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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
Commission file number 0-21055
TELETECH HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 84-1291044
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1700 LINCOLN STREET, SUITE 1400
DENVER, COLORADO 80203
(Address of principal (Zip Code)
executive office)
(303) 894-4000
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
------- --------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Outstanding at
Class of Common Stock November 7,
Common Stock, par value $.01 per share 56,284,965
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TELETECH HOLDINGS, INC.
FORM 10-Q
INDEX
PAGE
NUMBER
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets--September 30, 1997
and December 31, 1996 3
Condensed consolidated statements of income--Three months ended
September 30, 1997 and 1996 5
Condensed consolidated statements of income--Nine months ended
September 30, 1997 and 1996 6
Condensed consolidated statements of cash flows--Nine months ended
September 30, 1997 and 1996 7
Notes to condensed consolidated financial statements--
September 30, 1997 8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 2. Changes in Securities and Use of Proceeds 14
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
PART I. FINANCIAL INFORMATION
2
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
ASSETS
December 31, September 30,
1996 1997
------------ -------------
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents. . . . . . . . . . . . . . . . . $ 5,564 $ 5,282
Short-term investments.. . . . . . . . . . . . . . . . . . 71,573 64,768
Accounts receivable, net of allowance for doubtful
accounts of $1,462 and $1,924, respectively . . . . . . 31,731 40,355
Prepaids and other assets. . . . . . . . . . . . . . . . . 4,141 2,069
Deferred tax asset . . . . . . . . . . . . . . . . . . . . 1,128 1,903
-------- --------
Total current assets.. . . . . . . . . . . . . . . . . . 114,137 114,377
-------- --------
PROPERTY AND EQUIPMENT, net of accumulated
depreciation of $11,231 and $17,457, respectively. . . . . 23,684 44,213
-------- --------
OTHER ASSETS:
Deferred contract costs (net of amortization of $1,658
and $2,361, respectively). . . . . . . . . . . . . . . . 703 -
Goodwill (net of amortization of $238 and
$548, respectively). . . . . . . . . . . . . . . . . . . 3,257 7,231
Long-term accounts receivable. . . . . . . . . . . . . . . - 4,274
Investment in affiliated company accounted for under the
equity method. . . . . . . . . . . . . . . . . . . . . . 679 949
Other assets . . . . . . . . . . . . . . . . . . . . . . . 918 1,007
-------- --------
Total assets . . . . . . . . . . . . . . . . . . . . . . $143,378 $172,051
-------- --------
-------- --------
The accompanying notes are an integral part of these balance sheets.
3
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS EXCEPT SHARE AMOUNTS)
LIABILITIES AND STOCKHOLDERS EQUITY
December 31, September 30,
1996 1997
------------ -------------
(Unaudited)
CURRENT LIABILITIES:
Current portion of long-term debt. . . . . . . . . . . . . 4,985 5,273
Accounts payable . . . . . . . . . . . . . . . . . . . . . 6,108 9,276
Accrued employee compensation. . . . . . . . . . . . . . . 8,484 9,353
Accrued income taxes . . . . . . . . . . . . . . . . . . . 2,952 -
Other accrued expenses.. . . . . . . . . . . . . . . . . . 3,246 8,713
Customer advances, deposits and deferred income. . . . . . 787 1,180
-------- --------
Total current liabilities. . . . . . . . . . . . . . . 26,562 33,795
DEFERRED TAX LIABILITIES . . . . . . . . . . . . . . . . . . . 564 717
LONG-TERM DEBT, net of current portion:
Capital lease obligations. . . . . . . . . . . . . . . . . 9,675 7,857
Other debt . . . . . . . . . . . . . . . . . . . . . . . . 262 801
-------- --------
Total liabilities. . . . . . . . . . . . . . . . . . . 37,063 43,170
-------- --------
STOCKHOLDERS EQUITY:
Preferred stock, 10,000,000 shares authorized, zero shares
issued and outstanding. . . . . . . . . . . . . . . . . . - -
Common stock, $.01 par value, 150,000,000 shares
authorized, 55,811,840 and 56,383,775 shares issued,
55,713,030 and 56,284,965 shares outstanding. . . . . . . 558 564
Additional paid-in capital . . . . . . . . . . . . . . . . 92,030 99,339
Cumulative translation adjustment. . . . . . . . . . . . . 98 (418)
Unearned compensation-restricted stock.. . . . . . . . . . (254) (158)
Treasury stock, 98,810 shares, at cost.. . . . . . . . . . (988) (988)
Retained earnings. . . . . . . . . . . . . . . . . . . . . 14,871 30,542
-------- --------
Total stockholders equity. . . . . . . . . . . . . . . . 106,315 128,881
-------- --------
Total liabilities and stockholders equity. . . . . . . $143,378 $ 172,051
-------- --------
-------- --------
The accompanying notes are an integral part of these balance sheets.
4
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(Unaudited)
Three Months Ended
September 30,
----------------------
1996 1997
-------- --------
REVENUES . . . . . . . . . . . . . . . . . . . . $ 50,057 $ 65,505
-------- --------
OPERATING EXPENSES:
Costs of services .. . . . . . . . . . . . . 31,376 42,728
Selling, general and
administrative expenses . . . . . . . . . . 11,780 16,647
-------- --------
Total operating expenses . . . . . . . . . . 43,156 59,375
-------- --------
INCOME FROM OPERATIONS . . . . . . . . . . . . . 6,901 6,130
-------- --------
OTHER INCOME (EXPENSE):
Interest expense . . . . . . . . . . . . . . (339) (249)
Investment income. . . . . . . . . . . . . . 411 791
Equity in income (loss) of
affiliated company. . . . . . . . . . . . . (10) 160
Other. . . . . . . . . . . . . . . . . . . . 37 24
-------- --------
99 726
-------- --------
Income before income taxes . . . . . . . . . . 7,000 6,856
PROVISION FOR INCOME TAXES . . . . . . . . . . . 2,941 2,674
-------- --------
Net income . . . . . . . . . . . . . . . . . . $4,059 $ 4,182
-------- --------
-------- --------
WEIGHTED AVERAGE SHARES
OUTSTANDING. . . . . . . . . . . . . . . . . 57,448 59,222
-------- --------
-------- --------
NET INCOME PER COMMON SHARE. . . . . . . . . . . $.07 $.07
-------- --------
-------- --------
The accompanying notes are an integral part of these statements.
5
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(Unaudited)
Nine Months Ended
September 30,
---------------------
1996 1997
-------- --------
REVENUES . . . . . . . . . . . . . . . . . . . . . . $106,675 $189,837
-------- --------
OPERATING EXPENSES:
Costs of services .. . . . . . . . . . . . . . . 63,097 121,101
Selling, general and
administrative expenses . . . . . . . . . . . . 30,399 44,526
-------- --------
Total operating expenses . . . . . . . . . . . . 93,496 165,627
-------- --------
INCOME FROM OPERATIONS . . . . . . . . . . . . . . . 13,179 24,210
-------- --------
OTHER INCOME (EXPENSE):
Interest expense . . . . . . . . . . . . . . . . (799) (866)
Investment income. . . . . . . . . . . . . . . . 625 2,482
Equity in income (loss) of
affiliated company. . . . . . . . . . . . . . . (66) 263
Other. . . . . . . . . . . . . . . . . . . . . . (205) (2)
-------- --------
(445) 1,877
-------- --------
Income before income taxes . . . . . . . . . . . . 12,734 26,087
PROVISION FOR INCOME TAXES . . . . . . . . . . . . . 5,357 10,416
-------- --------
Net income . . . . . . . . . . . . . . . . . . . . $7,377 $15,671
-------- --------
-------- --------
WEIGHTED AVERAGE SHARES
OUTSTANDING. . . . . . . . . . . . . . . . . . . 55,368 59,430
-------- --------
-------- --------
NET INCOME PER COMMON SHARE. . . . . . . . . . . . . $.13 $.26
-------- --------
-------- --------
The accompanying notes are an integral part of these statements.
6
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
(DOLLARS IN THOUSANDS)
(Unaudited)
1996 1997
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income . . . . . . . . . . . . . . . . . . . . . . . $ 7,377 $ 15,671
Adjustments to reconcile net income to net cash
provided by operating activities-
Depreciation and amortization. . . . . . . . . . . . . 4,431 7,240
Allowance for doubtful accounts. . . . . . . . . . . . 527 462
Equity in (income) loss of affiliated company. . . . . 66 (263)
Deferred taxes on income.. . . . . . . . . . . . . . . (273) (785)
Deferred compensation expense. . . . . . . . . . . . . 84 96
Changes in assets and liabilities-
Accounts receivable . . . . . . . . . . . . . . . . . (17,403) (12,859)
Prepaids and other assets . . . . . . . . . . . . . . (566) (903)
Deferred contract costs . . . . . . . . . . . . . . . (2,263) -
Accounts payable and accrued liabilities. . . . . . . 13,506 5,581
Customer advances and deferred income . . . . . . . . 301 393
-------- --------
Net cash provided by operating activities . . . .. . . . 5,787 14,633
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment.. . . . . . . . . . . $ (5,410) $(23,875)
Purchase of Access 24. . . . . . . . . . . . . . . . . . (2,431) -
Proceeds from sale of interest in Access 24 UK
Limited . . . . . . . . . . . . . . . . . . . . . . . . 3,903 -
Purchase of TMI. . . . . . . . . . . . . . . . . . . . . - (2,337)
Return of deposit on new Call Center.. . . . . . . . . . - 3,000
Changes in accounts payable and accrued
liabilities relating to investing activities.. . . . . - 56
Decrease (increase) in short-term investments. . . . . . (42,940) 6,805
-------- --------
Net cash used in investing activities. . . . . . . . . . (46,878) (16,351)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in short-term borrowings. . . . . . . . . . $ (1,000) $ -
Net decrease in bank overdraft . . . . . . . . . . . . . (1,427) -
Payments on long-term debt and capital leases. . . . . . (2,227) (3,565)
Proceeds from issuance of common stock, net
of offering costs . . . . . . . . . . . . . . . . . . . 52,565 -
Acquisition of treasury stock. . . . . . . . . . . . . . (988) -
Exercise of stock options including tax benefit. . . . . - 5,517
-------- --------
Net cash provided by financing activities. . . . . . . . 46,923 1,952
-------- --------
Effect of exchange rate changes on cash. . . . . . . . . . 98 (516)
-------- --------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS . . . . . . . . . . . . . . . . . . . . 5,930 (282)
CASH AND CASH EQUIVALENTS,
beginning of period. . . . . . . . . . . . . . . . . . . 42 5,564
-------- --------
CASH AND CASH EQUIVALENTS,
end of period. . . . . . . . . . . . . . . . . . . . . . $ 5,972 $ 5,282
-------- --------
-------- --------
The accompanying notes are an integral part of these statements.
7
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
NOTE (1)--BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared without audit pursuant to the rules and regulations of the
Securities and Exchange Commission. The condensed consolidated financial
statements reflect all adjustments (consisting of only normal recurring
accruals) which, in the opinion of management, are necessary to present fairly
the financial position, results of operations and cash flows of TeleTech
Holdings, Inc. and subsidiaries as of September 30, 1997 and 1996 and for the
periods then ended. Operating results for the three and nine month periods
ended September 30, 1997 are not necessarily indicative of the results that may
be expected for the year ended December 31, 1997.
The unaudited condensed consolidated financial statements should be read in
conjunction with the consolidated and combined financial statements and
footnotes thereto included in the Company s Form 10-K for the year ended
December 31, 1996.
NOTE (2)--EARNINGS PER SHARE
Pursuant to Securities and Exchange Commission Staff Accounting Bulletin
No. 83, for purposes of determining the average number of common shares
outstanding for periods prior to completion of the Company's initial public
offering in August 1996, common stock and common stock equivalent shares issued
by the Company at prices below the initial public offering price during the 12
month period prior to the offering date (using the treasury stock method) have
been included in the calculation as if they were outstanding for all periods
presented. The shares of convertible preferred stock were considered common
stock equivalents due to the mandatory conversion provision.
The weighted average number of common shares for the three and nine months
ended September 30, 1997 and 1996 were calculated as follows (average common
shares outstanding for all periods presented in 1996 include 9.3 million shares
issued upon conversion of the convertible preferred stock as if they were
outstanding for the entire period):
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1997 1996 1997
------ ------ ------ ------
Average common shares outstanding 53,647 56,279 51,913 56,002
Equivalent common shares from
outstanding stock options 3,801 2,943 3,455 3,428
------ ------ ------ ------
57,448 59,222 55,368 59,430
------ ------ ------ ------
------ ------ ------ ------
In February 1997, the Financial Accounting Standards Board issued SFAS 128,
"Earnings Per Share". Under SFAS 128 primary earnings per share previously
required under Accounting Principles Board No. 15 is replaced with basic
earnings per share. Basic earnings per share is computed by dividing reported
earnings available to common stockholders by weighted average shares
outstanding. No dilution for any potentially dilutive securities is included.
Fully diluted earnings per share as defined under Accounting Principles Board
No. 15 is called diluted earnings per share under SFAS 128. Diluted earnings
per share reflects the potential dilution assuming the issuance of common shares
for all dilutive potential common shares outstanding during the period. SFAS
128 is effective for financial statements for periods ending after December 15,
1997. The pro forma earnings per share for the three and nine months ended
September 30, 1997 and 1996 utilizing the requirements of SFAS 128 is as
follows:
8
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997-CONTINUED
Three Months Ended Nine months Ended
September 30, September 30,
1996 1997 1996 1997
----- ----- ----- ------
Basic Earnings Per Share $0.08 $0.07 $0.13 $ 0.28
Diluted Earnings Per Share 0.07 0.07 0.13 0.26
For purposes of the calculation of basic earnings per share for the three
and nine months ended September 30, 1996 net income was reduced by zero and
$422,000, respectively, representing dividends on preferred stock, to arrive at
net income available for common shareholders.
NOTE (3)--SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION AND NONCASH INVESTING
AND FINANCING ACTIVITIES (IN THOUSANDS):
Nine Months Ended September 30,
-------------------------------
1996 1997
---- ----
Cash paid for interest $ 746 $ 887
Cash paid for income taxes $ 2,541 $10,897
Noncash investing and financing activities:
Assets acquired through capital leases $ 9,467 $ 2,266
Stock issued in purchase of Access 24 $ 4,851 $ -
Stock issued in purchase of TMI $ - $ 1,797
Restricted stock issued under employment
agreements $ 380 $ -
NOTE (4)--ACQUISITION OF TELEMERCADEO INTERNATIONAL, S.A.:
In May 1997 the Company acquired 100% of the common stock of Telemercadeo
Integral, S.A. ("TMI") for consideration of $4.2 million, consisting of 100,000
shares of the Company's common stock and cash of $2.2 million. TMI is an
inbound customer care 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 TMI is being amortized using the straight-line method
over 25 years. The operations of TMI 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.
9
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
INTRODUCTION
Management's discussion and analysis of financial condition and results of
operations in this Form 10-Q should be read in conjunction with the risk factors
included in the Company's Form 10-K for the year ended December 31, 1996.
The Company has experienced, and in the future could experience,
quarterly variations in revenues and earnings as a result of a variety of
factors, many of which are outside the Company's control, including: the
timing of new contracts; the timing of new product or service offerings or
modifications in client strategies; the expiration or termination of existing
contracts; the timing of increased expenses incurred to obtain and support
new business; and the seasonal pattern of certain of the businesses serviced
by the Company. Any event that adversely affects the demand for and
customers' use of a client's products or services, whether increased
competition, labor shortage or strike, unavailability of raw materials or
otherwise, may adversely affect the Company's revenues attributable to such
client's program. In addition, the Company has concentrated its marketing
efforts towards obtaining larger, more complex, strategic customer care
programs. As a result, the time required to negotiate and execute an
agreement with the client has increased. This may lead to short-term delays
in the anticipated start-up of new client programs and in the Company
achieving full capacity utilization. The Company's planned staffing levels,
investments and other operating expenditures are also based on revenue
forecasts. If revenues are below expectations in any given quarter as a
result of such delay or for other reasons, the Company's operating results
would likely be adversely affected for that quarter.
During the third quarter of 1997 the Company announced that third and
fourth quarter 1997 results would be negatively impacted by several factors
including: (1) lower call volumes and revenues in certain facility management
programs, due largely to a labor strike experienced by a significant client ;
(2) lower projected call volumes with a large telecommunications client due to
a change in their marketing programs, and (3) a longer sales cycle associated
with the Company's focus on large, complex customer care programs.
During the second quarter of 1997 the Company and GTE announced that they
entered into a five-year master agreement, which is renewable for two additional
one-year terms, under which the Company will provide support for a new national
sales service and marketing unit of GTE. The Company is expected to use
approximately 1,200 production workstations in several dedicated call centers in
support of this contract. Revenues from GTE will exceed 10% of the Company's
consolidated revenues for the year ended December 31, 1997.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1996 Revenues increased $15.4 million or 30.9% to $65.5 million for
the three months ended September 30, 1997 from $50.1 million for the three
months ended September 30, 1996. The increase resulted primarily from $30.1
million in revenues from new clients and $3.9 million in increased revenue
from existing clients. These increases were offset in part by contract
expirations and other client reductions. These reductions and terminations
include $7.3 million in revenues due to the cancellation of the CompuServe
contract in the first quarter of 1997 and $7.4 million in revenues due to
lower call volumes from two significant client programs in the
telecommunications and transportation industries. Revenues for the three
months ended September 30, 1997 include approximately $19.0 million from
facilities management contracts as compared with $16.7 million for the three
months ended September 30, 1996.
10
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS-CONTINUED
Costs of services increased $11.4 million, or 36.2%, to $42.7 million for
the three months ended September 30, 1997 from $31.4 million for the three
months ended September 30, 1996. Costs of services as a percentage of
revenues increased from 62.7% for the three months ended September 30, 1996 to
65.2% for the three months ended September 30, 1997. The increase in the
costs of services as a percentage of revenues is a result of lower volumes
from two significant client programs in the telecommunications and
transportation industries. As a result of a labor strike experienced by one
of these clients, the Company continued to incur labor costs that were not
billable to the client in an effort to preserve the workforce.
Selling, general and administrative expenses increased $4.9 million, or
41.3% to $16.6 million for the three months ended September 30, 1997 from $11.7
million for the three months ended September 30, 1996. Selling, general and
administrative expenses as a percentage of revenues increased from 23.5% for
the three months ended September 30, 1996 to 25.4% for the three months ended
September 30, 1997 primarily as a result of increased depreciation and
infrastructure costs associated with the opening of call centers in Niagara
Falls, NY and Melbourne, Australia.
As a result of the foregoing factors, income from operations decreased
$771,000 or 11.2%, to $6.1 million for the three months ended September 30,
1997 from $6.9 million for the three months ended September 30, 1996.
Operating income as a percentage of revenues decreased from 13.8% for the
three months ended September 30, 1996 to 9.4% for the three months ended
September 30, 1997.
Other income totaled $726,000 for the three months ended September 30,
1997 compared with $99,000 during the three months ended September 30,
1996. This is primarily related to increased investment income and decreased
interest expense. Investment income increased $380,000 to $791,000 for the
three months ended September 30,1997 from $411,000 for the three months ended
September 30, 1996. This increase is a result of the increase in short-term
investments resulting from the Company's July 1996 and October 1996 public
stock offerings. Interest expense decreased $90,000 resulting from
reductions in outstanding capital lease obligations.
As a result of the foregoing factors, net income increased $123,000 or
3.0%, to $4.2 million for the three months ended September 30, 1997 from $4.1
million for the three months ended September 30, 1996.
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1996
Revenues increased $83.2 million or 77.9% to $189.8 million for the nine
months ended September 30, 1997 from $106.7 million for the nine months ended
September 30, 1996. The increase resulted from $71.5 million in revenues
from new clients and $38.9 million in increased revenue from existing
clients. These increases were offset in part by contract expirations and
other client reductions, including the loss of $17.1 million from the
termination of the CompuServe contract in the first quarter of 1997. Revenues
for the nine months ended September 30, 1997 include approximately $61.7
million from facilities management contracts as compared with $23.8 million
in the nine months ended September 30, 1996.
Costs of services increased $58.0 million, or 91.9%, to $121.1 million
for the nine months ended September 30, 1997 from $63.1 million for the nine
months ended September 30, 1996. Costs of services as a percentage of
revenues increased from 59.1% for the nine months ended September 30, 1996 to
63.8% for the nine months ended September 30, 1997. The increase in the costs
of services as a percentage of revenues is primarily the result of the
significant incremental revenues received in 1997 from the Company's
facilities management programs. Facilities management
11
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS-CONTINUED
programs, under which the Company provides services from facilities owned or
leased by the clients, have higher costs of services as a percentage of
revenues than fully outsourced programs.
Selling, general and administrative expenses increased $14.1 million, or
46.5% to $44.5 million for the nine months ended September 30, 1997 from
$30.4 million for the nine months ended September 30, 1996. This increase is
primarily the result of increased revenues during the period. Selling,
general and administrative expenses as a percentage of revenues decreased
from 28.5% for the nine months ended September 30, 1996 to 23.5% for the nine
months ended September 30, 1997 primarily as a result of spreading fixed
costs over a larger revenue base as well as the impact of the Company's
facilities management programs, which have insignificant incremental selling,
general and administrative expenses.
As a result of the foregoing factors, income from operations increased
$11.0 million or 83.7%, to $24.2 million for the nine months ended September
30, 1997 from $13.2 million for the nine months ended September 30, 1996.
Operating income as a percentage of revenues increased from 12.4% for the
nine months ended September 30, 1996 to 12.7% for the nine months ended
September 30, 1997.
Other income totaled $1.9 million for the nine months ended September 30,
1997 compared with other expense of $445,000 during the nine months ended
September 30, 1996. This is primarily related to the $1.9 million increase
in investment income to $2.5 million for the nine months ended September
30,1997 from $625,000 for the nine months ended September 30, 1996. This
increase is a result of the increase in short-term investments resulting from
the Company's July 1996 and October 1996 public stock offerings.
As a result of the foregoing factors, net income increased $8.3 million
or 112.4%, to $15.7 million for the nine months ended September 30, 1997 from
$7.4 million for the nine months ended September 30, 1996.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1997 the Company had cash and cash equivalents of
$5.3 million and short-term investments of $64.8 million. Cash provided by
operating activities was $14.6 million for the nine months ended September
30, 1997.
Cash used in investing activities was $16.4 million for the nine months
ended September 30, 1997 resulting primarily from $23.9 million in capital
expenditures and $2.3 million in cash used to acquire TMI offset in part by
the reduction in short-term investments of $6.8 million and the return of a
$3.0 million temporary deposit on a new call center which was made by the
Company in December 1996.
Cash provided by financing activities was $1.9 million resulting
primarily from $5.5 million of proceeds from the exercise of stock options
and the related tax benefit offset in part by debt and capital lease
repayments.
The Company has a $15 million unsecured revolving operating line of
credit with a commercial bank which expires on May 31, 1998. At September
30, 1997, there were no outstanding borrowings under this agreement. The
Company is currently in negotiations to extend the term and increase the
amount of available borrowings. In addition, the Company has a master lease
agreement under which the Company may lease equipment up to an aggregate
value of $15.0 million. As of September 30, 1997, amounts outstanding under
this agreement were approximately $8.0 million.
12
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS-CONTINUED
The Company currently expects total capital expenditures in 1997 to be
approximately $36 million of which $26.1 million was expended in the first
nine months of 1997 (inclusive of expenditures under capital leases), most of
which will be used for the expansion and development of the Company's call
centers. The Company believes that existing cash on hand together with cash
from operations and available borrowings under the line of credit and master
lease agreement, will be sufficient to finance the Company's operations,
planned capital expenditures and anticipated growth through 1998.
FORWARD-LOOKING STATEMENTS
All statements contained in this "Management's Discussion and Analysis of
Financial Condition and Results of Operations" or elsewhere in this quarterly
report, that are not statements of historical facts are forward-looking
statements that involve substantial risks and uncertainties. Forward looking
statements include (i) the anticipated level of capital expenditures for
1997; (ii) the Company's belief that existing cash, short-term investments
and available borrowing will be sufficient to finance the Company's near term
operations; (iii) the percentage of 1997 revenues represented by the GTE
contract and the number of workstations to be dedicated to the GTE program;
and (iv) statements relating to the Company or its operations that are
preceded by terms such as "anticipates", "expects", "believes" and similar
expressions.
The Company's actual results, performance or achievements may differ
materially from those implied by such forward-looking statements as a result
of various factors, including the following: TeleTech's agreements with its
clients do not ensure that TeleTech will generate a specific level of revenue
and may be canceled by the clients on short notice. The amount of revenue
TeleTech generates from a particular client is dependent upon customers'
interest in and use of the client's products or services, some of which are
recently-introduced or untested. Any event that adversely affects the
demand for and customers' use of a client's products or services, whether
increased competition, labor shortage or strike, unavailability of raw
materials or otherwise, may adversely affect the Company's revenues
attributable to such client's program. The loss of a significant client or
the termination, completion or substantial reduction of a significant client
program may have a material adverse effect on TeleTech's capacity utilization
and results of operations.
13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
As disclosed in the Company's 1996 Annual Report on Form 10-K, in late
November 1996, CompuServe Incorporated ("CompuServe") terminated all the
programs the Company provided to CompuServe effective January 31, 1997. In
December 1996, the Company filed suit against CompuServe to enforce certain
contract termination provisions and to collect the termination fee specified in
the agreement with CompuServe. CompuServe filed a counterclaim in December 1996
alleging that the Company breached other provisions of the agreement and seeking
unspecified monetary damages.
In March 1997, CompuServe asserted a right to offset $4.3 million of
accounts receivable it owes to the Company for services it rendered to
CompuServe against the amount that may be awarded to CompuServe on its
counterclaim, in the event it were to be successful in its counterclaim
against the Company and the Company were to be unsuccessful in its claims
against CompuServe. While the Company believes that the adjudication of
CompuServe's counterclaim will not have a material adverse effect on the
Company's financial condition or results of operations, the ultimate outcome
is uncertain. It is possible that a settlement or trial may take in excess
of 12 months and accordingly the Company has reclassified the CompuServe
receivable as a long-term asset in the accompanying September 30, 1997
condensed consolidated balance sheet.
From time to time the Company is involved in litigation, most of which is
incidental to its business. In the Company's opinion, no litigation to which
the Company currently is a party is likely to have a material adverse effect on
the Company's results of operations or financial condition.
Item 2. Changes in Securities and Use of Proceeds
The registration statement for the Company's initial public offering was
effective July 30, 1996. As previously reported on Form SR filed for the period
ending April 30, 1997, the net proceeds to the Company from the initial public
offering were $52,565,000. The following is the amount of net offering proceeds
used by the Company for each of the purposes listed below. The following use of
proceed does not represent a material change in the use of proceeds described in
the initial public offering prospectus.
Direct or indirect Direct or indirect
payments to directors, payments to others
officers, general
partners of the issuer or
their associates: to
persons owning ten
percent of more of any
class of equity
securities of the issuer:
and to affiliates of the
issuer
Purchase and installation of
machinery and equipment $ 968,000
Acquisition of other
business 2,337,000
Repayment of indebtedness 9,950,000
Working Capital $500,000 9,545,000
14
TEMPORARY INVESTMENT
Morgan Stanley Cash 26,077,000
Management Account
Wells Fargo Cash 2,200,000
Management Account
OTHER PURPOSES
Acquisition of 98,810 988,000
shares of Treasury Stock
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following document is filed as an exhibit to this report:
27.1 Financial Data Schedule
(b) Reports on Form 8-K
In a current report filed on Form 8-K dated September 16, 1997, the
Company updated its anticipated results for third and fourth quarters
of 1997 previously included in a press release dated September 10,
1997.
15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TELETECH HOLDINGS, INC.
------------------------------------
(Registrant)
Date: November 7, 1997 /s/ KENNETH D. TUCHMAN
---------------- -----------------------------------
Kenneth D. Tuchman
Chairman of the Board, President and
Chief Executive Officer
Date: November 7, 1997 /s/ STEVEN B. COBURN
---------------- -----------------------------------
Steven B. Coburn, Chief Financial
Officer
16
5
9-MOS
DEC-31-1997
SEP-30-1997
5,282
64,768
42,279
1,924
0
114,377
61,670
17,457
172,051
33,795
8,658
0
0
564
128,317
172,051
189,837
189,837
121,101
165,627
(1,011)
0
866
26,087
10,416
15,671
0
0
0
15,671
0.26
0.26
