<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): July 28, 1998
TELETECH HOLDINGS, INC.
(Exact name of Registrant as Specified in Its Charter)
Delaware 0-21055 84-1291044
- ------------------------------ ----------------------- -----------------
(State or Other Jurisdiction of (Commission file number) (I.R.S. Employer
Incorporation or Organization) Identification 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 principal executive offices)
(303) 894-4000
---------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
N/A
------------------------------------------------------------
(Former name or former address, if changed since last report)
<PAGE>
ITEM 5. OTHER EVENTS.
On June 8, 1998, the Company acquired all of the outstanding capital
stock of Digital Creators, Inc., a Colorado corporation ("Digital"), in
exchange for 1,069,000 shares of Common Stock. In connection with such
transaction, TeleTech Holdings, Inc. ("TeleTech" or the "Company") agreed to
register all of the shares of Common Stock issued to the former stockholders
of Digital to enable the resale of such shares without restriction.
On June 17, 1998, the Company acquired EDM Electronic Direct Marketing
Ltd., a corporation incorporated under the laws of the Province of Ontario
("EDM"), pursuant to a recapitalization of the capital stock of EDM. In
connection with such recapitalization, TeleTech (i) created a series of
preferred stock consisting of one share of Series A Preferred Stock, par
value $.01 per share, of TeleTech and (ii) obligated itself to issue an
aggregate of 1,836,493 shares of Common Stock upon the exchange of
outstanding exchangeable shares of EDM by the holders thereof. TeleTech also
agreed to register all of the shares of Common Stock it has issued or will
issue upon exchange of the outstanding exchangeable shares of EDM to enable
the resale of such shares of Common Stock without restriction.
The Company accounted for its acquisitions of both Digital and EDM as
poolings of interests. Accordingly, this Form 8-K is being filed, on a
voluntary basis, to provide certain historical financial information that has
been restated to give effect to such acquisitions. Upon filing, the
supplemental consolidated financial statements contained herein will become
the historical consolidated financial statements of the Company after
financial statements are issued covering the dates of consummation of the
Digital and EDM acquisitions.
<PAGE>
TABLE OF CONTENTS:
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Arthur Andersen LLP . . . . . . . . . . . . . . . . . . . . . 3
Supplemental Consolidated Balance Sheets as of December 31, 1996 and
December 31, 1997. . . . . . . . . . . . . . . . . . . . . . . . . 4
Supplemental Consolidated Statements of Income for the years
ended December 31, 1995, 1996 and 1997 . . . . . . . . . . . . . . 6
Supplemental Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1995, 1996 and 1997 . . . . . . . . . . . 7
Supplemental Consolidated Statements of Cash Flows for the years ended
December 31, 1995, 1996 and 1997 . . . . . . . . . . . . . . . . . 8
Notes to Supplemental Consolidated Financial Statements . . . . . . . . 10
Supplemental Condensed Consolidated Balance Sheets as of
December 31, 1997 and March 31, 1998, unaudited. . . . . . . . . . 27
Supplemental Condensed Consolidated Statements of Income for the
three-month periods ended March 31, 1997 and March 31, 1998,
unaudited. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Supplemental Condensed Consolidated Statement of Cash Flows for the
three-month periods ended March 31, 1997 and March 31, 1998,
unaudited. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Notes to the Unaudited Supplemental Condensed Consolidated Financial
Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
</TABLE>
-2-
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To TeleTech Holdings, Inc.:
We have audited the accompanying supplemental consolidated balance
sheets of TELETECH HOLDINGS, INC. (a Delaware corporation) and subsidiaries
as of December 31, 1996 and 1997, and the related supplemental consolidated
statements of income, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1997. The supplemental
consolidated statements give retroactive effect to the mergers with Digital
Creators, Inc. on June 8, 1998 and with EDM Electronic Marketing Ltd. on June
17, 1998, which have been accounted for as pooling of interests, as described
in Note 17. These supplemental financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on
these supplemental 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 supplemental consolidated financial statements
referred to above present fairly, in all material respects, the consolidated
financial position of TeleTech Holdings, Inc. and subsidiaries as of December
31, 1996 and 1997, and the consolidated results of their operations and their
cash flows for each of the three years in the period ended December 31, 1997,
after giving retroactive effect to the mergers with Digital Creators, Inc.
and EDM Electronic Marketing Ltd., as described in Note 17, in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Denver, Colorado,
February 6, 1998 (except for the matters discussed in Note 17, as
to which the dates are February 17, 1998, June 8, 1998 and June 17, 1998.)
3
<PAGE>
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1997
---------- ----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................................................... $ 5,564 $ 7,338
Short-term investments.................................................................. 72,512 69,633
Accounts receivable, net of allowance for doubtful accounts of $1,462 and $2,327,
respectively.......................................................................... 32,897 43,664
Prepaids and other assets............................................................... 4,183 1,220
Deferred tax asset...................................................................... 1,128 2,902
---------- ----------
Total current assets.............................................................. 116,284 124,757
---------- ----------
PROPERTY AND EQUIPMENT, net of accumulated depreciation of $11,756 and $21,812,
respectively............................................................................. 24,859 53,738
---------- ----------
OTHER ASSETS:
Deferred contract costs, net of amortization of $1,658 and $2,361, respectively......... 703 --
Long-term accounts receivable........................................................... -- 4,274
Goodwill, net of amortization of $238 and $587, respectively............................ 3,257 7,295
Investment in affiliated company accounted for under the equity method.................. 679 981
Other assets............................................................................ 1,229 1,322
---------- ----------
Total assets...................................................................... $ 147,011 $ 192,367
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of these supplemental balance
sheets.
4
<PAGE>
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS (CONTINUED)
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1997
---------- ----------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt....................................................... $ 5,057 $ 5,910
Bank overdraft.......................................................................... 362 1,094
Accounts payable........................................................................ 6,379 8,086
Accrued employee compensation........................................................... 8,534 12,244
Accrued income taxes.................................................................... 3,194 2,507
Other accrued expenses.................................................................. 3,460 11,694
Customer advances, deposits and deferred income......................................... 787 1,472
---------- ----------
Total current liabilities......................................................... 27,773 43,007
DEFERRED TAX LIABILITIES.................................................................. 564 1,217
LONG-TERM DEBT, net of current portion:
Capital lease obligations............................................................... 9,854 9,432
Other debt.............................................................................. 290 459
---------- ----------
Total liabilities................................................................. 38,481 54,115
---------- ----------
COMMITMENTS AND CONTINGENCIES (Note 8)
STOCKHOLDERS' EQUITY:
Common stock; $.01 par value; 150,000,000 shares authorized; 57,155,969 and 59,262,397
shares, respectively, issued; and 57,057,159 and 59,163,587 shares, respectively,
outstanding........................................................................... 571 592
Additional paid-in capital.............................................................. 94,059 104,016
Accumulated other comprehensive income.................................................. 98 (922)
Unearned compensation-restricted stock................................................ (254) (127)
Treasury stock, 98,810 shares, at cost.................................................. (988) (988)
Retained earnings....................................................................... 15,044 35,681
---------- ----------
Total stockholders' equity........................................................ 108,530 138,252
---------- ----------
Total liabilities and stockholders' equity........................................ $ 147,011 $ 192,367
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of these supplemental balance
sheets.
5
<PAGE>
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1995 1996 1997
--------- ---------- ----------
<S> <C> <C> <C>
REVENUES....................................................................... $ 54,933 $ 171,265 $ 279,057
OPERATING EXPENSES:
Costs of services............................................................ 30,941 104,142 178,702
Selling, general and administrative expenses................................. 19,230 43,504 67,208
--------- ---------- ----------
Total operating expenses............................................... 50,171 147,646 245,910
--------- ---------- ----------
INCOME FROM OPERATIONS......................................................... 4,762 23,619 33,147
OTHER INCOME (EXPENSE):
Interest expense............................................................. (496) (1,160) (1,166)
Interest income.............................................................. 594 1,406 3,399
Equity in income (losses) of affiliate....................................... -- (70) 302
Other (Note 14).............................................................. 2,370 (158) (225)
--------- ---------- ----------
2,468 18 2,310
--------- ---------- ----------
INCOME BEFORE INCOME TAXES..................................................... 7,230 23,637 35,457
Provision for Income Taxes................................................... 2,992 9,773 14,123
--------- ---------- ----------
NET INCOME..................................................................... $ 4,238 $ 13,864 $ 21,334
--------- ---------- ----------
--------- ---------- ----------
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic........................................................................ 52,624 54,522 58,435
--------- ---------- ----------
--------- ---------- ----------
Diluted...................................................................... 55,882 58,152 61,646
--------- ---------- ----------
--------- ---------- ----------
NET INCOME PER SHARE
Basic........................................................................ $ .08 $ .25 $ .37
--------- ---------- ----------
--------- ---------- ----------
Diluted...................................................................... $ .08 $ .24 $ .35
--------- ---------- ----------
--------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these supplemental statements.
6
<PAGE>
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
MANDATORILY REDEEMABLE,
CONVERTIBLE PREFERRED
STOCK TREASURY STOCK COMMON STOCK COMMON STOCK OF
------------------------ -------------------------- ------------------------ COMBINED
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT ENTITIES
----------- ----------- ------ ----------- ----------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCES, January 1, 1995.... -- $ -- -- $ -- -- $ -- $ 25
Issuance of Preferred
Stock.................... 1,860 12,000
Reclassify retained
earnings to additional
paid-in capital upon
termination of S
corporation election.....
Stock exchange............. 40,700 407 (25)
Distribution to
stockholder..............
Net income.................
Comprehensive income.......
Dividends accrued on
Preferred Stock.......... 867
----------- ----------- ------ ----------- ----------- ----------- ---------------
BALANCES, December 31,
1995....................... 1,860 12,867 -- -- 40,700 407 --
Purchase of Access 24...... 970 10
Translation adjustments....
Dividends on Preferred
Stock.................... 422
Issuance of restricted
stock.................... 76 1
Compensation expense on
restricted stock.........
Conversion of Preferred
Stock.................... (1,860) (13,289) 9,300 93
Issuance of common stock... 5,944 59
Acquisition of treasury
stock.................... 99 (988)
Exercise of stock
options.................. 166 1
Tax benefit of stock option
exercises................
Net income.................
Comprehensive income.......
Distribution to
stockholder..............
----------- ----------- ------ ----------- ----------- ----------- ---------------
BALANCES, December 31,
1996....................... -- -- 99 (988) 57,156 571 --
Employee stock purchase
plan..................... 28
Acquisition of TMI......... 100 1
Translation adjustments....
Compensation expense on
restricted stock.........
Exercise of stock
options.................. 470 5
Tax benefit of stock option
exercises................
Issuance of common stock... 1,508 15
Net income.................
Comprehensive income.......
Distribution to
stockholder..............
----------- ----------- ------ ----------- ----------- ----------- ---------------
BALANCES, December 31,
1997....................... -- $ -- 99 $ (988) 59,262 $ 592 $ --
----------- ----------- ------ ----------- ----------- ----------- ---------------
----------- ----------- ------ ----------- ----------- ----------- ---------------
<CAPTION>
ADDITIONAL ACCUMULATED OTHER UNEARNED
PAID-IN COMPREHENSIVE COMPENSATION RETAINED COMPREHENSIVE TOTAL STOCK-
CAPITAL INCOME RESTRICTED STOCK EARNINGS INCOME HOLDERS' EQUITY
----------- ----------------- ----------------- ----------- ----------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
BALANCES, January 1, 1995.... $ -- $ -- $ -- $ 2,367 $ 2,392
Issuance of Preferred
Stock....................
Reclassify retained
earnings to additional
paid-in capital upon
termination of S
corporation election..... 2,172 (2,172)
Stock exchange............. (325) (57)
Distribution to
stockholder.............. (1,695) (1,695)
Net income................. 4,238 4,238 4,238
------
Comprehensive income....... 4,238
------
------
Dividends accrued on
Preferred Stock.......... (867) (867)
----------- ------- ----- ----------- ---------------
BALANCES, December 31,
1995....................... 1,847 -- -- 1,814 4,068
Purchase of Access 24...... 4,841 4,851
Translation adjustments.... 98 98 98
Dividends on Preferred
Stock.................... (422) (422)
Issuance of restricted
stock.................... 379 (380)
Compensation expense on
restricted stock......... 126 126
Conversion of Preferred
Stock.................... 13,196 13,289
Issuance of common stock... 71,939 71,998
Acquisition of treasury
stock.................... (988)
Exercise of stock
options.................. 249 250
Tax benefit of stock option
exercises................ 1,608 1,608
Net income................. 13,864 13,864 13,864
------
Comprehensive income....... 13,962
------
------
Distribution to
stockholder.............. (212) (212)
----------- ------- ----- ----------- ---------------
BALANCES, December 31,
1996....................... 94,059 98 (254) 15,044 108,530
Employee stock purchase
plan..................... 440 440
Acquisition of TMI......... 1,797 1,798
Translation adjustments.... (1,020) (1,020) (1,020)
Compensation expense on
restricted stock......... 127 127
Exercise of stock
options.................. 1,912 1,917
Tax benefit of stock option
exercises................ 3,160 3,160
Issuance of common stock... 2,648 2,663
Net income................. 21,334 21,334 21,334
------
Comprehensive income....... 20,314
------
------
Distribution to
stockholder.............. (697) (697)
----------- ------- ----- ----------- ---------------
BALANCES, December 31,
1997....................... $ 104,016 $ (922) $ (127) $ 35,681 $ 138,252
----------- ------- ----- ----------- ---------------
----------- ------- ----- ----------- ---------------
</TABLE>
The accompanying notes are an integral part of these supplemental statements.
7
<PAGE>
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................................. $ 4,238 $ 13,864 $ 21,334
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization............................................. 2,227 7,242 11,331
Allowance for doubtful accounts........................................... 616 673 865
Deferred income taxes..................................................... 21 (585) (1,169)
Equity in (income) losses of affiliate.................................... -- 70 (302)
Deferred compensation expense............................................. -- 126 127
Changes in assets and liabilities:
Accounts receivable..................................................... (6,298) (21,702) (15,421)
Prepaids and other assets............................................... (140) (1,170) 175
Deferred contract costs................................................. (346) (2,015) --
Accounts payable and accrued expenses................................... 3,114 11,500 12,012
Customer advances, deposits and deferred income......................... 150 7 455
---------- ---------- ----------
Net cash provided by operating activities............................... 3,582 8,010 29,407
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment.......................................... (1,850) (8,212) (34,803)
Purchase of TMI, net of cash acquired....................................... -- -- (2,440)
Purchase of Access 24, net of cash acquired................................. -- (2,461) --
Proceeds from sale of interest in Access 24 UK Limited...................... -- 3,905 --
Temporary deposit on new call center........................................ -- (3,000) 3,000
Changes in accounts payable and accrued liabilities related to investing
activities................................................................ -- 1,196 (190)
Decrease (increase) in short-term investments............................... (10,361) (62,151) 2,841
---------- ---------- ----------
Net cash used in investing activities..................................... (12,211) (70,723) (31,592)
---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these supplemental statements.
8
<PAGE>
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(AMOUNTS IN THOUSANDS) (CONTINUED)
<TABLE>
<CAPTION>
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in bank overdraft...................................... $ 867 $ (1,065) $ 745
Net increase (decrease) in short-term borrowings............................... 361 (1,000) --
Payments on long-term debt..................................................... (625) (936) (216)
Proceeds from long-term debt borrowings........................................ -- 42 593
Payments under capital lease obligations....................................... (971) (1,530) (4,933)
Proceeds from common stock issuances........................................... 71,998 3,240
Proceeds from exercise of stock options........................................ -- 250 1,917
Tax benefit from stock option exercises........................................ -- 1,608 3,160
Acquisition of treasury stock.................................................. -- (988) --
Payments under subordinated notes payable to stockholder....................... (1,104) -- 29
Distribution to stockholder.................................................... (2,034) (212) (678)
Issuance of Preferred Stock.................................................... 12,000 -- --
--------- --------- ---------
Net cash provided by financing activities........................................ 8,494 68,167 3,857
--------- --------- ---------
Effect of exchange rate changes on cash.......................................... -- 48 102
--------- --------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS........................................ (135) 5,502 1,774
CASH AND CASH EQUIVALENTS, beginning of period................................... 197 62 5,564
--------- --------- ---------
CASH AND CASH EQUIVALENTS, end of period......................................... $ 62 $ 5,564 $ 7,338
--------- --------- ---------
--------- --------- ---------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest......................................................... $ 502 $ 1,099 $ 1,296
--------- --------- ---------
--------- --------- ---------
Cash paid for income taxes..................................................... $ 2,424 $ 6,808 $ 12,189
--------- --------- ---------
--------- --------- ---------
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Assets acquired through capital leases......................................... $ 4,106 $ 10,483 $ 5,229
--------- --------- ---------
--------- --------- ---------
Stock issued in purchase of Access 24.......................................... $ -- $ 4,851 $ --
--------- --------- ---------
--------- --------- ---------
Stock issued in purchase of TMI................................................ $ -- $ -- $ 1,798
--------- --------- ---------
--------- --------- ---------
Restricted stock issued under employment agreements............................ $ -- $ 380 $ --
--------- --------- ---------
--------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these supplemental statements.
9
<PAGE>
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
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, New Zealand, Canada
and Mexico. 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 supplemental consolidated financial statements are composed of the
accounts of THI and its wholly owned subsidiaries. All intercompany balances and
transactions have been eliminated in consolidation.
As more fully discussed in Note 17, during June 1998, the Company entered
into business combinations with Digital Creators, Inc. ("Digital") and EDM
Electronic Marketing Ltd. ("EDM"). The business combinations have been accounted
for as pooling of interests and the historical consolidated financial statements
of the Company for all years prior to the business combination have been
restated in the accompanying supplemental consolidated financial statements to
include the financial position, results of operations and cash flows of Digital
and EDM. The supplemental financial statements will become the historical
financial statements of the Company upon issuance of financial statements for a
subsequent period that includes the dates of the acquisitions.
The supplemental consolidated financial statements of the Company include
reclassifications made to conform the financial statement presentation of
Digital and EDM to that of the Company.
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 is not included in determining net
income, but is accumulated as a separate component of stockholders' equity. The
net effect of translation gains on the Company's Mexican subsidiary is included
in determining net income, as Mexico is considered a highly inflationary
economy. 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.
10
<PAGE>
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 (CONTINUED)
Depreciation is computed on the straight-line method based on the estimated
useful lives of the assets, as follows:
<TABLE>
<S> <C>
Computer equipment and software................................... 4-5 years
Telephone equipment............................................... 5-7 years
Furniture and fixtures............................................ 5-7 years
Leasehold improvements............................................ 5-7 years
Vehicles.......................................................... 5 years
</TABLE>
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 upon termination of the lease).
REVENUE RECOGNITION
The Company recognizes revenues at the time services are performed. The
Company has certain contracts that 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 were not
material for any period presented.
DEFERRED CONTRACT COSTS
The Company previously deferred certain incremental direct costs incurred in
connection with preparing to provide services under certain long-term facilities
management agreements. Costs that were deferred included 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 were entered into until the beginning of providing services. Such
costs were amortized over 12 months. Deferred contract costs at December 31,
1995 and 1996, include costs incurred in preparing to provide services under a
five-year agreement entered into during October 1995, under which the Company
began providing services during April 1996. For the years ended December 31,
1996 and 1997, the Company recorded amortization expense of $1,658,000 and
$703,000, respectively.
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 to 25 years. Amortization of goodwill for the
years ended December 31, 1996 and 1997, was $238,000 and $349,000, respectively.
There was no amortization expense in 1995.
Subsequent to an acquisition, the Company 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 Company 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.
11
<PAGE>
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 (CONTINUED)
INCOME TAXES
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes",
which requires recognition of deferred tax assets and liabilities for the
expected future income tax consequences of transactions that have been included
in the financial statements or tax returns. Under this method, deferred tax
assets and liabilities are determined based on the difference between the
financial statement and tax bases of assets and liabilities using enacted tax
rates in effect for the year in which the differences are expected to reverse.
Net deferred tax assets then may be reduced by a valuation allowance for amounts
that do not satisfy the realization criteria of SFAS 109.
EARNINGS PER SHARE
Earnings per share are computed based upon the weighted average number of
common shares and common share equivalents outstanding. On May 14, 1996, the
Company approved a five-for-one share common stock split, which was effective
on July 31, 1996. Common stock amounts, equivalent share amounts and per
share amounts have been adjusted retroactively to give effect to the stock
split.
In February 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS 128, "Earnings Per Share." Under SFAS 128, primary earnings per share
previously required under Accounting Principles Board No. 15 is replaced with
basic earnings per share. Basic earnings per share is computed by dividing
reported earnings available to common stockholders by weighted average shares
outstanding. No dilution for any potentially dilutive securities is included.
Fully diluted earnings per share as defined under Accounting Principles Board
No. 15 is called diluted earnings per share under SFAS 128. Diluted earnings per
share reflects the potential dilution assuming the issuance of common shares for
all dilutive potential common shares outstanding during the period. For purposes
of the calculation of basic earnings per share for 1995 and 1996, net income was
reduced by $867,000 and $422,000, respectively, representing dividends on
Preferred Stock, to arrive at net income available for common shareholders. The
difference between diluted and basic shares outstanding relates to outstanding
stock options.
INCREASE IN AUTHORIZED SHARES
On May 14, 1996, the board of directors authorized an amendment to the
Company's Certificate of Incorporation that was effective immediately prior to
the closing of the initial public offering of the Company's common stock. The
amendment increased the authorized shares of common stock to 150.0 million
shares and also authorized the Company to issue up to 10.0 million 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. For the years ended December 31,
1996 and 1997, the Company recognized compensation expense of $126,000 and
$127,000, respectively, related to these awards.
12
<PAGE>
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 (CONTINUED)
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 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.
LONG-LIVED ASSETS
Long-lived assets and certain identifiable intangibles to be held and used
by the Company are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable.
EFFECTS OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS 130, "Reporting Comprehensive Income,"
which establishes standards for reporting and displaying comprehensive income
and its components (revenues, expenses, gains and losses) in a full set of
general purpose financial statements. SFAS 130 requires that all items that are
required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. SFAS 130 does not require a
specific format for that financial statement but requires that the enterprise
display an amount representing total comprehensive income for the period in that
financial statement. The Company has adopted SFAS 130 in the accompanying
supplemental consolidated financial statements.
In June 1997, the FASB issued SFAS 131, "Disclosures About Segments of an
Enterprise and Related Information," which establishes standards for the way
that public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. SFAS 131 requires
that a public business enterprise report financial and descriptive information
about its reportable operating segments. Operating segments are components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance. Generally, financial
information is required to be reported on the basis that it is used internally
for evaluating segment performance and deciding how to allocate resources to
segments. SFAS 131 is effective for financial statements for periods beginning
after December 15, 1997. Although the adoption of SFAS 131 will require
additional disclosure in the Company's financial statements, the Company has not
yet determined those additional disclosures.
13
<PAGE>
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 (CONTINUED)
(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
and transportation industries. The revenues from such customers as a percentage
of total revenues for each of the three years ended December 31, 1997, are as
follows:
<TABLE>
<CAPTION>
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Customer A............................................................. 28% 26% 18%
Customer B............................................................. 17% 1% --
Customer C............................................................. 3% 14% 2%
Customer D............................................................. -- 27% 23%
Customer E............................................................. -- -- 15%
--- --- ---
48% 68% 58%
--- --- ---
--- --- ---
</TABLE>
At December 31, 1997, accounts receivable from Customers A, C, D and E were
$6.2 million, $4.3 million, $4.3 million and $8.4 million, respectively. At
December 31, 1996, accounts receivable from Customers A, C and D were $8.9
million, $3.1 million and $6.3 million, respectively. There were no other
customers with receivable balances in excess of 10% of consolidated accounts
receivable.
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, 1997.
GEOGRAPHIC AREA INFORMATION
Prior to 1996, the Company operated exclusively within the United States.
Geographic area information as of and for the years ended December 31, 1996 and
1997, is as follows (in thousands):
<TABLE>
<CAPTION>
UNITED ASIA
STATES PACIFIC CANADA OTHER TOTAL
------------ ----------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
DECEMBER 31, 1997:
Revenues......................... $ 228,743 $ 29,790 $ 14,497 $ 6,027 $ 279,057
Income (loss) before income
taxes........................... 31,325 3,647 1,444 (959) 35,457
Assets........................... 150,138 18,564 9,623 14,042 192,367
DECEMBER 31, 1996:
Revenues......................... $ 151,596 $ 13,264 $ 5,761 $ 644 $ 171,265
Income (loss) before income
taxes........................... 22,163 1,750 292 (568) 23,637
Assets........................... 131,027 10,326 3,633 2,025 147,011
</TABLE>
14
<PAGE>
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 (CONTINUED)
(3) PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31, 1996 and
1997 (in thousands):
<TABLE>
<CAPTION>
1996 1997
---------- ----------
<S> <C> <C>
Computer equipment and software....................................... $ 21,177 $ 34,213
Telephone equipment................................................... 2,228 6,530
Furniture and fixtures................................................ 7,683 17,014
Leasehold improvements................................................ 5,113 17,456
Other................................................................. 414 337
---------- ----------
36,615 75,550
Less accumulated depreciation......................................... (11,756) (21,812)
---------- ----------
$ 24,859 $ 53,738
---------- ----------
---------- ----------
</TABLE>
Included in the cost of property and equipment is the following equipment
obtained through capitalized leases as of December 31, 1996 and 1997 (in
thousands):
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
Computer equipment and software......................................... $ 12,168 $ 15,545
Telephone equipment..................................................... 942 1,078
Furniture and fixtures.................................................. 5,596 7,471
--------- ---------
18,706 24,094
Less accumulated depreciation........................................... (4,441) (9,060)
--------- ---------
$ 14,265 $ 15,034
--------- ---------
--------- ---------
</TABLE>
Depreciation expense was $2.2 million, $5.4 million and $10.3 million for
the years ended December 31, 1995, 1996, and 1997, respectively. Depreciation
expense related to leased equipment under capital leases was $985,000, $3.2
million and $4.7 million for the years ended December 31, 1995, 1996, and 1997,
respectively.
(4) CAPITAL LEASE OBLIGATIONS
On July 11, 1995, the Company negotiated a master lease agreement with a
bank. In May 1996, the master lease was amended to increase the lease line to
$15.0 million. The terms 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.
The Company has financed property and equipment under non-cancelable 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 8.3% at December 31, 1997. Interest is charged to
expense at a level rate applied to declining principal over the period of the
obligation.
15
<PAGE>
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 (CONTINUED)
(4) CAPITAL LEASE OBLIGATIONS (CONTINUED)
The future minimum lease payments under capitalized lease obligations as of
December 31, 1997, are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
- ------------------------
<S> <C>
1998............................................................................... $ 7,177
1999............................................................................... 6,045
2000............................................................................... 2,786
2001............................................................................... 229
2002............................................................................... 133
---------
16,370
Less amount representing interest.................................................. (1,383)
---------
14,987
Less current portion............................................................... (5,555)
---------
$ 9,432
---------
---------
</TABLE>
Interest expense on the outstanding obligations under such leases was
$313,000, $892,000 and $1,106,000 for the years ended December 31, 1995, 1996,
and 1997, respectively.
(5) LONG-TERM DEBT
As of December 31, 1996 and 1997, long-term debt consisted of the following
notes (in thousands):
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
Note payable, interest at 8% per annum, principal and interest payable
monthly, maturing May 2000.................................................. $ 129 $ 95
Note payable, interest at 5% per annum, principal and interest payable
quarterly, maturing December 1999........................................... -- 422
Note payable, interest at 5% per annum, principal and interest payable
quarterly, maturing December 2000........................................... 242 174
Note payable, interest at 8.78% per annum, principal and interest payable
quarterly, maturing December 2002........................................... -- 97
Other notes payable.......................................................... 67 26
--------- ---------
438 814
Less current portion....................................................... (148) (355)
--------- ---------
$ 290 $ 459
--------- ---------
--------- ---------
</TABLE>
16
<PAGE>
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 (CONTINUED)
(5) LONG-TERM DEBT (CONTINUED)
Annual maturities of the long-term debt described above are as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
- -----------------------
<S> <C>
1998.................................................................................. $ 355
1999.................................................................................. 374
2000.................................................................................. 44
2001.................................................................................. 22
2002.................................................................................. 19
---------
$ 814
---------
---------
</TABLE>
(6) REVOLVING LINE OF CREDIT
The Company has an unsecured revolving line of credit agreement with a
commercial bank under which it may borrow up to $15.0 million, which expires in
May 1998. Interest is payable at various interest rates. The borrowings can be
made at (i) the bank's prime rate; (ii) a certificate of deposit rate plus 125
basis points for periods of 7 to 90 days with minimum advances of $500,000 with
$100,000 increments; (iii) LIBOR plus 125 basis points for borrowing periods of
1, 2, 3 or 6 months; or (iv) agreed-upon rates. At December 31, 1996 and 1997,
there were no amounts outstanding under this facility. The Company is required
to comply with certain minimum financial ratios under covenants in connection
with the borrowings described above.
The Company has available an operating loan of $2,000,000 (CDN$) which is
due on demand and bears interest at the bank's prime rate which was 6.5% at
December 31, 1997 (1996 - 4.75%). The operating loan is collateralized by a
general security agreement, a partial assignment of accounts receivable
insurance in the amount of $500,000 (CDN$), partial assignment of life insurance
on the majority shareholder in the amount of $400,000 (CDN$) and an assignment
of fire insurance. As of December 31, 1996 and 1997, there was $362,000 and
$1,094,000, respectively, outstanding under this operating loan.
(7) INCOME TAXES
The components of income before income taxes are as follows (in thousands):
<TABLE>
<CAPTION>
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Domestic...................................................... $ 7,085 $ 22,163 $ 31,325
Foreign....................................................... 145 1,474 4,132
--------- --------- ---------
Total................................................. $ 7,230 $ 23,637 $ 35,457
--------- --------- ---------
--------- --------- ---------
</TABLE>
17
<PAGE>
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(7) INCOME TAXES (CONTINUED)
The components of the provision for income taxes are as follows (in
thousands):
<TABLE>
<CAPTION>
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Current provision:
Federal..................................................... $ 2,473 $ 7,653 $ 11,116
State....................................................... 434 1,784 2,490
Foreign..................................................... 63 921 1,686
--------- --------- ---------
2,970 10,358 15,292
--------- --------- ---------
Deferred provision:
Federal..................................................... (154) (474) (1,036)
State....................................................... (37) (111) (190)
Foreign..................................................... -- -- 57
--------- --------- ---------
(191) (585) (1,169)
Change in tax status from S corporation to C corporation...... 213 -- --
--------- --------- ---------
$ 2,992 $ 9,773 $ 14,123
--------- --------- ---------
--------- --------- ---------
</TABLE>
The following reconciles the Company's effective tax rate to the federal
statutory rate for the years ended December 31, 1995, 1996, and 1997 (in
thousands):
<TABLE>
<CAPTION>
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Income tax expense per federal statutory rate................. $ 2,458 $ 8,273 $ 12,410
State income taxes, net of federal deduction.................. 262 1,144 1,491
Effect of change in tax status from S corporation to C
corporation.................................................. 213 -- --
Permanent differences......................................... 46 150 (100)
Foreign income taxed at higher rate........................... 13 206 322
--------- --------- ---------
$ 2,992 $ 9,773 $ 14,123
--------- --------- ---------
--------- --------- ---------
</TABLE>
The Company's deferred income tax assets and liabilities are summarized
as follows (in thousands):
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts......................................... $ 540 $ 876
Vacation accrual........................................................ 588 1,062
Insurance reserves...................................................... -- 475
Other................................................................... -- 489
--------- ---------
1,128 2,902
Deferred tax liabilities:
Excess depreciation for tax............................................. (564) (1,217)
--------- ---------
Net deferred income tax asset............................................. $ 564 $ 1,685
--------- ---------
--------- ---------
</TABLE>
A valuation allowance has not been recorded as the Company expects that
all deferred tax assets will be realized in the future.
18
<PAGE>
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(8) COMMITMENTS AND CONTINGENCIES
LEASES. The Company has various operating leases for equipment, call center
facilities and office space. Lease expense under operating leases was
approximately $2,100,000, $4,327,000 and $8,163,000 for the years ended December
31, 1995, 1996, and 1997, respectively.
The future minimum rental payments required under non-cancelable operating
leases as of December 31, 1997, are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
- -----------------------
<S> <C>
1998............................................................................... $ 9,599
1999............................................................................... 9,423
2000............................................................................... 7,061
2001............................................................................... 5,903
2002............................................................................... 4,271
Thereafter......................................................................... 14,929
---------
$ 51,186
---------
---------
</TABLE>
The Company has an outstanding irrevocable standby letter of credit of
$375,000 at December 31, 1997, which secures commitments under a facilities
lease and expires in February 1999.
AMOUNTS HELD IN TRUST. As part of its services to clients, the Company
administers bank accounts in trust for the benefit of the clients. Amounts held
in trust at December 31, 1997 and 1996 totaled $1,452,185 (CDN$) and $612,295
(CDN$), respectively. No amounts have been recognized in these financial
statements as the Company holds no claim to these funds.
LEGAL PROCEEDINGS. In November 1996, the Company received notice that
CompuServe Incorporated ("CompuServe") was withdrawing its WOW! Internet service
from the marketplace and that effective January 31, 1997, it would terminate all
the programs provided to CompuServe by the Company. Pursuant to the terms of its
agreement with the Company, CompuServe was entitled to terminate the agreement
for reasonable business purposes upon 120 days advance notice and by payment of
a termination fee calculated in accordance with the agreement. In December 1996,
the Company filed suit against CompuServe to enforce these termination
provisions and collect the termination fee. CompuServe filed a counterclaim in
December 1996 alleging that the Company breached other provisions of this
agreement and seeking unspecified monetary damages. In March 1997, CompuServe
asserted a right to offset, against the amount that may be awarded to CompuServe
on its counterclaim, if any, certain accounts receivable it owes to the Company
for services rendered. These accounts receivable total $4.3 million as of
December 31, 1997.
In mid-1997, CompuServe announced it had agreed to sell its worldwide
on-line services business to America Online, Inc. and its network services
business to a wholly owned subsidiary of WorldCom, Inc. The Company and
CompuServe agreed to stay their litigation pending the sale, which was completed
in January 1998. The litigation has now recommenced. Although the Company
believes that this litigation will not have a material adverse effect on the
Company's financial condition or results of operations, the ultimate outcome is
still uncertain. Because it is uncertain whether this litigation will be
concluded in 1998, the Company has reclassified the $4.3 million receivable as a
long-term asset in the December 31, 1997 balance sheet.
19
<PAGE>
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(9) COMMON STOCK OFFERINGS
In August 1996, the Company completed an initial public offering of 4.0
million shares of common stock at a price of $14.50 per share. Selling
shareholders sold an additional 3.2 million shares of common stock in the
Company's initial public offering. Immediately prior to the offering, the
Company acquired 98,810 shares of treasury stock at a price of $10 per share.
In November 1996, the Company completed a secondary offering of 600,000
shares of common stock at a price of $31 per share. Selling shareholders sold an
additional 4.0 million shares of common stock in connection with the secondary
offering of which 155,600 were shares sold upon the exercise of stock options.
(10) EMPLOYEE BENEFIT PLAN
The Company has a 401(k) profit-sharing plan that covers all employees who
have completed one year of service, as defined, and are 21 or older.
Participants may defer up to 15% of their gross pay up to a maximum limit
determined by law. Participants are always 100% vested in their contributions.
Participants are also eligible for a matching contribution by the Company of 50%
of the first 5% of compensation a participant contributes to the plan.
Participants vest in all matching contributions over a four-year period.
(11) MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK
In January 1995, the Company issued 1.86 million shares of convertible
Preferred Stock at $6.45 per share for gross proceeds of $12.0 million. The 1.86
million shares of Preferred Stock initially were convertible, at the option of
the preferred stockholders, into 9.3 million shares of common stock. In the
event that the holders of Preferred Stock had not exercised their conversion
rights prior to May 18, 2002, they would have been entitled to either convert
their Preferred Stock to shares of common stock or redeem their shares for cash.
Such conversion was to have provided an internal rate of return to the preferred
stockholders of 7% per annum. Accordingly, dividends were accrued cumulatively
at the rate of 0.5833% per month. In connection with and immediately prior to
the Company's initial public offering in July 1996, all 1.86 million outstanding
shares of Preferred Stock together with all accrued dividends thereon were
converted into 9.3 million shares of common stock.
(12) STOCK COMPENSATION 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 7.0 million shares of common stock
and permits the award of incentive stock options, non-qualified options, stock
appreciation rights and restricted stock. Outstanding options vest over a three-
or five-year period and are exercisable for 10 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 10 years from the date of
grant unless a participant is terminated for cause or one year after a
participant's death. The Director Plan had options to purchase 262,500 and
337,500 shares outstanding at December 31, 1996 and 1997, respectively.
In July 1996, the Company adopted an employee stock purchase plan (the
"ESPP"). Pursuant to the ESPP, an aggregate of 200,000 shares of common stock of
the Company will be sold in periodic offerings to
20
<PAGE>
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(12) STOCK COMPENSATION PLANS (CONTINUED)
eligible employees of the Company. The price per share purchased in any offering
period is equal to the lesser of 90% of the fair market value of the common
stock on the first day of the offering period or on the purchase date. The
offering periods have a term of six months. Contributions to the plan for the
years ended December 31, 1996 and 1997, were $166,000 and $419,000,
respectively.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 123 (SFAS 123)
The Financial Accounting Standards Board's SFAS 123, "Accounting for Stock
Based Compensation," defines a fair value based method of accounting for an
employee stock option, employee stock purchase plan 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 SFAS 123
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 using the Black-Scholes option
pricing model as prescribed by SFAS 123 and the following weighted average
assumptions used for grants:
<TABLE>
<CAPTION>
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Risk-free interest rate.................................. 6.3% 6.3% 5.4%
Expected dividend yield.................................. 0% 0% 0%
Expected lives........................................... 4.1 years 4.1 years 3.2 years
Expected volatility...................................... 59% 59% 70%
</TABLE>
The pro forma compensation expense was computed to be the following
approximate amounts:
<TABLE>
<CAPTION>
<S> <C>
Year ended December 31, 1995.................................... $341,000
Year ended December 31, 1996.................................... $3,922,000
Year ended December 31, 1997.................................... $4,121,000
</TABLE>
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:
NET INCOME (IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
As reported................................................... $ 4,238 $ 13,864 $ 21,334
Pro forma..................................................... $ 3,897 $ 11,491 $ 18,820
</TABLE>
21
<PAGE>
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(12) STOCK COMPENSATION PLANS (CONTINUED)
PRO FORMA NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE
<TABLE>
<CAPTION>
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
As reported:
Basic................................................................. $ .08 $ .25 $ .37
Diluted............................................................... $ .08 $ .24 $ .35
Pro forma:
Basic................................................................. $ .07 $ .21 $ .32
Diluted............................................................... $ .07 $ .20 $ .31
</TABLE>
A summary of the status of the Company's two stock option plans for the
three years ended December 31, 1997, together with changes during each of the
years then ended, is presented in the following table:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE PRICE
SHARES PER SHARE
------------ -------------
<S> <C> <C>
Outstanding, December 31, 1994 -- $ --
Grants........................................................... 2,355,000 1.90
Exercises........................................................ -- --
Forfeitures...................................................... -- --
------------ ------
Outstanding, December 31, 1995................................... 2,355,000 1.90
Grants........................................................... 2,929,405 8.78
Exercises........................................................ (165,600) 1.51
Forfeitures...................................................... (79,115) 9.36
------------ ------
Outstanding, December 31, 1996................................... 5,039,690 5.79
Grants........................................................... 880,500 17.79
Exercises........................................................ (470,272) 4.08
Forfeitures...................................................... (519,600) 9.95
------------ ------
Outstanding, December 31, 1997................................... 4,930,318 7.61
------------ ------
------------ ------
Options exercisable at year-end:
1995........................................................... 285,854 $ 1.32
------------ ------
------------ ------
1996........................................................... 990,234 $ 3.32
------------ ------
------------ ------
1997........................................................... 1,498,425 $ 4.90
------------ ------
------------ ------
Weighted average fair value of options granted during the year:
1995........................................................... $ 0.82
------------
------------
1996........................................................... $ 4.25
------------
------------
1997........................................................... $ 7.68
------------
------------
</TABLE>
22
<PAGE>
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(12) STOCK COMPENSATION PLANS (CONTINUED)
The following table sets forth the exercise price range, number of shares,
weighted average exercise price and remaining contractual lives at December 31,
1997:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE PRICE NUMBER OF EXERCISE CONTRACTUAL
RANGE SHARES PRICE LIFE
- ------------------- ---------- ----------- ---------------
<S> <C> <C> <C>
$1.29 1,041,100 $ 1.29 8
$1.30 - $5.00 1,540,346 $ 3.66 8
$8.00 1,067,614 $ 8.00 8
$9.00 - $19.25 852,758 $ 14.34 9
$19.50 - $26.88 403,500 $ 22.50 9
$27.13 25,000 $ 27.13 9
</TABLE>
(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 include primarily U.S. government Treasury bills,
investments in commercial paper, corporate bonds and other corporate
obligations. These investments are classified as held to maturity securities and
are measured at amortized cost. The carrying values of these investments
approximate their fair values.
Debt and long-term receivables carried on the Company's consolidated balance
sheet at December 31, 1996 and 1997, respectively, have a carrying value that is
not significantly different than its estimated fair value. The fair value 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 for the year ended December 31, 1995, includes $2.4 million
received in settlement of a premature termination of a contract.
(15) RELATED PARTY TRANSACTIONS
The Company provided reservation 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., and Rod Dammeyer, a director of the Company and a member of the Audit
Committee of the board of directors, is the managing director of Zell/Chilmark
Fund, L.P. During the years ended December 31, 1995, 1996, and 1997, the Company
charged Midway an aggregate of $1,292,000, $2,324,000 and $841,000,
respectively, for services rendered by the Company. Service to Midway was
discontinued in 1997 and as of December 31, 1996 and 1997, no amounts were due
from Midway for services rendered by the Company.
The Company utilizes the services of EGI Risk Services, Inc. for reviewing,
obtaining and/or renewing various insurance policies. EGI Risk Services, Inc. is
a wholly owned subsidiary of The Equity Group Investments, Inc., of which Samuel
Zell, a director of the Company, is chairman of the board. During the years
ended December 31, 1995, 1996, and 1997, the Company incurred $24,000, $448,000
and $1,166,000, respectively, for such services.
23
<PAGE>
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(15) RELATED PARTY TRANSACTIONS (CONTINUED)
During 1996 and 1997, the Company paid $115,000 and $4,000, respectively, to
various subsidiaries of Jacor Communications, Inc. for broadcasting radio
advertisements regarding employment opportunities at the Company. Rod Dammeyer,
a director of the Company, is a director of Jacor Communications, Inc.
On August 15, 1996, the Company entered into a one-year consulting agreement
with Richard Weingarten & Company, Inc. ("RWCO"). Under the consulting
agreement, RWCO received a monthly consulting fee of $10,000. Mr. Weingarten,
who is the founder and president of RWCO, tendered his resignation as a member
of the board of directors of the Company effective as of the date of the
consulting agreement. Mr. Weingarten also received an option to acquire 55,000
shares of common stock at an exercise price of $18 per share.
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:
<TABLE>
<S> <C>
Access 24 purchase...................................... $ 300,000
The Company's initial public offering of stock.......... 500,000
Sale of Access 24 Limited stock to PPP (Note 16)........ 200,000
---------
$1,000,000
---------
---------
</TABLE>
Fees associated with the Access 24 purchase were allocated to the purchase
price. Fees associated with the initial public offering of common stock were
netted against the offering proceeds received by the Company. Fees associated
with the sale of stock to PPP were netted against the proceeds from this sale.
(16) ACQUISITIONS
In May 1997, the Company acquired 100% of the common stock of Telemercadeo
Integral, S.A. ("TMI") for consideration of $4.2 million, consisting of 100,000
shares of the Company's common stock and cash of $2.4 million. TMI is an inbound
customer care provider in Mexico. The acquisition was accounted for using the
purchase method. The excess of cost of the acquisition over the underlying net
assets of $4.4 million is being amortized using the straight-line method over 25
years. The operations of TMI for all periods prior to the acquisition are
immaterial to the results of the Company and, accordingly, no pro forma
financial information has been presented.
On 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 $7.6 million, consisting of cash of $2.27 million; 970,240
shares of common stock in the Company and expenses related to the acquisition.
Access 24 provides inbound, toll-free customer service primarily to the
healthcare and financial services sector in Australia, the United Kingdom and
New Zealand.
On April 30, 1996, the Company completed the sale of 50% of the common stock
of Access 24 Limited ("Access 24 UK") to PPP Health Care Group plc ("PPP") for
$3.8 million cash. Access 24 UK was the United Kingdom subsidiary of Access 24,
acquired by the Company as part of the Access 24 acquisition, which operates a
call center in London, England. In addition PPP also purchased 1.0 million
preferred shares of Access 24 UK for consideration of $1.5 million. The
preferred shares have a par value of 1 British pound per share and dividends are
cumulative at the rate of 7% per annum. A portion of the proceeds from the sale
of the Preferred Stock was used to repay outstanding advances from Access 24.
24
<PAGE>
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(16) ACQUISITIONS (CONTINUED)
The acquisition of Access 24 has been accounted for using the purchase
method. The proceeds from the sale of 50% of the stock of Access 24 UK in excess
of the proportionate share of the carrying amounts of the Access 24 UK assets
and liabilities have been reflected as a reduction of the goodwill arising from
the Access 24 acquisition. The Company's remaining 50% interest in Access 24 UK
is being accounted for using the equity method of accounting. The excess of the
cost of the investment over the underlying net assets of Access 24 UK is being
amortized using the straight-line method over 15 years.
(17) SUBSEQUENT EVENTS
On February 17, 1998, the Company acquired the assets of Intellisystems,
Inc. ("Intellisystems") for $2.0 million in cash and 344,487 shares of common
stock. This transaction will be accounted for in accordance with the purchase
method of accounting. Intellisystems is a leading developer of patented
automated product support systems. Intellisystems' products can electronically
resolve a significant percentage of calls coming into customer support centers
through telephone, Internet or fax-on-demand.
On June 8, 1998 and June 17, 1998, the Company consummated business
combinations with Digital, which included the exchange of 1,069,000 shares of
Company common stock and EDM, which included the exchange of 1,783,444 shares of
Company common stock, respectively. These business combinations were accounted
for as pooling of interests, and accordingly, the historical financial
statements of the Company have been restated to include the financial statements
of Digital and EDM for all periods presented.
The supplemental consolidated statements of income and comprehensive income,
stockholders' equity, cash flows and accompanying notes of the Company for the
years ended December 31, 1995, 1996 and 1997 include the operations of EDM for
the fiscal years ended February 29, 1996, and February 28, 1997 and 1998. The
supplemental consolidated balance sheets of the Company as of December 31, 1995,
1996 and 1997 include the balance sheets of EDM for the fiscal years ended
February 29, 1996, and February 28, 1997 and 1998. Accordingly, the Company's
retained earnings will be adjusted during the year ended December 31, 1998 for
the effect of utilizing different fiscal year ends for these periods. Subsequent
to the business combinations, the fiscal year end of EDM has been changed from
February to December to conform to the Company's year end.
The supplemental consolidated financial statements have been prepared to
give retroactive effect to the business combinations with Digital and EDM in
June 1998. Generally accepted accounting principles prohibit giving effect to a
consummated business combination accounted for by the pooling of interests
method in financial statements that do not include the date of consummation. The
accompanying supplemental consolidated financial statements do not extend
through the date of consummation, however, they will become the historical
consolidated financial statements of the Company after financial statements
covering the date of consummation of the business combinations are issued.
25
<PAGE>
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(17) SUBSEQUENT EVENTS (CONTINUED)
The table below sets forth the combined revenues and net income for the
years ended December 31, 1995, 1996 and 1997 (in thousands):
<TABLE>
<CAPTION>
THI DIGITAL EDM ADJUSTMENTS COMBINED
---------- --------- --------- ----------- ----------
<S> <C> <C> <C> <C> <C>
1995:
Revenues......................................... $ 50,467 $ -- $ 4,466 $ -- $ 54,933
Net income....................................... 4,156 -- 82 -- 4,238
1996:
Revenues......................................... $ 165,504 $ -- $ 5,761 $ -- $ 171,265
Net income....................................... 13,756 -- 108 -- 13,864
1997:
Revenues......................................... $ 263,477 $ 2,521 $ 14,497 $ (1,438) $ 279,057
Net income....................................... 20,273 276 785 -- 21,334
</TABLE>
(18) SUPPLEMENTAL QUARTERLY FINANCIAL DATA (UNAUDITED) (IN THOUSANDS, EXCEPT
PER SHARE DATA)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1997:
Revenues.............................................................. $ 61,258 $ 67,648 $ 70,374 $ 79,777
Income from operations................................................ 8,564 10,244 6,773 7,566
Net income............................................................ 5,352 6,497 4,544 4,941
Net income per common share:
Basic............................................................... .09 .11 .08 .09
--------- --------- --------- ---------
--------- --------- --------- ---------
Diluted............................................................. .09 .10 .07 .09
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1996:
Revenues.............................................................. $ 23,329 $ 35,996 $ 51,540 $ 60,400
Income from operations................................................ 2,813 3,652 7,003 10,169
Net income............................................................ 1,282 2,086 4,087 6,409
Net income per common share:
Basic............................................................... .02 .04 .07 .12
--------- --------- --------- ---------
--------- --------- --------- ---------
Diluted............................................................. .02 .04 .07 .11
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
26
<PAGE>
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS EXCEPT SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
December 31, March 31,
1997 1998
------------ ---------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents ................................... $ 7,338 $ 7,894
Short-term investments ...................................... 69,633 67,556
Accounts receivable, net of allowance for doubtful
accounts of $2,327 and $2,737, respectively .......... 43,664 45,619
Prepaids and other assets ................................... 1,220 1,487
Deferred tax asset .......................................... 2,902 2,979
-------- --------
Total current assets ................................... 124,757 125,535
-------- --------
PROPERTY AND EQUIPMENT, net of accumulated
depreciation of $21,812 and $25,519, respectively ........... 53,738 58,670
-------- --------
OTHER ASSETS:
Goodwill and other intangible assets (net of amortization
of $587 and $879, respectively) ....................... 7,295 12,423
Long-term accounts receivable ............................... 4,274 4,274
Investment in affiliated company accounted for under the
equity method ........................................... 981 995
Other assets ................................................ 1,322 1,850
-------- --------
Total assets .......................................... $192,367 $203,747
-------- --------
-------- --------
</TABLE>
The accompanying notes are an integral part of these supplemental balance
sheets.
27
<PAGE>
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS EXCEPT SHARE AMOUNTS)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
December 31, March 31,
1997 1998
------------ ----------
(unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of long-term debt ..................... $ 5,910 $ 9,642
Bank overdraft ........................................ 1,094 -
Accounts payable ...................................... 8,086 7,408
Accrued employee compensation ......................... 12,244 10,666
Accrued income taxes .................................. 2,507 3,926
Other accrued expenses ................................ 11,694 15,410
Customer advances, deposits and deferred income ....... 1,472 1,000
-------- --------
Total current liabilities ....................... 43,007 48,052
DEFERRED TAX LIABILITIES .................................... 1,217 1,217
LONG-TERM DEBT, net of current portion:
Capital lease obligations ............................. 9,432 7,815
Other debt ............................................ 459 619
-------- --------
Total liabilities ............................... 54,115 57,703
-------- --------
STOCKHOLDERS' EQUITY:
Preferred stock, 10,000,000 shares authorized, zero shares
issued and outstanding ............................... - -
Common stock, $.01 par value, 150,000,000 shares
authorized, 59,262,397 and 59,594,318 shares issued,
59,163,587 and 59,594,318 shares outstanding ......... 592 595
Additional paid-in capital ............................... 104,016 106,385
Cumulative translation adjustment ........................ (922) (742)
Unearned compensation-restricted stock ................... (127) (95)
Treasury stock, 98,810 shares, at cost ................... (988) -
Retained earnings ........................................ 35,681 39,901
-------- --------
Total stockholders' equity ............................ 138,252 146,044
-------- --------
Total liabilities and stockholders' equity ...... $192,367 $203,747
-------- --------
-------- --------
</TABLE>
The accompanying notes are an integral part of these supplemental balance
sheets.
28
<PAGE>
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
1997 1998
---- ----
<S> <C> <C>
REVENUES ............................. $ 61,258 $ 80,244
-------- --------
OPERATING EXPENSES:
Costs of services ................. 38,887 51,856
Selling, general and
administrative expenses ....... 13,807 21,262
-------- --------
Total operating expenses .......... 52,694 73,118
-------- --------
INCOME FROM OPERATIONS ............... 8,564 7,126
-------- --------
OTHER INCOME (EXPENSES):
Interest expense .................. (455) (302)
Investment income ................. 874 889
Equity in income of
affiliated company ............ 53 14
Other ............................. (22) (94)
-------- --------
450 507
-------- --------
INCOME BEFORE INCOME TAXES ........... 9,014 7,633
Provision for income taxes ........ 3,662 3,081
-------- --------
NET INCOME ........................... $ 5,352 $ 4,552
-------- --------
-------- --------
WEIGHTED AVERAGE SHARES
OUTSTANDING:
Basic ............................. 57,619 59,423
-------- --------
-------- --------
Diluted ........................... 61,393 61,666
-------- --------
-------- --------
NET INCOME PER COMMON SHARE:
Basic ............................. $ .09 $ .08
-------- --------
-------- --------
Diluted ........................... $ .09 $ .07
-------- --------
-------- --------
</TABLE>
The accompanying notes are an integral part of these supplemental statements.
29
<PAGE>
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998
(AMOUNTS IN THOUSANDS)
(Unaudited)
<TABLE>
<CAPTION>
1997 1998
------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income ........................................ $ 5,352 $ 4,552
Adjustments to reconcile net income to net cash
provided by operating activities-
Depreciation and amortization .................. 2,484 3,858
Allowance for doubtful accounts ................ 149 155
Equity in (income) loss of affiliated company .. (53) (14)
Deferred taxes on income ....................... (571) (4)
Deferred compensation expense .................. 32 32
Changes in assets and liabilities-
Accounts receivable ......................... (5,142) (2,855)
Prepaids and other assets ................... 209 217
Deferred contract costs ..................... - -
Accounts payable and accrued liabilities .... 2,121 4,434
Customer advances and deferred income ....... 205 (429)
------- -------
Net cash provided by
operating activities ...................... 4,786 9,946
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment ................ (4,057) (9,533)
Purchase of Intellisystems ........................ - (2,000)
Return of deposit on new Call Center .............. 3,000 -
Changes in accounts payable and accrued
liabilities relating to investing activities . (196) (781)
Decrease in short-term investments ................ 716 2,646
------- -------
Net cash used in investing activities ............. (537) (9,668)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in bank overdraft ......... 233 (1,094)
Net increase in short-term borrowings ............. - 2,191
Net decrease in bank overdraft .................... - -
Payments on long-term debt and capital leases ..... (891) (1,365)
Exercise of stock options ......................... 13 413
------- -------
Net cash provided by (used in) financing activities (645) 145
------- -------
Effect of exchange rate changes on cash ................. (67) 133
------- -------
NET INCREASE IN CASH AND
CASH EQUIVALENTS .................................. 3,537 556
CASH AND CASH EQUIVALENTS,
beginning of period ............................... 5,564 7,338
------- -------
CASH AND CASH EQUIVALENTS,
end of period ..................................... $ 9,101 $ 7,894
------- -------
------- -------
</TABLE>
The accompanying notes are an integral part of these supplemental statements.
30
<PAGE>
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED SUPPLEMENTAL CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
NOTE (1)--BASIS OF PRESENTATION
The accompanying unaudited supplemental condensed consolidated financial
statements have been prepared without audit pursuant to the rules and
regulations of the Securities and Exchange Commission. The supplemental
condensed consolidated financial statements reflect all adjustments
(consisting of only normal recurring accruals) which, in the opinion of
management , are necessary to present fairly the financial position, results
of operations and cash flows of TeleTech Holdings, Inc. and subsidiaries as
of March 31, 1998 and 1997 and for the periods then ended. Operating results
for the three month period ended March 31, 1998 are not necessarily
indicative of the results that may be expected for the year ended December
31, 1998.
The unaudited supplemental condensed consolidated financial statements
should be read in conjunction with the audited supplemental consolidated
financial statements and footnotes thereto included in this registration
statement.
NOTE (2)--SUBSEQUENT EVENT
On June 8, 1998 and June 17, 1998, the Company consummated business
combinations with Digital Creators, Inc. ("Digital"), which included the
exchange of 1,069,000 shares of Company common stock and Electronic Direct
Marketing, Ltd. ("EDM") which included the exchange of 1,783,444 shares of
Company common stock, respectively. These business combinations were
accounted for as pooling of interests, and accordingly, the historical
financial statements of the Company have been restated to include the
financial statements of Digital and EDM for all periods presented.
The supplemental condensed consolidated statements of income and cash
flows of the Company for the year ended December 31, 1997 includes the
operations of EDM for the fiscal year ended February 28, 1998. The
supplemental condensed consolidated balance sheet of the Company as of
December 31, 1997 includes the balance sheet of EDM for the fiscal year ended
February 28, 1998. Accordingly, the Company's retained earnings have been
adjusted during the quarter ended March 31, 1998 for the effect of utilizing
different fiscal year ends for these periods. During 1998, the fiscal year
end of EDM has been changed from February to December to conform to the
Company's year end.
The supplemental condensed consolidated financial statements have been
prepared to give retroactive effect to the business combinations with Digital
and EDM in June 1998. Generally accepted accounting principles prohibit
giving effect to a consummated business combination accounted for by the
pooling of interests method in financial statements that do not include the
date of consummation. The accompanying supplemental condensed consolidated
financial statements do not extend through the date of consummation; however,
they will become the historical consolidated financial statements of the
Company after financial statements covering the date of consummation of the
business combinations are issued.
31
<PAGE>
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED SUPPLEMENTAL CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS-CONTINUED
The table below sets forth the combined revenues and net income for the
three months ended March 31, 1998 and 1997 (in thousands):
<TABLE>
<CAPTION>
THI DIGITAL EDM ADJUSTMENTS COMBINED
<S> <C> <C> <C> <C> <C>
1998:
Revenues $73,764 $1,216 $5,904 $(640) $80,244
Net income 4,154 90 308 - 4,552
1997:
Revenues $59,198 $ 184 $1,876 - $61,258
Net income 5,293 8 51 - 5,352
</TABLE>
NOTE (3)--SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION AND NONCASH INVESTING
AND FINANCING ACTIVITIES (IN THOUSANDS):
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1997 1998
---- ----
<S> <C> <C>
Cash paid for interest $ 465 $ 301
Cash paid for income taxes $1,753 $ 375
Noncash investing and financing activities:
Stock issued in purchase of Intellisystems $ - $3,389
</TABLE>
NOTE (4)--COMPREHENSIVE INCOME (IN THOUSANDS)
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
("SFAS 130"). The purpose of SFAS 130 is to report a measure of all changes
in equity that result from recognized transactions and other economic events
of the period other than transactions with owners in their capacity as
owners. The only item of other comprehensive income reported by the Company
is the cumulative translation adjustment. The Company's comprehensive income
for the three months ended March 31, 1997 and 1998 was as follows (in
thousands):
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1997 1998
---- ----
<S> <C> <C>
Net income for the period $5,352 $4,552
Change in cumulative translation
adjustment (72) 278
------ ------
Comprehensive income $5,280 $4,830
------ ------
------ ------
</TABLE>
32
<PAGE>
ITEM 7. FINANCIAL STATEMENT AND EXHIBITS
EXHIBIT
NO. DESCRIPTION
- ------- -----------
23.1 Consent of Arthur Anderson LLP
27.1 Financial Date Schedule for the three-month perioed ended March 31,
1997, restated
27.2 Financial Date Schedules for fiscal years ended December 31, 1995,
1996 and 1997, restated
-3-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
TELETECH HOLDINGS, INC.
/S/ KENNETH D. TUCHMAN
By: Kenneth D. Tuchman
CHAIRMAN OF THE BOARD OF DIRECTORS,
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Date: July 28, 1998
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation of our report dated February 6, 1998 (except for the matters
discussed in Note 17, as to which the dates are February 17, 1998, June 8,
1998 and June 17, 1998), included in this Current Report on Form 8-K, into
TeleTech Holdings, Inc.'s previously filed Registration Statement on Form S-8
(Registration No. 333-17569).
ARTHUR ANDERSEN LLP
Denver, Colorado
July 28, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1998
<PERIOD-END> MAR-31-1997 MAR-31-1998
<CASH> 9,101 7,894
<SECURITIES> 71,464 67,556
<RECEIVABLES> 39,499 48,356
<ALLOWANCES> 1,611 2,737
<INVENTORY> 0 0
<CURRENT-ASSETS> 121,193 125,535
<PP&E> 40,700 84,189
<DEPRECIATION> 13,641 25,519
<TOTAL-ASSETS> 153,631 203,747
<CURRENT-LIABILITIES> 29,890 48,052
<BONDS> 9,371 8,434
0 0
0 0
<COMMON> 571 595
<OTHER-SE> 113,236 145,449
<TOTAL-LIABILITY-AND-EQUITY> 153,631 203,747
<SALES> 61,258 80,244
<TOTAL-REVENUES> 61,258 80,244
<CGS> 38,887 51,856
<TOTAL-COSTS> 52,694 73,118
<OTHER-EXPENSES> (905) (809)
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 445 302
<INCOME-PRETAX> 9,014 7,633
<INCOME-TAX> 3,662 3,081
<INCOME-CONTINUING> 5,352 4,552
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 5,352 4,552
<EPS-PRIMARY> 0.09 0.08
<EPS-DILUTED> 0.09 0.07
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<S> <C> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1996 DEC-31-1997
<PERIOD-END> DEC-31-1995 DEC-31-1996 DEC-31-1997
<CASH> 62 5,564 7,338
<SECURITIES> 10,361 72,512 69,633
<RECEIVABLES> 11,390 34,359 45,991
<ALLOWANCES> 813 1,462 2,327
<INVENTORY> 0 0 0
<CURRENT-ASSETS> 21,959 116,284 124,757
<PP&E> 15,873 36,615 75,550
<DEPRECIATION> 6,510 11,756 21,812
<TOTAL-ASSETS> 32,177 147,011 192,367
<CURRENT-LIABILITIES> 11,146 27,773 43,007
<BONDS> 3,193 10,144 9,891
0 0 0
12,867 0 0
<COMMON> 407 571 592
<OTHER-SE> 3,661 107,959 137,660
<TOTAL-LIABILITY-AND-EQUITY> 32,177 147,011 192,367
<SALES> 54,933 171,265 279,057
<TOTAL-REVENUES> 54,933 171,265 279,057
<CGS> 30,941 104,142 178,702
<TOTAL-COSTS> 50,171 147,646 245,910
<OTHER-EXPENSES> (2,964) (1,178) (3,476)
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 496 1,160 1,166
<INCOME-PRETAX> 7,230 23,637 35,457
<INCOME-TAX> 2,992 9,773 14,123
<INCOME-CONTINUING> 4,238 13,864 21,334
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 4,238 13,864 21,334
<EPS-PRIMARY> 0.08 0.25 0.37
<EPS-DILUTED> 0.08 0.24 0.35
</TABLE>
