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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: JUNE 30, 1998
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 August 4, 1998
Common Stock, par value $.01 per share 59,761,493
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TELETECH HOLDINGS, INC. AND SUBSIDIARIES
FORM 10-Q
INDEX
PAGE
NUMBER
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets--December 31, 1997 and
June 30, 1998 3
Condensed consolidated statements of income--Three months ended
June 30, 1998 and 1997 5
Condensed consolidated statements of income--Six months ended
June 30, 1998 and 1997 6
Condensed consolidated statements of cash flows--Six months ended
June 30, 1998 and 1997 7
Notes to condensed consolidated financial
statements--June 30, 1998 8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 2. Changes in Securities and Use of Proceeds 14
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
2
PART I. FINANCIAL INFORMATION
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
ASSETS
December 31, June 30,
1997 1998
------------ -----------
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents............................. $ 7,338 $ 7,844
Short-term investments................................ 69,633 60,194
Accounts receivable, net of allowance for doubtful
accounts of $2,327 and $2,564, respectively......... 43,664 53,985
Prepaids and other assets............................. 1,220 1,449
Deferred tax asset.................................... 2,902 3,048
-------- --------
Total current assets................................ 124,757 126,520
-------- --------
PROPERTY AND EQUIPMENT, net of accumulated
depreciation of $21,812 and $29,570, respectively..... 53,738 60,916
-------- --------
OTHER ASSETS:
Goodwill (net of amortization of $587 and
$1,130, respectively)................................ 7,295 12,207
Long-term accounts receivable......................... 4,274 4,274
Investment in affiliated company accounted for
under the equity method.............................. 981 1,067
Other assets.......................................... 1,322 926
-------- --------
Total assets........................................ $192,367 $205,910
-------- --------
-------- --------
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, June 30,
1997 1998
------------ -----------
(Unaudited)
CURRENT LIABILITIES:
Current portion of long-term debt....................... 5,910 8,162
Bank overdraft.......................................... 1,094 -
Accounts payable........................................ 8,086 9,418
Accrued employee compensation........................... 12,244 11,420
Accrued income taxes.................................... 2,507 971
Other accrued expenses.................................. 11,694 14,467
Customer advances, deposits and deferred income......... 1,472 1,096
-------- --------
Total current liabilities............................. 43,007 45,534
DEFERRED TAX LIABILITIES................................. 1,217 1,214
LONG-TERM DEBT, net of current portion:
Capital lease obligations............................... 9,432 6,136
Other debt.............................................. 459 1,986
-------- --------
Total liabilities..................................... 54,115 54,870
-------- --------
STOCKHOLDERS' EQUITY:
Preferred stock, 10,000,000 shares authorized,
zero shares issued and outstanding................... - -
Series A preferred stock, one share authorized,
zero and one share issued and outstanding in 1997
and 1998, respectively............................... - -
Common stock, $.01 par value, 150,000,000 shares
authorized, 59,262,397 and 59,757,969 shares issued,
59,163,587 and 59,757,969 shares outstanding......... 592 597
Additional paid-in capital............................. 104,016 107,569
Accumulated other comprehensive income................. (922) (1,489)
Unearned compensation-restricted stock................. (127) (63)
Treasury stock, 98,810 shares, at cost................. (988) -
Retained earnings...................................... 35,681 44,426
-------- --------
Total stockholders' equity.......................... 138,252 151,040
-------- --------
Total liabilities and stockholders' equity........... $192,367 $205,910
-------- --------
-------- --------
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
June 30,
---------------------
1997 1998
------- -------
REVENUES............................................ $67,648 $88,099
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OPERATING EXPENSES:
Costs of services.................................. 42,357 57,295
Selling, general and
administrative expenses............................ 15,047 23,158
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Total operating expenses........................... 57,404 80,453
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INCOME FROM OPERATIONS 10,244 7,646
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OTHER INCOME (EXPENSE):
Interest expense................................... (322) (231)
Investment income.................................. 835 830
Equity in income of
affiliated company................................. 50 72
Business combination expenses...................... - (881)
Other.............................................. 35 (57)
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598 (267)
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Income before income taxes......................... 10,842 7,379
PROVISION FOR INCOME TAXES.......................... 4,345 2,915
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Net income......................................... $ 6,497 $ 4,464
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------- -------
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic............................................. 57,919 59,696
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------- -------
Diluted........................................... 61,882 62,373
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------- -------
NET INCOME PER COMMON SHARE:
Basic............................................. $.11 $.07
------- -------
------- -------
Diluted........................................... $.10 $.07
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------- -------
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)
Six Months Ended June 30,
-------------------------
1997 1998
-------- --------
REVENUES $128,906 $168,343
-------- --------
OPERATING EXPENSES:
Costs of services................................. 81,244 109,151
Selling, general and administrative expenses...... 28,854 44,420
-------- --------
Total operating expenses.......................... 110,098 153,571
-------- --------
INCOME FROM OPERATIONS............................. 18,808 14,772
-------- --------
OTHER INCOME (EXPENSE):
Interest expense................................... (777) (533)
Investment income.................................. 1,709 1,720
Equity in income of
affiliated company................................. 103 86
Business combination expenses...................... - (881)
Other.............................................. 13 (152)
-------- --------
1,048 240
-------- --------
Income before income taxes......................... 19,856 15,012
PROVISION FOR INCOME TAXES 8,007 5,996
-------- --------
Net income......................................... $ 11,849 $ 9,016
-------- --------
-------- --------
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic............................................. 57,919 59,696
-------- --------
-------- --------
Diluted........................................... 61,882 62,373
-------- --------
-------- --------
NET INCOME PER COMMON SHARE:
Basic............................................. $.20 $.15
-------- --------
-------- --------
Diluted........................................... $.19 $.14
-------- --------
-------- --------
The accompanying notes are an integral part of these statements.
6
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1998
(DOLLARS IN THOUSANDS)
(Unaudited)
1997 1998
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income............................................ $ 11,849 $ 9,016
Adjustments to reconcile net income to net cash
provided by operating activities-
Depreciation and amortization........................ 4,675 8,868
Allowance for doubtful accounts...................... 304 237
Equity in income of affiliated company............... (103) (86)
Deferred taxes on income............................. (571) (149)
Deferred compensation expense........................ 64 64
Changes in assets and liabilities-
Accounts receivable................................. (10,994) (10,558)
Prepaids and other assets........................... 56 166
Accounts payable and accrued liabilities............ 2,562 1,803
Customer advances and deferred income............... 89 (364)
-------- --------
Net cash provided by operating activities............. 7,931 8,997
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment.................... $(16,636) $(14,935)
Purchase of TMI....................................... (2,337) -
Acquisition of Intellisystems, Inc.................... - (2,000)
Return of deposit on new Call Center.................. 3,000 -
Changes in accounts payable and accrued
liabilities relating to investing activities......... 912 (762)
Decrease in short-term investments.................... 4,621 9,439
-------- --------
Net cash used in investing activities................. (10,440) (8,258)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in short-term borrowings................. $ - $ 1,715
Net increase in bank overdraft........................ 11 -
Payments on long-term debt and capital leases......... (2,507) (2,326)
Exercise of stock options including tax benefit....... 4,458 1,565
-------- --------
Net cash provided by financing activities............. 1,962 954
-------- --------
Effect of exchange rate changes on cash................ (281) (1,187)
-------- --------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS...................................... (828) 506
CASH AND CASH EQUIVALENTS,
beginning of period................................... 5,569 7,338
-------- --------
CASH AND CASH EQUIVALENTS,
end of period......................................... $ 4,741 $ 7,844
-------- --------
-------- --------
The accompanying notes are an integral part of these statements.
7
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
NOTE (1)--BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial
statements have been prepared without audit pursuant to the rules and
regulations of the Securities and Exchange Commission. The condensed
consolidated financial statements reflect all adjustments (consisting of only
normal recurring accruals) which, in the opinion of management , are necessary
to present fairly the financial position, results of operations and cash flows
of TeleTech Holdings, Inc. and subsidiaries as of June 30, 1998 and 1997 and for
the periods then ended. Operating results for the three month and six month
periods ended June 30, 1998 are not necessarily indicative of the results that
may be expected for the year ended December 31, 1998.
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, 1997.
NOTE (2)--EARNINGS PER SHARE
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.
In June 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities" effective for fiscal years
beginning after June 15, 1999. SFAS No. 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 No. 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
No. 133 will not significantly affect its financial reporting.
In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of
Start-Up Activities". This statement is effective for financial statements for
fiscal years beginning after December 15, 1998. In general, SOP 98-5 requires
costs of start-up activities and organization costs to be expensed as incurred.
Initial application of SOP 98-5 should be reported as the cumulative effect of a
change in accounting principle. Management believes that SOP 98-5 will not have
a material impact on the financial statements.
8
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 - CONTINUED
NOTE (3)--SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION AND NONCASH INVESTING
AND FINANCING ACTIVITIES (IN THOUSANDS):
Six Months Ended June 30,
-------------------------
1997 1998
------ -------
Cash paid for interest $ 777 $ 533
Cash paid for income taxes $9,360 $ 5,218
Noncash investing and financing activities:
Stock issued in purchase of Intellisystems $ - $3,389
NOTE (4)--ACQUISITIONS
On February 17, 1998, the Company acquired the assets of
Intellisystems,-R- Inc. ("Intellisystems") for $2.0 million in cash and 344,487
shares of common stock including 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 calls coming into customer support 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, respectively. 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 has 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 in June
1998.
The table below sets forth the results of operations of the
previously separate enterprises for the period prior to the consummation of
the combinations during the three and six months ended June 30, 1998 and 1997
(in thousands):
THREE MONTHS ENDED JUNE 30,: THI DIGITAL EDM ADJUSTMENTS COMBINED
1998:
Revenues $62,480 $822 $4,354 $(531) $67,125
Net income 2,818 46 346 - 3,210
1997:
Revenues $65,134 $705 $2,215 $(406) $67,648
Net income 6,196 179 122 - 6,497
9
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 - CONTINUED
SIX MONTHS ENDED JUNE 30,: THI DIGITAL EDM ADJUSTMENTS COMBINED
1998:
Revenues $136,244 $2,038 $10,258 $(1,171) $147,369
Net income 6,972 136 654 - 7,762
1997:
Revenues $124,332 $ 889 $ 4,091 $ (406) $128,906
Net income 11,489 187 173 - 11,849
NOTE (5)--COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS 130"). The purpose of SFAS 130 is to report a measure of all
changes in equity that result from recognized transactions and other economic
events of the period other than transactions with owners in their capacity as
owners. The only item of other comprehensive income reported by the Company is
the cumulative translation adjustment.
The Company's comprehensive income for the three and six months ended June 30,
1997 and 1998 was as follows (in thousands):
Three Months Ended June 30,
---------------------------
1997 1998
------ ------
Net income for the period $6,497 $4,464
Change in cumulative translation adjustment (158) (747)
------ ------
Comprehensive income $6,339 $3,717
------ ------
------ ------
Six Months Ended June 30,
---------------------------
1997 1998
------- ------
Net income for the period $11,849 $9,016
Change in cumulative translation adjustment (230) (567)
------- ------
Comprehensive income $11,619 $8,449
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NOTE 6 - PROPOSED SALE OF JOINT VENTURE
In June 1998 the Company reached an agreement in principle with
Priplan Investments, Ltd. ("Priplan") to sell the Company's 50% interest in
Access 24 (UK) Limited ("Access 24 UK") for cash consideration of
approximately $1.0 million. This transaction is subject to the execution of a
definitive agreement and is expected to close in August 1998. During the
second quarter of 1998 the Company charged the Parent of Priplan $1.3 million
related to call center consulting and design services.
10
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
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, 1997. 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 JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30, 1997
Revenues increased $20.5 million or 30.2% to $88.1 million for the
three months ended June 30, 1998 from $67.6 million for the three months ended
June 30, 1997. The increase resulted from $17.3 million in revenues from new
clients, $17.1 million in increased revenue from existing clients and $3.5
million from increases in the operations of EDM. These increases were offset
in part by contract expirations and other client reductions of which $12.3
million related to two significant clients in the telecommunications and
transportation industries. Revenues for the three months ended June 30, 1998
include approximately $22.3 million from facilities management contracts as
compared with $19.8 million for the three months ended June 30, 1997.
Costs of services increased $14.9 million, or 35.3%, to $57.3
million for the three months ended June 30, 1998 from $42.4 million for the
three months ended June 30, 1997. Costs of services as a percentage of
revenues increased from 62.6% for the three months ended June 30, 1997 to
65.0% for the three months ended June 30, 1998. This increase in the costs of
services as a percentage of revenues is primarily a result of lower second
quarter volumes in a significant facilities management client program as
compared with the previous year.
Selling, general and administrative expenses increased $8.1 million,
or 53.9% to $23.2 million for the three months ended June 30, 1998 from $15.0
million for the three months ended June 30, 1997. Selling, general and
administrative expenses as a percentage of revenues increased from 22.2% for
the three months ended June 30, 1997 to 26.3% for the three months ended June
30, 1998 primarily as a result of greater number of selling, general, and
administrative personnel along with higher depreciation expense resulting from
the completion of new call centers in the fourth quarter of 1997 which were
not fully utilized in the first half of 1998 and the impact of lower volumes
in a significant client in the telecommunications industry.
As a result of the foregoing factors, income from operations
decreased $2.6 million or 25.4%, to $7.6 million for the three months ended
June 30, 1998 from $10.2 million for the three months ended June 30, 1997.
Operating income as a percentage of revenues decreased from 15.1% for the
three months ended June 30, 1997 to 8.7% for the three months ended June 30,
1998. This decline resulted from reduced
11
capacity utilization and lower volumes associated with two significant clients
in the telecommunications and transportation industries. Although management
anticipates that operating income as a percentage of revenues will increase as
capacity utilization and volumes increase, the timing of any such increase is
uncertain.
Other income totaled $614,000 for the three months ended June 30,
1998 compared with $598,000 during the three months ended June 30, 1997.
During the three months ended June 30, 1998, the Company also incurred
$881,000 of one time charges relating to business combination expenses for EDM
Electronic Direct Marketing, Ltd. and Digital Creators, Inc.
As a result of the foregoing factors, net income decreased $2.0
million or 31.3%, to $4.5 million for the three months ended June 30, 1998
from $6.5 million for the three months ended June 30, 1997.
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
Revenues increased $39.4 million or 30.6% to $168.3 million for the
six months ended June 30, 1998 from $128.9 million for the six months ended
June 30, 1997. The increase resulted from $25.1 million in revenues from new
clients, $48.0 million in increased revenue from existing clients and $7.5
million increases in the operations of EDM. These increases were offset in
part by contract expirations and other client reductions of which $25.9
million related to two significant clients in the telecommunications and
transportation industries. Revenues for the six months ended June 30, 1998
include approximately $39.6 million from facilities management contracts as
compared with $40.6 million for the six months ended June 30, 1997.
Costs of services increased $27.9 million, or 34.4%, to $109.2
million for the six months ended June 30, 1998 from $81.2 million for the six
months ended June 30, 1997. Costs of services as a percentage of revenues
increased from 63.0% for the six months ended June 30, 1997 to 64.8% for the
six months ended June 30, 1998. This increase in the costs of services as a
percentage of revenues is primarily a result of lower first half volumes in a
significant facilities management client program as compared with the previous
year.
Selling, general and administrative expenses increased $15.6
million, or 54.0% to $44.4 million for the six months ended June 30, 1998 from
$28.9 million for the six months ended June 30, 1997. Selling, general and
administrative expenses as a percentage of revenues increased from 22.4% for
the six months ended June 30, 1997 to 26.4% for the six months ended June 30,
1998 primarily as a result of greater number of selling, general, and
administrative personnel along with higher depreciation expense resulting from
the completion of new call centers in the fourth quarter of 1997 which were
not fully utilized in the first half of 1998 and the impact of lower volumes
in a significant client in the telecommunications industry.
As a result of the foregoing factors, income from operations
decreased $4.0 million or 21.5%, to $14.8 million for the six months ended
June 30, 1998 from $18.8 million for the six months ended June 30, 1997.
Operating income as a percentage of revenues decreased from 14.6% for the six
months ended June 30, 1997 to 8.8% for the six months ended June 30, 1998.
This decline resulted from reduced capacity utilization and lower volumes
associated with two significant clients in the telecommunications and
transportation industries. Although management anticipates that operating
income as a percentage of revenues will increase as capacity utilization and
volumes increase, the timing of any such increase is uncertain.
Other income totaled $1,121,000 for the six months ended June 30,
1998 compared with $1,048,000 during the six months ended June 30, 1997.
During the six months ended June 30, 1998, the Company also incurred $881,000
of one time charges relating to business combination expenses for EDM
Electronic Direct Marketing, Ltd. and Digital Creators, Inc.
As a result of the foregoing factors, net income decreased $2.8
million or 23.9%, to $9.0 million for the six months ended June 30, 1998 from
$11.8 million for the six months ended June 30, 1997.
12
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1998 the Company had cash and cash equivalents of
$7.8 million and short-term investments of $60.2 million. Cash provided by
operating activities was $9.0 million for the six months ended June 30, 1998.
Cash used in investing activities was $8.3 million for the six
months ended June 30, 1998 resulting primarily from $14.9 million in capital
expenditures and $2.0 toward the purchase of Intellisystems (see Note 4
accompanying the condensed financial statements), offset in part by a decrease
of $9.4 million in short term investments.
Cash provided by financing activities was $1.0 million resulting
from the increase in short-term borrowings of $1.7 million and the exercise of
stock options of $1.6 million offset in part by pay downs of capital leases
from the Company's Canadian Subsidiary.
The Company is currently renegotiating its revolving line of credit
which expired on May 31, 1998 and expects to complete a new line of credit in
the third quarter of 1998.
The Company currently expects total capital expenditures in 1998 to
be approximately $40 to $50 million of which $14.9 million was expended in the
first six months. The Company believes that existing cash on hand together
with cash from operations will be sufficient to finance the Company's
operations, planned capital expenditures and anticipated growth through 1998.
POTENTIAL YEAR 2000 PROBLEMS
The Company has undertaken an assessment and compliance program (the
"Program") to ascertain the existence and extent of, and to remediate as
necessary, any Year 2000 problems that may reside in the computer systems of
the Company and its interfaces with its clients. The Program utilizes an
outside consulting firm, which specializes in Year 2000 compliance and
remediation, which will work with full-time employees of the Company whose
time is dedicated to the Program. The Company expects to complete the
assessment phase of the Program early in the fourth quarter of 1998. As
assessments are completed, the Company will commence immediate remediation, as
necessary. The Company believes, based upon the progress of the Program so
far, that costs of the assessment phase will not exceed $1,000,000. The
Company has not yet incurred any significant costs for this assessment. When
the assessment is completed, the Company should be able to estimate the total
cost of the Program.
The Company is currently unable to assess, and may be unable to
accurately determine, the magnitude of any Year 2000 problems that may reside
in the computer and information systems of its clients, or the impact that any
such problems could have on the services provided by the Company to such
clients. As part of the Program, the Company will contact its clients
regarding the nature and scope of any such problems and seek to work with the
clients to resolve them. The success of the Company's efforts will depend, in
significant part, upon factors outside the control of the Company, such as the
level of client cooperation and the status of the clients' own Year 2000
compliance programs. Thus, there can be no assurance that all such problems
will be resolved. The occurrence of Year 2000 related failures in the computer
and information systems of any of the Company's significant clients could have
a materially adverse effect on the business, results of operations, and
financial condition of the Company. The Company has not yet prepared a
contingency plan to handle a most reasonably likely worst case scenario as the
Program has not progressed sufficiently to identify the potential Year 2000
issues.
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
13
are forward-looking statements that involve substantial risks and
uncertainties. Forward looking statements include (i) the anticipated level
of capital expenditures for 1998; (ii) the Company's belief that existing cash
and short-term investments will be sufficient to finance the Company's near
term operations; (iii) management anticipation that operating income as a
percentage of revenue will increase as capacity utilization and volumes
increase; (iv) the Company's estimate of the impact of the year 2000 issues;
and (v) 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.
There can be no assurance that the Company will be successful in integrating
acquired companies into the Company's existing businesses, or that any
completed acquisition will enhance the Company's business, results of
operations or financial condition. There are certain risks inherent in
conducting international business, including without limitation exposure to
currency fluctuations, longer payment cycles and greater difficulties in
accounts receivable collection.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
As disclosed in the Company's 1997 Annual Report on Form 10-K, 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 certain accounts receivable it owes to the Company
for services rendered. These accounts receivable total $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. The Company
and CompuServe agreed to stay their litigation pending the sale, which was
completed in January 1998. The litigation has now recommenced. Although the
Company believes that this litigation will not have a material adverse effect
on the Company's financial condition or results of operations, the ultimate
outcome is uncertain. Because it is uncertain whether this litigation will be
concluded within one year, the Company has reclassified the $4.3 million
receivable as a long-term asset in the accompanying balance sheet.
Item 2. Changes in Securities and Use of Proceeds
The registration statement for the Company's initial public offering
was effective July 30, 1996. 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 proceeds does not represent a material change in the use
of proceeds described in the initial public offering prospectus.
14
DIRECT OR INDIRECT PAYMENTS TO
DIRECTORS, 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; DIRECT OR INDIRECT
AND TO AFFILIATES OF THE ISSUER PAYMENTS TO OTHERS
----------------------------------- ------------------
Purchase and installation
of machinery and equipment $7,536,000
Acquisition of other
businesses 4,337,000
Repayment of indebtedness 9,950,000
Working Capital $500,000 15,055,000
TEMPORARY INVESTMENT
Cash Management Account 14,199,000
OTHER PURPOSES
Acquisition of 98,810
shares of Treasury Stock 988,000
Item 4. Submission of Matters to a Vote of Security Holders.
On May 8, 1998, the Company held its annual meeting of stockholders,
at which there were 54,639,262 shares present or represented by proxy, which
is approximately 96% of the shares entitled to vote. At the annual meeting,
the following matters were approved by more than the requisite number of
stockholders:
The following directors of the Company were elected. The number of
votes cast for and withheld for each director were as follows:
Votes Cast
--------------------------
For Withheld
---------- --------
Kenneth D. Tuchman 54,595,763 43,499
Rod Dammeyer 54,595,763 43,499
John T. McLennan 54,595,763 43,499
Morton H. Meyerson 54,595,763 43,499
Alan Silverman 54,595,763 43,499
The engagement of Arthur Andersen LLP as the Company's
independent auditors for fiscal 1998 was ratified by the affirmative vote of
54,591,691 shares, with 26,765 shares voted against and 20,806 shares abstaining
and no broker non-votes.
15
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following document is filed as an exhibit to this report:
3 Certificate of Designations, Preferences and Rights of
Series A Preferred Stock
27.1 Financial Data Schedule
27.2 Financial Data Schedule - Restated
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the six
months ended June 30, 1998.
16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TELETECH HOLDINGS, INC.
-----------------------
(Registrant)
Date: August 7, 1998 /s/ KENNETH D. TUCHMAN
----------------------------------- ------------------------------------
Kenneth D. Tuchman
Chairman of the Board, President and
Chief Executive Officer
Date: August 7, 1998 /s/ STEVEN B. COBURN
----------------------------------- ------------------------------------
Steven B. Coburn, Chief Financial
Officer
17
CERTIFICATE OF DESIGNATIONS, PREFERENCES
AND RIGHTS OF SERIES A PREFERRED STOCK
OF
TELETECH HOLDINGS, INC.
PURSUANT TO SECTION 151 OF THE GENERAL CORPORATION LAW
OF THE STATE OF DELAWARE
I, Jimmy Holland, as Secretary of TeleTech Holdings, Inc., a corporation
organized and existing under the General Corporation Law of the State of
Delaware (the "Corporation"), in accordance with the provisions of Section 103
thereof, DO HEREBY CERTIFY THAT:
In accordance with the provisions of Section 151 of the General
Corporation Law of the State of Delaware and pursuant to ARTICLE FOUR, SECTION B
of the Restated Certificate of Incorporation of the Corporation (the
"CERTIFICATE OF INCORPORATION"), the Board of Directors of the Corporation is
authorized to issue from time to time shares of Preferred Stock, par value $.01
per share, in one or more series; and
In connection with a Combination Agreement (the "COMBINATION
AGREEMENT") to be entered into among the Corporation, EDM Electronic Direct
Marketing Ltd., a corporation existing under the laws of the Province of
Ontario, Canada ("EDM") and the shareholders of EDM, the Board of Directors of
the Corporation has approved and adopted the following resolutions creating a
series of one (1) share of Preferred Stock, par value $.01 per share, designated
as Series A Preferred Stock:
RESOLVED, that pursuant to the authority expressly vested in the
Board of Directors of the Corporation in accordance with the
provisions of its Certificate of Incorporation, a series of Preferred
Stock of the Corporation, par value $.01 per share, be, and it is
hereby, created and classified, and the designation and amount thereof
and the voting powers, preferences and relative, participating,
optional and other special rights of the shares of such series and the
qualifications, limitations or restrictions thereof are as follows:
SECTION 1. DESIGNATION. The distinctive serial designation of
this series shall be "Series A Preferred Stock" (hereinafter called
"SERIES A PREFERRED STOCK").
SECTION 2. NUMBER OF SHARES. The number of shares of authorized
Series A Preferred Stock shall be one (1). The share shall be issued
in the name of, and shall at all times be held by, a trustee
(including any successors thereto, the "TRUSTEE") to be appointed
under a Voting Trust Agreement (the "VOTING TRUST AGREEMENT") to be
entered into among the Corporation, EDM and said Trustee pursuant to
the Combination Agreement. At such time as the share of Series A
Preferred Stock has no votes attached to it because there are no
Exchangeable Shares (as hereinafter defined) outstanding which are not
owned by the Corporation or any of its subsidiaries or affiliates, and
there are no shares of stock, debt, options or other agreements of EDM
which could give rise to the issuance of Exchangeable Shares to any
person, the share of Series A Preferred Stock shall be cancelled.
SECTION 3. PRIORITY. Except as otherwise specified herein, the
Series A Preferred Stock shall rank PARI PASSU with the Common Stock.
SECTION 4. NO DIVIDENDS. The holder of record of the share of
Series A Preferred Stock shall not be entitled to receive any
dividends, whether payable in cash or shares of capital stock, from
the Corporation.
SECTION 5. RIGHTS UPON LIQUIDATION. In the event of any
voluntary or involuntary liquidation, dissolution or winding up of the
affairs of the Corporation, the holder of the share of Series A
Preferred Stock shall not be entitled to receive any distributions or
payments, including, without limitation, any liquidation amounts,
dividends, or preferential or other payments or distributions
SECTION 6. VOTING RIGHTS. The holder of record of the share of
Series A Preferred Stock shall have the following voting rights:
a. VOTING RIGHTS WITH COMMON STOCK. The share of Series A
Preferred Stock shall vote together with the Common Stock as a single
class and, except as set forth herein, such voting rights shall be
identical in all respects.
b. NUMBER OF VOTES. The holder of record of the share of
Series A Preferred Stock shall be entitled to such number of votes
equal to the number of shares of Common Stock into which the
outstanding shares of non-voting Class A Special Shares of EDM (the
"EXCHANGEABLE SHARES") may be exchanged, excluding Exchangeable Shares
owned by the Corporation or any of its subsidiaries or affiliates.
c. METHOD OF VOTING. The holder of the share of Series A
Preferred Stock shall be entitled to exercise the voting rights
attendant thereto in such manner as prescribed in the Voting Trust
Agreement.
SECTION 7. NO OTHER RIGHTS. The shares of Series A Preferred
Stock shall not have any relative, participating, optional or other
special rights and powers other than as set forth herein.
2
IN WITNESS WHEREOF, the Corporation has caused this Certificate of
Designations to be signed by its Secretary as of June 11, 1998.
TELETECH HOLDINGS, INC.
By: /s/ Jimmy Holland
----------------------------------
Jimmy Holland
Secretary
3
5
6-MOS
DEC-31-1998
JUN-30-1998
7,844
60,194
56,549
2,564
0
126,520
90,486
29,570
205,910
45,534
8,122
0
0
597
150,443
205,910
168,343
168,343
109,151
153,571
(773)
0
533
15,012
5,996
9,016
0
0
0
9,016
0.15
0.14
5
6-MOS
DEC-31-1997
JUN-30-1997
4,741
68,795
42,176
1,766
0
117,119
56,195
15,626
171,270
31,581
9,454
0
0
564
128,954
171,270
128,906
128,906
81,244
110,098
(1,825)
0
777
19,856
8,007
11,849
0
0
0
11,849
0.20
0.19
