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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: March 31, 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.
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(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
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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 April 30, 1997
Common Stock, par value $.01 per share 55,729,020
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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--March 31, 1997 and December 31, 1996 3
Condensed consolidated statements of income--Three months ended March 31,
1997 and 1996 5
Condensed consolidated statements of cash flows--Three months ended
March 31, 1997 and 1996 6
Notes to condensed consolidated financial statements--March 31, 1997 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 9
PART II. OTHER INFORMATION
- --------------------------
Item 1. Legal Proceedings 11
Item 4. Submission of Matters to a Vote of Security Holders 11
Item 6. Exhibits and Reports on Form 8-K 11
SIGNATURES 12
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PART I. FINANCIAL INFORMATION
- -----------------------------
2
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
ASSETS
------
December 31, March 31,
1996 1997
-------- ----------
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents............................................. $ 5,564 $ 9,037
Short-term investments................................................ 71,573 70,857
Accounts receivable, net of allowance for doubtful
accounts of $1,462 and $1,611, respectively........................ 31,731 36,393
Prepaids and other assets............................................. 4,141 933
Deferred tax asset.................................................... 1,128 1,699
-------- --------
Total current assets................................................ 114,137 118,919
-------- --------
PROPERTY AND EQUIPMENT, net of accumulated
depreciation of $11,231 and $13,042, respectively..................... 23,684 25,850
-------- --------
OTHER ASSETS:
Deferred contract costs (net of amortization of $1,658
and $2,199, respectively)........................................... 703 162
Goodwill (net of amortization of $238 and
$296, respectively)................................................ 3,257 3,199
Investment in affiliated company accounted for under the
equity method....................................................... 679 732
Other assets.......................................................... 918 917
-------- --------
Total assets....................................................... $143,378 $149,779
-------- --------
-------- --------
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, March 31,
1996 1997
---------- ----------
(unaudited)
CURRENT LIABILITIES:
Current portion of long-term debt........................ 4,985 4,833
Accounts payable......................................... 6,108 5,797
Accrued employee compensation............................ 8,484 8,234
Accrued income taxes..................................... 2,952 4,711
Other accrued expenses................................... 3,246 3,906
Customer advances, deposits and deferred income.......... 787 955
-------- --------
Total current liabilities.............................. 26,562 28,436
DEFERRED TAX LIABILITIES 564 564
LONG-TERM DEBT, net of current portion:
Capital lease obligations................................ 9,675 8,986
Other debt............................................... 262 212
-------- --------
Total liabilities...................................... 37,063 38,198
-------- --------
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 55,813,340 shares issued,
55,713,030 and 55,714,530 shares outstanding........... 558 558
Additional paid-in capital............................... 92,030 92,043
Cumulative translation adjustment........................ 98 26
Unearned compensation-restricted stock................... (254) (222)
Treasury stock, 98,810 shares, at cost................... (988) (988)
Retained earnings........................................ 14,871 20,164
-------- --------
Total stockholders' equity............................. 106,315 111,581
-------- --------
Total liabilities and stockholders' equity............. $143,378 $149,779
-------- --------
-------- --------
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
March 31,
--------------------------
1996 1997
--------- --------
REVENUES $ 22,019 $ 59,198
--------- --------
OPERATING EXPENSES:
Costs of services............................. 11,194 37,462
Selling, general and
administrative expenses..................... 8,102 13,389
--------- --------
Total operating expenses...................... 19,296 50,851
--------- --------
INCOME FROM OPERATIONS 2,723 8,347
--------- --------
OTHER INCOME (EXPENSES):
Interest expense............................. (234) (303)
Investment income............................ 111 873
Equity in income (loss) of
affiliated company......................... - 53
Other........................................ (341) (21)
--------- --------
(464) 602
--------- --------
Income before income taxes...................... 2,259 8,949
PROVISION FOR INCOME TAXES 1,001 3,656
--------- --------
Net income................................... $ 1,258 $ 5,293
--------- --------
--------- --------
WEIGHTED AVERAGE SHARES
OUTSTANDING................................. 54,328 59,488
--------- --------
--------- --------
NET INCOME PER COMMON SHARE.................... $.02 $.09
--------- --------
--------- --------
The accompanying notes are an integral part of these statements.
5
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1997
(dollars in thousands)
(Unaudited)
1996 1997
-------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income.............................................. $ 1,258 $ 5,293
Adjustments to reconcile net income to net cash
provided by operating activities-
Depreciation and amortization......................... 1,047 2,410
Allowance for doubtful accounts....................... 108 149
Equity in (income) loss of affiliated company......... - (53)
Deferred taxes on income.............................. (161) (571)
Deferred compensation expense......................... - 32
Changes in assets and liabilities-
Accounts receivable................................. (3,136) (4,811)
Prepaids and other assets........................... (197) 209
Deferred contract costs............................. (1,385) -
Accounts payable and accrued liabilities............ 5,299 2,054
Customer advances and deferred income............... 228 168
-------- -------
Net cash provided by
operating activities............................... 3,061 4,880
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment...................... $ (3,302) $(3,977)
Purchase of Access 24, net of cash acquired............. (2,218) -
Return of deposit on new Call Center.................... - 3,000
Changes in accounts payable and accrued
liabilities relating to investing activities.......... - (196)
Decrease in short-term investments...................... 2,499 716
-------- -------
Net cash used in investing activities................... (3,021) (457)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in short-term borrowings................... $ 2,500 $ -
Net decrease in bank overdraft.......................... (1,572) -
Payments on long-term debt and capital leases........... (405) (891)
Exercise of stock options............................... - 13
-------- -------
Net cash provided by (used in) financing activities..... 523 (878)
-------- -------
Effect of exchange rate changes on cash................. 123 (72)
-------- -------
NET INCREASE IN CASH AND CASH EQUIVALENTS................. 686 3,473
CASH AND CASH EQUIVALENTS,
beginning of period................................... 42 5,564
-------- -------
CASH AND CASH EQUIVALENTS,
end of period.......................................... $ 728 $ 9,037
-------- -------
-------- -------
The accompanying notes are an integral part of these statements.
6
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 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 March 31, 1997 and 1996 and
for the periods then ended. Operating results for the three month period
ended March 31, 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 months ended
March 31, 1997 and 1996 were calculated as follows:
1996 1997
---- ----
Average common shares outstanding 41,746 55,714
Convertible Preferred Stock 9,300 -
Equivalent common shares from
outstanding stock options 3,282 3,774
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54,328 59,488
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------ ------
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 17, 1997. The pro forma
earnings per share for the three months ended March 31, 1997 and 1996
utilizing the requirements of SFAS 128 is as follows:
7
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997-CONTINUED
1996 1997
---- ----
Basic Earnings Per Share $ .03 $ .10
Diluted Earnings Per Share .02 .09
For purposes of the calculation of basic earnings per share for the
three months ended March 31, 1996 net income was reduced by $211,000,
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):
Three Months Ended March 31,
-----------------------------
1996 1997
---- ----
Cash paid for interest $ 156 $ 313
Cash paid for income taxes $ 525 $ 1,753
Noncash investing and financing activities:
Assets acquired through capital leases $ 1,713 $ -
Stock issued in purchase of Access 24 $ 4,851 $ -
Restricted stock issued under employment
agreements $ 380 $ -
8
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 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. Specifically, the Company has experienced, and in the future could
experience, quarterly variations in revenues and earnings as a result of a
variety of factors, many of which are outside the Company's control, including:
the timing of new contracts; the timing of new product or service offerings or
modifications in client strategies; the expiration or termination of existing
contracts; the timing of increased expenses incurred to obtain and support new
business; and the seasonal pattern of certain of the businesses serviced by
the Company. 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.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS ENDED MARCH 31, 1996
Revenues increased $37.2 million or 168.8% to $59.2 million for the
three months ended March 31, 1997 from $22.0 million for the three months
ended March 31, 1996. The increase resulted from $15.4 million in revenues
from new clients and $29.6 million in increased revenue from existing
clients. These increases were offset in part by contract expirations and
other client reductions. Revenues for the three months ended March 31, 1997
include approximately $21.9 million from facilities management contracts.
There were no significant revenues from facilities management contracts for
the three months ended March 31, 1996.
Costs of services increased $26.3 million, or 234.7%, to $37.5 million
for the three months ended March 31, 1997 from $11.2 million for the three
months ended March 31, 1996. Costs of services as a percentage of revenues
increased from 50.8% for the three months ended March 31, 1996 to 63.3% for
the three months ended March 31, 1997. The increase in the costs of services
as a percentage of revenues is a result of the significant revenues received
in 1997 from the Company's facilities management programs, under which the
Company commenced significant operations in April 1996. Facilities
management programs, underwhich 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 $5.3 million, or
65.3% to $13.4 million for the three months ended March 31, 1997 from $8.1
million for the three months ended March 31, 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 36.8% for the three months ended March 31, 1996 to 22.6% for the three
months ended March 31, 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
$5.6 million or 206.5%, to $8.3 million for the three months ended March 31,
1997 from $2.7 million for the three months ended March 31, 1996. Operating
income as a percentage of revenues increased from 12.4% for the three months
ended March 31, 1996 to 14.1% for the three months ended March 31, 1997.
This is primarily the result of the spreading of fixed costs over a larger
revenue base.
Other income totaled $602,000 for the three months ended March 31, 1997
compared with other expense of $464,000 during the three months ended March
31, 1996. This is primarily related to the increase in investment income of
$762,000 to $863,000 for the three months ended March 31,1997 from $111,000
for the three months ended March 31, 1996. This increase is a result of the
increase in short-term investments resulting from the July 1996 and October
1996 public stock offerings.
As a result of the foregoing factors, net income increased $4.0 million
or 320.7%, to $5.3 million for the three months ended March 31, 1997 from
$1.3 million for the three months ended March 31, 1996.
LIQUIDITY AND CAPITAL RESOURCES
9
As of March 31, 1997 the Company had cash and cash equivalents of $9.0
million and short-term investments of $70.9 million. Cash provided by
operating activities was $4.9 million for the three months ended March 31,
1997.
Cash used in investing activities was $457,000 for the three months
ended March 31, 1997 resulting primarily from $4.0 million in capital
expenditures offset in part by the return of a $3.0 million temporary deposit
on a new call center which was made by the Company in December 1996.
Cash used in financing activities was $878,000 resulting from the pay
down of capital leases.
The Company has a $15 million unsecured revolving operating line of
credit which expires on May 31, 1998. At March 31, 1997, there were no
outstanding borrowings under this agreement. In addition, the Company has
two master lease agreements. Under one agreement the Company may lease
equipment up to an aggregate value of $15.0 million. As of March 31, 1997,
amounts outstanding under this agreement were approximately $9.0 million.
Under the second agreement, the Company's borrowings are approved, and
specific terms are set, on a case-by-case basis.
The Company currently expects total capital expenditures in 1997 to be
approximately $36 million of which $4.0 million was expended in the first
quarter. The Company believes that existing cash on hand together with cash
from operations and available borrowings under the line of credit and master
lease agreements, will be sufficient to finance the Company's operations,
planned capital expenditures and anticipated growth through 1997.
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; and (iii) statements relating to the
Company or its operations that are preceded by terms such as "anticipates",
"expects", "believes" and similar expressions.
The Company's actual results, performance or achievements may differ
materially from those implied by such forward-looking statements as a result
of various factors, including the following: TeleTech's agreements with its
clients do not ensure that TeleTech will generate a specific level of revenue
and may be canceled by the clients on short notice. The amount of revenue
TeleTech generates from a particular client is dependent upon customers'
interest in and use of the client's products or services, some of which are
recently-introduced or untested. The loss of a significant client or the
termination or completion of a significant client program may have a material
adverse effect on TeleTech's capacity utilization and results of operations.
10
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 proceedings are
still in an early stage and the ultimate outcome is uncertain.
From time to time the Company is involved in litigation, most of which
is incidental to its business. In the Company's opinion, no litigation to
which the Company currently is a party is likely to have a material adverse
effect on the Company's results of operations or financial condition.
Item 4. Submission of Matters to a Vote of Security Holders.
None
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
The Company did not file any reports on Form 8-K during
the three months ended March 31, 1997.
11
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: May 12, 1997 /s/ KENNETH D. TUCHMAN
---------------------- ------------------------------------
Kenneth D. Tuchman
Chairman of the Board, President and
Chief Executive Officer
Date: May 12, 1997 /s/ STEVEN B. COBURN
---------------------- ------------------------------------
Steven B. Coburn, Chief Financial
Officer
12
5
3-MOS
DEC-31-1997
MAR-31-1997
9,037
70,857
38,004
1,611
0
118,919
38,892
13,042
149,779
28,436
9,198
0
0
558
111,023
149,779
59,198
59,198
37,462
50,851
(905)
0
303
8,949
3,656
5,293
0
0
0
5,293
0.09
0.09
