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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report: August 31, 2000
(Date of earliest event reported)
TeleTech Holdings, Inc.
(Exact name of registrant as specified in its charter)
Delaware 0-21055 84-1291044
(State of Incorporation) (Commission File Number) (I.R.S. Employer
Identification No.)
1700 Lincoln Street, Suite 1400, Denver, Colorado 80203
(Address of principal executive offices, including Zip Code)
Telephone Number (303) 894-4000
(Registrant's telephone number, including area code)
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Item 5. Other Events
On August 31, 2000, TeleTech Holdings, Inc. (the "Company"), 3i Group
PLC,3i Europartners II LP, Milletti, S.L., and Albert Olle Bartolome entered
into a Share Purchase Agreement whereby the Company acquired all of the
issued share capital of Contact Center Holdings,S.L. The Company accounted
for this business combination as a pooling of interests. The Company hereby
files the Selected Financial Data, Management's Discussion and Analysis of
Financial Condition and Results of Operation and Supplemental Consolidated
Financial Statements, which give effect to the transaction and restate the
accounts of the Company to give effect to the pooling of interests. For a
complete understanding of the Company's results presented herein, refer to
the Company's Annual Report on Form 10-K for the fiscal year ended December
31, 1999, and to the Forms 10-Q for fiscal year 2000 already on record for
the periods ended March 31, 2000 and June 30, 2000.
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SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Financial Statements and the related notes appearing
elsewhere in this Form 8-K. The following data for the five years ended December
31, 1999 has been derived from audited financial statements. The data for the
six months ended June 30, 1999 and 2000 has been derived from unaudited
financial statements that reflect, in the opinion of the Company, all
adjustments, which include only normal recurring adjustments, necessary for a
fair presentation of the financial data for such periods.
<TABLE>
<CAPTION>
Six months ended .
June 30, Year ended December 31,
----------------------- -------------------------------------------------------------
2000 1999 1999 1998 1997 1996 1995
--------- --------- --------- --------- --------- --------- ---------
(Amounts in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF INCOME DATA:
Operating Revenue $ 369,854 $ 248,877 $ 549,076 $ 384,771 $ 284,683 $ 171,265 $ 54,933
Total operating expenses 335,027 228,859 503,119 351,257 251,256 147,646 50,171
--------- --------- --------- --------- --------- --------- ---------
Income from operations 34,827 20,018 45,957 33,514 33,427 23,619 4,762
Other income (expenses) 11,310 188 6,835 137 2,299 18 2,468
--------- --------- --------- --------- --------- --------- ---------
Income before income taxes and
minority interest 46,137 20,206 52,792 33,651 35,726 23,637 7,230
Provision for income taxes 17,567 8,009 20,847 13,344 14,206 9,773 2,992
--------- --------- --------- --------- --------- --------- ---------
Income before minority interest 28,570 12,197 31,945 20,307 21,520 13,864 4,238
Minority interest (399) -- -- -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
Net Income $ 28,171 $ 12,197 $ 31,945 $ 20,307 $ 21,520 $ 13,864 $ 4,238
========= ========= ========= ========= ========= ========= =========
Net Income per common share
Basic $ 0.43 $ 0.19 $ 0.50 $ 0.32 $ 0.35 $ 0.25 $ 0.08
Diluted $ 0.40 $ 0.19 $ 0.48 $ 0.31 $ 0.33 $ 0.24 $ 0.08
</TABLE>
<TABLE>
<CAPTION>
December 31,
June 30, ----------------------------------------------------------------
2000 1999 1998 1997 1996 1995
-------- -------- -------- -------- -------- --------
(Amounts in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital $162,945 $ 85,570 $ 65,579 $ 82,154 $ 88,511 $ 11,305
Total assets 465,864 311,484 238,957 194,947 147,011 30,583
Long-term debt 47,684 26,179 6,786 10,566 10,144 3,590
Redeemable preferred stock -- -- -- -- -- 12,867
Total stockholder's equity 296,539 210,798 169,064 139,401 108,530 4,068
</TABLE>
3
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TELETECH HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth certain income statement data as a
percentage of revenues:
<TABLE>
<CAPTION>
1997 1998 1999
------ ------ ------
<S> <C> <C> <C>
Revenues .......................... 100.0% 100.0% 100.0%
Costs of services ................. 64.1 65.9 67.8
SG&A expenses ..................... 24.1 25.4 23.8
Income from operations ............ 11.7 8.7 8.4
Other income ...................... 0.8 -- 1.2
Provision for income taxes ........ 5.0 3.5 3.8
Net income ........................ 7.6 5.3 5.8
</TABLE>
1999 COMPARED TO 1998
REVENUES. Revenues increased $164.3 million, or 42.7%, to $549.1 million in 1999
from $384.8 million in 1998. The revenue increase resulted from $22.3 million in
revenues from new clients and $142.0 million in increased revenues from existing
clients. These increases were offset in part by contract expirations and other
client reductions. On a segment basis, outsourced revenue increased 49.3% to
$299.4 million in 1999 from $200.5 million in 1998. The increase resulted from
$22.3 million in revenues from new clients and $111.9 million in increased
revenues from existing clients offset in part by contract expirations and other
client reductions. Revenues for 1999 include approximately $94.5 million from
facilities management contracts, an increase of 10.2%, as compared with $85.7
million during 1998, resulting from increased number of customer interactions.
International outsourced revenues increased 49.7% to $134.4 million in 1999 from
$89.8 million in 1998. The increase in international outsourced revenues
resulting from the 1999 Argentina acquisitions of Smart Call, S.A. and Connect,
S.A. was $6.6 million. The remaining increase resulted primarily from continued
expansion in the Company's Mexican and Australian operations. These increases
were offset by reductions in revenue in the Company's Canadian operations
resulting from the expiration of a client contract. Revenues from corporate
activities consist of consulting services, automated customer support, database
management, systems integration, Web-based applications and distance-based
learning and education. These revenues totaled $20.8 million in 1999, an
increase of $12.0 million from $8.8 million in 1998. Approximately $8.4 million
of this increase resulted from the Cygnus acquisition in December 1998 and the
Pamet acquisition in 1999.
COSTS OF SERVICES. Costs of services increased $118.8 million, or 46.9%, to
$372.2 million in 1999 from $253.4 million in 1998. Costs of services as a
percentage of revenues increased from 65.9% in 1998 to 67.8% in 1999. This
increase in costs of services as a percentage of revenues is primarily the
result of reduced margins in two of the Company's facilities management
contracts in 1999 and gross margin being favorably impacted by a non-recurring
technology sale in 1998. These factors more than offset the costs of
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services benefit resulting from the decline in the percentage of revenues
generated from facilities management programs.
SELLING, GENERAL AND ADMINISTRATIVE. SG&A expenses increased $33.1 million, or
33.8%, to $130.9 million in 1999, from $97.8 million in 1998 primarily resulting
from the Company's increased number of customer interaction centers, global
expansion and increased investment in technology. SG&A expenses as a percentage
of revenues decreased from 25.4% in 1998 to 23.8% in 1999. This decrease is
driven by an increase in revenues as a result of improvements in capacity
utilization in the second half of 1999 in the Company's outsourced domestic and
international customer interaction centers.
INCOME FROM OPERATIONS. As a result of the foregoing factors, income from
operations increased $12.4 million, or 37.1%, to $45.9 million in 1999 from
$33.5 million in 1998. Income from operations as a percentage of revenues
decreased to 8.4% in 1999 from 8.7% in 1998.
OTHER INCOME (EXPENSE). Other income increased $6.7 million to $6.8 million in
1999 compared to $137,000 in 1998. Included in other income in 1999 is a $6.7
million gain on the settlement of a long-term contract which was terminated by a
client in 1996. Included in other income (expense) in 1998 is $1.3 million in
business combination expenses relating to the business combinations accounted
for under the pooling of interests method. Interest expense increased $1.1
million to $2.5 million in 1999 compared to $1.4 million in 1998. This increase
is primarily the result of increased borrowings. Interest income decreased
$702,000 to $2.4 million in 1999 compared to $3.1 million in 1998. This decrease
is the result of the decrease in short-term investments during 1999.
INCOME TAXES. The Company's effective tax rate was 39.5% in 1999 and 39.8% in
1998. It is anticipated that the effective rate will decrease slightly in 2000,
resulting from the Company's increased state tax incentives.
NET INCOME. As a result of the foregoing factors, net income increased $11.6
million, or 57.3%, to $31.9 million in 1999 from $20.3 million in 1998. Diluted
earnings per share increased from 31 cents to 48 cents. Excluding the one-time
business combination expenses in 1998 and the one-time gain in 1999 from the
long-term contract settlement, net income in 1999 would have been $27.9 million,
compared with net income in 1998 of $21.1 million, an increase of 32.2%. Diluted
earnings per share excluding these one-time items would have been 42 cents in
1999 compared to 32 cents in 1998.
1998 COMPARED TO 1997
REVENUES. Revenues increased $100.1 million, or 35%, to $384.8 million in 1998
from $284.7 million in 1997. The increase resulted from $56.0 million in
revenues from new clients and $81.0 million in increased revenues from existing
clients. These increases were offset in part by contract expirations and other
client reductions. Client reductions reflect a $35.6 million decline in 1998
revenue from two significant clients. Revenues for 1998 include a $5.0 million
sale of technology consulting and call center technology products to an existing
client for use in its internal call centers. The Company has not historically
sold its technology or significant levels of consulting services as a separate
product and only provided such services to clients as part of a long-term
outsourcing agreement. Revenues for 1998 include approximately $85.7 million
from facilities management contracts as compared with $84.0 million during 1997.
Total international revenues represent 23.3% of consolidated revenues during
1998 as compared with 19.6% during 1997.
COSTS OF SERVICES. Costs of services increased $70.9 million, or 38.9%, to
$253.4 million in 1998 from $182.5 million in 1997. Costs of services as a
percentage of revenues increased from 64.1% in 1997 to 65.9% in 1998. This
increase in costs of services as a percentage of revenues is primarily the
result of
5
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reduced volumes in one of the Company's facilities management contracts. This
reduced volume resulted in excess capacity in three customer interaction centers
managed by the Company and reduced gross margins on the client program. This
resulted in a $4.5 million decrease in operating income from the Company's
facilities management business. The increase in costs of services as a percent
of revenues relating to this was partially offset by the favorable impact of the
technology sale discussed earlier. This sale had significantly lower costs of
services as a percentage of revenues when compared with the Company's recurring
revenues from outsourcing.
SELLING, GENERAL AND ADMINISTRATIVE. SG&A expenses increased $29.1 million, or
42.3% to $97.8 million in 1998, from $68.7 million in 1997 resulting from the
Company's increased number of customer interaction centers, global expansion and
increased investment in technology. SG&A expenses as a percentage of revenues
increased from 24.1% in 1997 to 25.4% in 1998. This increase is the result of
excess capacity in several of the Company's outsourced domestic and
international customer interaction centers discussed earlier.
INCOME FROM OPERATIONS. As a result of the foregoing factors, income from
operations increased $87,000 , or .3%, to $33.5 million in 1998 from $33.4
million in 1997. Income from operations as a percentage of revenues decreased
from 11.7% in 1997 to 8.7% in 1998. Operating income as a percentage of revenues
in 1998 has been favorably impacted by approximately 700 basis points resulting
from the technology sale discussed earlier. Operating income as a percentage of
revenues is not anticipated to significantly improve until the Company increases
capacity utilization.
OTHER INCOME (EXPENSE). Other income decreased $2.2 million to $137,000 in 1998
compared to $2.3 million in 1997. Included in other income (expense) in 1998 is
$1.3 million in business combination expenses relating to the business
combinations accounted for under the pooling of interests method. Interest
expense increased $280,000 to $1.4 million in 1998 compared to $1.2 million in
1997. This increase is primarily the result of increased borrowings in the
Company's international locations offset by debt reductions in the United
States. Interest income decreased $330,000 to $3.1 million in 1998 compared to
$3.4 million in 1997. This decrease is the result of the decrease in short-term
investments during 1998.
INCOME TAXES. The Company's effective tax rate was 39.8% in 1997 and 1998. This
resulted from a slight increase in the effective rate due primarily to higher
taxes on the Company's operations in Canada offset by increases in state income
tax credits received from certain states for employment incentives. It is
anticipated that the effective rate will increase slightly in 1999 as a result
of the Company's increased international operations.
NET INCOME. As a result of the foregoing factors, net income decreased $1.2
million, or 5.6%, to $20.3 million in 1998 from $21.5 million in 1997. Diluted
earnings per share decreased from 33 cents to 31 cents. Excluding the one-time
business combination expenses, net income in 1998 would have been $21.1 million,
representing a $400,000 decrease from 1997, and diluted earnings per share would
have been 32 cents.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities was $54.5 million in 1999 as compared
to $25.0 million in 1998. Cash provided by operating activities consists of
$61.2 million of total net income before depreciation and amortization, bad
debt, deferred income taxes and loss on disposal of assets offset in part by
$6.7 million of changes in working capital.
The amount of cash used by the Company in investing activities was $70.7
million in 1999. During 1999, the Company's capital expenditures (exclusive of
$2.2 million in assets acquired under
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capital leases) were $57.0 million, and the Company used $6.5 million in cash
for the Pamet, Smart Call and Connect acquisitions. The Company also invested
$2.5 million in a customer relationship management software company. These
expenditures were offset in part by the reduction of $4.5 million in short-term
investments. Cash used in investing activities was $19.9 million for 1998,
resulting primarily from $38.5 million in capital expenditures, $2.3 million for
acquisitions and $10.9 million for contract acquisition costs offset by
reductions in the Company's short-term investments.
Historically, capital expenditures have been, and future capital
expenditures are anticipated to be, primarily for the development of customer
interaction centers, as well as expansion of the Company's customer management
consulting, technology deployment and systems integration, Web-based education
platforms, Internet customer relationship management and customer-centric
marketing solutions. The Company currently expects total capital expenditures in
2000 to be approximately $60 million to $80 million, excluding any capital
expenditures for the joint venture with Ford Motor Company (Ford), which the
Company anticipates to be $10 million to $15 million in 2000. The Company
expects its capital expenditures will be used primarily to open up five or six
new shared customer interaction centers during 2000. Such expenditures will be
financed with internally generated funds, stock option exercises and the related
tax benefit, existing cash balances and additional borrowings. The level of
capital expenditures incurred in 2000 will be dependent upon new client
contracts obtained by the Company and the corresponding need for additional
capacity. In addition, if the Company's future growth is generated through
facilities management contracts, the anticipated level of capital expenditures
could be reduced significantly.
Cash provided by financing activities in 1999 was $23.5 million. This
primarily resulted from an increase in borrowings against the revolving line of
credit and long-term notes payable offset by capital lease and long-term debt
payments. Additional proceeds from financing activities were generated by the
exercise of stock options and the related tax benefit. In 1998, cash used in
financing activities of $2.9 million resulted from payments under capital lease
obligations and long-term debt offset by the exercise of stock options and the
related tax benefit.
In November 1998, the Company obtained a three-year, $50 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 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. The Company had $18 million in
borrowings under the line of credit at December 31, 1999. The Company recently
expanded its credit facility to $75 million.
The Company believes that existing cash and short-term investments together
with stock option exercises and the related tax benefit and available borrowings
under its line of credit will be sufficient to finance the Company's current
operations, planned capital expenditures and anticipated growth through 2001.
However, if the Company were to make any significant acquisitions for cash, it
may be necessary for the Company to obtain additional debt or equity financing.
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 financial condition and results of operations of the Company. There is no
assurance that any such discussions will result in the consummation of any such
transaction.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE SIX MONTH PERIOD
ENDED JUNE 30, 2000 AND 1999
SIX MONTH PERIOD ENDED JUNE 30, 2000 COMPARED TO JUNE 30, 1999
Revenues increased $121 million or 48.6% to $369.9 million for the six
months ended June 30, 2000 from $248.9 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 $67.2 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 1st and 4th quarter of 1999,
and increased capacity utilization.
Costs of services increased $79.8 million, or 48%, to $246 million for the
six months ended June 30, 2000 from $166.2 million for the six months ended June
30, 1999. Costs of services as a percentage of revenues decreased from 66.8% for
the six months ended June 30, 1999 to 66.5% 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 $26.4 million, or
42.2% to $89.0 million for the six months ended June 30, 2000 from $62.6 million
for the six months ended June 30, 1999. Selling, general and administrative
expenses as a percentage of revenues decreased from 25.2% for the six months
ended June 30, 1999 to 24.1% 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
$14.8 million or 74%, to $34.8 million for the six months ended June 30, 2000
from $20.0 million for the six months ended June 30, 1999. Operating income as a
percentage of revenues increased from 8.0% for the six months ended June 30,
1999 to 9.4% for the six months ended June 30, 2000.
Other income totaled $11.3 million for the six months ended June 30, 2000
compared with other income of $188,000 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 131%,
to $28.2 million for the six months ended June 30, 2000 from $12.2 million for
the six months ended June 30, 1999.
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LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2000 the Company had cash and cash equivalents of $6.4
million, short-term investments of $47.4 million and an investment in common
stock of $70.8 million. Cash used by operating activities was $5.1 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 $42.2 million for the six months
ended June 30, 2000 resulting primarily from $8.9 million decrease in short-term
investments, $5.1 million in capital contribution from a minority interest
partner offset by $46.3 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 $39.0 million resulting from the
increase in borrowings of $27.0 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 the Company'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; the Company'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; the Company's ability to predict the potential volume or
profitability of any future technology or consulting sales; the Company's
agreements with clients may be canceled on relatively short notice; and the
Company'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 the Company's 1999 Annual Report on Form 10-K,
Quarterly Reports on
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Form 10-Q for the first and second quarters of 2000, which describe other
important factors that may impact the Company's business, results of operations
and financial condition. However, these factors should not be construed as an
exhaustive list. The Company 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. The Company assumes no obligation to update its
forward-looking statements to reflect actual results or changes in factors
affecting such forward-looking statements.
10
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INDEX TO FINANCIAL STATEMENTS
TELETECH HOLDINGS, INC.
<TABLE>
<CAPTION>
Page
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Report of Independent Public Accountants........................................ 12
Supplemental Consolidated Balance Sheets
as of December 31, 1998 and 1999.............................................. 13
Supplemental Consolidated Statements of
Income for the Years Ended December 31, 1997, 1998 and 1999................... 14
Supplemental Consolidated Statements of
Stockholders' Equity for the Years Ended
December 31, 1997, 1998 and 1999.............................................. 15
Supplemental Consolidated Statements of Cash Flows
for the Years Ended December 31, 1997, 1998 and 1999.......................... 16
Notes to Supplemental Consolidated Financial Statements
for the Years Ended December 31, 1997, 1998 and 1999.......................... 18
Supplemental Condensed Consolidated Balance Sheets as of
December 31, 1999 and June 30, 2000, unaudited................................ 38
Supplemental Condensed Consolidated Statements of Income for the
six-month periods ended June 30, 1999 and June 30, 2000, unaudited............ 39
Supplemental Condensed Consolidated Statement of Cash flows for
the six-month periods ended June 30, 1999 and June 30, 2000, unaudited........ 40
Notes to the Unaudited Supplemental Condensed Consolidated Financial Statements. 42
</TABLE>
11
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To TeleTech Holdings, Inc.:
We have audited the accompanying supplemental consolidated balance sheets
of TELETECH HOLDINGS, INC. (a Delaware corporation) and subsidiaries as of
December 31, 1998 and 1999, and the related supplemental consolidated statements
of income, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1999. The supplemental consolidated statements
give retroactive effect to the acquisition of all of the issued share capital of
Contact Center Holdings, S.L. on August 31, 2000, which has been accounted for
as a pooling of interest, as described in Note 16. These supplemental financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these supplemental financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the supplemental consolidated financial statements referred
to above present fairly, in all material respects, the consolidated financial
position of TeleTech Holdings, Inc. and subsidiaries as of December 31, 1998 and
1999, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 1999, after giving
retroactive effect to the acquisition of all of the issued share capital of
Contact Center Holdings, S.L., as described in Note 16, in conformity with
accounting principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
Denver, Colorado
February 14, 2000 (except for the matters discussed in Note 16, as to which the
date is August 31, 2000).
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TELETECH HOLDINGS, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
December 31,
-------------------------
1998 1999
--------- ---------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ...................................................... $ 9,466 $ 16,227
Short-term investments ......................................................... 37,107 41,621
Accounts receivable, net of allowance for doubtful accounts
of $2,900 and $3,923, respectively .......................................... 74,612 91,979
Prepaids and other assets ...................................................... 2,811 5,361
Deferred tax asset ............................................................. 3,855 4,889
--------- ---------
Total current assets ........................................................ 127,851 160,077
--------- ---------
PROPERTY AND EQUIPMENT, net of accumulated depreciation
of $38,998 and $65,985, respectively ............................................ 78,987 111,644
--------- ---------
OTHER ASSETS:
Long-term accounts receivable .................................................. 4,274 3,930
Goodwill, net of accumulated amortization
of $1,599 and $3,103, respectively .......................................... 15,022 20,633
Contract acquisition cost, net of accumulated amortization
of zero and $1,614, respectively ............................................ 10,900 9,286
Deferred tax asset ............................................................. -- 550
Other assets ................................................................... 1,923 5,364
--------- ---------
Total assets ................................................................ $ 238,957 $ 311,484
========= =========
LIABILITIES AND STOCKHOLDER' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt and capital lease obligations ................ $ 8,363 $ 5,783
Bank overdraft ................................................................. 778 1,323
Accounts payable ............................................................... 12,659 12,426
Accrued employee compensation .................................................. 18,834 28,319
Accrued income taxes ........................................................... 6,093 4,397
Other accrued expenses ......................................................... 11,742 17,749
Customer advances, deposits and deferred income ................................ 3,803 4,510
--------- ---------
Total current liabilities ................................................... 62,272 74,507
--------- ---------
DEFERRED TAX LIABILITIES .......................................................... 835 --
LONG-TERM DEBT, net of current portion:
Capital lease obligations ...................................................... 4,274 2,530
Revolving line-of-credit ....................................................... -- 18,000
Other debt ..................................................................... 2,512 5,649
--------- ---------
Total liabilities ........................................................... 69,893 100,686
--------- ---------
COMMITMENTS AND CONTINGENCIES (Note 8)
STOCKHOLDERS' EQUITY:
Common stock; $.01 par value; 150,000,000 shares
authorized; 64,033,724 and 65,087,645 shares,
respectively, issued; and outstanding ....................................... 639 650
Additional paid-in capital ..................................................... 112,108 122,088
Accumulated other comprehensive loss ........................................... (1,200) (1,402)
Retained earnings .............................................................. 57,517 89,462
--------- ---------
Total stockholders' equity .................................................. 169,064 210,798
--------- ---------
Total liabilities and stockholders' equity .................................. $ 238,957 $ 311,484
========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated balance sheets.
13
<PAGE>
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
SUPPPLEMANTAL CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
REVENUES $ 284,683 $ 384,771 $ 549,076
OPERATING EXPENSES:
Costs of services ............................. 182,509 253,427 372,182
Selling, general and administrative expenses .. 68,747 97,830 130,937
--------- --------- ---------
Total operating expenses ................... 251,256 351,257 503,119
--------- --------- ---------
INCOME FROM OPERATIONS ........................... 33,427 33,514 45,957
--------- --------- ---------
OTHER INCOME (EXPENSE):
Interest expense .............................. (1,166) (1,446) (2,509)
Interest income ............................... 3,404 3,074 2,372
Equity in income of affiliate ................. 302 70 --
Business combination expenses ................. -- (1,321) --
Gain on settlement of long-term contract ...... -- -- 6,726
Other ......................................... (241) (240) 246
--------- --------- ---------
2,299 137 6,835
--------- --------- ---------
INCOME BEFORE INCOME TAXES ....................... 35,726 33,651 52,792
Provision for income taxes .................... 14,206 13,344 20,847
--------- --------- ---------
NET INCOME ....................................... $ 21,520 $ 20,307 $ 31,945
========= ========= =========
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic ......................................... 61,699 63,214 64,447
Diluted ....................................... 64,910 65,316 66,670
NET INCOME PER SHARE
Basic ......................................... $ .35 $ .32 $ .50
Diluted ....................................... $ .33 $ .31 $ .48
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
14
<PAGE>
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
Accumulated Unearned
Shares Amount Shares Amount Additional Other Compensation-
------ ------ ------ ------ Paid-in Comprehensive Restricted Retained
Treasury Stock Common Stock Capital Income Stock Earnings
-------------- --------------- ---------- ------------- ------------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCES, December 31, 1996 99 $ (988) 60,420 $ 604 $ 94,032 $ 98 $ (254) $ 15,853
Employee stock purchase
plan 28 440
Acquisition of TMI 100 1 1,797
Translation adjustments (872)
Compensation expense on
restricted stock 127
Exercise of stock options 470 5 5,072
Issuance of common stock 1,508 15 2,648
Net income 21,520
Comprehensive income
Distribution to
stockholder (697)
------------------------------------------------------------------------------------
BALANCES, December 31, 1997 99 (988) 62,526 625 103,989 (774) (127) 36,676
Employee stock purchase
plan 28 334
Acquisition of
Intellisystems (99) 988 245 2 2,089
Acquisition of Cygnus 325 3 2,658
Combination with
Outsource 606 6 804
Translation adjustments (426)
Brokerage fee on EDM
combination 42 485
Year-end change for EDM (270)
Exercise of stock options 249 3 1,457
Other stock issuances 13 1,096
Compensation expense on
restricted stock 127
Net income 20,307
Comprehensive income
------------------------------------------------------------------------------------
BALANCES, December 31, 1998 -- -- 64,034 639 112,108 (1,200) -- 57,517
Employee stock purchase
plan 131
Acquisition of Pamet 286 3 1,750
Translation adjustments (202)
Exercise of stock options 767 8 8,099
Net income 31,945
Comprehensive income
BALANCES, December 31, 1999 -- $ -- 65,087 $ 650 $ 122,088 $ (1,402) $ -- $ 89,462
------------------------------------------------------------------------------------
<CAPTION>
Total
Comprehensive Stockholders'
Income Equity
------------- ------------
<C> <C>
BALANCES, December 31, 1996 -- $ 109,345
Employee stock purchase
plan 440
Acquisition of TMI 1,798
Translation adjustments (872) (872)
Compensation expense on
restricted stock 127
Exercise of stock options 5,077
Issuance of common stock 2,663
Net income 21,520 21,520
---------
Comprehensive income $ 20,648 --
=========
Distribution to
stockholder (697)
---------------------------
BALANCES, December 31, 1997 -- 139,401
Employee stock purchase
plan 334
Acquisition of
Intellisystems 3,079
Acquisition of Cygnus 2,661
Combination with
Outsource 810
Translation adjustments (426) (426)
Brokerage fee on EDM
combination 485
Year-end change for EDM (270)
Exercise of stock options 1,460
Other stock issuances 1,096
Compensation expense on
restricted stock 127
Net income 20,307 20,307
---------
Comprehensive income $ 19,881 --
=========
---------------------------
BALANCES, December 31, 1998 -- 169,064
Employee stock purchase
plan 131
Acquisition of Pamet 1,753
Translation adjustments (202) (202)
Exercise of stock options 8,107
Net income 31,945 31,945
---------
Comprehensive income $ 31,743
=========
BALANCES, December 31, 1999 $ 210,798
---------------------------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
15
<PAGE>
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .............................................. $ 21,520 $ 20,307 $ 31,945
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ........................ 11,435 19,563 30,501
Allowance for doubtful accounts ...................... 865 705 904
Deferred income taxes ................................ (1,169) (1,235) (2,620)
Equity in income of affiliate ........................ (302) (70) --
Deferred compensation expense ........................ 127 127 --
Business combination expenses paid in stock .......... -- 485 --
Loss on Disposal of assets ........................... -- -- 509
Changes in assets and liabilities:
Accounts receivable ................................ (15,564) (29,277) (16,081)
Prepaids and other assets........................... (314) (199) (639)
Accounts payable and accrued expenses .............. 12,065 12,565 10,310
Customer advances, deposits and deferred income .... 455 2,030 (281)
-------- -------- --------
Net cash provided by operating activities ..... $ 29,118 $ 25,001 $ 54,548
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment ...................... $(34,910) $(38,495) $(57,024)
Acquisitions, net of cash acquired ...................... (2,440) (2,308) (9,048)
Contract acquisition costs .............................. -- (10,900) --
Proceeds from sale of interest in Access 24 UK Limited .. -- 981 --
Temporary deposit ....................................... 3,000 -- --
Changes in accounts payable and accrued liabilities
related to investing activities ....................... (190) (1,762) (112)
Decrease (increase) in short-term investments ........... 2,841 32,527 (4,517)
-------- -------- --------
Net cash used in investing activities .............. $(31,699) $(19,957) $(70,701)
-------- -------- --------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
16
<PAGE>
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in bank overdraft ........................... $ 745 $ (316) $ 545
Net increase (decrease) in short-term borrowings .................... 453 (170) (1,287)
Proceeds from line-of-credit ........................................ -- -- 18,000
Payments on long-term debt .......................................... (216) (1,126) (1,692)
Proceeds from long-term debt borrowings ............................. 593 3,227 5,000
Payments under capital lease obligations ............................ (4,933) (7,466) (5,176)
Proceeds from common stock issuances ................................ 3,240 1,514 --
Proceeds from exercise of stock options ............................. 1,917 1,008 5,184
Tax benefit from stock option exercises ............................. 3,160 452 2,923
Payments under subordinated notes payable to stockholder ............ 29 -- --
Distributions to stockholder ........................................ (678) -- --
-------- -------- --------
Net cash provided by (used in) financing activities ............ 4,310 (2,877) 23,497
-------- -------- --------
Effect of exchange rate changes on cash ................................ 87 (178) (583)
NET INCREASE IN CASH AND CASH EQUIVALENTS .............................. 1,816 1,989 6,761
CASH AND CASH EQUIVALENTS, beginning of period ......................... 5,661 7,477 9,466
-------- -------- --------
CASH AND CASH EQUIVALENTS, end of period ............................... $ 7,477 $ 9,466 $ 16,227
======== ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest .............................................. $ 1,296 $ 1,445 $ 2,509
Cash paid for income taxes .......................................... $ 12,272 $ 11,202 $ 23,516
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Assets acquired through capital leases .............................. $ 5,229 $ 3,445 $ 2,226
Stock issued in purchase of TMI ..................................... $ 1,798 $ -- $ --
Stock issued in purchase of Intellisystems .......................... $ -- $ 3,079 $ --
Stock issued in pooling of EDM (brokerage fee) ...................... $ -- $ 485 $ --
Stock issued in purchase of Cygnus .................................. $ -- $ 2,661 $ --
Stock issued in purchase of Pamet ................................... $ -- $ -- $ 1,753
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
17
<PAGE>
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998, AND 1999
TeleTech Holdings, Inc. (THI or the Company) is a provider of outsourced
customer management solutions for large and multinational companies in the
United States, Australia, Brazil, Canada, Mexico, New Zealand, Singapore and the
United Kingdom. Customer management encompasses a wide range of customer
acquisition, retention and satisfaction programs designed to maximize the
lifetime value of the relationship between the Company's clients and their
customers.
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The supplemental consolidated financial statements are composed of the
accounts of THI and its wholly-owned subsidiaries. All intercompany balances and
transactions have been eliminated in consolidation.
As more fully discussed in Note 16, during August 2000, the Company entered
into a business combination with Contact Center Holdings, S.L. ("CCH"). The
business combination has been accounted for as pooling of interest, and the
historical consolidated financial statements of the Company for all 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 consolidated financial statements of the Company include
reclassifications made to conform the financial statement presentation of CCH to
that of the Company.
FOREIGN CURRENCY TRANSLATION
The assets and liabilities of the Company's foreign subsidiaries, whose
functional currency is other than the U.S. dollar, are translated at the
exchange rates in effect on the reporting date, and income and expenses are
translated at the weighted average exchange rate during the period. The net
effect of translation gains and losses is not included in determining net
income, but is accumulated as a separate component of stockholders' equity.
During 1998, the net effect of translation gains on the Company's Mexican
subsidiary was included in determining net income, as Mexico was considered a
highly inflationary economy. Foreign currency transaction gains and losses are
included in determining net income. Such gains and losses were not material for
any period presented. In 1999, the Mexican economy was no longer considered
highly inflationary, and therefore translation gains and losses were included as
a component of stockholders' equity.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation.
Additions, improvements and major renewals are capitalized. Maintenance, repairs
and minor renewals are expensed as incurred. Amounts paid for software licenses
and third-party packaged software are capitalized.
Depreciation is computed on the straight-line method based on the estimated
useful lives of the assets, as follows:
18
<PAGE>
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998, AND 1999
<TABLE>
<S> <C>
Buildings ......................... 27.5 years
Computer equipment and software ... 4-5 years
Telephone equipment ............... 5-7 years
Furniture and fixtures ............ 5-7 years
Leasehold improvements ............ 5-10 years
Vehicles .......................... 5 years
</TABLE>
Assets acquired under capital lease obligations are amortized over the life
of the applicable lease of four to seven years (or the estimated useful lives of
the assets, of four to seven years, where title to the leased assets passes to
the Company upon termination of the lease).
REVENUE RECOGNITION
The Company recognizes revenues at the time services are performed. The
Company has certain contracts that are billed in advance. Accordingly, amounts
billed but not earned under these contracts are excluded from revenues and
included in deferred income.
The Company maintains ongoing training programs for its employees. The cost
of this training is expensed as incurred. In addition, certain contracts require
clients to reimburse the Company for specific training. These costs are billed
to the clients as incurred.
RESEARCH AND DEVELOPMENT
Research and development costs are charged to operations when incurred and
are included in operating expenses. Research and development costs were not
material for any period presented.
INTANGIBLE ASSETS
The excess of cost over the fair market value of tangible net assets and
trademarks of acquired businesses is amortized on a straight-line basis over the
periods of expected benefit of nine to 25 years. Amortization of goodwill for
the years ended December 31, 1997, 1998 and 1999, was $349,000, $1,012,000 and
$1,504,000, respectively.
Subsequent to an acquisition, the Company continually evaluates whether
later events and circumstances have occurred that indicate the remaining
estimated useful life of an intangible asset may warrant revision or that the
remaining balance of an intangible asset may not be recoverable. When factors
indicate that an intangible asset should be evaluated for possible impairment,
the Company uses an estimate of the related business' undiscounted future cash
flows over the remaining life of the asset in measuring whether the intangible
asset is recoverable. Management does not believe that any provision for
impairment of intangible assets is required.
CONTRACT ACQUISITION COSTS
Amounts paid to a client to obtain a long-term contract are being amortized
on a straight-line basis over the term of the contract commencing with the date
of the first revenues from the contract.
19
<PAGE>
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998, AND 1999
Amortization expense for the year ended December 31, 1999, was $1,614,000. There
was no amortization expense during 1998.
INCOME TAXES
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards (SFAS) 109, "Accounting for Income Taxes," which
requires recognition of deferred tax assets and liabilities for the expected
future income tax consequences of transactions that have been included in the
financial statements or tax returns. Under this method, deferred tax assets and
liabilities are determined based on the difference between the financial
statement and tax bases of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to reverse. Net
deferred tax assets then may be reduced by a valuation allowance for amounts
that do not satisfy the realization criteria of SFAS 109.
EARNINGS PER SHARE
Earnings per share are computed based upon the weighted average number of
common shares and common share equivalents outstanding.
Basic earnings per share are computed by dividing reported earnings
available to common stockholders by weighted average shares outstanding. No
dilution for any potentially dilutive securities is included. Diluted earnings
per share reflect the potential dilution assuming the issuance of common shares
for all dilutive potential common shares outstanding during the period. The
difference between diluted and basic shares outstanding relates to outstanding
stock options.
CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
For the purposes of the statement of cash flows, the Company considers all
cash and investments with an original maturity of 90 days or less to be cash
equivalents.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
SEGMENT REPORTING
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS
131, "Disclosures About Segments of an Enterprise and Related Information,"
which establishes standards for the way public business enterprises report
information about operating segments in annual financial statements and requires
those enterprises report selected information about operating segments in
interim financial reports issued to stockholders. It also establishes standards
for related disclosures about products and services, geographic areas and major
customers. SFAS 131 requires that a public business enterprise report financial
and descriptive information about its reportable operating segments. Operating
segments
20
<PAGE>
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998, AND 1999
are components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision-maker in
deciding how to allocate resources and in assessing performance.
LONG-LIVED ASSETS
Long-lived assets and certain identifiable intangibles to be held and used
by the Company are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. An asset is considered impaired when future undiscounted cash flows
are estimated to be insufficient to recover the carrying amount. If impaired, an
asset is written down to its fair value.
SELF-INSURANCE PROGRAM
The Company self-insures for certain levels of workers' compensation and
employee health insurance. Estimated costs of these self-insurance programs were
accrued at the projected settlements for known and anticipated claims.
Self-insurance liabilities of the Company amounted to $3.2 million and $2.9
million at December 31, 1998 and 1999, respectively.
EFFECTS OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities," effective for fiscal years beginning after
June 15, 2000. SFAS 133 establishes accounting and reporting standards requiring
that every derivative instrument (including certain derivative instruments
embedded in other contracts) be recorded in the balance sheet as either an asset
or liability measured at its fair value. It also requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the hedged
item in the income statement and requires that a company must formally document,
designate and assess the effectiveness of transactions that receive hedge
accounting. SFAS 133 may not be applied retroactively and must be applied to (a)
derivative instruments and (b) certain derivative instruments embedded in hybrid
contracts that were issued, acquired or substantively modified after December
31, 1997 (and, at the Company's election, before January 1, 1998). Management
believes that the impact of SFAS 133 will not significantly affect its financial
reporting.
In December 1999, the staff of the Securities and Exchange Commission
issued its Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition." SAB
No. 101 provides guidance on the measurement and timing of revenue recognition
in financial statements of public companies. Changes in accounting policies to
apply the guidance of SAB No. 101 must be adopted by recording the cumulative
effect of the change in the fiscal quarter ending March 31, 2000. The adoption
of SAB No. 101 did not effect the Company's method of recognizing revenue.
(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
21
<PAGE>
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998, AND 1999
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>
(Amounts in Thousands) 1997 1998 1999
---------------------- --------- --------- ---------
<S> <C> <C> <C>
REVENUES:
Outsourced ........................................ $ 143,627 $ 200,514 $ 299,379
Facilities Management ............................. 84,033 85,694 94,461
International Outsourced .......................... 55,940 89,791 134,416
Corporate Activities .............................. 1,083 8,772 20,820
--------- --------- ---------
Total ....................................... $ 284,683 $ 384,771 $ 549,076
========= ========= =========
OPERATING INCOME (LOSS):
Outsourced ........................................ $ 30,243 $ 41,495 $ 69,463
Facilities Management ............................. 16,159 11,648 6,849
International Outsourced .......................... 4,538 7,451 10,467
Corporate Activities .............................. (17,513) (27,080) (40,822)
--------- --------- ---------
Total ....................................... $ 33,427 $ 33,514 $ 45,957
========= ========= =========
DEPRECIATION AND AMORTIZATION
INCLUDED IN OPERATING INCOME:
Outsourced ........................................ $ 7,463 $ 12,688 $ 16,514
Facilities Management ............................. 522 239 483
International Outsourced .......................... 3,206 5,324 7,861
Corporate Activities .............................. 244 1,312 5,643
--------- --------- ---------
Total ....................................... $ 11,435 $ 19,563 $ 30,501
========= ========= =========
ASSETS:
Outsourced ........................................ $ 88,829 $ 101,105 $ 76,401
Facilities Management ............................. 6,759 18,121 11,290
International Outsourced .......................... 44,809 65,614 106,397
Corporate Activities .............................. 54,550 54,117 117,396
--------- --------- ---------
Total ....................................... $ 194,947 $ 238,957 $ 311,484
========= ========= =========
GOODWILL (INCLUDED IN TOTAL ASSETS):
International Outsourced Goodwill, Net ............ $ 7,295 $ 6,803 $ 10,496
Corporate Activities Goodwill, Net ................ -- 8,219 10,137
--------- --------- ---------
Total ....................................... $ 7,295 $ 15,022 $ 20,633
========= ========= =========
</TABLE>
22
<PAGE>
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998, AND 1999
<TABLE>
<S> <C> <C> <C>
CAPITAL EXPENDITURES (INCLUDING CAPITAL LEASES):
Outsourced ........................................ $ 22,337 $ 28,144 $ 23,562
Facilities Management ............................. 50 1,169 434
International Outsourced .......................... 16,070 5,580 21,344
Corporate Activities .............................. 1,682 7,047 16,520
--------- --------- ---------
Total ....................................... $ 40,139 $ 41,940 $ 61,860
========= ========= =========
</TABLE>
The following geographic data includes revenues based on the location the
services are provided and gross property and equipment based on the physical
location (in thousands).
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
REVENUES:
United States $228,743 $281,077 $394,141
Australia 29,790 36,958 49,925
Canada 14,497 36,852 35,814
Rest of world 11,653 29,884 69,196
-------- -------- --------
Total $284,683 $384,771 $549,076
======== ======== ========
GROSS PROPERTY AND EQUIPMENT:
United States $ 54,912 $ 86,189 $125,969
Australia 10,622 11,956 16,684
Canada 4,790 5,645 8,943
Rest of world 6,271 14,195 26,033
-------- -------- --------
Total $ 76,595 $117,985 $177,629
======== ======== ========
</TABLE>
The Company's revenues from major customers (revenues in excess of 10% of
total sales) are from entities involved in the telecommunications and
transportation industries. The revenues from such customers as a percentage of
total revenues for each of the three years ended December 31 are as follows:
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Customer A 18% 8% 7%
Customer B 23% 12% 9%
Customer C 15% 24% 25%
-- -- --
56% 44% 41%
== == ==
</TABLE>
At December 31, 1999, accounts receivable from Customers A, B and C were
$5.2 million, $4.7 million and $8.2 million, respectively. At December 31, 1998,
accounts receivable
23
<PAGE>
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998, AND 1999
from Customers A, B and C were $7.1 million, $7.3 million, and $13.4 million,
respectively. There were no other customers with receivable balances in excess
of 10% of consolidated accounts receivable. Customers A and C are included in
the outsourced reporting segment. Customer B is included in the facilities
management reporting segment.
The loss of one or more of its significant customers could have a
materially adverse effect on the Company's business, operating results or
financial condition. To limit the Company's credit risk, management performs
ongoing credit evaluations of its customers and maintains allowances for
potentially uncollectible accounts. Although the Company is directly impacted by
economic conditions in the telecommunications, technology, transportation,
healthcare, financial services and government services industries, management
does not believe significant credit risk exists at December 31, 1999.
(3) PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31, 1998 and
1999 (in thousands):
<TABLE>
<CAPTION>
1998 1999
--------- ---------
<S> <C> <C>
Land .............................. $ 64 $ 51
Buildings ......................... 258 202
Computer equipment and software ... 56,660 77,775
Telephone equipment ............... 7,773 12,631
Furniture and fixtures ............ 23,456 29,055
Leasehold improvements ............ 29,280 56,264
Other ............................. 494 1,651
--------- ---------
117,985 177,629
Less accumulated depreciation ..... (38,998) (65,985)
--------- ---------
$ 78,987 $ 111,644
========= =========
</TABLE>
Included in the cost of property and equipment is the following equipment
obtained through capitalized leases as of December 31, 1998 and 1999 (in
thousands):
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Computer equipment and software ... $ 17,562 $ 16,895
Telephone equipment ............... 1,906 1,615
Furniture and fixtures ............ 8,071 2,470
-------- --------
27,539 20,980
Less accumulated depreciation ..... (14,278) (14,728)
-------- --------
$ 13,261 $ 6,252
======== ========
</TABLE>
Depreciation expense was $10.4 million, $18.5 million and $27.4 million for
the years ended December 31, 1997, 1998 and 1999, respectively. Depreciation
expense related to leased
24
<PAGE>
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998, AND 1999
equipment under capital leases was $4.7 million, $5.2 million and $5.0 million
for the years ended December 31, 1997, 1998 and 1999, respectively.
(4) CAPITAL LEASE OBLIGATIONS
The Company has financed property and equipment under non-cancelable
capital lease obligations. Accordingly, the fair value of the equipment has been
capitalized and the related obligation recorded. The average implicit interest
rate on these leases was 8.3% at December 31, 1999. Interest is charged to
expense at a level rate applied to declining principal over the period of the
obligation.
The future minimum lease payments under capitalized lease obligations as of
December 31, 1999, are as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
<S> <C>
2000 $ 4,002
2001 1,598
2002 496
-------
6,096
Less amount representing interest..................... (501)
-------
5,595
Less current portion.................................. (3,065)
-------
$ 2,530
=======
</TABLE>
Interest expense on the outstanding obligations under such leases was
$1,106,000, $1,015,000 and $818,000 for the years ended December 31, 1997, 1998
and 1999, respectively.
(5) LONG-TERM DEBT
As of December 31, 1998 and 1999, long-term debt consisted of the following
notes (in thousands):
<TABLE>
<CAPTION>
1998 1999
------- -------
<S> <C> <C>
Note payable, interest at 8% per annum, principal and
interest payable monthly, maturing May 2000 ........... $ 58 $ --
Note payable, interest at 5% per annum, principal and
interest payable quarterly, maturing December 1999 .... 222 --
Note payable, interest at 8% per annum, principal and
interest payable quarterly, maturing March 2001 ....... 1,673 1,090
Note payable, interest at 7% per annum, principal and
interest payable quarterly, maturing December 1999 .... 449 --
Note payable, interest at 8% per annum, principal and
interest payable monthly, maturing January 2001 ....... 1,448 842
</TABLE>
25
<PAGE>
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998, AND 1999
<TABLE>
<S> <C> <C>
Note payable, interest at 5% per annum, principal and
interest payable monthly, maturing November 2009 ..... -- 4,935
Note payable, interest at 7% per annum, principal and
interest payable monthly, maturing July 2002 .......... -- 271
Note payable, interest at 7% per annum, principal and
interest payable monthly, maturing May 2002 ........... -- 348
Other notes payable ..................................... 1,000 881
------- -------
4,850 8,367
Less current portion .................................... (2,338) (2,718)
------- -------
$ 2,512 $ 5,649
======= =======
</TABLE>
Annual maturities of the long-term debt are as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
<S> <C>
2000 $2,718
2001 1,197
2002 648
2003 529
2004 551
Thereafter 2,724
------
$8,367
======
</TABLE>
(6) REVOLVING LINE OF CREDIT
In November 1998, the Company entered into a three-year unsecured revolving
line of credit agreement with a syndicate of five commercial banks under which
it may borrow up to $50 million. Interest is payable at various interest rates.
The borrowings can be made at (a) the bank's base rate or (b) the bank's
offshore rate (approximating LIBOR) plus a margin ranging from 50 to 150 basis
points depending upon the Company's leverage. In addition, the Company, at its
option, can elect to secure up to $25 million of the line with existing cash
investments. Advances under the secured portion will be made at a margin of 22.5
basis points. At December 31, 1999, there was $18 million outstanding under this
agreement. At December 31, 1998, there were no amounts outstanding under this
facility. The Company is required to comply with certain minimum financial
ratios under covenants in connection with the agreement described above, the
most restrictive of which requires the Company to maintain a fixed charge
coverage ratio of 3 to 1. Under this agreement, the Company has voluntarily
pledged $15 million of short-term investments at December 31, 1999, as
collateral to reduce the interest rate on short-term borrowings. The Company may
at its option, elect to unsecure the borrowings at any time. As of December 31,
1998 and 1999, the Company was in compliance with all covenants under the
agreement.
The Company's Canadian subsidiary has available an operating loan of
CDN$2.0 million, which is due on demand and bears interest at the bank's prime
rate, which was 6.75% at December 31,
26
<PAGE>
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998, AND 1999
1998 and 1999. The operating loan is collateralized by a general security
agreement, a partial assignment of accounts receivable insurance in the amount
of CDN$500,000, a partial assignment of life insurance on the former majority
shareholder in the amount of CDN$400,000 and an assignment of fire insurance. As
of December 31, 1998 and 1999, there was $778,000 and $1,323,000, respectively,
outstanding under this operating loan.
The Company's Spanish subsidiary has factoring lines of credit under which
it may borrow up to ESP$700 million and ESP$1,600 million at December 31, 1998
and 1999, respectfully. As of December 31, 1998 and 1999, there was $298,000 and
$2,755,000 outstanding under these factoring lines.
(7) INCOME TAXES
The components of income before income taxes are as follows (in thousands):
<TABLE>
<CAPTION>
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Domestic $31,325 $23,518 $41,653
Foreign 4,401 10,133 11,139
------- ------- -------
Total $35,726 $33,651 $52,792
======= ======= =======
</TABLE>
The components of the provision for income taxes are as follows (in
thousands):
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Current provision:
Federal $ 11,116 $ 8,297 $ 14,776
State 2,490 1,865 3,359
Foreign 1,769 4,417 5,131
-------- -------- --------
15,375 14,579 23,266
Deferred provision:
Federal (1,036) (834) (1,724)
State (190) (195) (303)
Foreign 57 (206) (392)
-------- -------- --------
(1,169) (1,235) (2,419)
-------- -------- --------
$ 14,206 $ 13,344 $ 20,847
======== ======== ========
</TABLE>
The following reconciles the Company's effective tax rate to the federal
statutory rate for the years ended December 31, 1997, 1998 and 1999 (in
thousands):
27
<PAGE>
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998, AND 1999
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Income tax expense per federal statutory rate .... $ 12,410 $ 11,152 $ 16,945
State income taxes, net of federal deduction ..... 1,491 1,100 1,883
Permanent differences ............................ (100) (315) 150
Foreign income taxed at higher rate .............. 405 1,407 1,869
-------- -------- --------
$ 14,206 $ 13,344 $ 20,847
======== ======== ========
</TABLE>
The Company's deferred income tax assets and liabilities are summarized as
follows (in thousands):
<TABLE>
<CAPTION>
1998 1999
------- -------
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts .... $ 1,024 $ 1,278
Vacation accrual ................... 1,202 1,265
Compensation ....................... 954 1,025
Insurance reserves ................. 644 796
State tax credits .................. -- 502
Other .............................. 31 23
------- -------
3,855 4,889
------- -------
Long-term deferred tax assets:
Depreciation and amortization ...... -- 550
Deferred tax liabilities:
Depreciation and amortization ...... (835) --
------- -------
Net deferred income tax asset ......... $ 3,020 $ 5,439
======= =======
</TABLE>
A valuation allowance has not been recorded as the Company expects that all
deferred tax assets will be realized in the future.
(8) COMMITMENTS AND CONTINGENCIES
LEASES. The Company has various operating leases for equipment, customer
interaction centers and office space. Lease expense under operating leases was
approximately $8,163,000, $12,336,000 and $15,368,000 for the years ended
December 31, 1997, 1998 and 1999, respectively.
The future minimum rental payments required under non-cancelable operating
leases as of December 31, 1999, are as follows (in thousands):
28
<PAGE>
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998, AND 1999
<TABLE>
<CAPTION>
Year ended December 31,
<S> <C>
2000 $15,469
2001 12,833
2002 10,052
2003 8,908
2004 6,890
Thereafter 30,844
-------
$84,996
=======
</TABLE>
LEGAL PROCEEDINGS. In November 1996, the Company received notice that CompuServe
Incorporated (CompuServe) was withdrawing its WOW! Internet service from the
marketplace and that effective January 31, 1997, it would terminate all the
programs provided to CompuServe by the Company. Pursuant to the terms of its
agreement with the Company, CompuServe was entitled to terminate the agreement
for reasonable business purposes upon 120 days advance notice and by payment of
a termination fee calculated in accordance with the agreement. In December 1996,
the Company filed suit against CompuServe to enforce these termination
provisions and collect the termination fee. CompuServe filed a counterclaim in
December 1996 alleging that the Company breached other provisions of this
agreement and seeking unspecified monetary damages. In March 1997, CompuServe
asserted a right to offset, against the amount that may be awarded to CompuServe
on its counterclaim, if any, certain accounts receivable it owed to the Company
for services rendered. These accounts receivable totaled $4.3 million.
In mid-1997, CompuServe announced it had agreed to sell its worldwide
on-line services business to America Online, Inc. and its network services
business to a wholly owned subsidiary of WorldCom, Inc. 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 was paid in the fourth
quarter of 1999. As a result, the Company recorded a gain of $6.7 million during
1999.
(9) EMPLOYEE BENEFIT PLAN
The Company has a 401(k) profit-sharing plan that covers all employees who
have completed one year of service, as defined, and are 21 or older.
Participants may defer up to 15% of their gross pay up to a maximum limit
determined by law. Participants are always 100% vested in their contributions.
Participants are also eligible for a matching contribution by the Company of 50%
of the first 5% of compensation a participant contributes to the plan.
Participants vest in all matching contributions over a four-year period.
(10) STOCK COMPENSATION PLANS
The Company adopted a stock option plan during 1995 and amended and
restated the plan in January 1996 for directors, officers, employees,
consultants and independent contractors. The plan reserves 7.0 million shares of
common stock and permits the award of incentive stock options, non-qualified
options, stock appreciation rights and restricted stock. Outstanding options
vest over a three- to five-year period and are exercisable for 10 years from the
date of grant.
29
<PAGE>
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998, AND 1999
In January 1996, the Company adopted a stock option plan for non-employee
directors (the Director Plan), covering 750,000 shares of common stock. All
options are to be granted at fair market value at the date of grant. Options
vest as of the date of the option and are not exercisable until six months after
the option date. Options granted are exercisable for 10 years from the date of
grant unless a participant is terminated for cause or one year after a
participant's death. The Director Plan had options to purchase 423,000, 418,750
and 337,500 shares outstanding at December 31, 1999, 1998 and 1997,
respectively.
In July 1996, the Company adopted an employee stock purchase plan (the
ESPP). Pursuant to the ESPP, an aggregate of 200,000 shares of common stock of
the Company will be sold in periodic offerings to eligible employees of the
Company. The price per share purchased in any offering period is equal to the
lesser of 90% of the fair market value of the common stock on the first day of
the offering period or on the purchase date. The offering periods have a term of
six months. Contributions to the plan for the years ended December 31, 1997,
1998 and 1999 were $419,000, $334,000 and $279,000, respectively.
In February 1999, the Company adopted the TeleTech Holdings, Inc. 1999
Stock Option and Incentive Plan (the 1999 Option Plan). The purpose of the 1999
Option Plan is to enable the Company to continue to (a) attract and retain high
quality directors, officers, employees and potential employees, consultants and
independent contractors of the Company or any of its subsidiaries, (b) motivate
such persons to promote the long-term success of the business of the Company and
its subsidiaries and (c) to induce employees of companies that are acquired by
TeleTech to accept employment with TeleTech following such an acquisition. The
1999 Option Plan supplements the TeleTech Holdings, Inc. Stock Plan, as amended
and restated, which was adopted by the Company in January 1995.
An aggregate of 5.0 million shares of common stock have been reserved for
issuance under the 1999 Option Plan and permits the award of incentive stock
options, non-qualified stock options and shares of restricted common stock. The
1999 Option Plan also authorizes the award of phantom stock and appreciation
rights (SARs).
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 123 (SFAS 123). The FASB's SFAS
123, "Accounting for Stock Based Compensation," defines a fair value based
method of accounting for an employee stock option, employee stock purchase plan
or similar equity instrument and encourages all entities to adopt that method of
accounting for all of their employee stock compensation plans. However, it also
allows an entity to continue to measure compensation cost for those plans using
the method of accounting prescribed by the Accounting Principles Board Opinion
No. 25 (APB 25), "Accounting for Stock Issued to Employees." Entities electing
to remain with the accounting in APB 25 must make pro forma disclosures of net
income and earnings per share as if the fair value based method of accounting
defined in SFAS 123 has been applied.
The Company has elected to account for its stock-based compensation plans
under APB 25; however, the Company has computed, for pro forma disclosure
purposes, the value of all options granted using the Black-Scholes option
pricing model as prescribed by SFAS 123 and the following weighted average
assumptions used for grants:
30
<PAGE>
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998, AND 1999
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Risk-free interest rate.................. 5.4% 5.2% 5.9%
Expected dividend yield.................. 0% 0% 0%
Expected lives........................... 3.2 years 6.0 years 5.3 years
Expected volatility...................... 70% 70% 79%
</TABLE>
The pro forma compensation expense was computed to be the following
approximate amounts:
<TABLE>
<S> <C>
Year ended December 31, 1997 ........... $4,121,000
Year ended December 31, 1998 ........... $8,652,000
Year ended December 31, 1999 ........... $8,196,000
</TABLE>
If the Company had accounted for these plans in accordance with SFAS 123,
the Company's net income and pro forma net income per share would have been
reported as follows:
NET INCOME (AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
As reported $21,520 $20,307 $31,945
Pro forma $19,006 $15,115 $26,863
</TABLE>
PRO FORMA NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE
<TABLE>
<CAPTION>
1997 1998 1999
----- ----- -----
<S> <C> <C> <C>
As reported:
Basic $ .35 $ .32 $ .50
Diluted $ .33 $ .31 $ .48
Pro forma:
Basic $ .31 $ .24 $ .42
Diluted $ .29 $ .23 $ .40
</TABLE>
A summary of the status of the Company's three stock option plans for the
three years ended December 31, 1999, together with changes during each of the
years then ended, is presented in the following table:
31
<PAGE>
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998, AND 1999
<TABLE>
<CAPTION>
Weighted
Average Price
Shares Per Share
--------- -------------
<S> <C> <C>
Outstanding, December 31, 1996 ................................... 5,039,690 $ 5.79
Grants ........................................................... 880,500 17.79
Exercises ........................................................ (470,272) 4.08
Forfeitures ...................................................... (519,600) 9.95
Outstanding, December 31, 1997 ................................... 4,930,318 7.61
Grants ........................................................... 3,163,074 12.03
Exercises ........................................................ (249,440) 4.03
Forfeitures ...................................................... (1,563,802) 13.73
Outstanding, December 31, 1998 ................................... 6,280,150 8.54
Grants ........................................................... 6,735,643 8.40
Exercises ........................................................ (768,210) 6.91
Forfeitures ...................................................... (1,800,384) 10.29
Outstanding, December 31, 1999 ................................... 10,447,199 8.55
Options exercisable at year-end:
1997 1,498,425 $ 4.90
1998 2,076,578 $ 5.62
1999 2,385,596 $ 6.04
Weighted average fair value of options granted during the year:
1997 $ 7.68
1998 $ 8.14
1999 $ 4.81
</TABLE>
The following table sets forth the exercise price range, number of shares,
weighted average exercise price and remaining contractual lives at December 31,
1999:
<TABLE>
<CAPTION>
Number of Weighted Average Weighted Average
Exercise Price Range Shares Exercise Price Contractual Life
-------------------- --------- ---------------- ----------------
<S> <C> <C> <C>
$ 1.29-$ 5.00 1,594,296 $2.34 6
$ 5.62-$ 6.00 587,084 $5.88 9
$ 6.13-$ 6.13 1,380,684 $6.13 9
$ 6.18-$ 7.00 1,630,000 $6.56 9
$ 7.06-$ 9.50 1,698,273 $8.72 8
$ 9.56-$12.75 1,494,608 $11.50 9
$12.88-$14.50 1,507,754 $13.46 9
$15.50-$34.06 554,500 $19.43 9
</TABLE>
32
<PAGE>
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998, AND 1999
(11) FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair values of cash equivalents and other current accounts receivable and
payable approximate the carrying amounts due to their short-term nature.
Short-term investments include primarily U.S. government Treasury bills,
investments in commercial paper, short-term corporate bonds and other short-term
corporate obligations. These investments are classified as held to maturity
securities and are measured at amortized cost. The carrying values of these
investments approximate their fair values.
Debt and long-term receivables carried on the Company's consolidated
balance sheet at December 31, 1998 and 1999 have a carrying value that is not
significantly different than its estimated fair value. The fair value is based
on discounting future cash flows using current interest rates adjusted for risk.
The fair value of the short-term debt approximates its recorded value due to its
short-term nature.
(12) RELATED PARTY TRANSACTIONS
The Company has entered into agreements pursuant to which the Company uses
aircraft services which Kenneth D. Tuchman, chairman of the board of the
Company, has a direct or indirect beneficial interest. During 1998 and 1999, the
Company paid an aggregate of $480,000 and $440,000, respectively, for use of the
aircraft services.
During 1998, the Company entered into an employment agreement with Morton
H. Meyerson, a director of the Company, pursuant to which Mr. Meyerson has
agreed to render certain advisory and consulting services to the Company. As
compensation for such services, the Company has granted to Mr. Meyerson an
option with an exercise price of $9.50 per share. The option vests over five
years and is subject to accelerated vesting if and to the extent that the
closing sales price of the common stock during the term equals or exceeds
certain levels. Under the terms of the option, the exercise price is required to
be paid by delivery of TeleTech shares to the Company and provides that Mr.
Meyerson will receive no more than 200,000 shares of common stock, net of the
shares received by the Company for exercise consideration.
The Company utilizes the services of EGI Risk Services, Inc. for reviewing,
obtaining and/or renewing various insurance policies. EGI Risk Services, Inc. is
a wholly-owned subsidiary of Equity Group Investments, Inc. Rod Dammeyer, a
director of the Company, is the managing partner of Equity Group Investments,
Inc., and Samuel Zell, a former director of the Company, is chairman of the
board. During the years ended December 31, 1997, 1998 and 1999, the Company
incurred $1,166,000, $2,288,000 and $3,521,000, respectively, for such services.
The Company provided reservation call handling services to Midway Airlines
Corporation (Midway), a majority-owned subsidiary of Zell/Chilmark Fund, L.P.
Samuel Zell, a former director of the Company, is an affiliate of Zell/Chilmark
Fund, L.P., and Rod Dammeyer, a director of the Company and a member of the
Audit Committee of the board of directors, is the managing director of
Zell/Chilmark
33
<PAGE>
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998, AND 1999
Fund, L.P. During the years ended December 31 1997, the Company charged Midway
an aggregate of $841,000 for services rendered by the Company. Services to
Midway were discontinued in 1997.
(13) CONTRACT ACQUISITION COSTS
In September 1998, the Company paid $10.9 million to obtain a long-term
contract with a significant client in the telecommunications industry. This
amount is recorded as contract acquisition cost in the accompanying balance
sheet and is being amortized over the six-year term of the contract commencing
with the opening of the first customer interaction center in the first quarter
of 1999. Amortization expense for the year ended December 31, 1999, was
$1,614,000.
(14) 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
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 management
systems integration capabilities. The option has been accounted for as an other
asset.
On October 12, 1999, the Company acquired 100% of the common stock of
Connect for approximately $2,300,000 in cash including costs related to the
acquisition. The former owners of Connect will also be entitled to an earn-out
premium based on the results of the Company's consolidated operations in
Argentina in 2000. Connect is located in Buenos Aires, Argentina, and provides
customer relationship management solutions to Latin American and multinational
companies in a variety of industries. 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 Connect 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.
The previous owners of Smart Call and Connect have the ability to earn a
contingent payment of between $250,000 and $2,500,000 during 2000 and 2001. The
contingent payment is based on reaching revenue and profitability targets.
34
<PAGE>
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998, AND 1999
On December 15, 1999, the Company invested $2.5 million in a customer
relationship management software company. On January 27, 2000, an additional
investment of $7.1 million was made in the same customer relationship management
software company. The total ownership interest after the two investments is in
excess of 7%. This investment is accounted for in long-term other assets.
On February 17, 1998, the Company acquired the assets of Intellisystems,
Inc. (Intellisystems) for $2.0 million in cash and 344,487 shares of common
stock, which included 98,810 shares of treasury stock. Intellisystems is a
leading developer of patented automated product support systems. Intellisystems'
products can electronically resolve a significant percentage of customer
interactions coming into customer interaction centers through telephone,
Internet or fax-on-demand. The acquisition has been accounted for as a purchase.
On June 8, 1998, and June 17, 1998, the Company consummated business
combinations with Digital Creators, Inc. (Digital), which included the issuance
of 1,069,000 shares of Company common stock, and Electronic Direct Marketing,
Ltd. (EDM), which included the obligation to issue 1,783,444 shares of Company
common stock. These business combinations were accounted for as poolings of
interests and, accordingly, the historical financial statements of the Company
have been restated to include the financial statements of Digital and EDM for
all periods presented.
The consolidated balance sheet of the Company as of December 31, 1997,
includes the balance sheet of EDM for the fiscal year ended February 28, 1998.
Accordingly, the Company's retained earnings have been adjusted during the
quarter ended March 31, 1998, for the effect of utilizing different fiscal
year-ends for this period. During 1998, the fiscal year-end of EDM has been
changed from February to December to conform to the Company's year-end.
The consolidated financial statements have been prepared to give
retroactive effect to the business combinations with Digital and EDM.
The table below sets forth the results of operations of the previously
separate enterprises for the period prior to the consummation of the June 1998
business combinations during the periods ended December 31, 1998 and 1997 (in
thousands):
<TABLE>
<CAPTION>
TeleTech Digital EDM Adjustments Combined
-------- -------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
1998:
Revenues $136,244 $ 2,038 $ 10,258 $ (1,171) $147,369
Net income 6,972 136 654 -- 7,762
1997:
Revenues $263,477 $ 2,521 $ 14,497 $ (1,438) $279,057
Net income 20,273 276 785 -- 21,334
</TABLE>
On August 26, 1998, the Company consummated a business combination with
Outsource Informatica Ltda. (Outsource), a leading Brazilian customer management
provider, which included the
35
<PAGE>
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998, AND 1999
issuance of 606,343 shares of Company common stock. This business combination
was accounted for as a pooling of interests. The operations of Outsource prior
to the acquisition are immaterial to all periods presented.
On December 31, 1998, the Company acquired 100% of the common stock of
Cygnus Computer Associates Ltd. (Cygnus) for approximately $660,000 in cash and
324,744 shares of common stock in the Company. Cygnus is a Canadian provider of
systems integration and call center solutions. The transaction has been
accounted for as a purchase and goodwill will be amortized using the
straight-line method over 10 years. The Company has also agreed to pay
contingent consideration of up to CDN$4.8 million if Cygnus achieves certain
levels of operating income in 1999 and 2000. Due to the uncertainty surrounding
the achievement of these targets, none of the contingent consideration has been
reflected as a liability in the accompanying financial statements. The
operations of Cygnus 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.
In May 1997, the Company acquired 100% of the common stock of Telemercadeo
Integral, S.A. (TMI) for total consideration of $4.2 million, consisting of
100,000 shares of the Company's common stock and cash of $2.4 million. TMI is a
customer management provider in Mexico. The acquisition was accounted for using
the purchase method. The excess of cost of the acquisition over the underlying
net assets of $4.4 million is being amortized using the straight-line method
over 25 years.
(15) SALE OF JOINT VENTURE
On September 21, 1998, the Company sold its 50% interest in Access 24 UK to
Priplan Investments, Ltd. for cash consideration of approximately $1.0 million.
The Company incurred $129,000 in costs relating to the disposal of this joint
venture in the third quarter 1998.
(16) SUBSEQUENT EVENTS
On August 31, 2000, the Company and CCH entered into a definitive Share
Purchase Agreement, which included the exchange of 3,264,000 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 interest, and accordingly, the
historical financial statements of the Company have been restated to include the
financial statements of CCH for all periods presented.
The supplemental consolidated financial statements have been prepared to
give retroactive effect to the business combination with CCH in August 2000.
Generally accepted accounting principles prohibit giving effect to a consummated
business combination accounted for by the pooling of interest method in
financial statements that do not include the date of consummation. The
accompanying supplemental consolidated financial statements do not extend
through the date of consummation, however, they will become the historical
consolidated financial statements of the Company after financial statements
covering the date of consummation of the business is issued.
The table below sets forth the combined revenues and net income for the
years ended December 31, 1997, 1998, and 1999 (in thousands):
36
<PAGE>
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998, AND 1999
<TABLE>
<CAPTION>
THI CCH Combined
-------- -------- --------
<S> <C> <C> <C>
1997:
Revenues ......... $279,057 $ 5,626 $284,683
Net income ....... 21,334 186 21,520
1998:
Revenues ......... $369,045 $ 15,726 $384,771
Net income ....... 19,202 1,105 20,307
1999:
Revenues ......... $509,268 $ 39,808 $549,076
Net income ....... 29,090 2,855 31,945
</TABLE>
(17) QUARTERLY FINANCIAL DATA (UNAUDITED) (Amounts in thousands, except per
share data)
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- -------- -------- --------
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1999:
Revenues .......................... $119,475 $129,402 $134,691 $165,509
Income from operations ............ 9,359 10,658 11,397 14,542
Net income ........................ 5,777 6,420 11,036 8,712
Net income per common share:
Basic .......................... .09 .10 .17 .14
Diluted ........................ .09 .10 .17 .13
</TABLE>
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- -------- -------- --------
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1998:
Revenues .......................... $ 84,175 $ 92,031 $ 96,297 $112,268
Income from operations ............ 7,570 8,090 8,582 9,272
Net income ........................ 4,829 4,740 4,991 5,747
Net income per common share:
Basic .......................... .08 .08 .08 .09
Diluted ........................ .07 .07 .08 .09
</TABLE>
37
<PAGE>
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS
December 31, June 30,
1999 2000
----------- ---------
(unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents ......................................... $ 16,227 $ 6,360
Short-term investments ............................................ 41,621 47,406
Investment securities available for sale .......................... -- 70,839
Accounts receivable, net of allowance for doubtful accounts
of $3,923 and $4,524 respectively .............................. 91,979 146,543
Prepaids and other assets ......................................... 5,361 7,939
Deferred tax asset ................................................ 4,889 --
--------- ---------
Total current assets ........................................... 160,077 279,087
--------- ---------
PROPERTY AND EQUIPMENT, net of accumulated depreciation
of $65,985 and $81,427, respectively .............................. 111,644 140,947
--------- ---------
OTHER ASSETS:
Long-term accounts receivable ..................................... 3,930 2,290
Goodwill, net of accumulated amortization
of $1,599 and $3,103, respectively ............................. 20,633 22,296
Contract acquisition cost, net of accumulated
amortization of zero and $1,614, respectively .................. 9,286 13,893
Deferred tax asset ................................................ 550 550
Other assets ...................................................... 5,364 6,801
--------- ---------
Total assets ................................................... $ 311,484 $ 465,864
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt and capital lease obligations ... $ 5,783 $ 14,725
Bank overdraft .................................................... 1,323 930
Accounts payable .................................................. 12,426 13,297
Accrued employee compensation ..................................... 28,319 31,780
Accrued income taxes .............................................. 4,397 10,456
Deferred income taxes ............................................. -- 16,733
Other accrued expenses ............................................ 17,749 25,022
Customer advances, deposits and deferred income ................... 4,510 3,199
--------- ---------
Total current liabilities ...................................... 74,507 116,142
LONG-TERM DEBT, net of current portion:
Capital lease obligations ......................................... 2,530 23
Revolving line-of-credit .......................................... 18,000 43,000
Other debt ........................................................ 5,649 4,661
--------- ---------
Total liabilities .............................................. 100,686 163,826
--------- ---------
MINORITY INTEREST, in consolidated subsidiaries ...................... -- 5,499
STOCKHOLDERS' EQUITY:
Stock purchase warrants ........................................... -- 5,100
Common stock; $.01 par value; 150,000,000 shares
authorized; 65,087,645 and 66,009,671 shares,
respectively, issued; and outstanding .......................... 650 660
Additional paid-in capital ........................................ 122,088 137,346
Accumulated other comprehensive loss .............................. (1,402) 36,971
Retained earnings ................................................. 89,462 116,462
--------- ---------
Total stockholders' equity ..................................... 210,798 296,539
--------- ---------
Total liabilities and stockholders' equity ..................... $ 311,484 $ 465,864
========= =========
</TABLE>
38
<PAGE>
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
SUPPPLEMENTAL CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended June 30,
1999 2000
--------- ---------
<S> <C> <C>
REVENUES .......................................... $ 248,877 $ 369,854
OPERATING EXPENSES:
Costs of services .............................. 166,241 245,991
Other operating expenses ....................... 62,618 89,036
--------- ---------
Total operating expenses .................... 228,859 335,027
--------- ---------
INCOME FROM OPERATIONS ............................ 20,018 34,827
--------- ---------
OTHER INCOME (EXPENSE):
Interest expense ............................... (1,041) (2,088)
Interest income ................................ 1,202 1,322
Gain on sale of securities ..................... -- 12,762
Other .......................................... 27 (686)
--------- ---------
Total other income .......................... 188 11,310
--------- ---------
INCOME BEFORE INCOME TAXES AND MINORITY INTEREST .. 20,206 46,137
Provision for income taxes ..................... 8,009 17,567
--------- ---------
INCOME BEFORE MINORITY INTEREST ................... 12,197 28,570
Minority interest, net of income taxes ....... -- (399)
--------- ---------
NET INCOME ........................................ $ 12,197 $ 28,171
========= =========
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic .......................................... 64,197 65,563
Diluted ........................................ 65,635 69,980
NET INCOME PER SHARE
Basic .......................................... $ 0.19 $ 0.43
Diluted ........................................ $ 0.19 $ 0.40
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
39
<PAGE>
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 2000
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
1999 2000
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ............................................................... $ 12,197 $ 28,171
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ......................................... 14,241 18,809
Minority interest ..................................................... -- 399
Allowance for doubtful accounts ....................................... 182 901
Deferred income taxes ................................................. (64) (459)
Gain on sale of securities ............................................ -- (12,762)
Loss on Disposal of assets ............................................ 582 459
Changes in assets and liabilities:
Accounts receivable ................................................. (5,952) (56,276)
Prepaids and other assets ........................................... (2,627) (2,713)
Accounts payable and accrued expenses ............................... (1,980) 16,054
Customer advances, deposits and deferred income ..................... (130) 2,358
-------- --------
Net cash provided by (used in) operating activities ................. 16,449 (5,059)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment ....................................... (31,012) (46,331)
Acquisition, net of cash required ........................................ (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 (increase) in short-term investments ............................ 2,969 8,935
-------- --------
Net cash used in investing activities ............................... (32,150) (42,241)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in bank overdraft ................................ 499 (393)
Net increase (decrease) in short-term borrowings ......................... 22,000 25,000
Net increase (decrease) on long-term debt and capital lease obligations .. (3,178) 2,070
Proceeds from exercise of stock options, net of tax benefit .............. (675) 13,468
Distributions to stockholder ............................................. -- (1,184)
-------- --------
Net cash provided by financing activities ........................... 18,646 38,961
-------- --------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
40
<PAGE>
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 2000
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
1999 2000
-------- --------
<S> <C> <C>
Effect of exchange rate changes on cash .......... (1,919) (1,528)
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS ........ 1,026 (9,867)
CASH AND CASH EQUIVALENTS, beginning of period ... 9,466 16,227
-------- --------
CASH AND CASH EQUIVALENTS, end of period ......... $ 10,492 $ 6,360
======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
41
<PAGE>
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED SUPPLEMENTAL CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
NOTE (1)--BASIS OF PRESENTATION
The accompanying unaudited supplemental condensed consolidated financial
statements have been prepared without audit pursuant to the rules and
regulations of the Securities and Exchange Commission. The supplemental
condensed consolidated financial statements reflect all adjustments (consisting
of only normal recurring accruals) which, in the opinion of management , are
necessary to present fairly the financial position, results of operations and
cash flows of TeleTech Holdings, Inc. and subsidiaries as of June 30, 1999 and
2000 and for the periods then ended. Operating results for the three and six
months ended June 30, 1999 and 2000 are not necessarily indicative of the
results that may be expected for the year ended December 31, 2000.
The unaudited supplemental condensed consolidated financial statements
should be read in conjunction with the audited supplemental consolidated
financial statements and footnotes thereto included in this filing.
NOTE (2)--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.
On August 31, 2000, the Company and CCH entered into a definitive Share
Purchase Agreement, which included the exchange of 3,264,000 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 interest, and accordingly, the
historical financial statements of the Company have been restated to include the
financial statements of CCH for all periods presented.
The supplemental consolidated financial statements have been prepared to
give retroactive effect to the business combination with CCH in August 2000.
Generally accepted accounting principles prohibit giving effect to a consummated
business combination accounted for by the pooling of interest method in
financial statements that do not include the date of consummation. The
accompanying supplemental consolidated financial statements do not extend
through the date of consummation, however, they will
42
<PAGE>
become the historical consolidated financial statements of the Company after
financial statements covering the date of consummation of the business is
issued.
The table below sets forth the combined revenues and net income for the six
months ended June 30, 1999 and 2000 (in thousands):
<TABLE>
<CAPTION>
THI CCH Adjustments Combined
-------- -------- ----------- --------
<S> <C> <C> <C> <C>
1999:
Revenues ......... $231,203 $ 17,674 -- $248,877
Net income ....... 10,265 1,932 -- 12,197
2000:
Revenues ......... $340,340 $ 29,514 -- $369,854
Net income ....... 26,282 2,506 (617) 28,171
</TABLE>
NOTE (3)-- 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
incapital 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
(Amounts in Thousands) 1999 2000
---------------------- --------- ---------
<S> <C> <C>
REVENUES:
Outsourced ........................ $ 72,530 $ 94,790
Facilities Management ............. 20,399 28,304
</TABLE>
43
<PAGE>
<TABLE>
<S> <C> <C>
International Outsourced .......... 29,527 70,700
Corporate Activities .............. 6,946 3,332
--------- ---------
Total ....................... $ 129,402 $ 197,126
========= =========
OPERATING INCOME (LOSS):
Outsourced ........................ $ 16,801 $ 21,032
Facilities Management ............. 1,406 3,547
International Outsourced .......... 2,025 9,772
Corporate Activities .............. (9,574) (15,352)
--------- ---------
Total ....................... $ 10,658 $ 18,999
========= =========
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended
(Amounts in Thousands) 1999 2000
---------------------- --------- ---------
<S> <C> <C>
REVENUES:
Outsourced ........................ $ 138,776 $ 184794
Facilities Management ............. 40,733 55,208
International Outsourced .......... 56,500 123,673
Corporate Activities .............. 12,868 6,179
--------- ---------
Total ....................... $ 248,877 $ 369,854
========= =========
OPERATING INCOME (LOSS):
Outsourced ........................ $ 30,555 $ 42,081
Facilities Management ............. 3,054 6,510
International Outsourced .......... 4,119 15,927
Corporate Activities .............. (17,710) (29,691)
--------- ---------
Total ....................... $ 20,018 $ 34,827
========= =========
</TABLE>
<TABLE>
<CAPTION>
Balance as of
December 31, June 30,
ASSETS: 1999 2000
------------ --------
<S> <C> <C>
Outsourced .................................. $ 76,401 $103,178
Facilities Management ....................... 11,290 13,417
International Outsourced .................... 106,397 157,037
Corporate Activities ........................ 117,396 192,232
-------- --------
Total ................................. $311,484 $465,864
======== ========
GOODWILL (INCLUDED IN TOTAL ASSETS):
International Outsourced Goodwill, Net ...... $ 10,496 $ 10,554
Corporate Activities Goodwill, Net .......... 10,137 11,742
-------- --------
Total .................................... $ 20,633 22,296
======== ========
</TABLE>
44
<PAGE>
The following geographic data include revenues based on the location the
services are provided (in thousands):
<TABLE>
<CAPTION>
Three Months Ended
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 10,128 21,397
-------- --------
Total $129,402 $197,126
======== ========
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended
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 20,128 39,658
-------- --------
Total $248,877 $369,854
======== ========
</TABLE>
NOTE (4)--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 $ 680 $1,282
Cash paid for income taxes $6,257 $4,254
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Assets acquired through capital leases $2,098 --
Issuance of stock purchase warrants in connection with
the formation of joint venture $5,100
Stock issued in purchase of Pamet $1,753
</TABLE>
45
<PAGE>
NOTE (5)--COMPREHENSIVE INCOME (IN THOUSANDS)
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
130"). The purpose of SFAS 130 is to report a measure of all changes in equity
that result from recognized transactions and other economic events of the period
other than transactions with owners in their capacity as owners. The only item
of other comprehensive income reported by the Company is the cumulative
translation adjustment. The Company's comprehensive income for the six months
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 $ 6,420 $ 18,673
Change in cumulative translation adjustment 456 (1,020)
Unrealized gain on securities available for sale, net of tax effect -- 40,303
-------- --------
Comprehensive income $ 6,876 $ 57,956
======== ========
</TABLE>
<TABLE>
<CAPTION>
Six months ended
June 30,
1999 2000
-------- --------
<S> <C> <C>
Net income for the period $ 12,197 $ 28,171
Change in cumulative translation adjustment 164 (1,930)
Unrealized gain on securities available for sale, net of tax effect -- 40,303
-------- --------
Comprehensive income $ 12,361 $ 66,544
======== ========
</TABLE>
NOTE (6)--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
46
<PAGE>
common stock. These warrants were valued at $5.1 million using the Black Scholes
Option model.
NOTE (7)--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 (8)--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.
47
<PAGE>
Item 7. Financial Statements and Exhibits
(c) Exhibits
The following exhibits are filed as part of this Current Report on
Form 8-K:
<TABLE>
<CAPTION>
Exhibit Number Exhibit
-------------- -------
<S> <C>
23.1 Consent of Arthur Andersen LLP
27.1 Financial Data Schedules for fiscal years ended December 31,
1999, 1998 and 1997, restated
27.2 Financial Data Schedules for the three month and six month
periods ended March 31, and June 30, 2000, respectively,
restated
27.3 Financial Data Schedule for the three month, six month and
nine month periods ended March 31, June 30, and September
30, 2000, respectively, restated
</TABLE>
48
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
TeleTech Holdings, Inc.
By: /s/ Margot O'Dell
-----------------------
Margot O'Dell
Chief Financial Officer
Dated: October 27, 2000
