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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2011.

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             .

Commission File Number: 001-33739

 

 

STREAM GLOBAL SERVICES, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   26-0420454

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

20 William Street, Suite 310

Wellesley, Massachusetts

  02481
(Address of Principal Executive Offices)   (Zip Code)

(781) 304-1800

(Registrant’s Telephone Number, Including Area Code)

 

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class

 

Name of Each Exchange on Which Registered

Units   NYSE Amex
Common Stock, $0.001 Par Value   NYSE Amex
Warrants   NYSE Amex

Securities registered pursuant to Section 12(g) of the Act:

None

Title of Class

 

 

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  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large Accelerated Filer   ¨    Accelerated Filer   ¨
Non-accelerated Filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

There were 76,527,031 shares of the Registrant’s common stock, $0.001 par value per share, issued and outstanding as of August 2, 2011 (including shares of common stock that are part of the Registrant’s outstanding, publicly traded units and excluding treasury shares).

 

 

 


Table of Contents

TABLE OF CONTENTS

 

          Page  
PART I. FINANCIAL INFORMATION      1   
Item 1.    Consolidated Financial Statements      1   
   Consolidated Balance Sheets as of June 30, 2011 and December 31, 2010      1   
   Consolidated Statements of Operations for the three months ended June 30, 2011 and June 30, 2010 and the six months ended June 30, 2011 and June 30, 2010      2   
   Consolidated Condensed Statements of Stockholders’ Equity for the six months ended June 30, 2011      3   
   Consolidated Statements of Cash Flows for the six months ended June 30, 2011 and June 30, 2010      4   
   Notes to Consolidated Condensed Financial Statements      5   
Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations      17   
Item 3.    Quantitative and Qualitative Disclosures About Market Risk      22   
Item 4.    Controls and Procedures      23   
PART II. OTHER INFORMATION      24   
Item 1.    Legal Proceedings      24   
Item 1A.    Risk Factors      24   
Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds      24   
Item 6.    Exhibits      24   
SIGNATURES      25   

Stream is a registered trademark of Stream Global Services, Inc.


Table of Contents

PART I—FINANCIAL INFORMATION

 

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

STREAM GLOBAL SERVICES, INC.

Consolidated Balance Sheets

(In thousands, except per share amounts)

 

     June 30,
2011
(unaudited)
    December 31,
2010
 

Assets

    

Current assets:

    

Cash and cash equivalents

   $ 23,792      $ 18,489   

Accounts receivable, net of allowance for bad debts of $400 and $714 at June 30, 2011 and December 31, 2010, respectively

     158,170        180,211   

Income taxes receivable

     1,104        1,154   

Deferred income taxes

     15,500        15,665   

Prepaid expenses and other current assets

     19,541        20,371   
  

 

 

   

 

 

 

Total current assets

     218,107        235,890   

Equipment and fixtures, net

     80,177        80,859   

Deferred income taxes

     4,559        3,975   

Goodwill

     226,749        226,749   

Intangible assets, net

     74,887        83,674   

Other assets

     15,729        16,838   
  

 

 

   

 

 

 

Total assets

   $ 620,208      $ 647,985   
  

 

 

   

 

 

 

Liabilities and Stockholders’ Equity

    

Current liabilities:

    

Accounts payable

   $ 11,806      $ 10,758   

Accrued employee compensation and benefits

     67,551        59,797   

Other accrued expenses

     29,039        29,989   

Income taxes payable

     1,859        1,796   

Current portion of long-term debt

     249        96   

Current portion of capital lease obligations

     8,922        9,100   

Other liabilities

     6,160        7,072   
  

 

 

   

 

 

 

Total current liabilities

     125,586        118,608   

Long-term debt, net of current portion

     212,557        217,199   

Capital lease obligations, net of current portion

     8,561        10,491   

Deferred income taxes

     21,930        21,838   

Other long-term liabilities

     18,288        20,131   
  

 

 

   

 

 

 

Total liabilities

     386,922        388,267   

Contingencies (Note 13)

    

Stockholders’ equity:

    

Preferred stock, par value $0.001 per share, shares authorized—1,000 shares authorized; issued and outstanding shares —0 shares issued and outstanding

     —          —     

Voting common stock, par value $0.001 per share, shares authorized—200,000 shares authorized; outstanding shares—76,406 and 80,101 shares at June 30, 2011 and December 31, 2010, respectively

     80        80   

Non-voting common stock, par value $0.001 per share, shares authorized—11,000 shares authorized; issued and outstanding shares—0 shares issued and outstanding

     —          —     

Additional paid-in-capital

     345,418        344,192   

Treasury stock, at cost (3,723 and 0 shares at June 30, 2011 and December 31, 2010, respectively)

     (12,095     —     

Accumulated deficit

     (101,420     (83,447

Accumulated other comprehensive income (loss)

     1,303        (1,107
  

 

 

   

 

 

 

Total stockholders’ equity

     233,286        259,718   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 620,208      $ 647,985   
  

 

 

   

 

 

 

See accompanying notes to consolidated condensed financial statements.

 

1


Table of Contents

STREAM GLOBAL SERVICES, INC.

Consolidated Condensed Statements of Operations

(Unaudited)

(In thousands, except per share amounts)

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2011     2010     2011     2010  

Revenue

   $ 206,139      $ 183,904      $ 418,830      $ 380,479   

Direct cost of revenue

     124,148        110,283        246,102        222,866   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     81,991        73,621        172,728        157,613   

Operating expenses:

        

Selling, general and administrative expenses

     67,235        63,954        136,037        132,520   

Severance, restructuring and other charges, net

     6,272        3,364        6,146        4,972   

Depreciation and amortization expense

     15,160        16,536        29,745        32,965   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     88,667        83,854        171,928        170,457   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

     (6,676     (10,233     800        (12,844

Other expenses, net:

        

Interest expense, net

     7,144        7,530        14,404        15,132   

Foreign currency loss

     165        1,980        1,410        432   

Other (income) expense, net

     —          (2     —          (2
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other expenses, net

     7,309        9,508        15,814        15,562   
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss before provision for income taxes

     (13,985     (19,741     (15,014     (28,406

Provision for income taxes

     1,893        1,764        2,959        3,574   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

     (15,878     (21,505     (17,973     (31,980

Net loss per share:

        

Basic and diluted

   $ (0.20   $ (0.27   $ (0.23   $ (0.40

Shares used in computing per share amounts:

        

Basic and diluted

     79,006        80,567        79,566        80,289   

See accompanying notes to consolidated condensed financial statements.

 

2


Table of Contents

STREAM GLOBAL SERVICES, INC.

Consolidated Condensed Statements of Stockholders’ Equity

For the six months ended June 30, 2011

(Unaudited)

(In thousands)

 

    

 

Common Stock

     Additional
Paid in
Capital
    Treasury Stock     Retained
Earnings
(Deficit)
    Accumulated
Other
Comprehensive
Income (Loss)
    Total  
     Shares     Par
Value
            

Balances at December 31, 2010

     80,101      $ 80       $ 344,192      $ —        $ (83,447   $ (1,107   $ 259,718   

Net loss

     —          —           —          —          (17,973     —          (17,973

Currency translation adjustment

     —          —           —          —          —          4,450        4,450   

Unrealized loss on derivatives

     —          —           —          —          —          (2,040     (2,040
               

 

 

 

Comprehensive income

     —          —           —          —          —          —          (15,563

Repurchase of common stock

     (3,723     —           —          (12,095     —          —          (12,095

Stock option exercises and vesting of restricted stock

     28        —           —          —          —          —          —     

Stock-based compensation expense

     —          —           1,237        —          —          —          1,237   

Taxes withheld on restricted stock

     —          —           (11     —          —          —          (11
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balances at June 30, 2011

     76,406      $ 80       $ 345,418      $ (12,095   $ (101,420   $ 1,303      $ 233,286   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated condensed financial statements.

 

3


Table of Contents

STREAM GLOBAL SERVICES, INC.

Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)

 

     Six Months Ended
June 30,
 
     2011     2010  

Operating Activities:

    

Net loss

   $ (17,973   $ (31,980

Adjustments to reconcile net loss to net cash provided by operating activities:

    

Depreciation and amortization

     29,745        32,965   

Amortization of bond discount and debt issuance costs

     1,944        1,729   

Deferred taxes

     (195     676   

Loss on impairment or disposal of assets

     29        244   

Noncash stock compensation

     1,237        2,771   

Changes in operating assets and liabilities:

    

Accounts receivable

     25,852        4,487   

Income taxes receivable

     36        690   

Prepaid expenses and other current assets

     (996     (845

Other assets

     65        955   

Accounts payable

     855        (2,293

Accrued expenses and other liabilities

     2,210        (4,107
  

 

 

   

 

 

 

Net cash provided by operating activities

     42,809        5,292   

Investing Activities:

    

Additions to equipment and fixtures

     (16,721     (6,491
  

 

 

   

 

 

 

Net cash used in investing activities

     (16,721     (6,491

Financing activities:

    

Net borrowings (repayments) on line of credit

     (5,638     9,699   

Payments on long-term debt

     (98     (44

Payment of capital lease obligations

     (4,891     (3,344

Proceeds from issuance of debt

     466        —     

Proceeds from capital leases

     —          1,670   

Proceeds from exercise of warrants

     —          2,288   

Proceeds from issuance of common stock related to pre-emptive rights and stock options

     —          268   

Tax payments on withholding of restricted stock

     (11     (125

Repurchase of common stock

     (12,095     —     

Repurchase of warrants

     —          (1,608
  

 

 

   

 

 

 

Net cash used in financing activities

     (22,267     8,804   

Effect of exchange rates on cash and cash equivalents

     1,482        (1,091

Net increase in cash and cash equivalents

     5,303        6,514   

Cash and cash equivalents, beginning of period

     18,489        14,928   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 23,792      $ 21,442   

Supplemental cash flow information:

    

Cash paid for interest

   $ 12,661      $ 12,804   

Cash paid for income taxes

     4,757        5,179   

Noncash financing activities:

    

Loss (gain) on foreign exchange forward contracts

     2,040        1,760   

Capital lease financing

     2,668        3,765   

See accompanying notes to consolidated condensed financial statements.

 

4


Table of Contents

STREAM GLOBAL SERVICES, INC.

Notes to Consolidated Condensed Financial Statements

June 30, 2011

(Unaudited)

(In thousands, except per share amounts)

Note 1—Our Business

Stream Global Services, Inc. (“Stream,” the “Company,” “we,” “us,” or “our”) is a leading global business process outsourcing (“BPO”) service provider specializing in customer relationship management (“CRM”), including sales, customer care and technical support, for Fortune 1000 companies. Our clients include leading technology, computing, telecommunications, retail, entertainment/media, and financial services companies. Our service programs are delivered through a set of standardized best practices and sophisticated technologies by a highly skilled multilingual workforce with the ability to support 35 languages across 50 locations in 23 countries. We continue to expand our global presence and service offerings to increase revenue, improve operational efficiencies and drive brand loyalty for our clients.

Note 2—Basis of Presentation

Our consolidated financial statements as of June 30, 2011 and December 31, 2010, and for the three and six months ended June 30, 2011 and 2010 include our accounts and those of our wholly owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.

Certain reclassifications have been made in the June 30, 2010 consolidated financial statements to conform to the 2011 financial statement presentation. The reclassifications have no impact on net loss.

For the three months ended June 30, 2010:

 

     As previously
reported in
June 30, 2010
financial
statements
     Reclassification
amounts
    June 30, 2010
as  reclassified
 

Direct cost of revenue

     110,996         (713 )(1)      110,283   

Selling, general and administrative expenses

     64,480         (526 )(2)      63,954   

Severance, restructuring and other charges, net

     2,838         526  (2)      3,364   

Foreign currency loss (gain)

     1,267         713  (1)      1,980   

For the six months ended June 30, 2010:

 

     As previously
reported in
June 30, 2010
financial
statements
    Reclassification
amounts
    June 30, 2010
as  reclassified
 

Direct cost of revenue

     223,836        (970 )(1)      222,866   

Selling, general and administrative expenses

     133,744        (1,224 )(2)      132,520   

Severance, restructuring and other charges, net

     3,748        1,224  (2)      4,972   

Foreign currency loss (gain)

     (538     970  (1)      432   

 

(1) Reclassification of realized gains on effective cash flow hedges from Foreign currency loss (gain) to Direct cost of revenue in our consolidated statement of operations.
(2) Reclassification of non-agent severance related costs from Selling, general and administrative expenses to Severance, restructuring and other charges, net in our consolidated statement of operations.

We have evaluated subsequent events through the date these financial statements were issued.

Note 3—Summary of Significant Accounting Policies

Unaudited Interim Financial Information

The accompanying consolidated condensed financial statements as of June 30, 2011 and for the three and six months ended June 30, 2011 and 2010 are unaudited. The unaudited interim financial statements have been prepared on the same basis as the annual financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly our financial position and results of operations and cash flows. The results for the three and six months ended June 30, 2011 are not necessarily indicative of the results to be expected for the year ended December 31, 2011, or for any other interim period or future year.

 

5


Table of Contents

Use of Estimates

The preparation of the consolidated condensed financial statements in conformity with accounting principles generally accepted in the U.S. (“GAAP”) requires management to make estimates and assumptions in determining the reported amounts of assets and liabilities, disclosure of contingent liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. On an on-going basis, we evaluate our estimates including those related to derivatives and hedging activities, income taxes including the valuation allowance for deferred tax assets, valuation of long-lived assets, self-insurance reserves, litigation and restructuring liabilities, and allowance for doubtful accounts. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ materially from these estimates under different assumptions or conditions.

Foreign Currency Translation and Derivative Instruments

We account for derivative financial instruments utilizing the authoritative guidance. We utilize forward contracts generally expiring within one to 18 months to reduce our foreign currency exposure due to exchange rate fluctuations on forecasted cash flows denominated in foreign currencies. Upon proper designation, certain of these contracts are accounted for as cash flow hedges, as defined by the authoritative guidance. These contracts are entered into to protect against the risk that the eventual cash flows resulting from such transactions will be adversely affected by changes in exchange rates. In using derivative financial instruments to hedge exposures to changes in exchange rates, we expose ourselves to counterparty credit risk. We do not believe that we are exposed to a concentration of credit risk with our derivative financial instruments as the counterparties are well established institutions and counterparty credit risk information is monitored on an ongoing basis.

All derivatives, including foreign currency forward contracts, are recognized in other current assets on the balance sheet at fair value. Fair values for our derivative financial instruments are based on quoted market prices of comparable instruments or, if none are available, on pricing models or formulas using current market and model assumptions. On the date the derivative contract is entered into, we determine whether the derivative contract should be designated as a cash flow hedge. Changes in the fair value of derivatives that are highly effective and designated as cash flow hedges are recorded in accumulated other comprehensive income (loss), until the forecasted underlying transactions occur. To date we have not experienced any hedge ineffectiveness of our cash flow hedges (except certain cash flow hedges previously determined to be effective, as of October 1, 2009, the date of the acquisition of EGS Corp., a Philippine corporation (“EGS”), which have since been designated to be ineffective at that date). Any realized gains or losses resulting from the effective cash flow hedges are recognized within direct cost of revenue. Cash flows from the derivative contracts are classified within cash flows from operating activities in the accompanying consolidated condensed statement of cash flows. Ineffectiveness is measured based on the change in fair value of the forward contracts and the fair value of the hypothetical derivatives with terms that match the critical terms of the risk being hedged.

We may also enter into derivative contracts that are intended to economically hedge certain risks, even though we elect not to apply hedge accounting as defined by the authoritative guidance. Changes in fair value of derivatives not designated as hedges are reported in income as foreign currency loss (gain).

The assets and liabilities of our foreign subsidiaries whose functional currency is their local currency are translated at the exchange rate in effect on the reporting date, and income and expenses are translated at the average exchange rate during the period. The net effect of translation gains and losses is not included in determining net income (loss), but is reflected in accumulated other comprehensive income (loss) as a separate component of stockholders’ equity until the sale or until the liquidation of the net investment in the foreign subsidiary.

As of June 30, 2011 and December 31, 2010, we had approximately $218,636 and $233,183, respectively, of foreign exchange risk hedged using forward exchange contracts. As of June 30, 2011, the forward exchange contracts we held were comprised of $138,305 of contracts determined to be effective cash flow hedges and $80,332 of contracts for which we elected not to apply hedge accounting.

As of June 30, 2011, the fair market value of those derivative instruments designated as cash flow hedges was a gain of $3,600. As of June 30, 2011, the fair market value of derivatives for which we elected not to apply hedge accounting was a loss of $2. As of June 30, 2011, $3,136 of gains, net of tax, may be reclassified to earnings within the next 12 months based on current foreign exchange rates.

For the three and six months ended June 30, 2011, we realized gains of $419 and $2,218, respectively, on hedges for which we elected to not apply hedge accounting. For the three and six months ended June 30, 2011, we realized gains of $1,602 and $3,153, respectively, on hedges which were deemed effective cash flow hedges. For the three and six months ended June 30, 2011, we realized no gain and a gain of $298, respectively, on hedges which were determined to be ineffective cash flow hedges. All realized gains resulting from hedges not deemed to be effective for the periods were reflected in Foreign currency loss (gain) in the Statement of Operations.

 

6


Table of Contents

Fair Value of Financial Instruments

We implemented the authoritative guidance for our financial assets and liabilities that are re-measured and reported at fair value at each reporting period and non-financial assets and liabilities that are re-measured and reported at fair value at least annually.

The following table presents information about our assets and liabilities and indicates the fair value hierarchy of the valuation techniques we utilized to determine such fair value. In general, fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities. Fair values determined by Level 2 inputs utilize data points that are observable such as quoted prices, interest rates and yield curves. Fair values determined by Level 3 inputs are unobservable data points for the asset or liability and includes situations where there is little, if any, market activity for the asset or liability:

 

     June 30,
2011
     Quoted Prices in
Active Markets
(Level 1)
     Significant Other
Observable
Inputs (Level 2)
     Significant
Unobservable
(Level 3)
 

Description

           

Forward exchange contracts

   $ 3,598       $ —         $ 3,598       $ —     
                                   

Total

   $ 3,598       $ —         $ 3,598       $ —     

The fair values of our forward exchange contracts are determined through market, observable and corroborated sources.

The carrying amounts reflected in the consolidated balance sheets for other current assets, accounts payable, and accrued expenses approximate fair value due to their short-term maturities. To the extent we have any outstanding borrowings under our revolving credit facility, the fair value would approximate its reported value because the interest rate is variable and reflects current market rates.

Net Income (Loss) Per Share

The following common stock equivalents were excluded from computing diluted net loss per share attributable to common stockholders because they had an anti-dilutive impact:

 

     Six months ended
June 30, 2011
     Six months ended
June 30, 2010
 

Options to purchase common stock at $6.00 per share

     5,669         8,030   

Pre-emptive rights at $6.00 per share

     17,849         17,856   

Publicly held warrants at $6.00 per share

     7,326         7,329   

Restricted stock units

     124         645   
                 

Total options, warrants and restricted stock units exercisable into common stock

     30,968         33,860   

Recent Accounting Pronouncements

In January 2010, the Financial Accounting Standards Board (“FASB”) issued guidance to amend the disclosure requirements related to recurring and nonrecurring fair value measurements. The guidance requires new disclosures on the transfers of assets and liabilities between Level 1 (quoted prices in active market for identical assets or liabilities) and Level 2 (significant other observable inputs) of the fair value measurement hierarchy, including the reasons and the timing of the transfers. Additionally, the guidance requires a roll forward of activities on purchases, sales, issuances, and settlements of the assets and liabilities measured using significant unobservable inputs (Level 3 fair value measurements). The guidance became effective for us with the reporting period beginning January 1, 2010, except for the requirement to separately disclose purchases, sales, issuances and settlements of recurring Level 3 fair value measurements which became effective January 1, 2011. Other than requiring additional disclosures, adoption of this new guidance did not have a material impact on our financial statements.

On September 23, 2009, the FASB ratified Emerging Issues Task Force (EITF) Issue 08-1 and EITF Issue 09-3, resulting in the issuance of accounting standard updates ASU 2009-13 and ASU 2009-14. We adopted the new accounting standards January 1, 2011. Under the new guidance, when vendor specific objective evidence or third party evidence for multi-element deliverables in an arrangement cannot be determined, a best estimate of the selling price is required to separate deliverables and allocate arrangement consideration using the relative selling price method. The new guidance includes new disclosure requirements on how the application of the relative selling price method affects the timing and amount of revenue recognition. The adoption of the new accounting standards had no effect to our revenue recognition policy.

 

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Note 4—Goodwill and Intangibles

Goodwill and Indefinite Lived Intangible Assets

We evaluate goodwill and indefinite lived intangible assets for impairment annually and whenever events or changes in circumstances suggest that the carrying value of goodwill and indefinite lived intangible assets may not be recoverable. No impairment of goodwill and indefinite lived intangible assets resulted from our most recent evaluation of goodwill and indefinite lived intangible assets for impairment, which occurred in the fourth quarter of 2010, or in any of the periods presented. Our next annual impairment assessment will be conducted in the fourth quarter of 2011.

Intangible Assets

We review identified intangible assets for impairment whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. Recoverability of these assets is measured by comparison of their carrying value to future undiscounted cash flows that the assets are expected to generate over their remaining economic lives. If such assets are considered to be impaired, the impairment to be recognized in the statement of operations is the amount by which the carrying value of the assets exceeds their fair value, determined by either a quoted market price, if any, or a value determined by utilizing a discounted cash flow technique.

Intangibles and Amortization

Intangible assets at June 30, 2011 consisted of the following:

 

     Estimated
useful life
   Weighted
average
remaining
life
     Gross
cost
     Accumulated
amortization
     Net  

Customer relationships

   Up to 10 years      6.3       $ 98,749       $ 41,249       $ 57,500   

Technology-based intangible assets

   5 years      2.2         2,378         1,091         1,287   

Trade names

   indefinite      indefinite         16,197         97         16,100   
        

 

 

    

 

 

    

 

 

 
         $ 117,324       $ 42,437       $ 74,887   

Future amortization expense of our intangible assets for the next five years is expected to be as follows:

 

     Remainder of
2011
     2012      2013      2014      2015      2016  

Amortization

   $ 8,216       $ 14,331       $ 11,497       $ 7,571       $ 5,652       $ 4,435   

Note 5—Warrants and Treasury Stock

Pursuant to our IPO, we sold 31,250 units, each consisting of one share of our common stock and one warrant entitling the holder to purchase one share of our common stock at an exercise price of $6.00 per share.

The warrants became exercisable beginning on October 17, 2008 and will expire on October 17, 2011, unless redeemed earlier. We may redeem the warrants at a price of $0.01 per warrant upon 30 days prior written notice of redemption if the last sales price of our common stock equals or exceeds $11.50 per share for any 20 trading days within a 30 trading day period ending three business days before we send the notice of redemption.

During the three and six months ended June 30, 2011, holders of our publicly traded warrants did not exercise any warrants.

As of June 30, 2011, Stream had 7,357 public warrants outstanding, including 31 warrants embedded in our units. The exercise of our public warrants triggers certain participation rights held by the following shareholders: Ares Management, Ayala Corporation and Providence Equity Partners (collectively, the “Participating Stockholders”). The Participating Stockholders have participation rights to purchase in the aggregate, for $6.00 per share, such number of shares of our common stock equal to 2.4364 multiplied by the number of shares issued upon exercise of the public warrants up to a maximum of 17,925 shares. These participation rights expire when the public warrants expire on October 17, 2011 and are reduced pro rata as the numbers of public warrants outstanding are reduced.

On June 6, 2011, we purchased 3,723 shares of common stock of the Company pursuant to a Securities Purchase Agreement among us, Trillium Capital LLC, a Delaware limited liability company and R. Scott Murray, our former chief executive officer, for a purchase price of $3.25 per share. The $3.25 purchase price was less than the trading price on June 6, 2011. The shares were placed into treasury stock.

 

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Note 6—Severance, Restructuring and Other Charges, Net

During the three and six months ended June 30, 2011 we recorded a net expense of $6,272 and $6,146, respectively, primarily related to salary continuation related to a reduction in workforce that occurred in second quarter of 2011, the release of lease exit liabilities established at one of our facilities and direct third party transaction related expenses incurred related to the review and pursuit of business development related activities. During the three and six months ended June 30, 2010 we recorded charges of $3,364 and $4,972 primarily related to lease exit liabilities established in vacated locations and charges related to changes in leadership and management positions within the company.

Severance, restructuring and other charges, net, consist of the following:

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2011     2010     2011     2010  

Severance related to reductions in non-agent workforce

   $ 5,578      $ 526      $ 6,115      $ 1,224   

(Release) establishment of lease exit liability

     262        3,018        (595     3,540   

Transaction related expense

     970        (180     972        208   

Litigation settlements

     (655     —          (655     —     

Other

     117        —          309        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Severance, restructuring and other charges, net

   $ 6,272      $ 3,364      $ 6,146      $ 4,972   

A rollforward of the activity in the Company’s restructuring liabilities is as follows (amounts in thousands):

 

     Reduction  in
work-force
    Closure of call
centers
    Total  

Balance at December 31, 2010

   $ 2,491      $ 2,807      $ 5,298   

Expense

     6,115        226        6,341   

Cash Paid

     (2,804     (641     (3,445

Reversals (1)

     —          (1,227     (1,227
  

 

 

   

 

 

   

 

 

 

Balance at June 30, 2011

   $ 5,802      $ 1,165      $ 6,967   

 

  (1) As previously disclosed, during the six months ended June 30, 2011 we reversed a previously recorded lease exit reserve.

Note 7—Equipment and Fixtures, Net

Equipment and fixtures, net, consist of the following:

 

     June 30,
2011
    December 31,
2010
 

Furniture and fixtures

   $ 12,985      $ 11,161   

Building improvements

     41,467        36,196   

Computer equipment

     44,157        37,200   

Software

     24,737        21,935   

Telecom and other equipment

     49,473        46,519   

Equipment and fixtures not yet placed in service

     3,568        1,232   
  

 

 

   

 

 

 
   $ 176,387      $ 154,243   

Less: accumulated depreciation

     (96,210     (73,384
  

 

 

   

 

 

 
   $ 80,177      $ 80,859   

Note 8—Accrued Employee Compensation and Benefits

Accrued employee compensation and benefits consist of the following:

 

     June 30,
2011
     December 31,
2010
 

Compensation related amounts

   $ 36,822       $ 31,805   

Vacation liabilities

     15,574         12,646   

Medical and dental liabilities

     2,175         1,860   

Employer taxes

     1,775         2,825   

Retirement plans

     8,640         8,146   

Other benefit related liabilities

     2,565         2,515   
  

 

 

    

 

 

 
   $ 67,551       $ 59,797   

 

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Note 9—Other Accrued Expenses and Other Liabilities

Other accrued expenses consist of the following:

 

     June 30,
2011
     December 31,
2010
 

Professional fees

   $ 7,563       $ 7,151   

Accrued interest

     5,940         5,921   

Occupancy expense

     2,262         2,250   

Technology expense

     3,043         3,116   

Other accrued expenses

     10,231         11,551   
                 
   $ 29,039       $ 29,989   

 

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Other liabilities consist of the following:

 

     June 30,
2011
     December 31,
2010
 

Lease exit liability

   $ 908       $ 1,743   

Deferred revenue

     659         365   

Market lease reserves

     3,197         3,930   

Other

     1,396         1,034   
  

 

 

    

 

 

 

Total other current liabilities

   $ 6,160       $ 7,072   

Other long-term liabilities consist of the following:

     

Deferred rent

     1,175         1,433   

Accrued income taxes

     12,831         12,268   

Market lease reserves

     1,448         2,750   

Asset retirement obligation

     2,181         2,053   

Other

     653         1,627   
  

 

 

    

 

 

 

Total other long-term liabilities

   $ 18,288       $ 20,131   

Note 10—Long-Term Debt and Revolving Credit Facility

We and certain of our subsidiaries (collectively, the “Borrowers”) entered into a credit agreement, dated as of October 1, 2009 (the “Credit Agreement”), as amended by the First Amendment to Credit Agreement dated June 3, 2011, with Wells Fargo Capital Finance, LLC, formerly known as Wells Fargo Foothill, LLC, as agent and co-arranger, and Goldman Sachs Lending Partners LLC, as co-arranger, and each of the lenders party thereto, as lenders, providing for revolving credit financing (the “Revolving Line of Credit”) of up to $100,000, including a $20,000 sub-limit for letters of credit. The Revolving Line of Credit has a maturity of four years at an interest rate of either Wells Fargo’s base rate plus 275 basis points or LIBOR plus 375 basis points, at our discretion. We capitalized fees of $7,815 and $3,929 associated with the $200,000 aggregate principal amount of 11.25% Senior Secured Notes due 2014, which were issued on October 1, 2009 (the “Notes”) and the Credit Agreement, respectively, at the inception of these agreements that are being amortized over their respective lives. For the three and six months ended June 30, 2011, we amortized $587 and $1,164 of such capitalized fees. Substantially all of our assets, excluding intangible assets, secure the Notes and the Revolving Line of Credit. See Note 15 for Guarantor Financial Information.

At June 30, 2011, we are in compliance with the covenants of our Revolving Line of Credit. The Revolving Line of Credit has a fixed charge financial ratio covenant that is operative when our availability under the line is less than $20.0 million. On a trailing four quarters basis, Consolidated EBITDA less Capital Expenditures (net of amounts financed by capital leases) must be at least 1.1 times Fixed Charges, each as defined in the Credit Agreement. For the reporting period ending June 30, 2011, the ratio was 1.0, which is less than the requirement of 1.1. This results from a cap on the amount of cash severance and restructuring costs which may be excluded from Consolidated EBITDA in this calculation. However, as a result of our significant availability under the line, we are in compliance with the Credit Agreement. We are initiating discussions with our lenders to expand this cap. For the availability portion of the test, we had approximately $55.3 million in excess availability versus the covenant (i.e., availability of $75.3 million less the required $20 million, below which the covenant would become operative).

Long-term borrowings consist of the following:

 

     June 30,
2011
    December 31,
2010
 

Revolving line of credit

   $ 18,868      $ 24,506   

11.25% Senior Secured Notes

     200,000        200,000   

Other

     516        147   
  

 

 

   

 

 

 
     219,384        224,653   

Less: current portion

     (249     (96

Less: discount on notes payable

     (6,578     (7,358
  

 

 

   

 

 

 

Long-term debt

   $ 212,557      $ 217,199   
  

 

 

   

 

 

 

Minimum principal payments on long-term debt subsequent to June 30, 2011 are as follows:

 

     Total  

2011

   $ 261   

2012

     255   

2013

     18,868   

2014

     200,000   
  

 

 

 

Total

   $ 219,384   
  

 

 

 

 

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We had Letters of Credit in the aggregate outstanding amounts of $5,716 at June 30, 2011 and $6,936 at December 31, 2010, respectively.

We had $171 and $161 of restricted cash as of June 30, 2011 and December 31, 2010, respectively.

Note 11—Income Taxes

The domestic and foreign source component of loss before taxes is as follows:

 

     Six months ended
June  30,
2011
    Six months ended
June  30,
2010
 

Total US

   $ (24,052   $ (36,937

Total Foreign

     9,038        8,531   
  

 

 

   

 

 

 

Total

   $ (15,014   $ (28,406

The provisions for income taxes for the six months ended June 30, 2011 and 2010 relate primarily to the foreign source component of loss before tax. Our operations in countries outside the United States are generally taxed at lower statutory rates and also benefit from tax holidays. The decrease in foreign tax expense for the six months ended June 30, 2011 was primarily due to the previously unrecognized benefit related to the current period receipt of a tax refund in a foreign jurisdiction.

We file income tax returns in the U.S. federal jurisdiction and various state and foreign tax jurisdictions. Currently, we are under audit for the 2007 tax year for EGS in the U.S. federal jurisdiction. We operate in a number of international tax jurisdictions and are subject to audits of income tax returns by tax authorities in those jurisdictions. We are currently under audit in India, the Philippines, Canada, Italy, and Spain.

As of June 30, 2011 and December 31, 2010, the liability for unrecognized tax benefits (including interest and penalties) was $14,310 and $13,227, respectively, of which $12,831 and $12,268, respectively, was recorded within other long term liabilities in our consolidated financial statements. Included in these amounts is approximately $1,599 of un-benefitted tax losses which would be realized if the related uncertain tax positions were settled. As of December 31, 2010, we had reserved $2,635 for accrued interest and penalties, which increased to $3,032 as of June 30, 2011. We recognize accrued interest and penalties associated with uncertain tax positions as part of the tax provision. The total amount of net unrealized tax benefits that would affect the income tax expense, if ever recognized in our consolidated financial statements, is $13,451. This amount includes interest and penalties of $3,032. We estimate that within the next 12 months, our unrecognized tax benefits, and interest and penalties, could decrease as a result of settlements with taxing authorities or the expiration of the statute of limitations by $2,080 and $1,032, respectively.

Note 12—Stock Options

The 2008 Stock Incentive Plan (the “Plan”) provides for the grant of incentive and nonqualified stock options. The Plan has authorized grants of up to 10,000 shares of common stock at an exercise price of not less than 100% of the fair value of the common stock at the date of grant. The Plan provides that the options shall have terms not to exceed ten years from the grant date. During the six months ended June 30, 2011 and 2010, we granted options to purchase 1,105 and 1,955, respectively, shares of our common stock to our employees. Generally, the options vest over a five-year period.

During the six-month period ended June 30, 2011 and 2010, 1,768 and 1,160, respectively, stock option grants were vested, zero and 35, respectively, were exercised, and 1,744 and 868, respectively, were forfeited.

The per share fair value of options granted was determined using the Black-Scholes-Merton model.

The following assumptions were used for the option grants in the six months ended June 30, 2011 and 2010:

 

     Six months ended
June 30,
2011
    Six months ended
June 30,
2010
 

Option term (years)

     6.380        6.375   

Volatility

     67.15% - 67.39     63.71% - 67.74

Risk-free interest rate

     1.98 - 2.62     2.42 - 3.06

Dividend yield

     0     0

Weighted-average grant date fair value per option granted

   $ 1.81      $ 3.95   

 

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The option term was calculated under the simplified method for all option grants issued during the quarters ended June 30, 2011 and 2010, as we do not have a long history of granting options. The volatility assumption is based on a weighted average of the historical volatilities for Stream and its peer group. The risk-free interest rate assumption was based upon the implied yields from the U.S. Treasury zero-coupon yield curve with a remaining term equal to the expected term in options.

Stock options under the Plan during the six months ended June 30, 2011 were as follows:

 

     Number
of options
     Weighted
Average
Exercise
Price
     Weighted
Average
Fair
Value
     Weighted
Average
Remaining
Contractual
Term
(Years)
 

Outstanding at December 31, 2010

     6,308       $ 6.13         —           7.64   

Granted

     1,105         5.31       $ 1.81      

Exercised

     —           —           

Forfeited or canceled

     1,744         6.15         
  

 

 

    

 

 

       

Outstanding at June 30, 2011

     5,669       $ 5.96            6.67   

At June 30, 2011, stock options to purchase 1,768 shares with a weighted-average exercise price of $6.12 were exercisable. The weighted average remaining contractual term of options exercisable at June 30, 2011 was 3.69 years. The total fair value of options vested during the six months ended June 30, 2011 was $1,142. On June 30, 2011, there were 4,623 options outstanding, vested, and expected to vest (including forfeiture adjusted unvested shares) with a weighted average exercise price of $6.00 and a weighted average remaining contractual term of 6.16 years.

For the three months ended June 30, 2011 and 2010, we recognized net stock compensation expense of $432 and $1,124, respectively, for the stock options in the table above.

For the six months ended June 30, 2011 and 2010, we recognized net stock compensation expense of $1,073 and $2,268, respectively, for the stock options in the table above.

As of June 30, 2011 and December 31, 2010, the aggregate intrinsic value (i.e., the difference in the estimated fair value of our common stock and the exercise price to be paid by the option holder) of stock options outstanding, excluding the effects of expected forfeitures, was zero. The aggregate intrinsic value of the shares of exercisable stock options at June 30, 2011 and December 31, 2010 was zero. The aggregate intrinsic value of options exercised for the three months ended June 30, 2011 and 2010, was zero and $19, respectively.

As of June 30, 2011 and December 31, 2010, there was $5,084 and $7,203, respectively, of unrecognized compensation cost related to the unvested portion of time-based arrangements granted under the Plan. That cost is expected to be recognized over a weighted-average period of 3.62 years from issue date.

Restricted stock award activity during the six months ended June 30, 2011 was as follows:

 

     Number of
Shares
     Weighted
average
Grant-
Date Fair Value
 

Unvested December 31, 2010

     399       $ 6.37   

Granted

     —           —     

Vested

     27         6.22   

Forfeited

     248         6.32   
  

 

 

    

 

 

 

Unvested June 30, 2011

     124       $ 6.50   

For the three months ended June 30, 2011 and 2010, we recognized net compensation expense of $60 and $318, respectively, for the restricted stock awards.

For the six months ended June 30, 2011 and 2010, we recognized net compensation expense of $164 and $503, respectively, for the restricted stock awards. Restricted stock awards vest either quarterly over four years for grants in 2008 or semi-annually over five years for grants after 2008.

 

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Note 13—Contingencies

We are subject to various lawsuits and claims in the normal course of business. In addition, from time to time, we receive communications from government or regulatory agencies concerning investigations or allegations of non-compliance with laws or regulations in jurisdictions in which we operate. Although the ultimate outcome of such lawsuits, claims and investigations cannot be ascertained, we believe, on the basis of present information, that the disposition or ultimate resolution of such claims, lawsuits and/or investigations will not have a material adverse effect on our business, results of operations or financial condition. We establish specific liabilities in connection with regulatory and legal actions that we deem to be probable and estimable, and we believe that our reserves for such liabilities are adequate.

We have been named as a third-party defendant in a putative class action captioned Kambiz Batmanghelich, on behalf of himself and all others similarly situated and on behalf of the general public, v. Sirius XM Radio, Inc., filed in the Los Angeles County Superior Court on November 10, 2009, and removed to the United States District Court for the Central District of California. The Plaintiff alleges that Sirius XM Radio, Inc. recorded telephone conversations between Plaintiff and members of the proposed class of Sirius customers, on the one hand, and Sirius and its employees, on the other, without the Plaintiff’s and class members’ consent in violation of California’s telephone recording laws. The Plaintiff also alleges negligence and violation of the common law right of privacy, and seeks injunctive relief. We believe that we have meritorious defenses and we intend to vigorously defend against these claims. On December 21, 2009, Sirius XM Radio, Inc. filed a Third-Party Complaint in the action against us seeking indemnification for any defense costs and damages that result from the putative class action. On March 25, 2010, the Plaintiff filed an amended complaint that added us as a defendant. In March 2011, the court granted preliminary approval of a settlement proposal, conditionally certified the settlement class, and approved the form of class notice. Final approval of the settlement must still be granted by the court, following the process set forth in the court’s preliminary approval order.

Note 14—Geographic Operations and Concentrations

We operate in one operating segment and provide services primarily in two regions: “Americas”, which includes the United States, Canada, the Philippines, India, Costa Rica, Nicaragua, the Dominican Republic, and El Salvador; and “EMEA”, which includes Europe, the Middle East, and Africa.

The following table presents geographic information regarding our operations:

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2011      2010      2011      2010  

Revenues

           

Americas

   $ 146,103       $ 135,837       $ 300,365       $ 279,168   

EMEA

     60,036         48,067         118,465         101,311   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 206,139       $ 183,904       $ 418,830       $ 380,479   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     June 30, 2011      December 31, 2010  

Total assets:

     

Americas

   $ 533,375       $ 569,325   

EMEA

     86,833         78,660   
  

 

 

    

 

 

 
   $ 620,208       $ 647,985   

We derive significant revenues from three significant clients. At June 30, 2011, three of our largest clients are global computer companies. The percentage of revenue for each of these clients is as follows:

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2011     2010     2011     2010  

Dell

     12     18     13     19

Hewlett Packard

     10     13     10     14

Microsoft

     10     3     10     3

 

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Related accounts receivable from these three clients were 18%, 11% and 5%, respectively, of our total accounts receivable at June 30, 2011.

Note 15—Guarantor Financial Information

The Notes are guaranteed by Stream, which is our parent company, along with certain of our wholly owned subsidiaries. Such guarantees are full, unconditional and joint and several. Condensed consolidating financial information related to Stream, our guarantor subsidiaries and our non-guarantor subsidiaries as of June 30, 2011 are reflected below:

Condensed Consolidating Statement of Operations

For the three months ended June 30, 2011

(Unaudited)

 

     Parent     Guarantor
subsidiaries
    Non-
Guarantor
subsidiaries
    Elimination     Total  

Net revenue:

          

Customers

   $ —        $ 169,065      $ 37,074      $ —        $ 206,139   

Intercompany

     —          22,160        81,530        (103,690     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     —          191,225        118,604        (103,690     206,139   

Direct cost of revenue

          

Customers

     —          55,723        68,425          124,148   

Intercompany

     —          94,413        9,277        (103,690     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     —          150,136        77,702        (103,690     124,148   

Gross Profit

     —          41,089        40,902        —          81,991   

Operating expenses

     610        48,417        39,640        —          88,667   

Non-operating expenses

     7,156        (2,127     2,280        —          7,309   

Equity in Earnings of Subsidiaries

     8,112        —          —          (8,112     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     (15,878     (5,201     (1,018     8,112        (13,985
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Provision (benefit) for income taxes

     —          337        1,556        —          1,893   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 15,878      $ (5,538   $ (2,574   $ 8,112      $ (15,878
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Condensed Consolidating Statement of Operations

For the six months ended June 30, 2011

(Unaudited)

 

     Parent     Guarantor
subsidiaries
    Non-
Guarantor
subsidiaries
    Elimination     Total  

Net revenue:

          

Customers

   $ —        $ 340,440      $ 78,390      $ —        $ 418,830   

Intercompany

     —          44,588        157,361        (201,949     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     —          385,028        235,751        (201,949     418,830   

Direct cost of revenue

          

Customers

     —          112,536        133,566          246,102   

Intercompany

     —          183,410        18,539        (201,949     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     —          295,946        152,105        (201,949     246,102   

Gross Profit

     —          89,082        83,646        —          172,728   

Operating expenses

     1,444        95,568        74,916        —          171,928   

Non-operating expenses

     13,934        (4,795     6,675        —          15,814   

Equity in Earnings of Subsidiaries

     2,595        —          —          (2,595     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     (17,973     1,691        2,055        2,595        (15,014
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Provision (benefit) for income taxes

     —          537        2,422        —          2,959   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ (17,973   $ (2,228   $ (367   $ 2,595      $ (17,973
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Condensed Consolidating Balance Sheet

As of June 30, 2011

(Unaudited)

 

     Parent      Guarantor
subsidiaries
     Non-
Guarantor
subsidiaries
     Elimination     Total  

Assets

             

Cash and cash equivalents

   $ 7       $ 4,676       $ 19,109       $ —        $ 23,792   

Accounts receivable, net

     —           132,553         25,617         —          158,170   

Other Current Assets

     2,467         24,920         8,758         —          36,145   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current assets

     2,474         162,149         53,484         —          218,107   

Equipment and fixtures, net and other assets

     5,387         45,044         50,034         —          100,465   

Investment in Subsidiary

     448,038         73,814         17         (521,869     —     

Goodwill and intangible assets, net

     —           183,202         118,434         —          301,636   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total assets

   $ 455,899       $ 464,209       $ 221,969       $ (521,869   $ 620,208   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Liabilities and Stockholders’ Equity

             

Current liabilities

   $ 10,322       $ 49,045       $ 66,219       $ —        $ 125,586   

Long-term liabilities

     212,291         40,522         8,523         —          261,336   

Total shareholders’ equity (deficit)

     233,286         374,642         147,227         (521,869     233,286   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 455,899       $ 464,209       $ 221,969       $ (521,869   $ 620,208   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Condensed Statements of Cash Flows

For the six months ended June 30, 2011

(Unaudited)

 

     Parent     Guarantor
subsidiaries
    Non-Guarantor
subsidiaries
    Elimination      Total  

Net cash provided by (used in) operating activities

   $ (4,948   $ 26,688      $ 21,069      $ —         $ 42,809   

Cash Flows from investing activities:

           

Investment in Subsidiary

     —          (62,390     62,390        —           —     

Additions to equipment and fixtures, net

     —          (7,677     (9,044     —           (16,721
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net cash provided by (used in) investing activities

     —          (70,067     (53,346     —           (16,721
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Cash Flows from financing activities:

           

Net borrowings (repayments) on line of credit

     (5,638     —          —          —           (5,638

Net borrowings (repayments) on long term debt

     —          368        —          —           368   

Net borrowings (repayments) on capital leases

     —          (3,542     (1,349     —           (4,891

Net Intercompany

     22,695        50,908        (73,603     —           —     

Proceeds from issuance of common stock related to pre-emptive rights and stock options

     —          —          —          —           —     

Tax withholding on Restricted Stock

     (11     —          —          —           (11

Proceeds from exercise of warrants

     (12,095     —          —          —           (12,095

Re-purchase of warrants

     —          —          —          —           —     
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net cash provided by financing activities

     4,951        47,734        (74,952     —           (22,267

Effect of exchange rates on cash and cash equivalents

     —          (2,110     3,592        —           1,482   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net increase (decrease) in cash and cash equivalents

     3        2,245        3,055        —           5,303   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Cash and cash equivalents, beginning of period

     6        2,431        16,052        —           18,489   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Cash and cash equivalents, end of period

   $ 9      $ 4,676      $ 19,107      $ —         $ 23,792   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. We have based these forward-looking statements on our current expectations and projections about future events. These forward-looking statements are subject to known and unknown risks, uncertainties and assumptions about us that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “may,” “should,” “could,” “would,” “expect,” “intend,” “plan,” target,” “goal,” “anticipate,” “believe,” “estimate,” “continue,” or the negative of such terms or other similar expressions. Factors that might cause or contribute to such a discrepancy include, but are not limited to, those described in Item 1A, “Risk Factors,” of our Annual Report on Form 10-K for the year ended December 31, 2010, filed with the SEC on March 2, 2011.

Except as required by applicable law, including the securities laws of the United States and the rules and regulations of the Securities and Exchange Commission (the “SEC”), we explicitly disclaim any obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise to reflect actual results or changes in factors or assumptions affecting such forward-looking statements. You are advised, however, to consult any further disclosure we make in our reports filed with the SEC.

Overview

Our Business

We are a leading global business process outsourcing (“BPO”) service provider specializing in customer relationship management (“CRM”), including sales, customer care and technical support, for Fortune 1000 companies. Our clients include leading computing/hardware, telecommunications/service providers, software/networking, entertainment/media, retail, travel, healthcare and financial services companies. Our service programs are delivered through a set of standardized best practices and sophisticated technologies by a highly skilled multilingual workforce with the ability to support 35 languages across 50 locations in 23 countries. We continue to expand our global presence and service offerings to increase revenue, improve operational efficiencies and drive brand loyalty for our clients.

We generate revenue based primarily on the amount of time our agents devote to a client’s program. Revenue is recognized as services are provided. The majority of our revenue is from multi-year contracts and we expect that trend to continue. However, we do provide certain client programs on a short-term basis.

Our industry is highly competitive. We compete primarily with the in-house business processing operations of our current and potential clients. We also compete with other third-party BPO providers. Our industry is labor-intensive and the majority of our operating costs relate to wages, employee benefits and employment taxes.

We periodically review our capacity utilization and projected demand for future capacity. In conjunction with these reviews, we may decide to consolidate or close under-performing service centers, including those impacted by the loss of client programs, in order to maintain or improve targeted utilization and margins.

This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our consolidated financial statements and notes thereto which appear elsewhere in this Quarterly Report on Form 10-Q.

Critical Accounting Policies

Use of Estimates

The preparation of the consolidated condensed financial statements in conformity with generally accepted accounting principles in the U.S. (“GAAP”) requires management to make estimates and assumptions in determining the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. On an on-going basis, we evaluate our estimates including those related to derivatives and hedging activities, income taxes including the valuation allowance for deferred tax assets, valuation of long-lived assets, self-insurance reserves, litigation and restructuring liabilities, and allowance for doubtful accounts. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ materially from these estimates under different assumptions or conditions.

 

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Equipment and Fixtures

Equipment and fixtures are recorded at cost and depreciated using the straight-line method over the estimated useful lives of the assets. Furniture and fixtures are generally depreciated over a five-year life, software over a three- to five-year life and equipment generally over a three- to five-year life. Leasehold improvements are depreciated over the shorter of their estimated useful life or the remaining term of the associated lease. Assets held under capital leases are recorded at the lower of the net present value of the minimum lease payments or the fair value of the leased asset at the inception of the lease. Amortization expense is computed using the straight-line method over the shorter of the estimated useful lives of the assets or the period of the related lease and is recorded in depreciation and amortization expense. Repair and maintenance costs are expensed as incurred.

The carrying value of equipment and fixtures to be held and used is evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable in accordance with authoritative guidance. An asset is considered to be impaired when the sum of the undiscounted future net cash flows expected to result from the use of the asset and its eventual disposition does not exceed its carrying amount. The amount of the impairment loss, if any, is measured as the amount by which the carrying value of the asset exceeds its estimated fair value, which is generally determined based on appraisals or sales prices of comparable assets. Occasionally, we redeploy equipment and fixtures from underutilized centers to other locations to improve capacity utilization. We estimate the fair value of our asset retirement obligations, if any, associated with the retirement of tangible long-lived assets such as property and equipment when the long-lived asset is acquired, constructed, or developed through normal operations.

Goodwill and Other Intangible Assets

In accordance with the authoritative guidance, goodwill is reviewed for impairment annually and on an interim basis if events or changes in circumstances between annual tests indicate that an asset might be impaired. Impairment occurs when the carrying amount of goodwill exceeds its estimated fair value. The impairment, if any, is measured based on the estimated fair value of the reporting unit. We operate in one reporting unit, which is the basis for impairment testing of all goodwill.

Intangible assets with a finite life are recorded at cost and amortized using their projected cash flows over their estimated useful life. Client lists and relationships are amortized over periods up to ten years, market adjustments related to facility leases are amortized over the term of the respective lease and developed software is amortized over five years. Brands and trademarks are not amortized as their life is indefinite. In accordance with the authoritative guidance, indefinite lived intangible assets are reviewed for impairment annually and on an interim basis if events or changes in circumstances between annual tests indicate that an asset might be impaired.

The carrying value of finite-lived intangibles is evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable in accordance with the authoritative guidance. An asset is considered to be impaired when the sum of the undiscounted future net cash flows expected to result from the use of the asset and its eventual disposition does not exceed its carrying amount. The amount of the impairment loss, if any, is measured as the amount by which the carrying value of the asset exceeds its estimated fair value, which is generally determined based on appraisals or sales prices of comparable assets.

Stock-Based Compensation

For share-based payments, the fair value of each grant under our stock-based compensation plan for employees and directors, including both the time-based grants and the performance-based grants, is estimated on the date of grant using the Black-Scholes-Merton option valuation model. Stock compensation expense is recognized on a straight-line basis over the vesting term, net of an estimated future forfeiture rate.

Income Taxes

We recognize income taxes in accordance with the authoritative guidance, which requires recognition of deferred assets and liabilities for the future income tax consequence of transactions that have been included in the consolidated financial statements or tax returns. Under this method deferred tax assets and liabilities are determined based on the difference between the carrying amounts of assets and liabilities for financial reporting purposes, and the amounts used for income tax, using the enacted tax rates for the year in which the differences are expected to reverse. We provide valuation allowances against deferred tax assets whenever we believe it is more likely than not, based on available evidence, that the deferred tax asset will not be realized. Further we provide for the accounting for uncertainty in income taxes recognized in financial statements and the impact of a tax position in the financial statements if that position is more likely than not of being sustained by the taxing authority.

Contingencies

We consider the likelihood of various loss contingencies, including non-income tax and legal contingencies arising in the ordinary course of business, and our ability to reasonably estimate the amount of loss in determining loss contingencies. An estimated loss contingency is accrued in accordance with the authoritative guidance, when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. We regularly evaluate current information available to determine whether such accruals should be adjusted.

 

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Recent Accounting Pronouncements

In January 2010, the Financial Accounting Standards Board (“FASB”) issued guidance to amend the disclosure requirements related to recurring and nonrecurring fair value measurements. The guidance requires new disclosures on the transfers of assets and liabilities between Level 1 (quoted prices in active market for identical assets or liabilities) and Level 2 (significant other observable inputs) of the fair value measurement hierarchy, including the reasons and the timing of the transfers. Additionally, the guidance requires a roll forward of activities on purchases, sales, issuances, and settlements of the assets and liabilities measured using significant unobservable inputs (Level 3 fair value measurements). The guidance became effective for us with the reporting period beginning January 1, 2010, except for the requirement to separately disclose purchases, sales, issuances and settlements of recurring Level 3 fair value measurements which became effective January 1, 2011. Other than requiring additional disclosures, adoption of this new guidance did not have a material impact on our financial statements.

On September 23, 2009, the FASB ratified Emerging Issues Task Force (EITF) Issue 08-1 and EITF Issue 09-3, resulting in the issuance of accounting standard updates ASU 2009-13 and ASU 2009-14. We adopted the new accounting standards January 1, 2011. Under the new guidance, when vendor specific objective evidence or third party evidence for multi-element deliverables in an arrangement cannot be determined, a best estimate of the selling price is required to separate deliverables and allocate arrangement consideration using the relative selling price method. The new guidance includes new disclosure requirements on how the application of the relative selling price method affects the timing and amount of revenue recognition. The adoption of the new accounting standards resulted in no change to our recognition of revenue.

Results of Operations

Three months ended June 30, 2011 compared with three months ended June 30, 2010

Revenue. Revenues increased $22.2 million, or 12.1%, to $206.1 million for the three months ended June 30, 2011, compared to $183.9 million for the three months ended June 30, 2010. The increase is primarily attributable to new business won in 2010, expansion with existing clients and approximately $6.6 million due to fluctuations in currency exchange rates.

Revenues for services performed in our United States and Canadian service centers increased $6.1 million, or 8.5%, for the three months ended June 30, 2011, compared to the three months ended June 30, 2010. Revenues for services performed in European service centers increased $9.8 million, or 29.3%, for the three months ended June 30, 2011, compared to the three months ended June 30, 2010. This increase is partly attributable to the strengthening of the European currencies relative to the U.S. Dollar resulting in approximately $5.7 million additional revenue in second quarter of 2011 on a constant currency basis. Revenues for services performed in offshore service centers in the Philippines, India, El Salvador, Costa Rica, the Dominican Republic, Tunisia and Egypt increased $6.3 million, or 8.1%, for the three months ended June 30, 2011, compared to the three months ended June 30, 2010. Revenues in our offshore service centers represented 41.1% of consolidated revenues for the three months ended June 30, 2011, compared to 42.7% in the same period in 2010.

Direct Cost of Revenue. Direct cost of revenue (exclusive of depreciation and amortization) increased $13.8 million, or 12.5%, to $124.1 million for the three months ended June 30, 2011, compared to $110.3 million for the three months ended June 30, 2010. The increase is primarily attributable to the payroll-related cost to service higher revenue and agent bonus programs in place for the current year.

Gross Profit. Gross profit increased $8.4 million, or 11.4%, to $82.0 million for the three months ended June 30, 2011 from $73.6 million for the three months ended June 30, 2010. Gross profit as a percentage of revenue was 39.8% and 40.0% for the three months ended June 30, 2011 and 2010, respectively. The decrease in gross margin percentage was partly attributed to increased training costs.

Operating Expenses. Operating expenses consists of selling, general and administrative expense, severance, restructuring and other charges, net and depreciation and amortization expense. Operating expenses increased $4.8 million, or 5.7%, to $88.7 million for the three months ended June 30, 2011, compared to $83.9 million for the three months ended June 30, 2010. Operating expenses as a percentage of revenues decreased to 43.0% for the three months ended June 30, 2011 compared to 45.6% for the three months ended June 30, 2010 primarily as a result of the decreases in depreciation and amortization, higher revenue and the effect of the reduction in work-force that was conducted in early second quarter.

Selling, general and administrative expense increased from $64.5 million for the three months ended June 30, 2010 to $67.2 million, or 5.0%, for the three months ended June 30, 2011. As a percentage of revenue, selling, general and administrative expense decreased from 34.8% for the three months ended June 30, 2010 to 32.6% for the three months ended June 30, 2011.

Severance, restructuring and other charges were $6.3 million and $3.4 million for the three months ended June 30, 2011 and 2010, respectively. The charge in 2011 principally relates to severance costs of $5.6 million in connection with a reduction in non-agent staffing during the quarter and $1.0 million incurred in pursuit of a business combination that was not consummated. The charge in 2010 related to non-agent severance, lease exit costs, and facility impairment charges.

Depreciation and amortization decreased $1.3 million per the scheduled decline in amortization expense for intangible assets and certain fixed assets becoming fully depreciated.

 

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Other Expenses, Net. Other expenses, net decreased $2.2 million, or 23.2%, to $7.3 million for the three months ended June 30, 2011, compared to $9.5 million for the three months ended June 30, 2010. Foreign currency loss (gain) consists of realized and unrealized gains and losses on forward currency contracts where we elect not to apply hedge accounting and the revaluation of certain assets and liabilities denominated in foreign currency. For the three months ended June 30, 2011, we recorded $0.2 million in losses versus a loss of $2.0 million for the comparable period in the prior year. The majority of our losses in 2010 related to unrealized gains on hedging activity in the Philippine Peso in connection with forward currency contracts that were acquired with our acquisition of EGS in 2009.

Provision for Income Taxes. Income taxes increased $0.1 million, or 5.6%, to $1.9 million for the three months ended June 30, 2011, compared to $1.8 million for the three months ended June 30, 2010. Foreign tax expense was comprised of $1.7 million for both of the three months ended June 30, 2011 and 2010. In the United States, where we operated at a loss for tax purposes, we recorded $0.2 million of state income tax expense for the three months ended June 30, 2011. We operate in a number of countries outside the United States that are generally taxed at lower statutory rates than the United States and also benefit from tax holidays in some foreign locations.

Six months ended June 30, 2011 compared with six months ended June 30, 2010

Revenue. Revenues increased $38.3 million, or 10.1%, to $418.8 million for the six months ended June 30, 2011, compared to $380.5 million for the six months ended June 30, 2010. The increase is primarily attributable to new business won in 2010, expansion with existing clients and approximately $6.7 million due to fluctuations in currency exchange rates.

Revenues for services performed in our United States and Canadian service centers increased $16.0 million, or 10.9%, for the six months ended June 30, 2011, compared to the six months ended June 30, 2010. Revenues for services performed in European service centers increased $15.2 million, or 21.2%, for the six months ended June 30, 2011, compared to the six months ended June 30, 2010. This increase is attributable to the addition of customers and the strengthening of the European currencies relative to the U.S. Dollar resulting in approximately $5.0 million additional revenue in the first six months of 2011 on a constant currency basis. Revenues for services performed in offshore service centers in the Philippines, India, El Salvador, Costa Rica, the Dominican Republic, Tunisia and Egypt increased $7.1 million, or 4.4%, for the six months ended June 30, 2011, compared to the six months ended June 30, 2010. Revenues in our offshore service centers represented 40.3% of consolidated revenues for the six months ended June 30, 2011, compared to 42.4% in the same period in 2010.

Direct Cost of Revenue. Direct cost of revenue (exclusive of depreciation and amortization) increased $23.2 million, or 10.4%, to $246.1 million for the six months ended June 30, 2011, compared to $222.9 million for the six months ended June 30, 2010. The increase is primarily attributable to the payroll-related cost to service higher revenue.

Gross Profit. Gross profit increased $15.1 million, or 9.6%, to $172.7 million for the six months ended June 30, 2011 from $157.6 million for the six months ended June 30, 2010. Gross profit as a percentage of revenue was consistent at 41.2% in both the six months ended June 30, 2011 and 2010.

Operating Expenses. Operating expenses consists of selling, general and administrative expense, severance , restructuring and other charges, net and depreciation and amortization expense. Operating expenses increased $1.4 million, or 0.8%, to $171.9 million for the six months ended June 30, 2011, compared to $170.5 million for the six months ended June 30, 2010. Operating expenses as a percentage of revenues decreased to 41.0% for the six months ended June 30, 2011 compared to 44.8% for the six months ended June 30, 2010, primarily as a result of the decreases in depreciation and amortization, higher revenue and the effect of the reduction in work-force that was conducted in early second quarter.

Selling, general and administrative expense grew from $133.7 million for the six months ended June 30, 2010 to $136.0 million, or 2.6%, for the six months ended June 30, 2011.

Severance, restructuring and other charges, net were a charge of $6.1 million and $5.0 million for the six months ended June 30, 2011 and 2010, respectively. The charge in 2011 principally relates to severance costs of $6.1 million in connection with a reduction in non-agent staffing during the second quarter. The charge in 2010 relates to non-agent severance, lease exit costs, and facility impairment charges.

Depreciation and amortization decreased $3.3 million per the scheduled step down of amortization expense and certain fixed assets becoming fully depreciated.

        Other Expenses, Net. Other expenses, net increased $0.2 million, or 1.3%, to $15.8 million for the six months ended June 30, 2011, compared to $15.6 million for the six months ended June 30, 2010. Foreign currency loss (gain) consists of realized and unrealized gains and losses on forward currency contracts where we elect not to apply hedge accounting and the revaluation of certain assets and liabilities denominated in foreign currency. For the six months ended June 30, 2011, we recorded a loss of $1.4 million versus $0.4 million for the comparable period in the prior year.

        Provision for Income Taxes. Income taxes decreased $0.6 million, or 16.7%, to $3.0 million for the six months ended June 30, 2011, compared to $3.6 million for the six months ended June 30, 2010. Foreign tax expense comprised of $2.6 million and $3.4 million for the six months ended June 30, 2011 and 2010, respectively. In the United States, where we operated at a loss for tax purposes, we recorded $0.3 million of state income tax expense for the six months ended June 30, 2011. We operate in a number of countries outside the United States that are generally taxed at lower statutory rates than the United States and also benefit from tax holidays in some foreign locations.

 

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Liquidity and Capital Resources

Our primary liquidity needs are for financing working capital associated with the expenses we incur in performing services under our client contracts and capital expenditures for the opening of new service centers, including the purchase of computers and related equipment. We have in place a credit facility that consists of a revolving line of credit that allows us to manage our cash flows. Our ability to make payments on the credit facility, to replace our indebtedness if desired, and to fund working capital and planned capital expenditures will depend on our ability to generate cash in the future. We have secured our working capital facility through our accounts receivable and therefore, our ability to continue servicing debt is dependent upon the timely collection of those receivables.

We made capital expenditures of $19.4 million, including those pursuant to capital leases, in the six months ended June 30, 2011, as compared to $10.3 million for the six months ended June 30, 2010. We expect to continue to make capital expenditures to build new service centers, meet new contract requirements and maintain and upgrade our technology.

On October 1, 2009, we issued $200 million aggregate principal amount of 11.25% Senior Secured Notes due 2014 (the “Notes”). The Notes were issued pursuant to the indenture among us, the Note Guarantors, and Wells Fargo, as trustee. The Notes were issued by us at an initial offering price of 95.454% of the principal amount. The Indenture contains restrictions on our ability to incur additional secured indebtedness under certain circumstances. The Notes mature on October 1, 2014. The Notes bear interest at a rate of 11.25% per annum. Interest on the Notes is computed on the basis of a 360-day year composed of twelve 30-day months and is payable semi-annually on April 1 and October 1 of each year, beginning on April 1, 2010. The obligations under the Notes are fully and unconditionally guaranteed, jointly and severally, by the Note Guarantors and will be so guaranteed by any future domestic subsidiaries of ours, subject to certain exceptions. The Notes and the Note Guarantors’ guarantees of the Notes are secured by senior liens on our and the Guarantors’ Primary Notes Collateral and by junior liens on our and the Guarantors’ Primary ABL Collateral (each as defined in the Indenture).

On October 1, 2009, we, Stream Holdings Corporation, Stream International, Inc., Stream New York, Inc., Stream Global Services-US, Inc., Stream Global Services-AZ, Inc. and Stream International Europe B.V. (collectively, the “U.S. Borrowers”), and SGS Netherland Investment Corporation B.V., Stream International Service Europe B.V., and Stream International Canada Inc., (collectively, the “Foreign Borrowers” and together with the U.S. Borrowers, the “Borrowers”) entered into the Credit Agreement, as amended by the First Amendment to Credit Agreement dated June 3, 2011, with Wells Fargo Capital Finance, LLC, formerly known as Wells Fargo Foothill, LLC, as agent and co-arranger, Goldman Sachs Lending Partners LLC, as co-arranger, and each of the lenders party thereto, as lenders, providing for the Revolving Line of Credit of up to $100.0 million, including a $20.0 million sub-limit for letters of credit, in each case, with certain further sub-limits for certain Foreign Borrowers. The Revolving Line of Credit has a term of four years at an interest rate of either Wells Fargo’s base rate plus 275 basis points or LIBOR plus 375 basis points, at our discretion. Substantially all of our assets, excluding intangible assets, secure the Notes and the Revolving Line of Credit. See Note 15 for Guarantor Financial Information.

At June 30, 2011, we are in compliance with the covenants of our Revolving Line of Credit. The Revolving Line of Credit has a fixed charge financial ratio covenant that is operative when our availability under the line is less than $20.0 million. On a trailing four quarters basis, Consolidated EBITDA less Capital Expenditures (net of amounts financed by capital leases) must be at least 1.1 times Fixed Charges, each as defined in the Credit Agreement. For the reporting period ending June 30, 2011, the ratio was 1.0, which is less than the requirement of 1.1. This results from a cap on the amount of cash severance and restructuring costs which may be excluded from Consolidated EBITDA in this calculation. However, as a result of our significant availability under the line, we are in compliance with the Credit Agreement. We are initiating discussions with our lenders to expand this cap. For the availability portion of the test, we had approximately $55.3 million in excess availability versus the covenant (i.e., availability of $75.3 million less the required $20 million, below which the covenant would become operative).

Letters of Credit. We have certain standby letters of credit for the benefit of landlords of certain sites in the United States and Canada. As of June 30, 2011, we had approximately $5.7 million of these letters of credit in place under our Revolving Line of Credit. The obligations under the letters of credit decline annually as the underlying obligations are satisfied.

Unrestricted cash and cash equivalents totaled $23.6 million for the six months ended June 30, 2011 which is a $1.0 million decrease compared to $24.6 million for the six months ended June 30, 2010. Working capital decreased $19.8 million to $92.5 million for the six months ended June 30, 2011, compared to $112.3 million for the six months ended June 30, 2010.

Net cash provided by operating activities totaled $42.8 million for the six months ended June 30, 2011, a $37.5 million increase from the $5.3 million provided in the six months ended June 30, 2010. The increase is primarily due to the $14.0 million reduction in net loss and $21.4 increase in accounts receivable comparing June 30, 2011 to June 30, 2010.

Net cash used in investing activities totaled $16.7 million for the six months ended June 30, 2011 which is a $10.2 million increase from the $6.5 million provided by the period ended June 30, 2010.

Net cash used in financing activities totaled $22.3 million for the six months ended June 30, 2011, a $31.1 million decrease from the $8.8 million of cash provided by financing activities for the period ended June 30, 2010. The change was primarily due to repayment of debt and repurchase of 3.7 million shares of common stock in June 2011, pursuant to the securities purchase agreement among us, Trillium Capital, LLC and R. Scott Murray, our former chief executive officer.

Our foreign exchange forward contracts require the exchange of foreign currencies for U.S. dollars or vice versa, and generally mature in one to 18 months. We had outstanding foreign exchange forward contracts with aggregate notional amounts of $218.6 million as of June 30, 2011 and $144.0 million as of June 30, 2010.

 

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We believe that our cash generated from operations, existing cash and cash equivalents, and available credit will be sufficient to meet expected operating and capital expenditures for the next 12 months.

Off-Balance Sheet Arrangements

With the exception of operating leases discussed above, we do not have any off-balance sheet arrangements.

Seasonality

We are exposed to seasonality in our revenues because of the nature of certain consumer-based clients. We may experience approximately 10% increased volume associated with the peak processing needs in the fourth quarter coinciding with the holiday period and a somewhat seasonal overflow into the first quarter of the following calendar year.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to a variety of market risks, including the effects of changes in foreign currency exchange rates and interest rates. Market risk is the potential loss arising from adverse changes in market rates and prices. Our risk management strategy includes the use of derivative instruments to reduce the effects on our operating results and cash flows from fluctuations caused by volatility in currency exchange and interest rates. By using derivative financial instruments to hedge exposures to changes in exchange rates, we expose ourselves to counterparty credit risk.

Interest Rate Risk

We are exposed to interest rate risk primarily through our debt facilities since some of those instruments, including capital leases, bear interest at variable rates. At June 30, 2011, we had outstanding borrowings under variable rate debt agreements that totaled approximately $21.0 million. A hypothetical 1% increase in the interest rate would have increased interest expense by approximately $0.2 million and would have decreased annual cash flow by a comparable amount. The carrying amount of our variable rate borrowings reflects fair value due to their short-term and variable interest rate features.

We had no outstanding interest rate derivatives covering interest rate exposure at June 30, 2011.

Foreign Currency Exchange Rate Risk

We serve many of our U.S.-based clients using our service centers in Canada, India, the Dominican Republic, El Salvador, Egypt, Germany, the Philippines, Nicaragua and Costa Rica. Although the contracts with these clients are typically priced in U.S. dollars, a substantial portion of the costs incurred to render services under these contracts are denominated in the local currency of the country in which the contracts are serviced which creates foreign exchange exposure. We serve most of our EMEA-based clients using our service centers in the Netherlands, the United Kingdom, Italy, Ireland, Spain, Sweden, France, Germany, Poland, Denmark, Bulgaria, Egypt, Tunisia and South Africa. We typically bill our EMEA-based clients in Euros or British Pound Sterling. While a substantial portion of the costs incurred to render services under these contracts are denominated in Euros, a part is also denominated in the local currency in which the contracts are serviced which creates foreign exchange exposure.

The expenses from these foreign operations create exposure to changes in exchange rates between the local currencies and the contractual currencies – primarily the U.S. dollar and the Euro. As a result, we may experience foreign currency gains and losses, which may positively or negatively affect our results of operations attributed to these subsidiaries. The majority of this exposure is related to work performed from call centers in Canada, India and the Philippines.

In order to manage the risk of these foreign currencies from strengthening against the currency used for billing, which thereby decreases the economic benefit of performing work in these countries, we may hedge a portion, although not 100%, of these foreign currency exposures. While our hedging strategy may protect us from adverse changes in foreign currency rates in the short term, an overall strengthening of the foreign currencies would adversely impact margins over the long term.

 

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The following summarizes the relative (weakening)/strengthening of the U.S. Dollar against the local currency during the years presented:

 

     Six Months Ended
June 30,
 
     2011     2010  

U.S. Dollar vs. Canadian Dollar

     (2.4 %)      (0.2 %) 

U.S. Dollar vs. Euro

     (7.9 %)      15.0

U.S. Dollar vs. Indian Rupee

     0.5     (0.9 %) 

U.S. Dollar vs. Philippine Peso

     (1.2 %)      (0.5 %) 

U.S. Dollar vs. S. African Rand

     2.7     3.4

U.S. Dollar vs. U.K. Pound Sterling

     (3.5 %)      6.6

Cash Flow Hedging Program

Substantially all of our subsidiaries use the respective local currency as their functional currency because they pay labor and operating costs in those local currencies. Certain of our subsidiaries in the Philippines use the U.S. dollar as their functional currency while paying their labor and operating cost in local currency. Conversely, revenue for most of our foreign subsidiaries is derived principally from client contracts that are invoiced and collected in U.S. dollars and other non-local currencies. To mitigate against the risk of principally a weaker U.S. dollar, we purchase forward contracts to acquire the local currency of the foreign subsidiary at a fixed exchange rate at specific dates in the future. We have designated and account for certain of these derivative instruments as cash flow hedges where applicable, as defined by the authoritative guidance.

Given the significance of our foreign operations and the potential volatility of certain of these currencies versus the U.S. dollar, we use forward purchases of Philippine Peso, Canadian Dollars, Euros, South African Rand and Indian Rupees to minimize the impact of currency fluctuations. As of June 30, 2011, we had entered into forward contracts with financial institutions to acquire the following currencies:

 

Currency

   Notional Value      USD Equivalent      Highest Rate      Lowest Rate  

Philippine Peso

     4,098,982       $ 97,187         48.52         43.45   

Canadian Dollar

     75,900       $ 78,478         1.04         0.96   

Indian Rupee

     961,500       $ 21,296         47.48         44.69   

Euro

     12,100       $ 17,556         1.45         1.45   

South African Rand

     28,000       $ 4,119         6.94         6.94   

While we have implemented certain strategies to mitigate risks related to the impact of fluctuations in currency exchange rates, we cannot ensure that we will not recognize gains or losses from international transactions, as this risk is part of transacting business in an international environment. Not every exposure is or can be hedged and, where hedges are put in place based on expected foreign exchange exposure, they are based on forecasts for which actual results may differ from the original estimate. Failure to successfully hedge or anticipate currency risks properly could affect our consolidated operating results.

 

ITEM 4. CONTROLS AND PROCEDURES

(a) Disclosure Controls and Procedures

Our Chief Executive Officer, Kathryn V. Marinello, and our Chief Financial Officer, Dennis Lacey (our principal executive officer and principal financial officer, respectively), have concluded that our disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e) and 15d-15(e)) were effective as of June 30, 2011 to ensure that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and include controls and procedures designed to ensure that information required to be disclosed by Stream in such reports is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurances of achieving the desired control objectives, and management necessarily was required to apply its judgment in designing and evaluating the controls and procedures. On an on-going basis, we review and document our disclosure controls and procedures and our internal control over financial reporting and we may from time to time make changes aimed at enhancing their effectiveness and to ensure that our systems evolve with our business.

(b) Changes in Internal Control over Financial Reporting

No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and Rule 15d-15(f) of the Exchange Act) occurred during the fiscal quarter ended June 30, 2011 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II—OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

We have been named as a third-party defendant in a putative class action captioned Kambiz Batmanghelich, on behalf of himself and all others similarly situated and on behalf of the general public, v. Sirius XM Radio, Inc., filed in the Los Angeles County Superior Court on November 10, 2009, and removed to the United States District Court for the Central District of California. The Plaintiff alleges that Sirius XM Radio, Inc. recorded telephone conversations between Plaintiff and members of the proposed class of Sirius customers, on the one hand, and Sirius and its employees, on the other, without the Plaintiff’s and class members’ consent in violation of California’s telephone recording laws. The Plaintiff also alleges negligence and violation of the common law right of privacy and seeks injunctive relief. We believe that we have meritorious defenses and we intend to vigorously defend against these claims. On December 21, 2009, Sirius XM Radio, Inc. filed a Third-Party Complaint in the action against us seeking indemnification for any defense costs and damages that result from the putative class action. On March 25, 2010, the Plaintiff filed an amended complaint that added us as a defendant. In March 2011, the court granted preliminary approval of a settlement proposal, conditionally certified the settlement class, and approved the form of class notice. Final approval of the settlement must still be granted by the court, following the process set forth in the court’s preliminary approval order.

 

ITEM 1A. RISK FACTORS

We operate in a rapidly changing environment that involves a number of risks, some of which are beyond our control. In addition to the other information set forth in this report, you should carefully consider the factors discussed in “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2010, filed with the SEC on March 2, 2011, which could have a material effect on our business, results of operations, financial condition and/or liquidity and that could cause operating results to vary significantly from period to period. As of June 30, 2011, there have been no material changes to the risk factors disclosed in our most recent Annual Report on Form 10-K for the year ended December 31, 2010, although we may disclose changes to such factors or disclose additional factors from time to time in our future filings with the SEC. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or operating results.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Issuer Purchases of Equity Securities

During the second quarter of 2011, our Compensation Committee approved the payment of applicable tax withholding on the vesting of restricted stock and restricted stock units held by certain members of our senior management team through the surrender by such shareholders and the repurchase by us of that number of the vested shares or units equal to the total tax withholding obligations divided by the fair market value of our common stock on the trading day preceding the vesting date. Such repurchases by us occurred in May 2011, and were not made pursuant to a publicly announced repurchase program.

In addition, in June 2011 we entered into a securities purchase agreement with Trillium Capital LLC, a Delaware limited liability company and R. Scott Murray, our former chief executive officer, pursuant to which we purchased 3,722,569 shares of our common stock from Trillium for a purchase price of $3.25 per share.

The aggregate number of shares repurchased by us pursuant to these arrangements is set forth in the table below.

 

Period

   (a)
Total Number of
Shares/Units
Purchased
     (b)
Average Price
Paid per Share
     (c)
Total Number of
Shares
Purchased as
Part of Publicly
Announced Plans
or Programs
     (d)
Maximum
Number of
Shares that
may yet be
Purchased under
the Plans or
Programs
 

April 2011

           

(April 1, 2011 – April 30, 2011)

     —         $ —           —           —     

May 2011

           

(May 1, 2011 – May 31, 2011)

     11,919        3.30        —           —     

June 2011

           

(June 1, 2011 – June 30, 2011)

     3,722,569        3.25        —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     3,734,488           —           —     

 

ITEM 6. EXHIBITS.

We are filing as part of this Report the Exhibits listed in the Exhibit Index following the signature page to this Report.

 

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  STREAM GLOBAL SERVICES, INC.
August 3, 2011   By:  

/s/    Kathryn V. Marinello        

   

Kathryn V. Marinello

Chairman, Chief Executive Officer and President

(Principal Executive Officer)

August 3, 2011   By:  

/s/    Dennis Lacey        

   

Dennis Lacey

Executive Vice President and Chief Financial Officer

(Principal Financial and Accounting Officer)

 

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Exhibit Index

 

Exhibit
No.

 

Description

10.1*   Separation Agreement, dated as of July 8, 2011, by and between Robert Dechant and Stream Global Services, Inc.
10.2   Securities Purchase Agreement, dated as of June 3, 2011, by and among Trillium Capital LLC, a Delaware limited liability company, R. Scott Murray and Stream Global Services, Inc. (filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, as filed with the Securities and Exchange Commission on June 6, 2011 (File No. 001-33739) and incorporated herein by reference).
10.3   First Amendment to Credit Agreement, dated as of June 3, 2011, by and among Wells Fargo Capital Finance, LLC, in its capacity as agent for the lenders and bank product providers party thereto, Stream Global Services, Inc. and each of the subsidiaries of Stream Global Services, Inc. signatory thereto (filed as Exhibit 10.2 to the Registrant’s Current Report on Form 8-K, as filed with the Securities and Exchange Commission on June 6, 2011 (File No. 001-33739) and incorporated herein by reference).
31.1*   Principal Executive Officer Certification required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*   Principal Financial Officer Certification required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1**   Principal Executive Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2**   Principal Financial and Accounting Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS***   XBRL Instance Document
101.SCH***   XBRL Taxonomy Extension Schema Document
101.CAL***   XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF***   XBRL Taxonomy Extension Definition Linkbase Document
101.LAB***   XBRL Taxonomy Extension Label Linkbase Document
101.PRE***   XBRL Taxonomy Extension Presentation Linkbase Document

 

* Filed herewith.
** Furnished herewith.
*** XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

 

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