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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
------------------------
/X/[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D)(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 1998March 31, 1999
OR
/ /[ ] TRANSITION REPORT PURSUANT TO SectionSECTION 13 OR 15(d)15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______ to ---------- ----------_______
Commission file number 0-21055
TELETECH HOLDINGS, INC.
-----------------------
(Exact name of registrant as specified in its charter)
DELAWARE 84-1291044
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1700 LINCOLN STREET, SUITE 1400
DENVER, COLORADO 80203
(Address of principal (Zip Code)
executive office)
(303) 894-4000
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
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 X NO
--- ------- ----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Outstanding at
Class of Common Stock October 31, 1998April 30, 1999
Common Stock, par value $.01 per share 60,235,700
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------61,056,760
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
FORM 10-Q
INDEX
PAGE
NUMBER
------
PART I. FINANCIAL INFORMATION
- ----------------------------------
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets--December 31, 19971998 and September 30, 1998March 31, 1999 3
Condensed consolidated statements of income--Three months ended September 30,March 31,
1999 and 1998 and 1997 5
Condensed consolidated statements of income--Ninecash flows--Three months ended
September 30,March 31, 1999 and 1998 and 1997 6
Condensed consolidated statements of cash flows--Nine months ended
September 30, 1998 and 1997 7
Notes to condensed consolidated financial statements--September 30, 1998 8statements--March 31, 1999 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 1110
Item 3. Quantitative and Qualitative Disclosures about Market Risk 13
PART II . OTHER INFORMATION
- -------------------------------
Item 1. Legal Proceedings 15
Item 2. Changes in Securities and Use of Proceeds 1514
Item 6. Exhibits and Reports on Form 8-K 1614
SIGNATURES 1715
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2
Item 1.
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS(AMOUNTS IN THOUSANDS)
PART I. FINANCIAL INFORMATIONTHOUSANDS EXCEPT PER SHARE AMOUNTS)
DECEMBER 31, MARCH 31,
ASSETS December 31, September 30,
1997 1998 1999
------ ------------ -------------------------
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . $ 7,3388,796 $ 11,29113,747
Short-term investments. . . . . . . . . . . . . . . . . . . . 69,633 56,110investments 37,082 36,230
Accounts receivable, net of allowance for doubtful
accounts of $2,327$2,900 and $2,714, respectively. . . . . . . . 43,664 52,120$3,167, respectively 68,830 75,423
Prepaids and other assets . . . . . . . . . . . . . . . . . . 1,220 2,4962,811 3,479
Deferred tax asset. . . . . . . . . . . . . . . . . . . . . . 2,902 3,072
--------asset 3,855 3,621
--------- --------
Total current assets. . . . . . . . . . . . . . . . . . . 124,757 125,089
--------assets 121,374 132,500
--------- --------
PROPERTY AND EQUIPMENT, net of accumulated depreciation of $21,812$38,432 and
$33,707,$43,790, respectively . . . . . . 53,738 64,313
--------77,546 86,233
--------- --------
OTHER ASSETS:
Long-term accounts receivable 4,274 6,575
Goodwill, (netnet of amortization of $587$1,599 and $1,347, respectively) . . . . . . . . . . . . . . . . . . 7,295 12,001
Long-term accounts receivable . . . . . . . . . . . . . . . . 4,274 4,274
Investment in affiliated company accounted for under the
equity method . . . . . . . . . . . . . . . . . . . . . . . 981 --$1,923, respectively 15,022 20,010
Contract acquisition costs. . . . . . . . . . . . . . . . . . --cost, net of amortization of zero and $251,
respectively 10,900 10,649
Other assets. . . . . . . . . . . . . . . . . . . . . . . . . 1,322 1,384
--------assets 1,794 1,973
--------- --------
Total assets. . . . . . . . . . . . . . . . . . . . . . . $192,367 $217,961
-------- --------
--------assets $230,910 $257,940
--------- --------
The accompanying notes are an integral part of these consolidated
balance sheets.
3
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
DECEMBER 31, MARCH 31,
LIABILITIES AND STOCKHOLDERS' EQUITY December 31, September 30,
1997 1998 1999
------------------------------------ ------------ ------------------------
(Unaudited)
CURRENT LIABILITIES:
Current portion of long-term debt . . . . . . . . . . . . . . 5,910 9,720$ 7,989 $ 12,833
Bank overdraft. . . . . . . . . . . . . . . . . . . . . . . . 1,094 --overdraft 778 434
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . 8,086 8,606payable 11,814 9,166
Accrued employee compensation . . . . . . . . . . . . . . . . 12,244 15,02618,134 20,400
Accrued income taxes. . . . . . . . . . . . . . . . . . . . . 2,507 2,350taxes 4,191 2,341
Other accrued expenses. . . . . . . . . . . . . . . . . . . . 11,694 15,411expenses 11,520 11,586
Customer advances, deposits and deferred income . . . . . . . 1,472 1,117
-------- --------3,803 2,933
------------ -----------
Total current liabilities . . . . . . . . . . . . . . . . 43,007 52,23058,229 59,693
DEFERRED TAX LIABILITIES . . . . . . . . . . . . . . . . . . . . 1,217 1,211835 1,037
LONG-TERM DEBT, net of current portion:
Capital lease obligations . . . . . . . . . . . . . . . . . . 9,432 3,4784,208 3,845
Line of credit -- 20,000
Other debt. . . . . . . . . . . . . . . . . . . . . . . . . . 459 3,682
-------- --------debt 2,145 1,148
------------ -----------
Total liabilities . . . . . . . . . . . . . . . . . . . . 54,115 60,601
-------- --------65,417 85,723
------------ -----------
STOCKHOLDERS' EQUITY:
Preferred stock, 10,000,000Common stock; $.01 par value; 150,000,000 shares
authorized , zeroauthorized; 60,769,724 and one
share61,056,760 shares, respectively,
issued and outstanding in 1997 and 1998, respectively -- --
Common stock, $.01 par value, 150,000,000 shares
authorized, 59,262,397 and 60,234,304 shares issued,
59,163,587 and 60,234,304 shares outstanding. . . . . . . . 592 602606 609
Additional paid-in capital . . . . . . . . . . . . . . . . . 104,016 108,315111,080 112,872
Accumulated other comprehensive income. . . . . . . . . . . . (922) (1,680)
Unearned compensation-restricted stock. . . . . . . . . . . . (127) (32)
Treasury stock, 98,810 shares, at cost. . . . . . . . . . . . (988) --income (1,610) (1,492)
Retained earnings . . . . . . . . . . . . . . . . . . . . . . 35,681 50,155
-------- --------55,417 60,228
------------ -----------
Total stockholders' equity. . . . . . . . . . . . . . . . . 138,252 157,360
-------- --------equity 165,493 172,217
------------ -----------
Total liabilities and stockholders' equity. . . . . . . . $192,367 $217,961
-------- --------
-------- --------equity $230,910 $257,940
------------ -----------
------------ -----------
The accompanying notes are an integral part of these consolidated
balance sheets.
4
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(Unaudited)DATA)
(UNAUDITED)
Three Months Ended
September 30,THREE MONTHS ENDED
MARCH 31,
---------------------
1997 1998 ---- ----1999
---------- ---------
REVENUES . . . . . . . . . . . . . . . . . . . . . . . . . . . . $70,374 $92,366
------- -------$80,244 $110,638
---------- ---------
OPERATING EXPENSES:
Costs of services . . . . . . . . . . . . . . . . . . . . 45,799 59,14351,856 74,368
Selling, general and administrative
expenses . . . . . . . . . . . . . . . . 17,802 25,085
------- -------Expenses 21,262 28,404
---------- ---------
Total operating expenses. . . . . . . . . . . . . . . . . 63,601 84,228
------- -------expenses 73,118 102,772
---------- ---------
INCOME FROM OPERATIONS . . . . . . . . . . . . . . . . . . . . . 6,773 8,138
------- -------7,126 7,866
OTHER INCOME (EXPENSE):
Interest expense. . . . . . . . . . . . . . . . . . . . . (276) (413)
Investmentexpense (302) (416)
Interest income . . . . . . . . . . . . . . . . . . . . 813 725889 554
Equity in income of affiliated company. . . . . . . . . . . . . . . . . . . 160 (16)
Business combination expenses . . . . . . . . . . . . . .affiliate 14 --
(440)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . (14) (220)
------- -------
683 (364)
------- -------
Income before income taxes. . . . . . . . . . . . . . . . . . 7,456 7,774
PROVISION FOR(94) 65
---------- ---------
507 203
---------- ---------
INCOME BEFORE INCOME TAXES . . . . . . . . . . . . . . . . . . . 2,912 3,059
------- -------
Net income. . . . . . . . . . . . . . . . . . . . . . . . . .7,633 8,069
Provision for income taxes 3,081 3,258
---------- ---------
NET INCOME $ 4,5444,552 $ 4,715
------- -------
------- -------4,811
---------- ---------
WEIGHTED AVERAGE SHARES OUTSTANDING:OUTSTANDING
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . 58,256 60,234
------- -------
------- -------59,423 60,770
---------- ---------
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . 61,405 62,040
------- -------
------- -------61,666 62,450
---------- ---------
NET INCOME PER COMMON SHARE:SHARE
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . $ .08 $ .08
------- -------
------- ----------------- ---------
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . $ .07 $ .08
------- -------
------- ----------------- ---------
The accompanying notes are an integral part of these statements.consolidated
balance sheets.
5
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(Unaudited)
Nine Months Ended
September 30,
---------------------
1997 1998
---- ----
REVENUES $199,280 $260,709
-------- --------
OPERATING EXPENSES:
Costs of services . . . . . . . . . . . . . . . . . . . . 127,043 168,294
Selling, general and
administrative expenses . . . . . . . . . . . . . . . . 46,656 69,505
-------- --------
Total operating expenses. . . . . . . . . . . . . . . . . 173,699 237,799
-------- --------
INCOME FROM OPERATIONS . . . . . . . . . . . . . . . . . . . . . 25,581 22,910
-------- --------
OTHER INCOME (EXPENSE):
Interest expense. . . . . . . . . . . . . . . . . . . . . (1,053) (946)
Investment income . . . . . . . . . . . . . . . . . . . . 2,522 2,444
Equity in income of
affiliated company. . . . . . . . . . . . . . . . . . . 263 70
Business combination expenses . . . . . . . . . . . . . . - (1,321)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . (1) (371)
-------- --------
1,731 (124)
-------- --------
Income before income taxes. . . . . . . . . . . . . . . . . . 27,312 22,786
PROVISION FOR INCOME TAXES . . . . . . . . . . . . . . . . . . . 10,919 9,055
-------- --------
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . $ 16,393 $ 13,731
-------- --------
-------- --------
WEIGHTED AVERAGE SHARES
OUTSTANDING:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . 57,931 59,784
-------- --------
-------- --------
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . 61,560 62,026
-------- --------
-------- --------
NET INCOME PER COMMON SHARE:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . $ .28 $ .23
-------- --------
-------- --------
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . $ .27 $ .22
-------- --------
-------- --------
The accompanying notes are an integral part of these statements.
6
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998
(DOLLARS(AMOUNTS IN THOUSANDS)
(Unaudited)(UNAUDITED)
1997THREE MONTHS ENDED
MARCH 31,
---------------------
1998 ---- ----1999
---------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income. . . . . . . . . . . . . . . . . . . . . . . . . .income $ 16,3934,552 $ 13,7314,811
Adjustments to reconcile net income to net cash provided by
operating activities-activities:
Depreciation and amortization . . . . . . . . . . . . . . 7,240 13,9353,858 6,307
Allowance for doubtful accounts . . . . . . . . . . . . . 462 387155 192
Deferred income taxes (4) 235
Equity in income of affiliated company. . . . . . . . . . (263) 981
Deferred taxes on income. . . . . . . . . . . . . . . . . (785) (176)affiliate (14) --
Deferred compensation expense . . . . . . . . . . . . . . 96 9532 --
Changes in assets and liabilities-liabilities:
Accounts receivable . . . . . . . . . . . . . . . . . (16,092) (8,458)(2,855) (5,783)
Prepaids and other assets . . . . . . . . . . . . . . (903) (1,237)217 (2,246)
Accounts payable and accrued liabilities. . . . . . . 7,614 6,662expenses 4,434 (2,309)
Customer advances, deposits and deferred income . . . . . . . . 458 (355)
-------- --------(429) (1,254)
---------- ---------
Net cash provided by (used in) operating activities . . . . . . . . . . 14,220 25,565
-------- --------9,946 (47)
---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment. . . . . . . . . . . . . . $(25,645) $(23,939)equipment (9,533) (13,440)
Purchase of TMI . . . . . . . . . . . . . . . . . . . . . . . (2,337)Intellisystems (2,000) --
AcquisitionPurchase of Intellisystems, Inc. . . . . . . . . . . . . .Pamet River, net of $339 cash acquired -- (2,000)
Return(1,462)
Purchase of deposit on newSmart Call Center. . . . . . . . . . . . . 3,000 -- Contract acquisition costs. . . . . . . . . . . . . . . . . . - (10,900)(2,650)
Changes in accounts payable and accrued liabilities relatingrelated to
investing activities. . . . . . . . 56activities (781) (55)
Decrease in short-term investments. . . . . . . . . . . . . . 6,805 13,790
-------- --------investments 2,646 852
---------- ---------
Net cash used in investing activities . . . . . . . . . . . . (18,121) (23,830)
-------- --------(9,668) (16,755)
---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in bank overdraft $(1,094) $ (344)
Net increase in short-term borrowings . . . . . . . . . . . . $ 65 $ 1,549
Net increase in bank overdraft. . . . . . . . . . . . . . . . 806 -
Cash received in acquisition. . . . . . . . . . . . . . . . . - 2762,191 25,000
Payments on long-term debt and capital leases . . . . . . . . (3,565) (1,908)
Exercise(1,365) (2,001)
Proceeds from exercise of stock options including tax benefit . . . . . . . 7,382 2,302
-------- --------413 41
---------- ---------
Net cash provided by financing activities . . . . . . . . . . 4,688 2,219
-------- --------145 22,696
---------- ---------
Effect of exchange rate changes on cash. . . . . . . . . . . . . (516) (1)
-------- --------cash 133 (943)
---------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS. . . . . . . . . . . . . . . . . . . . . . . 271 3,953EQUIVALENTS 556 4,951
CASH AND CASH EQUIVALENTS, beginning of period . . . . . . . . . . . . . . . . . . . . . 5,569 7,338 -------- --------8,796
---------- ---------
CASH AND CASH EQUIVALENTS, end of period . . . . . . . . . . . . . . . . . . . . . . . . $ 5,840 $ 11,291
-------- --------
-------- --------7,894 $13,747
---------- ---------
---------- ---------
The accompanying notes are an integral part of these statements.
7consolidated
balance sheets.
6
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998MARCH 31, 1999
NOTE (1)--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. The condensed consolidated financial
statements reflect all adjustments (consisting of only normal recurring
accruals) which, in the opinion of management, are necessary to present
fairly the financial position, results of operations and cash flows of
TeleTech Holdings, Inc. and subsidiaries as of September 30,March 31, 1999 and 1998 and 1997 and
for the periods then ended. Operating results for the three month and nine month periodsmonths ended
September 30, 1998March 31, 1999 are not necessarily indicative of the results that may be
expected for the year ended December 31, 1998.1999.
The unaudited condensed consolidated financial statements should be read
in conjunction with the consolidated and combined financial statements and
footnotes thereto included in the Company's Form 10-K for the year ended
December 31, 1997.1998.
NOTE (2)--RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" effective for fiscal years beginning after
June 15, 1999. SFAS No. 133 establishes accounting and reporting standards
requiring that every derivative instrument (including certain derivative
instruments embedded in other contracts) be recorded--SEGMENT INFORMATION AND CUSTOMER CONCENTRATIONS
The Company classified its business activities into four fundamental
areas: outsourced operations in the balance sheetUnited States, facilities management
operations, international outsourced operations, and technology services and
consulting. These areas are separately managed and each has significant
differences in capital requirements and cost structures. Outsourced,
facilities management and international outsourced operations are reportable
business segments with their respective financial performance detailed
herein. Technology services and consulting is included in corporate
activities as either an asset or liability measured at its fair value. It also requires that
changesit is not a material business segment. Also included in
corporate activities are general corporate expenses and overall operational
management expenses. Assets of corporate activities include unallocated cash,
short-term investments and deferred income taxes. There are no significant
transactions between the derivative's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. Special accountingreported segments for qualifying hedges allows a derivative's gains and losses to offset related
resultsthe periods presented.
THREE MONTHS ENDED
MARCH 31,
---------------------
(in thousands) 1998 1999
---------- ---------
REVENUES:
Outsourced $ 43,930 $ 62,914
Facilities Management 17,328 23,666
International Outsourced 17,349 18,137
Corporate Activities 1,637 5,921
---------- ---------
Total $ 80,244 $110,638
---------- ---------
---------- ---------
OPERATING INCOME (LOSS):
Outsourced $ 8,772 $ 12,329
Facilities Management 2,099 3,072
International Outsourced 1,284 601
Corporate Activities (5,029) (8,136)
---------- ---------
Total $ 7,126 $ 7,866
---------- ---------
---------- ---------
7
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999 - CONTINUED
BALANCE AS OF
-------------
DECEMBER 31 MARCH 31,
(in thousands) 1998 1999
----------- ---------
ASSETS:
Outsourced Assets $101,105 $114,944
Facilities Management Assets 18,121 20,229
International Outsourced Assets 50,764 54,727
Corporate Activities Assets 45,898 68,040
----------- ---------
Total $230,910 $257,940
----------- ---------
----------- ---------
GOODWILL:
International Outsourced Goodwill, Net $ 6,803 $ 9,106
Corporate Activities Goodwill, Net 8,219 10,904
----------- ---------
Total $ 15,022 $ 20,010
----------- ---------
----------- ---------
The following geographic data include revenues based on the hedged item inlocation the
income statement, and requires that a company
must formally document, designate, and assess the effectiveness of transactions
that receive hedge accounting. SFAS No. 133 may not be applied retroactively,
and must be applied to (a) derivative instruments and (b) certain derivative
instruments embedded in hybrid contracts that were issued, acquired, or
substantively modified after December 31, 1997 (and, at the company's election,
before January 1, 1998)services are provided (in thousands).
Management believes that the impact of SFAS No. 133
will not significantly affect its financial reporting.
In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of
Start-Up Activities". This statement is effective for financial statements for
fiscal years beginning after December 15, 1998. In general, SOP 98-5 requires
costs of start-up activities and organization costs to be expensed as incurred.
Initial application of SOP 98-5 should be reported as the cumulative effect of a
change in accounting principle. Management believes that SOP 98-5 will not have
a material impact on the financial statements.
THREE MONTHS ENDED
MARCH 31,
---------
1998 1999
----------- ---------
REVENUES:
United States $ 62,545 $ 87,592
Australia 9,190 10,719
Canada 6,254 8,920
Rest of world 2,255 3,407
----------- ---------
Total $ 80,244 $110,638
----------- ---------
----------- ---------
NOTE (3)--SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION AND NONCASH INVESTING
AND FINANCING ACTIVITIES (IN THOUSANDS):
NineThree Months Ended September 30,
1997March 31,
----------------------------
1998 ---- ----1999
------------ -------------
Cash paid for interest $ 1,053301 $ 946416
Cash paid for income taxes $10,897 $ 5,641375 $ 5,108
Noncash investing and financing activities:
Stock issued in purchase of Intellisystems $ 3,389 $ --
Stock issued in purchase of Pamet River, Inc. $ -- $ 3,3891,753
NOTE (4)--ACQUISITIONS
On March 18, 1999, the Company acquired 100% of the common stock of
Pamet River, Inc. ("Pamet") for approximately $1,821,000 in cash and 285,711
shares of common stock in the Company. Pamet is a global marketing company
offering end-to-end marketing solutions by leveraging Internet and database
technologies. The transaction has been accounted for as a purchase and
goodwill will be amortized using the straight-line
8
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998MARCH 31, 1999 - CONTINUED
NOTE (4)--ACQUISITIONS
On February 17, 1998, the Company acquired the assets of
Intellisystems,-Registered Trademark- Inc. ("Intellisystems") for $2.0 million
in cash and 344,487 shares of common stock including 98,810 shares of treasury
stock. Intellisystems is a leading developer of patented automated product
support systems. Intellisystems' products can electronically resolve a
significant percentage of calls coming into customer support centers through
telephone, Internet or fax-on-demand. The acquisition has been accounted for as
a purchase.
On June 8, 1998 and June 17, 1998, the Company consummated business
combinations with Digital Creators, Inc. ("Digital"), which included the
issuance of 1,069,000 shares of Company common stock and Electronic Direct
Marketing, Ltd. ("EDM") which included the obligation to issue 1,783,444
shares of Company common stock, respectively. These business combinations
were accounted for as poolings of interests, and accordingly, the historical
financial statements of the Company have been restated to include the
financial statements of Digital and EDM for all periods presented.
The consolidated balance sheet of the Company as of December 31, 1997
includes the balance sheet of EDM for the fiscal year ended February 28,
1998. Accordingly, the Company's retained earnings has been adjusted during
the quarter ended March 31, 1998 for the effect of utilizing different fiscal
year ends for this period. During 1998, the fiscal year end of EDM has been
changed from February to December to conform to the Company's year end.
The consolidated financial statements have been prepared to give
retroactive effect to the business combinations with Digital and EDM.
The table below sets forth the results of operations of the previously
separate enterprises for the period prior to the consummation of the
combinations during the nine months ended September 30, 1998 and 1997 (in
thousands):
Nine months ended September 30,: TELETECH DIGITAL EDM ADJUSTMENTS COMBINED
- -------------------------------
1998:
Revenues $136,244 $2,038 $10,258 $(1,171) $147,369
Net income 6,972 136 654 -- 7,762
1997:
Revenues $124,332 $889 $ 4,091 $ (406) $128,906
Net income 11,489 187 173 -- 11,849
On August 26, 1998 the Company consummated a business combination with
Outsource Informatica Ltda. ("Outsource"), a leading Brazilian customer care
provider, which included the issuance of 606,000 shares of Company common stock.
This business combination was accounted for as a pooling of interests.method over 20 years. The operations of OutsourcePamet for all periods prior to the
acquisition are immaterial to the results of the Company and, accordingly, no
pro forma financial information has been presented.
On March 31, 1999, the Company acquired 100% of the common stock of
Smart Call S.A. ("Smart Call") for approximately $2,350,000 in cash including
costs related to the acquisition. Smart Call is based in Buenos Aires,
Argentina and provides a wide range of customer management solutions to Latin
American and multinational companies. The transaction has been accounted for
as a purchase and goodwill will be amortized using the straight-line method
over 20 years. The operations of Smart Call for all periods prior to the
acquisition are immaterial to the results of the Company and, accordingly, no
pro forma financial information has been presented.
NOTE (5)--CONTRACT ACQUISITION COSTS
In September 1998,As a part of the Smart Call acquisition, the Company paid $10.9 million$300,000,
including costs associated with the transaction, for the option to obtainacquire
Connect S.A. ("Connect"), a long term
contractsister company with a significant client in the telecommunications industry. This
amount is recordedadditional customer service
and systems integration capabilities. The option has been accounted for as an
other asset and willasset. TeleTech may be amortized over the six year
term of the contract.
9
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998 -- CONTINUEDrequired to purchase Connect for $4.3 million to
$4.8 million in total consideration if Connect achieves certain operating
objectives.
NOTE (6)(5)--COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
("SFAS 130"). The purpose of SFAS 130 is to report a measure of all changes
in equity that result from recognized transactions and other economic events
of the period other than transactions with owners in their capacity as
owners. The only item of other comprehensive income reported by the Company
is the cumulative translation adjustment.
The Company's comprehensive income for the three and nine months ended September
30, 1997March 31,
1998 and 19981999 was as follows (in thousands):
Three Months Ended September 30,
--------------------------------
1997March 31,
----------------------------
1998 ---- ----1999
------------ -------------
Net income for the period $ 4,5444,552 $ 4,7154,811
Change in cumulative translation adjustment (342) (191)
------- -------278 118
------------ -------------
Comprehensive income $ 4,2024,830 $ 4,524
------- -------
------- -------
Nine Months Ended September 30,
--------------------------------
1997 1998
---- ----
Net income for the period $16,393 $13,731
Change in cumulative translation adjustment (572) (758)
------- -------
Comprehensive income $15,281 $12,973
------- -------
------- -------4,929
------------ -------------
------------ -------------
NOTE (7)--SALE OF JOINT VENTURE
On September 21, 1998, the Company sold their 50% interest in Access 24
(UK) Limited ("Access 24 UK") to Priplan Investments, Ltd. ("Priplan") for cash
consideration of approximately $1.061 million. The company incurred $129,000 in
costs relating to the disposal of this joint venture in the third quarter 1998.
109
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE NINETHREE MONTHS ENDED SEPTEMBER 30,MARCH 31, 1999 AND 1998 AND 1997
INTRODUCTION
Management's discussion and analysis of financial condition and results
of operations in this Form 10-Q should be read in conjunction with the risk
factors included in the Company's Form 10-K for the year ended December 31,
1997.1998. Specifically, the Company has experienced, and in the future could
experience, quarterly variations in revenues and earnings as a result of a
variety of factors, many of which are outside the Company's control,
including: the timing of new contracts; the timing of new product or service
offerings or modifications in client strategies; the expiration or
termination of existing contracts; the timing of increased expenses incurred
to obtain and support new business; and the seasonal pattern of certain of
the businesses serviced by the Company. In addition, the Company has
concentrated its marketing efforts towards obtaining larger, more complex,
strategic customer care programs. As a result, the time required to negotiate
and execute an agreement with the client has increased. This may lead to
short-term delays in the anticipated start-up of new client programs and in
the Company achieving full capacity utilization.
The Company's planned staffing levels, investments and other operating
expenditures are also based on revenue forecasts. If revenues are below
expectations in any given quarter as a result of such delay or for other
reasons, the Company's operating results would likely be adversely affected for
that quarter.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1998MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1997MARCH 31, 1998
Revenues increased $22.0$30.4 million or 31%38% to $92.4$110.6 million for the three
months ended September 30, 1998March 31, 1999 from $70.4$80.2 million for the three months ended
September 30, 1997.March 31, 1998. The increase resulted primarily from $14.6$12.3 million in
revenues from new clients and $18.1 million in increased revenue from
existing clients including $5 million relating to technology sales. These
technology sales include $1.7 million in hardware and third party software
sold under reseller arrangements, consulting services of approximately
$300,000 and the sale of approximately $3.0 million in proprietary call
center technology to a client for use in its internal call centers.
Technology sales for the corresponding period of the preceding year were not
significant. While TeleTech does expect technology revenues to represent a
more significant portion of total revenues in the future, there can be no
assurances as to the future levels of these revenues. These revenue increases
were offset in part by contract expirations and other client reductions.
These reductions and terminations include $6.4 million in revenue reductions
related to lower call volumes from two significant client programs in the
telecommunications and transportation industries. Revenues for the three
months ended September 30, 1998 include approximately $21.6 million from
facilities management contracts as compared with $18.1 million for the three
months ended September 30, 1997.
Costs of services increased $13.3 million, or 29%, to $59.1 million for
the three months ended September 30, 1998 from $45.8 million for the three
months ended September 30, 1997. Costs of services as a percentage of
revenues decreased slightly from 65.1% for the three months ended September
30, 1997 to 64.0% for the three months ended September 30, 1998. The decrease
in the costs of services as a percentage of revenues is a result of
significantly lower costs of services as a percentage of revenues associated
with the technology sales discussed above as compared with the Company's
recurring revenues from outsourcing. Cost of services as a percentage of
revenue was negatively impacted by unused capacity in several of the
Company's domestic and foreign call centers. Unused capacity contributes to
higher costs of services as a percentage of revenue as the fixed management
and facilities infrastructure costs are spread over reduced revenues.
Selling, general and administrative expenses increased $7.3 million, or 41%
to $25.1 million for the three months ended September 30, 1998 from $17.8
million for the three months ended September 30, 1997. Selling, general and
administrative expenses as a percentage of revenues increased from 25.3% for
the three months ended September 30, 1997 to 27.2% for the three months ended
September 30, 1998 primarily as a result of a greater number of selling,
general, and administrative personnel along with higher depreciation and
infrastructure costs associated with the opening of call centers in Niagara
Falls, NY; Moundsville, West Virginia; Uniontown, Pennsylvania;
11
Mexico City, Mexico and Glasgow, Scotland.
As a result of the foregoing factors, income from operations increased
$1.4 million or 20%, to $8.1 million for the three months ended September 30,
1998 from $6.7 million for the three months ended September 30, 1997.
Operating income as a percentage of revenues decreased from 9.6% for the
three months ended September 30, 1997 to 8.8% for the three months ended
September 30, 1998. In the third quarter 1998, operating income as a
percentage of revenue was favorably impacted by approximately 250 to 300
basis points by the technology sales discussed above.
Other income excluding business combination expenses totaled $76,000 for
the three months ended September 30, 1998 compared with $683,000 during the
three months ended September 30, 1997. This is primarily related to decreased
investment income of $88,000 resulting from the decrease in cash investments
from $66.1 million at September 30, 1997 to $56.1 million at September 30, 1998.
In addition, interest expense increased $137,000 resulting from an increase in
capital leases. Also included in other income and expense for the three months
ended September 30, 1998 was $129,000 relating to costs of disposing of the
Company's 50% interest in the PPP Joint Venture in the United Kingdom. Income
from this joint venture for the three months ended September 30, 1997 was
$160,000 compared to a loss of $16,000 for the three months ended September 30,
1998. The remaining difference quarter versus quarter was due to currency
fluctuations of $80,000 attributable to the Company's Mexican operations.
Business combination expenses related to the acquisition of Outsource
Informatica Ltda. were $440,000 for the three months ended September 30, 1998.
As a result of the foregoing factors, net income increased $171,000 or
4.0%, to $4.7 million for the three months ended September 30, 1998 from $4.5
million for the three months ended September 30, 1997.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1997
Revenues increased $61.4 million or 31% to $260.7 million for the nine
months ended September 30, 1998 from $199.3 million for the nine months ended
September 30, 1997. The increase resulted from $39.5 million in revenues from
new clients and $63.3$25.4 million in increased revenue from
existing clients. These increases were offset in part by contract expirations
and other client reductions of which $32.3 million related to two significant clients in the
telecommunications and transportation industries.reductions. Revenues for the ninethree months ended September 30, 1998March 31,
1999 include approximately $61.2$23.7 million from facilities management contracts
as compared with $58.7$17.3 million for the ninethree months ended September 30, 1997.March 31, 1998.
Costs of services increased $41.3$22.5 million, or 33%43%, to $168.3$74.4 million for
the ninethree months ended September 30, 1998March 31, 1999 from $127.0$51.9 million for the ninethree months
ended September 30, 1997.March 31, 1998. Costs of services as a percentage of revenues increased
from 63.8% for the nine months ended September 30, 1997 to 64.6% for the ninethree months ended September 30, 1998. ThisMarch 31, 1998 to 67.2% for the three
months ended March 31, 1999. The increase in the costs of services as a
percentage of revenues is a result of lower nine months volumes inhigher costs of services as a
significant facilities management client program as comparedpercentage of revenues associated with the previous
yearCompany's Latin American
operations and unused capacity in several of the Company's domestic and
foreign call
centers offsetcustomer interaction centers. Operations in Latin America were
negatively impacted by lower costs of services as a percentage of revenues associated
with the technology sale discussed in the three month comparative above.economic conditions.
Selling, general and administrative expenses increased $22.8$7.1 million, or
49%34% to $69.5$28.4 million for the ninethree months ended September 30, 1998March 31, 1999 from $46.7$21.3
million for the ninethree months ended September 30, 1997.March 31, 1998. Selling, general and
administrative expenses as a percentage of revenues increaseddecreased from 23.4%26.5% for
the ninethree months ended September 30, 1997March 31, 1998 to 26.7%25.7% for the ninethree months ended
September 30, 1998March 31, 1999 primarily as a result of revenue increases in certain large
client programs which have increased revenues without a greater number ofproportionate
increase in selling, general and administrative personnel along with higher depreciation expense
resulting fromexpenses. Expense reductions
were offset by Y2K expenditures totaling approximately $500,000 during the
completion of new call centers which were not fully utilized
during 1998 and the impact of lower volumes in a significant client in the
telecommunications industry.
12
first quarter 1999.
As a result of the foregoing factors, income from operations decreased
$2.7 millionincreased
$740,000 or 10%, to $22.9$7.9 million for the ninethree months ended September 30,
1998March 31, 1999
from $25.6$7.1 million for the ninethree months ended September 30, 1997.March 31, 1998. Operating income
as a percentage of revenues decreased from 12.8%8.9% for the ninethree months ended
September 30, 1997March 31, 1998 to 8.8%7.1% for the ninethree months ended September 30, 1998. This decline resulted primarily from reduced capacity
utilization and lower volumes associated with two significant clients in the
telecommunications and transportation industries. OperatingMarch 31, 1999.
Other income as a
percentage of revenuetotaled $203,000 for the ninethree months ended September 30,March 31, 1999
compared with $507,000
10
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998 was
favorably impacted by approximately 100 basis points by-- CONTINUED
during the technology sales
discussed above.
Other income excluding business combination expenses totaled $1,197,000 for
the ninethree months ended September 30, 1998 compared with $1,731,000 during the
nine months ended September 30, 1997.March 31, 1998. This is primarily related to
decreased investment income of $78,000$335,000 resulting from the decrease in cash
investments.
Also included in other income and expense for the nine months ended September
30,investments from $67.6 million at March 31, 1998 was $129,000 relating to costs of disposing of the Company's 50%
interest in the PPP Joint Venture in the United Kingdom. Income from this joint
venture for the nine months ended September 30, 1997 was $263,000 compared to
$70,000 for the nine months ended September 30, 1998. The remaining difference
quarter versus quarter was due to currency fluctuations of $205,000 attributable
to the Company's Mexican operations. During the nine months ended September 30,
1998, the Company also incurred $1,321,000 of one time charges relating to
business combination expenses for EDM Electronic Direct Marketing, Ltd., Digital
Creators, Inc., and Outsource Informatica Ltda.$36.2 million at March
31, 1999.
As a result of the foregoing factors, net income decreased $2.7 millionincreased $259,000 or
16%5.7%, to $13.7$4.8 million for the ninethree months ended September 30, 1998March 31, 1999 from $16.4$4.6
million for the ninethree months ended September 30, 1997.March 31, 1998.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1998March 31, 1999 the Company had cash and cash equivalents of $11.3$13.7
million and short-term investments of $56.1$36.2 million. Cash providedused by operating
activities was $25.6 million$47,000 for the ninethree months ended September
30, 1998.March 31, 1999, which
primarily resulted from increased accounts receivable during the period.
Cash used in investing activities was $23.8$16.8 million for the ninethree months
ended September 30, 1998March 31, 1999 resulting primarily from $23.9$13.4 million in capital
expenditures, $2.0$1.5 million toward the purchase of IntellisystemsPamet River and $2.7
million toward the purchase of Smart Call (see Note 4 accompanying the
condensed financial statements), and $10.9 million in contract
acquisition costs offset in part by a decrease of $13.8 million$852,000 in
short term investments.
Cash provided by financing activities was $2.2$22.7 million resulting from
the increase in short-term borrowings of $1.5 million and the exercise of stock
options of $2.3$25.0 million offset in part by pay downs of
capital leases by the
Company's Canadian Subsidiary.and other debt.
The Company is negotiatinghas a new $50$50.0 million 3-year, partially securedunsecured revolving line of credit agreement with
a syndicate of 5five banks. The Company anticipates thatalso has the option to secure at any
time up to $25.0 million of the line with available cash investments. The
Company has two interest rate options: an offshore rate option or a bank base
rate option. The Company will pay interest at a spread of 50 to 150 basis
points over the applicable offshore or bank base rate, depending upon the
Company's leverage. Interest on the secured portion is based on the
applicable rate plus 22.5 basis points. Borrowings under this agreement
will be completedtotaled $25.0 million at March 31, 1999 of which $15.0 million was secured at
the Company's option with temporary short term investments disclosed on the
balance sheet. Interest rates under these borrowings averaged 5.5% at March
31, 1999. Under this line of credit, the Company has agreed to maintain
certain financial ratios and capital expenditure limits. The Company is in
November 1998.compliance with all covenants of this agreement as of March 31, 1999.
The Company currently expects total capital expenditures in 19981999 to be
approximately $40$50 to $50$65 million of which $23.9$13.4 million was expended in the
first ninethree months. The Company believes that existing cash on hand and
available borrowings under the line of credit together with cash from
operations will be sufficient to finance the Company's operations, planned
capital expenditures and anticipated growth through 1999.
POTENTIAL YEAR 2000 PROBLEMS
The Company has undertaken an assessment and compliance program (the
"Program") to ascertain the existence and extent of, and to remediate as
necessary, any Year 2000 problemsproblem results from date-sensitive computer programs
being written using two digits, rather than four digits, to define the
applicable year. Computer programs that may
13
reside inare not Year 2000 compliant will be
unable, for example, to determine whether date references to "00" refers to
the information technologyyear 1900 or 2000. Determining whether the Company's and non-information technologyits clients'
systems ofare Year 2000 compliant is critical because the Company utilizes a
significant number of software programs and operating systems throughout its
interfacesorganization, and the Company's systems regularly interface with the various
information systems of its clients. The Program utilizes an
outside consulting firm, which specializes inCompany's or its clients' failure to
detect and remediate Year 2000 compliance and
remediation, which will work with full-time employees of the Company whose
time is dedicated to the Program. The Company has begun an enterprise wide
assessment and now expects to complete the assessment phase of the Program by
the first quarter of 1999. As assessments are completed, the Company will
commence immediate remediation, as necessary. The Company believes that costs
of the assessment phase will not exceed $1,000,000. The Company has not yet
incurred any significant costs for this assessment. When the assessment is
completed, the Company should be able to estimate the total cost of the
Program as well as the timing of remediation.
The Company is currently unable to assess, and may be unable to accurately
determine, the magnitude of any Year 2000related problems that may reside in theits or their computer and
information systems of its clients, or the impact that any such
problems could have on the services provided by the Company to such clients. As
part of the Program, the Company will contact its clients regarding the nature
and scope of any such problems and seek to work with the clients to resolve
them. The success of the Company's efforts will depend, in significant part,
upon factors outside the control of the Company, such as the level of client
cooperation and the status of the clients' own Year 2000 compliance programs.
Thus, there can be no assurance that all such problems will be resolved. The
occurrence of Year 2000 related failures in the computer and information systems
of any of the Company's significant clients could have a materiallymaterial adverse effect on the business,
results of operations andor financial condition of the Company.
11
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998 -- CONTINUED
The Company, will preparein conjunction with an outside consulting firm, has
implemented a contingency planmultiphased program to handle a most reasonably
likely worst case scenario atinventory, assess, remediate and test
its systems for Year 2000 compliance (the "Program"). The Company has nearly
completed the enterprisewide inventory, and the target date for the
completion of itsthe assessment, howeveranalysis and remediation associated with the
Program has not progressed sufficiently to identify the potential
Year 2000 issues.issues is September 1999. The targeted completion date includes
addressing the technology and non-technology interfaces with its clients and
suppliers.
The consulting firm works with full-time Company employees who are
dedicated to the Program. The assessments completed to date have led to the
need to migrate several human resource- and payroll-oriented applications to
Year 2000 compliant software, upgrade several telephone switches and procure
several hundred replacement workstations. Analysis and testing of
Company-generated software applications have been initiated. The Company
anticipates that the need for software conversion caused by Year 2000 issues
is not anticipated to be significant, given the Company's extensive use of
off-the-shelf products.
While the cost to address Year 2000 issues continues to be developed as
the assessment phase nears completion, the Company currently anticipates that
the total cost of assessment and remediation will be between $5 million and
$10 million. Of this total approximately 50% is anticipated to be new capital
expenditures to replace non-compliant computer hardware and software. For the
quarter ended March 31, 1999, the Company has incurred approximately $2.2
million in inventory and assessment work and equipment and software
replacement work on Year 2000 issues, $500,000 which was expensed in the
accompanying statement of operations and were funded by cash flow from
operations. Expenditures in 1999 will be funded primarily through cash flow
from operations and available cash on hand.
FORWARD-LOOKING STATEMENTS
All statements contained in this "Management's Discussion and Analysis
of Financial Condition and Results of Operations" or elsewhere in this
quarterly report, that are not statements of historical facts are
forward-looking statements that involve substantial risks and uncertainties.
Forward lookingForward-looking statements include (i) the anticipated level of capital
expenditures for 1998;1999; (ii) the Company's belief that existing cash,
available borrowings and short-term investmentscash from operations will be sufficient to finance
the Company's near term operations; (iii) the Company's belief that technology revenues will represent a more significant portion of the
total revenues in the future and the impact on operating margins as a result of
those revenues; (iv) the Company's estimate of the
impact of the yearYear 2000 issues; (iv) the Company's belief that near-term
interest rate fluctuations will not result in a material effect on future
earnings, fair values or cash flows of the Company; (v) the Company's belief
that foreign currency rate fluctuations may positively or negatively affect
revenues and (v)net income attributable to the Company's foreign subsidiaries;
and (vi) statements relating to the Company or its operations that are
preceded by terms such as "anticipates", "expects", "believes" and similar
expressions.
The Company's actual results, performance or achievements may differ
materially from those implied by such forward-looking statements as a result
of various factors, including the following: TeleTech's agreements with its
clients do not ensure that TeleTech will generate a specific level of revenue
and may be canceled by the clients on short notice. The amount of revenue
TeleTech generates from a particular client is dependent upon customers'
interest in and use of the client's products or services, some of which are
recently-introducedrecently introduced or untested. The loss of a significant client or the
termination or completion of a significant client program may have a material
adverse effect on TeleTech's capacity utilization and results of operations.
There can be no assurance that the Company will be successful in integrating
acquired companies into the Company's existing businesses, or that any
completed acquisition will enhance the Company's business, results of
operations or financial condition. There are certain risks inherent in
conducting international business, including without limitation exposure to
currency fluctuations, longer payment cycles and greater difficulties in
accounts receivable collection.
1412
Item 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FOR THE THREE MONTHS ENDED MARCH 31, 1999
Market risk represents the risk of loss that may impact the financial
position, results of operations or cash flows of the Company due to adverse
changes in financial and commodity market prices and rates. The Company is
exposed to market risk in the areas of changes in U.S. interest rates and
changes in foreign currency exchange rates as measured against the U.S.
dollar. These exposures are directly related to its normal operating and
funding activities. Historically, and as of March 31, 1999, the Company has
not used derivative instruments or engaged in hedging activities.
INTEREST RATE RISK
The interest on the Company's line of credit and its Canadian
subsidiary's operating loan is variable based on the bank's base rate or
offshore rate, and therefore, affected by changes in market interest rates.
At March 31, 1999, there was approximately $434,000 in borrowings outstanding
on the operating loan and $25.0 million outstanding on the line of credit.
The Company monitors interest rates frequently and has sufficient cash
balances to pay off the line of credit and any early termination penalties,
should interest rates increase significantly. The Company's investments are
typically short-term in nature and as a result do not expose the Company to
significant risk from interest rate fluctuations. Therefore, the Company does
not believe that reasonably possible near-term changes in interest rates will
result in a material effect on future earnings, fair values or cash flows of
the Company.
FOREIGN CURRENCY RISK
The Company has wholly owned subsidiaries in Argentina, Australia,
Brazil, Canada, Mexico, New Zealand, Singapore and the United Kingdom.
Revenues and expenses from these operations are typically denominated in
local currency, thereby creating exposures to changes in exchange rates. The
changes in the exchange rate may positively or negatively affect the
Company's revenues and net income attributed to these subsidiaries.
13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
As disclosed in the Company's 19971998 Annual Report on Form 10-K, in late
November 1996, the Company received noticeCompuServe notified TeleTech that CompuServe Incorporated
("CompuServe") was withdrawing
its WOW! Internet service from the marketplace and that effective January 31,
1997, it would terminate all the programs TeleTech provided to CompuServe by the Company.CompuServe.
Pursuant to the terms of its agreement with the Company,TeleTech, CompuServe was entitled to terminate
the agreement for reasonable business purposes upon 120 daysdays' advance notice
and by payment to TeleTech of a termination fee calculated in accordance with
the agreement. In December 1996, the CompanyTeleTech filed suit against CompuServe in
the Federal District Court for the Southern District of Ohio to enforce these
termination provisions and collect the termination fee. CompuServe filed a
counterclaim in December 1996 alleging that the Company breached other
provisions of this agreement and seeking unspecified monetary damages. In
March 1997, CompuServe asserted a right to offset certain accounts receivable
it owes to the Company for services rendered.rendered against the amount that may be
awarded to CompuServe on its counterclaim, if any. These accounts receivable
total $4.3 million. In mid 1997,mid-1997, because of the proposed acquisition of
CompuServe announced it hadby WorldCom, the parties agreed to sell its worldwide
on-line services businessdelay proceedings in the
lawsuit. In December 1997, proceedings related to America Online, Inc.the lawsuit were
recommenced and its network services
business to a wholly-owned subsidiary of WorldCom, Inc. The Company and
CompuServe agreed to stay their litigationthen stayed again pending the sale,settlement negotiations, which
was completed
in January 1998 at which time the litigation recommenced.currently are moving forward. Although the Company believes that this litigationthese legal
proceedings will not have a material adverse effect on the Company's
financial condition or results of operations, the ultimate outcome of the
proceedings is uncertain.
Because it is uncertain whether this litigation will be concluded
within one year,From time to time, the Company has reclassified the $4.3 million receivable as a
long-term assetis involved in the accompanying balance sheet.
Item 2. Changes in Securities and Uselitigation, most of Proceeds
The registration statement forwhich
is incidental to its business. In the Company's initial public offering was
effective July 30, 1996. The net proceedsopinion, no litigation to
which the Company from the initial
public offering were $52,565,000. The followingcurrently is the amount of net offering
proceeds used by the Company for each of the purposes listed below. The
following use of proceeds does not representa party is likely to have a material change inadverse
effect on the useCompany's results of proceeds described in the initial public offering prospectus.
15
DIRECT OR INDIRECT PAYMENTS TO
DIRECTORS, OFFICERS, GENERAL
PARTNERS OF THE ISSUER OR
THEIR ASSOCIATES: TO PERSONS
OWNING TEN PERCENT OF MORE OF
ANY CLASS OF EQUITY SECURITIES
OF THE ISSUER; AND TO DIRECT OR INDIRECT
AFFILIATES OF THE ISSUER PAYMENTS TO OTHERS
------------------------------ -------------------
Purchase and
installation of
machinery and
equipment $11,536,000
Acquisition of other
businesses 4,337,000
Repayment of
indebtedness 9,950,000
Working Capital $500,000 15,055,000
TEMPORARY INVESTMENT
Cash Management
Account 10,199,000
OTHER PURPOSES
Acquisition of 98,810
shares of Treasury
Stock 988,000
operations or financial condition.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following document isdocuments are filed as an exhibit to this report:
10.15 Employment Agreement dated March 2, 1998 between
Joseph Livingston and TeleTech
10.16 Employment Agreement dated February 25, 1999 between
Steven B. Coburn and TeleTech
10.17 Employment Agreement dated March 11, 1998 between
Deborah C. Gentry and TeleTech
10.18 Employment Agreement dated March 16, 1999 between
Vincent Cipolla and TeleTech
27.1 Financial Data Schedule
27.2 Financial Data Schedule - Restated
(b) Reports on Form 8-K
In a current report filed on Form 8-K dated July 28, 1998, the
Company updated certain historical financial information which
was restated to give effect of the acquisition of Digital
Creators, Inc. on June 8, 1998 and EDM Electronic Direct
Marketing Ltd. on June 17, 1998 accounted for as a pooling of
interests.
1614
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TELETECH HOLDINGS, INC.
-----------------------
(Registrant)
Date: NovemberMay 11, 19981999 /s/ KENNETH D. TUCHMAN
-------------------------------------------------------------------- ---------------------------------
Kenneth D. Tuchman
Chairman of the Board, President and Chief
Executive Officer
Date: NovemberMay 11, 19981999 /s/ STEVEN B. COBURN
-------------------------------------------------------------------- ---------------------------------
Steven B. Coburn, Chief Financial
Officer
17
15