<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
------------------------
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 1998
OR
/ / TRANSITION REPORT PURSUANT TO Section 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
---------- ----------
Commission file number 0-21055
TELETECH HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 84-1291044
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1700 LINCOLN STREET, SUITE 1400
DENVER, COLORADO 80203
(Address of principal (Zip Code)
executive office)
(303) 894-4000
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Outstanding at
Class of Common Stock October 31, 1998
Common Stock, par value $.01 per share 60,235,700
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets--December 31, 1997 and September 30, 1998 3
Condensed consolidated statements of income--Three months ended September 30,
1998 and 1997 5
Condensed consolidated statements of income--Nine months ended September 30,
1998 and 1997 6
Condensed consolidated statements of cash flows--Nine months ended
September 30, 1998 and 1997 7
Notes to condensed consolidated financial statements--September 30, 1998 8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 11
PART II . OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities and Use of Proceeds 15
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
</TABLE>
2
<PAGE>
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
ASSETS
December 31, September 30,
1997 1998
------------ -------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . $ 7,338 $ 11,291
Short-term investments. . . . . . . . . . . . . . . . . . . . 69,633 56,110
Accounts receivable, net of allowance for doubtful
accounts of $2,327 and $2,714, respectively. . . . . . . . 43,664 52,120
Prepaids and other assets . . . . . . . . . . . . . . . . . . 1,220 2,496
Deferred tax asset. . . . . . . . . . . . . . . . . . . . . . 2,902 3,072
-------- --------
Total current assets. . . . . . . . . . . . . . . . . . . 124,757 125,089
-------- --------
PROPERTY AND EQUIPMENT, net of accumulated
depreciation of $21,812 and $33,707, respectively . . . . . . 53,738 64,313
-------- --------
OTHER ASSETS:
Goodwill (net of amortization of $587 and
$1,347, respectively) . . . . . . . . . . . . . . . . . . 7,295 12,001
Long-term accounts receivable . . . . . . . . . . . . . . . . 4,274 4,274
Investment in affiliated company accounted for under the
equity method . . . . . . . . . . . . . . . . . . . . . . . 981 --
Contract acquisition costs. . . . . . . . . . . . . . . . . . -- 10,900
Other assets. . . . . . . . . . . . . . . . . . . . . . . . . 1,322 1,384
-------- --------
Total assets. . . . . . . . . . . . . . . . . . . . . . . $192,367 $217,961
-------- --------
-------- --------
</TABLE>
The accompanying notes are an integral part of these balance sheets.
3
<PAGE>
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31, September 30,
1997 1998
------------ -------------
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of long-term debt . . . . . . . . . . . . . . 5,910 9,720
Bank overdraft. . . . . . . . . . . . . . . . . . . . . . . . 1,094 --
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . 8,086 8,606
Accrued employee compensation . . . . . . . . . . . . . . . . 12,244 15,026
Accrued income taxes. . . . . . . . . . . . . . . . . . . . . 2,507 2,350
Other accrued expenses. . . . . . . . . . . . . . . . . . . . 11,694 15,411
Customer advances, deposits and deferred income . . . . . . . 1,472 1,117
-------- --------
Total current liabilities . . . . . . . . . . . . . . . . 43,007 52,230
DEFERRED TAX LIABILITIES . . . . . . . . . . . . . . . . . . . . 1,217 1,211
LONG-TERM DEBT, net of current portion:
Capital lease obligations . . . . . . . . . . . . . . . . . . 9,432 3,478
Other debt. . . . . . . . . . . . . . . . . . . . . . . . . . 459 3,682
-------- --------
Total liabilities . . . . . . . . . . . . . . . . . . . . 54,115 60,601
-------- --------
STOCKHOLDERS' EQUITY:
Preferred stock, 10,000,000 shares authorized , zero and one
share issued and outstanding in 1997 and 1998, respectively -- --
Common stock, $.01 par value, 150,000,000 shares
authorized, 59,262,397 and 60,234,304 shares issued,
59,163,587 and 60,234,304 shares outstanding. . . . . . . . 592 602
Additional paid-in capital . . . . . . . . . . . . . . . . . 104,016 108,315
Accumulated other comprehensive income. . . . . . . . . . . . (922) (1,680)
Unearned compensation-restricted stock. . . . . . . . . . . . (127) (32)
Treasury stock, 98,810 shares, at cost. . . . . . . . . . . . (988) --
Retained earnings . . . . . . . . . . . . . . . . . . . . . . 35,681 50,155
-------- --------
Total stockholders' equity. . . . . . . . . . . . . . . . . 138,252 157,360
-------- --------
Total liabilities and stockholders' equity. . . . . . . . $192,367 $217,961
-------- --------
-------- --------
</TABLE>
The accompanying notes are an integral part of these balance sheets.
4
<PAGE>
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
---------------------
1997 1998
---- ----
<S> <C> <C>
REVENUES . . . . . . . . . . . . . . . . . . . . . . . . . . . . $70,374 $92,366
------- -------
OPERATING EXPENSES:
Costs of services . . . . . . . . . . . . . . . . . . . . 45,799 59,143
Selling, general and
administrative expenses . . . . . . . . . . . . . . . . 17,802 25,085
------- -------
Total operating expenses. . . . . . . . . . . . . . . . . 63,601 84,228
------- -------
INCOME FROM OPERATIONS . . . . . . . . . . . . . . . . . . . . . 6,773 8,138
------- -------
OTHER INCOME (EXPENSE):
Interest expense. . . . . . . . . . . . . . . . . . . . . (276) (413)
Investment income . . . . . . . . . . . . . . . . . . . . 813 725
Equity in income of
affiliated company. . . . . . . . . . . . . . . . . . . 160 (16)
Business combination expenses . . . . . . . . . . . . . . -- (440)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . (14) (220)
------- -------
683 (364)
------- -------
Income before income taxes. . . . . . . . . . . . . . . . . . 7,456 7,774
PROVISION FOR INCOME TAXES . . . . . . . . . . . . . . . . . . . 2,912 3,059
------- -------
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,544 $ 4,715
------- -------
------- -------
WEIGHTED AVERAGE SHARES
OUTSTANDING:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . 58,256 60,234
------- -------
------- -------
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . 61,405 62,040
------- -------
------- -------
NET INCOME PER COMMON SHARE:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . $ .08 $ .08
------- -------
------- -------
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . $ .07 $ .08
------- -------
------- -------
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE>
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
---------------------
1997 1998
---- ----
<S> <C> <C>
REVENUES $199,280 $260,709
-------- --------
OPERATING EXPENSES:
Costs of services . . . . . . . . . . . . . . . . . . . . 127,043 168,294
Selling, general and
administrative expenses . . . . . . . . . . . . . . . . 46,656 69,505
-------- --------
Total operating expenses. . . . . . . . . . . . . . . . . 173,699 237,799
-------- --------
INCOME FROM OPERATIONS . . . . . . . . . . . . . . . . . . . . . 25,581 22,910
-------- --------
OTHER INCOME (EXPENSE):
Interest expense. . . . . . . . . . . . . . . . . . . . . (1,053) (946)
Investment income . . . . . . . . . . . . . . . . . . . . 2,522 2,444
Equity in income of
affiliated company. . . . . . . . . . . . . . . . . . . 263 70
Business combination expenses . . . . . . . . . . . . . . - (1,321)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . (1) (371)
-------- --------
1,731 (124)
-------- --------
Income before income taxes. . . . . . . . . . . . . . . . . . 27,312 22,786
PROVISION FOR INCOME TAXES . . . . . . . . . . . . . . . . . . . 10,919 9,055
-------- --------
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . $ 16,393 $ 13,731
-------- --------
-------- --------
WEIGHTED AVERAGE SHARES
OUTSTANDING:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . 57,931 59,784
-------- --------
-------- --------
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . 61,560 62,026
-------- --------
-------- --------
NET INCOME PER COMMON SHARE:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . $ .28 $ .23
-------- --------
-------- --------
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . $ .27 $ .22
-------- --------
-------- --------
</TABLE>
The accompanying notes are an integral part of these statements.
6
<PAGE>
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998
(DOLLARS IN THOUSANDS)
(Unaudited)
<TABLE>
<CAPTION>
1997 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income. . . . . . . . . . . . . . . . . . . . . . . . . . $ 16,393 $ 13,731
Adjustments to reconcile net income to net cash
provided by operating activities-
Depreciation and amortization . . . . . . . . . . . . . . 7,240 13,935
Allowance for doubtful accounts . . . . . . . . . . . . . 462 387
Equity in income of affiliated company. . . . . . . . . . (263) 981
Deferred taxes on income. . . . . . . . . . . . . . . . . (785) (176)
Deferred compensation expense . . . . . . . . . . . . . . 96 95
Changes in assets and liabilities-
Accounts receivable . . . . . . . . . . . . . . . . . (16,092) (8,458)
Prepaids and other assets . . . . . . . . . . . . . . (903) (1,237)
Accounts payable and accrued liabilities. . . . . . . 7,614 6,662
Customer advances and deferred income . . . . . . . . 458 (355)
-------- --------
Net cash provided by operating activities . . . . . . . . . . 14,220 25,565
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment. . . . . . . . . . . . . . $(25,645) $(23,939)
Purchase of TMI . . . . . . . . . . . . . . . . . . . . . . . (2,337) --
Acquisition of Intellisystems, Inc. . . . . . . . . . . . . . -- (2,000)
Return of deposit on new Call Center. . . . . . . . . . . . . 3,000 --
Contract acquisition costs. . . . . . . . . . . . . . . . . . - (10,900)
Changes in accounts payable and accrued
liabilities relating to investing activities. . . . . . . . 56 (781)
Decrease in short-term investments. . . . . . . . . . . . . . 6,805 13,790
-------- --------
Net cash used in investing activities . . . . . . . . . . . . (18,121) (23,830)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in short-term borrowings . . . . . . . . . . . . $ 65 $ 1,549
Net increase in bank overdraft. . . . . . . . . . . . . . . . 806 -
Cash received in acquisition. . . . . . . . . . . . . . . . . - 276
Payments on long-term debt and capital leases . . . . . . . . (3,565) (1,908)
Exercise of stock options including tax benefit . . . . . . . 7,382 2,302
-------- --------
Net cash provided by financing activities . . . . . . . . . . 4,688 2,219
-------- --------
Effect of exchange rate changes on cash. . . . . . . . . . . . . (516) (1)
-------- --------
NET INCREASE IN CASH AND
CASH EQUIVALENTS. . . . . . . . . . . . . . . . . . . . . . . 271 3,953
CASH AND CASH EQUIVALENTS,
beginning of period . . . . . . . . . . . . . . . . . . . . . 5,569 7,338
-------- --------
CASH AND CASH EQUIVALENTS,
end of period . . . . . . . . . . . . . . . . . . . . . . . . $ 5,840 $ 11,291
-------- --------
-------- --------
</TABLE>
The accompanying notes are an integral part of these statements.
7
<PAGE>
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
NOTE (1)--BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared without audit pursuant to the rules and regulations of the
Securities and Exchange Commission. The condensed consolidated financial
statements reflect all adjustments (consisting of only normal recurring
accruals) which, in the opinion of management, are necessary to present fairly
the financial position, results of operations and cash flows of TeleTech
Holdings, Inc. and subsidiaries as of September 30, 1998 and 1997 and for the
periods then ended. Operating results for the three month and nine month periods
ended September 30, 1998 are not necessarily indicative of the results that may
be expected for the year ended December 31, 1998.
The unaudited condensed consolidated financial statements should be read in
conjunction with the consolidated and combined financial statements and
footnotes thereto included in the Company's Form 10-K for the year ended
December 31, 1997.
NOTE (2)--RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" effective for fiscal years beginning after
June 15, 1999. SFAS No. 133 establishes accounting and reporting standards
requiring that every derivative instrument (including certain derivative
instruments embedded in other contracts) be recorded in the balance sheet as
either an asset or liability measured at its fair value. It also requires that
changes in the derivative's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. Special accounting for
qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the income statement, and requires that a company
must formally document, designate, and assess the effectiveness of transactions
that receive hedge accounting. SFAS No. 133 may not be applied retroactively,
and must be applied to (a) derivative instruments and (b) certain derivative
instruments embedded in hybrid contracts that were issued, acquired, or
substantively modified after December 31, 1997 (and, at the company's election,
before January 1, 1998). Management believes that the impact of SFAS No. 133
will not significantly affect its financial reporting.
In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of
Start-Up Activities". This statement is effective for financial statements for
fiscal years beginning after December 15, 1998. In general, SOP 98-5 requires
costs of start-up activities and organization costs to be expensed as incurred.
Initial application of SOP 98-5 should be reported as the cumulative effect of a
change in accounting principle. Management believes that SOP 98-5 will not have
a material impact on the financial statements.
NOTE (3)--SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION AND NONCASH INVESTING
AND FINANCING ACTIVITIES (IN THOUSANDS):
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1997 1998
---- ----
<S> <C> <C>
Cash paid for interest $ 1,053 $ 946
Cash paid for income taxes $10,897 $ 5,641
Noncash investing and financing activities:
Stock issued in purchase of Intellisystems $ -- $ 3,389
</TABLE>
8
<PAGE>
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998 - CONTINUED
NOTE (4)--ACQUISITIONS
On February 17, 1998, the Company acquired the assets of
Intellisystems,-Registered Trademark- Inc. ("Intellisystems") for $2.0 million
in cash and 344,487 shares of common stock including 98,810 shares of treasury
stock. Intellisystems is a leading developer of patented automated product
support systems. Intellisystems' products can electronically resolve a
significant percentage of calls coming into customer support centers through
telephone, Internet or fax-on-demand. The acquisition has been accounted for as
a purchase.
On June 8, 1998 and June 17, 1998, the Company consummated business
combinations with Digital Creators, Inc. ("Digital"), which included the
issuance of 1,069,000 shares of Company common stock and Electronic Direct
Marketing, Ltd. ("EDM") which included the obligation to issue 1,783,444
shares of Company common stock, respectively. These business combinations
were accounted for as poolings of interests, and accordingly, the historical
financial statements of the Company have been restated to include the
financial statements of Digital and EDM for all periods presented.
The consolidated balance sheet of the Company as of December 31, 1997
includes the balance sheet of EDM for the fiscal year ended February 28,
1998. Accordingly, the Company's retained earnings has been adjusted during
the quarter ended March 31, 1998 for the effect of utilizing different fiscal
year ends for this period. During 1998, the fiscal year end of EDM has been
changed from February to December to conform to the Company's year end.
The consolidated financial statements have been prepared to give
retroactive effect to the business combinations with Digital and EDM.
The table below sets forth the results of operations of the previously
separate enterprises for the period prior to the consummation of the
combinations during the nine months ended September 30, 1998 and 1997 (in
thousands):
<TABLE>
<CAPTION>
Nine months ended September 30,: TELETECH DIGITAL EDM ADJUSTMENTS COMBINED
- -------------------------------
<S> <C> <C> <C> <C> <C>
1998:
Revenues $136,244 $2,038 $10,258 $(1,171) $147,369
Net income 6,972 136 654 -- 7,762
1997:
Revenues $124,332 $889 $ 4,091 $ (406) $128,906
Net income 11,489 187 173 -- 11,849
</TABLE>
On August 26, 1998 the Company consummated a business combination with
Outsource Informatica Ltda. ("Outsource"), a leading Brazilian customer care
provider, which included the issuance of 606,000 shares of Company common stock.
This business combination was accounted for as a pooling of interests. The
operations of Outsource prior to the acquisition are immaterial to all periods
presented.
NOTE (5)--CONTRACT ACQUISITION COSTS
In September 1998, the Company paid $10.9 million to obtain a long term
contract with a significant client in the telecommunications industry. This
amount is recorded as an other asset and will be amortized over the six year
term of the contract.
9
<PAGE>
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998 -- CONTINUED
NOTE (6)--COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
130"). The purpose of SFAS 130 is to report a measure of all changes in equity
that result from recognized transactions and other economic events of the period
other than transactions with owners in their capacity as owners. The only item
of other comprehensive income reported by the Company is the cumulative
translation adjustment.
The Company's comprehensive income for the three and nine months ended September
30, 1997 and 1998 was as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended September 30,
--------------------------------
1997 1998
---- ----
<S> <C> <C>
Net income for the period $ 4,544 $ 4,715
Change in cumulative translation adjustment (342) (191)
------- -------
Comprehensive income $ 4,202 $ 4,524
------- -------
------- -------
<CAPTION>
Nine Months Ended September 30,
--------------------------------
1997 1998
---- ----
<S> <C> <C>
Net income for the period $16,393 $13,731
Change in cumulative translation adjustment (572) (758)
------- -------
Comprehensive income $15,281 $12,973
------- -------
------- -------
</TABLE>
NOTE (7)--SALE OF JOINT VENTURE
On September 21, 1998, the Company sold their 50% interest in Access 24
(UK) Limited ("Access 24 UK") to Priplan Investments, Ltd. ("Priplan") for cash
consideration of approximately $1.061 million. The company incurred $129,000 in
costs relating to the disposal of this joint venture in the third quarter 1998.
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
INTRODUCTION
Management's discussion and analysis of financial condition and results of
operations in this Form 10-Q should be read in conjunction with the risk
factors included in the Company's Form 10-K for the year ended December 31,
1997. Specifically, the Company has experienced, and in the future could
experience, quarterly variations in revenues and earnings as a result of a
variety of factors, many of which are outside the Company's control, including:
the timing of new contracts; the timing of new product or service offerings or
modifications in client strategies; the expiration or termination of existing
contracts; the timing of increased expenses incurred to obtain and support new
business; and the seasonal pattern of certain of the businesses serviced by the
Company. In addition, the Company has concentrated its marketing efforts
towards obtaining larger, more complex, strategic customer care programs. As a
result, the time required to negotiate and execute an agreement with the client
has increased. This may lead to short-term delays in the anticipated start-up
of new client programs and in the Company achieving full capacity utilization.
The Company's planned staffing levels, investments and other operating
expenditures are also based on revenue forecasts. If revenues are below
expectations in any given quarter as a result of such delay or for other
reasons, the Company's operating results would likely be adversely affected for
that quarter.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1997
Revenues increased $22.0 million or 31% to $92.4 million for the three
months ended September 30, 1998 from $70.4 million for the three months ended
September 30, 1997. The increase resulted primarily from $14.6 million in
revenues from new clients and $18.1 million in increased revenue from
existing clients including $5 million relating to technology sales. These
technology sales include $1.7 million in hardware and third party software
sold under reseller arrangements, consulting services of approximately
$300,000 and the sale of approximately $3.0 million in proprietary call
center technology to a client for use in its internal call centers.
Technology sales for the corresponding period of the preceding year were not
significant. While TeleTech does expect technology revenues to represent a
more significant portion of total revenues in the future, there can be no
assurances as to the future levels of these revenues. These revenue increases
were offset in part by contract expirations and other client reductions.
These reductions and terminations include $6.4 million in revenue reductions
related to lower call volumes from two significant client programs in the
telecommunications and transportation industries. Revenues for the three
months ended September 30, 1998 include approximately $21.6 million from
facilities management contracts as compared with $18.1 million for the three
months ended September 30, 1997.
Costs of services increased $13.3 million, or 29%, to $59.1 million for
the three months ended September 30, 1998 from $45.8 million for the three
months ended September 30, 1997. Costs of services as a percentage of
revenues decreased slightly from 65.1% for the three months ended September
30, 1997 to 64.0% for the three months ended September 30, 1998. The decrease
in the costs of services as a percentage of revenues is a result of
significantly lower costs of services as a percentage of revenues associated
with the technology sales discussed above as compared with the Company's
recurring revenues from outsourcing. Cost of services as a percentage of
revenue was negatively impacted by unused capacity in several of the
Company's domestic and foreign call centers. Unused capacity contributes to
higher costs of services as a percentage of revenue as the fixed management
and facilities infrastructure costs are spread over reduced revenues.
Selling, general and administrative expenses increased $7.3 million, or 41%
to $25.1 million for the three months ended September 30, 1998 from $17.8
million for the three months ended September 30, 1997. Selling, general and
administrative expenses as a percentage of revenues increased from 25.3% for
the three months ended September 30, 1997 to 27.2% for the three months ended
September 30, 1998 primarily as a result of a greater number of selling,
general, and administrative personnel along with higher depreciation and
infrastructure costs associated with the opening of call centers in Niagara
Falls, NY; Moundsville, West Virginia; Uniontown, Pennsylvania;
11
<PAGE>
Mexico City, Mexico and Glasgow, Scotland.
As a result of the foregoing factors, income from operations increased
$1.4 million or 20%, to $8.1 million for the three months ended September 30,
1998 from $6.7 million for the three months ended September 30, 1997.
Operating income as a percentage of revenues decreased from 9.6% for the
three months ended September 30, 1997 to 8.8% for the three months ended
September 30, 1998. In the third quarter 1998, operating income as a
percentage of revenue was favorably impacted by approximately 250 to 300
basis points by the technology sales discussed above.
Other income excluding business combination expenses totaled $76,000 for
the three months ended September 30, 1998 compared with $683,000 during the
three months ended September 30, 1997. This is primarily related to decreased
investment income of $88,000 resulting from the decrease in cash investments
from $66.1 million at September 30, 1997 to $56.1 million at September 30, 1998.
In addition, interest expense increased $137,000 resulting from an increase in
capital leases. Also included in other income and expense for the three months
ended September 30, 1998 was $129,000 relating to costs of disposing of the
Company's 50% interest in the PPP Joint Venture in the United Kingdom. Income
from this joint venture for the three months ended September 30, 1997 was
$160,000 compared to a loss of $16,000 for the three months ended September 30,
1998. The remaining difference quarter versus quarter was due to currency
fluctuations of $80,000 attributable to the Company's Mexican operations.
Business combination expenses related to the acquisition of Outsource
Informatica Ltda. were $440,000 for the three months ended September 30, 1998.
As a result of the foregoing factors, net income increased $171,000 or
4.0%, to $4.7 million for the three months ended September 30, 1998 from $4.5
million for the three months ended September 30, 1997.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1997
Revenues increased $61.4 million or 31% to $260.7 million for the nine
months ended September 30, 1998 from $199.3 million for the nine months ended
September 30, 1997. The increase resulted from $39.5 million in revenues from
new clients and $63.3 million in increased revenue from existing clients. These
increases were offset in part by contract expirations and other client
reductions of which $32.3 million related to two significant clients in the
telecommunications and transportation industries. Revenues for the nine months
ended September 30, 1998 include approximately $61.2 million from facilities
management contracts as compared with $58.7 million for the nine months ended
September 30, 1997.
Costs of services increased $41.3 million, or 33%, to $168.3 million for
the nine months ended September 30, 1998 from $127.0 million for the nine months
ended September 30, 1997. Costs of services as a percentage of revenues
increased from 63.8% for the nine months ended September 30, 1997 to 64.6% for
the nine months ended September 30, 1998. This increase in the costs of services
as a percentage of revenues is a result of lower nine months volumes in a
significant facilities management client program as compared with the previous
year and unused capacity in several of the Company's domestic and foreign call
centers offset by lower costs of services as a percentage of revenues associated
with the technology sale discussed in the three month comparative above.
Selling, general and administrative expenses increased $22.8 million, or
49% to $69.5 million for the nine months ended September 30, 1998 from $46.7
million for the nine months ended September 30, 1997. Selling, general and
administrative expenses as a percentage of revenues increased from 23.4% for the
nine months ended September 30, 1997 to 26.7% for the nine months ended
September 30, 1998 primarily as a result of a greater number of selling,
general, and administrative personnel along with higher depreciation expense
resulting from the completion of new call centers which were not fully utilized
during 1998 and the impact of lower volumes in a significant client in the
telecommunications industry.
12
<PAGE>
As a result of the foregoing factors, income from operations decreased
$2.7 million or 10%, to $22.9 million for the nine months ended September 30,
1998 from $25.6 million for the nine months ended September 30, 1997.
Operating income as a percentage of revenues decreased from 12.8% for the
nine months ended September 30, 1997 to 8.8% for the nine months ended
September 30, 1998. This decline resulted primarily from reduced capacity
utilization and lower volumes associated with two significant clients in the
telecommunications and transportation industries. Operating income as a
percentage of revenue for the nine months ended September 30, 1998 was
favorably impacted by approximately 100 basis points by the technology sales
discussed above.
Other income excluding business combination expenses totaled $1,197,000 for
the nine months ended September 30, 1998 compared with $1,731,000 during the
nine months ended September 30, 1997. This is primarily related to decreased
investment income of $78,000 resulting from the decrease in cash investments.
Also included in other income and expense for the nine months ended September
30, 1998 was $129,000 relating to costs of disposing of the Company's 50%
interest in the PPP Joint Venture in the United Kingdom. Income from this joint
venture for the nine months ended September 30, 1997 was $263,000 compared to
$70,000 for the nine months ended September 30, 1998. The remaining difference
quarter versus quarter was due to currency fluctuations of $205,000 attributable
to the Company's Mexican operations. During the nine months ended September 30,
1998, the Company also incurred $1,321,000 of one time charges relating to
business combination expenses for EDM Electronic Direct Marketing, Ltd., Digital
Creators, Inc., and Outsource Informatica Ltda.
As a result of the foregoing factors, net income decreased $2.7 million or
16%, to $13.7 million for the nine months ended September 30, 1998 from
$16.4 million for the nine months ended September 30, 1997.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1998 the Company had cash and cash equivalents of
$11.3 million and short-term investments of $56.1 million. Cash provided by
operating activities was $25.6 million for the nine months ended September
30, 1998.
Cash used in investing activities was $23.8 million for the nine months
ended September 30, 1998 resulting primarily from $23.9 million in capital
expenditures, $2.0 toward the purchase of Intellisystems (see Note 4
accompanying the condensed financial statements), and $10.9 million in contract
acquisition costs offset in part by a decrease of $13.8 million in short term
investments.
Cash provided by financing activities was $2.2 million resulting from the
increase in short-term borrowings of $1.5 million and the exercise of stock
options of $2.3 million offset in part by pay downs of capital leases by the
Company's Canadian Subsidiary.
The Company is negotiating a new $50 million, 3-year, partially secured
revolving line of credit agreement with a syndicate of 5 banks. The Company
anticipates that the agreement will be completed in November 1998.
The Company currently expects total capital expenditures in 1998 to be
approximately $40 to $50 million of which $23.9 million was expended in the
first nine months. The Company believes that existing cash on hand together
with cash from operations will be sufficient to finance the Company's
operations, planned capital expenditures and anticipated growth through 1999.
POTENTIAL YEAR 2000 PROBLEMS
The Company has undertaken an assessment and compliance program (the
"Program") to ascertain the existence and extent of, and to remediate as
necessary, any Year 2000 problems that may
13
<PAGE>
reside in the information technology and non-information technology systems
of the Company and its interfaces with its clients. The Program utilizes an
outside consulting firm, which specializes in Year 2000 compliance and
remediation, which will work with full-time employees of the Company whose
time is dedicated to the Program. The Company has begun an enterprise wide
assessment and now expects to complete the assessment phase of the Program by
the first quarter of 1999. As assessments are completed, the Company will
commence immediate remediation, as necessary. The Company believes that costs
of the assessment phase will not exceed $1,000,000. The Company has not yet
incurred any significant costs for this assessment. When the assessment is
completed, the Company should be able to estimate the total cost of the
Program as well as the timing of remediation.
The Company is currently unable to assess, and may be unable to accurately
determine, the magnitude of any Year 2000 problems that may reside in the
computer and information systems of its clients, or the impact that any such
problems could have on the services provided by the Company to such clients. As
part of the Program, the Company will contact its clients regarding the nature
and scope of any such problems and seek to work with the clients to resolve
them. The success of the Company's efforts will depend, in significant part,
upon factors outside the control of the Company, such as the level of client
cooperation and the status of the clients' own Year 2000 compliance programs.
Thus, there can be no assurance that all such problems will be resolved. The
occurrence of Year 2000 related failures in the computer and information systems
of any of the Company's significant clients could have a materially adverse
effect on the business, results of operations, and financial condition of the
Company. The Company will prepare a contingency plan to handle a most reasonably
likely worst case scenario at the completion of its assessment, however the
Program has not progressed sufficiently to identify the potential Year 2000
issues.
FORWARD-LOOKING STATEMENTS
All statements contained in this "Management's Discussion and Analysis of
Financial Condition and Results of Operations" or elsewhere in this quarterly
report, that are not statements of historical facts are forward-looking
statements that involve substantial risks and uncertainties. Forward looking
statements include (i) the anticipated level of capital expenditures for 1998;
(ii) the Company's belief that existing cash and short-term investments will be
sufficient to finance the Company's near term operations; (iii) the Company's
belief that technology revenues will represent a more significant portion of the
total revenues in the future and the impact on operating margins as a result of
those revenues; (iv) the Company's estimate of the impact of the year 2000
issues; and (v) statements relating to the Company or its operations that are
preceded by terms such as "anticipates", "expects", "believes" and similar
expressions.
The Company's actual results, performance or achievements may differ
materially from those implied by such forward-looking statements as a result of
various factors, including the following: TeleTech's agreements with its
clients do not ensure that TeleTech will generate a specific level of revenue
and may be canceled by the clients on short notice. The amount of revenue
TeleTech generates from a particular client is dependent upon customers'
interest in and use of the client's products or services, some of which are
recently-introduced or untested. The loss of a significant client or the
termination or completion of a significant client program may have a material
adverse effect on TeleTech's capacity utilization and results of operations.
There can be no assurance that the Company will be successful in integrating
acquired companies into the Company's existing businesses, or that any completed
acquisition will enhance the Company's business, results of operations or
financial condition. There are certain risks inherent in conducting
international business, including without limitation exposure to currency
fluctuations, longer payment cycles and greater difficulties in accounts
receivable collection.
14
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
As disclosed in the Company's 1997 Annual Report on Form 10-K, 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 certain accounts receivable it owes to the Company
for services rendered. These accounts receivable total $4.3 million.
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 at which time the litigation 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
uncertain. Because it is uncertain whether this litigation will be concluded
within one year, the Company has reclassified the $4.3 million receivable as a
long-term asset in the accompanying balance sheet.
Item 2. Changes in Securities and Use of Proceeds
The registration statement for the Company's initial public offering was
effective July 30, 1996. The net proceeds to the Company from the initial
public offering were $52,565,000. The following is the amount of net offering
proceeds used by the Company for each of the purposes listed below. The
following use of proceeds does not represent a material change in the use of
proceeds described in the initial public offering prospectus.
15
<PAGE>
<TABLE>
<CAPTION>
DIRECT OR INDIRECT PAYMENTS TO
DIRECTORS, OFFICERS, GENERAL
PARTNERS OF THE ISSUER OR
THEIR ASSOCIATES: TO PERSONS
OWNING TEN PERCENT OF MORE OF
ANY CLASS OF EQUITY SECURITIES
OF THE ISSUER; AND TO DIRECT OR INDIRECT
AFFILIATES OF THE ISSUER PAYMENTS TO OTHERS
------------------------------ -------------------
<S> <C> <C>
Purchase and
installation of
machinery and
equipment $11,536,000
Acquisition of other
businesses 4,337,000
Repayment of
indebtedness 9,950,000
Working Capital $500,000 15,055,000
TEMPORARY INVESTMENT
Cash Management
Account 10,199,000
OTHER PURPOSES
Acquisition of 98,810
shares of Treasury
Stock 988,000
</TABLE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following document is filed as an exhibit to this report:
27.1 Financial Data Schedule
27.2 Financial Data Schedule - Restated
(b) Reports on Form 8-K
In a current report filed on Form 8-K dated July 28, 1998, the
Company updated certain historical financial information which
was restated to give effect of the acquisition of Digital
Creators, Inc. on June 8, 1998 and EDM Electronic Direct
Marketing Ltd. on June 17, 1998 accounted for as a pooling of
interests.
16
<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 thereunto duly authorized.
TELETECH HOLDINGS, INC.
-----------------------
(Registrant)
Date: November 11, 1998 /s/ KENNETH D. TUCHMAN
----------------------------------------
Kenneth D. Tuchman
Chairman of the Board, President and
Chief Executive Officer
Date: November 11, 1998 /s/ STEVEN B. COBURN
----------------------------------------
Steven B. Coburn, Chief Financial
Officer
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM TELETECH
HOLDINGS, INC.'S 1998 THIRD QUARTER FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FORM 10-Q FILING.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 11,291
<SECURITIES> 56,110
<RECEIVABLES> 54,834
<ALLOWANCES> 2,714
<INVENTORY> 0
<CURRENT-ASSETS> 125,089
<PP&E> 98,020
<DEPRECIATION> 33,707
<TOTAL-ASSETS> 217,961
<CURRENT-LIABILITIES> 52,230
<BONDS> 7,160
0
0
<COMMON> 602
<OTHER-SE> 156,758
<TOTAL-LIABILITY-AND-EQUITY> 217,961
<SALES> 260,709
<TOTAL-REVENUES> 260,709
<CGS> 168,294
<TOTAL-COSTS> 237,799
<OTHER-EXPENSES> (822)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 946
<INCOME-PRETAX> 22,786
<INCOME-TAX> 9,055
<INCOME-CONTINUING> 13,731
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,731
<EPS-PRIMARY> 0.23
<EPS-DILUTED> 0.22
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS RESTATED SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
TELETECH HOLDINGS, INC.'S 1997 THIRD QUARTER FORM 10-Q AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FORM 10-Q FILING.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 5,840
<SECURITIES> 66,051
<RECEIVABLES> 46,754
<ALLOWANCES> 1,924
<INVENTORY> 0
<CURRENT-ASSETS> 120,866
<PP&E> 65,644
<DEPRECIATION> 18,474
<TOTAL-ASSETS> 181,624
<CURRENT-LIABILITIES> 37,406
<BONDS> 9,552
0
0
<COMMON> 564
<OTHER-SE> 133,385
<TOTAL-LIABILITY-AND-EQUITY> 181,624
<SALES> 199,280
<TOTAL-REVENUES> 199,280
<CGS> 127,043
<TOTAL-COSTS> 173,699
<OTHER-EXPENSES> (2,784)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,053
<INCOME-PRETAX> 27,312
<INCOME-TAX> 10,919
<INCOME-CONTINUING> 16,393
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,393
<EPS-PRIMARY> 0.28
<EPS-DILUTED> 0.27
</TABLE>
