##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 2006
 or
 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: 333-115328
 
 PeopleSupport, Inc.
  Delaware
    
    95-4695021(State or other jurisdiction
    
    (I.R.S. Employer Identification No.)of incorporation or organization)
 1100 Glendon Ave., Suite 1250, Los Angeles, California 90024
 (310) 824-6200
 
 þ o
  o þ o
 o þ




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##### 



PEOPLESUPPORT, INC.
FORM 10-Q
FOR THE QUARTER ENDED
June 30, 2006
 INDEX
 PagePART IFINANCIAL INFORMATIONITEM 1. Financial Statements (unaudited)
    
    
    3Consolidated Balance Sheets as of June 30, 2006 and December 31, 2005 (unaudited)
    
    
    3Consolidated Statements of Operations and Other Comprehensive Income for the three and six
months ended June 30, 2006 and 2005 (unaudited)
    
    
    4Consolidated Statements of Cash Flows for the six months ended June 30, 2006 and 2005 (unaudited)
    
    
    5Notes to Consolidated Financial Statements (unaudited)
    
    
    6ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    16ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    21ITEM 4. Controls and Procedures
    
    
    21PART IIOTHER INFORMATIONITEM 1. Legal Proceedings
    
    
    22ITEM 1A. Risk Factors
    
    
    22ITEM 4. Submission of Matters to a Vote of Security Holders
    
    
    23ITEM 6. Exhibits
    
    
    23Signature
    
    
    25EXHIBIT 10.1EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  Forward Looking and Cautionary Statements
 This quarterly report on Form 10-Q contains forward-looking statements within the meaning of
the federal securities laws that involve material risks and uncertainties, including without
limitation, statements about our expectations regarding our revenue, our clients, our expenses, our
anticipated cash needs, our estimates regarding our capital requirements and our needs for
additional financing. We generally identify forward-looking statements by using such terms as
may, will, could, should, potential, continue, expect, intend, plan, estimate,
anticipate, believe or similar phrases or the negatives of such terms. We base these statements
on our beliefs as well as assumptions we made using information currently available to us. These
forward-looking statements are subject to risks, uncertainties and assumptions, including those
identified below in Managements Discussion and Analysis of Financial Condition and Results of
Operations  Risk Factors, as well as other matters not yet known to us or not currently
considered material by us. Should one or more of these risks or uncertainties materialize, or
should underlying assumptions prove incorrect, actual results may vary materially from those
anticipated, estimated or projected. These risks, uncertainties and assumptions include, but are
not limited to, our dependence on a limited number of clients, negative public reaction to offshore
outsourcing and the effect of recently proposed legislation, competitive conditions in the markets
we serve, our ability to manage our growth, the risks associated with our operations in the
Philippines and Costa Rica, and other risks discussed in Managements Discussion and Analysis of
Financial Condition and Results of Operations  Risk Factors in this report. These forward-looking
statements represent our estimates and assumptions only as of the date of this report and, unless
required by law, we undertake no obligation to update or revise these forward-looking statements.
You should, however, review the factors and risks we describe in other reports, including our
report on Form 10-K , and registration statements that we file from time to time with the Securities
and Exchange Commission
 2




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##### Table of Contents



PART IFINANCIAL INFORMATION
 
 ITEM 1. Financial Statements
 PEOPLESUPPORT, INC. AND SUBSIDIARIES
 
 CONSOLIDATED BALANCE SHEETS
 (Unaudited, in thousands, except per share data)
 June 30,
    
    
    December 31,2006
    
    
    2005ASSETSCurrent assets:Cash and cash equivalents
    
    $
    16,729
    
    
    $
    27,760Marketable securities
    
    
    31,788
    
    
    
    23,853Accounts receivable, net of allowance
for doubtful accounts of $495 and $487,
respectively
    
    
    13,343
    
    
    
    8,414Deferred tax assets
    
    
    2,832
    
    
    
    4,226Prepaid expenses and other current assets
    
    
    3,222
    
    
    
    2,448Total current assets
    
    
    67,914
    
    
    
    66,701Property and equipment, net
    
    
    15,921
    
    
    
    10,622Deferred management incentive plan compensation
    
    
    427
    
    
    
    598Deferred tax assets
    
    
    15,791
    
    
    
    15,051Goodwill and other intangible assets
    
    
    8,261
    
    
    
    Other long-term assets
    
    
    2,537
    
    
    
    1,354Total assets
    
    $
    110,851
    
    
    $
    94,326LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    4,486
    
    
    $
    2,181Accrued liabilities
    
    
    6,700
    
    
    
    3,912Management incentive plan obligation
    
    
    475
    
    
    
    475Deferred revenue
    
    
    4,726
    
    
    
    3,481Current portion of capital lease obligations
    
    
    56
    
    
    
    Other current liabilities
    
    
    68
    
    
    
    69Total current liabilities
    
    
    16,511
    
    
    
    10,118Management incentive plan obligation
    
    
    474
    
    
    
    474Deferred rent
    
    
    1,370
    
    
    
    978Long-term portion of capital lease requirements
    
    
    40
    
    
    
    Other long-term liabilities
    
    
    582
    
    
    
    364Total liabilities
    
    
    18,977
    
    
    
    11,934Stockholders equity:Common stock, $.001 par value;
authorized 87,000 shares; 18,606 and
18,306 shares issued and outstanding at
June 30, 2006 and December 31, 2005,
respectively
    
    
    19
    
    
    
    18Additional paid-in capital
    
    
    115,125
    
    
    
    113,234Accumulated deficit
    
    
    (23,530
    )
    
    
    (30,214
    )Accumulated other comprehensive income
    
    
    260
    
    
    
    342Deferred stock compensation
    
    
    
    
    
    
    (988
    )Total stockholders equity
    
    
    91,874
    
    
    
    82,392Total liabilities and stockholders equity
    
    $
    110,851
    
    
    $
    94,326
 The accompanying notes are an integral part of these consolidated financial statements
 3




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PEOPLESUPPORT, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 AND OTHER COMPREHENSIVE INCOME
 (Unaudited, in thousands, except per share data)
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Revenue
    
    $
    25,947
    
    
    $
    14,739
    
    
    $
    48,994
    
    
    $
    28,795Cost of revenue (exclusive of management incentive plan and depreciation
expense shown below)
    
    
    15,946
    
    
    
    8,483
    
    
    
    29,360
    
    
    
    16,206Management incentive plan  cost of revenue
    
    
    67
    
    
    
    68
    
    
    
    135
    
    
    
    136Selling, general and administrative (exclusive of management incentive
plan expense shown below)
    
    
    4,688
    
    
    
    3,102
    
    
    
    9,597
    
    
    
    5,766Management incentive plan  selling, general and administrative
    
    
    18
    
    
    
    17
    
    
    
    36
    
    
    
    34Depreciation and amortization
    
    
    1,634
    
    
    
    1,117
    
    
    
    2,919
    
    
    
    2,133Income from operations
    
    
    3,594
    
    
    
    1,952
    
    
    
    6,947
    
    
    
    4,520Interest expense
    
    
    2
    
    
    
    
    
    
    
    5
    
    
    
    Interest income
    
    
    (489
    )
    
    
    (326
    )
    
    
    (912
    )
    
    
    (563
    )Other expense / (income)
    
    
    22
    
    
    
    6
    
    
    
    (1
    )
    
    
    16Income before provision for income taxes
    
    
    4,059
    
    
    
    2,272
    
    
    
    7,855
    
    
    
    5,067Provision for income taxes
    
    
    251
    
    
    
    33
    
    
    
    1,172
    
    
    
    72Net income
    
    
    3,808
    
    
    
    2,239
    
    
    
    6,683
    
    
    
    4,995Foreign currency translation adjustment
    
    
    (276
    )
    
    
    (181
    )
    
    
    (18
    )
    
    
    (4
    )Unrealized gain / (loss) on marketable securities:
    
    
    (30
    )
    
    
    10
    
    
    
    (64
    )
    
    
    (12
    )Comprehensive income
    
    $
    3,502
    
    
    $
    2,068
    
    
    $
    6,601
    
    
    $
    4,979Basic earnings per share
    
    $
    0.21
    
    
    $
    0.12
    
    
    $
    0.36
    
    
    $
    0.28Diluted earnings per share
    
    $
    0.20
    
    
    $
    0.12
    
    
    $
    0.35
    
    
    $
    0.26Basic weighted average shares outstanding
    
    
    18,511
    
    
    
    18,144
    
    
    
    18,467
    
    
    
    18,086Diluted weighted average shares outstanding
    
    
    19,348
    
    
    
    18,909
    
    
    
    19,251
    
    
    
    18,927
 The accompanying notes are an integral part of these consolidated financial statements
 4




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PEOPLESUPPORT, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited, in thousands)
 Six Months EndedJune 30,2006
    
    
    2005OPERATING ACTIVITIESNet income
    
    $
    6,683
    
    
    $
    4,995Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    2,920
    
    
    
    2,133Provision for doubtful accounts
    
    
    9
    
    
    
    (274
    )Stock-based compensation
    
    
    1,153
    
    
    
    464Management incentive plan
    
    
    171
    
    
    
    170Deferred income taxes
    
    
    894
    
    
    
    Tax benefits from employee stock option exercises
    
    
    (193
    )
    
    
    Gain on disposal of property and equipment
    
    
    
    
    
    
    (3
    )Changes in operating assets and liabilities:Accounts receivable
    
    
    (3,868
    )
    
    
    (1,823
    )Prepaid expenses and other assets
    
    
    (411
    )
    
    
    168Other long-term assets
    
    
    150
    
    
    
    (113
    )Accounts payable and accrued liabilities
    
    
    4,524
    
    
    
    781Deferred rent
    
    
    156
    
    
    
    Deferred revenue
    
    
    1,108
    
    
    
    2,099Net cash provided by operating activities
    
    
    13,296
    
    
    
    8,597INVESTING ACTIVITIESCollections applied to principal of receivable portfolios
    
    
    
    
    
    
    7Purchases of property and equipment
    
    
    (7,971
    )
    
    
    (4,608
    )Proceeds from sale of property and equipment
    
    
    
    
    
    
    8Purchases of marketable securities
    
    
    (11,000
    )
    
    
    (24,300
    )Maturities of marketable securities
    
    
    3,000
    
    
    
    300Acquisitions, net of cash received
    
    
    (8,968
    )
    
    
    Net cash used in investing activities
    
    
    (24,939
    )
    
    
    (28,593
    )FINANCING ACTIVITIESPayments of capital lease obligation
    
    
    (130
    )
    
    
    Tax benefits from employee stock option exercises
    
    
    193
    
    
    
    Proceeds from the exercise of stock options
    
    
    567
    
    
    
    181Net cash provided by financing activities
    
    
    630
    
    
    
    181Effect of exchange rate changes on cash
    
    
    (18
    )
    
    
    Net decrease in cash and cash equivalents
    
    
    (11,031
    )
    
    
    (19,815
    )Cash and cash equivalents, beginning of period
    
    
    27,760
    
    
    
    41,583Cash and cash equivalents, end of period
    
    $
    16,729
    
    
    $
    21,768NON-CASH INVESTING ACTIVITIESUnrealized holding losses on marketable securities
    
    $
    (64
    )
    
    $
    (12
    )Construction in progress costs incurred but not paid
    
    
    (723
    )
    
    
    (1,939
    )Common stock issued for acquisition (see Note 10)
    
    
    (966
    )
    
    
    Non-cash tax benefit from disqualifying dispositions
    
    
    48
    
    
    
    SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATIONInterest paid for the period
    
    $
    6
    
    
    $
    Taxes paid for the period
    
    
    78
    
    
    
    48
 The accompanying notes are an integral part of these consolidated financial statements
 5




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PEOPLESUPPORT, INC. AND SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (In thousands, except per share data)
 Note 1. Description and History of Business
   Note 2. Summary of Significant Accounting Policies
 Basis of Presentation
  Marketable Securities
  Goodwill and Other Intangible Assets
  Stock-Based Compensation Expense
  6




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PEOPLESUPPORT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
    Recent Accounting Pronouncements
    Note 3. Significant Customers
  For the Three Months
    
    For the Six MonthsEnded June 30,
    
    Ended June 30,2006
    
    2005
    
    2006
    
    2005% of Revenue
    
    % of RevenueCustomer A
    
    
    19
    %
    
    
    28
    %
    
    
    20
    %
    
    
    28
    %Customer B
    
    
    16
    
    
    
    19
    
    
    
    17
    
    
    
    20Customer C
    
    
    13
    
    
    
    9
    
    
    
    13
    
    
    
    8Customer D
    
    
    9
    
    
    
    13
    
    
    
    10
    
    
    
    13
 7




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PEOPLESUPPORT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
  As of June 30,2006
    
    2005Customer A
    
    
    13
    %
    
    
    33
    %Customer B
    
    
    22
    
    
    
    25Customer C
    
    
    1
    
    
    
    0Customer D
    
    
    7
    
    
    
    1
 Note 4. Cash, Cash Equivalents and Marketable Securities
  Cash Equivalents and Marketable Securities
 June 30,
    
    
    December 31,2006
    
    
    2005Cash
    
    $
    9,763
    
    
    $
    19,785Cash equivalents (government sponsored entities)
    
    
    6,966
    
    
    
    7,975Marketable securitiesAdjustable rate preferred bonds
    
    
    12,000
    
    
    
    9,000Government sponsored entities
    
    
    19,788
    
    
    
    14,853Total
    
    $
    48,517
    
    
    $
    51,613Unrealized losses
    
    $
    (217
    )
    
    $
    (146
    )MaturitiesDue in 90 days or less
    
    $
    18,966
    
    
    $
    16,9751 year through 2 years
    
    
    19,788
    
    
    
    14,853Total
    
    $
    38,754
    
    
    $
    31,828
 Note 5. Comprehensive Income
  Foreign
    
    
    UnrealizedCurrency
    
    
    Loss onTranslation
    
    
    Securities
    
    
    TotalBalance, December 31, 2005
    
    $
    495
    
    
    $
    (153
    )
    
    $
    342Quarterly change
    
    
    258
    
    
    
    (34
    )
    
    
    224Balance, March 31, 2006
    
    
    753
    
    
    
    (187
    )
    
    
    566Quarterly change
    
    
    (276
    )
    
    
    (30
    )
    
    
    (306
    )Balance, June 30, 2006
    
    $
    477
    
    
    $
    (217
    )
    
    $
    260
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PEOPLESUPPORT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
 Note 6. Income Taxes and Deferred Tax Assets
 Provision for Income Taxes
   Deferred Tax Assets
   Note 7. Computation of Earnings Per Share
   Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2006
    
    2005
    
    2006
    
    2005Options
    
    
    59
    
    
    
    160
    
    
    
    84
    
    
    
    108Warrants
    
    
    3
    
    
    
    64
    
    
    
    3
    
    
    
    96
  Three Months Ended June 30,2006
    
    2005Income
    
    Shares
    
    Per Share
    
    Income
    
    Shares
    
    Per Share(Numerator)
    
    (Denominator)
    
    Amount
    
    (Numerator)
    
    (Denominator)
    
    AmountBasic earnings per share:Income to common stockholders
    
    $
    3,808
    
    
    
    18,511
    
    
    $
    0.21
    
    
    $
    2,239
    
    
    
    18,144
    
    
    $
    0.12Effect of dilutive securities:Options
    
    
    
    
    
    
    741
    
    
    
    
    
    
    
    
    
    
    
    765Restricted stock units
    
    
    
    
    
    
    96
    
    
    
    
    
    
    
    
    
    
    
    Income available to common
stockholders
    
    $
    3,808
    
    
    
    19,348
    
    
    $
    0.20
    
    
    $
    2,239
    
    
    
    18,909
    
    
    $
    0.12
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PEOPLESUPPORT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
 Six Months Ended June 30,2006
    
    2005Income
    
    Shares
    
    Per Share
    
    Income
    
    Shares
    
    Per Share(Numerator)
    
    (Denominator)
    
    Amount
    
    (Numerator)
    
    (Denominator)
    
    AmountBasic earnings per share:Income to common stockholders
    
    $
    6,683
    
    
    
    18,467
    
    
    $
    0.36
    
    
    $
    4,995
    
    
    
    18,086
    
    
    $
    0.28Effect of dilutive securities:Options
    
    
    
    
    
    
    698
    
    
    
    
    
    
    
    
    
    
    
    841Restricted stock units
    
    
    
    
    
    
    86
    
    
    
    
    
    
    
    
    
    
    
    Income available to common
stockholders
    
    $
    6,683
    
    
    
    19,251
    
    
    $
    0.35
    
    
    $
    4,995
    
    
    
    18,927
    
    
    $
    0.26
 Note 8. Stock Compensation
  2004 Stock Incentive Plan
    2004 Employee Stock Purchase Plan
  10




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PEOPLESUPPORT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
 Accounting for Equity Awards
  Three Months
    
    Six MonthsEnded
    
    EndedJune 30,
    
    June 30,2005
    
    2005Net income as reported
    
    $
    2,239
    
    
    $
    4,995Add: Stock  based compensation expense
included in reported net income, net of
related tax effects
    
    
    217
    
    
    
    464Deduct: Total stock-based compensation
expense determined under fair value based
methods for all awards, net of related tax
effects
    
    
    (337
    )
    
    
    (669
    )Net income pro forma
    
    $
    2,119
    
    
    $
    4,790Basic earnings per shareas reported
    
    $
    0.12
    
    
    $
    0.28Diluted earnings per shareas reported
    
    $
    0.12
    
    
    $
    0.26Basic earnings per sharepro forma
    
    $
    0.12
    
    
    $
    0.26Diluted earnings per sharepro forma
    
    $
    0.11
    
    
    $
    0.25
  Three months
    
    Six monthsEnded June 30,
    
    Ended June 30,2005
    
    2005Risk-free interest rate
    
    
    3.9
    %
    
    
    3.9
    %Expected option life (years)
    
    
    4.4
    
    
    
    4.2Volatility
    
    
    37.2
    %
    
    
    32.6
    %Dividend rate
    
    
    0.0
    %
    
    
    0.0
    %
   Three months
    
    Six monthsEnded June 30,
    
    Ended June 30,2006
    
    2006Risk-free interest rate
    
    
    5.0
    %
    
    
    4.8
    %Expected option life (years)
    
    
    4.5
    
    
    
    4.5Volatility
    
    
    55
    %
    
    
    54
    %Dividend rate
    
    
    0.0
    %
    
    
    0.0
    %
 11




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PEOPLESUPPORT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
   Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2006
    
    2005
    
    2006
    
    2005Proceeds from stock options exercised
    
    $
    457
    
    
    $
    142
    
    
    $
    567
    
    
    $
    181Tax benefits related to stock options exercised
    
    
    177
    
    
    
    89
    
    
    
    193
    
    
    
    89Intrinsic value of stock options exercised
    
    
    1,350
    
    
    
    1,269
    
    
    
    1,638
    
    
    
    1,616
  Stock OptionsShares Outstanding
    
    
    
    
    
    
    
    
    
    Shares Vested / ExercisableWeighted
    
    Weighted
    
    
    
    
    
    Number
    
    Weighted
    
    WeightedNumber of
    
    Average
    
    Remaining
    
    Aggregate
    
    of Shares
    
    Average
    
    Remaining
    
    AggregateOptions
    
    Exercise
    
    Contractual
    
    Intrinsic
    
    Vested /
    
    Exercise
    
    Contractual
    
    IntrinsicOutstanding
    
    Price
    
    Term
    
    Value
    
    Exercisable
    
    Price
    
    Term
    
    ValueBalance at December 31, 2005
    
    
    1,699
    
    
    $
    5.58
    
    
    
    8.3
    
    
    $
    13,382
    
    
    
    474
    
    
    $
    2.98
    
    
    
    6.0
    
    
    $
    4,942Granted
    
    
    165
    
    
    
    10.42Forfeited
    
    
    (85
    )
    
    
    7.93Expired
    
    
    (9
    )
    
    
    8.38Exercised
    
    
    (188
    )
    
    
    2.97Balance at June 30, 2006
    
    
    1,582
    
    
    $
    6.25
    
    
    
    8.1
    
    
    $
    11,401
    
    
    
    452
    
    
    $
    3.47
    
    
    
    5.8
    
    
    $
    4,516
  Restricted Stock UnitsWt. Avg.
    
    WeightedRestricted
    
    Value of
    
    Remaining
    
    AggregateStock Units
    
    Awards
    
    Contractual
    
    IntrinsicOutstanding
    
    at Grant
    
    Term
    
    ValueBalance, at December 31, 2005
    
    
    54
    
    
    $
    7.69
    
    
    
    1.8
    
    
    $
    727Granted
    
    
    44
    
    
    
    10.07Canceled
    
    
    (2
    )
    
    
    7.79Converted
    
    
    
    
    
    
    Balance at June 30, 2006
    
    
    97
    
    
    $
    8.86
    
    
    
    1.4
    
    
    $
    1,301
  12




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##### Table of Contents



PEOPLESUPPORT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
  ExercisableOutstanding Weighted Average
    
    Weighted AverageRemainingContractual
    
    Exercise
    
    
    
    
    
    ExerciseRange of Exercise Prices Per Share
    
    Shares
    
    Life (Years)
    
    Price
    
    Shares
    
    Price$0.03  0.19
    
    
    122
    
    
    
    2.3
    
    
    $
    0.15
    
    
    
    122
    
    
    $
    0.150.41  0.41
    
    
    277
    
    
    
    7.1
    
    
    
    0.41
    
    
    
    129
    
    
    
    0.411.15  6.85
    
    
    169
    
    
    
    6.8
    
    
    
    5.89
    
    
    
    105
    
    
    
    5.647.23  7.23
    
    
    382
    
    
    
    9.3
    
    
    
    7.23
    
    
    
    2
    
    
    
    7.237.69  8.56
    
    
    170
    
    
    
    9.2
    
    
    
    8.40
    
    
    
    27
    
    
    
    8.148.63  9.09
    
    
    168
    
    
    
    9.2
    
    
    
    8.73
    
    
    
    16
    
    
    
    9.099.36  9.89
    
    
    108
    
    
    
    9.3
    
    
    
    9.58
    
    
    
    18
    
    
    
    9.3910.80  10.80
    
    
    80
    
    
    
    8.7
    
    
    
    10.80
    
    
    
    32
    
    
    
    10.8011.24  11.24
    
    
    83
    
    
    
    9.8
    
    
    
    11.24
    
    
    
    1
    
    
    
    11.2412.17  12.17
    
    
    23
    
    
    
    9.9
    
    
    
    12.17
    
    
    
    
    
    
    
    12.17Total
    
    
    1,582
    
    
    
    8.1
    
    
    $
    6.25
    
    
    
    452
    
    
    $
    3.47
  Three Months Ended
    
    
    Six Months EndedStock-based Compensation
    
    June 30,
    
    
    June 30,Expense
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Cost of revenue
    
    $
    147
    
    
    $
    69
    
    
    $
    257
    
    
    $
    148Selling, general & administrative
    
    
    517
    
    
    
    148
    
    
    
    896
    
    
    
    316Total
    
    $
    664
    
    
    $
    217
    
    
    $
    1,153
    
    
    $
    464
 Note 9. Warrants
  Note 10. Acquisition of Rapidtext
  13




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##### Table of Contents



PEOPLESUPPORT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
  Description
    
    ValueNet current assets
    
    $
    1,261Property, plant and equipment
    
    
    282Noncurrent deferred tax assets & other assets
    
    
    263Net current liabilities
    
    
    (855
    )Long term capital leases
    
    
    (140
    )Estimated fair value, net assets acquired
    
    
    811Goodwill
    
    
    8,285Other intangible assets
    
    
    860Total purchase price
    
    $
    9,956
  Intangible Assets
    
    ValueCustomer list
    
    $
    500Non-compete agreements
    
    
    200Software
    
    
    60Trademarks/Tradenames
    
    
    100Total
    
    $
    860
  Pro Forma Financial Data
  Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2006
    
    2005 (1)
    
    2006
    
    2005 (1)Pro forma revenue
    
    $
    25,947
    
    
    $
    17,295
    
    
    $
    49,252
    
    
    $
    33,637Pro forma net income
    
    
    3,808
    
    
    
    2,472
    
    
    
    6,684
    
    
    
    5,396Pro forma basic income per share
    
    
    0.21
    
    
    
    0.14
    
    
    
    0.36
    
    
    
    0.30Pro forma diluted income per share
    
    
    0.20
    
    
    
    0.13
    
    
    
    0.35
    
    
    
    0.28Pro forma basic weighted average shares outstanding
    
    
    18,511
    
    
    
    18,257
    
    
    
    18,467
    
    
    
    18,199Pro forma diluted weighted average shares outstanding
    
    
    19,348
    
    
    
    19,032
    
    
    
    19,251
    
    
    
    19,050
 
 (1)
    
    The 2005 pro forma basic weighted shares outstanding include the 113 shares issued to
acquire Rapidtext. In addition, the pro forma diluted weighted average shares outstanding
include the 10 options the Company assumed as part of the acquisition. 14




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##### Table of Contents



PEOPLESUPPORT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
 Note 11. Commitments and Contingencies
  Years Ending December 31,
    
    Commitments2006
    
    $
    1,6422007
    
    
    3,4192008
    
    
    3,2462009
    
    
    2,5632010
    
    
    2,930Thereafter
    
    
    12,673Total
    
    $
    26,472
 Note 12. Subsequent Event
  15




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##### Table of Contents



PEOPLESUPPORT, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2006
 
 ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
   Overview
   Sources of Revenue
  
    
    time-delineated or production based fees, including hourly or per minute charges and
charges per interaction or transaction, and training fees, all of which are separately
negotiated on an individual client basis; and
    
    implementation fees, including revenue associated with the installation and integration
of new clients into our telecommunications, information technology and client reporting
structures.
  Key Expense Categories
 Cost of revenue.
 Selling, general and administrative.
 Critical Accounting Policies and Estimates
  16




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##### Table of Contents



PEOPLESUPPORT, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2006
  Revenue and Deferred Revenue Recognition
    Stock-Based Compensation Expense
    Accounting for Income Taxes
  17




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##### Table of Contents



PEOPLESUPPORT, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2006
 Long-lived Asset Impairment
  Results of Operations
  Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2006
    
    2005
    
    2006
    
    2005Revenue
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %Cost of revenue (exclusive of management
incentive plan and depreciation expense shown
below)
    
    
    61
    
    
    
    58
    
    
    
    60
    
    
    
    56Management incentive plan  cost of revenue
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Selling, general, and administrative
(exclusive of management incentive plan
expense shown below)
    
    
    18
    
    
    
    21
    
    
    
    20
    
    
    
    20Management incentive plan  selling,
general, and administrative
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Depreciation and amortization
    
    
    6
    
    
    
    8
    
    
    
    6
    
    
    
    7Income from operations
    
    
    14
    
    
    
    13
    
    
    
    14
    
    
    
    16Interest income
    
    
    (2
    )
    
    
    (2
    )
    
    
    (2
    )
    
    
    (2
    )Other expense (income)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Income before provision for income taxes
    
    
    16
    
    
    
    15
    
    
    
    16
    
    
    
    18Provision for income taxes
    
    
    1
    
    
    
    
    
    
    
    2
    
    
    
    Net income
    
    
    15
    %
    
    
    15
    %
    
    
    14
    %
    
    
    17
    %
 Three Months Ended June 30, 2006 Compared with Three Months Ended June 30, 2005
 Revenue
  Cost of Revenue
   18




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PEOPLESUPPORT, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2006
   Selling, General, and Administrative
   Six Months Ended June 30, 2006 Compared with Six Months Ended June 30, 2005
 Revenue
  Cost of Revenue
    Selling, General, and Administrative
  19




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##### Table of Contents



PEOPLESUPPORT, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2006
  Liquidity and Capital Resources
  Operating Activities
   Investing Activities
    Financing Activities
   20




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PEOPLESUPPORT, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2006
  Off-Balance Sheet Arrangements
  
 ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
 Foreign Currency Exchange Risk
     Interest Rate Sensitivity
  Inflation Rate Sensitivity
  
 ITEM 4. Controls and Procedures
 Evaluation of disclosure controls and procedures.
 21




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##### Table of Contents





PEOPLESUPPORT, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2006




Changes in internal control over financial reporting.





PART IIOTHER INFORMATION





ITEM 1. Legal Proceedings







ITEM 1A. Risk Factors




Our revenues are highly dependent upon major clients, and any loss of business from our major
clients would reduce our revenues and seriously harm us.




Substantial future sales of our common stock in the public market could cause our stock price to
fall.




Government regulations and various bureaucratic constraints have increased and may continue to
increase operational costs in Costa Rica beyond budgeted expectations.




22



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##### Table of Contents



PEOPLESUPPORT, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2006
  
 Item 4. Submission of Matters to a Vote of Security Holders
  1.
    
    elected two Class II directors, Mr. Adam Berger and Mr. George Ellis, to serve
until the 2009 Annual Meeting of Stockholders and until their successors are duly
elected and qualified; and2.
    
    ratified the appointment of BDO Seidman, LLP as our independent registered public
accounting firm.
  VOTESFor
    
    WithheldAdam Berger
    
    

    15,724,166
    
    
    
    245,234George Ellis
    
    
    15,934,541
    
    
    
    34,859
  
  VOTESFor
    
    Against
    
    AbstentionsRatification of appointment of
BDO Seidman, LLP, independent
registered public accounting firm
    
    
    15,964,815
    
    
    
    4,385
    
    
    
    200
 
 Item 6. Exhibits
 ExhibitNumber10.1
    1
    Master Services Agreement and Statement of Work No. 1 dated August 9, 2004 between PeopleSupport, Inc.
and Vonage Holdings Corp.31.1
    
    Rule 13a-14(a) Certification of Chief Executive Officer of the
Company in accordance with Section 302 of the Sarbanes-Oxley Act
of 200231.2
    
    Rule 13a-14(a) Certification of Chief Financial Officer of the
Company in accordance with Section 302 of the Sarbanes-Oxley Act
of 200232.1
    2
    Section 1350 Certification of Chief Executive Officer of the
Company in accordance with Section 906 of the Sarbanes-Oxley Act
of 200232.2
    2
    Section 1350 Certification of Chief Financial Officer of the
Company in accordance with Section 906 of the Sarbanes-Oxley Act
of 2002
 
 1
    
    Confidential treatment has been requested for portions of this exhibit. These portions have been omitted from the Form 10-Q
and submitted separately to the Securities and Exchange Commission.2
    
    The material contained in this exhibit is not deemed filed with the Securities and Exchange
Commission and is not to be incorporated by reference into any filing of the Registrant under the
Securities Act of 1933 or the Securities Exchange Act of 1934, 23




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PEOPLESUPPORT, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2006
  24




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SIGNATURE
  PeopleSupport, Inc.By:
    
    /s/ Caroline RookCaroline RookChief Financial Officer(Principal Financial and Accounting Officer)
 25