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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, 1998
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OR
[ ] TRANSITION REPORT PURSUANT TO Section 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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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, 1998
Common Stock, par value $.01 per share 56,782,574
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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, 1998
and December 31, 1997 3
Condensed consolidated statements of income--Three months
ended March 31, 1998 and 1997 5
Condensed consolidated statements of cash flows--Three
months ended March 31, 1998 and 1997 6
Notes to condensed consolidated financial statements--March
31, 1998 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 12
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES 13
PART I. FINANCIAL INFORMATION
2
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS EXCEPT SHARE AMOUNTS)
ASSETS
------
December 31, March 31,
1997 1998
------------ ------------
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents.............. $ 6,673 $ 7,603
Short-term investments................. 69,633 66,987
Accounts receivable, net of allowance
for doubtful accounts of $2,312 and
$2,467, respectively.................. 37,818 38,997
Prepaids and other assets............... 1,141 1,267
Deferred tax asset...................... 2,902 2,978
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Total current assets............... 118,167 117,832
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PROPERTY AND EQUIPMENT, net of accumulated
depreciation of $20,593 and $24,192,
respectively............................ 49,948 55,692
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OTHER ASSETS:
Goodwill and other intangible assets (net
of amortization of $587 and $879,
respectively)........................... 7,295 12,422
Long-term accounts receivable............... 4,274 4,274
Investment in affiliated company accounted
for under the equity method............... 981 995
Other assets................................ 1,138 725
-------- --------
Total assets........................... $181,803 $191,940
-------- --------
-------- --------
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,
1997 1998
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(unaudited)
CURRENT LIABILITIES:
Current portion of long-term debt................ 5,561 8,070
Accounts payable................................. 7,359 11,226
Accrued employee compensation.................... 12,012 9,806
Accrued income taxes............................. 1,803 3,152
Other accrued expenses........................... 10,524 9,619
Customer advances, deposits and deferred income.. 1,472 999
-------- --------
Total current liabilities.................... 38,731 42,872
DEFERRED TAX LIABILITIES 1,147 1,138
LONG-TERM DEBT, net of current portion:
Capital lease obligations........................ 8,547 6,622
Other debt....................................... 368 618
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Total liabilities............................ 48,793 51,250
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STOCKHOLDERS EQUITY:
Preferred stock, 10,000,000 shares authorized , zero
shares issued and outstanding.................. - -
Common stock, $.01 par value, 150,000,000 shares
authorized, 56,409,953 and 56,741,874 shares
issued, 56,311,143 and 56,741,874 shares
outstanding.................................... 564 567
Additional paid-in capital......................... 99,339 101,708
Cumulative translation adjustment........... ...... (922) (788)
Unearned compensation-restricted stock............. (127) (95)
Treasury stock, 98,810 shares, at cost............. (988) -
Retained earnings.................................. 35,144 39,298
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Total stockholders' equity....................... 133,010 140,690
-------- --------
Total liabilities and stockholders' equity.. $181,803 $191,940
-------- --------
-------- --------
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,
-----------------------
1997 1998
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REVENUES $59,198 $73,764
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OPERATING EXPENSES:
Costs of services.. ........................... 37,462 47,310
Selling, general and
administrative expenses.................... 13,389 20,159
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Total operating expenses....................... 50,851 67,469
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INCOME FROM OPERATIONS 8,347 6,295
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OTHER INCOME (EXPENSES):
Interest expense............................... (303) (267)
Investment income.............................. 873 882
Equity in income of
affiliated company......................... 53 14
Other.......................................... (21) (94)
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602 535
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Income before income taxes.................... 8,949 6,830
Provision for income taxes.................... 3,656 2,676
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NET INCOME......................................... $ 5,293 $ 4,154
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WEIGHTED AVERAGE SHARES
OUTSTANDING:
Basic......................................... 55,714 56,529
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------- -------
Diluted....................................... 59,488 58,772
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------- -------
NET INCOME PER COMMON SHARE:
Basic....................................... $ .10 $ .07
------- -------
------- -------
Diluted .................................... $ .09 $ .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 CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998
(AMOUNTS IN THOUSANDS)
(Unaudited)
1997 1998
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income........................................ $ 5,293 $ 4,154
Adjustments to reconcile net income to net cash
provided by operating activities-
Depreciation and amortization.................. 2,410 3,858
Allowance for doubtful accounts................ 149 155
Equity in (income) loss of affiliated company.. (53) (14)
Deferred taxes on income....................... (571) (4)
Deferred compensation expense.................. 32 32
Changes in assets and liabilities-
Accounts receivable.......................... (4,811) (1,335)
Prepaids and other assets.................... 209 217
Deferred contract costs...................... - -
Accounts payable and accrued liabilities..... 2,054 2,435
Customer advances and deferred income........ 168 (461)
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Net cash provided by operating activities........ 4,880 9,037
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment................ $(3,977) $(9,348)
Purchase of Intellisystems........................ - (2,000)
Return of deposit on new Call Center.............. 3,000 -
Changes in accounts payable and accrued
liabilities relating to investing activities.... (196) (781)
Decrease in short-term investments................ 716 2,646
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Net cash used in investing activities............. (457) (9,483)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in short-term borrowings............. $ - $ 2,191
Net decrease in bank overdraft.................... - -
Payments on long-term debt and capital leases..... (891) (1,365)
Exercise of stock options....... ................. 13 413
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Net cash provided by (used in) financing activities (878) 1,239
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Effect of exchange rate changes on cash................ (72) 137
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NET INCREASE IN CASH AND
CASH EQUIVALENTS.................................. 3,473 930
CASH AND CASH EQUIVALENTS,
beginning of period............................... 5,564 6,673
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CASH AND CASH EQUIVALENTS,
end of period..................................... $ 9,037 $ 7,603
------- -------
------- -------
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, 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 March 31, 1998 and 1997 and
for the periods then ended. Operating results for the three month period
ended March 31, 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.
NOTE (3)--SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION AND NONCASH INVESTING
AND FINANCING ACTIVITIES (IN THOUSANDS):
Three Months Ended March 31,
----------------------------
1997 1998
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Cash paid for interest $ 313 $ 267
Cash paid for income taxes $1,753 $ 375
Noncash investing and financing activities:
Stock issued in purchase of Intellisystems $ - $3,389
NOTE (4)--ACQUISITION OF INTELLISYSTEMS
On February 17, 1998, the Company acquired the assets of
Intellisystems,-TM- 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. The operations of Intellisystems prior to the acquisition are
immaterial to all periods presented.
7
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998 - CONTINUED
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 months ended March 31, 1997 and 1998 was as follows (in thousands):
Three Months Ended March 31,
----------------------------
1997 1998
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Net income for the period $5,293 $4,154
Change in cumulative translation adjustment (72) 161
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Comprehensive income $5,221 $4,315
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8
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 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 MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31, 1997
Revenues increased $14.6 million or 24.6% to $73.8 million for the three
months ended March 31, 1998 from $59.2 million for the three months ended March
31, 1997. The increase resulted from $30.7 million in revenues from new clients,
$8.1 million in increased revenue from existing clients and $1.6 million from
acquisitions. These increases were offset in part by contract expirations and
other client reductions. Revenues for the three months ended March 31, 1998
include approximately $17.3 million from facilities management contracts as
compared with $21.9 million for the three months ended March 31, 1997.
Costs of services increased $9.8 million, or 26.3%, to $47.3 million for
the three months ended March 31, 1998 from $37.5 million for the three months
ended March 31, 1997. Costs of services as a percentage of revenues increased
from 63.3% for the three months ended March 31, 1997 to 64.1% for the three
months ended March 31, 1998. This increase in the costs of services as a
percentage of revenues is primarily a result of lower first quarter volumes in a
significant facilities management client program.
Selling, general and administrative expenses increased $6.8 million, or
50.6% to $20.2 million for the three months ended March 31, 1998 from $13.4
million for the three months ended March 31, 1997. Selling, general and
administrative expenses as a percentage of revenues increased from 22.6% for the
three months ended March 31, 1997 to 27.3% for the three months ended March 31,
1998 primarily as a result of increased personnel along with higher depreciation
expense as a percentage of revenues resulting from the completion of new call
centers in the last twelve months.
As a result of the foregoing factors, income from operations decreased $2.0
million or 24.6%, to $6.3 million for the three months ended March 31, 1998 from
$8.3 million for the three months ended March 31, 1997. Operating income as a
percentage of revenues decreased from 14.1% for the three months ended March 31,
1997 to 8.5% for the three months ended March 31, 1998. This decline resulted
from reduced capacity utilization and lower revenue due to lower volumes
associated with two significant clients in the telecommunications and
transportation industries. The Company believes its operating margin will
improve in the last half of 1998 as capacity utilization increases as new
clients are added.
9
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS-CONTINUED
As a result of the foregoing factors, net income decreased $1.1 million or
21.5%, to $4.2 million for the three months ended March 31, 1998 from $5.3
million for the three months ended March 31, 1997.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1998 the Company had cash and cash equivalents of $7.6
million and short-term investments of $67.0 million. Cash provided by operating
activities was $9.0 million for the three months ended March 31, 1998.
Cash used in investing activities was $9.5 million for the three months
ended March 31, 1998 resulting primarily from $9.3 million in capital
expenditures and $2.0 toward the purchase of Intellisystems (see Note 4
accompanying the financial statements), offset in part by a decrease of $2.6
million in short term investments.
Cash provided by financing activities was $1.2 million resulting from an
increase of $2.2 million in short-term borrowings offset by a $1.4 million pay
down of capital leases.
The Company has a $15.0 million unsecured revolving operating line of
credit that expires on May 31, 1998. Borrowings under this line bear interest at
various rates that are selected by the Company each time a draw is made. At
March 31, 1998, there were no outstanding borrowings under this agreement. Under
this line of credit, the Company has agreed to maintain certain financial ratios
and capital expenditure limits. The Company is in compliance with all covenants
of this agreement. The Company currently is negotiating a new, unsecured
revolving line of credit that will increase the amount available for borrowing.
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
March 31, 1998, amounts outstanding under this agreement were approximately $7.5
million. Lease rates under this agreement are based upon a 125 basis point
spread over three-year U.S. Treasury notes.
The Company currently expects total capital expenditures in 1998 to be
approximately $45 to $50 million of which $9.3 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 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 Company's expectation that operating margins will
improve in the last half of 1998; (ii) the anticipated level of capital
expenditures for 1998; (iii) the Company's belief that existing cash, short-term
investments and available borrowing will be sufficient to finance the Company's
near term operations; (iv) the Company's belief that the CompuServe litigation
will not have a material adverse impact on the Company; 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
10
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS-CONTINUED
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.
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 in 1998, 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.
11
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS-CONTINUED
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 DIRECT OR
OF EQUITY SECURITIES OF THE INDIRECT
ISSUER; AND TO AFFILIATES OF THE PAYMENTS
ISSUER TO OTHERS
-------------------------------- ---------
Purchase and installation of
machinery and equipment $2,968,000
Acquisition of other
businesses 4,337,000
Repayment of indebtedness 9,950,000
Working Capital $500,000 9,545,000
TEMPORARY INVESTMENT
Cash Management Account 24,277,000
OTHER PURPOSES
Acquisition of 98,810
shares of Treasury Stock 988,000
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, 1998.
12
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 7, 1998 /s/ KENNETH D. TUCHMAN
---------------------- ----------------------------------
Kenneth D. Tuchman
Chairman of the Board, President and
Chief Executive Officer
Date: May 7, 1998 /s/ STEVEN B. COBURN
---------------------- ----------------------------------
Steven B. Coburn, Chief Financial
Officer
13
5
3-MOS
DEC-31-1998
MAR-31-1998
7,603
66,987
41,464
2,467
0
117,832
79,884
24,192
191,940
42,872
7,240
0
0
567
140,123
191,940
73,764
73,764
47,310
67,469
(802)
0
267
6,830
2,676
4,154
0
0
0
4,154
0.07
0.07
