<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: June 30, 1999
---------------
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 August 1, 1999
Common Stock, par value $.01 per share 61,153,953
<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, 1998 and June 30, 1999 3
Condensed consolidated statements of income--Three months ended June 30,
1999 and 1998 5
Condensed consolidated statements of income--Six months ended June 30,
1999 and 1998 6
Condensed consolidated statements of cash flows--Six months ended
June 30, 1999 and 1998 7
Notes to condensed consolidated financial statements--June 30, 1999 8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures about Market Risk 18
PART II . OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 20
</TABLE>
2
<PAGE>
Item 1.
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
ASSETS 1998 1999
------ ----------- ----------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 8,796 $ 10,223
Short-term investments 37,082 34,113
Accounts receivable, net of allowance for doubtful
accounts of $2,900 and $3,296, respectively 68,830 70,584
Prepaids and other assets 2,811 3,967
Deferred tax asset 3,855 3,909
-------- --------
Total current assets 121,374 122,796
-------- --------
PROPERTY AND EQUIPMENT, net of accumulated depreciation
of $38,432 and $50,268, respectively 77,546 97,813
-------- --------
OTHER ASSETS:
Long-term accounts receivable 4,274 6,575
Goodwill, net of accumulated amortization of $1,599 and $2,328,
respectively 15,022 19,736
Contract acquisition cost, net of accumulated amortization of zero
and $706, respectively 10,900 10,194
Other assets 1,794 1,964
-------- --------
Total assets $230,910 $259,078
-------- --------
-------- --------
</TABLE>
The accompanying notes are an integral part of these
consolidated balance sheets.
3
<PAGE>
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1999
------------------------------------ ---- ----
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of long-term debt $ 7,989 $ 6,905
Bank overdraft 778 1,277
Accounts payable 11,814 5,573
Accrued employee compensation 18,134 19,174
Accrued income taxes 4,191 2,128
Other accrued expenses 11,520 14,257
Customer advances, deposits and deferred income 3,803 4,061
------ ------
Total current liabilities 58,229 53,375
DEFERRED TAX LIABILITIES 835 1,026
LONG-TERM DEBT, net of current portion:
Capital lease obligations 4,208 3,025
Line of credit -- 22,000
Other debt 2,145 919
------- ------
Total liabilities 65,417 80,345
------- ------
STOCKHOLDERS' EQUITY:
Common stock; $.01 par value; 150,000,000 shares authorized;
60,769,724 and 61,132,607 shares, respectively, issued and
outstanding 606 610
Additional paid-in capital 111,080 113,375
Accumulated other comprehensive income (1,610) (934)
Retained earnings 55,417 65,682
-------- -------
Total stockholders' equity 165,493 178,733
-------- -------
Total liabilities and stockholders' equity $230,910 $259,078
-------- -------
-------- -------
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
4
<PAGE>
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
1998 1999
---- ----
<S> <C> <C>
REVENUES $88,099 $120,565
------- --------
OPERATING EXPENSES:
Costs of services 57,295 79,835
Selling, general and administrative
Expenses 23,158 31,565
------- --------
Total operating expenses 80,453 111,400
------- --------
INCOME FROM OPERATIONS 7,646 9,165
OTHER INCOME (EXPENSE):
Interest expense (231) (477)
Interest income 830 648
Equity in income of affiliate 72 --
Business combination expenses (881) --
Other (57) (170)
------- --------
(267) 1
------- --------
INCOME BEFORE INCOME TAXES 7,379 9,166
Provision for income taxes 2,915 3,712
------- --------
NET INCOME $ 4,464 $ 5,454
------- --------
------- --------
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 59,696 61,095
------- --------
Diluted 62,373 62,692
------- --------
NET INCOME PER SHARE
Basic $ .07 $ .09
------- --------
Diluted $ .07 $ .09
------- --------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
5
<PAGE>
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
1998 1999
---- ----
<S> <C> <C>
REVENUES $168,343 $231,203
-------- --------
OPERATING EXPENSES:
Costs of services 109,151 154,203
Selling, general and administrative
Expenses 44,420 59,969
-------- --------
Total operating expenses 153,571 214,172
-------- --------
INCOME FROM OPERATIONS 14,772 17,031
OTHER INCOME (EXPENSE):
Interest expense (533) (894)
Interest income 1,720 1,202
Equity in income of affiliate 86 --
Business combination expenses (881) --
Other (152) (104)
-------- --------
240 204
-------- --------
INCOME BEFORE INCOME TAXES 15,012 17,235
Provision for income taxes 5,996 6,970
-------- --------
NET INCOME $ 9,016 $ 10,265
-------- --------
-------- --------
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 59,696 60,933
-------- --------
Diluted 62,373 62,371
-------- --------
NET INCOME PER SHARE
Basic $ .15 $ .17
-------- --------
Diluted $ .14 $ .16
-------- --------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
6
<PAGE>
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
1998 1999
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $9,016 $10,265
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 8,868 13,983
Allowance for doubtful accounts 237 311
Deferred income taxes (149) (64)
Equity in income of affiliate (86) --
Deferred compensation expense 64 --
Changes in assets and liabilities:
Accounts receivable (10,558) (1,005)
Prepaids and other assets 166 (2,207)
Accounts payable and accrued expenses 1,803 (5,391)
Customer advances, deposits and deferred income (364) (130)
-------- --------
Net cash provided by operating activities 8,997 15,762
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (14,935) (30,835)
Purchase of Intellisystems (2,000) --
Purchase of Pamet River, net of $339 cash acquired -- (1,462)
Purchase of Smart Call -- (2,590)
Changes in accounts payable and accrued liabilities related to
investing activities (762) (55)
Decrease in short-term investments 9,439 2,969
-------- --------
Net cash used in investing activities (8,258) (31,973)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in bank overdraft -- 499
Net increase in line of credit 1,715 22,000
Payments on long-term debt and capital leases (2,326) (3,546)
Proceeds from exercise of stock options 1,565 545
-------- --------
Net cash provided by financing activities 954 19,498
-------- --------
Effect of exchange rate changes on cash (1,187) (1,860)
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 506 1,427
CASH AND CASH EQUIVALENTS, beginning of period 7,338 8,796
-------- --------
CASH AND CASH EQUIVALENTS, end of period $ 7,844 $ 10,223
-------- --------
-------- --------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
7
<PAGE>
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
NOTE (1)--BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared without audit pursuant to the rules and regulations of the
Securities and Exchange Commission. The condensed consolidated financial
statements reflect all adjustments (consisting of only normal recurring
accruals) which, in the opinion of management, are necessary to present
fairly the financial position, results of operations and cash flows of
TeleTech Holdings, Inc. and subsidiaries as of June 30, 1999 and 1998 and for
the periods then ended. Operating results for the three and six months ended
June 30, 1999 are not necessarily indicative of the results that may be
expected for the year ended December 31, 1999.
The unaudited condensed consolidated financial statements should be read
in conjunction with the consolidated and combined financial statements and
footnotes thereto included in the Company's Form 10-K for the year ended
December 31, 1998.
NOTE (2)-- SEGMENT INFORMATION AND CUSTOMER CONCENTRATIONS
The Company classified its business activities into four fundamental
areas: outsourced operations in the United States, facilities management
operations, international outsourced operations, and technology services and
consulting. These areas are separately managed and each has significant
differences in capital requirements and cost structures. Outsourced,
facilities management and international outsourced operations are reportable
business segments with their respective financial performance detailed
herein. Technology services and consulting is included in corporate
activities as it is not a material business segment. Also included in
corporate activities are general corporate expenses and overall operational
management expenses. Assets of corporate activities include unallocated cash,
short-term investments and deferred income taxes. There are no significant
transactions between the reported segments for the periods presented. The
Company's three largest clients accounted for 49% of consolidated revenue for
the three months ended June 30, 1999 as compared to 45% for the three months
ended June 30, 1998. Due to the declines in operating income caused largely
by the capacity utilization in several of the Company's North American shared
customer interaction centers, these large clients contribution to the
operating income of the Company has also increased from prior periods.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
(in thousands) 1998 1999
---- ----
<S> <C> <C>
REVENUES:
Outsourced $ 45,484 $ 72,530
Facilities Management 22,262 20,399
International Outsourced 18,429 20,690
Corporate Activities 1,924 6,946
--------- --------
Total $ 88,099 $120,565
--------- --------
--------- --------
INCOME (LOSS) FROM OPERATIONS:
Outsourced $ 7,982 $ 16,801
Facilities Management 3,316 1,406
International Outsourced 2,266 532
Corporate Activities (5,918) (9,574)
--------- --------
Total $ 7,646 $ 9,165
--------- --------
--------- --------
</TABLE>
8
<PAGE>
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 - CONTINUED
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
(in thousands) 1998 1999
---- ----
<S> <C> <C>
REVENUES:
Outsourced $ 89,414 $138,776
Facilities Management 39,590 40,733
International Outsourced 35,779 38,826
Corporate Activities 3,560 12,868
--------- ---------
Total $168,343 $231,203
--------- ---------
--------- ---------
INCOME (LOSS) FROM OPERATIONS:
Outsourced $ 16,754 $ 30,555
Facilities Management 5,415 3,054
International Outsourced 3,550 1,132
Corporate Activities (10,947) (17,710)
--------- ---------
Total $ 14,772 $ 17,031
--------- ---------
--------- ---------
</TABLE>
<TABLE>
<CAPTION>
BALANCE AS OF
DECEMBER 31 JUNE 30,
(in thousands) 1998 1999
---- ----
<S> <C> <C>
ASSETS:
Outsourced Assets $101,105 $120,605
Facilities Management Assets 18,121 17,478
International Outsourced Assets 57,567 58,310
Corporate Activities Assets 54,117 62,685
--------- ---------
Total $230,910 $259,078
--------- ---------
--------- ---------
GOODWILL:
International Outsourced Goodwill, Net $ 6,803 $ 9,059
Corporate Activities Goodwill, Net 8,219 10,677
--------- ---------
Total $ 15,022 $ 19,736
--------- ---------
--------- ---------
</TABLE>
9
<PAGE>
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 - CONTINUED
The following geographic data include revenues based on the location the
services are provided (in thousands).
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
1998 1999
--------- ---------
<S> <C> <C>
REVENUES:
United States $ 64,232 $ 95,062
Australia 8,535 13,228
Canada 11,126 7,484
Rest of world 4,206 4,791
--------- ---------
Total $ 88,099 $120,565
--------- ---------
--------- ---------
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
1998 1999
--------- ---------
<S> <C> <C>
REVENUES:
United States $126,777 $182,653
Australia 17,725 23,947
Canada 17,380 16,404
Rest of world 6,461 8,199
--------- ---------
Total $168,343 $231,203
--------- ---------
--------- ---------
</TABLE>
NOTE (3)--SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION AND NONCASH INVESTING
AND FINANCING ACTIVITIES (IN THOUSANDS):
<TABLE>
<CAPTION>
Six Months Ended June 30,
--------------------------
1998 1999
--------- -------
<S> <C> <C>
Cash paid for interest $ 533 $ 894
Cash paid for income taxes $ 5,218 $ 9,033
Noncash investing and financing activities:
Stock issued in purchase of Intellisystems $ 3,389 $ --
Stock issued in purchase of Pamet River, Inc. $ -- $ 1,753
</TABLE>
NOTE (4)--ACQUISITIONS
On March 18, 1999, the Company acquired 100% of the common stock of Pamet
River, Inc. ("Pamet") for approximately $1,821,000 in cash and 285,711 shares of
common stock in the Company. Pamet is a global marketing company offering
end-to-end marketing solutions by leveraging Internet and database technologies.
The transaction has been accounted for as a purchase and goodwill will be
amortized using the straight-line method over 20 years. The operations of Pamet
for all periods prior to the acquisition are immaterial to the results of the
Company and, accordingly, no pro forma financial information has been presented.
On March 31, 1999, the Company acquired 100% of the common stock of Smart
Call S.A. ("Smart Call") for approximately $2,350,000 in cash including costs
related to the acquisition. Smart Call is based in Buenos Aires, Argentina and
provides a wide range of customer management solutions to Latin American and
10
<PAGE>
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 - CONTINUED
multinational companies. The transaction has been accounted for as a purchase
and goodwill will be amortized using the straight-line method over 20 years.
The operations of Smart Call for all periods prior to the acquisition are
immaterial to the results of the Company and, accordingly, no pro forma
financial information has been presented.
As a part of the Smart Call acquisition, the Company paid $300,000,
including costs associated with the transaction, for the option to acquire
Connect S.A. ("Connect"), a sister company with additional customer service and
systems integration capabilities. The option has been accounted for as an other
asset. TeleTech may be required to purchase Connect for $4.3 million to $4.8
million in total consideration if Connect achieves certain operating objectives.
NOTE (5)--COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
130"). The purpose of SFAS 130 is to report a measure of all changes in equity
that result from recognized transactions and other economic events of the period
other than transactions with owners in their capacity as owners. The only item
of other comprehensive income reported by the Company is the cumulative
translation adjustment.
The Company's comprehensive income for the three and six months ended
June 30, 1998 and 1999 was as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended June 30,
-----------------------------
1998 1999
----------- ---------
<S> <C> <C>
Net income for the period $ 4,464 $ 5,454
Change in cumulative translation adjustment (747) 558
--------- --------
Comprehensive income $ 3,717 $ 6,012
--------- --------
--------- --------
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended June 30,
---------------------------
1998 1999
--------- --------
<S> <C> <C>
Net income for the period $ 9,016 $ 10,265
Change in cumulative translation adjustment (567) 676
-------- --------
Comprehensive income $ 8,449 $ 10,941
--------- --------
--------- --------
</TABLE>
NOTE (6)--SUBSEQUENT EVENT
In July 1999, the Company reached a settlement on the litigation with
CompuServe and other parties whereby the Company will receive $12.0 million in
final settlement, of which $5.5 million was received on August 10, 1999 and the
remainder will be paid in the fourth quarter of 1999 (See "Part II. Other
Information, Item 1. Legal Proceedings.")
11
<PAGE>
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
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, 1998.
Specifically, the Company has experienced, and in the future could experience,
quarterly variations in revenues and earnings as a result of a variety of
factors, many of which are outside the Company's control, including: the timing
of new contracts; the timing of new product or service offerings or
modifications in client strategies; the expiration or termination of existing
contracts; the timing of increased expenses incurred to obtain and support new
business; the timing of increased expenses resulting from addressing potential
Year 2000 problems; 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.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THREE MONTHS ENDED JUNE 30, 1998
Total consolidated revenues increased $32.5 million or 37% to $120.6
million for the three months ended June 30, 1999 from $88.1 million for the
three months ended June 30, 1998. Revenues from the Company's Outsourced segment
increased $27.0 million to $72.5 million for the three months ended June 30,
1999 from $45.5 million for the three months ended June 30, 1998. This increase
resulted from $9.2 million in revenues from new client programs and $28.3
million in increased revenue from existing client programs. Included in the
increased revenue from new programs is approximately $850,000 of revenues
related to the resolution of client billings that related to services provided
in the first quarter of 1999. Contract expirations and other client reductions
offset these increases. Revenues for the three months ended June 30, 1999
include $20.4 million from the Facilities Management segment as compared with
$22.3 million for the three months ended June 30, 1998. This decrease is due to
reduced volumes in one of the Company's Facilities Management contracts.
Revenues from the Company's International Outsourced segment increased $2.3
million to $20.7 million for the three months ended June 30, 1999 from $18.4
million for the three months ended June 30, 1998. This increase is primarily due
to increased revenue from existing clients in Australia offset by declines in
volumes and capacity utilization in Canada and Mexico. Revenues from the
Corporate Activities segment (which includes technology-related revenues)
increased $5.0 million to $6.9 million for the three months ended June 30, 1999
from $1.9 million for the three months ended June 30, 1998. This is primarily
related to revenues from the Cygnus and Pamet River acquisitions completed in
the fourth quarter of 1998 and the first quarter of 1999, respectively.
Costs of services increased $22.5 million, or 39%, to $79.8 million for the
three months ended June 30, 1999 from $57.3 million for the three months ended
June 30, 1998. Costs of services as a percentage of revenues increased from
65.0% for the three months ended June 30, 1998 to 66.2% for the three months
ended June 30, 1999. This is primarily due to the decreased revenues in the
Facilities Management segment that results in higher costs of services as a
percentage of revenues. Also, increased revenues in several large client
programs as they matured through the start-up phase caused a change in the
revenue and service mix and resulted in cost of services as a higher percentage
of revenues.
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998 - CONTINUED
Selling, general and administrative expenses increased $8.4 million, or 36%
to $31.6 million for the three months ended June 30, 1999 from $23.2 million for
the three months ended June 30, 1998. Selling, general and administrative
expenses as a percentage of revenues decreased slightly from 26.3% for the three
months ended June 30, 1998 to 26.2% for the three months ended June 30, 1999.
Normally, the Company would expect selling, general and administrative expenses
as a percentage of revenue to decline in periods of significant revenue
increases as occurred in the second quarter of 1999. However, selling, general
and administrative expenses were negatively impacted in the second quarter of
1999 due to decreased capacity utilization in the Company's North American
shared customer interaction centers.
As a result of the foregoing factors, income from operations increased
$1.5 million or 20%, to $9.2 million for the three months ended June 30, 1999
from $7.6 million for the three months ended June 30, 1998. Operating income
as a percentage of revenues decreased from 8.7% for the three months ended
June 30, 1998 to 7.6% for the three months ended June 30, 1999. Income from
operations from the Company's Outsourced segment increased $8.8 million to
$16.8 million for the three months ended June 30, 1999 from $8.0 million for
the three months ended June 30, 1998. Income from operations as a percentage
of revenue for the outsourced segment increased from 17.5% for the three
months ended June 30, 1998 to 23.2% for the three months ended June 30, 1999.
This increase resulted from significant increases in revenues in several
large client programs offset by excess capacity in several customer
interaction centers. Income from operations for the three months ended June
30, 1999 includes approximately $1.4 million from the Facilities Management
segment as compared with $3.3 million for the three months ended June 30,
1998. Income from operations as a percentage of revenue for the Facilities
Management segment decreased from 14.9% for the three months ended June 30,
1999 to 6.9% for the three months ended June 30, 1998. This decrease resulted
primarily from decreased volumes and increased healthcare costs in one of the
Company's Facilities Management contracts. Income from operations in the
Company's International Outsourced segment decreased $1.7 million to $532,000
for the three months ended June 30, 1999 from $2.3 million for the three
months ended June 30, 1998. Income from operations as a percentage of revenue
for the International Outsourced segment decreased from 12.3% for the three
months ended June 30, 1999 to 2.6% for the three months ended June 30, 1998.
This decrease resulted primarily from lower volumes in Canada and Mexico
resulting in decreased capacity utilization. The operating loss from
operations from the Corporate Activities segment (which includes
technology-related operations) increased $3.7 million to $9.6 million for the
three months ended June 30, 1999 from $5.9 million for the three months ended
June 30, 1998. This increase is primarily related to the increased expenses
resulting from the Company's significant growth over the period and the
Company's increased investment in technology. The Company's three largest
clients accounted for 49% of the Company's revenues for the three months
ended June 30, 1999. Due to the declines in operating income caused largely
by the capacity utilization in several of the Company's North American shared
customer interaction centers, these large clients contribution to the
operating income of the Company has increased from prior periods.
Other income totaled $1,000 for the three months ended June 30, 1999
compared with a $267,000 loss during the three months ended June 30, 1998. This
is primarily related to a decrease in business combination expenses and
investment income offset by an increase in interest expense due to the
borrowings on the line of credit.
As a result of the foregoing factors, net income increased $990,000 or
22.2%, to $5.5 million for the three months ended June 30, 1999 from $4.5
million for the three months ended June 30, 1998.
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
Revenues increased $62.9 million or 37% to $231.2 million for the six
months ended June 30, 1999 from $168.3 million for the six months ended June 30,
1998. Revenues from the Company's Outsourced
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998 - CONTINUED
segment increased $49.4 million to $138.8 million for the six months ended
June 30, 1999 from $89.4 million for the six months ended June 30, 1998. This
increase resulted from $16.7 million in revenues from new client programs and
$40.2 million in increased revenue from existing client programs. Revenues
for the six months ended June 30, 1999 include $40.7 million from the
Facilities Management segment as compared with $39.6 million for the six
months ended June 30, 1998. Revenues from the Company's International
Outsourced segment increased $3.0 million to $38.8 million for the six months
ended June 30, 1999 from $35.8 million for the six months ended June 30,
1998. This increase is primarily due to increased revenue from existing
clients in Australia offset by declines in volumes and capacity utilization
in Canada and Mexico. Revenues from the Corporate Activities segment (which
includes technology-related revenues) increased $9.3 million to $12.9 million
for the six months ended June 30, 1999 from $3.6 million for the six months
ended June 30, 1998. This is primarily related to revenues from the Cygnus
and Pamet River acquisitions completed in the fourth quarter of 1998 and the
first quarter of 1999, respectively.
Costs of services increased $45.1 million, or 41%, to $154.2 million for
the six months ended June 30, 1999 from $109.2 million for the six months ended
June 30, 1998. Costs of services as a percentage of revenues increased from
64.8% for the six months ended June 30, 1998 to 66.7% for the six months ended
June 30, 1999. This is primarily a result of increased revenues in several large
client programs as they matured through the start-up phase caused a change in
the revenue and service mix and resulted in cost of services as a higher
percentage of revenues.
Selling, general and administrative expenses increased $15.5 million, or
35% to $60.0 million for the six months ended June 30, 1999 from $44.4 million
for the six months ended June 30, 1998. Selling, general and administrative
expenses as a percentage of revenues decreased from 26.4% for the six months
ended June 30, 1998 to 25.9% for the six months ended June 30, 1999. While the
Company expects selling, general and administrative expenses as a percentage of
revenue to decline in periods of significant revenue increases as occurred in
the second quarter of 1999, selling, general and administrative expenses were
negatively impacted in the first half of 1999 due to decreased capacity
utilization in the Company's North American shared customer interaction centers.
As a result of the foregoing factors, income from operations increased $2.3
million or 15%, to $17.0 million for the six months ended June 30, 1999 from
$14.8 million for the six months ended June 30, 1998. Operating income as a
percentage of revenues decreased from 8.8% for the six months ended June 30,
1998 to 7.4% for the six months ended June 30, 1999. Income from operations from
the Company's outsourced segment increased $13.8 million to $30.6 million for
the six months ended June 30, 1999 from $16.8 million for the six months ended
June 30, 1998. Income from operations as a percentage of revenue for the
Outsourced segment increased from 18.7% for the six months ended June 30, 1998
to 22.0% for the three months ended June 30, 1999. This increase resulted from
significant increases in revenues in several large client programs offset by
excess capacity in several customer interaction centers. Income from operations
for the six months ended June 30, 1999 includes approximately $3.1 million from
the Facilities Management segment as compared with $5.4 million for the six
months ended June 30, 1998. Income from operations as a percentage of revenue
for the Facilities Management segment decreased from 13.7% for the six months
ended June 30, 1999 to 7.5% for the six months ended June 30, 1998. This
decrease resulted primarily from decreased volumes and increased healthcare
costs in one of the Company's Facilities Management contracts. Income from
operations from the Company's International Outsourced segment decreased $2.4
million to $1.1 million for the six months ended June 30, 1999 from $3.5 million
for the six months ended June 30, 1998. Income from operations as a percentage
of revenue for the International Outsourced segment decreased from 9.9% for the
six months ended June 30, 1999 to 2.9% for the six months ended June 30, 1998.
This decrease resulted primarily from lower volumes in Canada and Mexico
resulting in decreased capacity utilization. The loss from
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998 - CONTINUED
operations from the Corporate Activities segment (which includes
technology-related operations) increased $6.8 million to $17.7 million for the
six months ended June 30, 1999 from $10.9 million for the six months ended June
30, 1998. This increase is primarily related to the increased expenses resulting
from the Company's significant growth over the period and the Company's
increased investment in technology.
Other income totaled $204,000 for the six months ended June 30, 1999
compared with $240,000 during the six months ended June 30, 1998. Other expense
in 1998 included $881,000 in expenses related to business combinations.
Exclusive of the business combination expenses other income decreased $917,000
resulting from decreased investment income of $518,000 resulting from the
decrease in cash investments from $60.2 million at June 30, 1998 to $34.1
million at June 30, 1999 and increased interest expense resulting from the
increased borrowings at June 30, 1999.
As a result of the foregoing factors, net income increased $1.2 million
or 13.9%, to $10.3 million for the six months ended June 30, 1999 from $9.0
million for the six months ended June 30, 1998.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1999 the Company had cash and cash equivalents of $10.2
million and short-term investments of $34.1 million. Cash provided by
operating activities was $15.8 million for the six months ended June 30,
1999, which primarily resulted from income from operations and increased
collections of accounts receivable during the period.
Cash used in investing activities was $32.0 million for the six months
ended June 30, 1999 resulting primarily from $30.8 million in capital
expenditures, $1.5 million toward the purchase of Pamet River and $2.6 million
toward the purchase of Smart Call (see Note 4 accompanying the condensed
financial statements), offset in part by a decrease of $3.0 million in short
term investments.
Cash provided by financing activities was $19.5 million resulting from the
increase in borrowings of $22.0 million offset in part by pay downs of capital
leases and other debt.
The Company has a $50.0 million unsecured revolving line of credit with a
syndicate of five banks. The Company also has the option to secure at any time
up to $25.0 million of the line with available cash investments. The Company has
two interest rate options: an offshore rate option or a bank base rate option.
The Company will pay interest at a spread of 50 to 150 basis points over the
applicable offshore or bank base rate, depending upon the Company's leverage.
Interest on the secured portion is based on the applicable rate plus 22.5 basis
points. Borrowings under this agreement totaled $22.0 million at June 30, 1999
of which $15.0 million was secured at the Company's option with temporary short
term investments disclosed on the balance sheet. Interest rates under these
borrowings averaged 5.5% at June 30, 1999. Under this line of credit, the
Company has agreed to maintain certain financial ratios and capital expenditure
limits. The Company is in compliance with all covenants of this agreement as of
June 30, 1999.
The Company currently expects total capital expenditures in 1999 to be
approximately $50 to $60 million of which $30.8 million was expended in the
first six months. The Company believes that existing cash on hand and available
borrowings under the line of credit together with cash from operations will be
sufficient to finance the Company's operations, planned capital expenditures and
anticipated growth through 1999.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998 - CONTINUED
POTENTIAL YEAR 2000 PROBLEMS
The Year 2000 problem results from date-sensitive computer programs being
written using two digits, rather than four digits, to define the applicable
year. Computer programs that are not Year 2000 compliant will be unable, for
example, to determine whether date references to "00" refers to the year 1900 or
2000. Determining whether the Company's and its clients' systems are Year 2000
compliant is critical because the Company utilizes a significant number of
software programs and operating systems throughout its organization, and the
Company's systems regularly interface with the various information systems of
its clients. The Company's or its clients' failure to detect and remediate Year
2000 related problems in its or their computer and information systems could
have a material adverse effect on the business, results of operations or
financial condition of the Company.
The Company, in conjunction with an outside consulting firm, has
implemented a multiphased program to inventory, assess, remediate and test its
systems for Year 2000 compliance (the "Program"). The Company has completed the
enterprisewide inventory, assessment and analysis and the target date for the
completion of the remediation associated with the Year 2000 issues is September
1999. The targeted completion date includes addressing the technology and
non-technology interfaces with its clients and suppliers.
The consulting firm works with full-time Company employees who are
dedicated to the Program. The assessments completed to date have led to the need
to migrate several human resource- and payroll-oriented applications to Year
2000 compliant software, upgrade several telephone switches and procure several
hundred replacement workstations. Analysis and testing of Company-generated
software applications has been completed and only minor remediation has been
required. The Company anticipates that the need for software conversion caused
by Year 2000 issues will not be significant, given the Company's extensive use
of off-the-shelf products.
Although the Company has completed its assessment of its internal systems,
many of the Company's client programs interact with and are at least partially
dependent upon the clients' internal computer systems. The Company has sought
representations from each of its clients as to the Year 2000-compliance status
of its systems. The Company has only received positive responses from three of
its clients, which represent less than 10% of the Company's consolidated
revenues, the remainder of the clients are indicated that they are in process of
reviewing these systems. The Company will continue to monitor the progress of
its clients and is in the process of developing contingency plans for each
client program in the event that clients' systems experience Year 2000 problems.
While the cost to address Year 2000 issues continues to be developed as the
project nears completion, the Company currently anticipates that the total cost
of assessment and remediation will be between $5 million and $6 million. Of this
total approximately 70% is anticipated to be new capital expenditures to replace
non-compliant computer hardware and software. For the six months ended June 30,
1999, the Company has incurred approximately $3.0 million in inventory,
assessment and remediation and equipment and software replacement work on Year
2000 issues. Of this amount, $1.1 million was expensed in the accompanying
statement of operations ($500,000 related to the second quarter of 1999) and
were funded through cash flow from operations. The remaining expenditures in
1999 will be funded primarily through cash flow from operations and available
cash on hand.
FORWARD-LOOKING STATEMENTS
All statements contained in this "Management's Discussion and Analysis
of Financial Condition and
16
<PAGE>
DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998 - CONTINUED
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
expectation that selling, general, and administrative expenses will decline in
periods of significant revenue increases; (ii) the anticipated level of capital
expenditures for 1999; (iii) the Company's belief that existing cash, available
borrowings and cash from operations will be sufficient to finance the Company's
near term operations; (iv) the Company's estimate of the impact of the Year 2000
issues; (v) the Company's belief that near-term interest rate fluctuations will
not result in a material effect on future earnings, fair values or cash flows of
the Company; (vi) the Company's belief that foreign currency rate fluctuations
may positively or negatively affect revenues and net income attributable to the
Company's foreign subsidiaries; and (vii) 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.
17
<PAGE>
Item 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FOR THE SIX MONTHS ENDED JUNE 30, 1999
Market risk represents the risk of loss that may impact the financial
position, results of operations or cash flows of the Company due to adverse
changes in financial and commodity market prices and rates. The Company is
exposed to market risk in the areas of changes in U.S. interest rates and
changes in foreign currency exchange rates as measured against the U.S. dollar.
These exposures are directly related to its normal operating and funding
activities. Historically, and as of June 30, 1999, the Company has not used
derivative instruments or engaged in hedging activities.
INTEREST RATE RISK
The interest on the Company's line of credit and its Canadian subsidiary's
operating loan is variable based on the bank's base rate or offshore rate, and
therefore, affected by changes in market interest rates. At June 30, 1999, there
was approximately $25 million in borrowings subject to interest rate risk. The
Company monitors interest rates frequently and has sufficient cash balances to
pay off the line of credit and any early termination penalties, should interest
rates increase significantly. The Company's investments are typically short-term
in nature and as a result do not expose the Company to significant risk from
interest rate fluctuations. Therefore, the Company does not believe that
reasonably possible near-term changes in interest rates will result in a
material effect on future earnings, fair values or cash flows of the Company.
FOREIGN CURRENCY RISK
The Company has wholly owned subsidiaries in Argentina, Australia, Brazil,
Canada, Mexico, New Zealand, Singapore and the United Kingdom. The substantial
majority of revenues and expenses from these operations are typically
denominated in local currency, thereby creating exposures to changes in exchange
rates. The changes in the exchange rate may positively or negatively affect the
Company's revenues and net income attributed to these subsidiaries.
18
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
As disclosed in the Company's 1998 Annual Report on Form 10-K, in late
November 1996, CompuServe notified TeleTech that CompuServe was withdrawing its
WOW! Internet service from the marketplace and that effective January 31, 1997,
it would terminate all the programs TeleTech provided to CompuServe. Pursuant to
its agreement with TeleTech, CompuServe was entitled to terminate the agreement
for reasonable business purposes upon 120 days' advance notice and payment to
TeleTech of a termination fee calculated in accordance with the agreement. In
December 1996, TeleTech filed suit against CompuServe in the Federal District
Court for the Southern District of Ohio to enforce these termination provisions
and collect the termination fee. CompuServe filed a counterclaim in December
1996 alleging that the Company breached other provisions of this agreement and
seeking unspecified monetary damages. In March 1997, CompuServe asserted a right
to offset certain accounts receivable it owes to the Company for services
rendered against the amount that may be awarded to CompuServe on its
counterclaim, if any. These accounts receivable total $4.3 million. In July
1999, the Company reached a settlement with CompuServe and other parties whereby
the Company would receive $12.0 million in final settlement, of which $5.5
million was received on August 10, 1999 and the remainder will be paid in the
fourth quarter of 1999.
From time to time, the Company is involved in litigation, most of which is
incidental to its business. In the Company's opinion, no litigation to which the
Company currently is a party is likely to have a material adverse effect on the
Company's results of operations or financial condition.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following documents are filed as an exhibit to this
report:
27.1 Financial Data Schedule
19
<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: August 11, 1999 /s/ Kenneth D. Tuchman
------------------------------- ---------------------------------
Kenneth D. Tuchman
Chairman of the Board, and Chief
Executive Officer
Date: August 11, 1999 /s/ Steven B. Coburn
------------------------------- ---------------------------------
Steven B. Coburn, Chief Financial
Officer
20
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM TELETECH
HOLDINGS, INC.'S 1999 SECOND QUARTER FORM 10-Q AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FORM 10-Q FILING.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 10,223
<SECURITIES> 34,113
<RECEIVABLES> 70,584
<ALLOWANCES> 3,296
<INVENTORY> 0
<CURRENT-ASSETS> 122,796
<PP&E> 148,081
<DEPRECIATION> 50,268
<TOTAL-ASSETS> 259,078
<CURRENT-LIABILITIES> 53,375
<BONDS> 25,944
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<COMMON> 610
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<TOTAL-LIABILITY-AND-EQUITY> 259,078
<SALES> 231,203
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<TOTAL-COSTS> 214,172
<OTHER-EXPENSES> (1,098)
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