<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, 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 August 4, 2000
Common Stock, par value $.01 per share 62,793,509
<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, 1999 and June 30, 2000 3
Condensed consolidated statements of income--Three months ended June 30,
2000 and 1999 5
Condensed consolidated statements of income--Six months ended June 30,
2000 and 1999 6
Condensed consolidated statements of cash flows--Six months ended
June 30, 2000 and 1999 7
Notes to condensed consolidated financial statements--June 30, 2000 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 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Recent Developments 18
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 20
</TABLE>
2
<PAGE>
Item 1.
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
December 31, June 30,
ASSETS 1999 2000
---------- --------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 14,663 $ 6,119
Short-term investments 41,599 47,359
Investment in common stock -- 70,839
Accounts receivable, net of allowance for doubtful
accounts of $3,787 and $4,388, respectively 78,753 123,601
Prepaids and other assets 5,361 7,852
Deferred tax asset 4,889 --
------- -------
Total current assets 145,265 255,770
------- -------
PROPERTY AND EQUIPMENT, net of accumulated depreciation
of $65,083 and $80,120, respectively 108,945 136,912
------- -------
OTHER ASSETS:
Long-term accounts receivable 3,930 2,290
Investment in customer relationship management
software company, at cost 2,500 --
Goodwill, net of amortization of $3,103 and $3,862, respectively 20,633 22,296
Contract acquisition cost, net of amortization of
$1,614 and $2,607, respectively 9,286 13,893
Deferred tax asset 550 550
Other assets 2,621 6,602
------- -------
Total assets $293,730 $438,313
======== ========
</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>
December 31, June 30,
LIABILITIES AND STOCKHOLDERS' EQUITY 1999 2000
----------- --------
(Unaudited)
CURRENT LIABILITIES:
<S> <C> <C>
Current portion of long-term debt $ 4,842 $ 7,755
Bank overdraft 1,323 930
Accounts payable 8,217 9,782
Accrued employee compensation 26,282 29,066
Accrued income taxes 1,523 5,069
Deferred income taxes -- 16,733
Other accrued expenses 16,831 23,509
Customer advances, deposits and deferred income 4,510 3,199
--------- --------
Total current liabilities 63,528 96,043
LONG-TERM DEBT, net of current portion:
Capital lease obligations 1,697 23
Line of credit 18,000 43,000
Other debt 5,469 3,359
--------- --------
Total liabilities 88,694 142,425
--------- --------
MINORITY INTEREST, in consolidated subsidiaries -- 5,499
--------- --------
STOCKHOLDERS' EQUITY:
Stock purchase warrants -- 5,100
Common stock; $.01 par value; 150,000,000 shares
authorized; 61,823,645 and 62,745,671 shares,
respectively, issued and outstanding 617 627
Additional paid-in capital 121,060 136,318
Accumulated other comprehensive income (1,148) 37,555
Retained earnings 84,507 110,789
--------- --------
Total stockholders' equity 205,036 290,389
--------- --------
Total liabilities and stockholders' equity $ 293,730 $438,313
========= ========
</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
June 30,
----------------------------
1999 2000
--------- ---------
<S> <C> <C>
REVENUES $ 120,565 $ 181,846
--------- ---------
OPERATING EXPENSES:
Costs of services 79,835 117,913
Other operating expenses 31,565 46,660
--------- ---------
Total operating expenses 111,400 164,573
--------- ---------
INCOME FROM OPERATIONS 9,165 17,273
OTHER INCOME (EXPENSE):
Interest expense (477) (1,087)
Interest income 648 688
Gain on sale of securities -- 12,762
Other (170) (675)
--------- ---------
1 11,688
--------- ---------
INCOME BEFORE INCOME TAXES AND MINORITY INTEREST 9,166 28,961
Provision for income taxes 3,712 10,952
--------- ---------
INCOME BEFORE MINORITY INTEREST 5,454 18,009
Minority interest, net of income taxes -- (399)
--------- ---------
NET INCOME $ 5,454 $ 17,610
========= =========
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 61,095 62,607
========= =========
Diluted 62,692 66,700
========= =========
NET INCOME PER SHARE
Basic $ .09 $ .28
========= =========
Diluted $ .09 $ .26
========= =========
</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>
Six Months Ended
June 30,
----------------------------
1999 2000
--------- ---------
<S> <C> <C>
REVENUES $ 231,203 $ 340,340
--------- ---------
OPERATING EXPENSES:
Costs of services 154,203 222,915
Other operating expenses 59,969 85,723
--------- ---------
Total operating expenses 214,172 308,638
--------- ---------
INCOME FROM OPERATIONS 17,031 31,702
OTHER INCOME (EXPENSE):
Interest expense (894) (1,893)
Interest income 1,202 1,322
Gain on sale of securities -- 12,762
Other (104) (657)
--------- ---------
204 11,534
--------- ---------
INCOME BEFORE INCOME TAXES AND MINORITY INTEREST 17,235 43,236
Provision for income taxes 6,970 16,555
--------- ---------
INCOME BEFORE MINORITY INTEREST 10,265 26,681
Minority interest, net of income taxes -- (399)
--------- ---------
NET INCOME $ 10,265 $ 26,282
========= =========
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 60,933 62,299
========= =========
Diluted 62,371 66,716
========= =========
NET INCOME PER SHARE
Basic $ .17 $ .42
========= =========
Diluted $ .16 $ .39
========= =========
</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>
Six Months Ended
June 30,
--------------------------
1999 2000
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 10,265 $ 26,282
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 13,983 18,197
Minority interest -- 399
Allowance for doubtful accounts 311 601
Gain on sale of securities -- (12,762)
Deferred income taxes (64) (459)
Changes in assets and liabilities:
Accounts receivable (1,005) (45,449)
Prepaids and other assets (2,207) (2,657)
Accounts payable and accrued expenses (5,391) 12,707
Customer advances, deposits and deferred income (130) 785
-------- --------
Net cash provided by (used in) operating activities 15,762 (2,356)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (30,835) (45,818)
Acquisitions, net of $339 cash acquired (4,052) --
Contract acquisition costs -- (1,356)
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) (600)
Decrease in short-term investments 2,969 8,961
-------- --------
Net cash used in investing activities (31,973) (41,702)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in bank overdraft 499 (393)
Net increase in short-term borrowings 22,000 25,000
Net decrease on long-term debt and capital leases (2,326) (1,102)
Proceeds from exercise of stock options
including tax benefit (675) 13,468
-------- --------
Net cash provided by financing activities 19,498 36,973
-------- --------
Effect of exchange rate changes on cash (1,860) (1,459)
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,427 (8,544)
CASH AND CASH EQUIVALENTS, beginning of period 8,796 14,663
-------- --------
CASH AND CASH EQUIVALENTS, end of period $ 10,223 $ 6,119
======== ========
</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
JUNE 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 June 30, 2000 and 1999 and for the periods
then ended. Operating results for the three and six months ended June 30, 2000
are not necessarily indicative of the results that may be expected for the year
ended December 31, 2000.
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)-- 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.
<TABLE>
<CAPTION>
Three Months Ended
June 30,
(in thousands) 1999 2000
--------- ---------
<S> <C> <C>
REVENUES:
Outsourced $ 72,530 $ 94,790
Facilities Management 20,399 28,304
International Outsourced 20,690 55,420
Corporate Activities 6,946 3,332
--------- ---------
Total $ 120,565 $ 181,846
========= =========
OPERATING INCOME (LOSS):
Outsourced $ 16,801 $ 21,032
Facilities Management 1,406 3,547
International Outsourced 532 8,046
Corporate Activities (9,574) (15,352)
--------- ---------
Total $ 9,165 $ 17,273
========= =========
</TABLE>
8
<PAGE>
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 - CONTINUED
<TABLE>
<CAPTION>
Six Months Ended
June 30,
(in thousands) 1999 2000
--------- ---------
<S> <C> <C>
REVENUES:
Outsourced $ 138,776 $ 184,794
Facilities Management 40,733 55,208
International Outsourced 38,826 94,159
Corporate Activities 12,868 6,179
--------- ---------
Total $ 231,203 $ 340,340
========= =========
OPERATING INCOME (LOSS):
Outsourced $ 30,555 $ 42,081
Facilities Management 3,054 6,510
International Outsourced 1,132 12,802
Corporate Activities (17,710) (29,691)
--------- ---------
Total $ 17,031 $ 31,702
========= =========
</TABLE>
<TABLE>
<CAPTION>
Balance as of
December 31, June 30,
(in thousands) 1999 2000
---------- --------
<S> <C> <C>
ASSETS:
Outsourced Assets $ 76,401 $103,178
Facilities Management Assets 11,290 13,417
International Outsourced Assets 88,643 129,486
Corporate Activities Assets 117,396 192,232
-------- --------
Total $293,730 $438,313
======== ========
GOODWILL:
International Outsourced Goodwill, Net $ 10,496 $ 10,554
Corporate Activities Goodwill, Net 10,137 11,742
-------- --------
Total $ 20,633 $ 22,296
======== ========
</TABLE>
The following geographic data include revenues based on the location the
services are provided (in thousands).
<TABLE>
<CAPTION>
Three Months Ended
June 30,
1999 2000
-------- --------
<S> <C> <C>
REVENUES:
United States $ 95,062 $120,887
Canada 7,484 23,726
Australia 13,228 16,484
Latin America 3,500 14,632
Rest of world 1,291 6,117
-------- --------
Total $120,565 $181,846
======== ========
</TABLE>
9
<PAGE>
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 - CONTINUED
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1999 2000
-------- --------
<S> <C> <C>
REVENUES:
United States $182,653 $235,335
Canada 16,404 36,453
Australia 23,947 31,396
Latin America 5,745 27,012
Rest of world 2,454 10,144
-------- --------
Total $231,203 $340,340
======== ========
</TABLE>
NOTE (3)--SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION AND NONCASH INVESTING
AND FINANCING ACTIVITIES (IN THOUSANDS):
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
1999 2000
------ ------
<S> <C> <C>
Cash paid for interest $ 533 $1,087
Cash paid for income taxes $5,218 $2,909
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 (4)--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 six months
period ended June 30, 1999 and 2000 was as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended June 30,
---------------------------
1999 2000
------ --------
<S> <C> <C>
Net income for the period $5,454 $ 17,610
Change in cumulative translation adjustment 558 (970)
Unrealized gain on securities available for sale,
less related tax effect -- 40,303
------ --------
Comprehensive income $6,012 $ 56,943
====== ========
</TABLE>
10
<PAGE>
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 - CONTINUED
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
1999 2000
------- --------
<S> <C> <C>
Net income for the period $10,265 $ 26,282
Change in cumulative translation adjustment 676 (1,600)
Unrealized gain on securities available for sale,
less related tax effect -- 40,303
------- --------
Comprehensive income $10,941 $ 64,985
======= ========
</TABLE>
NOTE (5)--FORD JOINT VENTURE
During the first quarter of 2000, the Company and Ford Motor Company
("Ford") formed the Percepta LLC. 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.
NOTE (6)--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 (7)--INVESTMENT IN COMMON STOCK
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. Prior to June 30, 2000, TeleTech sold 152,500 shares of
E.piphany for total proceeds fo $14.7 million, which resulted in a realized gain
of $12.7 million. The remaining 673,400 shares of E.piphany are reflected in the
accompanying June 30, 2000 balance sheet as an available for sale security.
Accordingly, they are reflected at their market value with the corresponding
unrealized income reflected in other comprehensive income net of tax. Subsequent
to June 30, 2000 TeleTech has sold an additional 290,000 shares for $35.9
million which resulted in a realized gain of $32 million.
NOTE (8)--SUBSEQUENT EVENT
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 will result in a gain recognized in the third quarter
of 2000 of approximately $3.0 million. The operating results, assets and
liabilities of this division are not significant to the consolidated operating
results, assets and liabilities of the Company.
11
<PAGE>
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE PERIOD ENDED JUNE 30, 2000 AND 1999
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 JUNE 30, 2000 COMPARED TO JUNE 30, 1999
Revenues increased $61.3 million or 51% to $181.8 million for the three
months ended June 30, 2000 from $120.6 million for the three months ended
June 30, 1999. Outsourced revenues increased $22.3 million, resulting from
$9.8 million in new customers and $12.4 million in increased revenues from
existing clients. Revenues for the three months ended June 30, 2000 include
approximately $28.3 million from facilities management contracts as compared
with $20.4 million for the three months ended June 30, 1999. This increase is
a result of significantly increased call volumes from one of the company's
facility management clients. International outsourced revenues increased
$34.7 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 $11.1 million as a result of an acquisition
in the fourth quarter of 1999, and increased capacity utilization.
Costs of services increased $38.1 million, or 48%, to $117.9 million for
the three months ended June 30, 2000 from $79.8 million for the three months
ended June 30, 1999. Costs of services as a percentage of revenues decreased
from 66.2% for the three months ended June 30, 1999 to 64.8% for the three
months ended June 30, 2000. The decrease in the costs of services as a
percentage of revenues is a result of increased capacity utilization in several
of the Company's domestic and foreign customer interaction centers.
Selling, general and administrative expenses increased $15.1 million, or
48% to $46.7 million for the three months ended June 30, 2000 from $31.6 million
for the three months ended June 30, 1999. Selling, general and administrative
expenses as a percentage of revenues decreased from 26.2% for the three months
ended June 30, 1999 to 25.7% for the three months ended June 30, 2000 primarily
as a result of increased capacity utilization in the Company's customer
interaction centers
As a result of the foregoing factors, income from operations increased $8.1
million or 88%, to $17.3 million for the three months ended June 30, 2000 from
$9.2 million for the three months ended June 30, 1999. Operating income as a
percentage of revenues increased from 7.6% for the three months ended June 30,
1999 to 9.5% for the three months ended June 30, 2000.
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE PERIOD ENDED JUNE 30, 2000 AND 1999 - CONTINUED
Other income totaled $11.7 million for the three months ended June 30, 2000
compared with other income of $1,000 during the three months ended June 30,
1999. This is primarily related to a one-time gain of $12.8 million on the sale
of securities offset by increased interest expense of $610,000 resulting from
the increased levels in borrowings on the line of credit from $22.0 million at
June 30, 1999 to $43.0 million at June 30, 2000. In addition, the Company
incurred a loss of $660,000 resulting from litigation with an equipment
supplier concerning cancellation of a contract.
As a result of the foregoing factors, net income increased $12.2 million
or 223%, to $17.6 million for the three months ended June 30, 2000 from $5.5
million for the three months ended June 30, 1999.
SIX MONTH PERIOD ENDED JUNE 30, 2000 COMPARED TO JUNE 30, 1999
Revenues increased $109.1 million or 47% to $340.3 million for the six
months ended June 30, 2000 from $231.2 million for the six months ended June
30, 1999. Outsourced revenues increased $46.0 million, resulting from $16
million in new customers and $30 million in increased revenues from existing
clients. Revenues for the six months ended June 30, 2000 include
approximately $55.2 million from facilities management contracts as compared
with $40.7 million for the six months ended June 30, 1999. This increase is a
result of significantly increased call volumes from one of the Company's
facility management clients. International outsourced revenues increased
$55.3 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. In addition,
revenues in Latin America grew by $21.3 million as a result of acquisitions
in the first quarter and fourth quarter of 1999 and increased capacity
utilization.
Costs of services increased $68.7 million, or 45%, to $222.9 million for
the six months ended June 30, 2000 from $154.2 million for the six months ended
June 30, 1999. Costs of services as a percentage of revenues decreased from
66.7% for the six months ended June 30, 1999 to 65.5% for the six months ended
June 30, 2000. The decrease in the costs of services as a percentage of revenues
is a result of increased capacity utilization in several of the Company's
domestic and foreign customer interaction centers.
Selling, general and administrative expenses increased $25.8 million, or
43% to $85.7 million for the six months ended June 30, 2000 from $60.0 million
for the six months ended June 30, 1999. Selling, general and administrative
expenses as a percentage of revenues decreased from 25.9% for the six months
ended June 30, 1999 to 25.2% for the six months ended June 30, 2000 primarily as
a result of increased capacity utilization in the Company's customer interaction
centers.
As a result of the foregoing factors, income from operations increased
$14.7 million or 86%, to $31.7 million for the six months ended June 30, 2000
from $17.0 million for the six months ended June 30, 1999. Operating income as a
percentage of revenues increased from 7.4% for the six months ended June 30,
1999 to 9.3% for the six months ended June 30, 2000.
Other income totaled $11.5 million for the six months ended June 30,
2000 compared with other income of $204,000 during the six months ended June
30, 1999. This is primarily related to a one-time gain of $12.8 million on
the sale of securities offset by increased interest expense of $1.0 million
resulting from the increased levels in borrowings on the line of credit from
$22.0 million at June 30, 1999 (of which the entire amount was not
outstanding during the period) to $43.0 million at June 30, 2000. In
addition, the Company incurred a loss of $660,000 resulting from litigation
with an equipment supplier concerning cancellation of a contract.
As a result of the foregoing factors, net income increased $16.0 or 156%,
to $26.3 million for the six months ended June 30, 2000 from $10.3 million for
the six months ended June 30, 1999.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE PERIOD ENDED JUNE 30, 2000 AND 1999 -- CONTINUED
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2000 the Company had cash and cash equivalents of $6.1
million, short-term investments of $47.4 million and an investment in common
stock of $70.8 million. Cash used by operating activities was $2.4 million for
the six months ended June 30, 2000, which primarily resulted from increased
accounts receivable due to unscheduled early payments in 1999 totaling
approximately $15.0 million the Company was expecting to receive in January
2000. This helped the Company achieve cash flow from operations of $14.0 million
in the fourth quarter of 1999.
Cash used in investing activities was $41.7 million for the six months
ended June 30, 2000 resulting primarily from $9.0 million decrease in short-term
investments, $5.1 million in capital contribution from a minority interest
partner offset by $45.8 million toward the purchase of property and equipment
and $8.0 million towards an investment in a customer relationship management
software company.
Cash provided by financing activities was $37.0 million resulting from the
increase in borrowings of $25.0 million and $13.5 million from stock option
exercises and their related tax benefit offset in part by pay downs of capital
leases and other debt.
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 $43.0 million at June 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 June 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 $80 to $90 million of which $45.8 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 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 2000.
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, which describes other important
factors that may impact TeleTech's business, results of operations and financial
condition. However, these factors
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE PERIOD ENDED JUNE 30, 2000 AND 1999 -- CONTINUED
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.
15
<PAGE>
Item 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FOR THE PERIOD ENDED JUNE 30, 2000
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 June 30, 2000, there
was approximately $930,000 in borrowings outstanding on the operating loan and
$43.0 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, Mexico, New Zealand, Singapore 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 six months
ended June 30, 2000, revenues from non-U.S. countries represented 34% and 31% 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 currency on a monthly
basis. Accordingly, the Company has contracted with a Commercial bank at no
material cost, to acquire a total of $27 million Canadian dollars during the
last 6 months of 2000 at a fixed price in U.S. dollars of $18.3 million.
There is no material differences between the fixed exchange ratio and the
current exchange ratio of the U.S./Canadian dollar.
OTHER ITEMS
From time to time, the Company engages in discussions regarding
restructuring, dispositions, acquisitions and other similar transactions. Any
such transaction could include, among other things, the transfer, sale or
acquisition of significant assets, businesses or interests, 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.
16
<PAGE>
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 4. Submission of Matters to a Vote of Security Holders
The Company held its annual meeting of shareholders ("Annual Meeting") on
May 3, 2000. As of March 24, 2000, the record date for the Annual Meeting,
approximately 62,338,826 shares of common stock were outstanding. Each matter
submitted to a vote of the shareholders at the Annual Meeting received a number
of votes sufficient for approval.
The following items were submitted to a vote of the Company's shareholders
at the Annual Meeting:
(a) Election of Directors
<TABLE>
<CAPTION>
VOTES FOR VOTES ABSTAINED
<S> <C> <C>
Kenneth D. Tuchman 53,054,481 15,547
Scott Thompson 53,054,481 15,547
James Barlett 53,054,481 15,547
Rod Dammeyer 53,054,481 15,547
George Heilmeier 53,054,481 15,547
Morton Meyerson 53,054,481 15,547
Alan Silverman 53,054,481 15,547
</TABLE>
(b) Ratification of appointment of Arthur Andersen LLP as the Company's
independent auditors for fiscal year 2000:
<TABLE>
<CAPTION>
VOTES FOR VOTES AGAINST VOTES ABSTAINED
<S> <C> <C>
53,062,122 5,174 2,732
</TABLE>
17
<PAGE>
(c) A proposal to adopt the Company's Amended and Restated 1999 Stock
Option and Incentive Plan:
<TABLE>
<CAPTION>
VOTES FOR VOTES AGAINST VOTES ABSTAINED
<S> <C> <C>
40,399,166 7,001,740 3,690
</TABLE>
(d) A proposal to adopt the Company's Amended and Restated Employee Stock
Purchase Plan:
<TABLE>
<CAPTION>
VOTES FOR VOTES AGAINST VOTES ABSTAINED
<S> <C> <C>
47,035,869 364,961 3,766
</TABLE>
Item 5. Recent Developments
New Corporate Headquarters
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.
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. Prior to June 30, 2000, TeleTech sold 152,500
shares of E.piphany, and subsequent to June 30, 2000 TeleTech has sold an
additional 290,000 shares.
18
<PAGE>
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}
10.28* Letter Agreement dated March 27, 2000 between
Larry Kessler and TeleTech
10.29* Stock Option Agreement dated March 27, 2000 between Larry Kessler
and TeleTech
10.30* Promissory Note dated April 3, 2000 by Larry Kessler for the
benefit of TeleTech
10.31* Lease and Deed of Trust Agreement dated June 22, 2000
10.32* Participation Agreement dated June 22, 2000
27.1 * Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K
None
-------------------
* 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).
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, 2000 By: /s/ SCOTT D. THOMPSON
-------------------------------
Scott D. Thompson
Chief Executive Officer and President
Date: August 11, 2000 By: /s/ MICHAEL E. FOSS
-------------------------------
Michael E. Foss
Chief Financial Officer and President
TeleTech Companies Group
20
