AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 5, 1996
REGISTRATION NO. 333-04097
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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TELETECH HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 7389 84-1291044
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employee
of Classification Code Number) Identification
incorporation or organization) No.)
1700 LINCOLN STREET, SUITE 1400
DENVER, COLORADO 80203
(303) 894-4000
(Address, including zip code, and telephone number, including
area code, of registrant's executive offices)
KENNETH D. TUCHMAN
CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER
TELETECH HOLDINGS, INC.
1700 LINCOLN STREET, SUITE 1400
DENVER, COLORADO 80203
(303) 894-4000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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WITH COPIES TO:
CHARLES EVANS GERBER, ESQ. HOWARD S. LANZNAR, ESQ.
HELEN N. KAMINSKI, ESQ. MARK D. WOOD, ESQ.
Neal, Gerber & Eisenberg Katten Muchin & Zavis
Two North LaSalle Street 525 West Monroe Street
Chicago, Illinois 60602 Chicago, Illinois 60661
(312) 269-8000 (312) 902-5200
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION ON SUCH DATE AS MAY BE
NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER
AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL
THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES OF
1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS
THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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TELETECH HOLDINGS, INC.
CROSS REFERENCE SHEET
PURSUANT TO REGULATION S-K, SECTION 501(B)
FORM S-1 ITEM LOCATION IN PROSPECTUS
------------------------------------------------------- -----------------------------------------------------
1. Forepart of the Registration Statement and Outside
Front Cover Page of Prospectus........................ Forepart of the Registration Statement and Outside
Front Cover Page of Prospectus
2. Inside Front and Outside Back Cover Pages of
Prospectus............................................ Inside Front and Outside Back Cover Pages of
Prospectus; Additional Information
3. Summary Information, Risk Factors and Ratio of Earnings
to Fixed Charges...................................... Prospectus Summary; The Company; Risk Factors;
Business
4. Use of Proceeds........................................ Prospectus Summary; Use of Proceeds
5. Determination of Offering Price........................ Outside Front Cover Page of Prospectus; Underwriters
6. Dilution............................................... Dilution
7. Selling Security Holders............................... Principal and Selling Stockholders
8. Plan of Distribution................................... Outside and Inside Front Cover Pages of Prospectus;
Underwriters
9. Description of Securities to be Registered............. Prospectus Summary; Capitalization; Description of
Capital Stock
10. Interests of Named Experts and Counsel................. Legal Matters; Experts
11. Information with Respect to the Registrant............. Cover Page of Registration Statement; Outside and
Inside Front Cover Pages of Prospectus; Prospectus
Summary; The Company; Risk Factors; Use of Proceeds;
Dividend Policy; Capitalization; Dilution; Selected
Financial Data; Management's Discussion and Analysis
of Financial Condition and Results of Operations;
Business; Management; Certain Relationships and
Related Party Transactions; Principal and Selling
Stockholders; Description of Capital Stock; Shares
Eligible for Future Sale; Legal Matters; Experts;
Financial Statements
12. Disclosure of Commission Position on Indemnification
for Securities Act Liabilities........................ *
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*Inapplicable
EXPLANATORY NOTES
Amendment No. 1 is being filed for the sole purpose of filing the Report of
Independent Public Accountants of Access 24 Service Corporation Pty Limited,
which is found on page F-4, and certain additional exhibits, as indicated on the
Exhibit Index of the Registration Statement.
This Registration Statement contains two forms of prospectuses: one to be
used in connection with an offering in the United States and Canada (the "U.S.
Prospectus") and one to be used in connection with a concurrent international
offering (the "International Prospectus") of the Common Stock, par value $.002
per share, of TeleTech Holdings, Inc. The form of U.S. Prospectus is included
herein and is followed by the outside front cover page to be used in the
International Prospectus, which is the only differing page of the International
Prospectus. The outside front cover page of the International Prospectus
included herein is labeled "Alternative Page for International Prospectus."
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
PROSPECTUS (SUBJECT TO COMPLETION)
ISSUED , 1996
6,000,000 SHARES
[LOGO]
COMMON STOCK
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OF THE 6,000,000 SHARES OF COMMON STOCK BEING OFFERED, 4,000,000 SHARES ARE
BEING SOLD BY THE COMPANY AND 2,000,000 SHARES ARE BEING SOLD BY THE SELLING
STOCKHOLDERS NAMED HEREIN. THE COMPANY WILL NOT RECEIVE ANY OF THE PROCEEDS
FROM THE SALE OF SHARES BY THE SELLING STOCKHOLDERS. SEE "PRINCIPAL AND
SELLING STOCKHOLDERS." OF THE SHARES BEING OFFERED, SHARES ARE
BEING OFFERED INITIALLY IN THE UNITED STATES AND CANADA BY THE U.S.
UNDERWRITERS AND SHARES ARE BEING OFFERED INITIALLY OUTSIDE OF
THE UNITED STATES AND CANADA BY THE INTERNATIONAL UNDERWRITERS. SEE
"UNDERWRITERS." PRIOR TO THE OFFERING, THERE HAS BEEN NO PUBLIC
MARKET FOR THE COMMON STOCK OF THE COMPANY. IT IS CURRENTLY
ANTICIPATED THAT THE INITIAL PUBLIC OFFERING PRICE WILL BE BETWEEN
$ AND $ . SEE "UNDERWRITERS" FOR A
DISCUSSION OF THE FACTORS CONSIDERED IN DETERMINING THE INITIAL
OFFERING PRICE.
------------------------
THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS"
COMMENCING ON PAGE 6 HEREOF.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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PRICE $ A SHARE
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UNDERWRITING PROCEEDS TO
DISCOUNTS AND PROCEEDS TO SELLING
PRICE TO PUBLIC COMMISSIONS (1) COMPANY (2) STOCKHOLDERS
----------------- ----------------- ----------------- -----------------
PER SHARE............................. $ $ $ $
TOTAL (3)............................. $ $ $ $
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(1) THE COMPANY AND THE SELLING STOCKHOLDERS HAVE AGREED TO INDEMNIFY THE
UNDERWRITERS AGAINST CERTAIN LIABILITIES, INCLUDING LIABILITIES UNDER THE
SECURITIES ACT OF 1933, AS AMENDED.
(2) BEFORE DEDUCTING EXPENSES PAYABLE BY THE COMPANY ESTIMATED AT
$ . THE COMPANY HAS AGREED TO PAY THE EXPENSES OF THE SELLING
STOCKHOLDERS, OTHER THAN UNDERWRITING DISCOUNTS AND COMMISSIONS.
(3) ONE OF THE SELLING STOCKHOLDERS HAS GRANTED THE U.S. UNDERWRITERS AN
OPTION, EXERCISABLE WITHIN 30 DAYS OF THE DATE HEREOF, TO PURCHASE UP TO
AN AGGREGATE OF 900,000 ADDITIONAL SHARES OF COMMON STOCK AT THE PRICE TO
PUBLIC LESS UNDERWRITING DISCOUNTS AND COMMISSIONS FOR THE PURPOSE OF
COVERING OVER-ALLOTMENTS, IF ANY. IF THE U.S. UNDERWRITERS EXERCISE SUCH
OPTION IN FULL, THE TOTAL PRICE TO PUBLIC, UNDERWRITING DISCOUNTS AND
COMMISSIONS, PROCEEDS TO COMPANY AND PROCEEDS TO SELLING STOCKHOLDERS
WILL BE $ , $ , $ , AND $ , RESPECTIVELY. SEE
"UNDERWRITERS."
------------------------
THE SHARES ARE OFFERED, SUBJECT TO PRIOR SALE, WHEN, AS AND IF ACCEPTED BY
THE UNDERWRITERS NAMED HEREIN AND SUBJECT TO APPROVAL OF CERTAIN LEGAL MATTERS
BY KATTEN MUCHIN & ZAVIS, COUNSEL FOR THE UNDERWRITERS. IT IS EXPECTED THAT
DELIVERY OF THE SHARES WILL BE MADE ON OR ABOUT , 1996 AT THE OFFICE OF
MORGAN STANLEY & CO. INCORPORATED, NEW YORK, NEW YORK, AGAINST PAYMENT THEREFOR
IN IMMEDIATELY AVAILABLE FUNDS.
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MORGAN STANLEY & CO.
INCORPORATED
ALEX. BROWN & SONS
INCORPORATED
SMITH BARNEY INC.
, 1996
INSIDE FRONT COVER OF PROSPECTUS:
The inside front cover is a gatefold which opens to a multicolor graphic
layout containing, in the upper right-hand corner, the title "integrated
customer lifecycle management." Under the title is written: "TeleTech's
solutions integrate all phases of the customer lifecycle -- customer
acquisition, service and retention, satisfaction and loyalty -- and are designed
to maximize the lifetime value of its client's customer relationships."
The gatefold contains six photographs of the Company's call centers (two
overlapping photographs in each of the lower left-hand, upper left-hand and
upper right-hand corners with the word "TeleTech" superimposed). In the center
of the gatefold, there is an oval photograph of a woman speaking on the
telephone, which is labelled "Client's Customer." This photograph is surrounded
by three smaller oval photographs of faces, each of which is labelled "TeleTech
representative." Radiating outward from the center oval photograph of the
Client's Customer are 16 curved lines, each of which terminates at an oval
point, adjacent to which is a question or request that the customer might have
regarding a particular product or service. Following this "customer lifecycle"
clockwise from a point labelled "Start", the questions or requests that a
customer might ask appear as follows:
"Tell me about it."
"Where can I buy it?"
"I want to order it."
"How do I activate it."
"Help me navigate it."
"Send someone to repair it."
"I want to upgrade it."
"My billing address has changed for it."
"How do I take care of it?"
"I want to complain about it."
"I want to rave about it."
"Make me a preferred customer and I'll keep buying it."
"Register me for the event celebrating it."
"Contact my friend about trying it."
"I'd like to buy it again."
These questions or requests are classified by color into the following three
phases of the customer lifecycle: "CUSTOMER ACQUISITION/SHORT-TERM VALUE,"
"CUSTOMER SERVICE + RETENTION/SUSTAINED VALUE," "CUSTOMER SATISFACTION +
LOYALTY/MAXIMUM VALUE."
Centered along the lower edge of the gatefold, is an oval graphic containing
text that lists under the heading "TeleTech's Core Strengths" the following
words: "People -- Infrastructure -- Technology -- Process -- Strategy --
Innovation." On either side of this text is an arrow, one of which points to the
left indicating "Customer Benefits" (listed as "Access to direct product and
service providers -- Rapid, single-call resolution -- Personalized service --
Long-term, loyal supplier relationships"), and the other of which points to the
right indicating "Client Benefits" (listed as "Reduced operating costs -- Core
competency concentration -- Enhance service quality -- Enlightening customer
relationships -- Maximum customer value").
TeleTech's corporate logo appears in the lower left-hand corner of the
gatefold, under which are written the words: "COPYRIGHT 1996."
NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN AS CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, BY ANY SELLING STOCKHOLDER
OR BY ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF ANY OFFER TO BUY BY ANY PERSON IN ANY JURISDICTION IN WHICH
IT IS UNLAWFUL TO MAKE SUCH AN OFFERING OR SOLICITATION. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES IMPLY
THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO
THE DATE HEREOF.
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UNTIL , 1996 (25 DAYS AFTER COMMENCEMENT OF THIS OFFERING), ALL
DEALERS EFFECTING TRANSACTIONS IN COMMON STOCK, WHETHER OR NOT PARTICIPATING IN
THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION
TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
-------------------
For investors outside of the United States: No action has been or will be
taken in any jurisdiction by the Company or by any Underwriter that would permit
a public offering of the Common Stock or possession or distribution of this
Prospectus in any jurisdiction where action for that purpose is required, other
than in the United States. Persons into whose possession this Prospectus comes
are required by the Company and the Underwriters to inform themselves about and
to observe any restrictions as to the offering of the Common Stock and the
distribution of this Prospectus.
In this Prospectus references to "dollars" and "$" are to United States
dollars, and the terms "United States" and "U.S." mean the United States of
America, its states, its territories, its possessions and all areas subject to
its jurisdiction.
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TABLE OF CONTENTS
PAGE
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Prospectus Summary......................................................................................... 3
The Company................................................................................................ 5
Risk Factors............................................................................................... 6
Use of Proceeds............................................................................................ 11
Dividend Policy............................................................................................ 11
Capitalization............................................................................................. 12
Dilution................................................................................................... 13
Selected Financial Data.................................................................................... 14
Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 17
Business................................................................................................... 23
Management................................................................................................. 34
Certain Relationships and Related Party Transactions....................................................... 41
Principal and Selling Stockholders......................................................................... 42
Description of Capital Stock............................................................................... 44
Shares Eligible for Future Sale............................................................................ 46
Certain United States Federal Tax Consequences for Non-U.S. Holders of Common Stock........................ 48
Underwriters............................................................................................... 50
Legal Matters.............................................................................................. 53
Experts.................................................................................................... 53
Additional Information..................................................................................... 53
Index to Financial Statements.............................................................................. F-1
-------------------
The Company intends to furnish to its stockholders annual reports containing
consolidated financial
statements audited by an independent accounting firm and quarterly reports for
the first three quarters of each fiscal year containing interim unaudited
financial information.
-------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR OTHERWISE. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN
THIS PROSPECTUS. EXCEPT AS OTHERWISE NOTED HEREIN, INFORMATION IN THIS
PROSPECTUS (I) ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION,
(II) REFLECTS A FIVE-FOR-ONE SPLIT OF THE COMPANY'S COMMON STOCK TO BE EFFECTED
IMMEDIATELY PRIOR AND SUBJECT TO THE CLOSING OF THIS OFFERING (THE "OFFERING")
AND (III) REFLECTS THE CONVERSION OF ALL OUTSTANDING SHARES OF CONVERTIBLE
PREFERRED STOCK, PAR VALUE $6.45 PER SHARE, OF THE COMPANY ("PREFERRED STOCK")
INTO 9,300,000 SHARES OF COMMON STOCK TO BE EFFECTED IMMEDIATELY PRIOR AND
SUBJECT TO THE CLOSING OF THE OFFERING (THE "PREFERRED STOCK CONVERSION"). SEE
"DESCRIPTION OF CAPITAL STOCK" AND "UNDERWRITERS." UNLESS OTHERWISE INDICATED,
REFERENCES TO "TELETECH" AND THE "COMPANY" MEAN TELETECH HOLDINGS, INC. AND ITS
WHOLLY-OWNED SUBSIDIARIES OR, FOR PERIODS PRIOR TO DECEMBER 1994, MEAN TELETECH
TELECOMMUNICATIONS, INC. AND TELETECH TELESERVICES, INC., COLLECTIVELY. SEE "THE
COMPANY."
THE COMPANY
TeleTech is a leading provider of customer care solutions for Fortune 1000
companies. Customer care encompasses a wide range of customer acquisition,
retention and satisfaction programs designed to maximize the lifetime value of
the relationships between TeleTech's clients and their customers. TeleTech's
customer care programs involve all stages of the customer lifecycle and usually
consist of a variety of customer service and technical and product support
activities, such as product information, program enrollment, help desk support,
account inquiries, problem resolution and satisfaction assessments. TeleTech
works closely with its clients to rapidly design and implement large scale,
tailored customer care programs that provide integrated, comprehensive solutions
to specific business needs.
TeleTech delivers its customer care services primarily through
customer-initiated ("inbound") telephone calls and also over the Internet.
Services are provided by trained customer care representatives
("Representatives") in TeleTech call centers ("Call Centers") in response to an
inquiry that a customer makes by calling a toll-free telephone number or by
sending an Internet message. Representatives respond to these inquiries
utilizing state-of-the-art workstations that leverage TeleTech's advanced
technology platform and enable them to provide rapid, single-call resolution.
This platform incorporates digital switching, client/server technology,
object-oriented software modules, relational database management systems,
proprietary call tracking management software, computer telephony integration
and interactive voice response. TeleTech's services generally are provided on
either a fully outsourced or facilities management basis.
TeleTech seeks to establish long-term, strategic relationships, typically
formalized by multi-year contracts, with selected clients in the
telecommunications, technology, transportation, health care and financial
services industries. TeleTech targets clients in these industries because of
their complex product and service offerings and large customer bases, which
require frequent, often sophisticated, customer interactions. The Company
recently entered into significant, multi-year contracts with CompuServe and
United Parcel Service and has obtained additional business from AT&T. Additional
clients include Apple Computer, Bell Atlantic, Novell, NYNEX and Wells Fargo
Bank.
The Company was founded in 1982 and has been providing inbound customer care
solutions since its inception. Since January 1995, the Company has opened,
acquired or initiated management of seven Call Centers. As of April 30, 1996,
TeleTech owned, leased or managed nine Call Centers in the United States, the
United Kingdom, Australia and New Zealand equipped with a total of 4,560
state-of-the-art workstations. TeleTech currently plans to open two additional
Call Centers and expand an existing Call Center by the end of 1996. In the first
quarter of 1996, approximately 95% of the Company's call handling revenues were
derived from inbound inquiries. TeleTech's revenues increased 42.3% to $50.5
million in 1995 from $35.5 million in 1994. In the first quarter of 1996,
revenues increased 111.5% to $22.0 million from $10.4 million in the same period
of 1995.
3
THE OFFERING
Common Stock offered......................... 6,000,000 shares
4,000,000 shares by the Company
2,000,000 shares by the Selling Stockholders
U.S. offering.............................. shares
International offering..................... shares
Common Stock to be outstanding after the
Offering.................................... 55,046,240 shares(1)
Use of proceeds to the Company............... For working capital and general corporate
purposes and to repay outstanding short-term
indebtedness.
Proposed Nasdaq National Market Symbol....... TTEC
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(1) Includes 9,300,000 shares of Common Stock to be issued upon the conversion
of all 1,860,000 outstanding shares of Preferred Stock pursuant to the
Preferred Stock Conversion. Excludes 4,968,500 shares of Common Stock
issuable upon exercise of options outstanding at May 15, 1996 with a
weighted average exercise price of $4.69 per share. See "Capitalization,"
"Management-- Compensation of Directors," "Management--Teletech Stock Option
Plan," "Underwriters" and note 11 to the Company's Consolidated and Combined
Financial Statements (the "Financial Statements").
SUMMARY FINANCIAL INFORMATION (1)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND OPERATING DATA)
YEAR ENDED ELEVEN YEAR ENDED THREE MONTHS ENDED
JANUARY 31, MONTHS ENDED DECEMBER 31, MARCH 31,
--------------------- DECEMBER 31, ------------------ ------------------
1993 1993 1994 1995 1995 1996
------- ------------ ------- ------- ------- -------
1992
-----------
(UNAUDITED) (UNAUDITED)
STATEMENT OF OPERATIONS DATA:
Revenues.......................................... $ 5,751 $13,814 $19,520 $35,462 $50,467 $10,412 $22,019
Income (loss) from operations..................... (332) 250 837 2,196 4,596 614 2,723
Net income........................................ 214 52 548 1,695 4,156(2) 1,628(2) 1,258
Pro forma net income.............................. 214 52 299(3) 1,037(3) 4,156(2) 1,628(2) 1,258
Pro forma net income per share of Common Stock and
equivalents (4).................................. -- -- .01(3) .02(3) .08(2) .03(2) .02
Weighted average shares outstanding (4)........... 44,085 44,085 44,085 44,085 54,658 54,586 54,682
OPERATING DATA:
Number of Call Centers............................ 1 1 2 2 3 3 9
Number of workstations............................ 300 300 560 560 960 960 3,107
MARCH 31, 1996
-------------------------------------------
PRO FORMA
ACTUAL PRO FORMA (5) AS ADJUSTED (6)
--------- --------------- ---------------
(UNAUDITED)
BALANCE SHEET DATA:
Working capital.......................................................... $ 5,380 $ 5,380
Total assets............................................................. 49,454 49,454
Long-term debt, net of current portion................................... 6,536 6,536
Total stockholders' equity............................................... 9,829 22,908
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(1) The Summary Financial Information presented in this table is derived from
the "Selected Financial Information" and the Financial Statements included
elsewhere in this Prospectus.
(2) Includes the $2.4 million pre-tax net proceeds of a one-time payment made by
a former client to TeleTech in connection with such client's early
termination of a contract.
(3) During 1993 and 1994, the Company was an S corporation under Subchapter S of
the Internal Revenue Code of 1986, as amended (the "Code"), and,
accordingly, was not subject to federal income taxes. Pro forma net income
includes a provision for income taxes at an effective rate of 44.4% for the
11 months ended December 31, 1993 and 39.5% for the year ended December 31,
1994.
(4) Calculated in the manner described in note 1 to the Financial Statements.
(5) Reflects the conversion of 1,860,000 shares of Preferred Stock into
9,300,000 shares of Common Stock pursuant to the Preferred Stock Conversion.
(6) Reflects the sale of 4,000,000 shares of Common Stock being offered by
TeleTech at an assumed initial price to public of $ per share (net of
approximately $ million of estimated offering expenses and underwriting
discounts and commissions) and the application of the estimated net proceeds
therefrom, including repayment of short-term indebtedness. See "Use of
Proceeds" and "Capitalization."
4
THE COMPANY
TeleTech is a leading provider of customer care solutions for Fortune 1000
companies. Customer care encompasses a wide range of customer acquisition,
retention and satisfaction programs designed to maximize the lifetime value of
the relationships between TeleTech's clients and their customers. TeleTech's
customer care programs involve all stages of the customer lifecycle and usually
consist of a variety of customer service and technical and product support
activities, such as product information, program enrollment, help desk support,
account inquiries, problem resolution and satisfaction assessments. TeleTech
delivers its customer care services primarily through customer initiated
telephone calls and also over the Internet. Services are generally provided by
customer care Representatives in Call Centers in response to an inquiry that a
customer makes by calling a toll-free telephone number or by sending an Internet
message. Representatives respond to these inquiries utilizing state-of-the-art
workstations that leverage TeleTech's advanced technology platform and enable it
to provide rapid, single-call resolution. TeleTech's services are generally
provided on either a fully outsourced or facilities management basis.
Companies today are finding it increasingly difficult to satisfy their
customers' needs for service and information. The Company believes that customer
care has become a clear competitive differentiator and that consumers
increasingly consider the relative effectiveness, ease of use and responsiveness
of customer service when evaluating comparable products or services.
Historically, companies have provided customer care and support in-house because
they believed that the "customer interface" was too critical to be outsourced.
Many now acknowledge that they do not have the core competencies or are
unwilling to invest the substantial resources necessary to provide high quality,
inbound customer care solutions on a timely, cost effective basis. As a result
of these trends, a large and rapidly growing customer care outsourcing industry
has emerged. Management believes that companies considering outsourcing their
customer care activities increasingly are seeking a strategic partner that can
understand their business, can provide a comprehensive range of services, and
has the flexibility, scalability, management expertise, facilities and
sophisticated technological and educational resources to serve effectively their
customers' long-term needs.
TeleTech designs and implements customer care programs that are customized
to provide an integrated solution tailored for each client. The Company's
programs are designed to (i) improve the quality and yield of customer
interactions, (ii) reduce the operating costs associated with the delivery of
customer service and product support, (iii) minimize the client's required
investment in and technology risks associated with operating in-house call
centers, (iv) eliminate the need to manage large numbers of call center
employees and (v) enable clients to focus on their core competencies. These
programs address inbound customer interactions in a manner that is seamless with
the client's operations and transparent to the customers. TeleTech effectively
delivers these programs by rapidly deploying the technology and human resources
required to implement and manage comprehensive, integrated customer care
solutions.
TeleTech seeks to establish long-term, strategic relationships, typically
formalized by multi-year contracts, with selected clients in the
telecommunications, technology, transportation, health care and financial
services industries. TeleTech targets clients in these industries because of
their complex product and service offerings and large customer bases that
require frequent, often sophisticated, customer interactions.
TeleTech's principal executive offices are located at 1700 Lincoln Street,
Suite 1400, Denver, Colorado 80203 and its telephone number is (303) 894-4000.
TeleTech was incorporated under the laws of Delaware in December 1994 in
connection with a restructuring of the ownership of TeleTech Telecommunications,
Inc., which was incorporated under the laws of California in October 1982, and
TeleTech Teleservices, Inc., which was incorporated under the laws of Colorado
in November 1992. As a result of such restructuring, TeleTech Teleservices and
TeleTech Telecommunications became wholly-owned subsidiaries of TeleTech.
5
RISK FACTORS
IN EVALUATING THE COMPANY'S BUSINESS, PROSPECTIVE INVESTORS SHOULD CAREFULLY
CONSIDER THE FOLLOWING FACTORS IN ADDITION TO THE OTHER INFORMATION PRESENTED IN
THIS PROSPECTUS.
RELIANCE ON MAJOR CLIENTS. The Company has strategically focused its
marketing efforts on developing long-term relationships with Fortune 1000
companies in targeted industries. As a result, a substantial portion of the
Company's revenues is derived from relatively few clients. Collectively, the
Company's 10 largest clients in 1995 accounted for approximately 82.1% of the
Company's 1995 revenues. The Company's three largest clients in 1995 were AT&T,
Continental Airlines and Apple Computer, which accounted for approximately 31%
(including 11% from AT&T's subsidiary McCaw Communications d/b/a Cellular One),
18% and 9%, respectively, of the Company's 1995 revenues. The Company's program
for Continental Airlines was completed in March 1996 and was not renewed. The
Company expects that its three largest clients in 1996, which it anticipates
will be AT&T, CompuServe and United Parcel Service, collectively will account
for an even greater percentage of the Company's 1996 net revenues. There can be
no assurance that the Company will be able to retain its significant clients or
that, if it were to lose one or more of its significant clients, it would be
able to replace such clients with clients that generate a comparable amount of
revenues. Consequently, the loss of one or more of its significant clients could
have a material adverse effect on the Company's business, results of operations
or financial condition. See "Business--Business Strategy," "-- Markets and
Clients," and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Substantially all of the Company's significant arrangements with its clients
generate revenues based, in large part, on the amount of time which the
Company's personnel devotes to such clients' customers. Consequently, and due to
the primarily inbound nature of the Company's business, the amount of revenues
generated from any particular client is generally dependent upon consumers'
interest in, and use of, the client's products and/or services. Furthermore, a
significant portion of the Company's expected revenues for 1996 relate to
recently-introduced, unproven product or service offerings of the Company's
clients, including two significant programs developed for two of the Company's
largest clients. There can be no assurance as to the number of consumers who
will be attracted to the products and services of the Company's clients and who
will therefore need the Company's services, or that the Company's clients will
develop new products or services that will require the Company's services.
MANAGEMENT OF GROWTH. The Company has experienced rapid growth over the
past several years and anticipates continued future growth. Continued growth
depends on a number of factors, including the Company's ability to (i) initiate,
develop and maintain new client relationships and expand its marketing
operations, (ii) recruit, motivate and retain qualified management and hourly
personnel, (iii) rapidly identify, acquire or lease suitable Call Center
facilities on acceptable terms and complete build-outs of such facilities in a
timely and economic fashion, and (iv) maintain the high quality of the services
and products that it provides to its clients. The Company's continued rapid
growth can be expected to place a significant strain on the Company's
management, operations, employees and resources. There can be no assurance that
the Company will be able to maintain or accelerate its current growth,
effectively manage its expanding operations or achieve planned growth on a
timely or profitable basis. If the Company is unable to manage growth
effectively, its business, results of operations or financial condition could be
materially adversely affected. See "Business--Growth Strategy," "--Operations"
and "--Facilities."
RISKS ASSOCIATED WITH THE COMPANY'S CONTRACTS. Although the Company
currently seeks to sign multi-year contracts with its clients, the Company's
contracts do not assure the Company a specific level of revenues and they
generally do not designate the Company as the client's exclusive service
provider. The Company believes maintaining satisfactory relationships with its
clients has a more significant impact on the Company's revenues than the
specific terms of its client contracts. Certain of the Company's current
contracts (representing approximately 36% of the Company's 1995 revenues) have
terms of one year or less and there can be no assurance that the clients will
renew or extend such contracts. In addition, the Company's contracts are
terminable by its clients on relatively short notice. Although many of such
contracts require payment of a contractually agreed amount in the event of early
termination, there can be no
6
assurance that the Company will be able to collect such amount or that such
amount, if received, will sufficiently compensate the Company for the investment
it has made to support the cancelled program or for the revenues it may lose as
a result of the early termination. In addition, some of the Company's contracts
limit the aggregate amount the Company can charge for its services during the
term of the contract and several prohibit the Company from providing services to
a direct competitor of a client that are similar to the services the Company
provides to such client. Although a few of the Company's more recently executed
contracts provide for annual increases in the rates paid by clients in the event
of increases in certain cost or price indices, most of the Company's contracts
do not include such provisions and some of the contracts currently in effect
provide that the service fees paid by clients may be adjusted downward if the
performance objectives specified therein are not attained or, at least in one
case, in the event of a decrease in a price index. Furthermore, there can be no
assurance that the adjustments based upon increases in cost or price indices
will fully compensate the Company for increases in labor and other costs that it
may experience in fulfilling its contractual obligations. See
"Business--Business Strategy," "--Services" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
DEPENDENCE ON LABOR FORCE. The Company's success is largely dependent on
its ability to recruit, hire, train and retain qualified employees. The
Company's industry is very labor intensive and has experienced high personnel
turnover. A significant increase in the Company's employee turnover rate could
increase the Company's recruiting and training costs and decrease operating
effectiveness and productivity. Also, the addition of significant new clients or
the implementation of new large-scale programs may require the Company to
recruit, hire and train qualified personnel at an accelerated rate. There can be
no assurance that the Company will be able to continue to hire, train and retain
sufficient qualified personnel to adequately staff new customer care programs.
Because a significant portion of the Company's operating costs relate to labor
costs, an increase in wages, costs of employee benefits or employment taxes
could have a material adverse effect on the Company's business, results of
operations or financial condition. In addition, certain of the Company's
facilities are located in geographic areas with relatively low unemployment
rates, thus potentially making it more difficult and costly to hire qualified
personnel. See "Business--Human Resources" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
DEPENDENCE ON KEY PERSONNEL. The Company's success to date has depended in
large part on the skills and efforts of Kenneth D. Tuchman, the Company's
founder, Chairman of the Board, President and Chief Executive Officer. There can
be no assurance that the Company will be able to hire or retain the services of
other officers or key employees. The loss of Mr. Tuchman or the Company's
inability to hire or retain such other officers or key employees could have a
material adverse effect on the Company's business, results of operations or
financial condition. The Company's success and achievement of its growth plans
depend on its ability to recruit, hire, train and retain other highly qualified
technical and managerial personnel, including individuals with significant
experience in the industries targeted by the Company. The inability of the
Company to attract and retain the necessary technical and managerial personnel
could have a material adverse effect on the Company's business, results of
operations or financial condition. See "Management."
DEPENDENCE ON KEY INDUSTRIES. The Company's clients are concentrated
primarily in the telecommunications, technology and transportation industries
and, to a lesser extent, the health care and financial services industries. The
Company's business and growth is largely dependent on the continued demand for
the Company's services from these industries and current trends in such
industries to outsource certain customer care services. A general economic
downturn in any of these industries or a slowdown or reversal of the trend in
any of these industries to outsource certain customer care services could have a
material adverse effect on the Company's business, results of operations or
financial condition. Additionally, a substantial percentage of the revenues
generated by clients in the telecommunications industry relate to the Company's
provision of legally required third-party verification of long-distance service
sales. The elimination of this requirement as a result of changes in the law
could have a material adverse effect on the Company's business, results of
operations or financial condition. See "Business--Industry Background" and
"--Markets and Clients."
RISK OF BUSINESS INTERRUPTION. The Company's operations are dependent upon
its ability to protect its Call Centers, computer and telecommunications
equipment and software systems against damage from fire,
7
power loss, telecommunications interruption or failure, natural disaster and
other similar events. In the event the Company experiences a temporary or
permanent interruption at one or more of its Call Centers, through casualty,
operating malfunction or otherwise, the Company's business could be materially
adversely affected and the Company may be required to pay contractual damages to
some clients or allow some clients to terminate or renegotiate their contracts
with the Company. While the Company maintains property and business interruption
insurance, such insurance may not adequately compensate the Company for all
losses that it may incur. See "Business--Operations."
RISKS ASSOCIATED WITH TECHNOLOGY. The Company's business is highly
dependent on its computer and telecommunications equipment and software systems.
The Company's failure to maintain the superiority of its technological
capabilities or to respond effectively to technological changes could have a
material adverse effect on the Company's business, results of operations or
financial condition. The Company's future success also will be highly dependent
upon its ability to enhance existing services and introduce new services or
products to respond to changing technological developments. There can be no
assurance that the Company can successfully develop and bring to market any new
services or products in a timely manner, that such services or products will be
commercially successful or that competitors' technologies or services will not
render the Company's products or services noncompetitive or obsolete. See
"Business--Technology."
COMPETITION. The market in which the Company competes is highly competitive
and fragmented. The Company expects competition to persist and intensify in the
future. The Company's competitors include small firms offering specific
applications, divisions of large entities, large independent firms and, most
significantly, the in-house operations of clients or potential clients. A number
of competitors have or may develop greater capabilities and resources than those
of the Company. Similarly, there can be no assurance that additional competitors
with greater resources than the Company will not enter the Company's market.
Because the Company's primary competitors are the in-house operations of
existing or potential clients, the Company's performance and growth could be
negatively impacted if its existing clients decide to provide in-house customer
care services that currently are outsourced or if potential clients retain or
increase their in-house customer service and product support capabilities. In
addition, competitive pressures from current or future competitors could cause
the Company's services to lose market acceptance or result in significant price
erosion, with a material adverse effect upon the Company's business, results of
operations or financial condition. See "Business--Competition."
RISKS ASSOCIATED WITH ACQUISITIONS AND JOINT VENTURES. One component of the
Company's growth strategy is to pursue strategic acquisitions of companies that
have services, products, technologies, industry specializations or geographic
coverage that extend or complement the Company's existing business. There can be
no assurance that the Company will be able successfully to identify, acquire on
favorable terms or integrate such companies. If any acquisition is completed,
there can be no assurance that such acquisition will enhance the Company's
business, results of operations or financial condition. The Company may in the
future face increased competition for acquisition opportunities, which may
inhibit the Company's ability to consummate suitable acquisitions on terms
favorable to the Company. A substantial portion of the Company's capital
resources, including proceeds from the Offering, could be used for acquisitions.
The Company may require additional debt or equity financing for future
acquisitions, which financing may not be available on terms favorable to the
Company, if at all. As part of its growth strategy, the Company may also pursue
opportunities to undertake strategic alliances in the form of joint ventures.
Joint ventures involve many of the same risks as acquisitions, as well as
additional risks associated with possible lack of control of the joint ventures.
See "Business--Growth Strategy."
The Company recently acquired Access 24 Service Corporation Pty Limited, an
Australian company ("Access 24"). Certain of Access 24's services, now provided
as part of the Company's health care and financial services strategic business
units ("SBUs"), differ from the traditional outsourcing services of the
Company's United States business. The Company also recently entered into a joint
venture with a subsidiary of PPP Healthcare Group plc ("PPP") to provide
services in the United Kingdom and Ireland similar to those provided by Access
24. The anticipated benefits of the Access 24 acquisition and the joint venture
with
8
PPP, including the successful offering in the United States of services similar
to those provided by Access 24, may not be achieved. See "Business--Markets and
Clients--Health Care," "Business--Markets and Clients--Financial Services" and
"Business--International Operations."
RISK ASSOCIATED WITH INTERNATIONAL OPERATIONS AND EXPANSION. As a result of
the recent acquisition of Access 24 and the joint venture with PPP, the Company
now conducts business in the United Kingdom, Australia and New Zealand. A key
component of the Company's growth strategy is its continued international
expansion. There can be no assurance that the Company will be able successfully
to market, sell and deliver its services in international markets, or that it
will be able successfully to acquire companies, or integrate acquired companies,
to expand international operations. In addition, there are certain risks
inherent in conducting international business, including exposure to currency
fluctuations, longer payment cycles, greater difficulties in accounts receivable
collection, difficulties in complying with a variety of foreign laws, unexpected
changes in regulatory requirements, difficulties in staffing and managing
foreign operations, political instability and potentially adverse tax
consequences. There can be no assurance that one or more of such factors will
not have a material adverse effect on the Company's international operations
and, consequently, on the Company's business, results of operations or financial
condition. See "Business-- Growth Strategy" and "--International Operations."
VARIABILITY OF QUARTERLY OPERATING RESULTS. The Company has experienced,
and in the future could experience, quarterly variations in revenues 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; changes in the Company's revenue mix among its various
service offerings; and the seasonal pattern of certain of the businesses
serviced by the Company. In addition, the Company's planned staffing levels,
investments and other operating expenditures are based on revenue forecasts. If
revenues are below expectations in any given quarter, the Company's operating
results would likely be materially adversely affected for that quarter. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Quarterly Results."
GOVERNMENT REGULATION. Because the Company's current business consists
primarily of responding to inbound telephone calls, it is not highly regulated.
However, in connection with the limited amount of outbound telemarketing
services that it provides, the Company is required to comply with the Federal
Communications Commission's rules under the Federal Telephone Consumer
Protection Act of 1991 and the Federal Trade Commission's regulations under the
Federal Telemarketing and Consumer Fraud and Abuse Prevention Act of 1994, both
of which govern telephone solicitation. In the event that the Company decides to
expand its outbound telemarketing services, such rules and regulations would
apply to a larger percentage of the Company's business. Furthermore, there may
be additional federal or state legislation, or changes in regulatory
implementation, that limit the activities of the Company or its clients in the
future or significantly increase the cost of compliance. Additionally, the
Company could be responsible for its failure, or the failure of its clients, to
comply with regulations applicable to its clients.
CONTROL BY PRINCIPAL STOCKHOLDER. Following completion of the Offering,
Kenneth D. Tuchman, the Company's Chairman, President and Chief Executive
Officer, will beneficially own approximately 72.1% of the outstanding shares of
Common Stock (approximately 70.5% if the Underwriters' over-allotment is
exercised in full). As a result, Mr. Tuchman will continue to be able to elect
the entire Board of Directors of the Company and to control substantially all
other matters requiring action by the Company's stockholders. Such voting
concentration may have the effect of discouraging, delaying or preventing a
change in control of the Company. See "Principal and Selling Stockholders."
NO PRIOR PUBLIC MARKET AND POSSIBLE VOLATILITY OF STOCK PRICE. Prior to the
Offering, there has been no public market for the Common Stock, and there can be
no assurance that an active public market for the Common Stock will develop or
be sustained after the Offering. The initial public offering price of the Common
Stock offered hereby was determined by negotiations between the Company and the
Underwriters based upon several factors. See "Underwriters" for a discussion of
the factors considered in determining the initial public offering price. The
market price of the Common Stock is likely to be highly volatile and could
9
be subject to wide fluctuations in response to quarterly variations in operating
results, announcements of new contracts or contract cancellations, announcements
of technological innovations or new products or services by the Company or its
competitors, changes in financial estimates by securities analysts or other
events or factors. In addition, the stock market has experienced significant
price and volume fluctuations that have particularly affected the market prices
of equity securities of many companies and that have often been unrelated to the
operating performance of such companies. These broad market fluctuations may
adversely affect the market price of the Common Stock. In the past, following
periods of volatility in the market price of a company's securities, securities
class action litigation has often been instituted against such a company. Any
such litigation instigated against the Company could result in substantial costs
and a diversion of management's attention and resources, which could have a
material adverse effect on the Company's business, results of operations or
financial condition.
SHARES ELIGIBLE FOR FUTURE SALE. The sale of a substantial number of shares
of Common Stock, or the perception that such sales could occur, could adversely
affect prevailing market prices of the Common Stock. The Company is unable to
make any prediction as to the effect, if any, that future sales of Common Stock
or the availability of Common Stock for sale may have on the market price of the
Common Stock prevailing from time to time. In addition, any such sale or such
perception could make it more difficult for the Company to sell equity
securities or equity related securities in the future at a time and price that
the Company deems appropriate. Upon completion of the Offering, the Company will
have outstanding an aggregate of 55,046,240 shares of Common Stock, excluding
shares of Common Stock issuable upon exercise of outstanding options. The Common
Stock offered hereby will be freely tradeable (other than by an "affiliate" of
the Company as such term is defined under the Securities Act of 1933, as amended
(the "Securities Act")) without restriction or registration under the Securities
Act. All remaining outstanding shares of Common Stock may be sold under Rule 144
or Regulation S promulgated under the Securities Act, subject to the holding
period, volume, manner of sale and other restrictions of Rule 144 or Regulation
S and subject in certain cases to 180-day lock-up agreements with the
Underwriters. See "Description of Capital Stock," "Shares Eligible for Future
Sale" and "Underwriters."
DILUTION. Investors participating in the Offering will incur immediate,
substantial dilution. To the extent outstanding options to purchase the
Company's Common Stock are exercised, there will be further dilution. See
"Dilution."
ANTI-TAKEOVER PROVISIONS. The Board of Directors has the authority to issue
up to 10,000,000 shares of preferred stock and to determine the price, rights,
preferences, privileges and restrictions, including voting rights, of those
shares without any vote or action by the stockholders. The rights of the holders
of the Common Stock will be subject to, and may be adversely affected by, the
rights of the holders of any preferred stock that may be issued in the future.
The issuance of the preferred stock, while providing desirable flexibility in
connection with possible acquisitions and other corporate purposes, could have
the effect of making it more difficult for a third party to acquire a majority
of the outstanding voting stock of the Company. The Company has no present plan
to issue any additional shares of preferred stock. Furthermore, certain
provisions of the Company's Restated Certificate of Incorporation and By-laws
and of Delaware law could delay or make difficult a merger, tender offer or
proxy contest involving the Company. See "Description of Capital Stock."
10
USE OF PROCEEDS
The net proceeds to TeleTech from the sale of the 4,000,000 shares of Common
Stock being offered by TeleTech are estimated to be approximately $ ,
after deducting underwriting discounts and commissions and estimated offering
expenses. TeleTech will not receive any proceeds from the sale of shares of
Common Stock by the Selling Stockholders. See "Principal and Selling
Stockholders." TeleTech intends to use the net proceeds it will receive from the
Offering primarily for working capital and general corporate purposes, including
the purchase of computer hardware and software needed to equip and open
additional Call Centers and expand existing Call Centers. In addition, TeleTech
intends to use a portion of the net proceeds of the Offering to repay
outstanding short-term indebtedness under its $15 million unsecured revolving
line of credit, which expires on May 31, 1998. Outstanding borrowings under this
line of credit bear interest at various rates, selected by TeleTech at the time
a draw is made. On May 17, 1996, a total of $6.0 million was outstanding under
this line of credit, of which $3.5 million bears interest at a rate of 6.6875%
and $2.5 million bears interest at a rate of 6.63%. The proceeds of such
outstanding indebtedness have been used by TeleTech for general corporate
purposes. See note 6 to the Financial Statements. A portion of the net proceeds
also may be used for the acquisition of businesses, products and technologies
that extend or complement TeleTech's existing business; however, TeleTech has no
current plans, agreements or commitments and is not currently engaged in any
negotiations with respect to any such transaction. Pending such uses, TeleTech
plans to invest the net proceeds, other than net proceeds used to repay
short-term indebtedness, in investment grade, interest bearing securities.
DIVIDEND POLICY
In 1995 TeleTech paid a dividend of approximately $452,000 to its principal
stockholder. TeleTech does not expect to pay dividends on its Common Stock in
1996 or in the foreseeable future. The Board of Directors anticipates that all
cash flow generated from operations in the foreseeable future will be retained
and used to develop and expand TeleTech's business. Any future payment of
dividends will depend upon TeleTech's results of operations, financial
condition, cash requirements and other factors deemed relevant by the Board of
Directors.
11
CAPITALIZATION
The following table sets forth as of March 31, 1996 the Company's (i) actual
short-term debt and capitalization, (ii) short-term debt and capitalization on a
pro forma basis after giving effect to the Preferred Stock Conversion and (iii)
short-term debt and capitalization as adjusted to reflect the sale of Common
Stock offered hereby (at an assumed initial offering price of $ per share
and after deducting the estimated underwriting discounts and commissions and the
Offering expenses payable by the Company) and the application of the net
proceeds therefrom as described herein under "Use of Proceeds."
MARCH 31, 1996
----------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
--------- ------------- --------------
(UNAUDITED, IN THOUSANDS)
Short-term debt and current portion of long-term debt.................. $ 5,819 $ 5,819
--------- -------------
--------- -------------
Long-term debt, net of current portion (1)............................. $ 6,536 $ 6,536
--------- -------------
Mandatorily redeemable convertible preferred stock, par value $6.45 per
share (2)............................................................. 13,079 --
Stockholders' equity:
Common stock, par value $.002 per share (3).......................... 83 102
Additional paid-in capital........................................... 7,401 20,461
Cumulative translation adjustment.................................... 141 141
Restricted stock..................................................... (380) (380)
Retained earnings.................................................... 2,584 2,584
--------- -------------
Total stockholders' equity......................................... 9,829 22,908
--------- -------------
Total capitalization............................................. $ 29,444 $ 29,444
--------- -------------
--------- -------------
- ---------
(1) See notes 4, 5 and 7 to the Financial Statements contained elsewhere herein
for information regarding the Company's long-term debt.
(2) The 1,860,000 shares of mandatorily redeemable convertible preferred stock,
including accrued dividends thereon of $1.1 million, will be converted into
9,300,000 shares of Common Stock. See note 11 to the Financial Statements
contained elsewhere herein.
(3) Does not include 7,750,000 shares reserved for issuance upon exercise of
outstanding options under the TeleTech Holdings, Inc. Stock Plan (the
"Option Plan") and the TeleTech Holdings, Inc. Directors Stock Option Plan
(the "Directors Option Plan") and for future awards thereunder. At May 15,
1996, options to acquire 4,743,500 shares were outstanding under the Option
Plan and options to acquire 225,000 shares were outstanding under the
Directors Option Plan, which options have a weighted average exercise price
of $4.68 per share and $5.00 per share, respectively. See
"Management--Compensation of Directors," "Management--Executive
Compensation" and "TeleTech Stock Option Plan."
12
DILUTION
The net tangible book value of TeleTech as of March 31, 1996, after giving
effect to the five-for-one stock split and the Preferred Stock Conversion, was
$16,635,826, or $0.33 per share of Common Stock. "Net tangible book value" per
share is equal to the aggregate tangible assets of TeleTech less its aggregate
liabilities, divided by the total number of shares of Common Stock outstanding
on March 31, 1996. After giving effect to the estimated net proceeds to TeleTech
of the Offering, the pro forma net tangible book value of TeleTech as of March
31, 1996 would have been approximately $ , or $ per share of Common
Stock. This represents an immediate increase in net tangible book value per
share of $ to existing stockholders and an immediate dilution in net
tangible book value per share of $ to purchasers of Common Stock in the
Offering, as illustrated in the following table:
Assumed initial public offering price per share......................... $
Net tangible book value per share at March 31, 1996..................... $ 0.33
Increase in net tangible book value per share attributable to new
investors..............................................................
---------
Pro forma net tangible book value per share after the Offering.......... $
----------
Dilution per share to new investors..................................... $
----------
----------
TeleTech has reserved 7,750,000 shares of Common Stock, as adjusted to
reflect the five-for-one stock split of the Company's Common Stock, for issuance
upon exercise of outstanding options and future awards. As of May 15, 1996,
there were outstanding options to purchase an aggregate of 4,743,500 shares of
Common Stock under the Option Plan, at a weighted average price of $4.68 per
share, and outstanding options to purchase an aggregate of 225,000 shares of
Common Stock under the Directors Option Plan, at a price of $5.00 per share. Of
the foregoing, options to purchase an aggregate of 472,085 shares of Common
Stock are currently exercisable. See "Management--Stock Option Plan" and
"Management--Compensation of Directors."
The following table sets forth as of May 15, 1996 the relative investments
of the existing TeleTech stockholders and of the new investors, giving pro forma
effect to (i) the sale by TeleTech of 4,000,000 shares and the sale by the
Selling Stockholders of 2,000,000 shares of the Common Stock being offered
hereby, at an assumed offering price of $ per share, (ii) the five-for-one
stock split and (iii) consummation of the Preferred Stock Conversion:
SHARES PURCHASED TOTAL CONSIDERATION
------------------------- -------------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------------ ----------- ------------- ----------- -------------
Existing stockholders............................. 49,046,240 89% $ % $
New investors..................................... 6,000,000 11% %
------------ ----- ------------- -----
Total......................................... 55,046,240 100% $ 100%
------------ ----- ------------- ----- -------------
------------ ----- ------------- ----- -------------
The foregoing table assumes no exercise of the Underwriters' over-allotment
option and no exercise of the options outstanding at May 15, 1996. To the extent
that any of such options are exercised, there will be further dilution to new
investors.
13
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Financial Statements and the related notes appearing
elsewhere in this Prospectus. The following table presents selected (a)
consolidated and combined financial data for TeleTech for (i) the year ended
January 31, 1992, which have been derived from reviewed financial statements;
(ii) the year ended January 31, 1993, which have been derived from audited
financial statements; (iii) the eleven months ended December 31, 1993, which
have been derived from financial statements (including those set forth elsewhere
in this Prospectus) that have been audited by Gumbiner, Savett, Finkel,
Fingleson & Rose, Inc., independent public accountants (formerly Gumbiner,
Savett, Friedman and Rose, Inc.); (iv) each of the two years in the period ended
December 31, 1995, which are derived from financial statements (including those
set forth elsewhere in this Prospectus) that have been audited by Arthur
Andersen LLP, independent public accountants; and (v) the three months ended
March 31, 1995 and 1996; and (b) unaudited pro forma consolidated financial data
for the year ended December 31, 1995. The selected financial data for the three
months ended March 31, 1995 and 1996 are derived from unaudited financial
statements that, in the opinion of management, include all adjustments,
consisting principally of normal recurring accruals, necessary for a fair
presentation of such data. The results for the three months ended March 31, 1996
are not necessarily indicative of the results expected for the full fiscal year.
ELEVEN
MONTHS THREE MONTHS
YEAR ENDED ENDED YEAR ENDED ENDED
JANUARY 31, DECEMBER DECEMBER 31, MARCH 31,
------------------- 31, -------------------- ----------------
1993 1993 1994 1995 1995 1996
------- ---------- ---------- ------- ------- -------
PRO
FORMA (1)
YEAR ENDED
1992 DECEMBER
--------- 31,
1995
(UNAUDITED) ----------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
STATEMENT OF OPERATIONS DATA:
Revenues................................ $ 5,751 $13,814 $19,520 $ 35,462 $50,467 $60,706 $10,412 $22,019
Costs of services..................... 2,703 7,324 10,726 17,406 27,246 31,239 5,469 11,194
SG&A expenses......................... 3,380 6,240 7,956 15,860 18,625 24,908 4,329 8,102
--------- ------- ---------- ---------- ------- ---------- ------- -------
Income (loss) from operations........... (332) 250 837 2,196 4,596 4,559 614 2,723
Other income (expenses)................. 707 (125) (299) (481) 2,489(2) 2,784(2) 2,338(2) (464)
Provision for income taxes.............. (161) (73) 10 (20) (2,929) (3,353) (1,324) (1,001)
--------- ------- ---------- ---------- ------- ---------- ------- -------
Net income.............................. 214 52 548 1,695 4,156(2) 3,990(2) 1,628(2) 1,258
Pro forma net income.................... 214 52 299(3) 1,037(3) 4,156(2) 3,990(2) 1,628(2) 1,258
Pro forma net income per share of Common
Stock and equivalents (4).............. -- -- .01(3) .02(3) .08(2) .07(2) .03(2) .02
Weighted average shares outstanding
(4).................................... 44,085 44,085 44,085 44,085 54,658 54,658 54,586 54,682
OPERATING DATA:
Number of Call Centers................ 1 1 2 2 3 3 9
Number of workstations................ 300 300 560 560 960 960 3,107
14
MARCH 31, 1996
JANUARY 31, DECEMBER 31, ----------------------
------------------------ ------------------------------- PRO
1993 1993 1994 1995 ACTUAL FORMA (5)
--------- --------- --------- --------- --------- -----------
PRO FORMA
DECEMBER 31,
1992 1995 (1)
------------- -------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
BALANCE SHEET DATA:
Working capital
(deficit)............ $ 221 $ (250) $ (228) $ (780) $ 11,305 $ 8,341 $ 5,380 $ 5,380
Total assets.......... 2,238 4,617 12,034 10,102 30,583 39,882 49,454 49,454
Long-term debt, net of
current portion...... 828 1,416 3,528 2,463 3,590 5,468 6,536 6,536
Total stockholders'
equity............... 338 394 942 2,197 3,791 8,220 9,829 22,908
PRO FORMA AS
ADJUSTED (6)
-------------
BALANCE SHEET DATA:
Working capital
(deficit)............ $
Total assets..........
Long-term debt, net of
current portion......
Total stockholders'
equity...............
- ------------
(1) Reflects the consolidated operating results and financial position of Access
24 and its subsidiaries, which were acquired by the Company effective
January 1, 1996, as if such acquisition had been completed on January 1,
1995. Costs and expenses of Access 24 have been reflected, for purposes of
this presentation, as costs of services.
(2) Includes the $2.4 million pre-tax net proceeds of a one-time payment made by
a former client to TeleTech in connection with such client's early
termination of a contract.
(3) During 1993 and 1994, the Company was an S corporation and, accordingly, was
not subject to federal income taxes. Pro forma net income includes a
provision for income taxes at an effective rate of 44.4% for the 11 months
ended December 31, 1993 and 39.5% for the year ended December 31, 1994.
(4) Calculated in the manner described in note 1 to the Financial Statements.
(5) Reflects the conversion of 1,860,000 shares of Preferred Stock into
9,300,000 shares of Common Stock pursuant to the Preferred Stock Conversion.
(6) Reflects the sale of 4,000,000 shares of Common Stock being offered by
TeleTech at an assumed initial price to public of $ per share (net of
approximately $ million of estimated offering expenses and underwriting
discounts and commissions) and the application of the estimated net proceeds
therefrom, including repayment of short-term indebtedness. See "Use of
Proceeds" and "Capitalization."
15
PRO FORMA CONSOLIDATED CONDENSED FINANCIAL INFORMATION
The following unaudited pro forma consolidated condensed income statement
gives effect to the acquisition of Access 24 as if it had occurred on January 1,
1995 and does not purport to represent what the Company's results of operations
actually would have been if such transactions had in fact occurred on such date.
See "Business--International Operations." The pro forma adjustments are based on
currently available information and upon certain assumptions that management
believes are reasonable under current circumstances. The unaudited pro forma
consolidated financial information and accompanying notes should be read in
conjunction with the Financials Statements and the related notes thereto, and
other financial information pertaining to the Company and Access 24 including
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business--International Operations," included elsewhere in this
Prospectus.
YEAR ENDED DECEMBER 31, 1995
------------------------------------
TELETECH
--------- ACCESS 24 PRO FORMA
------------ -----------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE
STATEMENT OF OPERATIONS DATA: DATA)
Revenues................................................................... $ 50,467 $ 10,239 $ 60,706
Operating expenses......................................................... 45,871 10,276(1) 56,147
--------- ------------ -----------
Income (loss) from operations.............................................. 4,596 (37) 4,559
Other income............................................................... 2,489 295 2,784
Provision for income taxes................................................. (2,929) (424) (3,353)
--------- ------------ -----------
Net income (loss).......................................................... $ 4,156 $ (166) $ 3,990
--------- ------------ -----------
--------- ------------ -----------
Pro forma net income per share............................................. $ .08 $ .07
Shares used in computing pro forma net income per share (2)................ 54,658 54,658
- ---------
(1) Includes amortization of $422,000 of goodwill arising on the Company's
acquisition of Access 24, approximately $300,000 associated with the opening
of a Call Center in the United Kingdom and a $141,000 write-off of an
unrecoverable loan associated with the disposition of an unrelated business.
(2) Includes outstanding shares of common stock and common stock equivalents.
16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
TeleTech generates its revenues by providing customer care solutions, both
from TeleTech-owned Call Centers (traditional outsourcing) and client-owned Call
Centers (facilities management). The Company normally bills for its services
based on the amount of time Representatives devote to a client's program and
revenues are typically recognized as services are provided. The Company seeks to
enter into multi-year contracts that cannot be terminated early except upon the
payment of a contractually agreed amount. In 1995, revenues from multi-year
contracts represented 64% of total revenues. In the second half of 1995, the
Company signed large, multi-year contracts with United Parcel Service and
CompuServe and obtained additional business from AT&T for programs commencing
principally in the first quarter of 1996. Accordingly, management expects
revenues from multi-year contracts to increase as a percentage of total revenues
in 1996.
TeleTech's profitability is significantly influenced by its Call Center
capacity utilization. The Company seeks to optimize new and existing Call Center
capacity utilization during both peak and off-peak (night and weekend) periods
to achieve maximum fixed cost absorption. The Company carefully plans the
development and opening of new Call Centers to minimize the financial impact
resulting from excess capacity.
The Company records costs specifically associated with client programs as
costs of services. These costs, which include direct labor wages and benefits,
telecommunication charges, sales commissions and certain facility costs, are
primarily variable in nature. All other expenses of operations, including
expenses attributable to technology support, sales and marketing, human resource
management and other administrative functions and Call Center operational
expenses that are not allocable to specific programs are recorded as selling,
general and administrative ("SG&A") expenses. SG&A expenses tend to be either
semi-variable or fixed in nature. Historically, the majority of the Company's
operating expenses have consisted of labor costs. Accordingly, Representative
wage rates, which comprise the majority of the Company's labor costs, have been
and are expected to continue to be a key component of the Company's expenses.
The cost characteristics of TeleTech's traditional outsourcing programs
differ significantly from the cost characteristics of its facilities management
programs. Under facilities management programs, Call Centers are owned by the
client but are staffed and managed by TeleTech. Accordingly, facilities
management programs have higher costs of services as a percentage of revenues
and lower SG&A expenses as a percentage of revenues than traditional outsourcing
programs. As a result, the Company expects that its overall gross margin will
fluctuate as revenues attributable to traditional outsourcing programs vary in
proportion to revenues attributable to facilities management programs. Based on
the foregoing, management believes that, for purposes of measuring profitability
on a period-to-period basis, operating margin, which is income from operations
expressed as a percentage of revenues, may be less subject to fluctuation as the
proportion of the Company's business portfolio attributable to outsourcing
contracts versus facilities management contracts changes.
TeleTech's revenues and income from operations have grown significantly over
the past three years. During this period, the Company's revenues have grown from
$19.5 million for the 11 months ended December 31, 1993 to $50.5 million for the
year ended December 31, 1995 and operating margin has increased from 4.3% in
1993 to 9.1% in 1995. In the first quarter of 1996, the Company's operating
margin rose to 12.4%. Management attributes this growth to the successful
implementation of the Company's strategy of developing long-term strategic
relationships with large corporate clients in targeted industries and the
Company's resulting ability to spread its fixed costs over a larger revenue
base.
The Company acquired Access 24 and its subsidiaries effective January 1,
1996 for consideration of $2.3 million cash and 970,240 shares of Common Stock.
Access 24's consolidated results of operations are included in the Company's
operating results beginning with the first quarter of 1996. The operations of
Access 24, which consist of inbound, client-branded customer care services, have
been substantially integrated into TeleTech's operations. Access 24 typically
bills its clients monthly, based on the number of
17
customers enrolled in a client's program, pursuant to multi-year agreements.
Access 24 is headquartered in Sydney, Australia with Call Centers in Australia
and New Zealand. On April 30, 1996, the Company sold a 50% interest in Access 24
Limited, the Company's United Kingdom subsidiary that owns and operates a Call
Center in London, for $3.8 million to PPP Healthcare Group plc, a subsidiary of
a large private health insurer in the United Kingdom. The Company anticipates
recognizing an after-tax gain of approximately $1.6 million on this sale in the
second quarter of 1996. TeleTech will account for its investment in Access 24
Limited as an unconsolidated subsidiary. See "Business--International
Operations" and the Consolidated Financial Statements of Access 24 contained
elsewhere in this Prospectus.
During 1993 and 1994, the Company was an S corporation and, accordingly, was
not subject to income taxes. Pro forma net income includes a provision for
federal income taxes at an effective rate of 44.4% for the 11 months ended
December 31, 1993 and 39.5% for the year ended December 31, 1994.
RESULTS OF OPERATIONS
The following table sets forth certain income statement data as a percentage
of revenues:
THREE MONTHS ENDED
PERIOD ENDED DECEMBER 31, MARCH 31,
------------------------------------ -----------------------
1993(1) 1994 1995 1995 1996
----------- --------- ------------ ------------ ---------
Revenues.............................................. 100.0% 100.0% 100.0% 100.0% 100.0%
Costs of services................................... 54.9 49.1 54.0 52.5 50.8
SG&A expenses....................................... 40.8 44.7 36.9 41.6 36.8
Income from operations................................ 4.3 6.2 9.1 5.9 12.4
Other income (expenses)............................... (1.5) (1.4) 4.9(2) 22.5(2) (2.1)
Provision for income taxes (3)........................ -- -- (5.8) (12.8) (4.6)
Net income (3)........................................ 2.8 4.8 8.2(2) 15.6(2) 5.7
Pro forma net income (3).............................. 1.5 2.9 8.2(2) 15.6(2) 5.7
- ---------
(1) Includes only eleven months due to a change in the Company's fiscal year
end.
(2) Includes the $2.4 million pre-tax net proceeds of a one-time payment made by
a former client to TeleTech in the first quarter of 1995 in connection with
such client's early termination of a contract (the "One-Time Payment").
(3) During 1993 and 1994, the Company was an S corporation and, accordingly, was
not subject to federal income taxes. Pro forma net income includes a
provision for income taxes at an effective rate of 44.4% for the 11 months
ended December 31, 1993 and 39.5% for the year ended December 31, 1994.
THREE MONTHS ENDED MARCH 31, 1996 COMPARED TO THREE MONTHS ENDED MARCH 31, 1995
REVENUES. Revenues increased $11.6 million, or 111.5%, to $22.0 million for
the first quarter of 1996 from $10.4 million for the first quarter of 1995. This
increase resulted from revenues of $9.6 million generated from new clients and
$3.3 million in revenues of Access 24, which was acquired in the first quarter
of 1996. These increases were partially offset by loss in revenues due to the
expiration of certain contracts. The Company's program for Continental Airlines
was completed in March 1996 and, due to Continental's excess in-house call
center capacity, was not renewed. Revenues for the first quarter of 1996 reflect
the first period in which the Burbank Call Center, which opened in February
1995, was fully utilized and additional capacity in the Denver Call Center,
which was expanded in February 1996.
COSTS OF SERVICES. Costs of services increased $5.7 million, or 104.7%, to
$11.2 million for the first quarter of 1996 from $5.5 million for the first
quarter of 1995. Costs of services decreased as a percentage of revenues to
50.8% for the first quarter of 1996 from 52.5% for the first quarter of 1995.
This change was primarily due to increased productivity as revenues increased at
a faster rate than personnel costs.
SELLING, GENERAL AND ADMINISTRATIVE. SG&A expenses increased $3.8 million,
or 87.2%, to $8.1 million for the first quarter of 1996 from $4.3 million for
the first quarter of 1995. As a percentage of revenues,
18
SG&A expenses decreased to 36.8% for the first quarter of 1996 from 41.6% for
the first quarter of 1995 reflecting economies of scale associated with
spreading fixed and semi-variable costs over a larger revenue base. This
decrease primarily resulted from a 3.5% decrease in wage expense as a percentage
of revenues.
INCOME FROM OPERATIONS. Operating income increased $2.1 million, or 343.2%
to $2.7 million in the first quarter of 1996 from $0.6 million during the first
quarter of 1995. Operating income as a percentage of revenues increased to 12.4%
in the first quarter of 1996 from 5.9% in the same period in 1995.
OTHER INCOME (EXPENSES). Other income (expenses) decreased $2.8 million, or
(119.8%), to ($464,000) million for the first quarter of 1996 from $2.3 million
for the first quarter of 1995. This decrease primarily resulted from the
One-Time Payment.
NET INCOME. As a result of the foregoing factors, net income decreased
$370,000, or 27.7%, to $1.3 million for the first quarter of 1996 from $1.6
million for the first quarter of 1995. Excluding the One-Time Payment, net
income for the three months ended March 31, 1995 would have been $116,000.
Accordingly, net income would have increased $1.1 million, or 984.5%, in the
first quarter of 1996 compared to the same period in 1995.
1995 COMPARED TO PRO FORMA 1995
Pro forma 1995 reflects the combined operating results of TeleTech and
Access 24, as if Access 24 had been acquired by TeleTech on January 1, 1995. For
the 12 months ended December 31, 1995, Access 24 had revenue of $10.2 million, a
loss from operations of approximately $37,000 and a net loss of $166,000. The
results for such period reflect amortization of $422,000 of goodwill arising
from the Company's acquisition of Access 24, approximately $300,000 of expenses
associated with the opening of a Call Center in the United Kingdom and a
$141,000 write-off of an unrecoverable loan associated with the disposition of
an unrelated business. On April 30, 1996, the Company sold a 50% interest in the
United Kingdom Call Center to PPP, a large private health insurer in the United
Kingdom. See "Business--International Operations."
1995 COMPARED TO 1994
REVENUES. Revenues increased $15.0 million, or 42.3%, to $50.5 million in
1995 from $35.5 million in 1994, reflecting an increase in revenues from
existing clients of approximately $9.7 million and revenues from new clients of
approximately $7.6 million. These increases were partially offset by the
expiration without renewal of certain other client contracts. See "Other Income
(Expense)" below.
COSTS OF SERVICES. Costs of services increased $9.8 million, or 56.5%, to
$27.2 million in 1995 from $17.4 million in 1994. The increase resulted in part
from the opening in February 1995 of the Company's Burbank Call Center. Costs of
services also increased as a percentage of revenues to 54.0% in 1995 from 49.1%
in 1994. The new Call Center was not fully utilized immediately after opening,
resulting in an increase in Call Center expenses without a corresponding
increase in revenues.
SELLING, GENERAL AND ADMINISTRATIVE. SG&A expenses increased $2.8 million,
or 17.4%, to $18.6 million in 1995 from $15.9 million in 1994. As a percentage
of revenues, SG&A expenses decreased to 36.9% in 1995 from 44.7% in 1994. A
substantial part of this change resulted from a 4.0% reduction in wage expense
as a percentage of revenues.
INCOME FROM OPERATIONS. Income from operations increased $2.4 million, or
109.3%, to $4.6 million in 1995 from $2.2 million 1994. Operating income as a
percentage of revenues increased to 9.1% in 1995 from 6.2% in 1994.
OTHER INCOME (EXPENSES). Other income (expenses) increased $3.0 million to
$2.5 million in 1995 from ($481,000) in 1994. This increase resulted from the
One-Time Payment as well as increased interest income attributable to the $12.0
million proceeds received by the Company from the sale of Preferred Stock in
1995.
NET INCOME AND PRO FORMA NET INCOME. Net income increased $2.5 million, or
145.2%, to $4.2 million in 1995 from $1.7 million in 1994. As a result of the
foregoing factors, net income in 1995 increased $3.1
19
million, or 300.7%, to $4.2 million from pro forma net income of $1.0 million in
1994. Excluding the One-Time Payment, net income for 1995 would have been $2.6
million. Accordingly, net income for 1995 would have increased $1.6 million, or
60%, over pro forma income of $1.0 million for 1994.
1994 COMPARED TO 1993
During 1993, the Company changed its fiscal year to December 31. As a
result, the 1993 fiscal year consists of the eleven months ended December 31,
1993.
REVENUES. Revenues increased $15.9 million, or 81.7%, to $35.5 million in
1994 from $19.5 million in 1993. This increase consisted primarily of $14.2
million of revenues generated from new clients, with the remaining increase
generated from existing clients. The increase reflects a full year of operations
of the Denver Call Center, which generated $13.9 million of revenue in 1994
versus $2.9 million of revenue in 1993.
COSTS OF SERVICES. Costs of services increased $6.7 million, or 62.3%, to
$17.4 million in 1994 from $10.7 million in 1993. Costs of services decreased as
a percentage of revenues to 49.1% in 1994 from 55.0% in 1993. Much of this
percentage decrease resulted from an increased proportion of services being
performed in 1994 for higher-margin client programs compared to in 1993.
SELLING, GENERAL AND ADMINISTRATIVE. SG&A expenses increased $7.9 million,
or 99.3%, to $15.9 million in 1994 from $8.0 million in 1993. SG&A expenses
increased as a percentage of revenues to 44.7% in 1994 from 40.8% in 1993. Much
of this increase resulted from increased compensation expense associated with
growth in administrative functions necessary to support projected expansion.
INCOME FROM OPERATIONS. Income from operations increased $1.4 million, or
162.1%, to $2.2 million in 1994 from $837,000 in 1993. Operating income as a
percentage of revenues increased to 6.2% in 1994 from 4.3% in 1993.
PRO FORMA NET INCOME. As a result of the foregoing factors, and a decrease
in the effective tax rate to 39.5% for the year ended December 31, 1994 from
44.4% for the 11 months ended December 31, 1993, pro forma net income increased
$738,000, or 247.2%, to $1.0 million in 1994 from $299,000 in 1993.
QUARTERLY RESULTS
The information set forth below is derived from unaudited quarterly
operating results of the Company for each quarter of 1994 and 1995 and the first
quarter of 1996. The data has been prepared by the Company on a basis consistent
with the Financial Statements included elsewhere in this Prospectus and includes
all adjustments, consisting principally of normal recurring accruals, that the
Company considers necessary for a fair presentation thereof. These operating
results are not necessarily indicative of the Company's future performance.
THREE MONTHS ENDED
--------------------------------------------------------------------------------------------
1994 1995
---------------------------------------------- --------------------------------------------
MAR 31 JUN 30 SEP 30 DEC 31 MAR 31(1) JUN 30 SEP 30 DEC 31
----------- ----------- --------- --------- ----------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues......................... $ 8,976 $ 8,406 $ 8,080 $ 10,000 $ 10,412 $ 11,879 $ 12,692 $ 15,484
Costs of services.............. 4,715 4,314 3,719 4,658 5,469 6,407 6,899 8,471
SG&A expenses.................. 3,556 4,014 3,702 4,588 4,329 4,265 4,575 5,456
Income from operations........... 705 78 659 754 614 1,207 1,218 1,557
Other income (expenses).......... (118) (154) (102) (107) 2,338(1) 35 38 78
Provision for income taxes....... (15) 3 (2) (6) (1,324) (449) (394) (762)
Net income....................... 572 (73) 555 641 1,628 793 862 873
Pro forma net income (2)......... 359 (49) 336 391 1,628 793 862 873
Pro forma net income per share... .01 -- .01 .01 .03 .01 .02 .02
Weighted average shares
outstanding..................... 44,085 44,085 44,085 44,085 54,586 54,682 54,682 54,682
1996
---------
MAR 31
---------
Revenues......................... $ 22,019
Costs of services.............. 11,194
SG&A expenses.................. 8,102
Income from operations........... 2,723
Other income (expenses).......... (464)
Provision for income taxes....... (1,001)
Net income....................... 1,258
Pro forma net income (2)......... 1,258
Pro forma net income per share... .02
Weighted average shares
outstanding..................... 54,682
20
The following table sets forth certain income statement data as a percentage
of revenues:
THREE MONTHS ENDED
--------------------------------------------------------------------------------------------------
1994 1995 1996
------------------------------------------- ------------------------------------------ ---------
MAR 31 JUN 30 SEP 30 DEC 31 MAR 31 JUN 30 SEP 30 DEC 31 MAR 31
--------- --------- --------- ---------- --------- --------- --------- --------- ---------
Revenues.................. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Costs of services....... 52.5 51.3 46.0 46.6 52.5 53.9 54.4 54.7 50.8
SG&A expenses........... 39.6 47.8 45.8 45.9 41.6 35.9 36.0 35.2 36.8
Income from operations.... 7.9 0.9 8.2 7.5 5.9 10.2 9.6 10.1 12.4
Other income (expenses)... (1.3) (1.8) (1.3) (1.0) 22.4(1) 0.3 0.3 0.5 (2.1)
Provision for income
taxes.................... 0.2 -- -- -- (12.7) (3.8) (3.1) (4.9) (4.6)
Net income................ 6.4 (0.9) 6.9 6.5 15.6(1) 6.7 6.8 5.7 5.7
Pro Forma net income...... 4.0 (0.6) 4.2(2) 3.9(2) 15.6 6.7 6.8 5.7 5.7
- ---------
(1) Includes the One-Time Payment.
(2) During 1993 and 1994, the Company was an S corporation and, accordingly, was
not subject to federal income taxes. Pro forma net income includes a
provision for income taxes at an effective rate of 44.4% for the 11 months
ended December 31, 1993 and 39.5% for the year ended December 31, 1994.
The Company has experienced and in the future could experience quarterly
variations in revenues 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; changes in the
Company's revenue mix among its various service offerings; and the seasonal
pattern of certain of the businesses serviced by the Company. In addition, the
Company's planned staffing levels, investments and other operating expenditures
are based on revenue forecasts. If revenues are below expectations in any given
quarter, the Company's financial results would likely be materially adversely
affected for that quarter.
For the quarterly periods in 1994, revenues fluctuated principally due to a
reduction in services provided for, and the ultimate termination of, a large
client program in the first half of 1994. The decrease in revenues from this
client program was partially offset by revenues from new client programs
throughout 1994 and fully offset in the fourth quarter of 1994 by revenues
relating to increased services for new and existing clients. The quarterly
revenue increases throughout 1995 and the first quarter of 1996 reflect
increased services provided for existing clients and the addition of certain new
programs.
In 1994, costs of services declined from 52.5% of revenues in the first
quarter to 46.6% in the fourth quarter due to the implementation of certain
higher margin programs as well as the lower wages that were paid to
Representatives during the training phase of several new programs. The increase
in costs of services from 46.6% of revenues in the fourth quarter of 1994 to
52.5% in the first quarter of 1995 resulted from a change in the allocation of
certain costs from SG&A expenses to costs of services. For the final three
quarters of 1995, costs of services ranged between 53.9% and 54.7% of revenues,
but declined to 50.8% in the first quarter of 1996 due to increased productivity
resulting from higher Call Center capacity utilization.
SG&A expenses increased from 39.6% of revenues in the first quarter of 1994
to 47.8% in the second quarter of 1994 due to a lower revenue base, costs
associated with the relocation of the Company's corporate offices to Denver,
Colorado and increased management staffing to support the Company's growth. SG&A
expenses decreased to 45.8% of revenues in the third quarter of 1994, due
principally to lower travel and advertising costs, and 45.9% of revenues in the
fourth quarter of 1994 as fixed and semi-variable costs were spread over a
larger revenue base. Despite a shift of certain costs from SG&A expenses to
costs of services in the first quarter of 1995, SG&A expenses as a percentage of
revenues were essentially unchanged due to increased overhead costs associated
with establishing the Company's Burbank Call Center without a corresponding
increase in revenues for the first quarter of 1995. Once the Burbank Call Center
became fully operational in the second quarter of 1995, SG&A expenses as a
percentage of revenues ranged from 35.2% to 36.8% from the second quarter of
1995 through the first quarter of 1996.
21
Income from operations fluctuated within the quarterly periods primarily
based on the factors noted above. Additionally, other income (expenses)
increased to $2.3 million in the first quarter of 1995 due to the One-Time
Payment. The provision for income taxes in the first quarter of 1995 reflects
the impacts of the One-Time Payment and the Company's change from an S
corporation to a C corporation.
LIQUIDITY AND CAPITAL RESOURCES
Historically, TeleTech has funded its operations and capital expenditures
primarily through cash flow from operations, borrowings under several lines of
credit and the sale of $12.0 million of Preferred Stock in January 1995. The
Company has a $15.0 million unsecured revolving operating line of credit, which
expires on May 31, 1998. Borrowings under this line bear interest at various
rates that are selected by TeleTech each time a draw is made. At May 17, 1996,
outstanding borrowings under this facility were $6.0 million, which accrue
interest at rates varying from 6.63% to 6.6875%. Borrowings under this line have
been made primarily to fund working capital. Under this line of credit, the
Company has agreed to maintain certain financial ratios and has agreed that,
during any fiscal year during which the line remains in place, it will not incur
operating lease expenses or make investments in fixed assets or in capital
leases in excess of $15.0 million in the aggregate.
In addition, the Company has two master lease agreements. Under one
agreement, the Company may lease equipment up to an aggregate value of $15.0
million. As of March 31, 1996, amounts outstanding under this agreement were
approximately $3.4 million. Lease rates under this agreement are based upon a
125 basis points spread over 3-year U.S. Treasury notes. Under the second
agreement, the Company's borrowings are approved, and specific terms are set, on
a case-by-case basis. As of March 31, 1996, the total amount outstanding under
this agreement was approximately $921,855.
Cash provided by operating activities was $1.5 million for the first quarter
of 1996, $4.1 million in 1995 and $3.6 million in 1994. From the beginning of
1994 through the first quarter of 1996, the Company generated an aggregate of
$9.3 million in cash from operating activities, consisting of $12.0 million of
total net income before depreciation, amortization and other non-cash charges,
offset in part by $(2.7) million changes in working capital. Changes in working
capital consist primarily of fluctuations in accounts receivable, accounts
payable and accruals arising from the growth of the Company's operations.
The amount of cash used by the Company in investing activities was $3.0
million for the first quarter of 1996 and $12.1 million and $1.9 million for
1995 and 1994, respectively. In the first quarter of 1996, the Company's capital
expenditures were $3.3 million and the Company used $2.3 million for the Access
24 acquisition while short-term investments decreased by $2.5 million. In 1995,
the Company's capital expenditures were $1.7 million and the Company's
short-term investments increased by $10.4 million. In 1994, capital expenditures
were $1.9 million. Historically, capital expenditures have been, and future
capital expenditures are anticipated to be, primarily for the development of
Call Center facilities and the acquisition of equipment to support expansion of
the Company's existing Call Centers and expansion of and improvements to the
Company's call and data management systems and management information systems.
Capital expenditures, including new capital leases, equaled $5.8 million and
$2.1 million in 1995 and 1994, respectively. The Company currently expects to
make capital expenditures in 1996 of approximately $26 million, $3.3 million of
which was spent during the first quarter.
Cash provided by financing activities for the first quarter of 1996 was $2.1
million, representing borrowings on the Company's line of credit, net of capital
lease payments. In 1995, cash provided by financing activities of $8.0 million
resulted primarily from the sale of $12.0 million of Preferred Stock in January
1995, which was partially offset by $2.8 millon of loan repayments, tax
distributions and dividends paid by the Company to its principal stockholder. In
1994, the Company used $1.7 million for financing activities, consisting
primarily of repayments on the Company's bank line of credit and other long-term
debt.
The Company believes that the net proceeds of the Offering, together with
cash from operations, existing cash and available borrowings under its line of
credit and master lease agreements, will be sufficient to finance the Company's
current operations, planned capital expenditures and anticipated growth at least
through 1997. However, if the Company were to make any significant acquisitions
for cash, it may be necessary for the Company to obtain additional debt or
equity financing. Any sale of additional equity or equity-related securities
could result in additional dilution to the Company's stockholders.
22
BUSINESS
TeleTech is a leading provider of customer care solutions for Fortune 1000
companies. Customer care encompasses a wide range of customer acquisition,
retention and satisfaction programs designed to maximize the lifetime value of
the relationships between TeleTech's clients and their customers. TeleTech's
customer care programs involve all stages of the customer lifecycle and usually
consist of a variety of customer service and technical and product support
activities, such as product information, program enrollment, help desk support,
account inquiries, problem resolution and satisfaction assessments. TeleTech
works closely with its clients to rapidly design and implement large scale,
tailored customer care programs that provide integrated, comprehensive solutions
to specific business needs.
TeleTech delivers its customer care services primarily through
customer-initiated ("inbound") telephone calls and also over the Internet.
Services are provided by trained customer care representatives
("Representatives") in TeleTech call centers ("Call Centers") in response to an
inquiry that a customer makes by calling a toll-free telephone number or by
sending an Internet message. Representatives respond to these inquiries
utilizing state-of-the-art workstations that leverage TeleTech's advanced
technology platform and enable them to provide rapid, single-call resolution.
This platform incorporates digital switching, client/server technology,
object-oriented software modules, relational database management systems,
proprietary call tracking management software, computer telephony integration
("CTI") and interactive voice response (IVR). TeleTech's services generally are
provided on either a fully outsourced or facilities management basis.
TeleTech seeks to establish long-term, strategic relationships, typically
formalized by multi-year contracts, with selected clients in the
telecommunications, technology, transportation, health care and financial
services industries. TeleTech targets clients in these industries because of
their complex product and service offerings and large customer bases, which
require frequent, often sophisticated, customer interactions. The Company
recently entered into significant, multi-year contracts with CompuServe and
United Parcel Service and has obtained additional business from AT&T. Additional
clients include Apple Computer, Bell Atlantic, Novell, NYNEX and Wells Fargo
Bank.
The Company was founded in 1982 and has been providing inbound customer care
solutions since its inception. Since January 1995, the Company has opened,
acquired or initiated management of seven Call Centers. As of April 30, 1996,
TeleTech owned, leased or managed nine Call Centers in the United States, the
United Kingdom, Australia and New Zealand equipped with a total of 4,560
state-of-the-art workstations. TeleTech currently plans to open two additional
Call Centers and expand an existing Call Center by the end of 1996. In the first
quarter of 1996, approximately 95% of the Company's call handling revenues were
derived from inbound inquiries. TeleTech's revenues increased 42.3% to $50.5
million in 1995 from $35.5 million in 1994. In the first quarter of 1996
revenues increased 111.5% to $22.0 million from $10.4 million in the same period
of 1995.
INDUSTRY BACKGROUND
Companies today are finding it increasingly difficult to satisfy their
customers' needs for service and information. As products and services become
more complex and product and service choices multiply, customers require more
information to make intelligent purchase decisions and to use products and
services properly. In addition, customers have less time to shop for, evaluate
and learn how to use new products and services, driving demand for faster and
better service. While these trends have been evolving, the burden of providing
personalized customer service has largely shifted from traditional retailers to
product manufacturers and service providers. Also, many companies have realized
that retaining customers generally is more profitable than acquiring new
customers. As a result of these and other factors, the Company believes that
customer care has become a clear competitive differentiator and that consumers
increasingly consider the relative effectiveness, ease of use and responsiveness
of customer service and product support when evaluating comparable products or
services.
Many companies find it difficult to provide high quality customer service
and product support without diverting significant resources away from their core
businesses. Historically, companies have provided
23
customer service in-house because they believed that the "customer interface"
was too critical to be outsourced. Many now acknowledge that they do not have
the core competencies or are unwilling to invest the substantial resources
necessary to provide high quality, inbound customer care services on a timely,
cost effective basis. As a result, a large and rapidly growing customer care
outsourcing industry has emerged. Industry sources estimate that telephone-based
direct marketing expenditures were $80 billion in 1995 with roughly 95% of the
industry comprised of captive (in-house) telemarketing organizations. Management
believes that large corporations are increasingly outsourcing their
telephone-based marketing and customer services activities as part of an overall
effort to focus internal resources on their core competencies, improve operating
efficiencies and reduce costs. This is particularly true in industries that are
undergoing deregulation and increased competition.
Although there are many independent teleservices firms, most are small,
single facility operations that primarily provide outbound services. Many
currently do not have the financial resources, industry expertise, technological
capabilities, human resources or facilities to provide high-quality, inbound
customer care. TeleTech believes that companies considering outsourcing their
customer care activities increasingly are seeking a strategic partner that can
understand their business, can provide a comprehensive range of services, and
has the flexibility, scalability, management expertise, facilities and
technological and educational resources to serve their customers' long-term
needs effectively and efficiently.
THE TELETECH SOLUTION
TeleTech develops and implements strategic customer care solutions designed
to improve the lifetime value of its clients' customers by enhancing customer
satisfaction and promoting long-term loyalty, which in turn can increase each
client's revenues and profitability. The Company devotes significant resources
to understanding a client's industry, products, services, processes and culture
and then designs programs to (i) improve the quality of customer interactions,
(ii) capture customer data and feedback, (iii) reduce the operating costs
associated with the delivery of customer service and product support, (iv)
minimize the client's required investment in and technology risks associated
with operating in-house call centers, (v) eliminate the need to manage large
numbers of call center employees and (vi) enable clients to focus on their core
competencies. These programs address inbound customer interactions in a manner
that is seamless with the client's operations and transparent to the customers.
TeleTech effectively delivers these programs by rapidly deploying the technology
and human resources required to implement and manage comprehensive, integrated
customer care solutions.
TeleTech strives to be a strategic partner to its clients. TeleTech believes
that its willingness to invest resources to identify the customer needs of a
potential client and its ability to quickly understand the fundamental
operations of a client's business differentiate TeleTech from its competitors
and enable it to offer unique and effective customer care solutions. By fully
understanding a client's industry, products, services, processes and culture,
TeleTech can design customized solutions that add value to a client's day-to-day
interactions with its customers. Additionally, TeleTech's responsive, flexible
and scalable technology platform enables it to design customer care programs
that can be adapted quickly and cost effectively to meet changing client and
customer needs. TeleTech's open-systems, client/server technology can be
integrated with its clients' information systems, enabling data captured from
customer interactions to be reviewed and analyzed by TeleTech and its clients on
a real-time basis.
BUSINESS STRATEGY
Key elements of the Company's business strategy are to:
ENHANCE CLIENTS' RELATIONSHIPS WITH THEIR CUSTOMERS THROUGH INNOVATIVE
CUSTOMER CARE SOLUTIONS
The Company believes that enhancing the client's relationship with its
customers at each stage of the customer lifecycle is crucial to providing a
value-added solution to a client's customer service and product support needs.
TeleTech works closely with its clients to identify the particular needs of
their customers, design appropriate solutions and implement specially tailored
customer care programs. TeleTech's solutions are designed to be cost effective
and to improve the quality of customer interactions and foster lifetime
24
customer loyalty. As part of its integrated solutions, TeleTech collects and
disseminates customer information to enable its clients to analyze and better
manage their customer bases while identifying new revenue generating
opportunities.
DEVELOP LONG-TERM STRATEGIC RELATIONSHIPS WITH LARGE CLIENTS IN TARGETED
INDUSTRIES
TeleTech seeks to develop long-term strategic relationships with large
corporate clients in targeted industries. The Company focuses on industries
containing companies with complex product and service offerings and with large
customer bases that require frequent, often sophisticated, customer
interactions. In establishing long-term strategic relationships with its
clients, TeleTech seeks to enter into multi-year contracts that generate
recurring revenues for TeleTech and allow the Company to leverage its
technology, human resource and training investments. The Company has established
strategic business units ("SBUs"), with specialized business development
personnel, that target the telecommunications, technology, transportation,
health care and financial services industries.
APPLY FLEXIBLE, INNOVATIVE TECHNOLOGICAL SOLUTIONS
TeleTech's technological expertise and scalable open-systems, client/server
architecture enable the Company to rapidly design customized customer care
programs, achieve seamless integration with its clients' information systems and
adapt quickly to new technologies. The Company seeks to differentiate itself
from in-house and other outsourced competitive service providers by creatively
employing hardware configurations and software applications to add flexibility
and responsiveness to its clients' customer service and product support
processes. TeleTech leverages its experience in the development of customized
software applications by combining industry-leading operating software with its
extensive library of proprietary, object-oriented applications to rapidly and
cost-effectively design intuitive, user-friendly custom software applications.
IMPLEMENT AND MAINTAIN SUPERIOR OPERATIONAL PROCESSES
To manage its growth and provide high levels of client service, the Company
is committed to implementing and maintaining superior operational processes
capable of efficiently executing customer care programs. Recognizing that it is
providing one of the client's most important and sensitive functions, the
Company adheres to a rigorous framework of quality processes based on ISO 9002,
an internationally recognized series of quality assurance standards, to ensure
successful on-going delivery of client programs. The Company designs and builds
its Call Centers based on a standardized model to provide efficient,
fully-integrated operations while increasing employee productivity. By linking
its Call Centers together into a seamless wide area network (WAN), the Company
also ensures rapid transfer of voice and data information to provide additional
call capacity and disaster recovery, as needed.
MAINTAIN EXCELLENCE IN HUMAN RESOURCE AND CALL CENTER MANAGEMENT
The Company believes that its ability to attract, hire, train and manage its
employees and efficiently manage its Call Centers is critical to its ability to
develop new and maintain existing long-term client relationships. TeleTech uses
proprietary software to automate much of its hiring, training, quality assurance
and staffing management functions. In an effort to reduce turnover and improve
the quality of its services, the Company devotes significant resources to
attracting and hiring skilled employees and provides extensive initial and
on-going product and service training. The Company's Representatives generally
are full-time and dedicated to a single client program. Representatives receive
from one to five weeks of on-site training in TeleTech's or the client's
training facilities before handling customer interactions, plus a minimum of six
to eight hours per month of ongoing training. Representatives often receive
supplemental laboratory training as needed to provide a specific customer
service successfully.
GROWTH STRATEGY
The Company's growth strategy is designed to capitalize on the increasing
demand for outsourced customer care solutions and to maintain and expand its
leadership position in its industry. The Company's primary growth strategies are
to:
25
EXPAND SERVICES PROVIDED TO EXISTING CLIENTS AND ESTABLISH NEW RELATIONSHIPS
IN TARGETED INDUSTRIES
The Company believes it has substantial opportunities to expand services
provided to existing clients and obtain new clients within its currently
targeted industries. Specifically, the Company is focusing on opportunities to
expand existing programs while cross-selling TeleTech's services to other
divisions or operations within its existing clients' organizations. For example,
TeleTech implemented its initial program for AT&T in 1991 and has since expanded
its relationship to include four separate programs for various AT&T products and
services. As part of its SBU strategy, the Company also is focusing on
developing new relationships with companies within its targeted industries.
DEVELOP NEW PRODUCTS AND SERVICES
Continued rapid technological advances, coupled with the on-going evolution
in retail and product distribution trends, will create new opportunities for
TeleTech. TeleTech expects that the proliferation of new interactive media will
provide more sophisticated customer interactions and additional opportunities to
provide expanded services to customers. TeleTech intends to capitalize on these
trends by developing new products and services, such as database marketing
solutions and real-time interactive support for Web sites on the Internet.
EXPAND INTO NEW INDUSTRIES AND GEOGRAPHIC MARKETS
TeleTech has identified additional industries that are experiencing many of
the same trends affecting its currently targeted industries and may establish
new SBUs to focus on evolving market opportunities. In addition, the Company
believes that trends toward increased customer care and recognition of the
benefits of outsourcing, which have been experienced in the U.S., are occurring
in international markets. TeleTech also believes that many multi-national
companies, including several of its existing clients, are seeking a single
provider of world-wide customer care solutions. To capitalize on these
international opportunities, the Company intends to further expand its
operations outside of the United States.
SELECTIVELY PURSUE COMPLEMENTARY ACQUISITIONS
The Company may selectively acquire complementary companies that extend its
presence into new geographic markets or industries, expand its client base, add
new product or service applications or provide substantial operating synergies.
The Company believes that there will be many potential domestic and
international acquisition opportunities as the teleservices industry
consolidates and as large corporations consider selling their existing call
center facilities and operations. For example, the Company may consider
acquiring a primarily outbound teleservices provider that could provide
substantial operating synergies and improve Call Center utilization during the
currently underutilized off-peak (night and weekend) periods resulting from the
Company's focus on inbound interactions.
SERVICES
TeleTech offers a wide range of services designed to provide superior
customer care. An integral component of these services is process reengineering,
by which the Company develops and applies enhanced processes to make a client's
customer service or product support processes more cost-effective, productive
and valuable. At the start of a potential new client relationship, TeleTech
assesses the client's existing capabilities, goals and strategies, customer
service or product support processes and related software, hardware and
telecommunications systems and training. After presenting a proposed solution
and being awarded a contract, TeleTech works closely with the client to further
develop, refine and implement more efficient and productive customer interaction
processes and technological solutions that seamlessly link the customer, the
client and TeleTech. These processes generally include the development of
event-driven software programs for the dynamic scripting of telephone
interactions, where script flow is predicated on variables in the customer file
or on the Representative's interaction with the customer.
26
Following the design and development of a customer care program,
Representatives provide a wide range of on-going voice and data communications
services integrating customer acquisition, service and retention and
satisfaction and loyalty programs. In a typical inbound customer interaction, a
customer calls a toll-free number to request product, service or technical
information or assistance. TeleTech's advanced telecommunications system
automatically identifies each inbound call by its telephone number and routes
the call to the appropriate Representative that is trained for that particular
client program. Upon receipt of the call, the Representative's computer screen
automatically displays the client's specific product, service or technical
information to enable the Representative to assist the customer.
Each customer interaction, even in its simplest form, presents TeleTech and
its clients with an opportunity to capture valuable customer information,
including the customer's demographic profile and preferences. This information
can prompt the Representative to make logical, progressive inquiries about the
customer's interest in additional services, identify additional revenue and
cross-selling opportunities or resolve other customer issues relating to a
client's products or services. TeleTech frequently provides several of the
services listed below in an integrated program tailored to its clients' needs.
CUSTOMER ACQUISITION PROGRAMS. Customer acquisition programs are designed
to secure new customers and can include a wide range of activities depending
upon the customer inquiry. A sampling of these services includes:
- providing pre-sales product or service education
- processing and fulfilling information requests for product or service
offerings
- verifying sales and activating services
- directing callers to product or service sources
- receiving orders for and processing purchases of products or services
- providing initial post-sales support, including operating instructions for
new product or service use
TeleTech's current customer acquisition programs do not include outbound
"cold calling," which is an outsourcing service typically provided by
traditional telemarketing firms.
CUSTOMER SERVICE AND RETENTION PROGRAMS. Customer service and retention
programs are designed to maintain and extend the customer relationship and
maximize lifetime customer value. These programs are generally driven by the
customer's receipt of a product or service, or by the customer's need for
on-going help-desk resources. The majority of the Company's revenues are
generated in the provision of customer service and retention programs. A
sampling of these services includes:
- providing technical help desk, product or service support
- activating product or service upgrades
- responding to billing and other account inquiries
- resolving complaints and product or service problems
- registering warranty information
- dispatching on-site service
CUSTOMER SATISFACTION AND LOYALTY PROGRAMS. Customer satisfaction and
loyalty programs are designed to enable clients to learn from their customers,
to be more responsive to the customer's needs and concerns and to reward
customers for their continued patronage. A sampling of these services includes:
- responding to client promotional, affinity-building initiatives
- developing and implementing client-branded loyalty programs
- conducting satisfaction assessments
27
- confirming receipt of promised products or services
- reserving and reconfirming space at product or service seminars
An example of a client-branded loyalty program is TeleTech's Emergency Home
Assist, which it implements for many of Australia's leading insurers and
financial institutions. Under Emergency Home Assist, if, for example, a storm
damages the roof of a customer insured by a TeleTech client, the customer calls
the toll-free number provided by the client. A Representative answers the
telephone on the client's behalf and contacts, books and dispatches tradesmen to
the customer's home to make repairs, while simultaneously opening an insurance
claims file. TeleTech's insurance company client, which directly pays the
tradesmen's invoices, is positioned as a caring, total solution provider, rather
than just a reimbursement agent. In addition, the insurer is able to control
costs by its early intervention and contracting in advance with qualified
tradesmen to provide services at a reasonable price.
MARKETS AND CLIENTS
TeleTech focuses its marketing efforts on Fortune 1000 companies in the
telecommunications, technology, transportation, health care and financial
services industries. To provide effective customer care solutions, TeleTech has
developed a separate SBU to serve each of these industries. Each SBU is
comprised of business development personnel, systems engineers, application
specialists and other support personnel, most of whom have prior industry
experience. Each SBU is responsible for developing and implementing customized,
industry-specific customer service and product support.
TELECOMMUNICATIONS. The Telecommunications SBU primarily services
long-distance carriers, regional telephone companies, wireless providers and
cable operators. Services include verifying long-distance service sales,
responding to customer inquiries, providing consumer and business telephone
service account management and providing on-going product and service support.
Clients include AT&T, NYNEX and Bell Atlantic. TeleTech believes that the
Telecommunications Act of 1996 and the development of new wireless products,
including products and services utilizing personal communication services (PCS)
technology, will expand the breadth of product and service offerings that will
require customer service and support and will create additional demand for
TeleTech's services.
TECHNOLOGY. The growth of high technology product offerings and service
introductions, including Internet-related products and services, has increased
demand for consumer and technical product support services. Clients include
AT&T, CompuServe, Apple and Novell. The Company currently provides telephone and
real-time, on-line interactive support to subscribers of CompuServe's WOW!
service and to customers of AT&T. TeleTech intends to leverage its technological
capabilities on the Internet and is exploring business opportunities related to
new interactive media.
TRANSPORTATION. TeleTech's Transportation SBU provides a variety of
services to clients in the package delivery and travel industries. In October
1995, TeleTech was awarded a contract to manage several Call Centers and provide
customer service and support on behalf of United Parcel Service, one of the
nation's largest parcel delivery companies. Under its five-year contract,
TeleTech will provide services to United Parcel Service from three Call Centers
leased by United Parcel Service but staffed and managed by TeleTech. TeleTech
also provides reservation call handling services for Reno Air and Midway
Airlines. See "--Case Study."
HEALTH CARE. TeleTech provides customer care solutions on behalf of health
care providers in the United Kingdom, Australia and New Zealand, including
Medical Benefits Funds of Australia Limited, Hospital Benefits Fund of Western
Australia, Inc., Southern Cross Medical Care Society and PPP. These services
include emergency and non-emergency medical information and referral services,
neonatal information and assistance to parents of newborns, information about
drug interventions, referrals to community support organizations such as home
care, child care and counseling options, and medical claims review services. The
Company provides these services to customers by means of telephone access to
registered nurses, counselors, pharmacists, medical librarians, dieticians and
other specially trained Representatives. TeleTech believes that there are
substantial opportunities to introduce comparable services in the U.S. market.
See "--International Operations."
28
FINANCIAL SERVICES. TeleTech is developing new and more responsive delivery
capabilities to satisfy the demands of financial institutions seeking to reduce
customer reliance on face-to-face interactions and increase customer utilization
of electronic and telephone banking and automated teller machines. From its Call
Centers in Australia and New Zealand, TeleTech provides customer care solutions
to customers of insurance company and automobile club clients, such as
Mercantile Mutual Insurance (Australia) Ltd, Zurich Australian Insurance Ltd and
Royal Automobile Club of Victoria (RACV) Insurance Pty Ltd. Solutions include
emergency home repair assistance, responding to customer inquiries regarding
property damage and insurance coverage, procuring emergency roadside automobile
and medical assistance and facilitating motor vehicle claims. TeleTech believes
that many of these customer care solutions are readily transferable to the U.S.
market. See "--International Operations."
CASE STUDY
In 1994, United Parcel Service operated regional Customer Service Telephone
Centers across the United States that provided customers with information
regarding package pick-ups and deliveries, package tracking and tracing and rate
information. To re-engineer its telephone-based customer service and support
strategy, United Parcel Service consolidated these regional centers into seven
national centers and decided to outsource the facilities management and staffing
functions. United Parcel Service benchmark studies led to the conclusion that
this reengineering would result in significant quality improvements while
creating a more efficient and much less costly operation.
In October 1995, after a competitive bidding process, TeleTech was awarded a
multi-year contract to staff and manage three United Parcel Service customer
service telephone centers and was granted the option to manage a fourth facility
if United Parcel Service requires additional capacity. By April 1996, TeleTech
began operating Call Centers in Tucson, Arizona and Greenville, South Carolina.
The third Call Center, located in Tampa, Florida, is scheduled to open in June
1996.
Telephone calls from United Parcel Service customers primarily consist of
customer service and package tracking inquires. TeleTech Representatives assist
customers by scheduling package pick ups, tracking packages, calculating
shipping rates, explaining package insurance options, describing types of
service and rates and answering other types of inquires.
TeleTech recruits, interviews, hires, and trains all personnel for the
United Parcel Service Call Centers. To manage the considerable human resources
and facilities management tasks associated with a customer care and support
program of this magnitude and complexity, TeleTech identified and hired a
separate project management team to launch and direct the program. In addition,
the Company devised an innovative incentive and gain-sharing plan to motivate
TeleTech personnel. TeleTech has introduced automated quality control processes,
electronic applicant screening and assessment, and is working in concert with
United Parcel Service to develop innovative technology to further optimize the
call handling process.
SALES AND MARKETING
As most companies consider the customer care function to be critical, the
Company's business development personnel generally focus their marketing efforts
on potential clients' senior executives. TeleTech hires business development
personnel and employees for each SBU who have substantial industry expertise and
can identify and generate sales leads.
TeleTech employs a consultative approach to assess the current and
prospective strategic needs of a potential client. Following initial discussions
with a client, a carefully chosen TeleTech team, usually comprised of
applications and systems specialists, operations experts, human resources
professionals and other appropriate SBU management personnel, thoroughly studies
the client's operations. The Company invests significant resources during the
development of a client relationship to understand the client's existing
customer service processes, culture, decision parameters and goals and
strategies. TeleTech assesses the client's customer care needs and, with input
from the client, develops and implements tailored customer care solutions.
As a result of its consultative approach, TeleTech can identify new revenue
generating opportunities, customer communication possibilities and product or
service improvements previously overlooked or not
29
adequately addressed by the client. TeleTech's technological capabilities enable
it to develop working prototypes of proposed customer care programs and to
rapidly implement strategic customer care solutions, generally with minimal
capital investment by the client.
TeleTech generally provides customer care solutions pursuant to written
contracts with terms ranging from one to five years, which often contain renewal
or extension options. Under substantially all of its significant contracts,
TeleTech generates revenues based on the amount of time Representatives devote
to a client's program. In addition, clients typically are required to pay fees
relating to TeleTech's training of Representatives to implement the client's
program, set-up and management of the program, and development of computer
software and technology. Many of TeleTech's contracts also require the client to
pay TeleTech a contractually agreed amount in the event of early termination.
When negotiating new contracts, TeleTech strives to obtain a contract term of at
least two years and contractual provisions adjusting the amount of TeleTech's
fees if there are significant variances from estimated implementation expenses.
OPERATIONS
TeleTech provides its customer care services through the operation of
state-of-the-art Call Centers located in the United States, the United Kingdom,
Australia and New Zealand. As of April 30, 1996, TeleTech leased seven Call
Centers and also managed two Call Centers on behalf of United Parcel Service.
Additional expansion planned for 1996 includes the opening of a new
Company-owned Call Center, expansion of an existing facility and opening of a
third United Parcel Service-owned Call Center. See "-- Facilities."
TeleTech uses its standardized development procedures to minimize Call
Center development lead times. The Company applies predetermined site selection
criteria to identify locations conducive to operating large scale, sophisticated
customer care facilities in a cost-effective manner. TeleTech can establish a
new, fully operational, inbound Call Center containing 450 or more workstations
within 90-150 days. In the last fourteen months, TeleTech has established two
Company-owned Call Centers and two United Parcel Service-owned Call Centers,
including a total of approximately 2,400 workstations.
A typical U.S. TeleTech Call Center has approximately 50,000 square feet of
space and contains approximately 450 workstations. Call Center capacity can vary
based on the complexity and type of customer care programs provided. All
TeleTech Call Centers are designed to operate 24 hours a day, seven days a week.
TeleTech received ISO 9002 certification for its Burbank Call Center in 1995 and
currently is involved in a Company-wide ISO 9002 certification process.
CALL CENTER MANAGEMENT. TeleTech manages its U.S. Call Centers through its
Technology Command Center in Colorado (the "Command Center"). The Command Center
operates 24 hours per day, 7 days a week, and is responsible for monitoring,
coordinating and managing TeleTech's U.S. operations. Each U.S. Call Center is
connected to the Command Center and to other U.S. Call Centers through multiple
fiber optic voice/data T-1 circuits to form an integrated and redundant wide
area network. This network connectivity provides a high level of security and
redundancy that is integral to TeleTech's ability to ensure recovery
capabilities in the event of a disaster or structural failure. If a Call Center
were to experience extreme excess call volume or become non-operational, the
Command Center is configured to re-route incoming calls to another Call Center
in a virtually transparent, uninterrupted manner.
TeleTech also has established a set of uniform operational policies and
procedures to ensure the consistent delivery of high-quality service at each
Call Center. These policies and procedures detail specific performance
standards, productivity and profitability objectives and daily administrative
routines designed to ensure efficient operation. TeleTech believes that
recruiting, training and managing full-time Representatives who are dedicated to
a single client facilitates seamless integration between client and
Representative, enhances service quality and efficiency and differentiates
TeleTech from its competitors.
TeleTech utilizes a number of sophisticated applications designed to
minimize administrative burdens and maximize productivity. Such applications
include a proprietary, integrated agent performance system
30
that tracks Representative activity at each workstation and a proprietary
billing system that tracks time expended on administration, training, data
processing and other processes conducted in support of client or internal tasks.
QUALITY ASSURANCE. TeleTech monitors and measures the quality and accuracy
of its customer interactions through a quality assurance department located at
each Call Center. Each department evaluates, on a real-time basis, at least 1.5%
of all calls per day. TeleTech also has the capabilities to enable its clients
to monitor customer interactions on a real-time basis. Quality assurance
professionals monitor customer interactions and simultaneously score
Representatives according to criteria mutually determined by the Company and the
client. Representatives are evaluated and provided with feedback on their
performance on a weekly basis and, as appropriate, recognized for superior
performance or scheduled for additional training and coaching.
TECHNOLOGY
Utilizing industry standard tools, the Company creates relational database
management systems customized for each client. These systems enable it to track
the details of each customer interaction and consolidate that information into a
customer file, which can be accessed and referred to by Representatives as they
deliver services. TeleTech Call Centers employ state-of-the-art technology that
incorporates digital switching technology, object-oriented software modules,
relational database management systems, proprietary call tracking and workforce
management systems, CTI and interactive voice response. TeleTech's digital
switching technology enables calls to be routed to the next available
Representative with the appropriate knowledge, skill and language sets. Call
tracking and workforce management systems generate and track historical call
volumes by client, enabling the Company to schedule personnel efficiently to
accommodate anticipated fluctuations in call volume. This technology base
enables TeleTech to provide single call resolution and decrease customer hold
times, thereby enhancing customer satisfaction.
TeleTech-owned Call Centers utilize "Universal Representative" workstations
with inbound, outbound, Internet and faxback capabilities, the majority of which
run on Pentium-Registered Trademark--based computers. All workstations are
PC-based and utilize CTI technology, which connects the computer to a telephone
switch allowing calls and computer data to be transferred simultaneously. By
using simple, intuitive graphical user interfaces (GUI), which substitute
graphics for text, TeleTech enables its Representatives to focus on assisting
the customer, rather than on the technology, and obtain customer information
using significantly fewer keystrokes. The user-friendly interface also helps to
decrease training time and increase the speed of call handling.
TeleTech's applications software is designed using products developed by
Microsoft, Oracle, Novell, IBM and others. TeleTech has invested significant
resources in designing, developing and debugging industry-specific and
open-systems software applications and tools. As a result, TeleTech maintains an
extensive library of reusable object-oriented code modules for use by TeleTech's
applications development professionals to develop customized customer care
software. TeleTech's systems capture and download a variety of information
obtained during each customer interaction into relational databases for
real-time, daily, weekly or monthly reporting to clients. TeleTech runs its
applications software on open-systems, client-server architecture that utilizes
computer processors, server components and hardware platforms produced by
manufacturers such as Compaq, Hewlett Packard, IBM and Sun Microsystems.
TeleTech has and will continue to invest significant resources into the research
and development of new and emerging customer care and technical support
technologies.
HUMAN RESOURCES
TeleTech's success in recruiting, hiring and training large numbers of
skilled employees is critical to its ability to provide high-quality customer
care solutions to its clients. TeleTech generally locates its Call Centers in
metropolitan areas that have access to higher education and a major
transportation infrastructure. TeleTech endeavors to offer a competitive pay
scale, hire primarily full-time employees who are eligible to receive the full
range of employee benefits and provide employees with a clear, viable career
path.
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TeleTech is committed to the continued education and development of its
employees and believes that providing TeleTech employees with access to new
learning opportunities produces job satisfaction, ensures a higher quality labor
force and fosters loyalty between TeleTech's employees and the clients they
serve. Before taking customer calls, Representatives receive from one to five
weeks of on-site training in TeleTech's or the client's training facilities to
learn about the client's corporate culture, specific product or service
offerings and the customer care program that TeleTech and the client will be
undertaking. Representatives also receive a minimum of six to eight hours of
on-going training per month and often receive supplemental laboratory training
as needed to provide high-quality customer service and product support.
As of April 30, 1996, TeleTech had 3,653 employees. Of its total employees,
2,795 were full-time Representatives, constituting 81.5% of its total
Representatives. None of TeleTech's employees are subject to a collective
bargaining agreement and TeleTech believes its relations with its employees are
good.
INTERNATIONAL OPERATIONS
TeleTech operates one Call Center in each of Australia and New Zealand, and
a third Call Center located in the United Kingdom that is operated through the
Company's joint venture with a subsidiary of PPP Healthcare Group plc ("PPP"),
one of the largest private medical insurers in the United Kingdom. In January
1996, TeleTech acquired Access 24, a leading provider of customer care solutions
to Australian and New Zealand companies primarily in the health care and
financial services industries. The operations of Access 24 have been
substantially integrated with TeleTech's operations and the Company intends to
leverage Access 24's experience by introducing similar services in the United
States. TeleTech operates Call Centers in Sydney, Australia and Auckland, New
Zealand, containing an aggregate of 131 workstations, and intends to develop a
traditional customer care outsourcing business in Australia and New Zealand, as
well as the United Kingdom.
On April 30, 1996, TeleTech entered into a joint venture with PPP, which
currently serves more than 2.3 million customers throughout the United Kingdom
and owns long-term health insurance, dental care and finance companies. TeleTech
and PPP have agreed to provide, exclusively through the joint venture and
initially solely in the United Kingdom and Ireland, distinct, value-added
customer care services. Apart from the joint venture, TeleTech intends to
provide traditional outsourcing services, similar to the type TeleTech provides
in the United States, in the United Kingdom. See "Business--Services." The joint
venture, which will operate initially from the 172-workstation Call Center
located in London, currently provides services only to PPP customers but intends
to eventually offer its services to customers of other companies.
COMPETITION
The Company believes that it competes primarily with the in-house
teleservices and customer service operations of its current and potential
clients. TeleTech also competes with certain companies operating in the
teleservices industry, including Access Health, Inc., APAC Teleservices, AT&T
American Transtech, Electronic Data Systems, MATRIXX Marketing Inc., SITEL
Corporation, STREAM and Sykes Enterprises Incorporated. TeleTech competes
primarily on the basis of quality and scope of services provided, speed and
flexibility of implementation and technological expertise. Although the
teleservices industry is very competitive and highly fragmented with numerous
small participants, management believes that TeleTech generally does not
directly compete with traditional telemarketing companies, which provide
primarily outbound "cold calling" services.
32
FACILITIES
TeleTech's corporate headquarters are located in Denver, Colorado in
approximately 27,000 square feet of leased office space that also contains a 553
workstation Call Center. As of April 30, 1996, TeleTech leased (unless otherwise
noted) and operated the following Call Centers, containing an aggregate of
approximately 225,000 square feet:
YEAR OPENED OR NUMBER OF
LOCATION ACQUIRED WORKSTATIONS(1)
- --------------------------------------------------------------- --------------- -----------------
U.S. CALL CENTERS
Sherman Oaks, California....................................... 1985 388
Denver, Colorado............................................... 1993 553
Burbank, California............................................ 1995 414
Thornton, Colorado............................................. 1996 475
INTERNATIONAL CALL CENTERS (2)
Sydney, Australia.............................................. 1996 104
London, United Kingdom (3)..................................... 1996 172
Auckland, New Zealand.......................................... 1996 27
MANAGED ON BEHALF OF UNITED PARCEL SERVICE
Greenville, South Carolina..................................... 1996 725
Tucson, Arizona................................................ 1996 762
Tampa, Florida (4)............................................. 1996 940
-----
Total number of workstations............................... 4,560
-----
-----
- ---------
(1) Includes training positions, which are fully operative as production
positions when necessary.
(2) Acquired January 1, 1996 through TeleTech's acquisition of Access 24. See
"--International Operations."
(3) Managed through the Company's joint venture with PPP. See "--International
Operations."
(4) The Company expects to commence operations at this Call Center in June 1996.
The leases for TeleTech's U.S. Call Centers have terms ranging from one to
eight years and generally contain renewal options. The Company plans to open a
United Parcel Service-owned Call Center in Tampa, Florida in June 1996, as well
as a Call Center in Houston, Texas in August 1996. It also plans to expand its
Thornton Call Center by 267 positions by July 15, 1996. Pursuant to its
agreement with United Parcel Service, if United Parcel Service opens a fourth
call center, TeleTech has the option to staff and manage such Call Center. The
Company believes that its existing Call Centers are suitable and adequate for
its current operations but that additional Call Centers, including the expansion
currently planned for 1996, will be required to support continued growth.
LEGAL PROCEEDINGS
From time to time the Company is involved in litigation, most of which is
incidental to its business. In the Company's opinion, no litigation to which the
Company currently is a party is likely to have a material adverse effect on the
Company's results of operations or financial condition.
33
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information with respect to the
executive officers and directors of the Company:
NAME AGE POSITION
- -------------------------- --- --------------------------------------------------------
Kenneth D. Tuchman 36 Chairman of the Board, President, Chief Executive
Officer and Director
Joseph D. Livingston 51 Senior Vice President and Chief Operating Officer
Steven B. Coburn 42 Chief Financial Officer
Alan Silverman (1) 52 Director
Richard Weingarten (1) 45 Director
Samuel Zell 53 Director
- ---------
(1) Member of the Compensation and Audit Committees of the Board of Directors of
the Company.
MR. TUCHMAN founded TeleTech and has served as its Chairman of the Board of
Directors, President and Chief Executive Officer since TeleTech's formation in
December 1994. Mr. Tuchman also is the founder and has served as the President
and Chief Executive Officer of each of TeleTech Telecommunications, Inc. and
TeleTech Teleservices, Inc., two operating subsidiaries of TeleTech, since their
formation in October 1982 and November 1992, respectively.
MR. LIVINGSTON has served the Company since February 1992 in various
capacities, including as Senior Vice President and Chief Operating Officer and
previously as Vice President of Operations and Technology. From 1989 to 1992,
Mr. Livingston was the Director of MIS Systems & Operations of Livestone
Corporation, a division of American Eastern Securities, and from 1985 to 1989 he
was employed by Coopers & Lybrand, an international accounting firm, as Director
of West Region MIS and Strategic Management Services for International Business.
MR. COBURN has served as Chief Financial Officer of the Company since
October 1995. From October 1989 to September 1995, Mr. Coburn was employed by U
S West, a diversified telecommunications company, and various of its affiliates,
during which time he served as Finance Director and Chief Financial Officer of
Interactive Video Enterprises, as Finance Director of U S West Marketing
Resources Group and as Finance Director and Controller of U S West Marketing
Services. In 1993, Mr. Coburn established and managed the finance, accounting
and treasury activities of U S West Polska, a start up operation in Warsaw,
Poland.
MR. SILVERMAN, who has served as a director of TeleTech since January 1995,
is an independent investor and has been a director of Exhibition Video
International, a company that is developing technology for satellite and video
transmissions, since 1992. Mr. Silverman has served since 1970 as a director and
is President of Essaness Theatres Corporation ("Essaness"), an investment
holding company. Mr. Silverman is a director of Keystone Biomedical, Inc., a
company that develops, tests and licenses pharmaceutical agents, and, since
1980, has been a director of Video 44, a Hispanic television broadcasting
company. Mr. Silverman also serves as a director of various private
corporations.
MR. WEINGARTEN has served as a director of TeleTech since January 1995. Mr.
Weingarten founded Richard Weingarten & Company, Inc., a company that provides
investment banking and financial advisory services, in 1991 and has served as
its President since its formation. From 1988 through 1991, Mr. Weingarten was a
Managing Director of Bear, Stearns & Co., Inc. and, from 1989 until 1991, served
as Director of Corporate Finance for its Southeastern region. Mr. Weingarten
currently serves as a director of Capsure Holdings Corp. ("Capsure"), a holding
company whose principal subsidiaries are specialty property and casualty
insurers.
34
MR. ZELL has served as a director of TeleTech since January 1995. Mr. Zell
serves as Chairman of the Board of Great American Management and Investments,
Inc., a diversified holding company, Anixter International Inc., a provider of
integrated network and cabling solutions, Falcon Building Products, Inc., a
manufacturer and supplier of building products, American Classic Voyages Co., an
owner and operator of cruise lines, Manufactured Home Communities, Inc., a real
estate investment trust specializing in the ownership and management of
manufactured home communities, Capsure, Equity Group Investments, Inc. and other
private corporations. Mr. Zell also serves as Chairman of the Board of Trustees
of Equity Residential Properties Trust, an owner and operator of multifamily
residential properties, and as Co-Chairman of the Board of Revco D.S., Inc., a
drug store chain. Mr. Zell is a director of Quality Food Centers, Inc., an
independent supermarket chain, and Sealy Corporation, a maker of bedding and
related products. Mr. Zell was President of Madison Management Group, Inc., a
holding company of low-tech manufacturing companies ("Madison"), prior to
October 4, 1991. Madison filed a petition for reorganization under the Federal
bankruptcy laws in November 1991.
ARRANGEMENTS FOR NOMINATION AS DIRECTOR
Directors are elected at each annual meeting of stockholders of the Company
to serve for one-year terms. After the closing of the Offering, the directors
intend to appoint persons in accordance with TeleTech's By-laws to fill the
current vacancies on the Board of Directors.
In connection with the sale of its Preferred Stock in January 1995, certain
stockholders of TeleTech executed an agreement (the "Investment Agreement")
pursuant to which they agreed to elect each year to TeleTech's Board of
Directors two individuals nominated by TeleTech Investors General Partnership
("TIGP") and Essaness and five individuals designated by Mr. Tuchman. Each of
the current directors of TeleTech was elected as a nominee of Mr. Tuchman or of
TIGP and Essaness pursuant to the Investment Agreement. The rights and
obligations of Mr. Tuchman, TIGP and Essaness to elect directors under the
Investment Agreement will terminate upon the closing of the Offering.
TeleTech's Certificate of Incorporation entitles the holders of Preferred
Stock, as a class, to elect two individuals, and entitles the holders of Common
Stock, as a class, to elect five individuals, to the Board of Directors of
TeleTech. The Restated Certificate of Incorporation, to be filed immediately
prior to the closing of the Offering, provides that the holders of a majority of
the outstanding Common Stock will elect all directors.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has standing Audit and Compensation Committees, which
assist the Board in the discharge of its responsibilities. Members of each such
committee are elected by the Board at its first meeting following the annual
meeting and serve for one year terms.
The Audit Committee reports to the Board regarding the appointment of the
independent public accountants of TeleTech, the scope and fees of the
prospective annual audit and the results thereof, compliance with TeleTech's
accounting and financial policies and management's procedures and policies
relative to the adequacy of TeleTech's internal accounting controls. The current
members of the Audit Committee are Alan Silverman and Richard Weingarten,
neither of whom is an employee of TeleTech.
The Compensation Committee reviews and approves the annual salary and bonus
for each executive officer (consistent with the terms of any applicable
employment agreement), reviews, approves and recommends terms and conditions for
all employee benefit plans (and changes thereto) and administers the Option Plan
and such other employee benefit plans as may be adopted by TeleTech from time to
time. The current members of the Compensation Committee are Alan Silverman and
Richard Weingarten, each of whom is a non-employee director of TeleTech.
COMPENSATION OF DIRECTORS
TeleTech does not pay its directors a fee for their services as such;
however, all directors are reimbursed for travel expenses incurred in attending
board and committee meetings.
35
The TeleTech Holdings, Inc. Directors Stock Option Plan, which was approved
by the Board of Directors of the Company effective January 1996 (the "Directors
Option Plan"), provides for the automatic annual grant, to each director who is
neither an employee of the Company nor, after this Offering, the beneficial
owner of 5% or more of the outstanding Common Stock, of options to acquire
shares of Common Stock. A total of 750,000 shares of Common Stock are reserved
for issuance pursuant to options granted under the Directors Option Plan. All
options granted under the Directors Option Plan are non-qualified options that
are not intended to qualify under Section 422 of the Code.
The Directors Option Plan currently provides that each eligible director
will receive options to acquire (i) 12,500 shares of Common Stock upon such
director's initial election to the Board of Directors and (ii) on the date of
each annual meeting of stockholders held each year thereafter at which such
director is re-elected, 12,500 shares of Common Stock for services to be
rendered as a director and 6,250 for services as a member on each committee of
the Board of Directors to which such director is appointed. The exercise price
of each option granted under the Directors Option Plan shall be equal to the
fair market value of the Common Stock on the date of grant. Options granted
under the Directors Option Plan (a) vest immediately, (b) are not exercisable
until six months after the date of grant and (c) expire on the earliest to occur
of the tenth anniversary of the date of grant, one year following the director's
death or immediately upon the director's termination of membership on the Board
of Directors for Cause (as defined in the Directors Option Plan).
As of May 15, 1996, options to acquire an aggregate of 225,000 shares of
Common Stock, at an exercise price of $5.00 per share, were outstanding under
the Directors Option Plan. Each of Messrs. Silverman, Weingarten and Zell has
been granted options under the Directors Option Plan to acquire 25,000 shares of
Common Stock in consideration for services rendered as a director of the Company
during 1995. In addition, each of Messrs. Weingarten and Silverman has been
granted options under the Directors Option Plan to acquire an additional 25,000
shares of Common Stock for services rendered during 1995 as members of the Audit
and Compensation Committees of the Board of Directors. Messrs. Weingarten,
Silverman and Zell have been granted options to acquire 37,500, 37,500 and
25,000 shares of Common Stock, respectively, for services rendered and to be
rendered as a director of the Company in 1996.
INCENTIVE COMPENSATION PLAN
In order to attract, retain and motivate qualified employees, align employee
interests with those of the stockholders and reward employees for enhancing the
value of the Company, TeleTech has established the TeleTech Holdings, Inc.
Incentive Compensation Plan (the "Incentive Plan"). Under the Incentive Plan,
certain management-level employees of the Company are eligible to receive annual
performance bonuses based upon the Company's achievement of certain
predetermined financial goals. Awards under the Incentive Plan will be paid
annually from an incentive pool, which is funded annually by a percentage of the
amount by which the net income of the Company exceeds the established threshold
performance level for that year. From this incentive pool, each SBU executive,
manager and key employee is entitled to receive a cash incentive award up to an
annual bonus limitation, which is determined each year based upon the
recipient's base salary. No awards will be made under the Incentive Plan, which
was adopted on May 14, 1996, until 1997.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Alan Silverman and Richard Weingarten are the current members of the
Compensation Committee of the Board of Directors.
Pursuant to the Amended and Restated Investment Agreement to take effect
upon the closing of the Offering, certain existing stockholders of the Company
(the "Existing Stockholders") are entitled, by majority vote, to require
TeleTech, at its sole expense, to register under the Securities Act all or part
of their Common Stock. In addition, if TeleTech proposes to register any of its
securities under the Securities Act for its own account, the Existing
Stockholders may require TeleTech, at its sole expense, to include in such
registration all or part of the 8,300,000 shares of Common Stock owned by the
Existing Stockholders. Mr. Silverman owns 258,330 shares of Common Stock. TIGP,
a partnership of which Mr. Weingarten is a general partner, owns 8,525,000
shares of Common Stock; however, the managing general partner of TIGP
36
holds sole power to vote and dispose of all shares owned by TIGP. The Company
has been advised that, immediately following the closing of the Offering, TIGP
will be dissolved and its assets will be distributed to its partners. See
"Principal and Selling Stockholders."
EXECUTIVE COMPENSATION
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION. The following table sets
forth information with respect to all compensation earned by TeleTech's chief
executive officer and TeleTech's two other executive officers as of December 31,
1995 (collectively, the "Named Executive Officers") for services rendered to
TeleTech during 1995.
SUMMARY COMPENSATION TABLE FOR 1995
ANNUAL COMPENSATION
-------------------------------------------
OTHER ANNUAL ALL OTHER
SALARY BONUS COMPENSATION COMPENSATION
NAME AND PRINCIPAL POSITION ($) ($) ($) ($) (1)
- ---------------------------------------------------- ------------- ------------- ------------- -------------
Kenneth D. Tuchman, Chairman, President & Chief
Executive Officer.................................. $ 750,000 $ 250,000 $ 56,300(2) $ 10,830
Joseph D. Livingston, Senior Vice President & Chief
Operating Officer.................................. 174,090(3) 168,743(4) -- 4,500
Steven B. Coburn, Chief Financial Officer........... 28,000(5) -- -- --
- ---------
(1) Represents the full dollar value of premiums paid by the Company with
respect to life insurance for the benefit of Mr. Tuchman or Mr. Livingston
and his respective beneficiaries.
(2) Includes $20,000 in aggregate membership dues and initiation fees, $17,500
paid as a car allowance, $15,600 for lease of a townhouse and other
perquisites and personal benefits paid by the Company to or on behalf of Mr.
Tuchman.
(3) Includes approximately $11,340 paid to Mr. Livingston for accrued but unused
vacation time.
(4) Includes a $75,000 annual performance bonus and an approximately $93,700
one-time bonus for Mr. Livingston's assistance in obtaining a client
contract.
(5) Mr. Coburn joined TeleTech in October 1995 at an annual base salary of
$120,000. See "--Employment Agreements."
OPTION GRANTS. The following table sets forth information regarding grants
of stock options under the Option Plan during 1995 to the Named Executive
Officers.
OPTION GRANTS IN 1995
POTENTIAL REALIZABLE
NUMBER OF VALUE AT ASSUMED ANNUAL
SHARES PERCENTAGE OF RATES OF STOCK PRICE
UNDERLYING TOTAL OPTIONS APPRECIATION FOR OPTION
OPTIONS GRANTED TO EXERCISE TERM (3)
GRANTED EMPLOYEES IN PRICE PER EXPIRATION ------------------------
NAME (#) FISCAL YEAR SHARE (1) DATE (2) 5% 10%
- ----------------------------------- ----------- ----------------- ----------- ------------ ---------- ------------
Kenneth D. Tuchman................. -- -- -- -- -- --
Joseph D. Livingston............... 750,000 36% $ 1.29 1/1/2005 $ 608,456 $ 1,541,946
Steven B. Coburn................... 250,000 12% 2.00 9/15/2005 314,447 796,871
- ---------
(1) Each option has been granted pursuant to the Option Plan and expires on the
date ten years after the date of grant. The exercise price equals the fair
market value of the Common Stock on the grant date, as determined by the
Board of Directors based upon the most recent price prior to the grant date
at which the Company, in arms' length transactions, had issued Common Stock
in connection with acquisitions or had sold Preferred Stock in capital
raising transactions.
37
(2) Options granted to Messrs. Livingston and Coburn vest pro rata over the
three years and five years, respectively, following the date of grant.
(3) The potential realizable value is calculated assuming that the fair market
value on the date of grant, which equals the exercise price, appreciates at
the indicated annual rate (set by the Commission), compounded annually for
the term of the option. Based on the initial price to public in the
Offering, the actual realizable value of the options will substantially
exceed the potential realizable values shown in the table.
OPTION HOLDINGS. No options were exercised by Named Executive Officers in
1995. The following table sets forth information with respect to the aggregate
number and value of shares underlying unexercised options held by each of the
Named Executive Officers as of December 31, 1995.
FISCAL YEAR-END OPTION VALUES
NUMBER OF SHARES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AS OF DECEMBER 31, IN-THE- MONEY OPTIONS AS
1995 OF DECEMBER 31, 1995 (1)
-------------------------- --------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------------------------------------- ----------- ------------- ----------- -------------
Kenneth D. Tuchman.................................. -- -- -- --
Joseph D. Livingston................................ 250,000 500,000 $ 927,500 $ 1,855,000
Steven B. Coburn.................................... -- 250,000 -- 750,000
- ---------
(1) The exercise price of each option was based on the deemed fair market value
of the option shares at fiscal year end ($5.00 per share as determined by
the Board of Directors based on the most recent price prior to December 31,
1995 at which the Company had issued or agreed to issue Common Stock) less
the exercise price payable for such shares.
TELETECH STOCK OPTION PLAN
The Company's Option Plan was adopted by the Board of Directors in December
1994 and by the Company's stockholders in January 1995 and was amended and
restated in January 1996. The Option Plan authorizes the issuance of up to
7,000,000 shares of Common Stock through the grant of (i) incentive stock
options ("ISOs") within the meaning of Section 422 of the Code, (ii) stock
options that are not intended to qualify under Section 422 of the Code ("NSOs"
and together with ISOs, "Options"), (iii) stock appreciation rights ("SARs"),
(iv) restricted stock and (v) phantom stock. Directors, officers, employees,
consultants and independent contractors of the Company or any subsidiary of the
Company, as selected from time to time by the committee administering the Option
Plan, are eligible to participate in the Option Plan. As of May 15, 1996,
Options to acquire an aggregate of 472,085 shares of Common Stock and 76,000
shares of restricted stock were outstanding. No SARs or phantom stock have been
issued under the Option Plan.
The Option Plan provides that it is to be administered by a committee
comprised of two or more disinterested directors appointed by the Board of
Directors (the "Committee"). The Compensation Committee of the Board of
Directors, which is comprised of two disinterested directors of the Company,
currently acts as the Committee under the Option Plan. Subject to certain
limitations, the Committee has complete discretion to determine which eligible
individuals are to receive awards under the Option Plan, the form and vesting
schedule of awards, the number of shares subject to each award and the exercise
price, the manner of payment and expiration date applicable to each award.
All awards under the Option Plan are subject to vesting and forfeiture.
Unless the Committee establishes otherwise at the time of award, all awards
under the Option Plan vest at an accelerating rate over a period of five years.
Set forth below is a summary of the terms of the Option Plan that are
applicable to each of the various types of awards covered thereby.
38
OPTIONS. All Options expire on the date that is the earliest of three
months after the holder's termination of employment with the Company (other than
termination for Cause), six months after the holder's death and 10 years after
the date of grant. Options also are subject to forfeiture upon termination of
employment or directorship for "Cause." The exercise price per share of an ISO
is determined by the Committee at the time of grant but in no event may be less
than the fair market value of the Common Stock on the date of grant.
Notwithstanding the foregoing, if an ISO is granted to a participant who owns
more than 10% of the voting power of all classes of stock of the Company, the
exercise price must be at least 110% of the fair market value of the Common
Stock and the exercise period must not exceed five years from the date of grant.
The exercise price per share of an NSO is determined by the Committee in its
sole discretion.
SARS. SARs may be issued independent of an Option or, alternatively, in
connection with an Option (a "Tandem SAR"), in which case the Tandem SAR
terminates simultaneously upon the expiration of the related Option. A Tandem
SAR is only exercisable if the fair market value of a share of Common Stock
exceeds the exercise price of the related Option.
RESTRICTED STOCK. Restricted stock entitles the holder thereof to
participate as a stockholder of the Company; however, the holder may not sell,
transfer, pledge or otherwise encumber such stock prior to the time it vests. A
holder of restricted stock forfeits all unpaid accumulated dividends and all
shares of restricted stock that have not vested prior to the date that such
holder's employment with the Company is terminated for any reason.
PHANTOM STOCK. Phantom stock entitles the holder thereof to surrender any
vested portion of such phantom stock in exchange for cash or shares of Common
Stock, as the Committee may determine, in an amount equal to the fair market
value of Common Stock on the date of surrender.
EMPLOYMENT AGREEMENTS
TeleTech entered into an employment agreement with Kenneth D. Tuchman as
Chairman of the Board and President of TeleTech for a term commencing on January
1, 1995 and ending on December 27, 1997 (the "Term"). Subsequent thereto, Mr.
Tuchman also was elected as the Chief Executive Officer of TeleTech. Pursuant to
the agreement, Mr. Tuchman is entitled to receive an annual base salary of
$750,000, as adjusted on January 1 of each year during the Term by the annual
percentage increase in the Consumer Price Index for Urban Wage Earners and
Clerical Workers for the Denver metropolitan area (the "CPI Percentage"). Mr.
Tuchman also is eligible to receive an annual performance bonus not to exceed
$250,000, as adjusted annually by the CPI Percentage, based upon TeleTech's
achievement of certain predetermined performance goals. The agreement requires
the Company to maintain, on behalf of Mr. Tuchman, a $24 million life insurance
policy (half of which is payable to his beneficiaries), disability insurance,
accident, death and dismemberment insurance, errors and omissions insurance with
a policy limit of not less than $1 million and entitles Mr. Tuchman to receive
certain perquisites specified therein. Under the terms of his agreement, Mr.
Tuchman is prohibited, during his employment and for three years thereafter,
from disclosing any confidential information or trade secrets of TeleTech. Mr.
Tuchman also is prohibited, during his employment and for three years after the
Company terminates his employment for Good Cause (as defined therein) or Mr.
Tuchman voluntarily terminates his employment with the Company, from engaging in
any business, or becoming employed by or otherwise rendering services to any
company (other than TeleTech) that has as its primary business inbound or
outbound teleservices. The agreement provides that if TeleTech terminates Mr.
Tuchman's employment for Good Cause, TeleTech will pay Mr. Tuchman his salary as
accrued through the date of termination. If TeleTech terminates Mr. Tuchman's
employment without Good Cause, TeleTech will pay to him the lesser of (i) the
sum of his salary as accrued through the date of termination, his performance
bonus, prorated for any portion of the year remaining and calculated as if
TeleTech had achieved its performance goals, and the present value of all
payments that otherwise would have been made to him during the remainder of the
Term, calculated as if TeleTech had achieved its performance goals, or (ii)
three times the aggregate salary and performance bonus earned by him in the
immediately preceding year.
TeleTech entered into an employment agreement with Joseph D. Livingston as
Senior Vice President and Chief Operating Officer of TeleTech effective January
1, 1995. Pursuant to the agreement, as amended,
39
Mr. Livingston is entitled to receive an annual base salary of $160,000 for 1995
and $250,000 for 1996 and thereafter and also is eligible to receive an annual
performance bonus based upon TeleTech's achievement of certain predetermined
performance goals. TeleTech also has granted Mr. Livingston options to purchase
750,000 and 75,000 shares of Common Stock at an exercise price of $1.29 and
$8.00 per share, respectively, which options vest over three and five years from
the date of grant, respectively. Mr. Livingston's employment with TeleTech is
terminable at any time by either party, with or without cause. Upon termination
of employment, Mr. Livingston will be entitled to unpaid compensation for
services rendered through the date of termination, together with employee
benefits accrued through the date of termination. Under the terms of his
agreement, Mr. Livingston is prohibited from disclosing any confidential
information or trade secrets of TeleTech. The Agreement also prohibits Mr.
Livingston, for the three years after termination of his employment with
TeleTech, from engaging in any business or becoming employed or otherwise
rendering services to any company engaging in, inbound or outbound teleservices,
development or maintenance of voice or data communication, certain software
applications, customer communications services or technological innovation or
support for any of the foregoing.
The Company entered into a three year employment agreement commencing on
October 2, 1995 with Steven B. Coburn. Pursuant to the agreement, Mr. Coburn
serves as Chief Financial Officer of the Company and is entitled to receive an
annual base salary of $120,000 for 1995 and, commencing January 1, 1996, an
annual base salary of $135,000. Mr. Coburn also is eligible to receive an annual
performance bonus of not more than twenty-five percent of his salary upon the
Company's achievement of certain predetermined performance goals. The Company
has granted Mr. Coburn options to purchase 250,000 shares of Common Stock at an
exercise price of $2.00 per share, which options vest over a period of five
years beginning with the thirteenth month of his employment. The agreement
prohibits Mr. Coburn from disclosing any confidential information or trade
secrets of the Company. Mr. Coburn also is prohibited, during his employment and
for three years after the Company terminates his employment for Good Cause (as
defined therein) or Mr. Coburn voluntarily terminates his employment with the
Company, from engaging in any business, or becoming employed by or otherwise
rendering services to any company (other than TeleTech), that has as its primary
business inbound or outbound teleservices or technological innovation or support
with respect thereto.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
TeleTech's Restated Certificate of Incorporation and By-laws provide that
TeleTech shall indemnify its directors, and may indemnify its officers,
employees and other agents, to the fullest extent permitted by Delaware law. The
Company also is authorized to secure insurance on behalf of any person it is
required or permitted to indemnify. Pursuant to this provision, TeleTech
maintains liability insurance for the benefit of its directors and officers.
TeleTech has entered into agreements to indemnify its directors and certain
of its officers, in addition to the indemnification provided for in TeleTech's
Restated Certificate of Incorporation and By-laws. These agreements provide,
among other things, that TeleTech will indemnify its directors and officers for
all direct and indirect expenses and costs (including, without limitation, all
reasonable attorneys' fees and related disbursements, other out-of-pocket costs
and reasonable compensation for time spent by such persons for which they are
not otherwise compensated by TeleTech or any third person) and liabilities of
any type whatsoever (including, but not limited to, judgements, fines and
settlement fees) actually and reasonably incurred by such person in connection
with either the investigation, defense, settlement or appeal of any threatened,
pending or completed action, suit or other proceeding, including any action by
or in the right of the corporation, arising out of such person's services as a
director, officer, employee or other agent of TeleTech, any subsidiary of
TeleTech or any other company or enterprise to which the person provides
services at the request of TeleTech. TeleTech believes that these provisions and
agreements are necessary to attract and retain talented and experienced
directors and officers.
40
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
In addition to the transactions described elsewhere in this Prospectus, the
following transactions have been effected, or are being contemplated, involving
the Company, and its directors, executive officers or stockholders. See
"Management--Compensation Committee Interlocks and Insider Participation" and
"Shares Eligible for Future Sale."
During 1995, TeleTech provided reservations call handling services to Midway
Airlines Corporation ("Midway"), a majority-owned subsidiary of Zell/Chilmark
Fund, L.P. Samuel Zell, a director of TeleTech, is an affiliate of Zell/Chilmark
Fund, L.P. During the twelve months ended December 31, 1995 and March 31, 1996,
TeleTech charged Midway an aggregate of $1,291,862 and $600,904, respectively,
for services rendered by TeleTech. As of December 31, 1995 and March 31, 1996,
the total amounts due from Midway for services rendered by TeleTech were
$535,845 and $570,274, respectively, of which $354,526 and $462,958,
respectively, were past due. TeleTech has continued to provide reservations call
handling services to Midway in the current fiscal year.
In April 1996, TeleTech agreed to accept from Midway, and Midway delivered
to the Company, a promissory note in the principal amount of $500,000 to
evidence a portion of the total amount due and owing. The note bears interest at
a rate of 8% per annum and is payable in 12 equal installments of principal,
together with interest, commencing May 1, 1996.
TeleTech has agreed to pay, prior to the closing of the Offering, $1 million
to Equity Group Investments, Inc. ("EGI"), an affiliate of Mr Zell, a director
of TeleTech, for certain advisory services rendered by EGI in connection with
the Offering, the acquisition of Access 24 and the joint venture with PPP. The
Company may retain EGI, or other affiliates of Mr. Zell, to render similar
services after the Offering. Any such engagement, and the terms upon which such
engagement will occur, will be subject to the prior approval of disinterested
directors of the Company. Of the $1 million payable to EGI, approximately
$500,000 relate to services rendered in connection with the Offering and are
included as expenses thereof.
TeleTech has utilized the services of The Riverside Agency, Inc. in
reviewing, obtaining or renewing various insurance policies. The Riverside
Agency, Inc. is a wholly-owned subsidiary of EGI. During the twelve months ended
December 31, 1995, The Riverside Agency, Inc. invoiced TeleTech an aggregate of
$23,965 and $47,930, respectively, for services rendered.
Under the terms of the Stock Transfer and Registration Rights Agreement
among Access 24 Holdings Pty Limited and Bevero Pty Limited, existing holders of
Common Stock (the "Common Stockholders"), and TeleTech, if TeleTech proposes to
register any of its securities under the Securities Act for its own account, the
Common Stockholders may require TeleTech, at its sole expense, to include in
such registration all or part of the 970,240 shares of Common Stock held by the
Common Stockholders. None of such shares are being registered in connection with
the Offering.
In 1993 and 1994, Mr. Tuchman made loans to the Company that were evidenced
by subordinated promissory notes with an interest rate of 8% per annum. In 1995,
the Company paid interest of $11,000 to Mr. Tuchman on such notes. In connection
with the Company's restructuring and sale of $12 million of Preferred Stock in
January 1995, the Company repaid the approximately $1.2 million outstanding
balance of such notes. Also in 1995, TeleTech paid a dividend of approximately
$452,000 to Mr. Tuchman.
TeleTech believes that all transactions disclosed above have been, and
TeleTech's Board of Directors intends that any future transactions with its
officers, directors, affiliates or principal stockholders will be, on terms that
are no less favorable to TeleTech than those that are obtainable in arms' length
transactions with unaffiliated third parties.
41
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock as of May 15, 1996, and as
adjusted to reflect the sale of shares of Common Stock being offered hereby, by
(i) each stockholder who is known by the Company to beneficially own more than
5% of the currently outstanding shares of Common Stock, (ii) each of the
Company's directors and the Named Executive Officers, (iii) all directors and
executive officers of the Company as a group and (iv) the Selling Stockholders.
SHARES BENEFICIALLY OWNED PRIOR SHARES BENEFICIALLY OWNED
TO THE OFFERING NUMBER OF AFTER THE OFFERING
DIRECTORS, EXECUTIVES OFFICERS ------------------------------- SHARES BEING ----------------------------
AND CERTAIN STOCKHOLDERS (1) NUMBER PERCENT OFFERED (2) NUMBER PERCENT
- ----------------------------------------------- ------------------ ----------- --------------- --------------- -----------
Kenneth D. Tuchman............................. 40,700,000(3) 79.7% 1,000,000 39,700,000 72.1%
Joseph D. Livingston........................... 354,167(4) * -- 354,167 *
Steven B. Coburn............................... -- * -- -- *
Alan Silverman................................. 345,830(5)(6) * -- 345,830 *
Richard Weingarten............................. 87,500(6)(7) * -- 255,834(7) *
Samuel Zell.................................... 8,575,000(8) 16.8 950,000(9) 2,570,973(8) 4.7%
All directors and executive officers as a group
(6 persons)................................... 50,049,997 98.1 1,950,000(10) 42,647,637 77.7
Jack Silverman................................. 258,340(11) * 50,000 208,340 *
TeleTech Investors General Partnership
c/o Equity Group Investments, Inc.
Two North Riverside Plaza
Chicago, Illinois 60606........................ 8,525,000(12) 16.7 950,000 -- *
- ---------
* Less than one percent
(1)The address of each director and executive officer is in care of the
Company, 1700 Lincoln Street, Suite 1400, Denver, Colorado 80203.
(2)Assumes no exercise of the Underwriters' over-allotment option. If the
Underwriters' over-allotment option is exercised, Mr. Tuchman will sell up
to 900,000 additional shares and, assuming all such shares are sold, he will
beneficially own 38,800,000 shares or 70.5% of the total outstanding shares.
(3)Mr. Tuchman is the founder, Chairman of the Board of Directors, President
and Chief Executive Officer of TeleTech. See "Management."
(4)Includes 354,167 shares of Common Stock subject to options granted under the
Option Plan, which are exercisable as of the date of this Prospectus. Mr.
Livingston is the Senior Vice President and Chief Operating Officer of the
Company. See "Management."
(5)Includes 258,330 shares of Common Stock issuable upon conversion of 51,666
shares of Preferred Stock owned by Mr. Silverman, which he has agreed to
convert into Common Stock pursuant to the Preferred Stock Conversion, and
87,500 shares subject to options exercisable as of the date of this
Prospectus. See note (6) below.
(6)Includes 87,500 shares of Common Stock subject to options granted to each of
Messrs. Silverman and Weingarten under the Directors Option Plan. See
"Management--Compensation of Directors."
(7) Mr. Weingarten, as a general partner of TeleTech Investors General
Partnership ("TIGP"), owns an undivided interest in the 8,525,000 shares of
Common Stock issuable upon conversion of TIGP's 1,705,000 shares of
Preferred Stock. Zell General Partnership, Inc., an affiliate of Mr. Zell
and the managing general partner of TIGP (the "Managing General Partner"),
has the sole power to vote and dispose of these shares. Upon dissolution of
TIGP (see note (8) below), Mr. Weingarten will receive a
42
distribution of his proportionate share of the net proceeds from TIGP's sale
of Common Stock and the remaining shares of Common Stock not sold by TIGP in
the Offering. Following such distribution, Mr. Weingarten will own 255,834
shares of Common Stock, which includes 87,500 shares of Common Stock subject
to options granted under the Directors Option Plan.
(8) Includes 50,000 shares of Common Stock subject to options granted to Mr.
Zell under the Directors Option Plan and, prior to the Offering 8,525,000
shares of Common Stock issuable upon conversion of the 1,705,000 shares of
Preferred Stock owned by TIGP. See note (10) below and "Certain
Relationships and Related Party Transactions." The Managing General Partner
has agreed to convert, pursuant to the Preferred Stock Conversion, all of
its shares of Preferred Stock into shares of Common Stock. The Company has
been advised that, immediately after the closing of the Offering, TIGP will
be dissolved and the net proceeds from TIGP's sale of Common Stock, and the
remaining shares of Common Stock not sold by TIGP in the Offering, will be
distributed to its partners. Following such distribution, Mr. Zell will
beneficially own 2,570,973 shares of Common Stock, which includes 50,000
shares of Common Stock subject to options granted under the Directors Option
Plan. See "Management" and "Certain Relationships and Related Party
Transactions."
(9) Represents the shares being sold by TIGP.
(10) Represents the shares being sold by Mr. Tuchman and TIGP.
(11) The shares reflected in the table are issuable upon conversion of, and Mr.
Silverman has agreed to convert in the Preferred Stock Conversion, his
51,668 shares of Preferred Stock into shares of Common Stock.
(12) Includes 8,525,000 shares of Common Stock issuable upon the conversion, to
occur immediately prior and subject to consummation of the Offering, of the
1,705,000 shares of Preferred Stock owned by TIGP. The Company has been
advised that, immediately after the closing of the Offering, TIGP will be
dissolved and its assets will be distributed to its partners. See notes (7)
and (8) above.
43
DESCRIPTION OF CAPITAL STOCK
Pursuant to the Company's Certificate of Incorporation, the Company has
authority to issue an aggregate of 51,860,000 shares of capital stock,
consisting of 50,000,000 shares of Common Stock, par value $.002 per share, and
1,860,000 shares of Preferred Stock, par value $6.45 per share. As of May 15,
1996, after giving effect to the five-for-one stock split, the Company's issued
and outstanding capital stock consisted of 41,746,240 shares of Common Stock,
held by five holders of record, and 1,860,000 shares of Preferred Stock, held by
four holders of record. Pursuant to the Preferred Stock Conversion, the holders
of all of the issued and outstanding shares of Preferred Stock have agreed to
convert, immediately prior and subject to the closing of the Offering, all of
the 1,860,000 shares of Preferred Stock owned by them into an aggregate of
9,300,000 shares of Common Stock. Thus, no information regarding the currently
outstanding Preferred Stock is set forth below.
Concurrently with the closing of the Offering, officers of the Company will
cause to be filed in Delaware and to take effect a Restated Certificate of
Incorporation of the Company (the "Restated Certificate"). Under the Restated
Certificate, the Company will have authority to issue an aggregate of
160,000,000 shares of capital stock, consisting of 150,000,000 shares of Common
Stock, par value $.002 per share, and 10,000,000 shares of preferred stock.
Set forth below is a description of the Common Stock, and of preferred stock
that may be issued, under the Restated Certificate.
COMMON STOCK
The rights of the holders of the Common Stock discussed below are subject to
such rights as the Board of Directors may hereafter confer on the holders of the
preferred stock; accordingly, rights conferred on holders of preferred stock
issued under the Restated Certificate may adversely affect the rights of holders
of the Common Stock.
Subject to the right of holders of Preferred Stock, the holders of
outstanding shares of Common Stock are entitled to receive dividends out of
assets legally available therefor, at such times and in such amounts as the
Board of Directors may from time to time determine. See "Dividend Policy." The
shares of Common Stock are neither redeemable nor convertible and the holders
thereof have no preemptive or subscription rights to purchase any securities of
the Company. Upon liquidation, dissolution or winding up of the Company, the
holders of Common Stock are entitled to receive, PRO RATA, the assets of the
Company that are legally available for distribution, after payment of all debts
and other liabilities and subject to the prior rights of any holders of
Preferred Stock then outstanding. Each outstanding share of Common Stock is
entitled to one vote on all matters submitted to a vote of stockholders. There
is no cumulative voting in the election of directors.
PREFERRED STOCK
The Restated Certificate authorizes the Board of Directors to issue
preferred stock in classes or series and to establish the designations,
preferences, qualifications, limitations or restrictions of any class or series
with respect to, among other things, the rate and nature of dividends, the
price, terms and conditions on which shares may be redeemed, the terms and
conditions for conversion or exchange into any other class or series of the
stock and voting rights. The Company will have authority, without approval of
the holders of Common Stock, to issue preferred stock that has voting, dividend
or liquidation rights superior to the Common Stock and that may adversely affect
the rights of holders of Common Stock. The issuance of preferred stock, while
providing flexibility in connection with possible acquisitions and other
corporate purposes, could, among other things, adversely affect the voting power
of the holders of Common Stock and could have the effect of delaying, deferring
or preventing a change in control of the Company. The Company currently has no
plans to issue any shares of preferred stock.
DELAWARE STATUTORY BUSINESS COMBINATION PROVISION
Section 203 of the Delaware General Corporation Law ("DGCL") is applicable
to corporate takeovers in Delaware. Subject to certain exceptions set forth
therein, Section 203 of the DGCL provides that a corporation shall not engage in
any business combination with any "interested stockholder" for a three-year
44
period following the date that such stockholder becomes an interested
stockholder unless (a) prior to such date, the board of directors of the
corporation approved either the business combination or the transaction that
resulted in the stockholder becoming an interested stockholder, (b) upon
consummation of the transaction that resulted in the stockholder becoming an
interested stockholder, the interested stockholder owned at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced (excluding certain specified shares) or (c) on or subsequent to such
date, the business combination is approved by the board of directors of the
corporation and by the affirmative vote of at least 66 2/3% of the outstanding
voting stock that is not owned by the interested stockholder. Except as
specified therein, an "interested stockholder" is defined to include any person
that is (i) the owner of 15% or more of the outstanding voting stock of the
corporation, (ii) an affiliate or associate of that corporation and was the
owner of 15% or more of the outstanding voting stock of the corporation, at any
time within three years immediately prior to the relevant date, and (iii) an
affiliate or associate of the persons described in the foregoing clauses (i) or
(ii). Under certain circumstances, Section 203 of the DGCL makes it more
difficult for an "interested stockholder" to effect various business
combinations with a corporation for a three-year period, although the
stockholders may, by adopting an amendment to the corporation's certificate of
incorporation or By-laws, elect for the corporation not to be governed by
Section 203, effective twelve months after adoption. None of the Certificate of
Incorporation, the Restated Certificate and the By-laws exempt the Company from
the restrictions imposed under Section 203 of the DGCL. It is anticipated that
the provisions of Section 203 of the DGCL may encourage companies interested in
acquiring the Company to negotiate in advance with the Board of Directors of the
Company because the stockholder approval requirement would be avoided if a
majority of the directors then in office approve either the business combination
or the transaction that results in the stockholder becoming an interested
stockholder.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is
.
45
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, TeleTech will have outstanding 55,046,240
shares of Common Stock. Of these outstanding shares of Common Stock, 8,015,200
shares, including the shares to be sold in the Offering, will be freely
tradeable without restriction or further registration under the Securities Act,
unless purchased by "affiliates" of TeleTech, as that term is defined in Rule
144 promulgated under the Securities Act. The remaining 49,031,040 shares of
Common Stock are "restricted securities" as the term is defined in Rule 144
("Restricted Shares"). Restricted Shares may be sold in the public market only
if registered or if such shares qualify for an exemption from registration under
Rules 144 or 701 promulgated under the Securities Act, which are summarized
below. Sales of the Restricted Shares in the public market, or the availability
of such shares for sale, could adversely affect the market price of the Common
Stock.
All officers and directors and certain stockholders (including the Selling
Stockholders) and option holders of TeleTech have agreed that they will not,
directly or indirectly, without the prior written consent of Morgan Stanley &
Co. Incorporated, offer, pledge, sell, contract to sell, sell any option or
contract to purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase or otherwise transfer or dispose of any shares of
Common Stock or any securities convertible into or exchangeable for Common
Stock, for a period of 180 days after the date of this Prospectus. The Company
has been advised that TIGP, one of the Selling Stockholders, intends to dissolve
after the Offering and distribute its shares of Common Stock to its partners,
provided that all of such partners have agreed to be bound by the 180-day
lock-up arrangement. The number of outstanding shares subject to the lock-up
arrangements that will be available for sale in the public market, upon
expiration of the 180-day lock-up period, will be approximately shares.
The approximately remaining Restricted Shares will become eligible for
sale upon expiration of their respective two-year holding periods or upon
exercise of the registration rights described below.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned Restricted Shares for at
least two years (including, in certain circumstances, the holding period of a
prior owner) would be entitled to sell within any three-month period a number of
shares that does not exceed the greater of: (i) one percent of the number of
shares of Common Stock then outstanding (which will equal approximately 570,400
shares immediately after the Offering); or (ii) the average weekly trading
volume of the Common Stock during the four calendar weeks preceding the filing
of a Form 144 with respect to such sale. Sales under Rule 144 are also subject
to certain "manner of sale" provisions and notice requirements and to the
availability of current public information about TeleTech. Under Rule 144(k), a
person who is not deemed to have been an affiliate of TeleTech at any time
during the 90 days preceding a sale, and who has beneficially owned the shares
proposed to be sold for at least three years (including, in certain
circumstances, the holding period of a prior owner), is entitled to sell such
shares without complying with the manner of sale, public information, volume
limitation or notice provisions of Rule 144; therefore, unless otherwise
restricted, "144(k) shares" may be sold immediately upon the completion of the
Offering.
In addition, any employee, officer or director of or consultant to TeleTech
who purchased his or her shares pursuant to a written compensatory plan or
contract may be entitled to rely on the resale provisions of Rule 701. Rule 701
permits affiliates to sell their Rule 701 shares under Rule 144 without
complying with the holding period requirements of Rule 144. Rule 701 further
provides that non-affiliates may sell such shares in reliance on Rule 144
without having to comply with the public information, volume limitation or
notice provisions of Rule 144.
Following the Offering, the Company intends to file under the Securities Act
one or more registration statements on Form S-8 to register all of the shares of
Common Stock (i) subject to outstanding options and reserved for future option
grants under the Option Plan and (ii) subject to options granted outside of the
Option Plan. These registration statements are expected to become effective upon
filing and shares covered by these registration statements will be eligible for
sale, subject, in the case of affiliates only, to the restrictions of Rule 144,
other than the holding period requirement, and subject to expiration of the
lock-up agreements with the Underwriters.
46
Pursuant to the Amended and Restated Investment Agreement to take effect
upon the closing of the Offering, the Existing Stockholders are entitled, by
majority vote, to require TeleTech, at its sole expense, to register under the
Securities Act all or part of their Common Stock. In addition, if TeleTech
proposes to register any of its securities under the Securities Act for its own
account, the Existing Stockholders may require TeleTech, at its sole expense, to
include in such registration all or part of the 9,300,000 shares of Common Stock
owned by the Existing Stockholders. These registration rights will continue in
effect following the Preferred Stock Conversion and the closing of the Offering.
An aggregate of 1,000,000 such shares are being registered by the Selling
Stockholder in connection with the Offering. See "Compensation Committee
Interlocks and Insider Participation."
Under the terms of the Stock Transfer and Registration Rights Agreement, if
TeleTech proposes to register any of its securities under the Securities Act for
its own account, the Common Stockholders may require TeleTech, at its sole
expense, to include in such registration all or part of the 970,240 shares of
Common Stock held by the Common Stockholders. None of such shares are being
registered in connection with the Offering. See "Certain Relationships and
Related Party Transactions."
47
CERTAIN UNITED STATES FEDERAL TAX CONSIDERATIONS
FOR NON-U.S. HOLDERS OF COMMON STOCK
The following discussion concerns the material United States federal income
and estate tax consequences of the ownership and disposition of shares of Common
Stock applicable to Non-U.S. Holders of such shares of Common Stock. In general,
a "Non-U.S. Holder" is any holder other than (i) a citizen or resident of the
United States, (ii) a corporation or partnership created or organized in the
United States or under the law of the United States or any State or (iii) an
estate or trust whose income is includible in gross income for United States
federal income tax purposes regardless of its source. The discussion is based on
current law, which is subject to change retroactively or prospectively, and is
for general information only. The discussion does not address all aspects of
federal income and estate taxation and does not address any aspects of state,
local or non-U.S. tax laws. The discussion does not consider any specific facts
or circumstances that may apply to a particular Non-U.S. Holder (including the
fact that in the case of a Non-U.S. Holder that is a partnership, the United
States tax consequences of holding and disposing of shares of Common Stock may
be affected by certain determinations made at the partner level). Accordingly,
prospective investors are urged to consult their tax advisors regarding the
United States federal, state, local and non-U.S. income and other tax
consequences of holding and disposing of shares of Common Stock.
DIVIDENDS. Dividends, if any (see "Dividend Policy"), paid to a Non-U.S.
Holder generally will be subject to United States withholding tax at a 30% rate
(or a lower rate as may be prescribed by an applicable tax treaty) unless the
dividends are effectively connected with a trade or business of the Non-U.S.
Holder within the United States. Dividends effectively connected with a trade or
business will generally not be subject to withholding (if the Non-U.S. Holder
properly files an executed United States Internal Revenue Service ("IRS") Form
4224 with the payor of the dividend) and generally will be subject to United
States federal income tax on a net income basis at regular graduated rates. In
the case of a Non-U.S. Holder which is a corporation, such effectively connected
income also may be subject to the branch profits tax (which is generally imposed
on a foreign corporation on the repatriation from the United States of
effectively connected earnings and profits). The branch profits tax may not
apply if the recipient is a qualified resident of certain countries with which
the United States has an income tax treaty. To determine the applicability of a
tax treaty providing for a lower rate of withholding, dividends paid to a
stockholder's address of record in a foreign country are presumed, under the
current IRS position, to be paid to a resident of that country, unless the payor
has knowledge that such presumption is not warranted or an applicable tax treaty
(or United States Treasury Regulations thereunder) requires some other method
for determining a non-U.S. Holder's residence. However, recently proposed U.S.
Treasury Regulations, if adopted, would modify the forms and procedures for this
certification.
SALE OF COMMON STOCK. Generally, a Non-U.S. Holder will not be subject to
United States federal income tax on any gain realized upon the disposition of
such holder's shares of Common Stock unless (i) the gain is effectively
connected with a trade or business carried on by the Non-U.S. Holder with the
United States (in which case the branch profits tax may apply); (ii) the
Non-U.S. Holder is an individual who holds the shares of Common Stock as a
capital asset and is present in the United States for 183 days or more in the
taxable year of the disposition and to whom such gain is United States source;
(iii) the Non-U.S. Holder is subject to tax pursuant to the provisions of U.S.
tax law applicable to certain former United States citizens or residents; or
(iv) the Company is or has been a "U.S. real property holding corporation" for
federal income tax purposes (which the Company does not believe that it is or is
likely to become) at any time during the five year period ending on the date of
disposition (or such shorter period that such shares were held) and, subject to
certain exceptions, the Non-U.S. Holder held, directly or indirectly, more than
five percent of the Common Stock.
ESTATE TAX. Shares of Common Stock owned or treated as owned by an
individual who is not a citizen or resident (as specifically defined for United
States federal estate tax purposes) of the United States at the time of death
may be subject to United States federal estate tax.
48
BACKUP WITHHOLDING AND INFORMATION REPORTING
DIVIDENDS. The Company must report annually to the IRS and to each Non-U.S.
Holder the amount of dividends paid to and the tax withheld, if any, with
respect to such holder. These information reporting requirements apply
regardless of whether withholding was reduced by an applicable tax treaty.
Copies of these information returns may also be available under the provisions
of a specific treaty or agreement with the tax authorities in the country in
which the Non-U.S. Holder resides. Dividends that are subject to United States
withholding tax at the 30% statutory rate or at a reduced tax treaty rate and
dividends that are effectively connected with the conduct of a trade or business
in the United States (if certain certification and disclosure requirements are
met) are exempt from backup withholding of U.S. federal income tax. In general,
backup withholding at a rate of 31% and information reporting will apply to
other dividends paid on shares of Common Stock to holders that are not "exempt
recipients" and fail to provide in the manner required certain identifying
information (such as the holder's name, address and taxpayer identification
number). Generally, individuals are not exempt recipients, whereas corporations
and certain other entities generally are exempt recipients.
DISPOSITIONS OF COMMON STOCK. The payment of the proceeds from the
disposition of shares of Common Stock through the United States office of a
broker will be subject to information reporting and backup withholding unless
the holder, under penalties of perjury, certifies, among other things, its
status as a Non-U.S. Holder, or otherwise establishes an exemption. Generally,
the payment of the proceeds from the disposition of shares of Common Stock to or
through a non-U.S. office of a broker will not be subject to backup withholding
and will not be subject to information reporting. In the case of the payment of
proceeds from the disposition of shares of Common Stock through a non-U.S.
office of a broker that is a U.S. person or a "U.S.-related person," existing
regulations require information reporting (but not backup withholding) on the
payment unless the broker receives a statement from the owner, signed under
penalties of perjury, certifying, among other things, its status as a Non-U.S.
Holder, or the broker has documentary evidence in its files that the owner is a
Non-U.S. Holder and the broker has no actual knowledge to the contrary. For tax
purpose, a "U.S.-related person" is (i) a "controlled foreign corporation" for
United States federal income tax purposes or (ii) a foreign person 50% or more
of whose gross income from all sources for the three year period ending with the
close of its taxable year preceding the payment (or for such part of the period
that the broker has been in existence) is derived from activities that are
effectively connected with the conduct of a United States trade or business.
Any amount withheld from a payment to a Non-U.S. Holder under the backup
withholding rules will be allowed as a credit against such holder's United
States federal income tax liability and may entitle such holder to a refund,
provided that the required information is furnished to the IRS. Non-U.S. Holders
should consult their tax advisors regarding the application of these rules to
their particular situations, the availability of an exemption therefrom and the
procedures for obtaining such an exemption, if available.
49
UNDERWRITERS
Under the terms and subject to conditions contained in an Underwriting
Agreement dated the date hereof, the U.S. Underwriters named below, for whom
Morgan Stanley & Co. Incorporated, Alex. Brown & Sons Incorporated and Smith
Barney Inc. are serving as U.S. Representatives, have severally agreed to
purchase, and the Company and the Selling Stockholders have severally agreed to
sell, and the International Underwriters named below, for whom Morgan Stanley &
Co. International Limited, Alex. Brown & Sons Incorporated and Smith Barney Inc.
are serving as International Representatives (collectively with the U.S.
Representatives, the "Representatives"), have severally agreed to purchase, and
the Company and the Selling Stockholders have severally agreed to sell, the
respective number of shares of Common Stock that in the aggregate equal the
number of shares set forth opposite the names of such Underwriters below:
NUMBER
NAME OF SHARES
- --------------------------------------------------------------------------------------------- ---------
U.S. Underwriters:
Morgan Stanley & Co. Incorporated........................................................
Alex. Brown & Sons Incorporated..........................................................
Smith Barney Inc.........................................................................
Subtotal.............................................................................
---------
International Underwriters:
Morgan Stanley & Co. International Limited...............................................
Alex. Brown & Sons Incorporated..........................................................
Smith Barney Inc.........................................................................
---------
Subtotal.............................................................................
---------
Total................................................................................
---------
---------
The U.S. Underwriters and the International Underwriters are collectively
referred to as the "Underwriters." The Underwriting Agreement provides that the
obligations of the several Underwriters to pay for and accept delivery of the
shares of Common Stock offered hereby are subject to the approval of certain
legal matters by counsel and to certain other conditions, including the
conditions that no stop order suspending the effectiveness of the Registration
Statement is in effect and no proceedings for such purpose are pending before or
threatened by the Securities and Exchange Commission and that there has been no
material adverse change or any development involving a prospective material
adverse change in the earnings, results of operations or financial condition of
the Company and its subsidiaries, taken as a whole, from that set forth in the
Registration Statement. The Underwriters are obligated to take and pay for all
of the shares of Common Stock offered hereby (other than those covered by the
over-allotment option described below) if any are taken.
Pursuant to the Agreement Between U.S. and International Underwriters, each
U.S. Underwriter has represented and agreed that, with certain exceptions set
forth below, (i) it is not purchasing any U.S. Shares (as defined below) for the
account of anyone other than a United States or Canadian Person (as defined
below) and (ii) it has not offered or sold, and will not offer or sell, directly
or indirectly, any U.S. Shares or distribute this Prospectus outside the United
States or Canada or to anyone other than a United States or Canadian Person.
Pursuant to the Agreement Between U.S. and International Underwriters, each
International Underwriter has represented and agreed that, with certain
exceptions set forth below, (a) it is not purchasing any International Shares
(as defined below) for the account of any United States or Canadian Person and
(b) it has not offered or sold, and will not offer or sell, directly or
indirectly, any International Shares or distribute this Prospectus within the
United States or Canada or to any United States or Canadian Person. The
foregoing limitations do not apply to stabilization transactions or to certain
other transactions specified in the Agreement Between U.S. and International
Underwriters. With respect to Smith Barney Inc.
50
and Alex. Brown & Sons Incorporated, the foregoing representations or agreements
(a) made by them in their capacity as U.S. Underwriters shall apply only to
shares of Common Stock purchased by them in their capacity as U.S. Underwriters,
(b) made by them in their capacity as International Underwriters shall apply
only to shares of Common Stock purchased by them in their capacity as
International Underwriters and (c) shall not restrict their ability to
distribute this Prospectus to any person. As used herein, "United States or
Canadian Person" means any national or resident of the United States or Canada
or any corporation, pension, profit-sharing or other trust or other entity
organized under the laws of the United States or Canada or of any political
subdivision thereof (other than a branch located outside of the United States
and Canada of any United States or Canadian Person) and includes any United
States or Canadian branch of a person who is not otherwise a United States or
Canadian Person, and "United States" means the United States of America, its
territories, its possessions and all areas subject to its jurisdiction. All
shares of Common Stock to be offered by the U.S. Underwriters and International
Underwriters under the Underwriting Agreement are referred to herein as the
"U.S. Shares" and the "International Shares," respectively.
Pursuant to the Agreement Between U.S. and International Underwriters, sales
may be made between the U.S. Underwriters and the International Underwriters of
any number of shares of Common Stock to be purchased pursuant to the
Underwriting Agreement as may be mutually agreed. The per share price and
currency settlement of any shares of Common Stock so sold shall be the public
offering price range set forth on the cover page hereof, in United States
dollars, less an amount not greater than the per share amount of the concession
to dealers set forth below.
Pursuant to the Agreement Between U.S. and International Underwriters, each
U.S. Underwriter has represented that it has not offered or sold, and has agreed
not to offer or sell, any shares of Common Stock, directly or indirectly, in
Canada in contravention of the securities laws of Canada or any province or
territory thereof and has represented that any offer of such shares in Canada
will be made only pursuant to an exemption from the requirement to file a
prospectus in the province or territory of Canada in which such offer is made.
Each U.S. Underwriter has further agreed to send to any dealer who purchases
from it any shares of Common Stock a notice starting in substance that, by
purchasing such shares, such dealer represents and agrees that it has not
offered or sold, and will not offer or sell, directly or indirectly, any of such
shares in Canada in contravention of the securities laws of Canada or any
province or territory thereof and that any offer of shares of Common Stock in
Canada will be made only pursuant to an exemption from the requirement to file a
prospectus in the province or territory of Canada in which such offer is made,
and that such dealer will deliver to any other dealer to whom it sells any of
such shares a notice to the foregoing effect.
Pursuant to the Agreement Between U.S. and International Underwriters, each
International Underwriter has represented that (i) it has not offered or sold
and will not offer or sell any shares of Common Stock to persons in the United
Kingdom except to persons whose ordinary activities involve them in acquiring,
holding, managing or disposing of investments (as principal or agent) for the
purposes of their businesses or otherwise in circumstances which have not
resulted and will not result in an offer to the public in the United Kingdom
within the meaning of the Public Offers of Securities Regulations 1995 (the
"Regulations"); (ii) it has complied and will comply with all applicable
provisions of the Financial Services Act 1986 and the Regulations with respect
to anything done by it in relation to such shares in, from or otherwise
involving the United Kingdom; and (iii) it has only issued or passed on and will
only issue or pass on to any person in the United Kingdom any document received
by it in connection with the issue of such shares, if that person is of a kind
described in Article 11(3) of the Financial Services Act 1986 (Investment
Advertisements) (Exemptions) Order 1995, or is a person to whom such document
may otherwise lawfully be issued or passed on.
Pursuant to the Agreement Between U.S. and International Underwriters, each
International Underwriter has represented and agreed that it has not offered or
sold, and will not offer or sell, directly or indirectly, in Japan or to or for
the account of any resident thereof, any shares of Common Stock acquired in
connection with the Offering, except for offers or sales of Japanese
International Underwriters or dealers and except pursuant to any exemption from
the registration requirements of the Securities and Exchange Law of Japan. Each
International Underwriter has further agreed to send to any dealer who purchases
from it any of such shares of Common Stock a notice stating in substance that
such dealer may not offer or sell any
51
of such shares, directly or indirectly, in Japan or to or for the account of any
resident thereof, except pursuant to any exemption from the registration
requirements of the Securities and Exchange Law of Japan, and that such dealer
will send to any other dealer to whom it sells any of such shares a notice to
the foregoing effect.
The Underwriters propose to offer part of the shares of Common Stock offered
hereby directly to the public at the public offering price set forth in the
cover page hereof and part to certain dealers at a price which represents a
concession not in excess of $ per share under the public offering price. The
Underwriters may allow, and such dealers may re-allow, a concession not in
excess of $ per share to other Underwriters or to certain other dealers.
After the initial offering of the shares of Common Stock, the offering price and
other selling terms may from time to time be varied by the Representatives.
Pursuant to the Underwriting Agreement, Mr. Tuchman, one of the Selling
Stockholders, has granted to the U.S. Underwriters an option, exercisable for 30
days from the date of this Prospectus, to purchase up to an additional 900,000
shares of Common Stock at the public offering price set forth on the cover page
hereof, less underwriting discounts and commissions. The U.S. Underwriters may
exercise such option to purchase solely for the purpose of covering
over-allotments, if any, incurred in the sale of the shares of Common Stock
offered hereby. To the extent such option is exercised, each U.S. Underwriter
will become obligated, subject to certain conditions, to purchase approximately
the same percentage of such additional shares as the number set forth next to
such U.S. Underwriters' name in the preceding table bears to the total number of
shares of Common Stock offered hereby to the U.S. Underwriters.
The Representatives have informed the Company and the Selling Stockholders
that the Underwriters do not intend to confirm sales to accounts over which they
exercise discretionary authority.
The Company, the Selling Stockholders and the Underwriters have agreed to
indemnify each other against certain liabilities, including liabilities under
the Securities Act.
See "Shares Eligible for Future Sale" for a description of certain
arrangements by which all officers, directors and certain stockholders and
option holders of the Company have agreed not to sell or otherwise dispose of
Common Stock or convertible securities of the Company for up to 180 days after
the date of this Prospectus without the prior consent of Morgan Stanley & Co.
Incorporated. The Company and the Selling Stockholders have agreed in the
Underwriting Agreement that they will not, directly or indirectly, without the
prior written consent of Morgan Stanley & Co. Incorporated, offer, pledge, sell,
contract to sell, sell any option or contract to purchase, purchase any option
or contract to sell, grant any option, right or warrant to purchase or otherwise
transfer or dispose of any shares of Common Stock or any securities convertible
into or exchangeable for Common Stock, for a period of 180 days after the date
of this Prospectus, except under certain circumstances. TIGP, one of the Selling
Stockholders, is permitted to distribute its remaining shares of Common Stock to
its partners, provided that all of such partners have agreed to be bound by the
180-day lock-up arrangement.
PRICING OF THE OFFERING
Prior to the Offering, there has been no public market for the Company's
Common Stock. The initial public offering price will be determined by
negotiation between the Company and the Representatives. Among the factors to be
considered in determining the initial public offering price will be the future
prospects of the Company and its industry in general, revenues, earnings and
certain other financial and operating information of the Company in recent
periods and the price-earnings ratios, price-revenues ratios, market prices of
securities and certain financial and operating information of companies engaged
in activities similar to those of the Company. The estimated initial public
offering price range set forth on the cover page of this Preliminary Prospectus
is subject to change as a result of market conditions and other factors.
52
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for TeleTech by Neal, Gerber & Eisenberg, Chicago, Illinois. Certain legal
matters in connection with the Offering will be passed upon for the Underwriters
by Katten Muchin & Zavis, Chicago, Illinois.
EXPERTS
The financial statements of TeleTech as of December 31, 1994 and 1995, and
for each of the two years in the period ended December 31, 1995 and the
financial statements Access 24 for the 10 months ended December 31, 1995 and for
the year ended February 28, 1995 included in this Prospectus and elsewhere in
the Registration Statement have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their reports with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in
accounting and auditing in giving said reports.
The financial statements of TeleTech as of December 31, 1993 and for the 11
month period ended December 31, 1993 included in this Prospectus and elsewhere
in the Registration Statement have been audited by Gumbiner, Savett, Finkel,
Fingleson & Rose, Inc. (formerly Gumbiner, Savett, Friedman & Rose, Inc.),
independent public accountants, and are included herein in reliance upon the
authority of said firm as experts in giving said reports.
ADDITIONAL INFORMATION
TeleTech has filed with the Commission under the Securities Act a
Registration Statement on Form S-1 with respect to the Common Stock offered
hereby. This Prospectus, which constitutes a part of the Registration Statement,
omits certain of the information contained in the Registration Statement and the
exhibits and schedules thereto on file with the Commission pursuant to the
Securities Act and the rules and regulations of the Commission thereunder. For
further information with respect to TeleTech and the Common Stock, reference is
made to the Registration Statement and the exhibits and schedules thereto. The
Registration Statement, including exhibits and schedules thereto, may be
inspected and copied at the public reference facilities maintained by the
Commission, including at the Commission's Public Reference Room, 450 Fifth
Street, N.W., Judiciary Plaza, Washington, D.C. 20549, and at the Commission's
Regional Offices at 7 World Trade Center, Suite 1300, New York, New York 10048
and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661. Copies may be obtained at prescribed rates from the Public Reference
Section of the Commission as its principal office in Washington, D.C.
Statements contained in this Prospectus as to the contents of any contract
or other document referred to are not necessarily complete and in each instance
reference is made to the copy of such contract or other documents filed as an
exhibit to the Registration Statement, each such statement being qualified in
its entirety by such reference.
53
INDEX TO FINANCIAL STATEMENTS
TELETECH HOLDINGS, INC.
PAGE
---------
Report of Gumbiner, Savett, Finkel, Fingleson & Rose, Inc. (formerly Gumbiner, Savett, Friedman & Rose,
Inc.)..................................................................................................... F-2
Report of Arthur Andersen LLP.............................................................................. F-3
Consolidated and Combined Balance Sheets as of December 31, 1994 and 1995, and
March 31, 1996............................................................................................ F-4
Consolidated and Combined Statements of Income for the eleven months ended December 31, 1993, the years
ended December 31, 1994 and 1995 and the three months ended March 31, 1995 and 1996....................... F-6
Consolidated and Combined Statements of Stockholders' Equity for the years ended December 1994 and 1995.... F-7
Consolidated and Combined Statements of Cash Flows for the eleven months ended December 31, 1993, the years
ended December 31, 1994 and 1995 and the three months ended March 31, 1995 and 1996....................... F-8
Notes to Consolidated and Combined Financial Statements for the years ended December 31, 1994 and 1995 and
for the eleven months ended December 31, 1993 and for the three months ended March 31, 1995 and 1996...... F-10
ACCESS 24 SERVICE CORPORATION PTY LIMITED
AND CONTROLLED ENTITIES
PAGE
---------
Consolidated Balance Sheets as of February 29, 1995 and December 31, 1995.................................. F-26
Consolidated Profit and Loss Accounts for the year ended February 28, 1995 and the ten months ended
December 31, 1995......................................................................................... F-27
Consolidated Statements of Cash Flows for the year ended February 28, 1995 and the ten months ended
December 31, 1995......................................................................................... F-28
Notes to the Consolidated Financial Statements for the years ended February 28, 1995 and the ten months
ended December 31, 1995................................................................................... F-29
F-1
INDEPENDENT AUDITOR'S REPORT
The Board of Directors
TeleTech Holdings, Inc.
Denver, Colorado
We have audited the accompanying combined statements of income and cash
flows of TeleTech Telecommunications, Inc. and TeleTech Teleservices, Inc. ("the
Companies") (see Note 1) for the eleven months ended December 31, 1993. These
combined statements of income and cash flows are the responsibility of the
Companies' management. Our responsibility is to express an opinion on these
combined statements of income and cash flows based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the combined statements of income and cash
flows are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the combined
statements of income and cash flows. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall presentation of the combined statements of income and
cash flows. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the combined statements of income and cash flows referred to
above present fairly, in all material respects, the results of the Companies'
operations and cash flows for the eleven months ended
December 31, 1993 in conformity with generally accepted accounting principles.
GUMBINER, SAVETT, FINKEL, FINGLESON & ROSE, INC.
(formerly Gumbiner, Savett, Friedman & Rose, Inc.)
Santa Monica, California
April 13, 1994
F-2
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To TeleTech Holdings, Inc.:
We have audited the accompanying consolidated and combined balance sheets of
TELETECH HOLDINGS, INC. (a Delaware corporation) and subsidiaries, as of
December 31, 1994 and 1995, and the related consolidated and combined statements
of income, stockholders' equity and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated and combined financial statements referred
to above present fairly, in all material respects, the consolidated and combined
financial position of TeleTech Holdings, Inc. and subsidiaries as of December
31, 1994 and 1995, and the results of their operations and their cash flows for
the years then ended in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Denver, Colorado,
February 10, 1996.
F-3
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the members of
Access 24 Service Corporation Pty Limited
We have audited the accompanying financial statements of Access 24 Service
Corporation Pty Limited and Controlled Entities and of the economic entity for
the periods ended 28 February 1995 and December 31, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on those financial statements based on
our audit.
We conducted our audit in accordance with Australian Auditing Standards,
which do not differ substantially from generally accepted auditing standards in
the United States of America. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free from material misstatements. An audit includes examining, on a test
basis, evidence supporting amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Access 24 Service
Corporation Pty Limited and Controlled Entities as of 28 February 1995 and
December 31, 1995, and the results of the group's operations and cash flows for
the periods then ended in accordance with Australian Accounting Standards.
There are certain differences between Australian Accounting Standards and
those generally accepted in the United States of America. Application of the
generally accepted accounting principles in the United States of America would
not result in material differences to these financial statements.
ARTHUR ANDERSEN
Chartered Accountants
/s/ Arthur Andersen Chartered
Accountants
Sydney, Australia,
May 21, 1996
F-4
TELETECH HOLDINGS, INC.
AND SUBSIDIARIES
CONSOLIDATED AND COMBINED BALANCE SHEETS
DECEMBER 31
----------------------------
ASSETS 1994 1995
- ---------------------------------------------------- ------------- ------------- MARCH 31, PRO FORMA
1996 MARCH 31,
------------- 1996
(UNAUDITED) -------------
(UNAUDITED)
(NOTE 1)
CURRENT ASSETS:
Cash and cash equivalents......................... $ 37,733 $ 42,304 $ 728,403
Short-term investments............................ -- 10,361,213 8,203,527
Accounts receivable, net of allowance for doubtful
accounts of $172,512, $788,907 and $896,685,
respectively..................................... 4,298,147 9,786,123 14,280,609
Prepaids and other assets......................... 201,439 238,022 608,896
Deposits.......................................... 123,883 220,243 432,010
Deferred tax asset (Note 8)....................... -- 485,742 637,720
------------- ------------- -------------
Total current assets............................ 4,661,202 21,133,647 24,891,165
------------- ------------- -------------
PROPERTY AND EQUIPMENT, net of accumulated
depreciation of $3,935,136, $6,059,424 and
$6,987,766, respectively........................... 5,386,456 9,103,701 16,308,351
------------- ------------- -------------
OTHER ASSETS:
Deposits.......................................... 53,968 -- --
Deferred contract costs (Note 1).................. -- 345,978 1,731,234
Goodwill (net of amortization of $108,000) (Note
1)............................................... -- -- 6,272,193
Other assets...................................... -- -- 251,297
------------- ------------- -------------
Total assets.................................... $ 10,101,626 $ 30,583,326 $ 49,454,240
------------- ------------- -------------
------------- ------------- -------------
The accompanying notes are an integral part of these balance sheets.
F-5
TELETECH HOLDINGS, INC.
AND SUBSIDIARIES
CONSOLIDATED AND COMBINED BALANCE SHEETS
DECEMBER 31
--------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY 1994 1995
- --------------------------------------------------------- ------------ ------------ MARCH 31, PRO FORMA
1996 MARCH 31,
------------ 1996
(UNAUDITED) ------------
(UNAUDITED)
(NOTE 1)
CURRENT LIABILITIES:
Bank overdraft......................................... $ 560,490 $ 1,427,017 $ --
Short term borrowings (Note 6)......................... 638,635 1,000,000 3,500,000
Current portion of capital lease obligations
(Note 4).............................................. 401,001 1,255,966 2,129,440
Current portion of other long-term debt (Note 5)....... 624,483 195,660 189,443
Current portion of subordinated notes payable to
stockholder (Note 7).................................. 145,299 -- --
Accounts payable....................................... 1,442,503 2,604,297 4,820,221
Accrued employee compensation.......................... 962,664 1,742,915 3,452,438
Other accrued expenses................................. 475,142 1,261,984 4,322,239
Customer advances and deposits......................... 165,756 292,626 537,282
Deferred income........................................ 25,683 47,699 560,215
------------ ------------ ------------
Total current liabilities............................ 5,441,656 9,828,164 19,511,278
DEFERRED TAX LIABILITIES (Note 8)........................ -- 507,365 498,790
LONG-TERM DEBT, net of current portion:
Capital lease obligations (Note 4)..................... 911,578 3,192,997 5,408,307
Subordinated note payable to stockholder
(Note 7).............................................. 959,038 -- --
Other debt (Note 5).................................... 592,282 396,618 1,127,846
------------ ------------ ------------
Total liabilities.................................... 7,904,554 13,925,144 26,546,221
------------ ------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 9)
MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK (Notes
1 and 11):
$6.45 par value, 1,860,000 shares authorized, zero,
1,860,000, 1,860,000, and zero shares respectively
issued and outstanding (including accrued dividends of
zero, $867,430, $1,078,645 and zero).................. -- 12,867,430 13,078,645 --
------------ ------------ ------------ ------------
STOCKHOLDERS' EQUITY (Note 1):
Common stock, $.002 par value, 150,000,000 shares
authorized, zero, 40,700,000, 41,746,240 and
51,046,240 shares, respectively issued and
outstanding........................................... -- 81,400 83,493 102,093
Common stock of combined entities, no par value
10,000,000 shares authorized, 127,500, zero, zero and
zero shares, respectively, issued and outstanding..... 25,000 -- -- --
Additional paid-in capital............................. -- 2,172,072 7,401,179 20,461,224
Cumulative translation adjustment...................... -- -- 141,095 141,095
Unearned compensation-restricted stock................. -- -- (380,000) (380,000)
Retained earnings...................................... 2,172,072 1,537,280 2,583,607 2,583,607
------------ ------------ ------------ ------------
Total stockholders' equity........................... 2,197,072 3,790,752 9,829,374 22,908,019
------------ ------------ ------------ ------------
Total liabilities and stockholders' equity........... $ 10,101,626 $ 30,583,326 $ 49,454,240
------------ ------------ ------------
------------ ------------ ------------
The accompanying notes are an integral part of these balance sheets.
F-6
TELETECH HOLDINGS, INC.
AND SUBSIDIARIES
CONSOLIDATED AND COMBINED STATEMENTS OF INCOME
ELEVEN THREE MONTHS ENDED MARCH
MONTHS ENDED YEAR ENDED DECEMBER 31, 31,
DECEMBER 31, -------------------------- --------------------------
1993 1994 1995 1995 1996
------------ ------------ ------------ ------------ ------------
(UNAUDITED)
REVENUES.................................... $ 19,519,593 $ 35,462,172 $ 50,467,490 $ 10,412,306 $ 22,019,345
------------ ------------ ------------ ------------ ------------
OPERATING EXPENSES:
Costs of services......................... 10,726,189 17,405,789 27,245,961 5,468,962 11,194,498
Selling, general and administrative
expenses................................. 7,956,176 15,860,157 18,625,431 4,328,934 8,102,020
------------ ------------ ------------ ------------ ------------
Total operating expenses................ 18,682,365 33,265,946 45,871,392 9,797,896 19,296,518
------------ ------------ ------------ ------------ ------------
INCOME FROM OPERATIONS...................... 837,228 2,196,226 4,596,098 614,410 2,722,827
------------ ------------ ------------ ------------ ------------
OTHER INCOME (EXPENSES):
Interest expense.......................... (299,552) (481,516) (459,589) (102,912) (234,013)
Interest income........................... -- -- 577,350 152,400 111,308
Other (Note 14)........................... -- -- 2,371,221 2,288,390 (341,278)
------------ ------------ ------------ ------------ ------------
(299,552) (481,516) 2,488,982 2,337,878 (463,983)
------------ ------------ ------------ ------------ ------------
Income before income taxes.............. 537,676 1,714,710 7,085,080 2,952,288 2,258,844
PROVISION (BENEFIT) FOR INCOME TAXES........ (10,000) 19,736 2,928,996 1,324,463 1,001,302
------------ ------------ ------------ ------------ ------------
Net income.............................. $ 547,676 $ 1,694,974 $ 4,156,084 $ 1,627,825 $ 1,257,542
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
SHARES USED IN COMPUTING PRO FORMA NET
INCOME PER COMMON AND COMMON EQUIVALENT
SHARE...................................... 54,657,975 54,585,654 54,682,083
------------ ------------ ------------
------------ ------------ ------------
PRO FORMA NET INCOME PER COMMON AND COMMON
EQUIVALENT SHARE........................... $.08 $.03 $.02
------------ ------------ ------------
------------ ------------ ------------
PRO FORMA NET INCOME AND EARNINGS PER COMMON
SHARE (UNAUDITED)
(Notes 1 and 8):
Historical net income before income
taxes.................................. $ 537,676 $ 1,714,710
Historical provision (benefit) for
income taxes........................... (10,000) 19,736
Pro forma income tax effects............ 248,996 657,866
------------ ------------
Pro forma net income.................... $ 298,680 $ 1,037,108
------------ ------------
------------ ------------
Pro forma common shares outstanding..... 44,085,354 44,085,354
------------ ------------
------------ ------------
Pro forma earnings per common share..... $.01 $.02
------------ ------------
------------ ------------
The accompanying notes are an integral part of these statements.
F-7
TELETECH HOLDINGS, INC.
AND SUBSIDIARIES
CONSOLIDATED AND COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
MANDATORILY
REDEEMABLE, STOCKHOLDERS' EQUITY
CONVERTIBLE ----------------------------------------------------------
PREFERRED COMMON
STOCK COMMON STOCK STOCK OF ADDITIONAL CUMULATIVE
---------------------- -------------------- COMBINED PAID-IN TRANSLATION
SHARES AMOUNT SHARES AMOUNT ENTITIES CAPITAL ADJUSTMENT
--------- ----------- --------- --------- ----------- ---------- -----------
BALANCES, January 1, 1994................ $ 25,000 $ -- $ --
Distribution to stockholder............ -- -- --
Net income............................. -- -- --
----------- ---------- -----------
BALANCES, December 31, 1994.............. -- $ -- -- $ -- 25,000 -- --
Issue of Preferred Stock (Note 11)..... 1,860,000 12,000,000 -- -- -- -- --
Adjustment to reclassify retained
earnings to additional paid in capital
upon termination of S corporation
election
(Note 11)............................. -- -- -- -- -- 2,172,072 --
Stock exchange (Note 1)................ -- -- 40,700,000 81,400 (25,000) -- --
Distribution to stockholder............ -- -- -- -- -- -- --
Net Income............................. -- -- -- -- -- -- --
Dividends accrued on Preferred Stock
(Note 11)............................. -- 867,430 -- -- -- -- --
--------- ----------- --------- --------- ----------- ---------- -----------
BALANCES, December 31, 1995.............. 1,860,000 12,867,430 40,700,000 81,400 -- 2,172,072 --
Purchase of Access 24 (Note 16)........ -- -- 970,240 1,941 -- 4,849,259 --
Cumulative translation adjustments..... -- -- -- -- -- -- 141,095
Net income............................. -- -- -- -- -- -- --
Dividends accrued on Preferred Stock
(Note 11)............................. -- 211,215 -- -- -- -- --
Issuance of restricted stock for
compensation.......................... -- -- 76,000 152 -- 379,848 --
--------- ----------- --------- --------- ----------- ---------- -----------
BALANCES, March 31, 1996 (unaudited)..... 1,860,000 13,078,645 41,746,240 83,493 -- 7,401,179 141,095
Pro Forma adjustment to reflect
conversion of Mandatorily Redeemable
Preferred Stock to Common Stock (Note
11)................................... (1,860,000) (13,078,645) 9,300,000 18,600 -- 13,060,045 --
--------- ----------- --------- --------- ----------- ---------- -----------
BALANCES, Pro Forma March 31, 1996
(unaudited)............................. -- $ -- 51,046,240 $ 102,093 $ -- $20,461,224 $ 141,095
--------- ----------- --------- --------- ----------- ---------- -----------
UNEARNED
COMPENSATION- TOTAL
RESTRICTED RETAINED STOCKHOLDERS'
STOCK EARNINGS EQUITY
-------------- --------- ------------
BALANCES, January 1, 1994................ $ -- $ 917,098 $ 942,098
Distribution to stockholder............ -- (440,000) (440,000)
Net income............................. -- 1,694,974 1,694,974
-------------- --------- ------------
BALANCES, December 31, 1994.............. -- 2,172,072 2,197,072
Issue of Preferred Stock (Note 11)..... -- -- --
Adjustment to reclassify retained
earnings to additional paid in capital
upon termination of S corporation
election
(Note 11)............................. -- (2,172,072) --
Stock exchange (Note 1)................ -- (56,400) --
Distribution to stockholder............ -- (1,694,974) (1,694,974)
Net Income............................. -- 4,156,084 4,156,084
Dividends accrued on Preferred Stock
(Note 11)............................. -- (867,430) (867,430)
-------------- --------- ------------
BALANCES, December 31, 1995.............. -- 1,537,280 3,790,752
Purchase of Access 24 (Note 16)........ -- -- 4,851,200
Cumulative translation adjustments..... -- -- 141,095
Net income............................. -- 1,257,542 1,257,542
Dividends accrued on Preferred Stock
(Note 11)............................. -- (211,215) (211,215)
Issuance of restricted stock for
compensation.......................... (380,000) -- --
-------------- --------- ------------
BALANCES, March 31, 1996 (unaudited)..... (380,000) 2,583,607 9,829,374
Pro Forma adjustment to reflect
conversion of Mandatorily Redeemable
Preferred Stock to Common Stock (Note
11)................................... -- -- 13,078,645
-------------- --------- ------------
BALANCES, Pro Forma March 31, 1996
(unaudited)............................. $ (380,000) $2,583,607 $22,908,019
-------------- --------- ------------
The accompanying notes are an integral part of these statements.
F-8
TELETECH HOLDINGS, INC.
AND SUBSIDIARIES
CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
ELEVEN THREE MONTHS ENDED MARCH
MONTHS ENDED YEAR ENDED DECEMBER 31, 31,
DECEMBER 31, -------------------------- --------------------------
1993 1994 1995 1995 1996
------------ ------------ ------------ ------------ ------------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................ $ 547,676 $ 1,694,974 $ 4,156,084 $ 1,627,825 $ 1,257,542
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities--
Depreciation and amortization....... 722,753 1,164,696 2,124,287 435,998 1,047,383
Allowance for doubtful accounts..... 302,408 (20,381) 616,395 46,545 107,778
Deferred taxes on income............ (22,000) -- 21,623 212,500 (160,553)
Changes in assets and liabilities--
Accounts receivable............... (4,804,330) 2,288,110 (6,104,371) (1,466,617) (3,135,533)
Prepaids and other assets......... (162,599) 75,774 (36,583) (16,080) (169,594)
Deposits.......................... (125,144) (26,327) (42,392) (39,872) (129,853)
Deferred costs.................... -- -- (345,978) -- (1,385,256)
Other assets...................... -- -- -- -- 101,871
Bank overdraft.................... 81,277 479,213 866,527 (560,490) (1,572,294)
Accounts payable.................. 2,298,421 (1,860,500) 1,161,794 (234,569) 1,941,453
Accrued expenses.................. 133,076 200,925 786,842 1,725,434 2,012,477
Accrued employee compensation..... (129,094) 328,371 780,251 1,122,634 1,344,802
Customer advances and deposits.... 309,863 (213,933) 126,870 (118,868) 244,656
Deferred income................... 492,350 (466,667) 22,016 675,796 (16,255)
------------ ------------ ------------ ------------ ------------
Net cash provided by (used in)
operating activities............. (355,343) 3,644,255 4,133,365 3,410,236 1,488,644
------------ ------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment.... (1,589,609) (1,932,312) (1,735,206) (243,469) (3,301,426)
Purchase of Access 24, net of cash
acquired............................. -- -- -- -- (2,218,149)
(Increase) decrease in short-term
investments............................ -- -- (10,361,213) (11,840,569) 2,499,017
------------ ------------ ------------ ------------ ------------
Net cash used in investing
activities....................... (1,589,609) (1,932,312) (12,096,419) (12,084,038) (3,020,558)
------------ ------------ ------------ ------------ ------------
The accompanying notes are an integral part of these statements.
F-9
TELETECH HOLDINGS, INC.
AND SUBSIDIARIES
CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
ELEVEN THREE MONTHS ENDED MARCH
MONTHS ENDED YEAR ENDED DECEMBER 31, 31,
DECEMBER 31, -------------------------- --------------------------
1993 1994 1995 1995 1996
------------ ------------ ------------ ------------ ------------
(UNAUDITED)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in short-term
borrowings............................... $ 832,000 $ (840,365) $ 361,365 $ (388,635) $ 2,500,000
Payments on long-term debt................ (157,756) (418,241) (624,487) (113,121) (47,829)
Proceeds from long-term debt borrowings... 1,042,374 475,000 -- -- --
Payments under capital lease
obligations.............................. (99,984) (324,924) (969,942) (149,522) (356,895)
Payments under subordinated notes payable
to stockholder........................... (49,695) (125,680) (1,104,337) (1,104,337) --
Distributions to stockholder -- (440,000) (1,694,974) (1,210,000) --
Issuance of preferred stock............... -- -- 12,000,000 12,000,000 --
------------ ------------ ------------ ------------ ------------
Net cash provided by (used in)
financing activities................. 1,566,939 (1,674,210) 7,967,625 9,034,385 2,095,276
------------ ------------ ------------ ------------ ------------
Effect of exchange rate changes on cash..... -- -- -- -- 122,737
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS................................ (378,013) 37,733 4,571 360,583 686,099
CASH AND CASH EQUIVALENTS, beginning of
period..................................... 378,013 -- 37,733 37,733 42,304
------------ ------------ ------------ ------------ ------------
CASH AND CASH EQUIVALENTS, end of period.... $ -- $ 37,733 $ 42,304 $ 398,316 $ 728,403
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid for interest.................... $ 299,552 $ 455,375 $ 464,551 $ 101,403 $ 155,904
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Cash paid for income taxes................ $ 108,085 $ 13,506 $ 2,423,591 $ -- $ 525,000
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Assets acquired through capital leases.... $ 2,137,884 $ 211,194 $ 4,106,326 $ 1,589,799 $ 1,712,887
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Stock issued in purchase of Access 24..... $ -- $ -- $ -- $ -- $ 4,851,200
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
The accompanying notes are an integral part of these statements.
F-10
TELETECH HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995
AND FOR THE ELEVEN MONTHS ENDED DECEMBER 31, 1993
AND FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 (UNAUDITED)
TeleTech Holdings, Inc. ("THI" or the "Company") is a provider of outsourced
strategic customer care solutions for Fortune 1000 corporations in targeted
industries in the United States, United Kingdom, Australia and New Zealand.
Customer care encompasses a wide range of customer acquisition, retention and
satisfaction programs designed to maximize the lifetime value of the
relationship between the Company's clients and their customers.
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements are comprised of the accounts of THI
and its wholly owned subsidiaries, TeleTech Telecommunications, Inc., a
California corporation ("TTC"), TeleTech Teleservices, Inc., a Colorado
corporation ("TTS") and effective January 1, 1996, Access 24 and subsidiaries
(Note 16), (jointly "the Group"). Prior to January 1, 1995, the Group comprised
TTC and TTS, held under the common ownership of a sole stockholder ("the
Stockholder"). Financial statements for 1993 and 1994 represent the combined
financial statements of TTC and TTS.
In January 1995, a Preferred Stock Purchase Agreement and an Investment
Agreement (collectively the "Agreements") were executed by TeleTech Investors
General Partnership ("TIGP"), Essaness Theaters Corporation ("Essaness") and the
Stockholder. The Stockholder of TTC and TTS contributed 100% of his shares in
these companies to THI, a newly formed Delaware corporation, in exchange for
40,700,000 shares of THI's common stock, which constituted 100% of THI's
outstanding stock. Concurrent with this stock exchange, TIGP and Essaness
purchased an aggregate of 1,860,000 shares of THI's convertible preferred stock
("Preferred Stock") for $12 million. The Preferred Stock is initially
convertible into 9,300,000 shares of THI's common stock (Note 11). TIGP and
Essaness purchased 1,705,000 and 155,000 shares of the Preferred Stock,
respectively. The Agreements also required THI to enter into employment
agreements with key executives, to obtain key man life and disability insurance
policies and to adopt a stock option plan for key employees.
The exchange of stock constituted a reorganization of entities under common
control and the assets and liabilities of TTC and TTS are reflected in the
consolidated financial statements of THI based on their historical cost to TTC
and TTS.
All intercompany balances and transactions have been eliminated in the
consolidated and combined financial statements.
UNAUDITED PRO FORMA INFORMATION
If the offering contemplated by this Prospectus is consummated, all of the
Preferred Stock outstanding at the closing date will be converted into shares of
Common Stock ("Common Stock"). The unaudited pro forma balance sheet as of March
31, 1996, reflects the conversion of outstanding Preferred Stock at March 31,
1996 into 9,300,000 shares of Common Stock.
INTERIM FINANCIAL STATEMENTS
The consolidated financial statements of THI as of March 31, 1995 and 1996
presented herein have been prepared by THI without audit, pursuant to the rules
and regulations of the Securities and Exchange Commission. The 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 THI and
subsidiaries as of March 31, 1995 and 1996, and for the periods then ended.
F-11
TELETECH HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995
AND FOR THE ELEVEN MONTHS ENDED DECEMBER 31, 1993
AND FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 (UNAUDITED)
(CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FOREIGN CURRENCY TRANSLATION
The assets and liabilities of the Company's foreign subsidiaries whose
functional currency is other than the U.S. Dollar are translated at the exchange
rates in effect on the reporting date, and income and expenses are translated at
the weighted average exchange rate during the period. The net effect of
translation gains and losses are not included in determining net income, but are
accumulated as a separate component of shareholders' equity. Foreign currency
transaction gains and losses are included in determining net income. Such gains
and losses were not material for any period presented.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation.
Additions, improvements, and major renewals are capitalized. Maintenance,
repairs, and minor renewals are expensed as incurred. Amounts paid for software
licenses and third-party packaged software are capitalized. Costs relating to
the internal development of software are expensed as incurred.
Depreciation is computed on the straight-line method based on the estimated
useful lives of the assets, as follows:
Computer equipment and software........................................... 5 years
Telephone equipment....................................................... 5 years
Furniture and fixtures.................................................... 5-7 years
Leasehold improvements.................................................... 5-7 years
Vehicles.................................................................. 5 years
Assets acquired under capital lease obligations are amortized over the life
of the applicable lease of four to seven years (or the estimated useful lives of
the assets, of four to seven years, where title to the leased assets passes to
the Company on termination of the lease).
REVENUE RECOGNITION
The Company recognizes revenues at the time services are performed. The
Company has certain contracts which are billed in advance. Accordingly, amounts
billed but not earned under these contracts are excluded from revenues and
included in deferred income.
RESEARCH AND DEVELOPMENT
Research and development costs are charged to operations when incurred and
are included in operating expenses. Research and development costs amounted to
approximately $430,000, $684,000, $458,000, $108,000 (unaudited) and $102,000
(unaudited) for the eleven months ended December 31, 1993, the years ended
December 31, 1994 and 1995, and the three-month periods ended March 31, 1995 and
1996, respectively.
DEFERRED CONTRACT COST
The Company defers certain direct costs incurred in connection with
preparing to provide services under long-term facilities management agreements.
Costs that have been deferred include the costs of hiring dedicated personnel to
manage client-owned facilities, their related payroll and other directly
associated costs from the time long-term facilities management agreements are
entered into until the beginning of providing services. Such costs are amortized
ratably over the life of the long-term facilities management agreements based on
total estimated revenues to be earned under the agreements. Deferred contract
costs
F-12
TELETECH HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995
AND FOR THE ELEVEN MONTHS ENDED DECEMBER 31, 1993
AND FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 (UNAUDITED)
(CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
at December 31, 1995 and March 31, 1996 include costs incurred in preparing to
provide services under a five year agreement entered into in October, 1995,
under which the Company began providing services during April 1996.
INTANGIBLE ASSETS
The excess of cost over the fair market value of tangible net assets and
trademarks of acquired businesses is amortized on a straight-line basis over the
periods of expected benefit of 15 years. Accumulated amortization of intangible
assets for the three-month period ended March 31, 1996, was $108,000
(unaudited). No amortization expense was recorded in prior periods.
Subsequent to an acquisition, the corporation continually evaluates whether
later events and circumstances have occurred that indicate the remaining
estimated useful life of an intangible asset may warrant revision or that the
remaining balance of an intangible asset may not be recoverable. When factors
indicate that an intangible asset should be evaluated for possible impairment,
the corporation uses an estimate of the related business' undiscounted future
cash flows over the remaining life of the asset in measuring whether the
intangible asset is recoverable. Management does not consider that any provision
for impairment of intangible assets is required.
INCOME TAXES
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
109") which requires recognition of deferred tax assets and liabilities for the
expected future income tax consequences of transactions which have been included
in the financial statements or tax returns. Under this method, deferred tax
assets and liabilities are determined based on the difference between the
financial statement and tax bases of assets and liabilities using enacted tax
rates in effect for the year in which the differences are expected to reverse.
Net deferred tax assets are then reduced by a valuation allowance for amounts
which do not satisfy the realization criteria of SFAS 109.
During 1993 and 1994, TTC and TTS were S corporations and their income was
taxable to the Stockholder rather than the companies. Effective January 1, 1995,
S corporation status terminated and THI and its domestic subsidiaries began to
file consolidated corporate Federal and state income tax returns (Access 24,
(Note 16) will file separate tax returns in Australia). As required by SFAS 109,
this change in tax status was recognized by establishing deferred tax assets and
liabilities for temporary differences between the tax basis and amounts reported
in the accompanying consolidated balance sheet (Note 8).
EARNINGS PER SHARE
Earnings per share are computed based upon the weighted average number of
common shares and common share equivalents outstanding. The shares of
convertible Preferred Stock are considered common stock equivalents due to the
mandatory conversion provision (Note 11). Pursuant to Securities and Exchange
Commission Staff Accounting Bulletin No. 83, common stock and common stock
equivalent shares issued by the Company at prices below the assumed public
offering price during the twelve month period prior to the proposed offering
date (using the treasury stock method) have been included in the calculation as
if they were outstanding for all the periods presented regardless of whether
they are antidilutive. On May 14, 1996, the Company approved a five for one
share common stock split to be effective immediately prior and subject
F-13
TELETECH HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995
AND FOR THE ELEVEN MONTHS ENDED DECEMBER 31, 1993
AND FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 (UNAUDITED)
(CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
to the closing of the offering contemplated by this Registration Statement.
Common stock amounts, equivalent share amounts and per share amounts have been
adjusted retroactively to give effect to the stock split.
The weighted average number of common shares and common share equivalents
was calculated as follows assuming the anticipated five-for-one stock split:
THREE MONTHS ENDED MARCH
YEAR ENDED 31,
DECEMBER 31, --------------------------
1995 1995 1996
------------ ------------ ------------
PRO FORMA ELEVEN PRO FORMA
MONTHS ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1993 1994
---------------- ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
Common shares outstanding............ 40,700,000 40,700,000 40,700,000 40,700,000 41,746,240
Convertible preferred stock.......... -- -- 9,300,000 9,300,000 9,300,000
Common equivalent shares............. 3,385,354 3,385,354 4,657,975 4,585,654 3,635,843
---------------- ------------ ------------ ------------ ------------
Shares used in computing pro forma
net income per common and common
equivalent share.................... 44,085,354 44,085,354 54,657,975 54,585,654 54,682,083
---------------- ------------ ------------ ------------ ------------
---------------- ------------ ------------ ------------ ------------
For comparative purposes, the earnings per share for 1993 and 1994 have been
calculated on a pro-forma basis as the historical earnings per share is not
meaningful due to the Company reorganization on January 1, 1995.
A portion of the proceeds from the proposed public offering will be used to
repay short-term borrowings. If this reduction had taken place at January 1,
1995 or January 1, 1996, the effect on pro forma earnings would have been
immaterial.
INCREASE IN AUTHORIZED SHARES
On May 14, 1996, the Board of Directors authorized an amendment to the
Company's Certificate of Incorporation that will be effective upon the closing
of the proposed public offering of the Company's Common Stock. The amendment
increases the authorized shares of Common Stock to 150,000,000 shares. The
amendment also authorizes the Company to issue up to 10,000,000 shares of
preferred stock.
RESTRICTED STOCK AWARDS
In January 1996, the Company awarded 76,000 restricted shares of the
Company's common stock to certain employees as compensation to be earned over
the term of the employees' related employment agreements (three years). The
market value of the stock at the date of award was $380,000. This amount has
been recorded as unearned compensation-restricted stock and is shown as a
separate component of stockholders' equity.
CASH AND CASH EQUIVALENTS
For the purposes of the statement of cash flows, the Company considers all
cash and investments with an original maturity of 90 days or less to be cash
equivalents.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and
F-14
TELETECH HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995
AND FOR THE ELEVEN MONTHS ENDED DECEMBER 31, 1993
AND FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 (UNAUDITED)
(CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting period. Actual results could differ from those estimates.
NEW ACCOUNTING STANDARDS
In March 1995, the Financial Accounting Standards Board issued SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of." SFAS 121 requires that long-lived assets and certain
identifiable intangibles to be held and used by an entity be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. SFAS 121 is effective for
financial statements for fiscal years beginning after December 15, 1995. The
adoption of SFAS 121 on January 1, 1996 had no impact on the Company's
consolidated financial position or results of operations.
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123. "Accounting for Stock Based Compensation." With respect to stock options
granted to employees, SFAS No. 123 permits companies to continue using the
accounting method promulgated by the Accounting Principles Board Opinion No. 25
("APB No. 25"), "Accounting for Stock Issued to Employees," to measure
compensation or to adopt the fair value based method prescribed by SFAS No. 123.
If APB No. 25's method is continued, pro forma disclosures are required as if
SFAS No. 123 accounting provisions were followed. Management has determined not
to adopt SFAS No. 123's accounting recognition provisions (Note 12).
(2) CONCENTRATIONS
The Company's revenues from major customers (revenues in excess of 10% of
total sales) are from entities involved in the telecommunications, technology,
transportation, healthcare and financial services industries and for the periods
ended December 31, 1993, 1994 and 1995 are as follows:
THREE MONTHS
ELEVEN YEAR ENDED ENDED
MONTHS ENDED DECEMBER 31, MARCH 31,
DECEMBER 31, ----------------- -----------------
1993 1994 1995 1995 1996
------------ ------- ------- ------- -------
(UNAUDITED)
Customer A.................... 23% 18% 31% 33% 22%
Customer B.................... -- 5% 18% 24% 6%
Customer C.................... 21% 17% 9% 13% 6%
Customer D.................... -- 13% -- -- --
Customer E.................... 18% -- -- -- --
-- -- -- -- --
62% 53% 58% 70% 34%
-- -- -- -- --
-- -- -- -- --
The loss of one or more of its significant customers could have a material
adverse effect on the Company's business, operating results or financial
condition.
To limit the Company's credit risk, management performs ongoing credit
evaluations of its customers and maintains allowances for potentially
uncollectible accounts. Although the Company is directly impacted by economic
conditions in the telecommunications, technology, transportation, healthcare and
financial services industries, management does not believe significant credit
risk exists at December 31, 1995 or at March 31, 1996.
F-15
TELETECH HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995
AND FOR THE ELEVEN MONTHS ENDED DECEMBER 31, 1993
AND FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 (UNAUDITED)
(CONTINUED)
(2) CONCENTRATIONS (CONTINUED)
GEOGRAPHIC AREA INFORMATION
Prior to the acquisition of Access 24 in January 1996 (Note 16), the Company
operated exclusively within the United States. Unaudited geographic area
information for the three months ended March 31, 1996 is as follows:
UNITED STATES EUROPE ASIA PACIFIC TOTAL
------------- ------------ ------------- -------------
Revenues.............................................. $ 18,680,313 $ 476,576 $ 2,862,456 $ 22,019,345
Income (loss) before income taxes..................... 2,054,659 (86,676) 290,861 2,258,844
Assets................................................ 37,317,780 1,794,743 10,341,717 49,454,240
(3) PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31, 1994 and
1995, and March 31, 1996:
DECEMBER 31,
----------------------------
1994 1995
------------- ------------- MARCH 31,
1996
-------------
(UNAUDITED)
Computer equipment and software..................................... $ 5,848,105 $ 9,807,113 $ 11,197,300
Telephone equipment................................................. 1,105,246 1,219,642 1,851,831
Furniture and fixtures.............................................. 1,507,171 2,938,478 5,307,555
Leasehold improvements.............................................. 861,070 1,197,892 4,915,141
Vehicles............................................................ -- -- 24,290
------------- ------------- -------------
9,321,592 15,163,125 23,296,117
Less--Accumulated depreciation...................................... (3,935,136) (6,059,424) (6,987,766)
------------- ------------- -------------
$ 5,386,456 $ 9,103,701 $ 16,308,351
------------- ------------- -------------
------------- ------------- -------------
Included in the cost of property and equipment above is equipment obtained
through capitalized leases. The following is a summary of equipment under
capital leases as of December 31, 1994 and 1995, and March 31, 1996:
DECEMBER 31,
---------------------------
1994 1995
------------ ------------- MARCH 31,
1996
-------------
(UNAUDITED)
Computer equipment and software....................................... $ 726,569 $ 3,227,113 $ 4,166,995
Telephone equipment................................................... 282,969 310,295 737,314
Furniture and fixtures................................................ 847,984 2,038,597 3,854,957
Vehicles.............................................................. -- -- 1,811
------------ ------------- -------------
1,857,522 5,576,005 8,761,077
Less--Accumulated depreciation........................................ (556,704) (1,291,704) (1,073,018)
------------ ------------- -------------
$ 1,300,818 $ 4,284,301 $ 7,688,059
------------ ------------- -------------
------------ ------------- -------------
Depreciation expense related to leased equipment under capital leases was
$109,556, $409,518, $984,597, $77,947 (unaudited) and $312,265 (unaudited) for
the eleven months ended December 31, 1993, the years ended December 31, 1994 and
1995, and the three-month periods ended March 31, 1995 and 1996, respectively.
F-16
TELETECH HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995
AND FOR THE ELEVEN MONTHS ENDED DECEMBER 31, 1993
AND FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 (UNAUDITED)
(CONTINUED)
(4) CAPITAL LEASE OBLIGATIONS
On July 11, 1995, the Company negotiated a master lease agreement with a
bank under which it may lease equipment up to a value of $8,000,000. As of May
13, 1996, the master lease has been amended to increase the lease line to
$15,000,000. The term of the leases are 48 months and interest is payable at the
then most recent weekly average of three-year Treasury notes plus 125 basis
points. In August 1995, the Company entered into another master lease agreement
with a bank under which it may lease equipment. Under the agreement, individual
lease terms are negotiated on a lease by lease basis. Subsequent to December 31,
1995, the Company entered into several leases under this agreement which are
being accounted for as operating leases (See Note 9).
The Company finances a substantial portion of its property and equipment
under noncancelable capital lease obligations. Accordingly, the fair value of
the equipment has been capitalized and the related obligation recorded. The
average implicit interest rate on these leases was 8.9% at December 31, 1995.
Interest is charged to expense at a level rate applied to declining principal
over the period of the obligation.
The future minimum lease payments under capitalized lease obligations as of
December 31, 1995 and March 31, 1996 are as follows:
DECEMBER 31,
1995
------------- MARCH 31,
1996
-------------
(UNAUDITED)
Year ending December 31--
1996.............................................................................. $ 1,658,828 $ 2,159,825
1997.............................................................................. 1,594,470 2,608,577
1998.............................................................................. 1,246,793 2,116,303
1999.............................................................................. 570,519 1,217,108
2000.............................................................................. 54,875 211,443
------------- -------------
5,125,485 8,313,256
Less--Amount representing interest................................................ (676,522) (775,509)
------------- -------------
4,448,963 7,537,747
Less--Current portion of capital lease obligations................................ (1,255,966) (2,129,440)
------------- -------------
$ 3,192,997 $ 5,408,307
------------- -------------
------------- -------------
Interest expense on the outstanding obligations under such leases was
$39,981, $160,483, $312,653, $73,350 (unaudited) and $135,524 (unaudited) for
the eleven months ended December 31, 1993, the years ended December 31, 1994 and
1995, and the three-month periods ended March 31, 1995 and 1996, respectively.
F-17
TELETECH HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995
AND FOR THE ELEVEN MONTHS ENDED DECEMBER 31, 1993
AND FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 (UNAUDITED)
(CONTINUED)
(5) LONG-TERM DEBT
As of December 31, 1994 and 1995 and March 31, 1996, long-term debt
consisted of the following (unsecured unless otherwise stated):
DECEMBER 31,
--------------------------
1994 1995
------------ ------------ MARCH 31,
1996
------------
(UNAUDITED)
Note payable, interest at 8% per annum, principal and interest payable
monthly at $3,594, maturing May 2000................................... $ 189,177 $ 160,131 $ 152,500
Note payable, collateralized by all of the assets of TTS, interest
payable monthly at 6% per annum, principal due July 1995............... 350,000 -- --
Note payable, interest at 6% per annum, principal and interest payable
monthly at $4,563, maturing January 1997............................... 106,989 57,297 44,403
Note payable, interest at 13% per annum, principal and interest payable
monthly at $9,266, maturing April 1995................................. 95,599 -- --
Note payable, interest at 6% per annum, principal and interest payable
monthly at $3,598, maturing June 1997.................................. 100,000 61,786 51,869
Note payable, interest at 5% per annum, principal and interest payable
monthly at $7,077, maturing January 2000............................... 375,000 313,064 295,675
Note payable to a bank, interest at 8-9% per annum, principal payable
annually at $154,568 maturing September 2000, secured by an equitable
mortgage over all assets and uncalled capital of Access 24............. -- -- 772,842
------------ ------------ ------------
1,216,765 592,278 1,317,289
Less--Current portion................................................. (624,483) (195,660) (189,443)
------------ ------------ ------------
$ 592,282 $ 396,618 $ 1,127,846
------------ ------------ ------------
------------ ------------ ------------
Annual maturities of the long-term debt described above are as follows:
DECEMBER 31,
1995
------------ MARCH 31,
1996
------------
(UNAUDITED)
Year ended December 31--
1996............................................................................... $ 195,660 $ 147,831
1997............................................................................... 134,324 288,892
1998............................................................................... 115,210 269,778
1999............................................................................... 122,278 276,846
2000............................................................................... 24,806 179,372
Thereafter......................................................................... -- 154,570
------------ ------------
$ 592,278 $ 1,317,289
------------ ------------
------------ ------------
F-18
TELETECH HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995
AND FOR THE ELEVEN MONTHS ENDED DECEMBER 31, 1993
AND FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 (UNAUDITED)
(CONTINUED)
(6) SHORT-TERM BORROWINGS
On June 23, 1994, TTC entered into a revolving line of credit agreement (the
"Credit Agreement") with a bank under which it could borrow up to $3,000,000
through June 30, 1995. Initial borrowings under this line of credit were used to
retire TTC's previous line of credit. Interest is payable monthly at the bank's
prime rate plus 1.75% (10.25% at December 31, 1994).
On April 12, 1995, the Company negotiated a new unsecured revolving line of
credit agreement with the bank under which it may borrow up to $5,000,000.
Interest is payable at various interest rates. The borrowings can be made at (1)
the bank's prime rate, (2) a CD rate plus 125 basis points for periods of 7 to
90 days with minimum advances of $500,000 with $100,000 increments, (3) LIBO
rate plus 125 basis points for borrowing periods of 1, 2, 3 or 6 months, or (4)
agreed upon rates. At December 31, 1995 and March 31, 1996, the amount
outstanding under this facility was $1,000,000 and $3,500,000, respectively, and
is classified as short-term.
In April 1996, the Company was granted an increased line of credit of
$15,000,000 through May 1998. The terms of this line of credit remained
unchanged from the previous $5,000,000 line of credit.
The Company is required to comply with certain minimum financial ratios
under covenants in connection with the borrowings described above.
(7) SUBORDINATED NOTES PAYABLE TO COMMON STOCKHOLDER
At December 31, 1994 subordinated notes payable to the Stockholder with
interest at 8% per annum amounted to $1,104,337, of which $145,299 was due
within one year.
These notes payable were subordinated to the long-term debt (Note 5) and the
short-term borrowings (Note 6) as specified in the credit agreements. Interest
incurred on indebtedness to the stockholder amounted to approximately $91,000,
$96,000, $11,000, $11,000 (unaudited) and $0 (unaudited) for the eleven months
ended December 31, 1993, the years ended December 31, 1994 and 1995, and the
three months ended March 31, 1995 and 1996, respectively.
In February 1995, in conjunction with the Company's reorganization and stock
sale (Note 1), the Company paid in full these subordinated notes payable.
(8) INCOME TAXES
As stated in Note 1, TTC and TTS terminated their S corporation status
effective January 1, 1995. This change in tax status was recognized by
establishing net deferred tax liabilities of approximately $212,000 on that date
for temporary differences between tax basis and amounts reported in the
accompanying combined balance sheets of TTC and TTS. The current provision for
income taxes for 1994 and for the 11 months ended December 31, 1993, reflects
only amounts payable to certain state tax jurisdictions that do not recognize S
corporation status. Beginning in 1995, THI and its domestic subsidiaries will
file consolidated corporate federal and state income tax returns. Access 24
(Note 17) will file separate tax returns in the various countries in which it
provides services.
F-19
TELETECH HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995
AND FOR THE ELEVEN MONTHS ENDED DECEMBER 31, 1993
AND FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 (UNAUDITED)
(CONTINUED)
(8) INCOME TAXES (CONTINUED)
The components of income before income taxes are as follows:
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
-------------------------- --------------------------
1994 1995 1995 1996
------------ ------------ ------------ ------------
ELEVEN
MONTHS ENDED
DECEMBER 31,
1993
-------------
(UNAUDITED) (UNAUDITED)
Domestic.................................. $ 537,676 $ 1,714,710 $ 7,085,080 $ 2,952,288 $ 2,054,659
Foreign................................... -- -- -- -- 204,185
------------- ------------ ------------ ------------ ------------
Total..................................... $ 537,676 $ 1,714,710 $ 7,085,080 $ 2,952,288 $ 2,258,844
------------- ------------ ------------ ------------ ------------
------------- ------------ ------------ ------------ ------------
The components of the provision for income taxes are as follows:
THREE MONTHS ENDED MARCH
YEAR ENDED 31,
DECEMBER 31, --------------------------
1995 1995 1996
------------ ------------ ------------
(UNAUDITED)
Current provision:
Federal.............................................................. $2,472,925 $ 952,940 $ 942,658
State................................................................ 433,813 159,023 145,691
Foreign.............................................................. -- -- 73,506
------------ ------------ ------------
2,906,738 1,111,963 1,161,855
------------ ------------ ------------
Deferred provision:
Federal.............................................................. (153,610) -- (132,761)
State................................................................ (36,632) -- (27,792)
------------ ------------ ------------
(190,242) -- (160,553)
Change in tax status from S corporation to C corporation............... 212,500 212,500 --
------------ ------------ ------------
$2,928,996 $ 1,324,463 $ 1,001,302
------------ ------------ ------------
------------ ------------ ------------
The following reconciles the Company's effective tax rate to the federal
statutory rate for the year ended December 31, 1995 and for the three months
ended March 31, 1995 and 1996:
THREE MONTHS ENDED MARCH
YEAR ENDED 31,
DECEMBER 31, --------------------------
1995 1995 1996
------------ ------------ ------------
(UNAUDITED)
Income tax expense per federal statutory rate.......................... $2,408,927 $ 1,003,778 $ 768,007
State income taxes, net of federal deduction........................... 262,139 98,687 111,813
Effect of change in tax status from S corporation to C corporation..... 212,500 212,500 --
Permanent differences.................................................. 37,210 9,498 114,482
Environmental tax...................................................... 8,220 -- --
Foreign income taxed at higher rate.................................... -- -- 7,000
------------ ------------ ------------
$2,928,996 $ 1,324,463 $ 1,001,302
------------ ------------ ------------
------------ ------------ ------------
F-20
TELETECH HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995
AND FOR THE ELEVEN MONTHS ENDED DECEMBER 31, 1993
AND FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 (UNAUDITED)
(CONTINUED)
(8) INCOME TAXES (CONTINUED)
The Company's deferred income tax assets and liabilities are summarized as
follows:
YEAR ENDED
DECEMBER 31,
1995
------------ THREE MONTHS
ENDED MARCH
31, 1996
-------------
(UNAUDITED)
Deferred tax assets:
Allowance for doubtful accounts................................................... $ 178,068 $ 292,496
Vacation accrual.................................................................. 307,674 345,224
------------ -------------
485,742 637,720
Deferred tax liabilities:
Excess depreciation for tax....................................................... (507,365) (498,790)
------------ -------------
Net deferred income tax (liability) asset........................................... $ (21,623) $ 138,930
------------ -------------
------------ -------------
A valuation allowance has not been recorded as the Company expects that all
deferred tax assets will be realized in the future.
The combined statement of income for 1993 and 1994 presents, on an unaudited
pro forma basis, net income as if the Company had filed consolidated C
corporation federal and state income tax returns for that year. The pro forma
tax effects assume that the deferred tax assets established effective January 1,
1995, as described above, would have been provided for as the related temporary
differences arose. The pro forma provision for income taxes for 1993 and 1994 is
reconciled to the amount computed by applying the statutory federal tax rate to
income before taxes as follows:
UNAUDITED
------------------------
1993 1994
(PRO FORMA) (PRO FORMA)
----------- -----------
AMOUNT AMOUNT
----------- -----------
Income tax expense per federal statutory rate........................................... $ 182,810 $ 583,001
State income taxes, net of federal deduction............................................ 23,410 81,491
Permanent differences................................................................... 32,776 13,110
----------- -----------
Total pro forma provision for income taxes............................................ 238,996 677,602
Historical provision (benefit) for income taxes......................................... (10,000) 19,736
----------- -----------
Pro forma tax effects................................................................... $ 248,996 $ 657,866
----------- -----------
----------- -----------
(9) COMMITMENTS AND CONTINGENCIES
The Company leases its premises in Sherman Oaks and Burbank, California and
Denver, Colorado pursuant to agreements expiring through 2003. The monthly rents
are subject to certain operating expenses and real estate taxes.
The Company has various operating leases for equipment and office space.
Lease expense under operating leases was approximately $626,000, $1,366,000,
$442,000, $88,000 (unaudited) and $118,000 (unaudited), for the eleven months
ended December 31, 1993, the years ended December 31, 1994 and 1995, and the
three months ended March 31, 1995 and 1996, respectively.
F-21
TELETECH HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995
AND FOR THE ELEVEN MONTHS ENDED DECEMBER 31, 1993
AND FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 (UNAUDITED)
(CONTINUED)
(9) COMMITMENTS AND CONTINGENCIES (CONTINUED)
The future minimum rental payments required under noncancelable operating
leases as of December 31, 1995, and March 31, 1996, are as follows:
DECEMBER 31,
1995
------------- MARCH 31,
1996
------------
(UNAUDITED)
Year ended December 31--
1996............................................................................... $ 2,611,341 $ 1,494,490
1997............................................................................... 2,202,442 1,982,791
1998............................................................................... 1,877,301 1,946,135
1999............................................................................... 1,773,350 1,645,375
2000............................................................................... 768,452 347,356
Thereafter......................................................................... 1,974,493 302,900
------------- ------------
$ 11,207,379 $ 7,719,047
------------- ------------
------------- ------------
(10) EMPLOYEE BENEFIT PLAN
The Company has a 401(k) Profit Sharing Plan which covers all employees who
have completed one year of service, as defined, and are 21 or older.
Participants may defer up to 19% of their gross pay up to a maximum limit
determined by law. Participants are always 100% vested in their contributions.
The Company may make discretionary contributions to the plan which are
distributed to participants in accordance with the plan. Participants are vested
in these contributions at a rate of 20% per year. For the eleven months ended
December 31, 1993 and the years ended December 31, 1994 and 1995, the Company's
contributions to the plan were $40,000, $64,000 and $131,000, respectively.
There were no contributions made during the periods ended March 31, 1995 and
1996.
(11) MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK
In January, 1995, the Company issued 1,860,000 shares of convertible
preferred stock, $6.45 par value, at $6.45 per share for gross proceeds of
$12,000,000. The Company used the funds for the repayment of certain notes as
well as for working capital requirements.
Preferred Stock is initially convertible at the option of the preferred
stockholders, into 9,300,000 shares of common stock. This number of shares of
common stock is subject to adjustment in the event of certain issuances of
common stock, excluding up to 7,000,000 shares of common stock that may be
issued upon exercise of stock options, to ensure that preferred stockholders
maintain ownership of 16.9% of the common stock on a fully diluted basis (as
adjusted pursuant to the Company's Certificate of Incorporation).
In the event that preferred stockholders do not exercise their conversion
rights set out above, the preferred stock converts to common stock at the rate
set out above, at the earlier of the consummation of a qualified initial
offering of shares to the public (as defined in the Company's Certificate of
Incorporation) or May 18, 2002.
In the event that the holders of Preferred Stock have not exercised their
conversion rights prior to May 18, 2002, they are entitled to either convert
their Preferred Stock to shares of common stock or redeem their shares for cash.
Such conversion is to provide an internal rate of return to the Preferred
Stockholders of 7% per annum. Accordingly, dividends are accrued cumulatively at
the rate of 0.5833% per month.
F-22
TELETECH HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995
AND FOR THE ELEVEN MONTHS ENDED DECEMBER 31, 1993
AND FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 (UNAUDITED)
(CONTINUED)
(12) STOCK OPTION PLANS
The Company adopted a stock option plan during 1995 and amended and restated
the plan in January 1996, for directors, officers, employees, consultants and
independent contractors. The plan reserves 7,000,000 shares of common stock and
permits the award of incentive stock options ("ISOs"), other non-qualified
options ("NSOs"), stock appreciation rights ("SARs") and restricted stock. Under
the terms of this plan, the purchase price of shares subject to each ISO granted
must not be less than the fair market value on the date of grant. The
compensation committee of the Board of Directors has complete discretion as to
exercise prices of all other awards, including NSOs. Outstanding options vest
over a three or five-year period and are exercisable for ten years from the date
of grant.
In January, 1996, the Company adopted a stock option plan for non-employee
directors (the "Director Plan"), covering 750,000 shares of common stock. All
options are to be granted at fair market value at the date of grant. Options
vest as of the date of the option and are not exercisable until six months after
the option date. Options granted are exercisable for ten years from the date of
grant unless a participant is terminated for cause or one year after a
participant's death. Options to purchase 225,000 shares were outstanding at
March 31, 1996.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 123 ("SFAS 123")
During 1995, the Financial Accounting Standards Board issued SFAS 123,
"Accounting for Stock Based Compensation," which defines a fair value based
method of accounting for an employee stock option or similar equity instrument
and encourages all entities to adopt that method of accounting for all of their
employee stock compensation plans. However, it also allows an entity to continue
to measure compensation cost for those plans using the method of accounting
prescribed by the Accounting Principles Board Opinion No. 25 ("APB 25"),
"Accounting for Stock Issued to Employees." Entities electing to remain with the
accounting in APB 25 must make pro forma disclosures of net income and earnings
per share, as if the fair value based method of accounting defined in this
Statement has been applied.
The Company has elected to account for its stock-based compensation plans
under APB 25; however, the Company has computed for pro-forma disclosure
purposes the value of all options granted during 1995 and in the quarter ended
March 31, 1996, using the Black-Scholes option pricing model as prescribed by
SFAS 123 and the following weighted average assumptions used for grants:
Risk-free interest rate................................................. 6.34%
Expected dividend yield................................................. 0%
Expected lives.......................................................... 4.48 years
Expected volatility..................................................... 59%
Options were assumed to be exercised upon vesting for the purpose of this
valuation. Adjustments are made for options forfeited prior to vesting. The
total value of options granted was computed to be the following approximate
amounts, which would be amortized on a straight line basis over the vesting
period of the options:
Year ended December 31, 1995.............................................. $ 340,727
Three months ended March 31, 1996 (unaudited)............................. $ 335,010
If the Company had accounted for these plans in accordance with SFAS 123,
the Company's net income and pro forma net income per share would have been
reported as follows:
F-23
TELETECH HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995
AND FOR THE ELEVEN MONTHS ENDED DECEMBER 31, 1993
AND FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 (UNAUDITED)
(CONTINUED)
(12) STOCK OPTION PLANS (CONTINUED)
NET INCOME
YEAR ENDED
DECEMBER 31,
1995
------------ THREE MONTHS ENDED
MARCH 31, 1996
-------------------
(UNAUDITED)
As Reported......................................................... $4,156,084 $ 1,257,542
Pro Forma........................................................... 3,815,357 922,532
PRO FORMA NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE
YEAR ENDED
DECEMBER 31,
1995
--------------- THREE MONTHS ENDED
MARCH 31, 1996
---------------------
(UNAUDITED)
As Reported......................................................... $ 0.08 $ 0.02
Pro Forma........................................................... $ 0.07 $ 0.02
A summary of the status of the Company's two stock option plans at March 31,
1996 and December 31, 1995 together with changes during the periods then ended
are presented in the following table:
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, 1995 MARCH 31, 1996
----------------------- -----------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
PRICE PER PRICE PER
SHARES SHARE SHARES SHARE
---------- ----------- ---------- -----------
Outstanding at beginning of period...................... -- 2,355,000 $ 1.88
Grants during period.................................... 2,355,000 $ 1.88 793,750 $ 5.13
---------- ----------
Outstanding at end of period............................ 2,355,000 $ 1.88 3,148,750 $ 2.70
---------- ----------
---------- ----------
The following table sets forth the exercise price range, number of shares,
weighted average exercise price and remaining contractual lives by groups of
similar price and grant date:
WEIGHTED
AVERAGE
EXERCISE NUMBER OF WEIGHTED CONTRACTUAL
PRICE RANGE SHARES AVERAGE PRICE LIFE
- -------------- ---------- --------------- ---------------
$ 1.29 - $1.30 1,400,000 $ 1.29 10
$ 2 455,000 $ 2.00 10
$ 3 - $5 1,243,750 $ 4.36 10
$ 7 50,000 $ 7.00 10
Subsequent to March 31, 1996, THI granted an additional 1,819,750 options at
a weighted average price of $8.15.
(13) FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair values of cash equivalents and other current amounts receivable and
payable approximate the carrying amounts due to their short-term nature.
Short-term investments consist of overnight deposits in mutual funds. These
funds hold short-term investments which include primarily U.S. Government
Treasury
F-24
TELETECH HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995
AND FOR THE ELEVEN MONTHS ENDED DECEMBER 31, 1993
AND FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 (UNAUDITED)
(CONTINUED)
(13) FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
Bills, bankers' acceptance notes, commercial paper and Master notes with
maturities of 90 days or less. Interest accrues daily on these funds, and
accordingly, the carrying values of these investments approximate their fair
values.
Debt carried on the Company's consolidated balance sheet of $592,278 and
$1,317,289 at December 31, 1995 and March 31, 1996, has an estimated fair value
of $626,478 and $1,173,339, respectively. The fair value of the long-term
portion of the Company's debt is based on discounting future cash flows using
current interest rates adjusted for risk. The fair value of the short-term debt
approximates its recorded value due to its short-term nature.
(14) OTHER INCOME
Other income (expense) for the year ended December 31, 1995 and for the
three months ended March 31, 1995 includes $2,400,000 received in settlement of
a premature termination of a contract.
(15) RELATED PARTY TRANSACTIONS
During fiscal 1995, the Company provided reservations call handling services
to Midway Airlines Corporation ("Midway"), a majority-owned subsidiary of
Zell/Chilmark Fund, L.P. Samuel Zell, a director of the Company, is an affiliate
of Zell/Chilmark Fund, L.P. During the twelve months ended December 31, 1995 and
the three months ended March 31, 1996, the Company charged Midway an aggregate
of $1,291,862 and $600,904, respectively, for services rendered by the Company.
As of December 31, 1995 and March 31, 1996, the amounts due from Midway for
services rendered by the Company was $535,845 and $570,274 (unaudited),
respectively, of which $354,526 and $462,958 (unaudited), respectively, was past
due.
In April 1996, the Company agreed to accept from Midway, and Midway
delivered to the Company, a promissory note in the principal amount of $500,000
to evidence a portion of the total amount due. The note bears interest at a rate
of 8% per annum and is payable in 12 equal installments of principal, together
with interest, commencing May 1, 1996. The Company is continuing to provide call
handling services to Midway.
The Company utilizes the services of The Riverside Agency, Inc. for
reviewing, obtaining and/or renewing various insurance policies. The Riverside
Agency, Inc. is a wholly owned subsidiary of Equity Group Investments, Inc., of
which Samuel Zell, a director of the Company, is Chairman of the Board. During
the twelve months ended December 31, 1995 and the three months ended March 31,
1996, the Company incurred $23,965 and $47,930, respectively, for such services.
(16) ACQUISITIONS
On January 1, 1996, the Company acquired 100% of the common stock of Access
24 Services Corporation Pty Limited (with its subsidiaries, "Access 24"), for
consideration of $7.1 million, consisting of cash of $2.27 million and 970,240
shares of common stock in the Company. Access 24 provides inbound, toll free
customer service, primarily to the healthcare and financial services sector in
Australia, the United Kingdom and New Zealand.
This acquisition has been accounted for using the purchase method. Goodwill
of $6.3 million arising on the acquisition is being amortized over 15 years on a
straight line basis.
F-25
TELETECH HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995
AND FOR THE ELEVEN MONTHS ENDED DECEMBER 31, 1993
AND FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 (UNAUDITED)
(CONTINUED)
(16) ACQUISITIONS (CONTINUED)
The following unaudited pro forma consolidated income statement gives effect
to the consummation of the acquisition as if it had occurred on January 1, 1995:
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(IN THOUSANDS)
YEAR ENDED DECEMBER 31, 1995
-----------------------------------
THI ACCESS 24 PRO FORMA
--------- ----------- -----------
(UNAUDITED)
Revenue......................................................................... $ 50,467 $ 10,239 $ 60,706
--------- ----------- -----------
--------- ----------- -----------
Net income (loss)............................................................... $ 4,156 $ (166) $ 3,990
--------- ----------- -----------
--------- ----------- -----------
Pro forma net income per common and common equivalent share..................... $ 0.08 $ 0.07
--------- -----------
--------- -----------
Shares used in computing pro forma net income per common and common equivalent
share.......................................................................... 54,658 54,658
--------- -----------
--------- -----------
Pro forma net loss for Access 24 for the year ended December 31, 1995
reflects a charge of $422,000 for amortization of goodwill arising on
acquisition.
(17) SUBSEQUENT EVENTS (UNAUDITED)
SALE OF STOCK
As of April 30, 1996, the Company sold 50% of the common stock of Access 24,
Limited (the Company's United Kingdom subsidiary that operates a call center in
London, England) to PPP Healthcare Group plc ("PPP") for cash consideration of
$3.8 million. This transaction resulted in an after-tax gain of approximately
$1.6 million.
In addition, Access 24, Limited also issued 1,000,000 Cumulative 7%
Preference Shares at a par value of 1 pound each, redeemable in 2006, to PPP for
consideration of $1.5 million.
Access 24, Limited did not contribute significantly to the results of
operations of the Company for any of the periods presented herein.
BONUS PLAN
In May, 1996, the Company adopted the 1996 Management Bonus Plan ("Bonus
Plan") to provide a performance-based incentive for the Company's executive
officers and key employees. The compensation committee of the Board of Directors
administers the Bonus Plan and determines which employees are eligible for
anticipation. Bonuses are based on the Company's results of operations.
TRANSACTION FEES
In May 1996, the Board of Directors approved the payment of fees to the
Equity Group Investments, Inc., an affiliate of Samuel Zell, a director of the
Company, for advice and assistance in consummating the following transactions:
i) Access 24 purchase (Note 16)............................... $ 300,000
ii) The Company's proposed initial public offering of stock.... 500,000
iii) Sale of Access 24, Limited stock to PPP.................... 200,000
---------
$1,000,000
---------
---------
Fees associated with the Access 24 purchase will be allocated to the
purchase price. Fees associated with the proposed public offering of common
stock will be netted against the offering proceeds. Fees associated with the
sale of stock to PPP will be netted of against the gain arising on this sale.
F-26
ACCESS 24 SERVICE CORPORATION PTY LIMITED AND CONTROLLED ENTITIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
1995 FEBRUARY 29,
------------ 1995
NOTE ------------
----- A$
(NOTE 22) A$
CURRENT ASSETS
Cash........................................................................ 5 816,220 1,837,982
Receivables................................................................. 6 1,976,041 1,340,978
Other....................................................................... 7 401,173 165,432
------------ ------------
TOTAL CURRENT ASSETS.......................................................... 3,193,434 3,344,392
------------ ------------
NON-CURRENT ASSETS
Property, plant and equipment............................................... 8 4,217,281 2,170,050
Intangibles................................................................. 9 1,964,360 2,163,362
Other....................................................................... 10 466,726 366,517
------------ ------------
TOTAL NON-CURRENT ASSETS...................................................... 6,648,367 4,699,929
------------ ------------
TOTAL ASSETS.................................................................. 9,841,801 8,044,321
------------ ------------
CURRENT LIABILITIES
Creditors and borrowings.................................................... 11 3,042,545 2,230,026
Provisions.................................................................. 12 802,176 1,586,870
------------ ------------
TOTAL CURRENT LIABILITIES..................................................... 3,844,721 3,816,896
------------ ------------
NON-CURRENT LIABILITIES
Creditors and borrowings.................................................... 13 2,521,226 791,276
Provisions.................................................................. 14 169,943 97,216
------------ ------------
TOTAL NON-CURRENT LIABILITIES................................................. 2,691,169 888,492
------------ ------------
TOTAL LIABILITIES............................................................. 6,535,890 4,705,388
------------ ------------
NET ASSETS.................................................................. 3,305,911 3,338,933
------------ ------------
------------ ------------
SHAREHOLDERS' EQUITY
Share capital............................................................... 15 212 212
Reserves.................................................................... 16 3,017,136 3,007,188
Retained profits............................................................ 288,563 331,533
------------ ------------
TOTAL SHAREHOLDERS' EQUITY.................................................... 3,305,911 3,338,933
------------ ------------
------------ ------------
The accompanying notes form an integral part of this balance sheet.
F-27
ACCESS 24 SERVICE CORPORATION PTY LIMITED AND CONTROLLED ENTITIES
CONSOLIDATED PROFIT AND LOSS ACCOUNTS
TEN MONTHS
ENDED YEAR ENDED
DECEMBER 31, FEBRUARY 28,
1995 1995
NOTE ------------ ------------
----- A$ A$
(NOTE 22)
Operating revenue............................................................. 2 12,208,051 12,726,187
------------ ------------
------------ ------------
Operating profit.............................................................. 2 463,916 1,611,910
Income tax attributable to operating profit................................... 3 492,351 612,820
------------ ------------
Operating profit/(loss) after income tax...................................... (28,435) 999,090
Retained profits at the beginning of the period............................... 331,533 118,101
Adjustment to retained profits at the beginning of the period re AASB 1028:
Accounting for Employee Entitlements......................................... 1 (14,535) --
------------ ------------
Adjusted retained profits at the beginning of the financial period............ 316,998 --
------------ ------------
Total available for appropriation............................................. 288,563 1,117,191
Dividends provided for........................................................ -- 785,658
------------ ------------
Retained profits at the end of the financial period........................... 288,563 331,533
------------ ------------
------------ ------------
The accompanying notes form an integral part of this profit and loss account.
F-28
ACCESS 24 SERVICE CORPORATION PTY LIMITED AND CONTROLLED ENTITIES
CONSOLIDATED STATEMENT OF CASH FLOWS
TEN MONTHS
ENDED YEAR ENDED
DECEMBER 31, FEBRUARY 28,
1995 1995
NOTE ------------- ------------
------------ A$ A$
(NOTE 22)
Cash flows from operating activities
Receipts from customers................................................... 11,936,094 12,451,360
Payments to suppliers and employees....................................... (10,749,686) (9,938,953)
Interest paid............................................................. (10,972) --
Interest received......................................................... 82,708 87,747
Advances to related parties............................................... (68,591) --
Repayment of advances to related parties.................................. -- 78,855
Interest paid (leases).................................................... (128,958) (70,192)
Income taxes paid......................................................... (578,105) (209,093)
------------- ------------
Net operating cash flows.................................................. 21(b) 482,490 2,399,724
------------- ------------
Cash flows from investing activities
Cash paid for acquisition of property, plant and equipment................ (1,510,622) (684,091)
Payments for investments.................................................. -- --
Proceeds from sale of fixed assets........................................ 60,079 54,187
Acquisition of intangibles................................................ -- (1,547)
------------- ------------
Net investing cash flows.................................................. (1,450,543) (631,451)
------------- ------------
Cash flows from financing activities
Proceeds from borrowings.................................................. 1,000,000 -
Repayment of hire purchase and lease liabilities.......................... (456,043) (260,613)
Advances to controlled entities........................................... -- --
Repayment of advances to controlled entities.............................. -- --
Dividends paid............................................................ (785,658) --
------------- ------------
Net financing cash flows.................................................... (241,701) (260,613)
------------- ------------
Net increase/(decrease) in cash held........................................ (1,209,754) 1,507,660
Cash at the beginning of the financial period............................... 1,837,982 327,538
Exchange rate variations on foreign cash balances........................... (8,461) 2,784
------------- ------------
Cash at the end of the financial period..................................... 21(a) 619,767 1,837,982
------------- ------------
------------- ------------
The accompanying notes form an integral part of this statement of cash flows.
F-29
ACCESS 24 SERVICE CORPORATION PTY LIMITED AND CONTROLLED ENTITIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED FEBRUARY 28, 1995
AND THE TEN MONTHS ENDED DECEMBER 31, 1995
NOTE 1. STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES:
(a) BASIS OF THE PREPARATION OF THE FINANCIAL STATEMENTS
The financial statements have been prepared in accordance with the
historical cost convention using the accounting policies described below and do
not take account of changes in either the general purchasing power of the dollar
or in the prices of specific assets.
The carrying amounts of all non-current assets are reviewed at least
annually to determine whether they exceed their recoverable amount. The
recoverable amounts of all non-current assets have been determined using net
cash flows which have not been discounted to their present value.
All amounts are in Australian dollars.
(b) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the financial statements of
the parent entity, Access 24 Service Corporation Pty Limited and its controlled
entities. The term "Economic Entity" used throughout these financial statements
means the parent entity and its controlled entities.
Where a controlled entity has been acquired during the period, its results
are included in the consolidated result from the date of acquisition. Similarly,
where a controlled entity is sold, its results are included in the consolidated
result until the date of disposal.
All inter-entity balances and transactions have been eliminated.
(c) OPERATING REVENUE
Sales revenue represents revenue earned (net of discounts and allowances)
from the sale of services. Other revenue includes interest income on short term
deposits and gross proceeds from the sale of non-current assets.
(d) PLANT AND EQUIPMENT
(i) ACQUISITION
Items of plant and equipment are recorded at cost and depreciated as
outlined below.
(ii) DISPOSALS OF ASSETS
The gain or loss on disposal of assets is calculated as the difference
between the carrying amount of the asset at the time of disposal and the
proceeds on disposal, and is included in the result of the economic entity in
the period of disposal.
(iii) DEPRECIATION AND AMORTIZATION
Items of plant and equipment, and leasehold property, are
depreciated/amortized over their estimated useful lives ranging from 3 to 30
years. The straight line method is used except in the case of one controlled
entity where the reducing balance method is used in respect of all plant and
equipment.
(iv) LEASED PLANT AND EQUIPMENT
Assets of the economic entity acquired under finance leases are capitalized.
The initial amount of the leased asset and corresponding lease liability are
recorded at the present value of minimum lease payments. Leased assets are
amortized over the life of the relevant lease or, where it is likely the
economic entity will obtain ownership of the asset on expiration of the lease,
the expected useful life of the asset. Lease liabilities are reduced by the
principal component of lease payments. The interest component is charged against
operating profit.
F-30
ACCESS 24 SERVICE CORPORATION PTY LIMITED AND CONTROLLED ENTITIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED FEBRUARY 28, 1995
AND THE TEN MONTHS ENDED DECEMBER 31, 1995
(CONTINUED)
NOTE 1. STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
Operating leases are not capitalized and rental payments are charged against
operating profit in the period in which they are incurred.
(e) INCOME TAX
The economic entity adopts the liability method of tax effect accounting.
Income tax expense is calculated on operating profit adjusted for permanent
differences between taxable and accounting income. The tax effect of timing
differences which arise from items being brought to account in different periods
for income tax and accounting purposes, is carried forward in the balance sheet
as a future income tax benefit or a deferred tax liability.
Future income tax benefits relating to tax losses are only brought to
account when their realization is virtually certain.
(f) FOREIGN CURRENCY
TRANSACTIONS
Foreign currency transactions are translated to Australian currency at the
rates of exchange ruling at the dates of the transactions. Amounts receivable
and payable in foreign currencies at balance date are translated at the rates of
exchange ruling on that date.
TRANSLATION OF FINANCIAL STATEMENTS OF OVERSEAS OPERATIONS
All overseas operations are deemed self-sustaining as each is financially
and operationally independent of Access 24 Service Corporation Pty Limited. The
financial statements of overseas operations are translated using the current
rate method and any exchange differences are taken directly to the foreign
currency translation reserve.
(g) PROVISIONS
EMPLOYEE ENTITLEMENTS
Provision has been made in the financial statements for benefits accruing to
employees in relation to such matters as annual leave and long service leave.
Long service leave provisions are calculated based on the probability of
employee's service continuity, even though in some cases such amounts are not
currently vesting.
From this financial year, all on-costs, including payroll tax, workers'
compensation premiums and fringe benefits tax are included in the determination
of provisions for annual leave and long service leave. Provisions for annual
leave and current long service leave are measured at their nominal value. Non
current long service leave is measured at its present value where materially
different from the nominal value. All provision where previously measure at
their nominal value. This represents a change in accounting policy so as to
satisfy the requirements of AASB 1028--Accounting for Employee Entitlements.
The impact of this change in policy for the economic entity is to reduce
opening retained profits by $14,535.
DOUBTFUL DEBTS
The collectibility of debts is assessed at year end and specific provision
is made for any doubtful accounts.
F-31
ACCESS 24 SERVICE CORPORATION PTY LIMITED AND CONTROLLED ENTITIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED FEBRUARY 28, 1995
AND THE TEN MONTHS ENDED DECEMBER 31, 1995
(CONTINUED)
NOTE 1. STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
(h) SUPERANNUATION FUND
Contributions to a defined contribution superannuation fund are expensed in
the year they are paid or become payable. No amount is recognized in the
accounts or group accounts in respect of the net surplus or deficiency of each
plan.
(i) INTANGIBLES
Goodwill represents the excess of the purchase consideration over the fair
value of identifiable net assets acquired at the time of acquisition of a
business or shares in a controlled entity.
Goodwill is amortized by the straight line method over the period during
which benefits are expected to be received. This is taken as being 10 years.
(j) COMPARATIVE BALANCES
Certain prior year comparatives have been amended to accord with current
year disclosure.
NOTE 2. REVENUE AND EXPENSES:
TEN MONTHS
ENDED YEAR ENDED
DECEMBER 31, FEBRUARY 28,
1995 1995
------------- -------------
Operating profit/(loss) for the period has been arrived at
after including:
Operating Revenue:
Fees received................................................ $ 11,783,312 $ 12,316,889
Interest from:
--other persons............................................ 84,986 87,747
Other revenue................................................ 339,753 321,551
------------- -------------
Total operating revenue........................................ 12,208,051 12,726,187
------------- -------------
------------- -------------
EXPENSES:
Abnormal item:
Write off of non recoverable loan............................ 188,952 --
------------- -------------
Other expenses:
Provision for doubtful debts................................. (42,135) 35,255
Provision for annual leave................................... 408,906 389,223
Provision for long service leave............................. 16,203 25,230
Rental expense on operating leases........................... 466,083 216,506
Depreciation of plant and equipment.......................... 547,589 346,420
Interest paid
--Other persons............................................ 19,203 --
--Finance leases and hire purchases........................ 130,408 70,192
Amortization of goodwill..................................... 210,048 237,668
Amortization of finance lease assets......................... 196,086 203,335
Foreign exchange (gains)/losses.............................. 9,128 (36,841)
(Gain)/loss on disposal of fixed assets (a).................. (28,929) 71,733
------------- -------------
(a) Proceeds on the disposal of fixed assets were:........... 60,079 54,187
------------- -------------
------------- -------------
F-32
ACCESS 24 SERVICE CORPORATION PTY LIMITED AND CONTROLLED ENTITIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED FEBRUARY 28, 1995
AND THE TEN MONTHS ENDED DECEMBER 31, 1995
(CONTINUED)
NOTE 3. INCOME TAX:
(a) The difference between income tax expense provided in the financial
statements and the prima facie income tax expense is reconciled as follows.
TEN MONTHS
ENDED YEAR ENDED
DECEMBER 31, FEBRUARY 28,
1995 1995
------------ ------------
Operating profit..................................................................... $ 463,916 $ 1,611,910
------------ ------------
------------ ------------
Prima facie tax expense thereon at 36% (February 28, 1995: 33%)...................... 167,010 531,930
Increase/ (decrease) in prima facie tax expense arising from:
Amortization of goodwill........................................................... 57,830 78,430
Entertaining....................................................................... 3,833 2,724
Fringe benefit tax................................................................. -- 2,141
Write-off of non-recoverable loan.................................................. 68,023 --
Other non-deductible items......................................................... 21,585 (3,667)
Effects of lower rates of tax on overseas income................................... (5,537) --
Prior year adjustment.............................................................. 10,708 1,262
Tax losses not brought to account.................................................. 168,899 --
------------ ------------
Total income tax attributable to operating profit.................................... 492,351 612,820
------------ ------------
------------ ------------
Total income tax expense comprises movements in:
Provision for income tax........................................................... 445,758 656,627
Provision for deferred income tax.................................................. 52,246 47,045
Future income tax benefit.......................................................... (5,653) (90,852)
------------ ------------
$ 492,351 $ 612,820
------------ ------------
------------ ------------
(b) As at 31 December 1995, there are companies within the economic entity
which have income tax losses available to offset against future years' taxable
income. The benefit of these losses has not been brought to account as
realization is not virtually certain.
F-33
ACCESS 24 SERVICE CORPORATION PTY LIMITED AND CONTROLLED ENTITIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED FEBRUARY 28, 1995
AND THE TEN MONTHS ENDED DECEMBER 31, 1995
(CONTINUED)
NOTE 4. PARENT ENTITY INVESTMENT IN CONTROLLED ENTITIES AND CONTRIBUTION TO
CONSOLIDATED RESULT:
(a) Particulars in relation to controlled entities
CONTRIBUTION TO
% OF SHARES HELD BOOK VALUE OF INVESTMENT CONSOLIDATED PROFIT/(LOSS)
----------------------------------- -------------------------------- --------------------------
FEBRUARY 28, FEBRUARY 28, FEBRUARY 28,
1995 1995 1995
DECEMBER 31 1995 ---------------- DECEMBER 31 --------------- ------------
----------------- 1995 DECEMBER 31
--------------- 1995
(NOTE 22) (NOTE 22) ------------
(NOTE 22)
Access 24 Service
Corporation Pty Limited.... -- -- $ -- $ -- $ 343,285 $ 852,890
Access 24 (Service
Corporation) Limited
(incorporated in New
Zealand)................... 100% 100% 83 83 99,021 146,200
Controlled entities acquired
during the period:
Support 24 Pty Limited
(incorporated in
Australia) (iii)(vi)..... -- -- -- -- -- --
Access 24 Limited
(incorporated in the
United Kingdom)
(iii)(iv)................ 100% -- 4 -- (440,535) --
High Performance
Healthcare Pty Limited
(incorporated in
Australia) (v)........... 100% -- 99 -- (30,206) --
----- ----- ------------ ------------
$ 186 $ 83 $ (28,435) $ 999,090
----- ----- ------------ ------------
----- ----- ------------ ------------
- ------------
(i) All entities operate solely in their place of incorporation.
(ii) The financial year ends of each controlled entity are the same as that of
the parent entity.
(iii)This company is not audited by the parent entity auditor or their
affiliates.
(iv) The parent entity acquired this company for cash consideration of $4. The
company did not trade prior to the acquisition by the parent entity.
(v) The parent entity acquired this company for cash consideration of $99. The
company did not trade prior to the acquisition by the parent entity.
(vi) A 51% shareholding in this company was acquired for nil consideration on
July 1, 1995 and was sold for $1 consideration on December 22, 1995. At the
date of acquisition, the net deficiency of Support 24 was $145,983 made up
of the following assets and liabilities by major class: Cash balances
$2,089, Receivables $10,522, Fixed Assets $10,875 and Creditors &
Borrowings $(169,469). At the date of disposal, the net assets of Support
24 were $892 and were made up of: Receivables $59,967 and Creditors &
Borrowings $(59,075). A loss of $42,078 had been generated from trading
activities during the period the company was a controlled entity and Access
24 Service Corporation Pty Limited forgave a loan of $188,952 resulting in
an operating profit of $146,874 for the same period.
F-34
ACCESS 24 SERVICE CORPORATION PTY LIMITED AND CONTROLLED ENTITIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED FEBRUARY 28, 1995
AND THE TEN MONTHS ENDED DECEMBER 31, 1995
(CONTINUED)
NOTE 4. PARENT ENTITY INVESTMENT IN CONTROLLED ENTITIES AND CONTRIBUTION TO
CONSOLIDATED RESULT: (CONTINUED)
(b) Segment information
TEN MONTHS ENDED DECEMBER 31, 1995
-------------------------------------------------------
EXTERNAL INTERGROUP TOTAL SEGMENT SEGMENT
REVENUE REVENUE REVENUE RESULT ASSETS
--------- ----------- --------- --------- ---------
Australia................................. $10,085,045 $ 251,754 $10,336,799 $ 313,079 $8,080,913
New Zealand............................... 1,645,502 -- 1,645,502 99,021 1,203,597
United Kingdom............................ 477,504 -- 477,504 (438,957) 2,170,657
Eliminations.............................. -- (251,754) (251,754) (1,578) (1,613,366)
--------- ----------- --------- --------- ---------
Consolidated.............................. $12,208,051 $ -- $12,208,051 $ (28,435) $9,841,801
--------- ----------- --------- --------- ---------
--------- ----------- --------- --------- ---------
YEAR ENDED FEBRUARY 28, 1995
-------------------------------------------------------
EXTERNAL INTERGROUP TOTAL SEGMENT SEGMENT
REVENUE REVENUE REVENUE RESULT ASSETS
--------- ----------- --------- --------- ---------
Australia................................. $11,228,111 $ 169,891 $11,398,002 $ 852,890 $7,440,308
New Zealand............................... 1,498,076 -- 1,498,076 146,200 1,137,691
Eliminations.............................. -- (169,891) (169,891) -- (533,678)
--------- ----------- --------- --------- ---------
Consolidated.............................. $12,726,187 $ -- $12,726,187 $ 999,090 $8,044,321
--------- ----------- --------- --------- ---------
--------- ----------- --------- --------- ---------
The group derives income by providing emergency medical and trade
assistance.
(c) Ultimate Parent Entity
The ultimate parent entity of Access 24 Service Corporation Pty Limited is
the Royal Automobile Club of Victoria (RACV) Limited, a company incorporated in
the state of Victoria.
NOTE 5. CASH:
FEBRUARY 28,
1995
DECEMBER 31, ------------
1995
------------
(NOTE 22)
Cash at bank and in hand......................................... $ 807,875 $ 1,797,191
Cash held in trust............................................... 8,345 40,791
------------ ------------
$ 816,220 $ 1,837,982
------------ ------------
------------ ------------
NOTE 6. RECEIVABLES:
FEBRUARY 28,
1995
DECEMBER 31, ------------
1995
------------
(NOTE 22)
Trade debtors.................................................... $1,288,033 $ 801,326
Provision for doubtful trade debtors............................. (1,530) (43,665)
------------ ------------
1,286,503 757,661
Trade balances receivable from related parties................... 186,474 117,882
Amounts receivable from controlled entities...................... -- --
Accrued fees..................................................... 499,624 462,059
Other debtors.................................................... 3,440 3,376
------------ ------------
$1,976,041 $ 1,340,978
------------ ------------
------------ ------------
F-35
ACCESS 24 SERVICE CORPORATION PTY LIMITED AND CONTROLLED ENTITIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED FEBRUARY 28, 1995
AND THE TEN MONTHS ENDED DECEMBER 31, 1995
(CONTINUED)
NOTE 7. OTHER CURRENT ASSETS:
FEBRUARY 28,
1995
DECEMBER 31, ------------
1995
------------
(NOTE 22)
Other assets..................................................... $ 121,621 $ 96,348
Prepayments...................................................... 279,552 69,084
------------ ------------
$ 401,173 $ 165,432
------------ ------------
------------ ------------
NOTE 8. PLANT AND EQUIPMENT:
Plant and equipment and leasehold improvements:
FEBRUARY 28,
1995
DECEMBER 31, ------------
1995
------------
(NOTE 22)
At cost (a)...................................................... $4,285,965 $ 2,124,874
Less accumulated depreciation.................................... (924,807) (375,932)
------------ ------------
$3,361,158 $ 1,748,942
------------ ------------
Leased plant and equipment:
Capitalized value of leased plant and equipment................ $1,236,861 $ 667,753
Less accumulated amortization.................................. (380,738) (246,645)
------------ ------------
856,123 421,108
------------ ------------
$4,217,281 $ 2,170,050
------------ ------------
------------ ------------
(a) A charge has been registered by a finance company, over assets under hire
purchase of a controlled entity, to the value of $83,584.
NOTE 9. INTANGIBLES:
FEBRUARY 28,
1995
DECEMBER 31, ------------
1995
------------
(NOTE 22)
Goodwill at cost................................................. $2,455,393 $ 2,443,866
Accumulated amortization......................................... (491,033) (280,504)
------------ ------------
$1,964,360 $ 2,163,362
------------ ------------
------------ ------------
F-36
ACCESS 24 SERVICE CORPORATION PTY LIMITED AND CONTROLLED ENTITIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED FEBRUARY 28, 1995
AND THE TEN MONTHS ENDED DECEMBER 31, 1995
(CONTINUED)
NOTE 10. OTHER NON-CURRENT ASSETS:
FEBRUARY 28,
1995
DECEMBER 31, ------------
1995
------------
(NOTE 22)
Investments
--Controlled entities (Note 4(a)).............................. $ -- $ --
Security deposits................................................ 110,770 82,895
Future income tax benefit........................................ 270,871 276,523
Amount receivable from a controlled entity....................... -- --
Other non-current assets......................................... 85,085 7,099
------------ ------------
$ 466,726 $ 366,517
------------ ------------
------------ ------------
NOTE 11. CREDITORS AND BORROWINGS (CURRENT):
FEBRUARY 28,
1995
DECEMBER 31, ------------
1995
------------
(NOTE 22)
Bank overdraft................................................... $ 196,453 $ --
Trade creditors.................................................. 357,306 294,785
Sundry creditors................................................. 948,329 928,507
Lease and hire purchase liabilities (Note 18(a))................. 821,968 607,080
Prepaid fees and claims:
--Trade........................................................ 710,527 322,548
--Trust accounts............................................... 7,962 41,316
Amounts due to related parties................................... -- 35,790
------------ ------------
$3,042,545 $ 2,230,026
------------ ------------
------------ ------------
NOTE 12. PROVISIONS (CURRENT):
FEBRUARY 28,
1995
DECEMBER 31, ------------
1995
------------
(NOTE 22)
Dividend......................................................... $ -- $ 785,657
Taxation......................................................... 423,680 567,220
Employee entitlements............................................ 378,496 233,993
------------ ------------
$ 802,176 $ 1,586,870
------------ ------------
------------ ------------
NOTE 13. CREDITORS AND BORROWINGS (NON-CURRENT):
FEBRUARY 28,
1995
DECEMBER 31, ------------
1995
------------
(NOTE 22)
Bank Loan (a).................................................... $1,000,000 $ --
Lease and hire purchase liabilities (Note 18(a))................. 1,521,226 791,276
------------ ------------
$2,521,226 $ 791,276
------------ ------------
------------ ------------
(a) The bank loan is secured by a registered mortgage debenture over all the
assets/undertakings of the parent entity and by a letter of support to the value
of $3.77m from the ultimate parent entity, the RACV.
F-37
ACCESS 24 SERVICE CORPORATION PTY LIMITED AND CONTROLLED ENTITIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED FEBRUARY 28, 1995
AND THE TEN MONTHS ENDED DECEMBER 31, 1995
(CONTINUED)
NOTE 14. PROVISIONS (NON-CURRENT):
FEBRUARY 28,
1995
DECEMBER 31, ------------
1995
------------
(NOTE 22)
Deferred income tax.............................................. $ 111,345 $ 59,099
Employee entitlements............................................ 58,598 38,117
------------ ------------
$ 169,943 $ 97,216
------------ ------------
------------ ------------
NOTE 15. SHARE CAPITAL:
FEBRUARY 28,
1995
DECEMBER 31, -------------
1995
-------------
(NOTE 22)
Authorized capital:
--10,000,000 ordinary shares of $1 each...................... $ 10,000,000 $ 10,000,000
------------- -------------
Issued and fully paid:
--212 ordinary shares of $1 each............................. $ 212 $ 212
------------- -------------
------------- -------------
NOTE 16. RESERVES:
FEBRUARY 28,
1995
DECEMBER 31, ------------
1995
------------
(NOTE 22)
Share premium account............................................ $2,999,900 $ 2,999,900
Foreign currency translation..................................... 17,236 7,288
------------ ------------
$3,017,136 $ 3,007,188
------------ ------------
------------ ------------
Foreign currency translation
--Balance at beginning of year................................. $ 7,288 $ (273)
--Gain on translation of overseas controlled entities.......... 9,948 7,561
------------ ------------
--Balance at end of period..................................... $ 17,236 $ 7,288
------------ ------------
------------ ------------
NOTE 17. REMUNERATION OF AUDITORS:
Amounts received or due and receivable by the auditors of the company for:
FEBRUARY 28,
1995
DECEMBER 31, ------------
1995
------------
(NOTE 22)
- --Audit services................................................. $ 43,363 $ 20,418
- --Other services................................................. -- 20,250
------------ ------------
$ 43,363 $ 40,668
------------ ------------
------------ ------------
F-38
ACCESS 24 SERVICE CORPORATION PTY LIMITED AND CONTROLLED ENTITIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED FEBRUARY 28, 1995
AND THE TEN MONTHS ENDED DECEMBER 31, 1995
(CONTINUED)
NOTE 18. COMMITMENTS:
FEBRUARY 28,
1995
DECEMBER 31, ------------
1995
------------
(NOTE 22)
(a) Finance lease and hire purchase expenditure contracted for is
payable as follows:
Not later than one year........................................ $ 852,954 $ 623,191
Later than one year and not later than two years............... 727,574 423,010
Later than two years and not later than five years............. 771,673 463,396
------------ ------------
2,352,201 1,509,597
Deduct future finance charges (i)................................ (9,007) (111,241)
------------ ------------
Net lease and hire purchase liability............................ $2,343,194 $ 1,398,356
------------ ------------
------------ ------------
Reconciled to:
Current liability (Note 11).................................... $ 821,968 $ 607,080
Non-current liability (Note 13)................................ 1,521,226 791,276
------------ ------------
$2,343,194 $ 1,398,356
------------ ------------
------------ ------------
(i) In the current period, assets under hire purchase have been recorded on
a gross basis, resulting in the recognition of a liability and equivalent asset
equal to the amount of future interest payable. The finance charges disclosed
for the current year relate solely to finance leases while the prior year
comparatives include interest on assets under hire purchase.
FEBRUARY 28,
1995
DECEMBER 31, ------------
1995
------------
(NOTE 22)
b) Operating leases
expenditure contracted for is payable as follows:
Not later than one year........................................ $ 302,129 $ 238,429
Later than one year and not later than two years............... 320,008 243,739
Later than two year and not later than five years.............. 361,031 517,833
------------ ------------
$ 983,168 $ 1,000,001
------------ ------------
------------ ------------
The above operating lease commitments include amounts for rental operating
leases which are gross of amounts received for subleases of various premises.
F-39
ACCESS 24 SERVICE CORPORATION PTY LIMITED AND CONTROLLED ENTITIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED FEBRUARY 28, 1995
AND THE TEN MONTHS ENDED DECEMBER 31, 1995
(CONTINUED)
NOTE 19. REMUNERATION OF DIRECTORS:
The number of directors of the parent entity who received, or were due to
receive, remuneration (including brokerage, commissions, bonuses, retirement
payments and salaries, but excluding prescribed benefits) directly or indirectly
from the company or any related body corporate, as shown in the following bands
were:
PARENT ENTITY
--------------------------
DECEMBER 31, FEBRUARY 28,
1995 1995
------------ ------------
$ 0 - $ 9,999.................................................................... -- 2
$ 20,000 - $ 29,999................................................................... 1 --
$ 50,000 - $ 59,999................................................................... 1 --
$110,000 - $119,999................................................................... 1 --
$210,000 - $219,999................................................................... 2 --
$250,000 - $259,999................................................................... -- 2
$260,000 - $269,999................................................................... -- 1
$270,000 - $279,999................................................................... 1 --
The aggregate remuneration of the directors referred to in the above bands was: $ 904,589 $ 776,821
------------ ------------
------------ ------------
The total of all remuneration received, or due and receivable, directly or
indirectly, from the respective corporations of which they are a director, or
any related body corporate, by all the directors of each corporation in the
economic entity of December 31, 1995 and February 28, 1995 $904,589 and
$839,301, respectively.
Amounts paid to or on behalf of directors of the company in respect
of retirement benefits and superannuation contributions were: $ 53,071 $ 67,043
----------- -----------
----------- -----------
NOTE 20. RELATED PARTY DISCLOSURES:
(a) The directors of Access 24 Service Corporation Pty Limited during the
financial period were:
Dr. John Eric Kendall
Mr. Louis Thomas Carroll
Mr. Nigel Alexander Dick
Mr. John Norman Isaac
Mr. Keith William Blyth (resigned August 1, 1995)
Mr. Edmund Christopher Johnson (appointed September 8, 1995)
F-40
ACCESS 24 SERVICE CORPORATION PTY LIMITED AND CONTROLLED ENTITIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED FEBRUARY 28, 1995
AND THE TEN MONTHS ENDED DECEMBER 31, 1995
(CONTINUED)
NOTE 20. RELATED PARTY DISCLOSURES: (CONTINUED)
(b) The following related party transactions occurred during the financial
period:
NATURE OF RELATIONSHIP WITH ACCESS 24 SERVICE OWNERSHIP
IDENTITY OF RELATED PARTY CORPORATION PTY LIMITED INTEREST
- -------------------------------------------------- -------------------------------------------------- --------------
RACV Insurance Pty Limited Commonly controlled entity --
Access 24 (Service Corporation) Limited (NZ) Controlled entity 100%
Access 24 Limited (UK) Controlled entity 100%
High Performance Healthcare Pty Ltd Controlled entity 100%
Support 24 Pty Limited Controlled entity 51%
Auto 24 Pty Limited Commonly controlled entity --
Dataview Solutions Pty Limited Director related entity --
VOLUME
TERMS & CONDITIONS OF EACH FEBRUARY 28,
IDENTITY OF RELATED PARTY TYPE OF TRANSACTION TRANSACTION 1995
- ----------------------------- ----------------------------- ----------------------------- VOLUME ------------
DECEMBER 31,
1995
------------
(NOTE 22)
RACV Insurance Pty Limited Sales Commercial terms and $ 779,467 $ 693,039
conditions
Auto 24 Pty Limited Staff services fees Commercial terms and 877,093 448,863
conditions
Loans advanced Interest charged at 651,050 545,000
commercial bank rates
Loan repayments 632,459 427,118
Interest receipts 18,392 --
High Performance Healthcare Loans advanced Nil interest 34,933 --
Pty Limited
Access 24 (Service Management fees Commercial terms and 251,754 169,891
Corporation) Limited conditions
Loans advanced Nil interest -- 555,000
Loan repayments 220,708 42,000
Support 24 Pty Limited Loans advanced Nil interest 313,952 --
Loan repayments 75,000 --
Dataview Solutions Pty Rent and related costs, Commercial terms and $ 100,329 $ 133,906
Limited software development, and conditions
accounts preparation
Access 24 Limited Loan advance Nil interest 1,256,206 --
(c) During the current financial period, the parent entity entered into
certain contracts on behalf of a controlled entity. These contracts are for:
- the provision of services to third parties,
F-41
ACCESS 24 SERVICE CORPORATION PTY LIMITED AND CONTROLLED ENTITIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED FEBRUARY 28, 1995
AND THE TEN MONTHS ENDED DECEMBER 31, 1995
(CONTINUED)
NOTE 20. RELATED PARTY DISCLOSURES: (CONTINUED)
- operating lease for premises,
- finance lease for equipment.
The assets, liabilities, revenues and expenses associated with these
contracts have been reflected in the financial statements of the economic
entity. They have not been reflected in the financial statements of the parent
entity as, in substance, the transactions relate solely to the operations of the
controlled entity.
(d) Interests in the shares of entities within the economic entity held by
directors of the reporting entity and their director related entities, as at
December 31, 1995:
ACCESS 24 SERVICE CORPORATION
PTY LTD
--------------------------------
$1 ORDINARY SHARES, FULLY PAID
--------------------------------
DECEMBER 31, FEBRUARY 28,
1995 1995
--------------- ---------------
J. E. Kendall........................................ 70 70
L. T. Carroll........................................ 36 36
NOTE 21. CASH FLOWS:
(a) Reconciliation of cash
For the purposes of the statement of cash flows, cash includes cash on hand
and in banks and deposits at call, net of outstanding bank overdrafts. Cash at
the end of the financial period as shown in the statement of cash flows is
reconciled to the related items in the balance sheet as follows:
DECEMBER 31, FEBRUARY 28,
1995 1995
------------ ------------
Cash balance comprises:
Cash at bank and on hand....................................... $ 807,875 $ 1,797,191
Cash held in trust............................................. 8,345 40,791
------------ ------------
816,220 1,837,982
Bank overdraft................................................. (196,453) --
------------ ------------
$ 619,767 $ 1,837,982
------------ ------------
------------ ------------
F-42
ACCESS 24 SERVICE CORPORATION PTY LIMITED AND CONTROLLED ENTITIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED FEBRUARY 28, 1995
AND THE TEN MONTHS ENDED DECEMBER 31, 1995
(CONTINUED)
NOTE 21. CASH FLOWS: (CONTINUED)
(b) Reconciliation of operating profit/loss after tax to net cash flows from
operating activities:
YEAR ENDED
FEBRUARY 28,
1995
TEN MONTHS ------------
ENDED
DECEMBER 31,
1995
------------
(NOTE 22)
Operating profit/(loss) after tax................................ $ (28,435) $ 999,090
Depreciation and amortization:
--Property, plant and equipment................................ 547,589 346,420
--Intangibles.................................................. 210,048 237,668
--Leased assets................................................ 196,086 203,335
Gain/(loss) on sale of non-current assets........................ (28,929) 70,736
Bad and doubtful debts........................................... (42,135) 35,255
Changes in assets and liabilities:
Trade receivables................................................ (486,706) (128,396)
Other receivables................................................ (64) 2,662
Advances to related parties...................................... (68,592) --
Intercompany trade receivables................................... -- --
Security deposits................................................ (27,875) --
Accrued fees..................................................... (37,565) --
Future income tax benefit........................................ 5,652 (90,852)
Prepayments...................................................... (210,468) (65,178)
Other assets..................................................... (6,449) --
Trade creditors.................................................. 62,521 4,359
Sundry creditors and accruals.................................... 19,822 225,978
Prepaid fees and claims:
--Trade creditors.............................................. 387,979 --
--Trust accounts............................................... (33,354) (4,498)
Amounts due to related parties................................... (35,790) --
Repayment of advances to related parties......................... -- 78,855
Tax provision.................................................... (143,540) 447,534
Deferred income tax liability.................................... 52,246 47,045
Adjustment to retained earnings (re AASB 1028: Accounting for
Employee Entitlements).......................................... (14,535) --
Employee provisions.............................................. 164,984 (10,289)
------------ ------------
Net cash flows from operating activities......................... $ 482,490 $ 2,399,724
------------ ------------
------------ ------------
(c) Non-cash financing and investing activities:
Purchases of certain plant and equipment has been conducted through finance
leases and hire purchase agreements. These transactions do not result in cash
outflows until the lease payments occur as per the individual agreements.
Purchases of property, plant and equipment financed in this way for the 10
months ended December 31, 1995 totalled $630,789 for Access 24 and $1,304,100
for the economic entity ($826,505 and $787,960 for the year ended February 28,
1995). The total value of property, plant and equipment under lease and the
resulting lease liabilities are disclosed in the financial statements.
F-43
ACCESS 24 SERVICE CORPORATION PTY LIMITED AND CONTROLLED ENTITIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED FEBRUARY 28, 1995
AND THE TEN MONTHS ENDED DECEMBER 31, 1995
(CONTINUED)
NOTE 22. FINANCIAL PERIOD:
The parent entity and its controlled entities have changed financial year
end from February 28 to December 31. As a result, these financial statements
cover the ten month period from March 1 1995 to December 31, 1995. The
comparative figures relate to the year ended February 28, 1995.
F-44
INSIDE BACK COVER OF PROSPECTUS:
The inside back cover is a multicolor graphic layout entitled "CUSTOMER
CONNECTIVITY through TeleTech's network of people and technology." AFTER THE
WORDS "CUSTOMER CONNECTIVITY", THERE IS A SUPERSCRIPT "R" SURROUNDED BY A
CIRCLE, INDICATING THAT THE WORDS ARE A REGISTERED TRADEMARK OF TELETECH.
Located in the center of the page is a rectangular photograph of a call
center over which is superimposed the word "TELETECH". Along the bottom edge of
this photograph are four ovals labelled as follows (from left to right): "PHONE"
(together with graphic icon of telephone handset); "INTERNET" (together with
graphic icon of arrow "clicking" on a computer screen); "IVR" (together with a
graphic icon of three buttons arranged vertically and labeled "1, 2 and 3"); and
"FAX" (together with graphic icon of telephone handset and a sheet of paper).
Located towards the bottom of the page, below the above-described
rectangular photograph and connected to the same by a curvilinear line, is an
oval graphic labeled "teletech's clients", beneath which is written "fortune
1000."
Located above the rectangular photograph are six oval photographs containing
close-up of one or more faces and labelled "client's customers." Overlapping
each of these oval photographs is one of graphic icons identified along the
bottom of the rectangular photograph, which indicates the services provided by
TeleTech to the client's customer (e.g., FAX, PHONE, IVR [interactive voice
response] and INTERNET). Each oval photograph is connected to the rectangular
photograph by a curvilinear line.
TeleTech's corporate logo appears in the lower left-hand corner of the page,
under which are written the words: "COPYRIGHT 1996."
OUTSIDE BACK COVER OF PROSPECTUS
[LOGO]
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
[ALTERNATIVE PAGE FOR INTERNATIONAL PROSPECTUS]
PROSPECTUS (SUBJECT TO COMPLETION)
ISSUED , 1996
6,000,000 SHARES
[LOGO]
COMMON STOCK
--------------
OF THE 6,000,000 SHARES OF COMMON STOCK BEING OFFERED, 4,000,000 SHARES ARE
BEING SOLD BY THE COMPANY AND 2,000,000 SHARES ARE BEING SOLD BY THE SELLING
STOCKHOLDERS NAMED HEREIN. THE COMPANY WILL NOT RECEIVE ANY OF THE PROCEEDS
FROM THE SALE OF SHARES BY THE SELLING STOCKHOLDERS. SEE "PRINCIPAL AND
SELLING STOCKHOLDERS." OF THE SHARES BEING OFFERED, SHARES ARE
BEING OFFERED INITIALLY OUTSIDE OF THE UNITED STATES AND CANADA BY THE
INTERNATIONAL UNDERWRITERS AND SHARES ARE BEING OFFERED
INITIALLY IN THE UNITED STATES AND CANADA BY THE U.S. UNDERWRITERS.
SEE "UNDERWRITERS." PRIOR TO THE OFFERING, THERE HAS BEEN NO PUBLIC
MARKET FOR THE COMMON STOCK OF THE COMPANY. IT IS CURRENTLY
ANTICIPATED THAT THE INITIAL PUBLIC OFFERING PRICE WILL BE BETWEEN
$ AND $ . SEE "UNDERWRITERS" FOR A DISCUSSION
OF THE FACTORS CONSIDERED IN DETERMINING THE
INITIAL OFFERING PRICE.
------------------------
THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS"
COMMENCING ON PAGE 6 HEREOF.
-----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
-------------------
PRICE $ A SHARE
-------------------
UNDERWRITING PROCEEDS TO
DISCOUNTS AND PROCEEDS TO SELLING
PRICE TO PUBLIC COMMISSIONS (1) COMPANY (2) STOCKHOLDERS
----------------- ----------------- ----------------- -----------------
PER SHARE............................. $ $ $ $
TOTAL (3)............................. $ $ $ $
- ---------
(1) THE COMPANY AND THE SELLING STOCKHOLDERS HAVE AGREED TO INDEMNIFY THE
UNDERWRITERS AGAINST CERTAIN LIABILITIES, INCLUDING LIABILITIES UNDER THE
SECURITIES ACT OF 1933, AS AMENDED.
(2) BEFORE DEDUCTING EXPENSES PAYABLE BY THE COMPANY ESTIMATED AT
$ . THE COMPANY HAS AGREED TO PAY THE EXPENSES OF THE SELLING
STOCKHOLDERS, OTHER THAN UNDERWRITING DISCOUNTS AND COMMISSIONS.
(3) ONE OF THE SELLING STOCKHOLDERS HAS GRANTED THE U.S. UNDERWRITERS AN
OPTION, EXERCISABLE WITHIN 30 DAYS OF THE DATE HEREOF, TO PURCHASE UP TO
AN AGGREGATE OF 900,000 ADDITIONAL SHARES OF COMMON STOCK AT THE PRICE TO
PUBLIC LESS UNDERWRITING DISCOUNTS AND COMMISSIONS FOR THE PURPOSE OF
COVERING OVER-ALLOTMENTS, IF ANY. IF THE U.S. UNDERWRITERS EXERCISE SUCH
OPTION IN FULL, THE TOTAL PRICE TO PUBLIC, UNDERWRITING DISCOUNTS AND
COMMISSIONS, PROCEEDS TO COMPANY AND PROCEEDS TO SELLING STOCKHOLDERS
WILL BE $ , $ , $ , AND $ , RESPECTIVELY. SEE
"UNDERWRITERS."
------------------------
THE SHARES ARE OFFERED, SUBJECT TO PRIOR SALE, WHEN, AS AND IF ACCEPTED BY
THE UNDERWRITERS NAMED HEREIN AND SUBJECT TO APPROVAL OF CERTAIN LEGAL MATTERS
BY KATTEN MUCHIN & ZAVIS, COUNSEL FOR THE UNDERWRITERS. IT IS EXPECTED THAT
DELIVERY OF THE SHARES WILL BE MADE ON OR ABOUT , 1996 AT THE OFFICE OF
MORGAN STANLEY & CO. INCORPORATED, NEW YORK, NEW YORK, AGAINST PAYMENT THEREFOR
IN IMMEDIATELY AVAILABLE FUNDS.
-------------------
MORGAN STANLEY & CO.
INTERNATIONAL
ALEX. BROWN & SONS
INCORPORATED
SMITH BARNEY INC.
, 1996
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following are the estimated expenses (other than the SEC registration
fee, NASD filing fee and the Nasdaq National Market application fee) of the
issuance and distribution of the securities being registered, all of which will
be paid by TeleTech Holdings, Inc. ("TeleTech").
SEC registration fee............................................ $41,637.93
NASD filing fee................................................. 12,575.00
Nasdaq National Market application fee.......................... 50,000.00
Printing expenses............................................... *
Fees and expenses of counsel.................................... *
Fees and expenses of accountants................................ *
Transfer agent and registrar fees............................... *
Blue sky fees and expenses...................................... *
Miscellaneous................................................... *
---------
Total....................................................... $ *
---------
---------
- ---------
*To be provided by amendment.
TeleTech will bear all of the foregoing expenses. In addition, TeleTech intends
to pay all expenses of registration, issuance and distribution, excluding
underwriters' discounts and commissions, with respect to the shares being sold
by the Selling Stockholders.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Under Delaware law, a corporation may indemnify any person who was or is a
party or is threatened to be made a party to an action (other than an action by
or in the right of the corporation) by reason of such person's service as a
director of officer of the corporation, or such person's service, at the
corporation's request, as a director, officer, employee or agent of another
corporation or other enterprise, against expenses (including attorneys' fees)
that are actually and reasonably incurred by such person ("Expenses"), and
judgments, fines and amounts paid in settlement that are actually and reasonably
incurred by such person, in connection with the defense or settlement of such
action; provided that such person acted in good faith and in a manner such
person reasonably believed to be in or not opposed to the corporation's best
interests and, with respect to any criminal action or proceeding, had no
reasonable cause to believe that such person's conduct was unlawful. Although
Delaware law permits a corporation to indemnify any person referred to above
against Expenses in connection with the defense or settlement of an action by or
in the right of the corporation, provided that such person acted in good faith
and in a manner such person reasonably believed to be in or not opposed to the
corporation's best interests, if such person has been judged liable to the
corporation, indemnification is only permitted to the extent that the
adjudicating court (or the court in which the action was brought) determines
that, despite the adjudication of liability, such person is entitled to
indemnity for such Expenses as the court deems proper. The determination as to
whether a person seeking indemnification has met the required standard of
conduct is to be made (1) by a majority vote of a quorum of disinterested
members of the board of directors, or (2) by independent legal counsel in a
written opinion, if such a quorum does not exist or if the disinterested
directors so direct, or (3) by the stockholders. The General Corporation Law of
Delaware also provides for mandatory indemnification of any director, officer,
employee or agent against Expenses to the extent such person has been successful
in any proceeding covered by the statute. In addition, the General Corporation
Law of Delaware provides for the general authorization of advancement of a
director's or officer's litigation expenses in lieu of requiring the
authorization of such advancement by the board of directors in specific cases,
and that indemnification and advancement of expenses provided by the statute
shall not be deemed exclusive of any other rights to which those seeking
indemnification or advancement of expenses may be entitled under any bylaw,
agreement or otherwise.
II-1
TeleTech's Restated Certificate of Incorporation and By-laws provide that
TeleTech shall indemnify its directors, officers, employees and other agents to
the fullest extent permitted by Delaware law.
TeleTech has also entered into agreements to indemnify its directors and
certain of its officers, in addition to the indemnification provided for in
TeleTech's Restated Certificate of Incorporation and By-laws. These agreements
provide, among other things, that TeleTech will indemnify its directors and
officers for all direct and indirect expenses and costs (including, without
limitation, all reasonable attorneys' fees and related disbursements, other
out-of-pocket costs and reasonable compensation for time spent by such persons
for which they are not otherwise compensated by TeleTech or any third person)
and liabilities of any type whatsoever (including, but not limited to,
judgements, fines and settlement fees) actually and reasonably incurred by such
person in connection with either the investigation, defense, settlement or
appeal of any threatened, pending or completed action, suit or other proceeding,
including any action by or in the right of the corporation, arising out of such
person's services as a director, officer, employee or other agent of TeleTech,
any subsidiary of TeleTech or any other company or enterprise to which the
person provides services at the request of TeleTech. TeleTech believes that
these provisions and agreements are necessary to attract and retain talented and
experienced directors and officers.
TeleTech maintains liability insurance for the benefit of its directors and
officers.
Under the terms of the Underwriting Agreement, the Underwriters have agreed
to indemnify, under certain conditions, TeleTech, its directors, certain of its
officers and persons who control TeleTech within the meaning of the Securities
Act of 1933, as amended (the "Securities Act") against certain liabilities.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
The shares of common stock, par value $.002 per share (the "Common Stock"),
issued in the transactions described below reflect a five-for-one split of the
Common Stock to be effected immediately prior to the closing of the Offering
contemplated by this Registration Statement.
Pursuant to the terms of, and as a condition precedent to consummation of
the transactions contemplated by, that certain Preferred Stock Purchase
Agreement dated as of December 22, 1994 by and among TeleTech Teleservices,
Inc., a Colorado corporation ("TTS"), TeleTech Telecommunications, Inc., a
California corporation ("TTC"), TeleTech, TeleTech Investors General
Partnership, an Illinois general partnership (the "Partnership"), and Essaness
Theaters Corporation, a Delaware corporation ("Essaness"), TeleTech, on January
17, 1995, issued (a) 40,700,000 shares of Common Stock to Kenneth D. Tuchman
("Tuchman") in exchange for all of the issued and outstanding shares of capital
stock of TTS and TTC then owned by Tuchman, and (b) and 1,705,000 and 155,000 of
its convertible preferred stock, par value $6.45 per share ("Preferred Stock"),
to the Partnership and Essaness, respectively, in exchange for $11,000,000 and
$1,000,000 respectively. Each share of Preferred Stock is convertible into five
shares of Common Stock, subject to adjustment under various anti-dilution
provisions.
Between January 1, 1995 and May 15, 1996, TeleTech granted to certain of its
officers, employees, consultants and independent contractors options to acquire
an aggregate of 4,968,500 shares of Common Stock. All of such options were
granted pursuant to option agreements between TeleTech and each option holder
and are subject to the terms of the TeleTech Holdings, Inc. Stock Plan ("Option
Plan").
On January 1, 1996, TeleTech acquired all of the outstanding capital stock
of Access 24 Service Corporation Pty Limited, a corporation incorporated under
the laws of New South Wales, Australia ("Access 24"). As consideration for such
capital stock, TeleTech issued 712,520 shares of Common Stock to Bevero Pty
Limited and paid $2.27 million and issued 257,220 shares of Common Stock to
Access 24 Holdings Pty Limited.
In connection with the acquisition of Access 24, TeleTech entered into an
employment agreement dated as of January 1, 1996 with Dr. John E. Kendall, as
Vice President, Strategic Planning, of TeleTech. In connection with Dr.
Kendall's execution of the agreement, TeleTech issued to Dr. Kendall 38,000
shares of Common Stock, which shares constitute restricted stock subject to the
terms of the Option Plan and vest proportionately over the three year period
commencing on the date of issuance.
II-2
Also in connection with the acquisition of Access 24, TeleTech caused Access
24 to enter into an employment agreement dated as of January 1, 1996 with Louis
T. Carroll, as Managing Director of Access 24. In connection with Mr. Carroll's
execution of the agreement, TeleTech issued to Mr. Carroll 38,000 shares of
Common Stock, which shares constitute restricted stock subject to the terms of
the Option Plan and vest proportionately over the three year period commencing
on the date of issuance.
During 1996, TeleTech has granted options to acquire 225,000 shares of
Common Stock to its former and current non-executive directors, at an exercise
price of $5.00 per share, pursuant to the TeleTech Holdings, Inc. Directors
Stock Option Plan (the "Directors Plan"). All of such options are subject to the
terms of the Directors Plan and were granted pursuant to option agreements
between TeleTech and each director who received such options.
No underwriters were involved in the transactions described above. All of
the shares and options issued in the foregoing transactions were issued or
granted by the Company in reliance upon the exemptions from registration
available under Section 4(2) of the Securities Act, including Rule 701,
Regulation D or Regulation S promulgated thereunder.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
See attached Exhibit Index.
(b) Financial Statement Schedules:
None
ITEM 17. UNDERTAKINGS.
(a) The undersigned Registrant hereby undertakes to provide to the
Underwriters at the closings specified in the Underwriting Agreement
certificates in such denominations and registered in such names as required by
the Underwriters to permit prompt delivery to each purchaser.
(b) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered hereunder, the Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
(c) The undersigned Registrant hereby undertakes that for purposes of
determining any liability under the Securities Act, (i) the information omitted
from the form of prospectus filed as part of this Registration Statement in
reliance upon Rule 430A and contained in a form of prospectus filed by the
Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act
shall be deemed to be part of this Registration Statement as of the time it was
declared effective and (ii) each post-effective amendment that contains a form
of prospectus shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
II-3
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Amendment No. 1 to the Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized, in
Denver, Colorado on June 5, 1996.
By: /s/ KENNETH D. TUCHMAN
-----------------------------------
Kenneth D. Tuchman
CHAIRMAN OF THE BOARD OF DIRECTORS,
PRESIDENT AND CHIEF EXECUTIVE
OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
AMENDMENT NO. 1 TO THE REGISTRATION STATEMENT HAS BEEN SIGNED ON JUNE 5, 1996 BY
THE FOLLOWING PERSONS IN THE CAPACITIES INDICATED:
SIGNATURE TITLE
- ------------------------------------------------------ ---------------------------------------------------------
/s/ KENNETH D. TUCHMAN
------------------------------------------- Chairman of the Board, President and Chief Executive
Kenneth D. Tuchman Officer (Principal Executive Officer)
* STEVEN B. COBURN
------------------------------------------- Chief Financial Officer (Principal Financial and
Steven B. Coburn Accounting Officer)
* ALAN SILVERMAN
------------------------------------------- Director
Alan Silverman
* RICHARD WEINGARTEN
------------------------------------------- Director
Richard Weingarten
* SAMUEL ZELL
------------------------------------------- Director
Samuel Zell
*By: /s/ KENNETH D. TUCHMAN
--------------------------------------
Kenneth D. Tuchman
As Attorney-in-Fact
II-4
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
- --------- --------------------------------------------------------------------------------------------------------
1.1* Form of Underwriting Agreement
3.1* Restated Certificate of Incorporation of TeleTech
3.2* Amended and Restated By-laws of TeleTech
4.1* Amended and Restated Investment Agreement dated as of May , 1996 among TeleTech, TeleTech Investors
General Partnership, Alan Silverman, Susan Silverman and Jack Silverman
4.2* Stock Transfer and Registration Rights Agreement dated as of January 1, 1996 among TeleTech, Access 24
Holdings Pty Limited, Bevero Pty Limited and Access 24 Service Corporation Pty Limited
4.3* Specimen Common Stock Certificate
5.1* Opinion of Neal, Gerber & Eisenberg, counsel to TeleTech
10.1** Employment Agreement dated as of January 1, 1995 between Kenneth D. Tuchman and TeleTech
10.2** Employment Agreement dated as of January 1, 1995 between Joseph D. Livingston and TeleTech (the
"Livingston Employment Agreement")
10.3* Amendment to the Livingston Employment Agreement dated May , 1996
10.4* Employment Agreement dated as of September 30, 1995 between Steven B. Coburn and TeleTech
10.5** Preferred Stock Purchase Agreement dated as of December 22, 1994 among TeleTech Teleservices, Inc.,
TeleTech Telecommunications, Inc., TeleTech, TeleTech Investors General Partnership and Essaness
Theaters Corporation
10.6* Subscription and Shareholders Agreement dated April 30, 1996 among TeleTech, Access 24 Limited and
Priplan Investments Limited
10.7** TeleTech Holdings, Inc. Stock Plan
10.8** TeleTech Holdings, Inc. Director Stock Option Plan
10.9 Sublease Agreement dated September 26, 1994 between International Business Machines Corporation and
TeleTech Telecommunications, Inc.
10.10 Agreement dated March 16, 1993 between 1700 Lincoln Limited and TeleTech Telecommunications, Inc. and
TeleTech Teleservices, Inc.
10.11** Lease dated September 21, 1995 between First Union Management, Inc. and TeleTech Teleservices and
TeleTech
10.12 Form of Client Services Agreement
10.13* Agreement for Call Center Management between United Parcel General Services Co. and TeleTech
10.14* Office Lease dated July 24, 1992 between Sam Menlo, d/b/a Menlo Enterprises and TeleTech Telecom-
munications
10.15** Business Loan Agreement dated March 29, 1996 among TeleTech Telecommunications, Inc., TeleTech
Teleservices, Inc. and TeleTech, as Borrower, and First Interstate Bank of California, as Lender;
Addendum dated March 29, 1996
10.16** Stock Purchase Agreement dated as of January 1, 1996 among Access 24 Holdings Pty Limited, Bevero Pty
Limited, Access 24 Service Corporation Pty Limited and TeleTech
10.17* Master Lease Agreement dated as of July 11, 1995 among First Interstate Bank of California, TeleTech,
TeleTech Telecommunications, Inc. and TeleTech Teleservices, Inc.
10.18 Master Equipment Lease Agreement dated as of August 16, 1995 between NationsBanc Leasing Corporation and
TeleTech
21.1* List of subsidiaries
23.1 Consent of Arthur Anderson LLP, independent public accountants
23.2 Consent of Gumbiner, Savett, Finkel, Fingleson & Rose, Inc. (formerly Gumbiner, Savett, Friedman & Rose,
Inc.), independent public accountants
23.3* Consent of Neal, Gerber & Eisenberg (included in Exhibit 5.1)
24.1** Power of Attorney (previously included on the signature page to the Registration Statement)
27** Financial Data Schedule
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*To be filed by amendment.
**Previously filed