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

For the quarterly period ended September 30, 2005

o		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 001-11919

TeleTech Holdings, Inc.

(Exact name of Registrant as specified in its charter)

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

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

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES o NO þ

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

As of October 24, 2005, 72,591,289 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—September 30, 2005 (unaudited) and December 31, 2004		3
Condensed Consolidated Statements of Operations—Three Months and Nine Months Ended September 30, 2005 and 2004 (unaudited)		4
Condensed Consolidated Statement of Stockholders’ Equity—As of and For the Nine Months Ended September 30, 2005 (unaudited)		5
Condensed Consolidated Statements of Cash Flows—Nine Months Ended September 30, 2005 and 2004 (unaudited)		6
Notes to Unaudited Condensed Consolidated Financial Statements—September 30, 2005		7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		13
Item 3. Quantitative and Qualitative Disclosures about Market Risk		29
Item 4. Controls and Procedures		30
PART II. OTHER INFORMATION		30
Item 1. Legal Proceedings		30
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		30
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

CONDENSED CONSOLIDATED BALANCE SHEETS

		September 30,				December 31
		2005				2004
		(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	55,463			$	75,066
Accounts receivable, net			184,097				148,627
Prepaid and other assets			38,115				31,579
Income taxes receivable			14,055				16,154
Deferred tax assets, net			11,406				6,609
Total current assets			303,136				278,035
PROPERTY AND EQUIPMENT, net			122,497				132,214
OTHER ASSETS:
Contract acquisition costs, net			13,825				14,607
Deferred tax assets, net			28,587				18,454
Goodwill			32,055				30,613
Other assets			19,603				22,872
Total assets		$	519,703			$	496,795
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable		$	32,218			$	23,204
Accrued employee compensation and benefits			65,379				54,376
Other accrued expenses			42,407				32,824
Income taxes payable			24,774				15,226
Customer advances and deferred income			8,050				5,017
Deferred tax liability			3,822				5,245
Current portion of long-term debt			192				300
Total current liabilities			176,842				136,192
LONG-TERM LIABILITIES:
Long-term debt and capital lease obligations, net of current portion:
Long-term debt and capital lease obligations			2,361				377
Grant advances			6,880				7,287
Other liabilities			15,006				13,936
Deferred tax liability			7,183				8,586
Total liabilities			208,272				166,378
MINORITY INTEREST			5,733				7,872
STOCKHOLDERS’ EQUITY:
Stock purchase warrants			5,100				5,100
Common stock; $.01 par value; 150,000,000 shares authorized; 71,048,152 and 74,931,907 shares, respectively, issued and outstanding			712				750
Additional paid-in capital			160,472				199,063
Deferred compensation			—				(74	)
Accumulated other comprehensive income			6,884				3,249
Retained earnings			132,530				114,457
Total stockholders’ equity			305,698				322,545
Total liabilities and stockholders’ equity		$	519,703			$	496,795

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

TELETECH HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

		Three Months Ended								Nine Months Ended
		September 30, 2005								September 30, 2005
		2005				2004				2005				2004
REVENUE		$	274,259			$	258,347			$	782,518			$	791,876
OPERATING EXPENSES:
Costs of services			202,492				188,808				580,663				587,213
Selling, general and administrative expenses			46,642				43,072				136,728				122,215
Depreciation and amortization			12,659				14,304				40,650				44,492
Restructuring charges, net			537				(54	)			1,480				2,110
Impairment losses			—				—				2,537				2,641
Total operating expenses			262,330				246,130				762,058				758,671
INCOME FROM OPERATIONS			11,929				12,217				20,460				33,205
OTHER INCOME (EXPENSE):
Interest income			882				2,264				2,448				3,281
Interest expense			(727	)			(2,766	)			(1,931	)			(8,266	)
Other, net			369				158				1,013				1,039
Debt restructuring charges			—				(2,756	)			—				(10,402	)
INCOME BEFORE INCOME TAXES AND MINORITY INTEREST			12,453				9,117				21,990				18,857
Provision (benefit) for income taxes			432				(1,372	)			3,204				4,825
INCOME BEFORE MINORITY INTEREST			12,021				10,489				18,786				14,032
Minority interest			(401	)			68				(713	)			316
NET INCOME		$	11,620			$	10,557			$	18,073			$	14,348
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic			71,650				74,612				72,946				74,733
Diluted			72,591				75,944				74,604				75,909
NET INCOME PER SHARE:
Basic		$	0.16			$	0.14			$	0.25			$	0.19
Diluted		$	0.16			$	0.14			$	0.24			$	0.19

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

TELETECH HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(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			—				—				—				—				—				—				18,073				18,073				18,073
Other comprehensive income:
Translation adjustments			—				—				—				5,032				—				—				—				5,032				5,032
Derivative valuation, net of tax			—				—				—				(1,397	)			—				—				—				(1,397	)			(1,397	)
																															3,635
Comprehensive income			—				—				—				—				—				—				—				21,708
Exercise of stock options			907				6				5,011				—				—				—				—								5,017
Employee stock purchase plan			59				1				475				—				—				—				—								476
Purchases of common stock			(4,850	)			(45	)			(44,221	)			—				—				—				—								(44,266	)
Amortization of deferred compensation			—				—				—				—				74				—				—								74
Other			—				—				144				—				—				—				—								144
Balances, September 30, 2005			71,048			$	712			$	160,472			$	6,884			$	—			$	5,100			$	132,530							$	305,698

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

TELETECH HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

		Nine Months Ended
		September 30,
		2005				2004
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	18,073			$	14,348
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			40,650				44,492
Amortization of contract acquisition costs			2,942				3,474
Minority interest			713				(257	)
Provision for doubtful accounts			378				1,859
Impairment losses			3,058				2,641
Loss on disposal of assets			74				—
Deferred income taxes			(17,763	)			(2,903	)
Tax benefit from stock option exercise			1,544				971
Other			—				(9	)
Changes in assets and liabilities:
Accounts receivable			(35,848	)			(16,688	)
Prepaid and other assets			(4,281	)			2,366
Accounts payable and accrued expenses			39,089				13,369
Customer advances and deferred income			4,103				(3,764	)
Net cash provided by operating activities			52,732				59,899
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment			(23,614	)			(26,151	)
Investment in joint venture			—				(310	)
Capitalized software costs			(3,149	)			(2,241	)
Purchase of intangible assets			(240	)			—
Contract acquisition costs			(2,160	)			—
Other			—				(171	)
Net cash used in investing activities			(29,163	)			(28,873	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from bank debt			243,100				85,506
Payments on bank debt			(243,100	)			(116,300	)
Payments on long-term debt and capital lease obligations			(532	)			(77,854	)
Payment on grant advances			—				(5,780	)
Payments from minority shareholder			—				1,742
Payments to minority shareholder			(2,700	)			(2,700	)
Proceeds from exercise of stock options			3,473				4,081
Proceeds from employee stock purchase plan			476				—
Debt refinancing fees			—				(1,000	)
Purchases of treasury stock			(44,266	)			(5,000	)
Net cash used in financing activities			(43,549	)			(117,305	)
Effect of exchange rate changes on cash and cash equivalents			377				2,223
NET DECREASE IN CASH AND CASH EQUIVALENTS			(19,603	)			(84,056	)
CASH AND CASH EQUIVALENTS, beginning of period			75,066				141,655
CASH AND CASH EQUIVALENTS, end of period		$	55,463			$	57,599

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

TELETECH HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(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 September 30, 2005, and the results of operations and cash flows of the Company and its subsidiaries for the three and nine month periods ended September 30, 2005 and 2004. Operating results for the three and nine month periods ended September 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 September 30, 2005 and 2004 were estimated as of the grant date using a Black-Scholes option-pricing model with the following assumptions:

		September 30, 2005				September 30, 2004
Volatility			75.53	%			77.97	%
Dividend yield			0.0	%			0.0	%
Risk-free interest rate			3.75% — 4.17	%			3.39% — 3.67	%
Expected life (years)			4.43				5.44
Fair value per option		$	5.09			$	5.75

     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								Nine Months Ended
		September 30,								September 30,
		2005				2004				2005				2004
Net income as reported		$	11,620			$	10,557			$	18,073			$	14,348
Add (deduct): Stock-based employee compensation expense (reversal) included in reported net income, net of related tax effects			(1	)			149				31				283
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects			(995	)			(1,560	)			(3,109	)			(4,629	)
Pro forma net income		$	10,624			$	9,146			$	14,995			$	10,002
Net income per share:
Basic-as reported		$	0.16			$	0.14			$	0.25			$	0.19
Basic-pro forma		$	0.15			$	0.14			$	0.21			$	0.19
Diluted-as reported		$	0.16			$	0.14			$	0.24			$	0.19
Diluted-pro forma		$	0.15			$	0.12			$	0.21			$	0.13

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 SEC release, 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 inter-company 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 September 30, 2005 and 2004, approximately $0.7 million and $1.5 million, respectively, of income from operations in the International Customer Care segment was generated from these arrangements. For the nine months ended September 30, 2005 and 2004, approximately $2.2 million and $2.5 million, respectively, of income from operations in the International Customer Care segment was generated from these arrangements. The following table presents Revenue and Income (Loss) from Operations by segment:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2005				2004				2005				2004
		(Amounts in thousand)
Revenue:
North American Customer Care		$	170,930			$	157,387			$	474,852			$	481,321
International Customer Care			82,596				76,625				244,157				236,233
Database Marketing and Consulting			20,733				24,335				63,509				74,322
Total		$	274,259			$	258,347			$	782,518			$	791,876
Income (Loss) from Operations:
North American Customer Care		$	15,654			$	13,996			$	40,752			$	41,806
International Customer Care			(1,871	)			(2,898	)			(12,188	)			(14,799	)
Database Marketing and Consulting			(1,854	)			1,119				(8,104	)			6,198
Total		$	11,929			$	12,217			$	20,460			$	33,205

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

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2005				2004				2005				2004
		(Amounts in thousands)
Revenue:
United States		$	120,955			$	116,771			$	335,615			$	270,379
Asia Pacific			44,616				47,110				130,771				139,655
Canada			49,689				27,080				146,511				89,933
Europe			30,866				43,665				92,171				123,954
Latin America			28,133				23,721				77,450				167,955
Total		$	274,259			$	258,347			$	782,518			$	791,876

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								Nine Months Ended
		September 30,								September 30,
		2005				2004				2005				2004
Customer A			17.1				17.0				17.8				17.6
Customer B			9.9				12.8				10.6				13.8

     As of September 30, 2005, accounts receivable from customers A and B were $21.0 million and $11.7 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, the Company does not believe significant credit risks exist at September 30, 2005.

(3) COMPREHENSIVE INCOME (LOSS)

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

		Three Months Ended September 30,								Nine Months Ended September 30,
		2005				2004				2005				2004
						(Amounts in thousands)
Net income for the period		$	11,620			$	10,557			$	18,073			$	14,348
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments			5,755				5,321				5,032				(1,969	)
Gain (loss) on derivatives			(2,675	)			4,138				(1,397	)			1,644
Other comprehensive income (loss), net of tax			3,080				9,459				3,635				(325	)
Comprehensive income		$	14,700			$	20,016			$	21,708			$	14,023

     At September 30, 2005, Accumulated Comprehensive Income (Loss) consisted of $2.6 million and $4.3 million of foreign currency translation 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								Nine Months Ended
		September 30,								September 30,
		2005				2004				2005				2004
		(Amounts in thousands)
Shares used in basic per share calculation			71,650				74,612				72,946				74,733
Effects of dilutive securities:
Stock options			841				1,232				1,558				1,076
Restricted stock			100				100				100				100
Shares used in diluted per share calculation			72,591				75,944				74,604				75,909

(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 September 30, 2005 interest accrues at the weighted-average rate of 6.75%. As of September 30, 2005 and December 31, 2004, the Company had no outstanding borrowings under the credit facility.

(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.

     During the third quarter, the Company reached the decision that it was appropriate to reverse $9.9 million of the U.S. valuation allowance, which was $14.1 million at the end of the second quarter. The remaining U.S. valuation allowance of $4.2 million relates to the tax benefit of tax loss carryforwards in Spain (a branch of the U.S.). This change in judgment concerning the recoverability of deferred tax assets in the U.S. during future accounting periods comes as a result of several factors, including (i) the strength of new business and contracts signed during the third quarter, (ii) significant increases since the second quarter of 2005 in both current year and projected book income, and (iii) three years of cumulative book income in the U.S. As required by FAS 109, the valuation allowance was reversed into earnings during the quarter in which the change in judgment occurred. As of the end of the third quarter, the Company has a valuation allowance of $7.1 million related to foreign tax jurisdictions for a worldwide valuation allowance of $11.3 million.

     Also, during the third quarter the Company adopted a “Qualified Domestic Reinvestment Plan” under IRC Section 965, permitting the repatriation of foreign earnings as a cash dividend at significantly reduced U.S. tax rates. By adopting this plan, the Company repatriated approximately $38 million dollars of cash held offshore at a worldwide tax cost of $3.9 million.

(7) DERIVATIVES

     The Company follows the provisions of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”), as amended by SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities”. 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, with the exception of hedges on inter-company notes, 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 Argentina, 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 September 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
September 30, 2005:
Canadian Dollar			109.6			$	87.3			January 2007
Argentine Peso			9.2				3.2			July 2006
Philippines Peso			250.0				4.5			July 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 September 30, 2005 and 2004, the Company recorded gains of $1.1 million and $1.8 million, respectively, for settled derivative contracts, which are recorded in Revenue in the accompanying Condensed Consolidated Statements of Operations. During the nine months ended September 30, 2005 and 2004, the Company recorded gains of $4.7 million and $4.3 million, respectively, for settled derivative contracts, which are recorded in Revenue in the accompanying Condensed Consolidated Statements of Operations. As of September 30, 2005 and December 31, 2004, the Company had derivative assets of $9.7 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 short-term inter-company 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 September 30, 2005 and 2004, the Company recorded a transaction loss of $0.1 million and a transaction gain of $0.4 million, respectively, in Other Income (Expense) related to the inter-company receivables/payable balances generated from labor arbitrage activities. For the nine months ended September 30, 2005 and 2004, the Company recorded a transaction loss of $0.9 million and a transaction gain of $0.9 million, respectively, in Other Income (Expense) related to these activities.

(8) RESTRUCTURING CHARGES AND IMPAIRMENT LOSSES

     During the nine months ended September 30, 2005, the Company recognized restructuring charges in the amount of $1.5 million related to reductions in force across all three segments and its decision to exercise an early lease termination option.

     During the nine months ended September 30, 2004, the Company recognized approximately $2.1 million of restructuring charges related to reductions in force (across all three segments), partially offset by reduction of an estimated lease liability.

     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			521				1,058				1,579
Payments			—				(687	)			(687	)
Reversal of unused balances			—				(99	)			(99	)
Balances, September 30, 2005		$	1,120			$	505			$	1,625

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

     During the nine months ended September 30, 2005, the Company recognized impairment losses in the amount of $2.5 million related to its decision to close its Glasgow, Scotland facility.

(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 or 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.

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

     Letters of credit. At September 30, 2005 outstanding letters of credit and other performance guarantees totaled approximately $17.8 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: the Company’s belief that it’s continuing to see strong demand for its services; estimated revenue from new or expanded client business; the belief that the prospects for new business remain strong; achieving the Company’s expected profit improvement in its International operations; the ability to close and ramp new business opportunities that are currently being pursued with existing clients and potential 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 year-end 2007 financial goals and targeted cost reductions; the possibility of the Company’s Database Marketing and Consulting segment not increasing revenue, lowering costs, achieving similar operating results to its third quarter 2005 results, or returning to historic levels of profitability thereafter; the possibility of lower revenue or price pressure from clients experiencing a downturn or merger in their business; greater than anticipated competition in the customer care market, causing adverse pricing and more stringent contractual terms; risks associated with losing or not renewing 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 our 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 (see table below for classification of countries’ operations). 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.

North American Customer Care		International Customer Care
Canada		Argentina
India		Australia
Philippines		Brazil
United States		Germany
		Hong Kong
		Ireland
		Korea
		Malaysia
		Mexico
		New Zealand
		Scotland
		Singapore
		Spain

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 for 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 our 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. During the third quarter we incurred contract relocation costs of approximately $0.4 million and expect to incur a similar amount during the fourth quarter.

     We review our capacity quarterly and the demand for that capacity. In conjunction with these quarterly reviews, we may decide to 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.

     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 the majority of our accounts, 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. A combination of factors contributed to this segment operating at a loss of approximately $1.9 million during the third quarter. The primary factor is that our client attrition rate has exceeded our new account growth, resulting in a significant decrease in revenue from the prior year period. Secondly, in connection with our program with Ford (whose dealers represent approximately 64% of the revenue of our Database Marketing and Consulting segment), we agreed to absorb dealer subsidies in return for anticipated additional dealers and existing dealers increasing their utilization of our services. We have agreed with Ford to jointly devise a new program for 2006 and because of the preliminary nature of such matters, no assurances can be given that a new program will improve revenue or profitability or not cause the current trends to continue. Due to a delay in the launch of that 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. During the nine months ended September 30, 2005, although this segment reported an operating loss (as depreciation and amortization is 11% of revenue) this segment generated positive cash flow, and we expect it will generate positive cash flow during the remainder of 2005.

     We plan to focus on the following during 2005 and 2006:

	•		reducing our customer attrition rate by improving customer services and increasing customer contact;
	•		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 customer losses, lower volumes or place additional pricing pressures on our operations.

Overall

     As shown in the “Financial Comparison” on page 24, we believe that we have been successful in improving income from operations for our North American and International Customer Care segments. The increases for both the third quarter and the first nine months of 2005 (excluding the Database Marketing and Consulting segment results and other factors separately identified in that table) are attributable to a variety of factors such as our successfully performing under a short-term government program contract (which we currently expect to end prior to December 31, 2005), expansion of work on certain client programs, 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.

     We implemented an $80 million profit improvement plan starting in August 2003, 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 operation profitably during the past nine 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. We recently announced our plan for an additional $20 million of future cost savings.

     As a result of these initiatives, our operational cash flow improved and, coupled with tax planning strategies providing for the repatriation of cash from international subsidiaries to the U.S., allowed us to repay all of our outstanding bank debt as of September 30, 2005. As such, we expect lower interest expense in future periods, except for any 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, performance-based and hybrid 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.

     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 billings at 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) 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.

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 these analyses 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 an impairment had occurred.

     For the three month periods ended September 30, 2005 and 2004, and the nine month periods ended September 30, 2005 and 2004, one client represented 47.8%, 48.8%, 44.9% and 48.0% 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 September 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, in part, 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 $13.4 million as of September 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 the 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 their 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 had 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 $10.7 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 September 30, 2005.

     The following table summarizes the sensitivity analysis performed at September 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		$	50,494				52			$	—
Negative cash flow in period			3,499				6				3,499
			53,993				58				3,499
Not tested based on Two Year Rule
Positive cash flow in period			3,165				4				129
Negative cash flow in period			7,747				4				7,092
			10,912				8				7,221
Total
Positive cash flow in period			53,659				56				129
Negative cash flow in period			11,246				10				10,591
		$	64,905				66			$	10,720

     Of the 7 CMCs not tested based on the Two Year Rule, one becomes eligible for testing during the remainder fiscal 2005. That center is currently experiencing negative cash flows. However, we have recently put a new program into the CMC that increases utilization to 100% and, we believe, will allow us to recover the carrying value. The amount of impairment under the sensitivity test (included in the table above) for that CMC is $1.4 million.

     The CMCs 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 $2.6 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 provide 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 a liability 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, regional legal settlements, 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 transaction 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 transaction gains and corporate 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 in our Consolidated Statements of Cash Flows.

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

Days sales outstanding. We define days sales outstanding (“DSO”) as 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 accounting principles generally accepted in the United States (“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								Nine Months Ended
		September 30,								September 30,
		2005				2004				2005				2004
		(Amounts in thousands)
Free cash flow		$	7,376			$	37,312			$	29,118			$	33,748
Add back:
Purchases of property and equipment			10,043				5,808				23,614				26,151
Net cash flows from operating activities		$	17,419			$	43,120			$	52,732			$	59,899

RESULTS OF OPERATIONS

Operating Review

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

		Three Months Ended September 30,
						% of								% of
		2005				Revenue				2004				Revenue				$ Change				% Change
Revenue:
North American Customer Care		$	170,930				62.3	%		$	157,387				60.9	%		$	13,543				8.6	%
International Customer Care			82,596				30.1	%			76,625				29.7	%			5,971				7.8	%
Database Marketing and Consulting			20,733				7.6	%			24,335				9.5	%			(3,602	)			-14.8	%
		$	274,259				100.0	%		$	258,347				100.0	%		$	15,912				6.2	%
Costs of Services:
North American Customer Care		$	127,416				74.5	%		$	116,716				74.2	%		$	10,700				9.2	%
International Customer Care			63,695				77.1	%			61,254				79.9	%			2,441				4.0	%
Database Marketing and Consulting			11,381				54.9	%			10,838				44.5	%			543				5.0	%
		$	202,492				73.8	%		$	188,808				73.1	%		$	13,684				7.2	%
Selling, General and Administrative:
North American Customer Care		$	21,002				12.3	%		$	19,048				12.1	%		$	1,954				10.3	%
International Customer Care			16,579				20.1	%			14,026				18.3	%			2,553				18.2	%
Database Marketing and Consulting			9,061				43.7	%			9,998				41.1	%			(937	)			-9.4	%
		$	46,642				17.0	%		$	43,072				16.7	%		$	3,570				8.3	%
Depreciation and Amortization:
North American Customer Care		$	6,310				3.7	%		$	7,819				5.0	%		$	(1,509	)			-19.3	%
International Customer Care			4,193				5.1	%			4,126				5.4	%			67				1.6	%
Database Marketing and Consulting			2,156				10.4	%			2,359				9.7	%			(203	)			-8.6	%
		$	12,659				4.6	%		$	14,304				5.6	%		$	(1,645	)			-11.5	%
Restructuring Charges, net:
North American Customer Care		$	548				0.3	%		$	(192	)			-0.1	%		$	740				-385.4	%
International Customer Care			—				0.0	%			117				0.2	%			(117	)			-100.0	%
Database Marketing and Consulting			(11	)			-0.1	%			21				0.1	%			(32	)			-152.4	%
		$	537				0.2	%		$	(54	)			0.0	%		$	591				-1,094.4	%
Income (Loss) from Operations:
North American Customer Care		$	15,654				9.2	%		$	13,996				8.9	%		$	1,658				11.8	%
International Customer Care			(1,871	)			-2.3	%			(2,898	)			-3.8	%			1,027				35.4	%
Database Marketing and Consulting			(1,854	)			-8.9	%			1,119				4.6	%			(2,973	)			-265.7	%
		$	11,929				4.3	%		$	12,217				4.7	%		$	(288	)			-2.4	%
Other Income (Expense):		$	524				0.2	%		$	(3100	)			-1.2	%		$	3,624				116.9	%
Provision for Income Taxes:		$	432				0.2	%		$	(1,372	)			-0.5	%		$	1,804				-131.5	%

		Nine Months Ended September 30,
						% of								% of
		2005				Revenue				2004				Revenue				$ Change				% Change
Revenue:
North American Customer Care		$	474,852				60.7	%		$	481,321				60.8	%		$	(6,469	)			-1.3	%
International Customer Care			244,157				31.2	%			236,233				29.8	%			7,924				3.4	%
Database Marketing and Consulting			63,509				8.1	%			74,322				9.4	%			(10,813	)			-14.5	%
		$	782,518				100.0	%		$	791,876				100.0	%		$	(9,358	)			-1.2	%
Costs of Services:
North American Customer Care		$	352,360				74.2	%		$	362,155				75.2	%		$	(9,795	)			-2.7	%
International Customer Care			194,415				79.6	%			192,642				81.5	%			1,773				0.9	%
Database Marketing and Consulting			33,888				53.4	%			32,416				43.6	%			1,472				4.5	%
		$	580,663				74.2	%		$	587,213				74.2	%		$	(6,550	)			-1.1	%
Selling, General and Administrative:
North American Customer Care		$	60,064				12.6	%		$	52,357				10.9	%		$	7,707				14.7	%
International Customer Care			46,511				19.0	%			42,020				17.8	%			4,941				10.7	%
Database Marketing and Consulting			30,153				47.5	%			27,838				37.5	%			2,315				8.3	%
		$	136,728				17.5	%		$	122,215				15.4	%		$	14,513				11.9	%
Depreciation and Amortization:
North American Customer Care		$	20,582				4.3	%		$	24,330				5.1	%		$	(3,748	)			-15.4	%
International Customer Care			12,797				5.2	%			12,880				5.5	%			(83	)			-0.6	%
Database Marketing and Consulting			7,271				11.4	%			7,282				9.8	%			(11	)			-0.2	%
		$	40,650				5.2	%		$	44,492				5.6	%		$	(3,842	)			-8.6	%
Restructuring Charges, net:
North American Customer Care		$	1,094				0.2	%		$	673				0.1	%		$	(100	)			14.9	%
International Customer Care			85				0.0	%			849				0.4	%			(764	)			-90.0	%
Database Marketing and Consulting			301				0.5	%			588				0.8	%			(287	)			-48.8	%
		$	1,480				0.2	%		$	2,110				0.3	%		$	(1,151	)			-54.5	%
Impairment Losses:
North American Customer Care		$	—				0.0	%		$	—				0.0	%		$	—				0.0	%
International Customer Care			2,537				1.0	%			2,641				1.1	%			(104	)			0.0	%
Database Marketing and Consulting			—				0.0	%			—				0.0	%			—				0.0	%
		$	2,537				0.3	%		$	2,641				0.3	%		$	(104	)			-3.9	%
Income (Loss) from Operations:
North American Customer Care		$	40,752				8.6	%		$	41,806				8.7	%		$	(1,054	)			-2.5	%
International Customer Care			(12,188	)			-5.0	%			(14,799	)			-6.3	%			2,611				17.6	%
Database Marketing and Consulting			(8,104	)			-12.8	%			6,198				8.3	%			(14,302	)			-230.8	%
		$	20,460				2.6	%		$	33,205				4.2	%		$	(12,745	)			-38.4	%
Other Income (Expense):		$	1,530				0.2	%		$	(14,348	)			-1.8	%		$	15,878				110.7	%
Provision for Income Taxes:		$	3,204				0.4	%		$	4,825				0.6	%		$	(1,621	)			-33.6	%