<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, 2000
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 November 10, 2000
Common Stock, par value $.01 per share 66,249,092
<PAGE>
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PAGE
NUMBER
PART I. FINANCIAL INFORMATION
<S> <C> <C>
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets--December 31, 1999 and September 30, 2000 3
Condensed consolidated statements of income--Three months ended September 30,
2000 and 1999 5
Condensed consolidated statements of income--Nine months ended September 30,
2000 and 1999 6
Condensed consolidated statements of cash flows--Nine months ended
September 30, 2000 and 1999 7
Notes to condensed consolidated financial statements--September 30, 2000 8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures about Market Risk 16
PART II . OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities and Use of Proceeds 18
Item 5. Recent Developments 18
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 20
</TABLE>
<PAGE>
Item 1.
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
ASSETS 2000 1999
------ ------------- ------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 19,275 $ 16,227
Short term investments 47,945 --
Investment in available-for-sale securities 28,609 41,621
Accounts receivable, net of allowance for doubtful accounts of $5,730 and
$3,923, respectively 166,333 91,979
Prepaids and other assets 4,862 5,361
Deferred tax asset -- 4,889
-------- --------
Total current assets 267,024 160,077
-------- --------
PROPERTY AND EQUIPMENT, net of accumulated depreciation of $88,888 and
$65,083, respectively 155,458 111,644
-------- --------
OTHER ASSETS:
Long-term accounts receivable 4,300 3,930
Goodwill, net of amortization of $4,075 and $3,103, respectively 19,219 20,633
Contract acquisition cost, net of amortization of $3,231 and $1,614,
respectively 13,269 9,286
Deferred tax asset 550 550
Other assets 7,523 5,364
-------- --------
Total assets $467,343 $311,484
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
balance sheets.
3
<PAGE>
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 2000 1999
------------------------------------ ------------- ------------
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of long-term debt $ 12,879 $ 5,783
Bank overdraft -- 1,323
Accounts payable 6,255 12,426
Accrued employee compensation 23,663 28,319
Accrued income taxes 14,996 4,397
Deferred income taxes 1,790 --
Other accrued expenses 34,537 17,749
Customer advances, deposits and deferred income 4,903 4,510
-------- ---------
Total current liabilities 99,023 74,507
LONG-TERM DEBT, net of current portion:
Capital lease obligations 307 2,530
Line of credit 55,000 18,000
Other debt 1,891 5,649
-------- ---------
Total liabilities 156,221 100,686
-------- ---------
MINORITY INTEREST, in consolidated subsidiaries 6,025 --
-------- ---------
STOCKHOLDERS' EQUITY:
Stock purchase warrants 5,100 --
Common stock; $.01 par value; 150,000,000 shares authorized;
66,180,192 and 65,087,645 shares, respectively, issued and
outstanding 661 650
Additional paid-in capital 141,958 122,088
Accumulated other comprehensive income 10,221 (1,402)
Retained earnings 147,157 89,462
-------- ---------
Total stockholders' equity 305,097 210,798
-------- ---------
Total liabilities and stockholders' equity $467,343 $ 311,484
======== =========
</TABLE>
The accompanying notes are an integral part of these condensed 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
SEPTEMBER 30,
--------------------------------
2000 1999
-------- --------
<S> <C> <C>
REVENUES $212,716 $134,691
OPERATING EXPENSES:
Costs of services 135,532 90,336
Other operating expenses 56,750 32,958
Loss on closure of subsidiary 3,419 --
-------- --------
Total operating expenses 195,701 123,294
-------- --------
INCOME FROM OPERATIONS 17,015 11,397
-------- --------
OTHER INCOME (EXPENSE):
Interest expense (1,334) (650)
Interest income 1,007 477
Gain on settlement of long-term contract -- 6,726
Gain on sale of securities 32,089 --
Other 1,183 334
-------- --------
32,945 6,887
-------- --------
INCOME BEFORE INCOME TAXES AND MINORITY INTEREST 49,960 18,284
Provision for income taxes 18,739 7,248
-------- --------
INCOME BEFORE MINORITY INTEREST 31,221 11,036
Minority interest, net of income taxes (526) --
-------- --------
NET INCOME $ 30,695 $ 11,036
======== ========
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 66,105 64,511
======== ========
Diluted 70,472 66,544
======== ========
NET INCOME PER SHARE
Basic $ 0.46 $ 0.17
======== ========
Diluted $ 0.44 $ 0.17
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed 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>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------------
2000 1999
--------- ---------
<S> <C> <C>
REVENUES $ 582,570 $ 383,567
OPERATING EXPENSES:
Costs of services 381,523 256,576
Other operating expenses 145,786 95,576
Loss on closure of subsidiary 3,419 --
--------- ---------
Total operating expenses 530,728 352,152
--------- ---------
INCOME FROM OPERATIONS 51,842 31,415
--------- ---------
OTHER INCOME (EXPENSE):
Interest expense (3,422) (1,690)
Interest income 2,329 1,809
Gain on settlement of long-term contract -- 6,726
Gain on sale of securities 44,851 --
Other 497 229
--------- ---------
44,255 7,074
--------- ---------
INCOME BEFORE INCOME TAXES AND MINORITY INTEREST 96,097 38,489
Provision for income taxes 36,306 15,257
--------- ---------
INCOME BEFORE MINORITY INTEREST 59,791 23,232
Minority interest, net of income taxes (925) --
--------- ---------
NET INCOME $ 58,866 $ 23,232
========= =========
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 65,743 64,301
========= =========
Diluted 70,144 65,871
========= =========
NET INCOME PER SHARE
Basic $ 0.90 $ 0.36
========= =========
Diluted $ 0.84 $ 0.35
========= =========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statement
6
<PAGE>
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
2000 1999
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 58,866 $ 23,232
Adjustments to reconcile net income to net cash used in operating
activities:
Depreciation and amortization 30,378 21,465
Minority interest 925 --
Allowance for doubtful accounts 1,808 335
Gain on sale of securities (44,851) --
Deferred income taxes (1,073) (355)
Net gain on asset dispositions (545) 574
Non-cash deal costs 1,800 --
Tax benefit from exercise of stock options 7,886 753
Changes in assets and liabilities:
Accounts receivable (76,163) (12,419)
Prepaids and other assets 789 (1,101)
Accounts payable and accrued expenses 21,721 7,016
Customer advances, deposits and deferred income (3,285) 120
-------- --------
Net cash (used in) provided by operating activities (1,744) 39,620
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (76,216) (40,169)
Proceeds from sale of available-for-sale securities 50,634 --
Acquisitions, net of cash acquired (600) (1,462)
Purchase of Smart Call -- (2,590)
Contract acquisition costs (4,389) --
Proceeds from sale of HPH 5,400 --
Investment in customer relationship management software company (7,989) --
Proceeds from minority interest in subsidiary 5,100 --
Changes in accounts payable and accrued liabilities related to investing
activities -- (55)
Increase in short-term investments (10,914) (191)
-------- --------
Net cash used in investing activities (38,974) (44,467)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in short-term borrowings -- 307
Net increase in line of credit 37,000 22,000
Net increase (decrease) on long-term debt and capital leases 1,093 (4,484)
Distribution to shareholders (1,171) --
Proceeds from exercise of stock options 10,177 1,560
-------- --------
Net cash provided by financing activities 47,099 19,383
-------- --------
Effect of exchange rate changes on cash (3,333) (2,227)
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 3,048 12,309
CASH AND CASH EQUIVALENTS, beginning of period 16,227 9,466
-------- --------
CASH AND CASH EQUIVALENTS, end of period $ 19,275 $ 21,775
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
7
<PAGE>
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
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, 2000 and 1999 and for the
periods then ended. Operating results for the three and nine months ended
September 30, 2000 are not necessarily indicative of the results that may be
expected for the year ended December 31, 2000.
As more fully discussed in Note 4, during August 2000, the Company
entered into a business combination with Contact Center Holdings, S.L. ("CCH").
The business combination has been accounted for using the pooling of interests
method, and the historical consolidated financial statements of the Company for
all the years prior to the business combination have been restated in the
accompanying consolidated financial statements to include the financial
position, results of operations and cash flows of CCH.
The unaudited condensed consolidated financial statements should be
read in conjunction with the consolidated financial statements and footnotes
thereto included in the Company's Form 10-K for the year ended December 31,
1999. Certain 1999 amounts have been reclassified to conform to 2000
presentation.
NOTE (2)--RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards (SFAS) No. 133,
"Accounting for Derivative Instrument and Hedging Activities," establishes fair
value accounting and reporting standards for derivative instruments and hedging
activities. The effective date of SFAS No. 133 was deferred until January 1,
2001 by the issuance of SFAS No. 137. Management anticipates that the adoption
of SFAS No. 133 will not materially effect the Company as it anticipates that no
derivative instruments will be outstanding on January 1, 2001. Currently, the
only derivative type instruments the Company is participating in relate to
purchasing forward contracts of Canadian dollars. These contracts will be
settled by January 1, 2001 and the current difference between the market value
of these outstanding contracts and the cost of the contracts are not material.
NOTE (3)-- SEGMENT INFORMATION AND CUSTOMER CONCENTRATIONS
The Company classifies 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.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
------------------------------
(in thousands) 2000 1999
--------- ---------
<S> <C> <C>
REVENUES:
Outsourced $ 93,879 $ 74,369
8
<PAGE>
Facilities Management 30,625 23,556
International Outsourced 85,317 31,994
Corporate Activities 2,895 4,772
--------- ---------
Total $ 212,716 $ 134,691
========= =========
OPERATING INCOME (LOSS):
Outsourced $ 20,740 $ 17,451
Facilities Management 3,560 1,118
International Outsourced 15,542 2,420
Corporate Activities (22,827) (9,592)
--------- ---------
Total $ 17,015 $ 11,397
========= =========
</TABLE>
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000 - CONTINUED
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------------
(in thousands) 2000 1999
--------- ---------
<S> <C> <C>
REVENUES:
Outsourced $ 278,673 $ 213,145
Facilities Management 85,833 64,289
International Outsourced 208,990 88,493
Corporate Activities 9,074 17,640
--------- ---------
Total $ 582,570 $ 383,567
========= =========
OPERATING INCOME (LOSS):
Outsourced $ 62,821 $ 48,007
Facilities Management 10,070 4,172
International Outsourced 31,469 6,540
Corporate Activities (52,518) (27,304)
--------- ---------
Total $ 51,842 $ 31,415
========= =========
</TABLE>
<TABLE>
<CAPTION>
BALANCE AS OF
SEPTEMBER 30 DECEMBER 31,
(in thousands) 2000 1999
------------ ------------
<S> <C> <C>
ASSETS:
Outsourced Assets $115,238 $ 76,401
Facilities Management Assets 14,088 11,290
International Outsourced Assets 178,207 106,397
Corporate Activities Assets 160,231 117,396
-------- --------
Total $467,764 $311,484
======== ========
GOODWILL:
International Outsourced Goodwill, Net 10,508 $ 10,496
Corporate Activities Goodwill, Net 8,711 10,137
-------- --------
Total $ 19,219 $ 20,633
======== ========
</TABLE>
The following geographic data include revenues based on the location
the services are provided (in thousands).
9
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
-----------------------------
2000 1999
-------- --------
<S> <C> <C>
REVENUES:
United States $118,580 $ 97,594
Canada 21,911 12,983
Europe 19,306 10,232
Australia 16,407 8,218
Latin America 16,132 4,947
Rest of world 20,380 717
-------- --------
Total $212,716 $134,691
======== ========
</TABLE>
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000 - CONTINUED
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------------
2000 1999
-------- --------
<S> <C> <C>
REVENUES:
United States $353,915 $280,248
Canada 58,364 36,930
Australia 47,803 24,622
Latin America 43,144 10,692
Europe 56,835 30,359
Rest of world 22,509 716
-------- --------
Total $582,570 $383,567
======== ========
</TABLE>
NOTE (4)--SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION AND NONCASH INVESTING
AND FINANCING ACTIVITIES (IN THOUSANDS):
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
2000 1999
---- ----
<S> <C> <C>
Cash paid for interest $1,068 $ 1,690
Cash paid for income taxes $9,091 $15,444
Noncash investing and financing activities:
Stock issued in purchase of Pamet River, Inc. $ -- $ 1,753
Issuance of stock purchase warrants in connection
with formation of joint venture $5,100 $ --
</TABLE>
NOTE (5) - ACQUISITION
On August 31, 2000, the Company and CCH entered into a definitive Share
Purchase Agreement, which included the exchange of 3,263,816 shares of the
Company's common stock for all of the issued share capital of CCH. The business
combination was accounted for as a pooling of interests, and accordingly, the
historical financial statements of the Company have been restated to include the
financial statements of CCH for all periods presented. The consolidated
financial statements have been prepared to give retroactive effect to the
business combination with CCH in August 2000.
The table below sets forth the combined revenues and net income of the
previously separate enterprises
10
<PAGE>
for the period prior to the consummation of the combinations during the three
and the nine months ended September 30, 2000 and 1999 (in thousands):
<TABLE>
<CAPTION>
THI CCH COMBINED
--- --- --------
<S> <C> <C> <C>
THREE MONTHS ENDED SEPTEMBER 30,
2000:
Revenues .......................................... $134,242 $9,026 $143,268
Net income ........................................ 29,680 371 30,051
1999:
Revenues .......................................... $126,131 $8,560 $134,691
Net income ........................................ 10,831 205 11,036
</TABLE>
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000 - CONTINUED
<TABLE>
<CAPTION>
THI CCH COMBINED
--- --- --------
<S> <C> <C> <C>
NINE MONTHS ENDED SEPTEMBER 30,
2000:
Revenues .......................................... $474,582 $38,540 $513,122
Net income ........................................ 55,963 2,259 58,222
1999:
Revenues .......................................... $357,334 $26,233 $383,567
Net income ........................................ 21,096 2,136 23,232
</TABLE>
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 Company's comprehensive income for the three months and nine months
period ended September 30, 1999 and 2000 was as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
-----------------------
2000 1999
-------- -------
<S> <C> <C>
Net income for the period $ 30,695 $11,036
Change in cumulative translation adjustment (2,149) 351
Unrealized loss on securities available for
sale, net of tax effect (24,601) --
-------- -------
Comprehensive income $ 3,945 $11,387
</TABLE>
======== =======
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
2000 1999
-------- -------
<S> <C> <C>
Net income for the period $ 58,866 $23,232
Change in cumulative translation adjustment (4,079) 515
11
<PAGE>
Unrealized gain on securities available for
sale, net of tax effect 15,702 --
-------- -------
Comprehensive income $ 70,489 $23,747
======== =======
</TABLE>
NOTE (7)--FORD JOINT VENTURE
During the first quarter of 2000, the Company and Ford Motor Company
("Ford") formed the Percepta joint venture. In connection with this formation,
the Company issued stock purchase warrants to Ford entitling Ford to purchase
750,000 shares of TeleTech common stock. These warrants were valued at $5.1
million using the Black Scholes Option model.
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000 - CONTINUED
NOTE (8)--LEASE COMMITMENT
In March, 2000 the Company and State Street Bank and Trust Company of
Connecticut ("State Street") entered into a lease agreement (the "Agreement")
whereby State Street acquired 12 acres of land in Arapahoe County, Colorado for
approximately $5.2 million for the purpose of constructing a new corporate
headquarters for the Company. In June, 2000 the Agreement was amended to provide
for the construction of the building. The total estimated cost of the land and
building provided for under the Agreement is $30 million. Rent expense will
commence upon completion of the building, which is estimated to be in the first
quarter of 2001. The rental expense will be based upon the total project costs
times a floating rate factor based on a spread of 100 to 175 basis points over
LIBOR.
NOTE (9)-INVESTMENT IN AVAILABLE-FOR-SALE SECURITIES
In December 1999 and January 2000, the Company invested a total of $9.6
million in a privately held customer relationship management software company
which resulted in an ownership of approximately 7%. In June, 2000, this company
merged with E.piphany, Inc., a publicly traded customer relationship management
company. As a result of the merger, TeleTech received 825,000 shares of
E.piphany common stock. During the three and nine months ended September 30,
2000, the Company sold 290,000 and 442,200 shares, respectively, of E.piphany
for total proceeds of $35.9 million and $50.6 million, respectively, which
resulted in a realized gain of $32.1 million and $44.9 million, respectively.
The remaining 382,800 shares of E.piphany are reflected in the accompanying
September 30, 2000 balance sheet as an available for sale security recorded at
their fair market value of $28.6. Accordingly, they are reflected at their
market value with the corresponding unrealized gain reflected in other
comprehensive income, net of tax.
NOTE (10)-ASSET DISPOSITIONS
In July 2000, the Company sold a division of its Australian subsidiary,
which provides services in the healthcare industry, for cash of approximately
$5.4 million. This sale resulted in a gain recognized in the third quarter of
2000 of approximately $4.0 million. The operating results, assets and
liabilities of this division are not material to the consolidated operating
results assets and liabilities of the Company.
In September 2000, the Company closed its Pamet River subsidiary, which
provided marketing solutions by leveraging Internet and database technologies.
The Company closed the subsidiary due to weak operating performance and
incompatibility with the Company's key strategic initiatives. It was more cost
effective to close the operation than to seek a buyer. The disposal resulted in
a $3.4 million loss, which is included as an operating expense in the
accompanying statement of income.
12
<PAGE>
NOTE (11)- SUBSEQUENT EVENT
In November 2000, the Company acquired the customer care division of
Boston Communications Group in an asset purchase transaction accounted for under
the purchase method of accounting. Boston Communications Group's customer care
division provides 24x7 inbound customer care solutions for the wireless
industry. The Company purchased the customer care division in a cash transaction
valued at $15 million, including a $13 million cash payment and assumption of
approximately $2 million of liabilities.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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 note
regarding Forward Looking Information included in the Company's Form 10-K for
the year ended December 31, 1999. 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.
RESULTS OF OPERATIONS
THREE MONTH PERIOD ENDED SEPTEMBER 30, 2000 COMPARED TO SEPTEMBER 30, 1999
Revenues increased $78.0 million or 58% to $212.7 million for the three
months ended September 30, 2000 from $134.7 million for the three months ended
September 30, 1999. Outsourced revenues increased $19.5 million, resulting from
growth in new and existing client relationships. Revenues for the three months
ended September 30, 2000 include approximately $30.6 million from facilities
management contracts as compared with $23.6 million for the three months ended
September 30, 1999. This increase is a result of significantly increased number
of customer interactions managed on behalf of one of the company's facilities
management clients. International outsourced revenues increased $53.3 million.
This is due to significant increases in Canada as a result of the commencement
of operations of Percepta and an increasing number of United States clients
utilizing the Company's Canadian locations. Revenues in Latin America grew by
$11.2 million as a result of growth in new and existing client relationships and
an acquisition completed in the fourth quarter of 1999. Additionally, revenues
in Spain increased by $4.9 million.
Costs of services increased $45.2 million, or 50%, to $135.5 million
for the three months ended September 30, 2000 from $90.3 million for the three
months ended September 30, 1999. Costs of services as a percentage of revenues
decreased from 67.1% for the three months ended September 30, 1999 to 63.7% for
the three months ended September 30, 2000. The decrease in the costs of services
as a percentage of revenues is a result of strong growth in revenues from both
new and existing clients and increased operating efficiencies.
Selling, general and administrative expenses increased $23.8 million,
or 72% to $56.8 million for the three months ended September 30, 2000 from $33.0
million for the three months ended September 30, 1999. Selling, general and
administrative expenses as a percentage of revenues increased from 24.5% for the
three months ended September 30, 1999 to 26.7% for the three months ended
September 30, 2000 primarily as a result of strong growth in revenues from both
new and existing clients and increased operating efficiencies.
As a result of the foregoing factors, income from operations
increased $5.6 million or 49.3%, to $17.0 million for the three months ended
September 30, 2000 from $11.4 million for the three months ended
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September 30, 1999. Operating income as a percentage of revenues decreased from
8.5% for the three months ended September 30, 1999 to 8.0% for the three months
ended September 30, 2000. Income from operations, exclusive of the one-time
impact of the closure of the Pamet River subsidiary, increased $9.0 million or
79% to $20.4 million for the three months ended September 30, 2000. Operating
income as a percentage of revenues, exclusive of the one-time impact of the
closure of the Pamet River subsidiary, increased to 9.6% for the three months
ended September 30, 2000.
Other income totaled $32.9 million for the three months ended
September 30, 2000 compared with other income of $6.9 million during the three
months ended September 30, 1999. Included in other income for the three months
ended September 30, 2000 is a one-time gain of $32.1 million on the sale of
securities. Included in other income for the three months ended September 30,
1999 is a one-time gain of $6.7 million on the settlement of a long-term
contract. Interest expense increased $684,000 to $1.3 million for the three
months ended September 30, 2000 compared to $650,000 for the three months ended
September 30, 1999. This increase is primarily the result of increased
borrowings.
As a result of the foregoing factors, net income increased $19.7
million or 178%, to $30.7 million for the three months ended September 30, 2000
from $11.0 million for the three months ended September 30, 1999. Net income for
the three months ended September 30, 2000 was $11.7 million, exclusive of a net
one-time gain from the sale of a portion of an equity investment. Net income for
the three months ended September 30, 2000 was $6.8 million, exclusive of a net
one-time gain on the settlement of a contract.
NINE MONTH PERIOD ENDED SEPTEMBER 30, 2000 COMPARED TO SEPTEMBER 30, 1999
Revenues increased $199.0 million or 52% to $582.6 million for the nine
months ended September 30, 2000 from $383.6 million for the nine months ended
September 30, 1999. Outsourced revenues increased $65.5 million, resulting from
growth in new and existing client relationships. Revenues for the nine months
ended September 30, 2000 include approximately $85.8 million from facilities
management contracts as compared with $64.3 million for the nine months ended
September 30, 1999. This increase is a result of significantly increased number
of customer interactions managed on behalf of one of the Company's facility
management clients. International outsourced revenues increased $120.5 million.
This is due to significant increases in Canada as a result of the commencement
of operations of Percepta and an increasing number of United States clients
utilizing the company's Canadian locations. In addition, revenues in Latin
America grew by $32.4 million as a result of growth in new and existing client
relationships and completed acquisitions in the first and fourth quarter of
1999. Additionally, revenues in Spain increased by $16.7 million.
Costs of services increased $124.9 million, or 49%, to $381.5 million
for the nine months ended September 30, 2000 from $256.6 million for the nine
months ended September 30, 1999. Costs of services as a percentage of revenues
decreased from 66.9% for the nine months ended September 30, 1999 to 65.5% for
the nine months ended September 30, 2000. The decrease in the costs of services
as a percentage of revenues is a result of strong growth in revenues from both
new and existing clients and increased operating efficiencies.
Selling, general and administrative expenses increased $50.2 million,
or 53% to $145.8 million for the nine months ended September 30, 2000 from $95.6
million for the nine months ended September 30, 1999. Selling, general and
administrative expenses as a percentage of revenues increased from 24.9% for the
nine months ended September 30, 1999 to 25.0% for the nine months ended
September 30, 2000 primarily as a result of increased investment in the
Company's enhansiv subsidiary.
As a result of the foregoing factors, income from operations increased
$20.4 million or 65%, to $51.8 million for the nine months ended September 30,
2000 from $31.4 million for the nine months ended September 30, 1999. Operating
income as a percentage of revenues increased from 8.2% for the nine months ended
September 30, 1999 to 8.9% for the nine months ended September 30, 2000. Income
from operations, exclusive of the one-time impact of the closure of the Pamet
River subsidiary, increased $23.8 million or 76%, to $55.2 million for the nine
months ended September 30, 2000. Operating income as a percentage of revenues,
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exclusive of the one-time impact of the closure of the Pamet River subsidiary,
increased to 9.5% for the nine months ended September 30, 2000.
Other income totaled $44.3 million for the nine months ended September
30, 2000 compared with other income of $7.1 million during the nine months ended
September 30, 1999. Included in other income for the nine months ended September
30, 2000 is a one-time gain of $44.9 million on the sale of securities. Included
in other income for the nine months ended September 30, 1999 is a one-time gain
of $6.7 million on the settlement of a long-term contract. Interest expense
increased $1.7 million to $3.4 million for the nine months ended September 30,
2000 compared to $1.7 for the nine months ended September 30, 1999. This
increase is primarily the result of increased borrowings.
As a result of the foregoing factors, net income increased $35.6 or
153%, to $58.9 million for the nine months ended September 30, 2000 from $23.2
million for the nine months ended September 30, 1999. Net income for the nine
months ended September 30, 2000 was $31.1 million, exclusive of a net one-time
gain from the sale of a portion of an equity investment. Net income for the
three months ended September 30, 2000 was $19.9 million, exclusive of a net
one-time gain on the settlement of a contract.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2000 the Company had cash and cash equivalents of
$19.3 million, an investment in available-for-sale securities of $76.6 million.
Cash used in operating activities was $1.7 million for the nine months ended
September 30, 2000, which primarily resulted from increased accounts receivable
balances due to the recent Spanish acquisition and various slow paying
customers.
Cash used in investing activities was $39.0 million for the nine months
ended September 30, 2000 resulting primarily from $76.2 million used for the
purchase of property and equipment and $8.0 million towards an investment in a
customer relationship management software company offset primarily by $50.6
million proceeds from the sale of available-for-sale securities.
Cash provided by financing activities was $47.1 million resulting from
the increase in borrowings of $38.1 million and $10.1 million from stock option
exercises and their related tax benefit offset in part by distributions to
shareholders.
During the first quarter of 2000, the Company completed an amendment to
its unsecured revolving line of credit with a syndicate of four banks. The
amendment increased the line of credit to $75.0 million from $50.0 million. The
Company 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 $55.0 million at September 30, 2000 of which $20.0 million was
secured at the Company's option with temporary short term investments disclosed
on the balance sheet. Interest rates under these borrowings ranged from 6.7% to
9.5% at September 30, 2000. Under this line of credit, the Company has agreed to
maintain certain financial ratios and capital expenditure limits.
The Company currently expects total capital expenditures in 2000 to be
approximately $105 to $115 million of which $76.2 million was expended in the
first nine months. The Company believes that existing cash on hand and available
borrowings under the line of credit together with cash from operations and
proceeds from the sale of E.piphany common stock will be sufficient to finance
the Company's operations, planned capital expenditures and anticipated growth
through 2001.
OTHER FACTORS
On September 28, 2000, the Company announced that Verizon
Communications informed the Company of a change in its CLEC strategy. The
Company has a long-term contract with Verizon and the two companies will work
together to find the best way for Verizon to fulfill the terms of the contract
given the change in their strategic direction. Verizon is pursuing options to
redirect the Company's business from its CLEC operations to other strategic
business units and the Company is encouraged by the progress made to date in
this regard. Based on its successful, long-standing alliance with Verizon,
TeleTech does not expect a change in its Verizon business in fiscal year 2000.
Verizon's CLEC business accounted for 21% of TeleTech's revenues for the year
ended December 31, 1999 and 16.8% of TeleTech's revenues for the nine months
ended September 30, 2000.
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FORWARD-LOOKING STATEMENTS
All statements not based on historical fact are forward-looking
statements that involve substantial risks and uncertainties. In accordance with
the Private Securities Litigation Reform Act of 1995, following are important
factors that could cause TeleTech's actual results to differ materially from
those expressed or implied by such forward-looking statements: lower than
anticipated customer interaction center capacity utilization; the loss or delay
in implementation of a customer management program; TeleTech's ability to
build-out facilities in a timely and economic manner; greater than anticipated
competition from new entrants into the customer care market, causing increased
price competition or loss of clients; the loss of one or more significant
clients; higher than anticipated start-up costs associated with new business
opportunities; TeleTech's ability to predict the potential volume or
profitability of any future technology or consulting sales; TeleTech's
agreements with clients may be canceled on relatively short notice; and
TeleTech's ability to generate a specific level of revenue is dependent upon
customer interest in and use of the Company's clients' products and services.
Readers are encouraged to review TeleTech's 1999 Annual Report on Form 10-K and
other publicly filed documents, which describe other important factors that may
impact TeleTech's business, results of operations and financial condition.
However, these factors should not be construed as an exhaustive list. TeleTech
cannot always predict which factors could cause actual results to differ
materially from those in its forward-looking statements. In light of these risks
and uncertainties the forward-looking statements might not occur. TeleTech
assumes no obligation to update its forward-looking statements to reflect actual
results or changes in factors affecting such forward-looking statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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.
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
September 30, 2000, there was approximately $930,000 in borrowings outstanding
on the operating loan and $55.0 million outstanding on the Company's line of
credit. The Company monitors interest rates frequently and has sufficient cash
balances to significantly reduce the line of credit, 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, Hong Kong, Mexico, New Zealand, Singapore, Spain, and the
United Kingdom. The substantial majority of revenues and expenses from these
operations are 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. For the three and nine months ended September 30, 2000,
revenues from non-U.S. countries represented 44% and 39% of consolidated
revenues, respectively.
The Company's Canadian subsidiary receives payment in U.S. dollars for
certain of its larger customer contracts. As all its expenditures are in
Canadian dollars, the Company must acquire Canadian
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currency on a monthly basis. Accordingly, the Company has contracted with a
Commercial bank at no material cost, to acquire a total of $13.5 million
Canadian dollars during the last 3 months of 2000 at a fixed price in U.S.
dollars of $9.2 million. There is no material differences between the fixed
exchange ratio and the current exchange ratio of the U.S./Canadian dollar.
OTHER ITEMS
As part of its ongoing business strategy, the Company frequently
engages in discussions regarding restructuring, dispositions, acquisitions,
joint ventures and other similar transactions. This strategy includes the
pursuit of acquisitions and joint ventures as a means of entry into regions and
countries where the Company lacks significant market presence, including
countries in Europe, Asia and Latin America. Such transactions could include,
among other things, the transfer, sale or acquisition of significant assets,
businesses or interests, agreements to work with third parties, including joint
ventures, or the incurrence, assumption or refinancing of indebtedness, and
could be material to the Company's financial condition and results of
operations. There is no assurance that any such discussions will result in the
consummation of any such transaction.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, the Company is involved in litigation, most of which
is incidental to its business. In the Company's opinion, no litigation to
which the Company currently is a party is likely to have a material adverse
effect on the Company's results of operations or financial condition.
ITEM 2. CHANGE IN SECURITIES AND USE OF PROCEEDS
During the past fiscal quarter, the Company issued the following
securities, which were privately placed and not registered under the
Securities Act of 1933 (the "Securities Act"):
(a) On August 31, 2000, in reliance on Sections 4(2) and 4(6) of the
Securities Act and Regulation S thereunder, the Company issued (i) 2,032,336
shares of common stock to Milletti, S.L., (ii) 490,564 shares of common stock
to 3i Group PLC, and (iii) 487,644 shares of common stock to 3i Europartners
II LP, as consideration pursuant to that certain Share Purchase Agreement
whereby TeleTech acquired all of the issued and outstanding shares of capital
stock of Contact Center Holdings, S.L. ("CCH Acquisition").
(b) On August 31, 2000, in reliance on Sections 4(2) and 4(6) of the
Securities Act, the Company issued 253,272 shares of its common stock to
Wells Fargo Bank West N.A., the escrow agent in the CCH Acquisition.
ITEM 5. RECENT DEVELOPMENTS
INVESTMENT IN COMMON STOCK
In December 1999 and January 2000, the Company invested a total of $9.6
million in Octane Software, Inc., a privately held customer relationship
management software company. In June, 2000, Octane merged with E.piphany,
Inc., a publicly traded customer relationship management company. As a result
of the merger, TeleTech received 825,000 shares of E.piphany common stock.
During the three and the nine months ended September 30, 2000, the Company
sold 290,000 and 442,200 shares of E.piphany, respectively.
ACQUISITIONS
On August 21, 2000, TeleTech announced a definitive agreement to
acquire Newgen Results Corporation for approximately $200 million in a merger
transaction to be accounted under the pooling of interests method of
accounting. Newgen is a leading provider of customized, outsourced database
management, direct marketing and related services for automobile dealerships'
service departments and automobile manufacturers. The Company anticipates
that the Newgen acquisition will close in the fourth quarter of 2000, subject
to the satisfaction of customary closing conditions.
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On August 31, 2000, TeleTech acquired Spain's largest independent CRM
company, Contact Center Holding S.A. ("CCH"), for approximately $100 million
in a stock purchase transaction accounted for under the pooling of interests
method of accounting.
On October 27, 2000, TeleTech acquired iCcare Limited, a CRM company
registered in Hong Kong, for approximately $4 million and the possibility of
a future earnout based on the achievemnet of predetermined revenue targets,
in a stock purchase transaction accounted for under the purchase method of
accounting.
On November 7, 2000, TeleTech acquired the customer care division of
Boston Communications Group Inc. for $15 million and the possibility of a
future earnout based on the achievement of predetermined revenue targets in
an asset purchase transaction.
During the quarter, TeleTech also closed its Pamet River subsidiary and
sold a division of its Australian subsidiary, which provided services in the
healthcare industry.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits filed through the filing of this Form 10-Q
<TABLE>
<S> <C>
3.1 Restated Certificate of Incorporation of TeleTech[1]
{Exhibit 3.1}
3.2 Amended and Restated Bylaws of TeleTech[1] {Exhibit 3.2}
10.33* Offer letter between Teletech Holdings, Inc. and
Margot O'Dell dated August 6, 2000
10.34* Stock Option Agreement between Teletech Holdings,
Inc. and Margot O'Dell dated September 11, 2000
10.35* Asset purchase agreement among TeleTech Holdings, Inc.,
TeleTech Customer Care Management (Colorado), Inc., Boston
Communications Group Inc., Cellular Express, Inc., and
Wireless Teleservices Corp. dated as of October 11, 2000
27.1* Financial Data Schedule
27.2* Restated Financial Data Schedule
</TABLE>
----------
* Filed Herewith
[ ] Such exhibit previously filed with the Securities and Exchange
Commission as exhibits to the filings indicated below, under the
exhibit number indicated in brackets { }, and is incorporated by
reference.
[1] TeleTech's Registration Statement on Form S-1, as amended
(Registration Statement No. 333-04097).
(b) Reports on Form 8-K filed during the Third Quarter of
2000 and through the filing of this Form 10-Q:
(i) Form 8-K dated August 25, 2000 providing
notification of a press release announcing a
definitive merger agreement with Newgen Results
Corporation.
(ii) Form 8-K dated September 6, 2000 providing
notification of a press release announcing the
acquisition of CCH.
(iii) Form 8-K dated October 27, 2000 filing the
Selected Financial Data, Management's Discussion
and Analysis of Financial Conditions and Results
of Operation and Supplemental Consolidated
Financial Statements, which give effect to the CCH
acquisition and restate the accounts of the
Company to give effect to the pooling of interests.
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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 13, 2000 BY: /s/ SCOTT D. THOMPSON
-------------------- -------------------------------------
Scott D. Thompson
Chief Executive Officer and President
Date: November 13, 2000 BY: /s/ MARGOT O'DELL
-------------------- -------------------------------------
Margot O'Dell
Chief Financial Officer
(Principal Financial and Accounting
Officer)
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