007, we received additional proceeds of $10.3 million, net of
underwriting discounts and commissions and offering costs of $844,000, as a result of the exercise
by our underwriters of their over-allotment option to purchase an additional 825,000 ADSs from us.
In April 2007, we used an aggregate of $36.3 million from these proceeds to repay outstanding debt.
In late November 2007, we completed our listing by way of introduction on the Philippine Stock
Exchange. We currently are a foreign private issuer under the applicable rules and regulations in
the United States. However, we voluntarily elect to file our periodic and current company reports
under the Exchange Act in accordance with the rules and regulations applicable to a U.S. issuer.
On September 19, 2008, we entered into an Acquisition Agreement (the Acquisition Agreement)
with EGS Acquisition Co LLC (EGS), pursuant to which EGS agreed, subject to the terms and
conditions of the Acquisition Agreement, to commence a tender offer to purchase all of our issued
and outstanding common shares listed on the Philippine Stock Exchange and all of our issued and
outstanding American Depositary Shares, or ADSs, traded on the Nasdaq Global Market, at an offer
price of $9.00 per common share
13
or ADS, as applicable. The offer price is payable in cash, without interest thereon and less
any required taxes or costs EGS, eTelecare, or any paying agent may be required to deduct or
withhold in accordance with applicable law or rules, including payment of any stock transaction
taxes, brokers commissions and other fees customarily for the account of a seller in connection
with the crossing of the common shares on the Philippine Stock Exchange, Inc. EGS is a Delaware
limited liability company, jointly owned by affiliates of Providence Equity Partners Inc. and Ayala
Corporation.
Results of Operations for the Three and Nine Months Ended September 30, 2008 and 2007
The following table sets forth our unaudited historical operating results, as a percentage of
revenue for the periods indicated:
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Three Months
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Nine Months
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Ended
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Ended
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September 30,
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September 30,
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2008
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2007
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2008
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2007
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Consolidated Statements of Operations Data:
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Service revenue
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100.0
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%
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100.0
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%
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100.0
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%
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100.0
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%
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Cost and expenses:
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Cost of services (exclusive of depreciation shown separately below)
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74.4
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72.2
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74.9
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70.4
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Selling and administrative expenses
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16.2
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14.1
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15.7
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13.8
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Depreciation and amortization
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7.4
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5.7
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7.5
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5.7
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Total cost and expenses
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98.0
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92.0
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98.1
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89.9
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Income from operations
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2.0
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8.0
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1.9
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10.1
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Other income (expense):
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Interest expense and financing charges
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(0.1
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)
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(0.2
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)
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(0.1
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)
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(1.0
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)
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Interest income
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0.3
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0.7
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0.2
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0.5
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Foreign exchange gain
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0.1
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(0.3
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)
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0.1
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(0.5
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)
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Other
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0.0
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0.0
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0.0
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0.1
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Net other income (expense)
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0.3
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0.2
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0.2
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(0.9
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)
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Income before income tax provision
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2.3
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8.2
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2.1
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9.2
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Income tax provision
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(0.4
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)
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(0.8
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)
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|
(0.4
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)
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|
(0.7
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)
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Minority Interest
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0.2
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0.1
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Net income
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2.1
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%
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7.4
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%
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1.8
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%
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8.5
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%
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Service Revenue.
We generate revenue from the customer care and other BPO programs we
administer for our clients. We provide our services to clients under contracts that typically
consist of a master services agreement, which contains the general terms and conditions of our
client relationship, and a statement of work, which describes in detail the terms and conditions of
each program we administer for a client. Our contracts with our clients typically have a term of
one year and can be terminated earlier by our clients or us without cause, typically upon 30 to 90
days notice. Although the contractual commitments from our clients are short, our client
relationships tend to be longer-term given the scale and complexity of the services we provide
coupled with the risk and costs to our clients associated with bringing business processes in-house
or outsourcing them to another provider. For the same reasons, our sales cycle tends to range from
six to 12 months.
The outsourcing industry is extremely competitive, and outsourcers have historically competed
based on pricing terms. Accordingly, we could be subject to pricing pressure and may experience a
decline in our average selling prices for our services. We attempt to mitigate this pricing
pressure by differentiating ourselves from our competition based on the value we bring to our
clients through the quality of our services and our ability to provide quantifiable results that
our clients can measure against our competitors. We provide a sales proposition to a client based
on quantifiable value per dollar spent by the client on our services. For example, we work with the
client to quantify the costs to the client of activities such as the time it takes to handle a
call, repeat calls, parts dispatches and cancelled sales. We similarly work with a client to
quantify the value from initial product sales, sales of products complimentary or more expensive
than the products in which a customer is originally interested and repeat purchasing based on
customer satisfaction. This information on costs and value created is combined to develop a value
created per dollar spent model on which both the client and we agree in order to set the price for
our services in our contract. We then assess our performance against this model on a quarterly
basis and share our results measured by these metrics with our client on a quantified scorecard.
This gives our client a means of comparing the value we created per dollar spent on us to the same
metrics for our clients internal business process centers or other outsourcers.
We derive our revenue primarily through time-delineated or session-based fees, including
hourly or per-minute charges and charges per interaction, which are separately negotiated on a
client-by-client basis. In some contracts, we are paid higher rates if we meet specified
performance criteria, which are based on objective performance metrics that our client agrees would
add quantifiable value
14
to their operations. These payment arrangements can take many forms, including additional
payments to us based on the number of confirmed sale transactions we make on behalf of a client or
based on meeting customer satisfaction targets. Bonuses are typically 5% to 10% of revenue for a
program. Conversely, some of our contracts include provisions that provide for downward revision of
our prices under certain circumstances, such as if the average speed required to answer a call is
longer than agreed to with the client. Downward revisions are typically limited to a maximum of 5%
of revenue for a program. All of our bonus and downward revision provisions are negotiated at the
time that we sign a statement of work with a client and our revenue from our contracts is thus
fixed and determinable at the end of each month.
We currently derive substantially all of our revenue from U.S.-based clients. We receive most
of our revenue from a small number of clients, with an aggregate of approximately 81% and 85% of
our revenue from our five largest clients for the nine months ended September 30, 2008 and 2007,
respectively. For the three and nine months ended September 30, 2008, we had three clients that
each contributed more than 10% of revenue, including AT & T, representing 25% and 26%,
respectively, of revenue, Sprint, representing 21% and 21%, respectively, of revenue, and Dell,
representing 20% and 19%, respectively, of revenue. We often administer multiple programs for a
single client with separate contracts or statements of work that sometimes are negotiated with
separate parts of the client organization, which we view as being different clients for practical
purposes. For example, we perform four separate programs for AT & T for two separate AT & T
business units.
(amounts in thousands)
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Three Months
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Ended
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September 30,
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Increase (Decrease)
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2008
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2007
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$
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%
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Service revenue
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$
|
76,846
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$
|
65,362
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|
$
|
11,484
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18
|
%
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|
|
|
|
|
|
Nine Months
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|
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|
|
Ended
|
|
|
|
|
September 30,
|
|
Increase (Decrease)
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|
|
2008
|
|
2007
|
|
$
|
|
%
|
Service revenue
|
|
$
|
225,485
|
|
|
$
|
188,898
|
|
|
$
|
36,587
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|
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|
19
|
%
|
Our revenue growth was primarily driven by an expansion of work with existing clients
delivered from both our Philippine and U.S. locations.
Cost of services.
Cost of services consists primarily of the salaries, payroll taxes and
employee benefit costs of our customer service associates and other operations personnel. Cost of
services also includes direct communications costs, rent expense, information technology costs,
facilities support and customer management support costs related to the operation of our delivery
centers. We expense these costs as incurred.
Our cost of services is most heavily impacted by prevailing salary levels. Although we have
not been subject to significant wage inflation in the Philippines or the United States, any
significant increase in the market rate for wages could harm our operating results and our
operating margin.
We often incur significant costs in the early stages of implementation or in anticipation of
meeting a current clients forecasted demand for our services, with the expectation that these
costs will be recouped over the life of the program, thereby enabling us to achieve our targeted
returns. Similarly, we may also be required to increase recruiting and training costs to prepare
our customer service associates for a specific type of service. Such costs are expensed as
incurred. If we undertake additional recruiting and training programs and our client terminates a
program early or does not meet its forecasted demand, our operating margin could decline.
Our cost of services is also impacted by our ability to manage and employ our customer service
associates efficiently. Our workforce management group continuously monitors staffing requirements
in an effort to ensure efficient use of these employees. Although we generally have been able to
reallocate our customer service associates as client demand has fluctuated, an unanticipated
termination or significant reduction of a program by a major client may cause us to experience a
higher-than-expected number of unassigned customer service associates.
15
Our efficient use of customer service associates is also impacted by seasonal changes in the
operations of our clients, which impact the level of services our clients require. For example, the
amount of technical support and financial services we provide has traditionally been greater during
the fourth quarter of each year driven by increased customer spending during the holiday season.
This demand trends down slightly during the first quarter of each year with demand for these same
services typically declining significantly during the second quarter of each year. As a result, the
fourth quarter of each year is typically our period of highest demand, while the second quarter of
each year is typically our period of lowest demand.
We believe that our clients are increasingly looking for vendors that provide BPO services
from multiple geographic locations. This allows clients to manage fewer vendors while minimizing
geopolitical risk and risk to operations from natural disasters. Moreover, clients ultimately
willing to have service operations offshore may not be willing to do so initially or at any time
completely. To address this demand we have service operations in both the U.S and the Philippines.
An important element of our multi-shore service offering is our ability to migrate clients offshore
over time. This allows clients to gain confidence in the quality of our services before shifting
services to our offshore delivery locations. This migration strategy both lowers costs for our
clients and improves our financial performance.
(amounts in thousands)
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
|
Ended
|
|
|
|
|
September 30,
|
|
Increase (Decrease)
|
|
|
2008
|
|
2007
|
|
$
|
|
%
|
Cost of services (exclusive of depreciation and amortization)
|
|
$
|
57,136
|
|
|
$
|
47,172
|
|
|
$
|
9,964
|
|
|
|
21
|
%
|
% of revenue
|
|
|
74
|
%
|
|
|
72
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
|
|
Ended
|
|
|
|
|
September 30,
|
|
Increase (Decrease)
|
|
|
2008
|
|
2007
|
|
$
|
|
%
|
Cost of services (exclusive of depreciation and amortization)
|
|
$
|
168,787
|
|
|
$
|
132,949
|
|
|
$
|
35,838
|
|
|
|
27
|
%
|
% of revenue
|
|
|
75
|
%
|
|
|
70
|
%
|
|
|
|
|
|
|
|
|
The absolute dollar increase in cost of services in the three and nine months ended September
30, 2008 compared to the three and nine months ended September 30, 2007 was primarily related to
the increase in service revenue of 18% and 19% in each comparative period. The increase in cost of
services as a percentage of revenue was primarily due to the significant strengthening of the
Philippine peso compared to the U.S. dollar on a hedge adjusted basis which resulted in an increase
of approximately 3.7% and 4.5% of our total operating expenses in the three and nine months ended
September 30, 2008, respectively, compared to the same periods in the prior year primarily
impacting our cost of services. Because substantially all of our service revenue is denominated in
U.S. dollars and 50% and 47% of our cost of services in the three months ended September 30, 2008
and 2007, respectively, and 53% and 44% of our cost of services in the nine months ended September
30, 2008 and 2007, respectively, were generated in the Philippines substantially all of which were
paid in Philippine pesos, the effective net costs of our services has increased as the peso
strengthens against the U.S. dollar. This increase was partially offset by the expanded use of our
lower-cost Philippine operations, which despite the strengthening peso continues to show
significant cost advantages over our U.S. operations.
Selling and administrative expenses.
Selling and administrative expenses consist primarily of
our sales and administrative employee-related expenses, sales commissions, professional fees,
travel costs, marketing programs and other corporate expenses. Substantially all of our share-based
compensation expense is included in selling and administrative expenses.
(amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
|
Ended
|
|
|
|
|
September 30,
|
|
Increase (Decrease)
|
|
|
2008
|
|
2007
|
|
$
|
|
%
|
Selling and administrative expenses
|
|
$
|
12,417
|
|
|
$
|
9,204
|
|
|
$
|
3,213
|
|
|
|
35
|
%
|
% of revenue
|
|
|
16
|
%
|
|
|
14
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
|
|
Ended
|
|
|
|
|
September 30,
|
|
Increase (Decrease)
|
|
|
2008
|
|
2007
|
|
$
|
|
%
|
Selling and administrative expenses
|
|
$
|
35,310
|
|
|
$
|
26,033
|
|
|
$
|
9,277
|
|
|
|
36
|
%
|
% of revenue
|
|
|
16
|
%
|
|
|
14
|
%
|
|
|
|
|
|
|
|
|
16
The increase in selling and administrative expenses in three and nine months ended September
30, 2008 compared to the comparative periods in 2007 was primarily due to additional salaries,
wages and benefits, consulting fees, travel expenses, and equity compensation expenses. We hired
additional personnel to support our growth and to enhance our executive team and professional staff
as we expanded our Philippine operations. Share-based compensation included in selling and
administrative expenses was $0.9 million and $0.7 million in the three months ended September 30,
2008 and 2007, respectively, and $2.6 million and $1.7 million for the nine months ended September
30, 2008 and 2007, respectively, which represented 1% of revenue in each period. Also included in
selling and administrative expenses in the nine months ended September 30, 2008 is $1.2 million
associated with due diligence expenditures related to a potential business acquisition that we
decided not to pursue to conclusion. Included in selling and administrative expenses in the three
and nine months ended September 30, 2008 is $1.3 million related to professional fees associated
with the negotiation and execution of the Acquisition Agreement and $0.4 million of expenses
related to startup costs associated with eTelecare Nicaragua.
Impact of Foreign Currency.
As a result of our multi-shore delivery model, our results of
operations and cash flows are subject to fluctuations due to changes in foreign currency exchange
rates, particularly changes in the Philippine peso. Substantially all of our revenue is denominated
in U.S. dollars, but a significant amount of our expenses is denominated in Philippine pesos. In
the three month ended September 30, 2008 and 2007, 47% and 43%, respectively, and in the nine
months ended September 30, 2008 and 2007, 50% and 42%, respectively, of our cost of services and
selling and administrative expenses were generated in the Philippines substantially all of which
were paid in Philippine pesos.
Prior to our initial public offering, our outstanding debt included covenants that prohibited
us from entering foreign currency hedging transactions. Upon completion of the initial public
offering in the first quarter of 2007, we used a portion of the proceeds to pay off the outstanding
debt and negotiated terms that allowed foreign currency hedging. As a result, in the third quarter
of 2007, we initiated a strategy to hedge against short-term foreign currency fluctuations. This
strategy consists of a rolling hedge program that entails contracting with third-party financial
institutions to acquire zero cost, non-deliverable forward contracts.
Depreciation and amortization.
We currently purchase substantially all of our equipment. We
record property and equipment at cost and calculate depreciation using the straight-line method
over the estimated useful lives of our assets, which generally range from three to five years. We
amortize leasehold improvements on a straight-line basis over the shorter of the lease term or the
estimated useful life of the asset. If the actual useful life of any asset is less than its
estimated depreciable life, we would record additional depreciation expense or a loss on disposal
to the extent the net book value of the asset is not recovered upon sale.
Our depreciation is primarily driven by large investments in capital equipment required for
our continued expansion, including the build-out of seats, which we define as workstations where
customer service associates generate revenue. These expenditures include tenant improvements to new
facilities, furniture, information technology infrastructure, computers and software licenses and
generally range from $8,000 to $12,000 per seat depending on specific client requirements. These
costs are generally depreciated over a period of three to five years and are substantially the same
in the United States and the Philippines. The effect of our depreciation and amortization on our
operating margin is impacted by our ability to manage and utilize our seats efficiently. We seek to
expand our seat capacity only after receiving contractual commitments from our clients. However, we
have in the past increased our seat capacity based on forecasted demand projections from our
clients, which are not contractual commitments. This has resulted in a surplus of seats, which has
increased our depreciation and, to a limited extent, reduced our operating margin. As a general
matter, the efficiency of our use of seats has had less of an impact on our operating margin than
the efficiency of our deployment of our customer service associates.
(amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
|
Ended
|
|
|
|
|
September 30,
|
|
Increase (Decrease)
|
|
|
2008
|
|
2007
|
|
$
|
|
%
|
Depreciation and amortization
|
|
$
|
5,692
|
|
|
$
|
3,789
|
|
|
$
|
1,903
|
|
|
|
50
|
%
|
% of revenue
|
|
|
7
|
%
|
|
|
6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
|
|
Ended
|
|
|
|
|
September 30,
|
|
Increase (Decrease)
|
|
|
2008
|
|
2007
|
|
$
|
|
%
|
Depreciation and amortization
|
|
$
|
16,886
|
|
|
$
|
10,826
|
|
|
$
|
6,060
|
|
|
|
56
|
%
|
% of revenue
|
|
|
7
|
%
|
|
|
6
|
%
|
|
|
|
|
|
|
|
|
The increase in depreciation and amortization was due to continued expansion of our facilities
and infrastructure to support the growth of our operations.
17
Income from operations; operating margin
(amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
|
Ended
|
|
|
|
|
September 30,
|
|
Increase (Decrease)
|
|
|
2008
|
|
2007
|
|
$
|
|
%
|
Income from operations
|
|
$
|
1,601
|
|
|
$
|
5,197
|
|
|
$
|
(3,596
|
)
|
|
|
(69
|
%)
|
Operating margin
|
|
|
2
|
%
|
|
|
8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
|
|
Ended
|
|
|
|
|
September 30,
|
|
Increase (Decrease)
|
|
|
2008
|
|
2007
|
|
$
|
|
%
|
Income from operations
|
|
$
|
4,502
|
|
|
$
|
19,090
|
|
|
$
|
(14,588
|
)
|
|
|
(76
|
%)
|
Operating margin
|
|
|
2
|
%
|
|
|
10
|
%
|
|
|
|
|
|
|
|
|
The decrease in operating margin in the three and nine months ended September 30, 2008
compared to the comparative periods in the prior year was principally the result of an increase in
our cost of services, which increased at a faster rate than did revenues. The operating margin was
primarily impacted by the increase in cost of services due to the significant strengthening of the
Philippine peso compared to the U.S. dollar on a hedge adjusted basis when comparing the three and
nine months ending September 30, 2008 to the comparable periods in the prior year. Other decreases
to the operating margin were due to:
|
|
|
due diligence expenditures of $1.2 million related to a potential business acquisition
that we decided not to pursue to conclusion which were incurred in the nine months ended
September 30, 2008;
|
|
|
|
|
startup costs of $0.4 million associated with eTelecare Nicaragua; and,
|
|
|
|
|
expenditures of $1.3 million related to professional fees associated with the
negotiation and execution of the Acquisition Agreement.
|
These decreases to our operating margin were partially offset by the expanded use of our
lower-cost Philippine operations, which despite the strengthening peso continues to show
significant cost advantages over our U.S. operations.
Other Income (Expense).
Interest and other income (expense), net includes mainly interest
income, interest expense and gains and losses on foreign currency transactions.
(amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
|
|
|
Ended
|
|
|
|
|
|
|
September 30,
|
|
|
Increase (Decrease)
|
|
|
|
2008
|
|
|
2007
|
|
|
$
|
|
|
%
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense and financing charges
|
|
$
|
(114
|
)
|
|
$
|
(77
|
)
|
|
$
|
(37
|
)
|
|
|
48
|
%
|
Interest income
|
|
|
260
|
|
|
|
434
|
|
|
|
(174
|
)
|
|
|
(40
|
)%
|
Foreign exchange gain (loss)
|
|
|
73
|
|
|
|
(165
|
)
|
|
|
238
|
|
|
|
(144
|
)%
|
Other
|
|
|
12
|
|
|
|
5
|
|
|
|
7
|
|
|
|
140
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net other income (expense)
|
|
$
|
231
|
|
|
$
|
197
|
|
|
$
|
34
|
|
|
|
17
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of revenue
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
|
|
|
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
|
|
|
|
Ended
|
|
|
|
|
|
|
September 30,
|
|
|
Increase (Decrease)
|
|
|
|
2008
|
|
|
2007
|
|
|
$
|
|
|
%
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense and financing charges
|
|
$
|
(333
|
)
|
|
$
|
(1,832
|
)
|
|
$
|
1,499
|
|
|
|
(82
|
)%
|
Interest income
|
|
|
671
|
|
|
|
861
|
|
|
|
(190
|
)
|
|
|
(22
|
)%
|
Foreign exchange gain (loss)
|
|
|
138
|
|
|
|
(849
|
)
|
|
|
987
|
|
|
|
116
|
%
|
Other
|
|
|
(84
|
)
|
|
|
153
|
|
|
|
(237
|
)
|
|
|
(155
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net other income (expense)
|
|
$
|
392
|
|
|
$
|
(1,667
|
)
|
|
$
|
2,059
|
|
|
|
124
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of revenue
|
|
|
0
|
%
|
|
|
(1
|
%)
|
|
|
|
|
|
|
|
|
Interest expense and financing charges decreased significantly in the nine months ended
September 30, 2008 compared to the comparative period in the prior year because of the repayment of
our debt using the proceeds of our initial public offering.
We are exposed to short-term currency fluctuations with respect to Philippine peso-denominated
accrued liabilities on our balance sheet. The volatility of our foreign exchange (loss) gain
relating to these fluctuations was reduced in the three and nine months ended September 30, 2008
due to our hedging strategy which we initiated in the third quarter of 2007.
Provision for income taxes.
For the third quarter of 2008, our effective tax rate was 17%,
compared to 10% for the third quarter of 2007. The effective tax rate for the third quarter of
2008 included a favorable impact for one-time discrete benefits totaling $0.7 million, or 37%.
These discrete benefits recognized in the third quarter of 2008 related to the recognition of
previously unrecognized income tax benefits due to the close of 2004 Federal statute of limitations
The increase in the effective tax rate compared to the third quarter of 2007 resulted primarily
from a decline in Philippine profitability year-over-year. This decline in Philippine
profitability, due primarily to higher costs in 2008 driven from a stronger Philippine peso versus
the U.S. dollar, created a lower mix of profits subject to the Philippine tax holidays and a higher
mix of profits subject to U.S. federal and state taxes. This mix shift of taxable profits between
jurisdictions, combined with tax benefits received in 2007 for the one quarter of interest expense
deductions incurred prior to the payoff of debt with the proceeds of our initial public offering,
resulted in a higher effective tax rate for the third quarter of 2008 and a higher expected annual
effective tax rate for the full year 2008.
For the nine months ending September 30, 2008, our effective tax rate was 18%, compared to 8%
for the first nine months of 2007. The effective tax rate for the nine months ended September 30,
2008 included a favorable impact for one-time discrete benefits totaling $0.8 million, or 16%.
These discrete benefits recognized during the nine months ended September 30, 2008 related to the
recognition of previously unrecognized income tax benefits due to the close of 2004 U.S. federal
statute of limitations, the 2004 Philippine statute of limitations and the reduction of our 2007
Philippine tax liability due to a favorable tax ruling received. The increase in the effective tax
rate compared to the nine months ended September 30, 2007 resulted primarily from a decline in
Philippine profitability year-over-year. This decline in Philippine profitability, due primarily
to higher costs in 2008 driven from a stronger Philippine peso versus the U.S. dollar, created a
lower mix of profits subject to the Philippine tax holidays and a higher mix of profits subject to
U.S. federal and state taxes. This mix shift of taxable profits between jurisdictions, combined
with tax benefits received in 2007 for the one quarter of interest expense deductions incurred
prior to the payoff of debt with the proceeds of our initial public offering, resulted in a higher
effective tax rate for the nine months ending September 30, 2008 and a higher expected annual
effective tax rate for the full year 2008. We anticipate our 2008 annual effective tax rate will be
34%, before the impact of any one-time discrete adjustments or income tax holiday extensions.
Liquidity and Capital Resources
We have financed our operations primarily with cash from operations, proceeds from our initial
public offering in the United States, proceeds from our loan agreements.
Net cash provided by our operating activities was $22.6 million and $13.5 million during the
nine months ended September 30, 2008 and 2007, respectively. Cash flows from our operating
activities in the nine month ended September 30, 2008 increased compared to the same period in the
prior year. The change is primarily attributable to the timing of receivables collections in the
comparable periods.
19
Net cash used in our investing activities was $18.7 million and $31.6 million during the nine
months ended September 30, 2008 and 2007, respectively. The primary use of cash in our investing
activities for each year is for our purchase of equipment, including information technology
equipment, furniture, fixtures and leasehold improvements for expansion of available seats.
Net cash provided by our financing activities was $3.1 million in the nine months ended
September 30, 2008 compared to $48.7 million in the nine months ended September 30, 2007. The
change is a result of the proceeds from our public offering being included in the 2007 period.
We expect to incur $26 to $28 million in expenditures related to property and equipment for
the full year 2008 for facilities improvements and expansion based on our current estimates of our
facilities requirements necessary to support the anticipated growth in our business. We believe
that we will be able to finance our working capital needs and currently planned facilities
improvements and expansion for at least the next 12 months from cash balances, cash generated from
operations, and borrowings under our revolving line of credit. Our available line of credit as of
September 30, 2008 was $25.0 million.
Our long-term future capital requirements will depend on many factors, including our level of
revenue, the timing and extent of our spending to support the maintenance and growth of our
operations, the expansion of our sales and marketing activities, continued market acceptance of our
services, and potential merger and acquisition activities. We expect to continue to have
significant capital requirements associated with the maintenance and growth of our operations,
including the lease and build-out of additional facilities primarily to support an increase in the
number of our customer service associates and the purchase of computer equipment and software,
telecommunications equipment and furniture, fixtures and office equipment to support our
operations. These additional long-term expenses may require us to seek other sources of financing,
such as additional borrowings or public or private equity or debt capital. The availability of
these other sources of financing will depend upon our financial condition and results of operations
as well as prevailing market conditions, and may not be available on terms reasonably acceptable to
us or at all.
Recent Accounting Pronouncements
The Company adopted Statement of Financial Accounting Standards (SFAS) No. 157, Fair Value
Measurements (SFAS 157) on January 1, 2008 for financial assets and liabilities, and
non-financial assets and liabilities that are recognized or disclosed at fair value in the
financial statements on a recurring basis. SFAS 157 defines fair value, establishes a framework for
measuring fair value as required by other accounting pronouncements and expands fair value
measurement disclosures. The provisions of SFAS 157 are applied prospectively upon adoption and did
not have a material impact on the Companys condensed consolidated financial statements. In
February 2008, the FASB issued staff position No. 157-2 (FSP 157-2), which delays the effective
date of SFAS 157 one year for all non-financial assets and non-financial liabilities, except those
recognized or disclosed at fair value in the financial statements on a recurring basis. Following
FSP 157-2, the Company is assessing the impact of SFAS 157 for non-financial assets and
non-financial liabilities on its consolidated financial statements and will measure such assets and
liabilities no later than the first quarter of 2009. The disclosures required by SFAS 157 are
included in Note 4, Fair Value Measurements, to the Companys condensed consolidated financial
statements.
In April 2008, the FASB issued FASB Staff Position Financial Accounting Standard 142-3 (FSP
FAS 142-3), Determination of the Useful Life of Intangible Assets. FSP FAS 142-3 amends the
factors that should be considered in developing renewal or extension assumptions used to determine
the useful life of a recognized intangible asset under SFAS No. 142, Goodwill and Other Intangible
Assets (SFAS 142). The intent of the FSP is to improve the consistency between the useful life
of a recognized intangible asset under SFAS 142 and the period of expected cash flows used to
measure the fair value of the asset under SFAS No. 141, Business Combinations. We are required to
adopt FSP FAS 142-3 in the first quarter of 2009 and will apply it prospectively to intangible
assets acquired after the effective date.
In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161 (SFAS
161), Disclosures about Derivative Instruments and Hedging Activities, which amends and expands
Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and
Hedging Activities. SFAS 161 requires tabular disclosure of the fair value of derivative
instruments and their gains and losses. This Statement also requires disclosure regarding the
credit-risk related contingent features in derivative agreements, counterparty credit risk, and
strategies and objectives for using derivative instruments. We are required to adopt SFAS 161 in
the first quarter of 2009. We are currently evaluating the additional disclosures required by SFAS
161.
In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160 (SFAS
160), Noncontrolling Interests in Consolidated Financial Statements an amendment of ARB No.
51. SFAS 160 amends Accounting Research Bulletin No. 51, Consolidated Financial Statements to
establish accounting and reporting standards for the noncontrolling interest in a subsidiary and
for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a
subsidiary, which is sometimes referred to as
20
minority interest, is an ownership interest in the consolidated entity that should be reported
as equity. Among other requirements, this Statement requires that the consolidated net income
attributable to the parent and the noncontrolling interest be clearly identified and presented on
the face of the consolidated income statement. SFAS 160 is effective for the first fiscal period
beginning on or after December 15, 2008. We are required to adopt SFAS 160 in the first quarter of
2009. We are currently evaluating the impact of adopting SFAS 160.
In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141 (revised
2007) (SFAS 141R), Business Combinations. SFAS 141R establishes principles and requirements for
how an acquirer recognizes and measures in its financial statements the identifiable assets
acquired, the liabilities assumed, any noncontrolling interest in an acquiree and the goodwill
acquired. SFAS 141R applies to business combinations for which the acquisition date is on or after
the first fiscal period beginning on or after December 15, 2008.
ITEM 3:
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Foreign Currency Exchange Risk
Our results of operations and cash flows are subject to fluctuations due to changes in foreign
currency exchange rates, particularly changes in the Philippine peso. In the three months ended
September 30, 2008 and 2007, 47% and 43%, respectively, and in the nine months ended September 30,
2008 and 2007, 50% and 42%, respectively, of our cost of services and selling and administrative
expenses were generated in the Philippines, substantially all of which were paid in Philippine
pesos. We bill substantially all of our revenue in U.S. dollars. The average exchange rate
excluding the impact of our foreign currency hedges used to translate pesos to U.S. dollars was
44.95 during the third quarter of 2008. Calculated based on our Philippines related expense during
the three months ended September 30, 2008 annualized, if we did not hedge our foreign currency
exposure, a 10% increase in the value of the U.S. dollar relative to the Philippine peso would
reduce our annual expenses associated with our offshore operations by approximately $12 million,
whereas a 10% decrease in the relative value of the U.S. dollar would increase the annual cost
associated with these operations by approximately $14 million.
Payments for employee-related costs, facilities management, other operational expenses and
capital expenditures are incurred in Philippine pesos on a monthly basis. Based upon prior credit
agreements, we were not allowed to enter into hedging contracts. Therefore, when our loans were
paid off, we initiated in the third quarter of 2007 a strategy to hedge against short-term foreign
currency fluctuations. This strategy consists of a rolling hedge program that entails contracting
with third-party financial institutions to acquire zero cost, non-deliverable forward contracts
that are expected to cover approximately 80% of Philippine peso-denominated forecasted expenses for
the current quarter, 60% of the forecasted peso expenses for the next quarter, 40% of the
forecasted peso expenses for two quarters out and finally, 20% of forecasted peso expenses for
three quarters out. For 2008, however, we modified the application of this strategy to hedge
approximately 90% of forecasted Philippine peso-denominated expenses. For 2009 forecasted
Philippine peso-denominated expenses, we have resumed the rolling hedge program and, as of
September 30, 2008, approximately 60%, 40% and 20% of the first quarter, second quarter, and third
quarter 2009 forecasted peso expenses, respectively, have been hedged. In October 2008, in light
of the current market environment and the substantial weakening of the Philippine peso, we
re-evaluated our hedge percentage coverage for 2009 and intend to add new hedge contracts in the
fourth quarter of 2008 to cover approximately 60% to 75% of total 2009 forecasted peso expenses.
Interest Rate Sensitivity
We have interest rate exposure arising from borrowings under our revolving line of credit,
which has variable interest rates. These variable interest rates are affected by changes in
short-term interest rates. Assuming the current level of borrowings, a hypothetical one-percentage
point increase in interest rates would not increase our annual interest expense as we repaid the
entire March 31, 2007 balance of our term loans and line of credit on April 3, 2007 and have not
borrowed on our existing line of credit.
Inflation Rate Sensitivity
In the three month ended September 30, 2008 and 2007, 47% and 43%, respectively, and in the
nine months ended September 30, 2008 and 2007, 50% and 42%, respectively, of our cost of services
and selling and administrative expenses were generated in the Philippines, substantially all of
which were paid in Philippine pesos. Although the Philippines has historically experienced periods
of high inflation, the inflation rate has been below 10% since 1999. For the year ended December
31, 2007, inflation averaging 2.8% kept prices generally stable. Inflation in the Philippines has
not affected our operating results because the Philippines has historically experienced
deflationary pressure on wages due to a fast-growing population and high unemployment. A reversal
of these trends, increased wage pressure due to increased competition as our industry expands or
higher rates of inflation in the Philippines could
result in increased costs and harm our operating results. A number of our leases in the
Philippines have escalation clauses triggered by Philippine inflation above negotiated thresholds.
21
ITEM 4:
CONTROLS AND PROCEDURES.
Evaluation of disclosure controls and procedures.
We maintain disclosure controls and procedures, as such term is defined in Rule 13a-15(e)
under the Securities Exchange Act of 1934 (the Exchange Act), that are designed to ensure that
information required to be disclosed by us in reports that we file or submit under the Exchange Act
is recorded, processed, summarized, and reported within the time periods specified in Securities
and Exchange Commission rules and forms, and that such information is accumulated and communicated
to our management, including our chief executive officer and chief financial officer, as
appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating
our disclosure controls and procedures, management recognized that disclosure controls and
procedures, no matter how well conceived and operated, can provide only reasonable, not absolute,
assurance that the objectives of the disclosure controls and procedures are met. Our disclosure
controls and procedures have been designed to meet reasonable assurance standards. Additionally, in
designing disclosure controls and procedures, our management necessarily was required to apply its
judgment in evaluating the cost-benefit relationship of possible disclosure controls and
procedures. The design of any disclosure controls and procedures also is based in part upon certain
assumptions about the likelihood of future events, and there can be no assurance that any design
will succeed in achieving its stated goals under all potential future conditions.
Based on their evaluation as of the end of the period covered by this Quarterly Report on Form
10-Q, our chief executive officer and chief financial officer have concluded that, as of such date,
our disclosure controls and procedures were effective at the reasonable assurance level.
Changes in internal control over financial reporting.
There was no change in our internal control over financial reporting (as defined in Rule
13a-15(f) under the Exchange Act) that occurred during the period covered by this quarterly report
on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
22
PART II: OTHER INFORMATION
ITEM 1.
LEGAL PROCEEDINGS.
We are the defendant in the employment matter of James Dreyfuss vs. ETelecare Global
Solutions-US, Inc. filed in the United States District Court, Southern District of New York
on February 4, 2008. In the matter, James Dreyfuss, who served as our Regional Vice President of
Sales, has asserted the following claims against the company: (1) two counts of breach of contract;
(2) violation of New York Labor Law Sections 190 et seq. (3) quantum merit; (4) unjust enrichment;
(5) breach of covenant of good faith and fair dealing; and (6) promissory estoppel. Mr. Dreyfuss
seeks compensatory damages in an amount to be proven at trial, penalties under New York Labor Law
Section 198, pre- and post-judgment interest and costs and expenses for such suit, including
attorneys fees. We filed a motion to compel arbitration on April 7, 2008 and filed a brief in
support of such motion on July 16, 2008 and are now in the early stages of discovery. While we
cannot predict with certainty the outcome of the litigation, we do not believe a liability is
probable; therefore, no liability has been recorded in the financial statements.
On August 7, 2008, an action entitled
Peter Mikhalev v. eTelecare Global Solutions, Inc. et
al.
(Case No. BC 395919) was filed in the Los Angeles County Superior Court. The complaint alleges
that in July 2007 we refused to allow the plaintiff, a former employee of ours, to exchange common
shares then owned by him into ADSs. The complaint seeks compensatory and punitive damages for
conversion. On September 8, 2008, we filed a general denial to the complaint. On September 9,
2008, we filed a notice of removal of the case to the United States District Court for the Central
District of California. On September 12, 2008, the district court issued an order to show cause
regarding remand to state court, to which we responded on September 26, 2008. Plaintiff did not
file a motion to remand the case to state court. A scheduling conference will take place in the
district court on December 1, 2008. While we cannot predict with certainty the outcome of the
litigation, we do not believe a liability is probable; therefore, no liability has been recorded in
the financial statements.
ITEM 1A.
RISK FACTORS.
Set forth below, elsewhere in this Form 10-Q and in other documents we file with the SEC are
important risks and uncertainties that could cause our actual results of operations, business and
financial condition to differ materially from the results contemplated by the forward-looking
statements contained in this Form 10-Q. Other than as set forth below, there are no material
changes from the risk factors previously disclosed in Item 1A of Part II of our Quarterly Report on
Form 10-Q for the three months ended March 31, 2008. You should not construe the following
cautionary statements as an exhaustive list. The risk factors contained in this report reflect only
changes from or additions to the risks stated in our Quarterly Report on Form 10-Q for the three
months ended March 31, 2008, and these risks must be read in conjunction with those in our
Quarterly Report on Form 10-Q for the three months ended March 31, 2008.
Risks Related to Our Business
One of our major clients is Vonage, who has been and may in the future be, subject to damaging and
disruptive intellectual property litigation that could adversely affect its business and its
continued viability, which, in turn, could harm our business, results of operations and financial
condition.
For the nine months ended September 30, 2008 and 2007, we derived 8% and 13%, respectively, of our
revenue from Vonage. Vonage has been named as a defendant in several lawsuits that relate to
alleged patent infringement and may be subject to infringement claims in the future. Vonage has
entered into an agreement to settle its patent infringement litigation with each of Sprint, Verizon
Services Corp. and AT & T which included aggregate cash payments by Vonage of approximately $240
million over specified terms. The agreements to pay up to an aggregate of $240 million combined
with the potential impact of future patent litigation could materially and adversely affect
Vonages business, results of operations and financial condition, as well as the continued
viability of Vonage. As a result of our significant client relationship with Vonage, any
determination against Vonage in patent litigation or the agreement by Vonage to make large
settlement payments could, in turn, harm our business, results of operations and financial
condition.
ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3.
DEFAULTS UPON SENIOR SECURITIES.
None.
23
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of stockholders was held at our PBCom Tower offices in Makati City,
Philippines on August 26, 2008. Seven incumbent directors were re-elected to serve until
our next annual meeting of stockholders, or until their successors are duly elected and
qualified. The results of this election are as follows:
|
|
|
|
|
|
|
Votes for
|
Name of Director
|
|
(Shares)
|
Alfredo I. Ayala
|
|
|
15,256,987
|
|
John Harris
|
|
|
15,291,403
|
|
John-Paul Ho
|
|
|
54,518,925
|
|
Rafael LL. Reyes
|
|
|
15,251,403
|
|
Jamie del Rosario, Jr.
|
|
|
15,291,403
|
|
Gary J. Fernandes
|
|
|
15,331,403
|
|
Richard Hamlin
|
|
|
15,291,403
|
|
On a proposal to ratify the appointment of SyCip Gorres Velayo & Co. as our external
auditors for the current fiscal year, there were 20,842,194 votes cast in favor,
40,796 votes cast against and 15,700 abstentions.
On a proposal to ratify all acts and resolutions of the board of directors and
management for the year 2007, there were 20,879,254 votes cast in favor, 8,557 votes cast
against and 10,879 abstentions.
ITEM 5.
OTHER INFORMATION.
On November 13, 2008, we issued a press release announcing our earnings for the three and nine
months ended September 30, 2008. A copy of the press release is attached hereto as Exhibit 99.1.
ITEM 6.
EXHIBITS
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
2.1
|
|
Acquisition Agreement by and between eTelecare Global Solutions, Inc., a
Philippine corporation, and EGS Acquisition Co LLC, a Delaware limited liability
company, dated as of September 19, 2008 (incorporated by reference to Exhibit 2.1
attached to the Current Report on Form 8-K filed by eTelecare Global Solutions,
Inc. on September 23, 2008)
|
|
|
|
2.2
|
|
First Amendment to Acquisition Agreement by and between eTelecare Global
Solutions, Inc., a Philippine corporation, and EGS Acquisition Co LLC, a Delaware
limited liability company, dated as of November 9, 2008 (incorporated by
reference to Exhibit (e)(2) attached to the Solicitation/Recommendation Statement
on Schedule 14D-9 filed by eTelecare Global Solutions, Inc. on November 10, 2008)
|
|
|
|
10.1
|
|
Form of Limited Guarantee (incorporated by reference to Exhibit 10.1 attached to
the Current Report on Form 8-K filed by eTelecare Global Solutions, Inc. on
September 23, 2008)
|
|
|
|
10.2
|
|
Standstill Agreement between eTelecare Global Solutions, Inc., a Philippine
corporation, and NewBridge International Investment Ltd, a British Virgin Islands
company, dated September 19, 2008 (incorporated by reference to Exhibit 10.2
attached to the Current Report on Form 8-K filed by eTelecare Global Solutions,
Inc. on September 23, 2008)
|
|
|
|
31.1*
|
|
Rule 13a 14(a) Certification of Chief Executive Officer.
|
|
|
|
31.2*
|
|
Rule 13a 14(a) Certification of the Chief Financial Officer.
|
|
|
|
32.1**
|
|
Statement of the Chief Executive Officer under Section 906 of the Sarbanes-Oxley
Act of 2002 (18 U.S.C. Section 1350).
|
|
|
|
32.2**
|
|
Statement of the Chief Financial Officer under Section 906 of the Sarbanes-Oxley
Act of 2002 (18 U.S.C. Section 1350).
|
|
|
|
99.1
|
|
Press release dated November 13, 2008 related to eTelecare Global Solutions,
Incs earnings for the three and nine months ended September 30, 2008.
|
|
|
|
99.2
|
|
Form of Tender and Support Agreement (incorporated by reference to Exhibit 99.1
attached to the Current Report on Form 8-K filed by eTelecare Global Solutions,
Inc. on September 23, 2008)
|
|
|
|
99.3
|
|
Tender and Support Agreement between EGS Acquisition Co LLC and NewBridge
International Investment Ltd, dated September 19, 2008 (incorporated by reference
to Exhibit 99.2 attached to the Current Report on Form 8-K filed by eTelecare
Global Solutions, Inc. on September 23, 2008)
|
|
|
|
*
|
|
Filed herewith
|
|
**
|
|
In accordance with Item 601(b)(32)(ii) of Regulation S-K and SEC
Release Nos. 33-8238 and 34-47986, Final Rule: Managements Reports on
Internal Control Over Financial Reporting and Certification of
Disclosure in Exchange Act Periodic Reports, the certifications
furnished in Exhibits 32.1 and 32.2 hereto are deemed to accompany
this Form 10-Q and will not be deemed filed for purposes of Section
18 of the Exchange Act. Such certifications will not be deemed to be
incorporated by reference into any filing under the Securities Act or
the Exchange Act, except to the extent that the Company specifically
incorporates it by reference.
|
24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
eTELECARE GLOBAL SOLUTIONS, INC.
|
|
|
By:
|
/s/ John R. Harris
|
|
|
|
John R. Harris
|
|
|
|
President, Chief Executive Officer and Director
(Principal Executive Officer)
|
|
|
|
|
|
|
By:
|
/s/ J. Michael Dodson
|
|
|
|
J. Michael Dodson
|
|
|
|
Chief Financial Officer
(Principal Financial Officer)
|
|
|
|
|
|
|
By:
|
/s/ Lewis W. Moorehead
|
|
|
|
Lewis W. Moorehead
|
|
|
|
Corporate Controller and Chief Accounting Officer
(Principal Accounting Officer)
|
|
|
DATED: November 13, 2008
25
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