UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

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

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

TeleTech Holdings, Inc.

(Exact name of Registrant as specified in its charter)

Delaware		84-1291044
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

9197 South Peoria Street
Englewood, Colorado 80112
(Address of principal executive offices)

Registrant’s telephone number, including area code: (303) 397-8100

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, and (2) has been subject to such filing requirements for the past (90) days. YES þ NO o

Indicate by check mark if an accelerated filer (as defined in Rule 12b-2 of the Act). YES þ NO o

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

As of July 27, 2005, 72,179,465 shares of the Registrant’s common stock were outstanding.

 

 

TELETECH HOLDINGS, INC. AND SUBSIDIARIES

FORM 10-Q

INDEX

		Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets — June 30, 2005 (unaudited) and December 31, 2004			3
Condensed Consolidated Statements of Operations — Three Months and Six Months Ended June 30, 2005 and 2004 (unaudited)			4
Condensed Consolidated Statement of Stockholders’ Equity — As of and For the Six Months Ended June 30, 2005 (unaudited)			5
Condensed Consolidated Statements of Cash Flows — Six Months Ended June 30, 2005 and 2004 (unaudited)			6
Notes to Unaudited Condensed Consolidated Financial Statements — June 30, 2005			7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			14
Item 3. Quantitative and Qualitative Disclosures about Market Risk			30
Item 4. Controls and Procedures			31
PART II. OTHER INFORMATION			31
Item 1. Legal Proceedings
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 6. Exhibits
Certification of CEO Pursuant to Section 302
Certification of CFO Pursuant to Section 302
Certification of CEO Pursuant to Section 906
Certification of CFO Pursuant to Section 906

Item 1.

TELETECH HOLDINGS, INC. AND SUBSIDIARIES

		June 30,				December 31,
		2005				2004
		(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	82,909			$	75,066
Accounts receivable, net			156,219				148,627
Prepaids and other assets			30,706				31,579
Income taxes receivable			14,944				16,154
Deferred tax assets, net			6,323				6,609
Total current assets			291,101				278,035
PROPERTY AND EQUIPMENT, net			120,852				132,214
OTHER ASSETS:
Contract acquisition costs, net			14,776				14,607
Deferred tax assets, net			20,359				18,454
Goodwill			31,485				30,613
Other assets			21,017				22,872
Total assets		$	499,590			$	496,795
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable		$	25,344			$	23,204
Accrued employee compensation and benefits			59,428				54,376
Other accrued expenses			32,132				32,824
Income taxes payable			13,061				15,226
Customer advances and deferred income			8,079				5,017
Deferred tax liability			5,435				5,245
Current portion of long — term debt			227				300
Total current liabilities			143,706				136,192
LONG-TERM LIABILITIES:
Long — term debt, net of current portion:
Bank debt			21,900				—
Other long-term debt			1,116				377
Grant advances			6,971				7,287
Other liabilities			14,154				13,936
Deferred tax liability			7,571				8,586
Total liabilities			195,418				166,378
MINORITY INTEREST			6,235				7,872
STOCKHOLDERS’ EQUITY:
Stock purchase warrants			5,100				5,100
Common stock; $.01 par value; 150,000,000 shares authorized; 72,210,571 and 74,931,907 shares, respectively, issued and outstanding			725				750
Additional paid-in capital			172,772				199,063
Deferred compensation			(25	)			(74	)
Accumulated other comprehensive income (loss)			(1,546	)			3,249
Retained earnings			120,910				114,457
Total stockholders’ equity			297,936				322,545
Total liabilities and stockholders’ equity		$	499,590			$	496,795

The accompanying notes are an integral part of these condensed consolidated balance sheets.

TELETECH HOLDINGS, INC. AND SUBSIDIARIES

		Three Months Ended								Six Months Ended
		June 30								June 30
		2005				2004				2005				2004
REVENUE		$	253,933			$	265,531			$	508,259			$	533,529
OPERATING EXPENSES:
Costs of services			187,161				194,674				378,171				398,405
Selling, general and administrative expenses			46,110				38,777				90,086				79,143
Depreciation and amortization			13,683				14,206				27,991				30,188
Restructuring charges, net			(10	)			322				943				2,164
Impairment losses			2,537				2,641				2,537				2,641
Total operating expenses			249,481				250,620				499,728				512,541
INCOME FROM OPERATIONS			4,452				14,911				8,531				20,988
OTHER INCOME (EXPENSE):
Interest income			754				454				1,566				1,017
Interest expense			(687	)			(2,550	)			(1,204	)			(5,430	)
Other, net			65				854				644				811
Debt restructuring charges			—				(7,646	)			—				(7,646	)
INCOME BEFORE INCOME TAXES AND MINORITY INTEREST			4,584				6,023				9,537				9,740
Provision for income taxes			623				3,675				2,772				6,197
INCOME BEFORE MINORITY INTEREST			3,961				2,348				6,765				3,543
Minority interest			(249	)			42				(312	)			248
NET INCOME		$	3,712			$	2,390			$	6,453			$	3,791
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic			73,008				74,519				73,594				74,794
Diluted			74,501				75,260				75,611				75,892
NET INCOME PER SHARE:
Basic			0.05				0.03				0.09				0.05
Diluted			0.05				0.03				0.09				0.05

The accompanying notes are an integral part of these condensed consolidated financial statements.

TELETECH HOLDINGS, INC. AND SUBSIDIARIES

(Amounts in thousands)
(Unaudited)

														Accumulated
										Additional				Other								Stock												Total
										Paid-in				Comprehensive				Deferred				Purchase				Retained				Comprehensive				Stockholders’
		Shares				Amount				Capital				Income (Loss)				Compensation				Warrants				Earnings				Income (Loss)				Equity
Balances, December 31, 2004			74,932			$	750			$	199,063			$	3,249			$	(74	)		$	5,100			$	114,457							$	322,545
Comprehensive income (loss):
Net income			—				—				—				—				—				—				6,453				6,453				6,453
Other comprehensive income:
Translation adjustments			—				—				—				(723	)			—				—				—				(723	)			(723	)
Derivative valuation, net of tax			—				—				—				(4,072	)			—				—				—				(4,072	)			(4,072	)
																															(4,795	)
Comprehensive income			—				—				—				—				—				—				—				1,658
Exercise of stock options			531				4				3,915				—				—				—				—								3,919
Employee stock purchase plan			59				1				475				—				—				—				—								476
Purchases of common stock			(3,311	)			(30	)			(30,880	)			—				—				—				—								(30,910	)
Amortization of deferred compensation			—				—				—				—				49				—				—								49
Other			—				—				199				—				—				—				—								199
Balances, June 30, 2005			72,211			$	725			$	172,772			$	(1,546	)]		$	(25	)		$	5,100			$	120,910							$	297,936

The accompanying notes are an integral part of these condensed consolidated financial statements.

TELETECH HOLDINGS, INC. AND SUBSIDIARIES

		Six Months Ended
		June 30,
		2005				2004
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	6,453			$	3,791
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			27,991				30,188
Amortization of contract acquisition costs			1,991				2,316
Minority interest			312				(248	)
Provision for doubtful accounts			818				2,163
Impairment losses			2,537				2,641
Loss on disposal of assets			60				146
Deferred income taxes			(1,544	)			(21	)
Changes in assets and liabilities:
Accounts receivable			(8,410	)			(24,116	)
Prepaids and other assets			(2,653	)			1,702
Accounts payable, accrued expenses and other liabilities			3,363				2
Customer advances and deferred income			4,395				(1,785	)
Net cash provided by operating activities			35,313				16,779
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment			(13,571	)			(20,343	)
Investment in joint venture			—				(310	)
Capitalized software costs			(2,547	)			(1,409	)
Purchase of intangible assets			(240	)			—
Contract acquisition costs			(2,160	)			—
Net cash used in investing activities			(18,518	)			(22,062	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from bank debt			119,600				66,006
Payments on bank debt			(97,700	)			(39,800	)
Payments on long-term debt and capital lease obligations			(450	)			(77,358	)
Payment on grant advances			—				(5,780	)
Payments from minority shareholder			—				1,742
Payments to minority shareholder			(1,800	)			(1,800	)
Proceeds from exercise of stock options			3,919				3,549
Proceeds from employee stock purchase plan			476				—
Debt refinancing fees			—				(1,000	)
Purchases of treasury stock			(30,910	)			(5,000	)
Net cash used in financing activities			(6,865	)			(59,441	)
Effect of exchange rate changes on cash and cash equivalents			(2,087	)			3,482
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS			7,843				(61,242	)
CASH AND CASH EQUIVALENTS, beginning of period			75,066				141,655
CASH AND CASH EQUIVALENTS, end of period		$	82,909			$	80,413

The accompanying notes are an integral part of these condensed consolidated financial statements.

TELETECH HOLDINGS, INC. AND SUBSIDIARIES

(1) OVERVIEW AND BASIS OF PRESENTATION

Overview. TeleTech Holdings, Inc. (“TeleTech” or the “Company”) serves its clients through two primary businesses: (i) Customer Management Services, which provides outsourced customer support and marketing services (“Customer Care”) for a variety of industries via call centers (“customer management centers”, or “CMCs”) in the United States (“U.S.”), Argentina, Australia, Brazil, Canada, China, Germany, India, Korea, Malaysia, Mexico, New Zealand, Northern Ireland, the Philippines, Scotland, Singapore, and Spain; and (ii) Database Marketing and Consulting, which provides outsourced database management, direct marketing and related customer retention services for automotive dealerships and manufacturers in North America.

Basis of Presentation. The accompanying unaudited condensed consolidated financial statements have been prepared without audit pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). The condensed consolidated financial statements reflect all adjustments (consisting of only normal recurring entries) which, in the opinion of management, are necessary to present fairly the financial position at June 30, 2005, and the results of operations and cash flows of the Company and its subsidiaries for the three and six month periods ended June 30, 2005 and 2004. Operating results for the three and six month periods ended June 30, 2005 are not necessarily indicative of the results that may be expected for the year ended December 31, 2005.

     The unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004.

Stock Option Accounting. The Company has elected to follow Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”), and related interpretations in accounting for its employee stock options including Statement No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosures”. Under APB 25, because the exercise price of the Company’s employee stock options is generally equal to the market price of the underlying stock on the date of the grant, no compensation expense is recognized. Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting and Disclosure of Stock-Based Compensation” (“SFAS 123”), establishes an alternative method of expense recognition for stock-based compensation awards to employees based on fair values. The Company elected not to adopt SFAS 123 for expense recognition purposes.

     Pro forma information regarding net income and earnings per share is required by SFAS 123 and has been calculated as if the Company had accounted for its employee stock options under the fair value method of SFAS 123. The fair values of options granted during the three months ended June 30, 2005 and 2004 were estimated as of the grant date using a Black-Scholes option-pricing model with the following assumptions:

		June 30, 2005				June 30, 2004
Volatility			76.34	%			78.89	%
Dividend yield			0.00	%			0.00	%
Risk — free interest rate			3.83% — 4.24	%			2.91% — 3.98	%
Expected life (years)			4.47				5.31
Fair value per option		$	4.98			$	4.66

     The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation (in thousands except per share amounts):

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2005				2004				2005				2004
Net income as reported		$	3,712			$	2,390			$	6,453			$	3,791
Add (deduct): Stock-based employee compensation expense (reversal) included in reported net income, net of related tax effects			(113	)			67				32				134
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects			(1,014	)			(1,475	)			(2,114	)			(3,069	)
Pro forma net income		$	2,585			$	982			$	4,371			$	856
Net income per share:
Basic — as reported		$	0.05			$	0.03			$	0.09			$	0.05
Basic — pro forma		$	0.04			$	0.01			$	0.06			$	0.01
Diluted — as reported		$	0.05			$	0.03			$	0.09			$	0.05
Diluted-pro forma		$	0.03			$	0.01			$	0.06			$	0.01

Recently Issued Accounting Pronouncements. In December 2004, the Financial Accounting Standards Board issued SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123R”), which replaces SFAS No. 123, “Accounting for Stock Issued to Employees.” SFAS 123R requires all share-based payments to employees, including grants of employee stock options and purchases under employee stock purchase plans, to be recognized in the consolidated financial statements based on their fair values, beginning with the first interim or annual period after June 15, 2005, with early adoption encouraged. The SEC has adopted a rule postponing compliance dates for SFAS 123R. Under the new SEC rule, companies are required to implement SFAS 123R as of the beginning of their next fiscal year after June 15, 2005.

     The pro forma disclosures previously permitted under SFAS 123 no longer will be an alternative to financial statement recognition. The Company is required to adopt SFAS 123R by first quarter of fiscal 2006. Under SFAS 123R, the Company must determine the appropriate fair value model to be used for valuing share-based payments, the amortization method for compensation cost and the transition method to be used at date of adoption. The transition methods include modified prospective and modified retrospective adoption options. Under the retrospective options, prior periods may be restated either as of the beginning of the year of adoption or for all periods presented. The modified prospective method requires that compensation expense be recorded at the beginning of the first quarter of adoption of SFAS 123R for all unvested stock options and restricted stock based upon the previously disclosed SFAS 123 methodology and amounts. The retrospective methods would record compensation expense beginning with the first period restated for all unvested stock options and restricted stock. The Company is evaluating the requirements of SFAS 123R and has not yet determined which method of adoption it will employ.

(2) SEGMENT INFORMATION

     The Company classifies its business activities into three segments: North American Customer Care, International Customer Care, and Database Marketing and Consulting. These segments are consistent with the Company’s management of the business and reflect its internal financial reporting structure and operating focus. North American and International Customer Care provide comprehensive customer management services. North American Customer Care consists of customer management services provided to United States’ and Canadian clients while International Customer Care consists of all other countries. Database Marketing and Consulting provides outsourced database management, direct marketing and related customer retention services for automobile dealerships and manufacturers.

     All intercompany transactions between the reported segments for the periods presented have been eliminated.

     It is a Company strategy to garner additional business through the lower cost opportunities offered by certain international countries. Accordingly, the Company provides services to certain U.S. clients from CMCs in Argentina, Canada, India, Mexico and the Philippines. Under this arrangement, while the U.S. subsidiary invoices and collects from the end client, the U.S. subsidiary also enters into a contract with the foreign subsidiary to reimburse the foreign subsidiary for their costs plus a reasonable profit. As a result, a portion of the profits from these client contracts is recorded in the U.S. while a portion is recorded in the foreign location. For U.S. clients being serviced from Canada, India and the Philippines, which represent the majority of these arrangements, the profits all remain within the North American Customer Care segment. For U.S. clients

being serviced from other countries, a portion of the profits is reflected in the International Customer Care segment. For the three months ended June 30, 2005 and 2004, approximately $0.9 million and $0.3 million, respectively, of income from operations in the International Customer Care segment was generated from these arrangements. For the six months ended June 30, 2005 and 2004, approximately $1.4 million and $1.0 million, respectively, of income from operations in the International Customer Care segment was generated from these arrangements.

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2005				2004				2005				2004
		(Amounts in thousand)
Revenue:
North American Customer Care		$	151,670			$	161,658			$	303,922			$	323,934
International Customer Care			81,141				79,184				161,561				159,608
Database Marketing and Consulting			21,122				24,689				42,776				49,987
Total		$	253,933			$	265,531			$	508,259			$	533,529
Income (Loss) from Operations:
North American Customer Care		$	13,865			$	18,011			$	25,098			$	27,509
International Customer Care			(5,994	)			(7,184	)			(10,317	)			(11,600	)
Database Marketing and Consulting			(3,418	)			4,084				(6,250	)			5,079
Total		$	4,452			$	14,911			$	8,531			$	20,988

     The following table presents revenue based on the geographic location where services are provided or the physical location of the equipment:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2005				2004				2005				2004
		(Amounts in thousands)
Revenue:
United States		$	106,481			$	124,046			$	214,660			$	253,631
Asia Pacific			43,094				41,854				86,155				80,289
Canada			47,991				45,738				96,822				92,522
Europe			29,958				31,499				61,305				62,853
Latin America			26,409				22,394				49,317				44,234
Total		$	253,933			$	265,531			$	508,259			$	533,529

Significant Customers

     The Company has two customers who contributed in excess of 10% of total revenue, both of which are in the communications industry. The revenue from these customers as a percentage of total revenue is as follows:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2005				2004				2005				2004
Customer A			16.7	%			16.9	%			16.9	%			16.1	%
Customer B			10.8	%			12.9	%			10.9	%			14.4	%

     As of June 30, 2005, accounts receivable from customers A and B were $17.4 million and $8.3 million, respectively. As of December 31, 2004, accounts receivable from customers A and B were $27.9 million and $10.2 million, respectively.

     The Company does not require collateral from its customers. To limit the Company’s credit risk, the Company performs ongoing credit evaluations of its customers and maintains an allowance for uncollectible accounts. Although the Company is impacted by economic conditions in the communications and media, automotive, financial services and government services industries, management does not believe significant credit risk exists at June 30, 2005.

(3) COMPREHENSIVE INCOME (LOSS)

     The Company’s comprehensive income (loss) for the three and six month periods ended June 30, 2005 and 2004 was as follows:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2005				2004				2005				2004
		(Amounts in thousands)
Net income for the period		$	3,712			$	2,390			$	6,453			$	3,791
Other comprehensive income (loss), net of tax:
Foreign currency transaction adjustment			634				(7,085	)			(723	)			(7,290	)
Gain (loss) on derivatives			(1,793	)			(1,253	)			(4,072	)			(2,494	)
Other comprehensive income (loss), net of tax			(1,159	)			(8,338	)			(4,795	)			(9,784	)
Comprehensive income (loss)		$	2,553			$	(5,948	)		$	1,658			$	(5,993	)

     At June 30, 2005, accumulated comprehensive income (loss) consisted of $(3.2) million and $1.6 million of foreign currency transaction adjustments and derivatives valuation, respectively. At December 31, 2004, accumulated comprehensive income (loss) consisted of $(2.5) million and $5.7 million of foreign currency translation adjustments and derivatives valuation, respectively.

(4) EARNINGS PER SHARE

     Basic earnings per share are computed by dividing the Company’s net income by the weighted average number of common shares outstanding. The impact of any potentially dilutive securities is excluded. Diluted earnings per share are computed by dividing the Company’s net income by the weighted average number of shares and dilutive potential common shares outstanding during the period. The following table sets forth the computation of basic and diluted earnings per share for the periods indicated:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2005				2004				2005				2004
		(Amounts in thousands)
Shares used in basic per share calculation			73,008				74,519				73,594				74,794
Effects of dilutive securities:
Stock options			1,393				641				1,917				998
Unvested restricted stock			100				100				100				100
Shares used in diluted per share calculation			74,501				75,260				75,611				75,892

     For the three months ended June 30, 2005 and 2004, 3.2 million and 5.1 million, respectively, of options to purchase shares of common stock were outstanding but not included in the computation of diluted earnings per share because the effect would have been anti-dilutive. For the six months ended June 30, 2005 and 2004, 2.5 million and 4.3 million, respectively, of options to purchase shares of common stock were outstanding but not included in the computation of diluted earnings per share because the effect would have been anti-dilutive. The Company has also excluded the impact of outstanding warrants, as the impact would be anti-dilutive for all periods presented.

(5) DEBT

     Under the Company’s credit facility, the Company may borrow up to $100 million, with an option to increase the size of the credit facility to a maximum of $150 million (subject to approval by the lenders) at any time up to 90 days prior to maturity of the credit facility. The credit facility matures May 4, 2007. However, the Company may request a one year extension, subject to approval by the lenders. The credit facility is secured by 100% of the Company’s domestic accounts receivable and a pledge of 65% of capital stock of specified material foreign subsidiaries.

     The credit facility, which includes customary financial covenants, may be used for general corporate purposes, including working capital, purchases of treasury stock and acquisition financing. The credit facility accrues interest at a rate based on either (1) the Prime Rate, defined as the higher of the lender’s prime rate or the Federal Funds Rate plus 0.50%, or (2) the London Interbank Offered Rate (“LIBOR”) plus an applicable credit spread, at the Company’s option. The interest rate will vary based on the Company’s leverage ratio as defined in the credit facility. As of June 30, 2005 interest accrues at the weighted-average rate of 5.85%. As of June 30, 2005 and December 31, 2004, the Company had $21.9 million and $0 outstanding borrowings under the credit facility, respectively.

(6) INCOME TAXES

     The Company accounts for income taxes under the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 109, “Accounting for Income Taxes,” which requires recognition of deferred tax assets and liabilities for the expected future income tax consequences of transactions that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.

When circumstances warrant, the Company assesses the likelihood that its net deferred tax assets will more likely than not be recovered from future projected taxable income. Management judgment has been used in forecasting future taxable income.

     Based upon assessments of recoverability of its deferred tax assets made in prior periods, the Company has recorded a valuation allowance against deferred tax assets of $20.7 million as of June 30, 2005, which is an increase of $0.7 million from December 31, 2004, and is primarily related to its U.S., Spain, Brazil and Argentina tax jurisdictions. The Company has approximately $13.7 million and $11.2 million of net deferred tax assets as of June 30, 2005 and December 31, 2004, respectively, related to the U.S. and certain international countries whose recoverability is dependent upon future profitability. The net deferred tax asset for US operations of approximately $4.4 million as of June 30, 2005, is recoverable based upon estimates of 2005 taxable income.

(7) DERIVATIVES

     The Company follows the provisions of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”). SFAS No. 133 requires every derivative instrument (including certain derivative instruments embedded in other contracts) to be recorded in the Balance Sheet as either an asset or liability measured at its fair value, with changes in the fair value of qualifying hedges recorded in Other Comprehensive Income. SFAS 133 requires that changes in a derivative’s fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Accounting for qualifying hedges allows a derivative’s gains and losses to offset the related results of the hedged item and requires that a Company must formally document, designate and assess the effectiveness of transactions that receive hedge accounting treatment. Based on the criteria established by SFAS No. 133, all of the Company’s hedges consisting of foreign currency options, forward exchange, non-deliverable, forward and participating contracts are deemed effective. While the Company expects that its derivative instruments will continue to meet the conditions for hedge accounting, if the hedges did not qualify as highly effective or if the Company did not believe that forecasted transactions would occur, the changes in the fair value of the derivatives used as hedges would be reflected in earnings. The Company does not believe it is exposed to more than a nominal amount of credit risk in its hedging activities, as the counter parties are established, well-capitalized financial institutions.

     The Company’s subsidiaries in Canada and the Philippines have their local currency as their functional currency. The functional currency is used to pay labor and other operating costs. However, these subsidiaries have customers contracts providing for payment in U.S. dollars for which the Company has contracted with several commercial banks, at no material costs, to acquire, under forward exchange, non-deliverable, forward and participating contracts as well as options, the functional currency at a fixed price in U.S. dollars to hedge its foreign currency risk. As of June 30, 2005 and December 31, 2004, the notional amount of those contracts is summarized as follows (in millions):

Local

Date

Currency

U.S. Dollar

contracts are

Local Currency

Amount

Amount

through

June 30, 2005:

Canadian Dollar

140.1

$

111.7

January 2007

Philippines Peso

184.0

3.3

May 2006

December 31, 2004:

Canadian Dollar

165.3

$

129.4

December 2006

Argentinean Peso

2.8

0.9

May 2005

Philippines Peso

189.0

3.2

November 2005

     During the three months ended June 30, 2005 and 2004, the Company recorded gains of $1.5 million and $0.5 million, respectively, for settled forward contracts, which are recorded in Revenue in the accompanying Condensed Consolidated Statements of Operations. During the six months ended June 30, 2005 and 2004, the Company recorded gains of $3.7 million and $2.5 million, respectively, for settled forward contracts, which are recorded in Revenue in the accompanying Condensed Consolidated Statements of Operations. As of June 30, 2005 and December 31, 2004, the Company had derivative assets of $5.6 million and $9.8 million, respectively, associated with foreign exchange contracts consisting of the fair market value of forward, non-deliverable forward, participating forward and option contracts outstanding. Included in these derivative assets are premiums paid by the Company as part of obtaining the foreign exchange options. The cost of these premiums is recognized in earnings based on changes in their fair value because they are considered components of the overall fair value of the forward exchange contracts.

     The Company settles intercompany receivable and payable balances monthly to mitigate the exposure caused by changes in foreign exchange rates. However, at times the Company is unable to complete the settlement prior to the end of the month. Accordingly, transaction gains and losses from fluctuations in exchange rates may occur. Additionally, certain foreign locations

maintain U.S. bank accounts denominated in U.S. dollars, which are also subject to transaction gains and losses from fluctuations in exchange rates. Such transaction gains and losses are included in determining net income. For the three months ended June 30, 2005 and 2004, the Company recorded a transaction loss of $0.9 million and a transaction gain of $0.6 million, respectively in Other Income (Expense) related to the intercompany receivables/payable balances generated from labor arbitrage activities. For the six months ended June 30, 2005 and 2004, the Company recorded a transaction loss of $0.8 million and a transaction gain of $0.5 million, respectively in Other Income (Expense) related to these activities.

(8) RESTRUCTURING CHARGES AND IMPAIRMENT LOSSES

     During the three months ended June 30, 2005, the Company recorded impairment losses in the amount of $2.5 million related to its decision to exercise an early lease termination option and close its Glasgow, Scotland facility effective July, 2006.

     During the six months ended June 30, 2005, the Company recognized restructuring charges in the amount of $1.0 million related to termination benefits for approximately 21, primarily administrative, employees.

     During the three months ended June 30, 2004, the Company recorded impairment losses in the amount of $2.6 million to reduce the net book value of long-lived assets at its Glasgow, Scotland facility to their then estimated fair value.

     During the three months ended June 30, 2004, the Company recognized approximately $1.6 million of termination benefits for approximately 100 employees, across all three segments. In addition, the Company recognized $0.4 million of termination benefits for approximately 500 employees at a center in Topeka, Kansas that closed in April 2004.

     A rollforward of the activity in restructuring accruals is as follows:

		Closure				Reduction in
		of CMCs				Force				Total
		(in thousands)
Balances, December 31, 2003		$	1,203			$	1,256			$	2,459
Expense			452				2,525				2,977
Payments			(987	)			(2,692	)			(3,679	)
Reversal of unused balances			(69	)			(856	)			(925	)
Balances, December 31, 2004			599				233				832
Expense			—				1,031				1,031
Payments			—				(478	)			(478	)
Reversal of unused balances			—				(88	)			(88	)
Balances, June 30, 2005		$	599			$	698			$	1,297

     The restructuring accrual is included in Other Accrued Expenses in the accompanying Condensed Consolidated Balance Sheets.

(9) CONTINGENCIES

     Legal Proceedings. From time to time, the Company may be involved in claims or lawsuits that arise in the ordinary course of business. Accruals for claims or lawsuits have been provided for to the extent that losses are deemed probable and estimable. Although the ultimate outcome of these claims or lawsuits cannot be ascertained, on the basis of present information and advice received from counsel, the Company accrues for the estimated probable loss for such claims on lawsuits as a liability. Management believes that the disposition or ultimate determination of all such claims or lawsuits will not have a material adverse effect on the Company.

Sales and Use Taxes. As of June 30, 2005 and December 31, 2004, the Company had accrued a liability of $0.7 million for potential sales and use tax liabilities of its Database Marketing and Consulting segment.

     As of June 30, 2005 and December 31, 2004, the Company had accrued a liability of $0.5 million for potential sales and use tax liabilities of its North American Customer Care segment.

Guarantees. The Company’s credit facility is guaranteed by 100% of the Company’s domestic accounts receivable and a pledge of 65% of capital stock of specified material foreign subsidiaries.

Letters of credit. At June 30, 2005 outstanding letters of credit and other performance guarantees totaled approximately

$16.8 million, which primarily guarantees workers’ compensation and other insurance related obligations, and facility leases.

Item 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

INTRODUCTION

     This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains certain forward-looking statements that involve risks and uncertainties. The projections and statements contained in these forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the Company’s actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. All statements not based on historical fact are forward-looking statements that involve substantial risks and uncertainties. In accordance with the Private Securities Litigation Reform Act of 1995, following are important factors that could cause TeleTech’s and its subsidiaries’ actual results to differ materially from those expressed or implied by such forward-looking statements, including but not limited to the following: risks associated with achieving the Company’s expected profit improvement in its United Kingdom operations; the ability to close and ramp new business opportunities that are currently being pursued with potential and existing clients; the ability for the Company to execute its growth plans, including sales of new products; to increase profitability via the globalization of its North American best operating practices; to achieve its three-year financial goals and targeted cost reductions; the possibility of the Company’s Database Marketing and Consulting segment not increasing revenue, lowering costs, and achieving profitability during the fourth quarter or returning to historic levels of profitability; the possibility of lower revenue or price pressure from clients experiencing a downturn in their business; the ability of the Company to fund its future growth initiatives; greater than anticipated competition in the customer care market, causing adverse pricing and more stringent contractual terms; risks associated with losing or not renewing significant client relationships, particularly large client agreements, or early termination of a client agreement; the risk of losing clients due to consolidation in the industries we serve; consumers’ concerns or adverse publicity regarding the products of the Company’s clients; higher than anticipated start-up costs or lead times associated with new ventures or business in new markets; execution risks associated with performance-based pricing metrics in certain client agreements; the Company’s ability to find cost effective locations, obtain favorable lease terms, and build or retrofit facilities in a timely and economic manner; risks associated with business interruption due to weather or terrorist-related events; risks associated with attracting and retaining cost-effective labor at the Company’s customer management centers; the possibility of additional asset impairments and restructuring charges; risks associated with changes in foreign currency exchange rates; economic or political changes affecting the countries in which the Company operates; changes in accounting policies and practices promulgated by standard setting bodies; and, new legislation or government regulation that impacts the customer care industry.

EXECUTIVE OVERVIEW

     We serve our clients through two primary businesses: (i) Customer Management Services, which provides outsourced customer support and marketing services for a variety of industries via call centers (“customer management centers”, or “CMCs”) throughout the world; and (ii) Database Marketing and Consulting. We separate our Customer Management Services business into two segments consistent with our management of the business, which reflects the internal financial reporting structure and operating focus. North American Customer Care consists of customer management services provided to United States’ and Canadian clients while International Customer Care consists of clients in all other countries. Database Marketing and Consulting provides outsourced database management, direct marketing and related customer retention services for automobile dealerships and manufacturers. Segment accounting policies are the same as those used in the consolidated financial statements. See Note 2 to the Condensed Consolidated Financial Statements for additional discussion regarding preparation of segment information.

Customer Management Services

     The Customer Management Services segment generates revenue based primarily on the amount of time our representatives devote to a client’s program. We primarily focus on large global corporations in the following industries: automotive, communications and media, financial services, government, healthcare, logistics, retail, technology and travel. Revenue is recognized as services are provided. The majority of our revenue is, and we anticipate that the majority of our future revenue will continue to be, from multi-year contracts. However, we do provide some programs on a short-term basis and our operations outside of North America are characterized by shorter-term contracts. Additionally, we typically experience client attrition of approximately 10% to 15% of our revenue each year (although we currently anticipate 2005’s attrition will be less than these historic levels). Our invoice terms with customers range from 30 days to 45 days with longer terms in Europe.

     The customer relationship management industry is highly competitive. Our ability to sell existing services or gain acceptance of new products is challenged by the competitive nature of the industry. There can be no assurance that we will be able to sell services to new clients, renew relationships with existing clients or gain client acceptance of new products.

     We compete primarily with the in-house customer management operations of our current and potential clients. We also compete with companies that provide customer management services on an outsourced basis. In general, over the last several years, the global economy has had a negative impact on the customer care management market. More specifically, sales cycles have lengthened, competition has increased, and contract values have decreased. We believe that sales cycles have begun shortening; however pricing pressures continue within our industry due to the rapid growth in competitors providing offshore labor capabilities.

     Occasionally when renewing contracts, clients request that all or a portion of the renewal work be located at international locations. These requests decrease our revenue as we charge less for international locations and, in the short-term, increase our costs as we incur expenses related to relocating the work. The activity, along with decreases in volume, led to decreased revenue in our North American Customer Care segment. During the second quarter we incurred contract relocation costs of approximately $0.1 million. We expect to incur additional contract relocation costs in the amount of $0.5 million during the third quarter.

     We routinely review our capacity and the demand for that capacity. In conjunction with those quarterly reviews, we may consolidate or close under-performing CMCs, including those impacted by the loss of a major client program, in order to maintain or improve targeted utilization and margins. In the event that we close CMCs in the future, we may be required to record restructuring or impairment charges, which would adversely impact our results of operations. There can be no assurance that we will be able to achieve or maintain optimal CMC capacity utilization.

     Based on the fact that some clients request that we serve their customers from international locations with lower prevailing labor rates, in the future we may decide to close one or more U.S.-based CMCs, even though it is generating positive cash flow, because we believe the future profits from conducting such work outside the U.S. may more than compensate for the one-time charges related to closing the facility.

     The short-term focus of management is to increase revenue in this segment by:

	•		selling new business to existing customers;
	•		continuing to focus new sales efforts on large, complex, multi-center opportunities;
	•		differentiating our products and services by developing and offering new solutions to clients; and
	•		exploring merger and acquisition possibilities.

     Our ability to enter into new multi-year contracts, particularly large complex opportunities, is dependent upon the macroeconomic environment in general and the specific industry environments in which our customers operate. A weakening of the U.S. and/or the global economy could lengthen sales cycles or cause delays in closing new business opportunities.

     Our profitability is significantly influenced by our ability to increase capacity utilization in our CMCs, to increase the number of new or expanded programs and our success at managing personnel turnover and employee costs. Managing our costs is critical since we continue to see pricing pressure within our industry.

     Our potential clients typically obtain bids from multiple vendors and evaluate many factors in selecting a service provider including, among other factors, the scope of services offered, the service record of a vendor, and price. We generally price our bids with a long-term view of profitability and, accordingly, we consider all of our fixed and variable costs in developing our bids. We believe that our competitors may bid business based upon a short-term view, as opposed to our longer-term view, resulting in a lower price bid. While we believe our clients’ perceptions of the value we provide results in our being successful in certain competitive bid situations, there are often situations where a client may prefer a lower cost. Because of this competitive factor, the time necessary to implement new client programs and that the third quarter is seasonally slower in some international regions, we currently estimate that our revenue for the third quarter will be approximately the same as the second quarter.

     Our industry is very labor-intensive and the majority of our operating costs relate to wages, costs of employee benefits and employment taxes. An improvement in the local or global economies where our CMCs are located could lead to increased labor-related costs. The industry trend of servicing clients from off-shore locations adds to cost pressures as the

competitive market for qualified personnel increases wages and benefits. In addition, our industry experiences high personnel turnover, and the length of training required to implement new programs continues to increase due to increased complexities of our clients’ programs. This may create challenges if we obtain several significant new clients or implement several new, large-scale programs, and need to recruit, hire and train qualified personnel at an accelerated rate.

     Our success in improving our profitability will depend on successful execution of a comprehensive business plan, including the following broad steps:

	•		increasing sales to absorb unused capacity in existing global CMCs;
	•		reducing costs and continued focus on cost controls; and
	•		managing our workforce in domestic and international CMCs in a cost-effective manner.

Database Marketing and Consulting

     Our Database Marketing and Consulting segment has contracts with more than 5,000 automobile dealers representing 27 different brand names. These contracts generally, many of which are governed by agreements with the automobile manufacturers, have terms ranging from 12 to 24 months. For a few major automotive manufacturers, the automotive manufacturer collects from the individual automobile dealers on our behalf. Our average collection period is 30 days.

     A majority of revenue from this segment is generated utilizing a database and contact engine to promote the service business of automobile dealership customers using targeted marketing solutions through mail, the “web”, e-mail or phone. This segment was expected to operate at a smaller loss for the second quarter compared to the first quarter of 2005. However, a combination of factors contributed to this segment operating at a loss of approximately $3.4 million during the second quarter (see discussion below). In connection with our new program with Ford (whose dealers represent approximately 58% of the revenue of our Database Marketing and Consulting segment), the terms of our existing contract with Ford were amended such that we agreed to absorb dealer subsidies in return for anticipated additional dealers and existing dealers increasing their utilization of our services. Due to a delay in the launch of the new Ford program and less than expected dealer growth and utilization, these subsidies, which are recorded as a reduction of revenue, have resulted in the program profitability being less than anticipated. As a result of cost savings and sales initiatives we plan to employ, we expect this segment to operate at profit, before corporate allocations during the fourth quarter. During the six months ended June 30, 2005, this segment generated positive cash flow, and we expect it will generate positive cash flow during 2005.

     We plan to focus on the following during 2005:

	•		increasing revenue by expanding our offerings;
	•		diversifying our customer base by establishing new, and leveraging existing, relationships with dealer groups and new automotive manufacturers;
	•		continuing to drive cost reductions through a combination of reductions and relocations in force and increased operational effectiveness; and
	•		acquiring business platforms for similar and related services.

     The clients of our Database Marketing and Consulting segment, as well as our joint venture with Ford, come primarily from the auto industry. That industry is currently reporting declining earnings, which may result in lower volumes or place additional pricing pressures on our operations.

Overall

     As shown in the “Financial Comparison” on page 24, we believe that, for the first half of 2005, we have been successful in improving income from operations. The increase for the first half of 2005 (excluding the Database Marketing and Consulting segment results and other factors separately identified in that table) is attributable to a variety of factors such as our multi-phased cost reduction plan, transitioning work on certain client programs to lower cost operating centers, and taking actions to improve individual client profit margins and/or eliminate unprofitable client programs. However, during the three months ended June 30, 2005, our income from operations, excluding other factors separately identified in the table, declined, on a year over year basis, for the first time in 5 quarters. We attribute that decline principally to i) costs of approximately $3.5 million to execute our strategy to increase the size of our sales organization and the delivery of new products, ii) a reduction of approximately $2.0 million from the year ago quarter in performance-based pricing from a certain client program, iii) an increase in the loss in our United Kingdom operations of approximately $0.5 million arising from the

loss of client programs and costs of additions to the United Kingdom sales organization. These declines in operating income have been offset, in part, by approximately $2 million of improved gross margin in Latin America as a result of continuing revenue growth and operational improvements.

     We implemented an $80 million profit improvement plan starting 24 months ago to address known changes in our business and, in particular, the decline in revenue and operating income due to the declining minimum commitments of one of our significant clients. We believe this plan, among other factors, enabled us to operate profitably during the past eight quarters. These improvements were achieved primarily through cost savings in the areas of CMC operations, telecommunications, professional fees, insurance and reduced interest expense associated with our debt-restructuring plan.

     As a result of these initiatives, our operational cash flow improved and, coupled with tax planning strategies providing repatriation of cash from international subsidiaries to the U.S., allowed us to reduce our indebtedness. As such, we expect lower interest expense in future periods, unless we incur additional indebtedness to finance acquisitions or to fund our stock repurchase program.

Critical Accounting Policies

     We have identified the policies below as critical to our business and results of operations. For further discussion on the application of these and other accounting policies, see Note 1 to the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004.

     Our reported results are impacted by the application of the following accounting policies, certain of which require management to make subjective or complex judgments. These judgments involve making estimates about the effect of matters that are inherently uncertain and may significantly impact quarterly or annual results of operations. Specific risks associated with these critical accounting policies are described in the following paragraphs.

     For all of these policies, management cautions that future events rarely develop exactly as expected, and the best estimates routinely require adjustment. Descriptions of these critical accounting policies follow:

Revenue Recognition. We recognize revenue at the time services are performed. Our Customer Management Services business recognizes revenue under production rate and performance-based models, which are:

     Production Rate-Revenue is recognized based on the billable hours or minutes of each CSR as defined in the client contract. The rate per billable hour or minute is based on a predetermined contractual rate. This contractual rate can fluctuate based on our performance against certain pre-determined criteria related to quality and performance.

     Performance-based-Under performance-based arrangements, we are paid by our clients based on achievement of certain levels of sales or other client-determined criteria specified in the client contract. We recognize performance-based revenue by measuring our actual results against the performance criteria specified in the contracts. Amounts collected from customers prior to the performance of services are recorded as customer advances.

     Hybrid – Under hybrid models we are paid a fixed fee or production element as well as a performance-based element.

     Certain client programs provide for adjustments to monthly billings based upon whether we meet or exceed certain performance criteria as set forth in the contract. Increases or decreases to monthly billings arising from such contract terms are reflected in revenue as incurred.

     Our Database Marketing and Consulting segment recognizes revenue when services are rendered. Most agreements require the billing of predetermined monthly rates. Where the contractual billing periods do not coincide with the periods over which services are provided, the Company recognizes revenue straight-line over the life of the contract (typically six to twenty-four months).

     From time to time we make certain expenditures related to acquiring contracts (recorded as Contract Acquisition Costs, Net in the accompanying Condensed Consolidated Balance Sheets). Those expenditures are amortized each quarter in proportion to the revenue earned from the related contract to total expected revenue over the life of the contract and are recorded as a reduction to revenue.

     Some of our contracts are billed in advance. Accordingly, amounts billed and collected but not earned under these contracts are excluded from revenue and included in customer advances and deferred income.

Income Taxes. We account for income taxes under the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 109, “Accounting for Income Taxes” (“SFAS 109”), which requires recognition of deferred tax assets and liabilities for the expected future income tax consequences of transactions that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. When circumstances warrant, we assess the likelihood that our net deferred tax assets will more likely than not be recovered from future projected taxable income.

SFAS No. 109 provides for the weighing of positive and negative evidence in determining whether it is more likely than not that a deferred tax asset is recoverable. We prepare a forecast of future taxable income, including domestic and international operating results and the reversal of existing temporary differences between income recognized under accounting principles generally accepted in the U.S. (“GAAP”) and income for federal income tax reporting purposes. Relevant accounting guidance suggests that a recent history of cumulative losses constitutes significant negative evidence, and that future expectations about taxable income are overshadowed by such recent losses. Accordingly, the expectations of future taxable income would generally be limited to no more than two or three years for generating sufficient income to recover deferred tax assets.

Based upon assessments of recoverability of our deferred tax assets, our valuation allowance was $20.7 million as of June 30, 2005, and is essentially unchanged from December 31, 2004. This valuation allowance is principally related to deferred tax assets associated with the local operations in the U.S., Spain, Brazil, Argentina, Korea and India.

     We routinely review the facts and circumstances surrounding the valuation allowance and the probability of utilizing deferred tax assets on a jurisdiction by jurisdiction basis. This review includes, among other factors, cumulative and forecasted taxable income, business trends and tax planning strategies. It is possible, that as a result of such a review, the preponderance of the evidence may suggest that the U.S. (approximately $14.1 million) or any individual foreign valuation allowance is no longer required (in whole or in part) and, accordingly, that amount of the valuation allowance would be reversed into income.

Goodwill. Goodwill is tested for impairment at least annually on reporting units one level below the segment level. 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. Fair value can be determined based on discounted cash flows, comparable sales or valuations of other similar businesses. Our policy is to test goodwill for impairment in the fourth quarter of each year unless an indicator of impairment arises during an intervening quarter.

     The most significant assumptions used in this analysis are those made in estimating future cash flows. In estimating future cash flows, we generally use the financial assumptions in our internal forecasting model such as projected capacity utilization, projected changes in the prices we charge for our services and projected labor costs. We then use a discount rate we consider appropriate for the country where the business unit is providing services. If actual results are less than the assumptions used in performing the impairment test, the fair value of the reporting units may be significantly lower, causing the carrying value to exceed the fair value and indicating impairment had occurred. Based on the analysis performed in the fourth quarter of 2004, there was no impairment of the December 31, 2004 goodwill balance of $30.6 million. If projected revenue used in the December 2004 analyses of goodwill was 10% less than the forecasts (the projections assumed revenue growth rates ranging from -20% to 23% per annum over a three-year period), there would still be no impairment to goodwill.

     For the three month periods ended June 30, 2005 and 2004, and the six month periods ended June 30, 2005 and 2004, one client represented 42%, 48%, 43% and 48% of the revenue in the Asia Pacific region, respectively. One of this client’s programs is up for renewal during 2005 and we anticipate that contract will be renewed. If we are not successful in obtaining a renewal with satisfactory terms, we could incur an impairment of goodwill and, potentially, certain long-lived assets. The goodwill reported in the accompanying Condensed Consolidated Balance Sheets for the Asia Pacific region is approximately $5.4 million as of June 30, 2005.

     Our Database Marketing and Consulting Segment has recently experienced operating losses. We have plans to improve the profitability of that segment that we believe will be implemented by the fourth quarter of 2005. We perform our annual goodwill impairment test during the fourth quarter and, accordingly, were our plans not to be effective, we could incur an impairment of goodwill. The goodwill reported in the accompanying Condensed Consolidated Balance Sheets for our Database Marketing and Consulting segment is approximately $13.0 million as of June 30, 2005.

Restructuring Liability. We routinely assess the profitability and utilization of our CMCs. In some cases we have chosen to close under-performing CMCs and make reductions in force to enhance future profitability. We follow SFAS No. 146,

“Accounting for Costs Associated with Exit or Disposal Activities” (“SFAS 146”), which specifies that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred instead of upon commitment to a plan.

     A significant assumption used in determining the amount of estimated liability for closing CMCs and other corporate facilities is the estimated liability for future lease payments on vacant centers, which we determine based on a third party broker’s assessment of our ability to successfully negotiate early termination agreements with landlords and/or our ability to sublease the premises. If our assumptions regarding early termination and the timing and amounts of sublease payments prove to be inaccurate, we may be required to record additional losses, or conversely, a future gain, in our Condensed Consolidated Statements of Operations.

Impairment of Long-Lived Assets. We evaluate the carrying value of our individual CMCs in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”), to assess whether future operating results are sufficient to recover the carrying costs of these long-lived assets. When the operating results of a center have deteriorated to the point it is likely that losses will continue for the foreseeable future, or we expect that a CMC will be closed or disposed of before the end of its estimated useful life, we select the CMC for further review.

     For CMCs selected for further review, we estimate the probability-weighted future cash flows from operating the CMC over its useful life. Significant judgment is involved in projecting future capacity utilization, pricing of services, labor costs and the estimated useful life of the center. Additionally, we do not subject CMCs that have been operated for less than two years or those centers that have been impaired within the past two years (the “Two Year Rule”) to the same test because we believe sufficient time is necessary to establish a market presence and build a customer base for such new or modified centers in order to adequately assess recoverability. However, such CMCs are nonetheless evaluated in case other factors would indicate an impairment in value had occurred. For impaired CMCs, we write the assets down to estimated fair market value. If the assumptions used in performing the impairment test prove insufficient, the estimated fair value of the CMCs may be significantly lower, thereby causing the carrying value to exceed fair value and indicating an impairment has occurred.

     A sensitivity analysis of the impairment evaluation assuming that the future results were 10% less than the current operating performance for these CMC’s indicated that an impairment of approximately $8.9 million would arise as shown in the table below. However, for the CMC’s tested, the current probability-weighted projection scenarios indicated that an impairment had not occurred as of June 30, 2005.

     The following table summarizes the sensitivity analysis performed at June 30, 2005 (dollars in thousands):

		Net								Additional
		Book				Number				Impairment Under
		Value				Of CMCs				Sensitivity Test
Tested based on Two Year Rule
Positive cash flow in period		$	59,224				52			$	—
Negative cash flow in period			3,470				5				316
			62,694				57				316
Not tested based on Two Year Rule
Positive cash flow in period			1,339				4				1,339
Negative cash flow in period			7,285				6				7,285
			8,624				10				8,624
Total
Positive cash flow in period			60,563				56				1,339
Negative cash flow in period			10,755				11				7,601
		$	71,318				67			$	8,940

     Of the ten CMCs not tested based on the Two Year Rule, three become eligible for testing during fiscal 2005. Of those three, one is currently experiencing negative cash flows and becomes eligible for testing during the fourth quarter. The amount of impairment under the sensitivity test (included in the table above) for that CMC is $1.2 million.

     The markets experiencing negative cash flow includes Korea and United Kingdom, which are international markets we are focused on improving. In the event we are unable to improve operations, resulting in improved earnings and cash flow, we may be required to record future impairment losses of approximately $2.9 million and $0.7 million for Korea and United Kingdom, respectively, excluding charges related to exit or disposal activities, if any.

     We also assess the realizable value of capitalized software on a quarterly basis, based upon current estimates of future cash flows from services utilizing the software (principally utilized by our Database Marketing and Consulting segment).

Contingencies. We have established an allowance for doubtful accounts to reserve for uncollectible accounts receivable. Each quarter, management reviews the receivables on an account-by-account basis and assigns a probability of collection. Management judgment is used in assessing the probability of collection. Factors considered in making this judgment are the age of the identified receivable, client’s financial condition, previous client history and any recent communications with the client.

     We record an allowance for pending litigation and claims that are probable and reasonably estimable. Each quarter, management reviews these matters on a case-by-case basis and assigns probability of loss based upon the assessment of in-house counsel and outside counsel.

Explanation of Key Metrics and Other Items

Costs of services. “Costs of services” principally include costs incurred in connection with our customer management operations and database marketing services, including direct labor, telecommunications, printing, postage and certain fixed costs associated with CMCs.

Selling, general and administrative expenses. “Selling, general and administrative expenses” primarily include employee-related costs associated with administrative services such as sales, marketing, product development, legal, information systems, accounting and finance. It also includes outside professional fees (i.e. legal and accounting services) and building maintenance expense for non-CMC facilities and other items associated with administration.

Restructuring charges, net. “Restructuring charges, net” primarily include costs incurred in conjunction with reductions in force or decisions to exit facilities, primarily termination benefits and lease liabilities, net of expected sublease rentals.

Interest expense. “Interest expense” includes interest expense and amortization of debt issuance costs associated with our grants, debt and capitalized lease obligations.

Other expenses. The main components of “Other expenses” are non-recurring, de minimis expenditures not directly related to our operating activities, such as corporate legal settlements and foreign exchange translation losses.

Other income. The main components of “Other income” are miscellaneous receipts not directly related to our operating activities, such as recognized grant income, foreign exchange translation gains and legal settlements.

Free cash flow. We define free cash flow as “Net cash flows from operating activities” less “Purchases of property and equipment,” as shown on our Consolidated Statements of Cash Flows.

Quarterly average daily revenue. We define quarterly average daily revenue as net revenue for the fiscal quarter divided by calendar days during the fiscal quarter.

Days sales outstanding. We define days sales outstanding (“DSO”) as net accounts receivable divided by quarterly average daily revenue.

Presentation of Non-GAAP Measurements

Free Cash Flow. Free cash flow is a non-GAAP liquidity measurement. We believe free cash flow is useful to our investors because it measures, during a given period, the amount of cash generated that is available for servicing debt obligations and investments other than purchases of property and equipment. Free cash flow is not a measure determined in accordance with (“GAAP”) and should not be considered a substitute for “Operating Income”, “Net Income”, “Net Cash Flows from Operating Activities” or any other measure determined in accordance with GAAP. We believe this non-GAAP liquidity measure is useful in addition to the most directly comparable GAAP measure of “Net Cash Flows from Operating Activities” because free cash flow includes investments in operational assets. Free cash flow does not represent residual cash available for discretionary expenditures, since it includes cash required for debt service. Free cash flow also excludes cash which may be necessary for acquisitions, investments and other needs that may arise. The following table reconciles free cash flow to “Net Cash Flow from Operating Activities”, the most directly comparable GAAP measure:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2005				2004				2005				2004
		(Amounts in thousands)
Free cash flow		$	11,041			$	(17,562	)		$	21,742			$	(3,564	)
Add back:
Purchases of property and equipment			9,174				8,477				13,571				20,343
Net cash flows from operating activities		$	20,215			$	(9,085	)		$	35,313			$	16,779

RESULTS OF OPERATIONS

Operating Review

     The following tables are presented to facilitate Management’s Discussion and Analysis (dollars in thousands):

		Three Months Ended June 30,
						% of								% of
		2005				Revenue				2004				Revenue				$ Change				% Change
Revenue:
North American Customer Care		$	151,670				59.7	%		$	161,658				60.9	%		$	(9,988	)			(6.2	)%
International Customer Care			81,141				32.0	%			79,184				29.8	%			1,957				2.5	%
Database Marketing and Consulting			21,122				8.3	%			24,689				9.3	%			(3,567	)			(14.4	)%
		$	253,933				100.0	%		$	265,531				100.0	%		$	(11,598	)			(4.4	)%
Costs of Services:
North American Customer Care		$	111,326				73.4	%		$	118,902				73.6	%		$	(7,576	)			(6.4	)%
International Customer Care			64,602				79.6	%			65,360				82.5	%			(758	)			(1.2	)%
Database Marketing and Consulting			11,233				53.2	%			10,412				42.2	%			821				7.9	%
		$	187,161				73.7	%		$	194,674				73.3	%		$	(7,513	)			(3.9	)%
Selling, General and Administrative:
North American Customer Care		$	19,647				13.0	%		$	17,066				10.6	%		$	2,581				15.1	%
International Customer Care			15,670				19.3	%			13,899				17.6	%			1,771				12.7	%
Database Marketing and Consulting			10,793				51.1	%			7,812				31.6	%			2,981				38.2	%
		$	46,110				18.2	%		$	38,777				14.6	%		$	7,333				18.9	%
Depreciation and Amortization:
North American Customer Care		$	6,814				4.5	%		$	7,499				4.6	%		$	(685	)			(9.1	)%
International Customer Care			4,266				5.3	%			4,276				5.4	%			(10	)			(0.2	)%
Database Marketing and Consulting			2,603				12.3	%			2,431				9.8	%			172				7.1	%
		$	13,683				5.4	%		$	14,206				5.4	%		$	(523	)			(3.7	)%
Restructuring Charges, net:
North American Customer Care		$	18				0.0	%		$	180				0.1	%		$	(162	)			(90.0	)%
International Customer Care			60				0.1	%			192				0.2	%			(132	)			(68.8	)%
Database Marketing and Consulting			(88	)			(0.4	)%			(50	)			(0.2	)%			(38	)			76.0	%
		$	(10	)			0.0	%		$	322				0.1	%		$	(332	)			(103.1	)%
Impairment Loss:
North American Customer Care		$	—				0.0	%		$	—				0.0	%		$	—				0.0	%
International Customer Care			2,537				3.1	%			2,641				3.3	%			(104	)			3.9	%
Database Marketing and Consulting			—				0.0	%			—				0.0	%			—				0.0	%
		$	2,537				1.0	%		$	2,641				1.0	%		$	(104	)			0.0	%
Income (Loss) from Operations:
North American Customer Care		$	13,865				9.1	%		$	18,011				11.1	%		$	(4,146	)			(23.0	)%
International Customer Care			(5,994	)			(7.4	)%			(7,184	)			(9.1	)%			1,190				16.6	%
Database Marketing and Consulting			(3,419	)			(16.2	)%			4,084				16.5	%			(7,503	)			(183.7	)%
		$	4,452				1.8	%		$	14,911				5.6	%		$	(10,459	)			(70.1	)%
Other Income (Expense):		$	132				0.1	%		$	(8,888	)			(3.3	)%		$	9,020				101.5	%
Provision for Income Taxes:		$	623				0.2	%		$	3,675				1.4	%		$	(3,052	)			(83.0	)%

		Six Months Ended June 30,
						% of								% of
		2005				Revenue				2004				Revenue				$ Change				% Change
Revenue:
North American Customer Care		$	303,922				59.8	%		$	323,934				60.7	%		$	(20,012	)			(6.2	)%
International Customer Care			161,561				31.8	%			159,608				29.9	%			1,953				1.2	%
Database Marketing and Consulting			42,776				8.4	%			49,987				9.4	%			(7,211	)			(14.4	)%
		$	508,259				100.0	%		$	533,529				100.0	%		$	(25,270	)			(4.7	)%
Costs of Services:
North American Customer Care		$	224,944				74.0	%		$	245,408				75.8	%		$	(20,495	)			(8.4	)%
International Customer Care			130,720				80.9	%			131,388				82.3	%			(668	)			(0.5	)%
Database Marketing and Consulting			22,507				52.6	%			21,609				43.2	%			929				4.3	%
		$	378,171				74.4	%		$	398,405				74.7	%		$	(20,234	)			(5.1	)%
Selling, General and Administrative:
North American Customer Care		$	39,062				12.9	%		$	33,760				10.4	%		$	5,753				17.3	%
International Customer Care			29,932				18.5	%			27,693				17.4	%			1,938				6.9	%
Database Marketing and Consulting			21,092				49.3	%			17,690				35.3	%			3,252				18.2	%
		$	90,086				17.7	%		$	79,143				14.8	%		$	10,943				13.8	%
Depreciation and Amortization:
North American Customer Care		$	14,272				4.7	%		$	16,511				5.1	%		$	(2,239	)			(13.6	)%
International Customer Care			8,604				5.3	%			8,754				5.5	%			(150	)			(1.7	)%
Database Marketing and Consulting			5,115				12.0	%			4,923				9.8	%			192				3.9	%
		$	27,991				5.5	%		$	30,188				5.7	%		$	(2,197	)			(7.3	)%
Restructuring Charges, net:
North American Customer Care		$	546				0.2	%		$	865				0.3	%		$	(319	)			(36.9	)%
International Customer Care			85				0.1	%			732				0.5	%			(647	)			(88.4	)%
Database Marketing and Consulting			312				0.7	%			567				1.1	%			(255	)			(45.0	)%
		$	943				0.2	%		$	2,164				0.4	%		$	(1,221	)			(56.4	)%
Impairment Loss:
North American Customer Care		$	—				0.0	%		$	—				0.0	%		$	—				0.0	%
International Customer Care			2,537				1.6	%			2,641				1.7	%			(104	)			(3.9	)%
Database Marketing and Consulting			—				0.0	%			—				0.0	%			—				0.0	%
		$	2,537				0.5	%		$	2,641				0.5	%		$	(104	)			(3.9	)%
Income (Loss) from Operations:
North American Customer Care		$	25,098				8.3	%		$	27,509				8.4	%		$	(2,712	)			(9.8	)%
International Customer Care			(10,317	)			(6.4	)%			(11,600	)			(7.3	)%			1,584				13.3	%
Database Marketing and Consulting			(6,250	)			(14.6	)%			5,079				10.5	%			(11,329	)			(223.1	)%
		$	8,531				1.7	%		$	20,988				3.9	%		$	(12,457	)			(59.4	)%
Other Income (Expense):		$	1,006				0.2	%		$	(11,248	)			(2.1	)%		$	12,254				108.9	%
Provision for Income Taxes:		$	2,772				0.5	%		$	6,197				1.2	%		$	(3,425	)			(55.3	)%