Back to GetFilings.com
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999,
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-21055
------------------------
TELETECH HOLDINGS, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 84-1291044
(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
1700 LINCOLN STREET, SUITE 1400, DENVER, COLORADO 80203
(Address of Principal Executive Offices) (Zip Code)
(303) 894-4000
(Registrant's Telephone Number, Including Area Code)
------------------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
$.01 par value per share
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 (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
As of March 24, 2000, there were 62,338,826 shares of the registrant's
common stock outstanding. The aggregate market value of the registrant's voting
stock that was held by non-affiliates on such date was $855,716,114 based on the
closing sale price of the registrant's common stock on such date as reported on
the Nasdaq Stock Market.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of TeleTech Holdings, Inc.'s definitive proxy statement for its
annual meeting of stockholders to be held on May 3, 2000, are incorporated by
reference into Part III of this Form 10-K, as indicated.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PART I
ITEM 1. BUSINESS.
OVERVIEW
TeleTech Holdings, Inc. (together with its wholly-owned subsidiaries, the
Company or TeleTech) is a leading provider of eCommerce-enabling customer
management solutions (eCRM) for large domestic, foreign and multinational
companies. TeleTech helps its clients acquire, serve, retain and maximize their
revenue from customers by strategically managing inbound telephone and
Internet-based inquiries on their behalf. Such programs include both automated
and human-assisted support and involve all stages of the customer relationship.
Programs consist of a variety of customer management and product support
activities, such as providing new product information, enrolling customers in
client programs, providing 24-hour technical and help desk support and resolving
customer complaints. The Company's customer management solution encompasses the
following capabilities:
- strategic consulting and process redesign;
- infrastructure deployment including the securing, designing and building
of world-class customer interaction centers;
- recruitment, education and management of client-dedicated customer care
representatives;
- electronic intelligence delivery to clients;
- engineering operational process controls and quality systems;
- technology consulting and implementation, including the integration of
hardware, software, network and computer-telephony technology; and
- database management, which involves the accumulation, management and
analysis of customer information to deliver actionable marketing
solutions.
TeleTech delivers its customer management services mostly through
customer-initiated (inbound) telephone calls, e-mail and the Internet. Services
are provided via automated support and by trained customer care representatives
(representatives) in response to an inquiry that a customer makes by calling a
toll-free telephone number or by sending an Internet message.
Representatives respond to customer inquiries from customer interaction
centers utilizing state-of-the-art workstations, which operate on TeleTech's
sophisticated technology platform. This technology platform incorporates digital
switching, client/server technology, object-oriented software modules,
relational database management systems, proprietary call tracking management
software, computer telephony integration and interactive voice response.
In July 1999, TeleTech launched CyberCare-TM-, an innovative multichannel
eCRM technology platform. CyberCare integrates TeleTech's best-of-breed
software, systems integration capabilities and customer management to enable
companies to sell to and service their customers on a very large scale anytime,
anywhere, over any media. The solution incorporates the full spectrum of
Internet communications, including custom e-mail response, chat and extensive
Web co-browsing capabilities. Whether a customer sends an e-mail, clicks an icon
on a Web site asking for immediate help or service or places a telephone call,
CyberCare routes the inquiry to a trained and technology-enabled TeleTech
representative. The representative is then able to perform a host of services,
including personalized customer care, billing and technical support, online
sales, loyalty and affinity programs, real-time product availability and
delivery status, Web site support, up-selling, cross-selling, and more.
The primary components of TeleTech's CyberCare solution are as follows:
- Customer-Centric Platform: TeleTech's customer relationship management
software that has been enhanced to manage the various Web-based
communications associated with CyberCare;
- E-mail: Provides automated e-mail responses to customer interactions, or
routes customer e-mail to appropriate representative to respond in a
personalized fashion;
2
- Chat: Allows for representative interaction with customer real-time over
the Web;
- Web Co-browsing: Provides representatives with the ability to
simultaneously view a Web site with the customer and navigate based upon
the customer's request for information - a phone call or chat session is
simultaneously initiated to interact with the customer during the
co-browsing session;
- Web Call Back: Customers have the ability to click an icon on a Web site
to request a phone call back from a representative either immediately or
at a specific time;
- Real-time Training: Incorporates real-time training via the Web for
CyberCare representatives delivered directly to the desktop;
- Online Reference Library: Provides representatives with access to a
searchable online database and comprehensive information resource; and
- Automated Support: TeleTech's inference-based expert system enables
customers to diagnose and resolve support issues via interactive response,
e-mail or the Internet.
TeleTech provides services from customer interaction centers leased,
equipped and staffed by TeleTech (fully outsourced programs) and from customer
interaction centers leased and equipped by its clients and staffed by TeleTech
(facilities management programs). The Company's fully outsourced customer
interaction centers serve either multiple clients (shared centers) or one
dedicated client (dedicated centers). TeleTech typically establishes long-term,
strategic relationships, formalized by multiyear contracts, with selected
clients in the telecommunications, technology, transportation, financial
services, government services, healthcare and utilities industries. TeleTech
targets clients in these industries because of their complex product and service
offerings and large customer bases, which require frequent, increasingly
sophisticated, customer interactions. For example, the Company has entered into
multiyear, multi-facility contracts with the U.S. Postal Service (the Postal
Service) and GTE Communications Corporation (GTE).
The Company was founded in 1982 and has been providing primarily inbound
customer management solutions since its inception. As of December 31, 1999,
TeleTech leased or managed a total of 29 customer interaction centers, 16
located in the United States, four in Canada, three in Australia and one each in
Argentina, Brazil, Mexico, New Zealand, Singapore and the United Kingdom,
equipped with a total of 11,908 state-of-the-art workstations. In 2000, the
Company plans to deploy five or six additional shared centers.
RECENT DEVELOPMENTS
During the first quarter 2000, the Company reached definitive agreement on
the formation of a joint venture with Ford Motor Company (Ford) to consolidate
Ford's customer contact centers around the globe. Under the terms of the
agreement, the Company holds a majority share of the new venture (55 percent).
It is anticipated that the venture will consolidate Ford's current worldwide
network of customer contact centers under a single partner with an integrated
central database that ultimately will enhance customers' total relationship with
Ford. The Company will utilize its CyberCare platform to integrate various
channels, including voice and Internet, into the venture's customer management
solution.
SERVICES
TeleTech offers fully integrated, eCommerce-enabling customer management
solutions encompassing strategy, infrastructure, education, technology and
marketing solutions. TeleTech works closely with its clients to rapidly design
and implement large-scale, tailored customer management programs that provide
comprehensive solutions to their specific business needs. An integral component
of TeleTech's service offering is strategic consulting, by which the Company
develops and applies improved processes to make a client's customer management
or product support processes more cost-effective, productive and valuable. At
the start of a potential new client relationship, TeleTech assesses the client's
existing capabilities; goals and strategies; customer management or product
support processes and related software, hardware and telecommunications systems;
training; real estate project development; and facilities management and
3
develops a tailored customer management solution based on its assessment. After
presenting a proposed solution and being awarded a contract, TeleTech works
closely with the client to further develop, refine and implement more efficient
and productive customer interaction processes and technological solutions that
link the customer, the client and TeleTech.
After the Company designs and develops a customer management program,
representatives provide a wide range of ongoing voice and Web-based
communications services incorporating one or more customer acquisition, service,
retention, satisfaction and loyalty programs. In a typical inbound customer
interaction, a customer calls a toll-free number or sends an Internet message to
request product, service or technical information or assistance. Upon receipt of
the call or Internet message, the representative's computer screen automatically
displays the client's specific product, service or technical information to
enable the representative to assist the customer.
Each customer interaction, even in its simplest form, presents TeleTech and
its clients with an opportunity to gather valuable customer information,
including the customer's demographic profile and preferences. This information
can prompt the representative to make logical, progressive inquiries about the
customer's interest in additional services, identify additional
revenue-generating and cross-selling opportunities, or resolve other customer
issues relating to a client's products or services.
TeleTech frequently provides several of the services listed below in an
integrated program tailored to its clients' needs:
CUSTOMER ACQUISITION PROGRAMS. Customer acquisition programs are designed
to secure new customers and can include a wide range of activities depending
upon the customer inquiry. A sampling of these services includes:
- providing presales product or service education;
- processing and fulfilling information requests for product or service
offerings;
- verifying sales and activating services;
- directing customers to product or service sources;
- receiving orders for and processing purchases of products or services; and
- providing initial post-sales support, including operating instructions for
new product or service use.
CUSTOMER SERVICE AND RETENTION PROGRAMS. Customer service and retention
programs are designed to maintain and extend the customer relationship and
maximize the long-term value of a client's relationships with its customers.
These programs generally are driven by the customer's purchase of a product or
service, or by the customer's need for ongoing help desk resources. The majority
of the Company's revenues are generated by the provision of customer service and
retention programs. A sampling of these services includes:
- providing technical help desk, product or service support;
- activating product or service upgrades;
- responding to billing and other account inquiries;
- resolving complaints and product or service problems;
- registering warranty information; and
- dispatching on-site service.
CUSTOMER SATISFACTION AND LOYALTY PROGRAMS. Customer satisfaction and
loyalty programs enable clients to learn from their customers, be more
responsive to customers' needs and concerns, and reward customers for their
continued patronage. A sampling of these services includes:
- responding to client promotional, affinity-building programs;
- developing and implementing client-branded loyalty programs;
4
- conducting satisfaction assessments;
- confirming receipt of promised products or services; and
- reserving and reconfirming reservations at product or service seminars.
MARKETS AND CLIENTS
TeleTech focuses its marketing efforts on large domestic, foreign and
multinational companies in the telecommunications, technology, government
services, financial services, transportation and healthcare industries, which
accounted for approximately 41%, 21%, 13%, 11%, 10% and 3%, respectively, of the
Company's revenues in 1999. The Company is also currently developing
opportunities in the utilities marketplace given the deregulation and
privatization taking place in the industry. Other industries, including
utilities, accounted for 1% of the Company's revenues in 1999. The Company's two
largest clients in 1999 were GTE and United Parcel Service which accounted for
approximately 27% and 10%, respectively, of the Company's revenues. TeleTech's
Strategic Business Units (SBUs) are responsible for developing and implementing
customized, industry-specific customer management solutions for clients in these
target industries. TeleTech's healthcare and utilities SBUs are still in the
development stage.
TELECOMMUNICATIONS. The telecommunications SBU primarily serves
long-distance, local and wireless telephone service providers, including GTE and
certain long distance and regional Bell operating companies. Services include
verifying long-distance service sales, responding to customer inquiries,
providing consumer and business telephone service account management and
providing ongoing product and service support. TeleTech believes that the
Telecommunications Act of 1996, which has removed barriers to competition in and
between the local and long-distance telephone markets within the United States,
and the development of new wireless products, including those utilizing personal
communication services (PCS) technology, are expanding the breadth of products
and services that require customer service and support and will create
additional demand for TeleTech's services within the telecommunications
industry.
TECHNOLOGY. The growth of high technology products and services, including
Internet-related products and services, has increased demand for consumer and
technical product support. TeleTech provides technical support to a number of
Internet Service Providers (ISPs), including GTE in the United States, and
several international ISPs. TeleTech intends to further utilize its
technological capabilities to serve customers over the Internet and is exploring
business opportunities related to new interactive media.
TRANSPORTATION. TeleTech's transportation SBU provides a variety of
services to clients in the package delivery and travel industries. Since 1996,
TeleTech has managed three customer interaction centers and provided customer
management on behalf of United Parcel Service, one of the nation's largest
parcel delivery companies. In February 1999, TeleTech was awarded a multiyear
contract from a Singapore-based airline to manage customer interactions for its
new frequent flyer program. This new relationship enabled TeleTech to launch its
first customer interaction center in Singapore.
FINANCIAL SERVICES. In February 2000, TeleTech was awarded a long-term
contract from a leading insurance company. Under this agreement, TeleTech's
licensed representatives will provide quotes and assist customers in the
purchase and modification of insurance policies across multiple channels.
TeleTech also provides comprehensive customer management solutions for several
leading financial services institutions, including a large Canadian insurance
company and two prominent North American providers of financial services. In
1999, TeleTech was awarded a multiyear contract to be the exclusive provider of
customer relationship management services across multiple media for a large
North American-based online bank. In addition, TeleTech provides customer
services for several large Australian banks from its customer interaction
centers in Australia and New Zealand. The Australian and New Zealand operations
also provide customer management solutions to customers of insurance companies
and automobile club clients.
5
GOVERNMENT SERVICES. TeleTech provides customer management services to the
United States Postal Service through two customer interaction centers, under a
facilities management contract awarded in 1997 and a fully-outsourced contract
awarded in August 1998.
HEALTHCARE. TeleTech provides customer management solutions on behalf of
healthcare providers located primarily in Australia and New Zealand. Services
include emergency and non-emergency medical information and referral services;
information and assistance to parents of newborns; information about drug
interventions; referrals to community support organizations such as home care,
child care and counseling options; and medical claims review services. The
Company provides these services to customers by means of telephone access to
registered nurses, counselors, pharmacists, medical librarians, dieticians and
other specially trained representatives.
SALES AND MARKETING
As most companies consider the customer management function to be strategic
in nature, the Company's business development personnel generally focus their
marketing efforts on potential clients' senior executives. For each SBU,
TeleTech hires business development personnel who have substantial industry
expertise and can identify and generate sales leads. TeleTech employs a
consultative approach in assessing the current and prospective needs of a
potential client. Following initial discussions with a potentially significant
client, a carefully chosen TeleTech team, usually composed of applications and
systems specialists, operations experts, human resources professionals and other
appropriate management personnel, thoroughly studies the client's operations.
The Company invests significant resources during the development of a
potentially large client relationship to understand the client's existing
customer management processes, culture, decision parameters and goals and
strategies. TeleTech assesses the client's customer management needs and, with
input from the client, develops and implements tailored customer management
solutions.
As a result of its consultative approach, TeleTech can identify new
revenue-generating opportunities, customer communication possibilities and
product or service improvements previously overlooked or not adequately
addressed by the client. TeleTech's technological capabilities enable it to
develop working prototypes of proposed customer management programs and to
rapidly implement strategic customer management solutions, generally with
minimal capital investment by the client.
TeleTech generally provides customer management solutions pursuant to
written contracts with terms ranging from one to seven years, which often
contain renewal or extension options. Under substantially all of its significant
contracts, TeleTech generates revenues based on the amount of time
representatives devote to a client's program. In addition, clients typically are
required to pay fees relating to TeleTech's education and training of
representatives to implement the client's program, setup and management of the
program, and development and integration of computer software and technology.
TeleTech typically negotiates a Client Services Agreement (CSA) with each of its
clients. The CSA generally contains provisions that (i) allow TeleTech or the
client to terminate the contract upon the occurrence of certain events,
(ii) designate the manner by which TeleTech is to receive payment for its
services, (iii) limit TeleTech's maximum liability to the client thereunder and
(iv) protect the confidentiality and ownership of information and materials
owned by TeleTech or the client that are used in connection with the performance
of the contract. Many of TeleTech's contracts also require the client to pay
TeleTech a contractually agreed amount in the event of early termination.
TeleTech's material contracts generally have terms of at least two years and, in
some cases, contain contractual provisions adjusting the amount of TeleTech's
fees if there are significant variances from estimated implementation expenses.
OPERATIONS
TeleTech provides its customer management services through the operation of
29 state-of-the-art customer interaction centers located in the United States,
Argentina, Australia, Brazil, Canada, Mexico,
6
New Zealand, Singapore and the United Kingdom. As of December 31, 1999, TeleTech
leased 24 customer interaction centers and also managed five customer
interaction centers on behalf of three clients. TeleTech expects to open five or
six new shared customer interaction centers in 2000. TeleTech has received
ISO 9002 certification for 11 of its U.S. customer interaction centers and for
three of its customer interaction centers in Australia and New Zealand. In
addition, TeleTech's Corporate Real Estate Organization has received ISO 9002
certification for its real estate services.
TeleTech uses standardized development procedures to minimize the time it
takes to open a new customer interaction center. The objectives of the Project
Delivery Process are to minimize costs, reduce cycle time (time-to-market), and
eliminate the effects that might compromise success. The Project Delivery
Process is comprised of eight phases that are further broken down into more than
130 individual tasks. Each step must fully support the general objectives of
reducing costs and optimizing cycle times, as well as more focused and
client-specific goals such as labor availability/cost, right-to-work status,
competition for employees from area call centers, economic incentives and
telecom infrastructure/cost.
The Company applies predetermined site selection criteria to identify
locations conducive to operating large-scale, sophisticated customer management
facilities in a cost-effective manner. TeleTech maintains current databases
covering demographic statistics on over 275 cities and availability of specific
properties that meet TeleTech's generic needs which are used to produce a
project-specific short list. The Company also aggressively pursues incentives
such as tax abatements, cash grants, low-interest loans, training grants and low
cost utilities. Following comprehensive site evaluations and cost analyses, a
specific site is located and a lease is negotiated and finalized. Thereafter,
the site is retrofitted to exacting requirements that incorporate value
engineering, cost control and schedule concepts while placing great emphasis on
the quality of the representative work environment. Upon completion, the Company
integrates the new customer interaction center into the corporate facility and
asset management programs. TeleTech conducts critical reviews of the Project
Delivery Process at each phase to evaluate effectiveness and efficiency. Because
of the effectiveness of the Project Delivery Process, TeleTech can establish a
new, fully operational inbound customer interaction center containing 450 or
more workstations within 90 to 120 days.
Customer interaction center capacity is determined both by geographical
analysis and site selection as well as complexity and type of customer
management programs provided. The Company's U.S.-leased, full-scale customer
interaction centers range in size from 31,000 to 90,000 square feet and contain
between 350 and 570 production workstations. Although the dimensions of its
existing customer interaction centers currently are not uniform, the Company has
developed a standardized technology and infrastructure platform for
TeleTech-leased customer interaction centers. The Company expects that new U.S.
customer interaction centers will contain approximately 50,000 to 65,000 square
feet of space and between 300 to 450 workstations.
CUSTOMER INTERACTION CENTER MANAGEMENT. TeleTech manages its U.S. customer
interaction centers through its Technology Command Center in Colorado (the
Command Center). The Command Center operates 24 hours a day, seven days a week,
and is responsible for monitoring, coordinating and managing TeleTech's U.S.
operations. Each U.S. customer interaction center is connected to the Command
Center and to other U.S. customer interaction centers through multiple
fiber-optic voice/data T-1 circuits to form an integrated and redundant wide
area network. This network connectivity provides a high level of security and
redundancy that is integral to TeleTech's ability to ensure recovery
capabilities in the event of a disaster or structural failure.
TeleTech also has established uniform operational policies and procedures to
ensure the consistent delivery of high-quality service at each customer
interaction center. These policies and procedures detail specific performance
standards, productivity and profitability objectives and daily administrative
routines designed to ensure efficient operation. All TeleTech customer
interaction centers are designed to operate 24 hours a day, seven days a week.
TeleTech believes that recruiting, training and managing full-time
7
representatives who are dedicated to a single client facilitate integration
between client and representative, enhance service quality and efficiency and
differentiate TeleTech from its competitors.
TeleTech utilizes a number of sophisticated applications designed to
minimize administrative burdens and maximize productivity. Such applications
include a proprietary representative performance system that tracks
representative activity at each workstation and a proprietary billing system
that tracks time spent on administration, training, data processing and other
processes conducted in support of client or internal tasks.
QUALITY ASSURANCE. TeleTech monitors and measures the quality and accuracy
of its customer interactions through a quality assurance department located at
each center. Each department evaluates, on a real-time basis, approximately 1%
of calls per day. TeleTech also has the capabilities to enable its clients to
monitor customer interactions as they occur. Quality assurance professionals
monitor customer interactions and simultaneously evaluate representatives
according to criteria mutually determined by the Company and the client.
Representatives are evaluated and provided with feedback on their performance on
a weekly basis and, as appropriate, recognized for superior performance or
scheduled for additional training and coaching.
TECHNOLOGY
The Company utilizes industry standard tools to create customized customer
relationship management solutions for its clients. These solutions enable the
Company to track the details of each customer interaction and consolidate
interaction information into a customer database that can be accessed and
referred to by representatives as they deliver services. TeleTech customer
interaction centers employ state-of-the-art technology that incorporates
Internet-enabled digital switching technology, object-oriented software,
relational database management systems, state-of-the-art interaction tracking
and workforce management systems, CTI, interactive voice response and voice
recognition. TeleTech's interaction routing technology enables customer requests
to be routed to the next available representative who has the appropriate
knowledge, skill, equipment and language sets. Interaction tracking and
workforce management systems generate and track historical volumes by client,
enabling the Company to schedule personnel efficiently to accommodate
fluctuations in customer interaction volume. TeleTech's technology base enables
it to provide single interaction resolution and decrease customer wait times,
thereby enhancing customer satisfaction.
TeleTech's applications use products developed by Microsoft, Oracle,
Genesys, Cisco, IBM and others. TeleTech has invested significant resources in
designing and developing industry-specific open-systems software applications
and tools. As a result, TeleTech maintains an extensive library of reusable,
object-oriented software code that is used by TeleTech's applications
development professionals to develop customized customer management software.
TeleTech's systems capture and record varieties of information obtained during
each customer interaction into relational databases for real-time, daily, weekly
or monthly reporting to clients. TeleTech runs its applications software on
open-system, client-server architecture that utilizes computer processors,
server components and hardware platforms produced by manufacturers such as
Compaq, Hewlett Packard, IBM and Sun Microsystems. TeleTech has and will
continue to invest significant resources into the development and implementation
of emerging customer management and technical support technologies.
TeleTech centers utilize "Universal Representative" workstations with
inbound, outbound, Internet and fax-back capabilities, the majority of which run
on Pentium-based computers. All workstations are PC-based and utilize CTI
technology, which connects the computer to a telephone switch allowing calls and
computer data to be transferred simultaneously. By using simple, intuitive
graphical user interfaces (GUIs), which substitute easy-to-understand graphics
for text, TeleTech enables its representatives to focus on assisting the
customer rather than on the technology and to obtain customer information using
8
significantly fewer keystrokes. The user-friendly interface also helps to
decrease training time and increase the speed of managing customer interactions.
During 1999 TeleTech launched its CyberCare online customer management
solution. CyberCare integrates TeleTech's best-of-breed software, systems
integration capabilities and customer care to enable companies to sell to and
service their customers on a very large scale anytime, anywhere, over any media.
The solution incorporates the full spectrum of Internet communications,
including custom e-mail response, chat and extensive Web co-browsing
capabilities. Whether a customer sends an e-mail, clicks an icon on a Web site
asking for immediate help or service or places a telephone call, CyberCare
routes the inquiry to a trained and technology-enabled TeleTech representative.
The representative uses TeleTech's proprietary customer management software
platform to perform a host of services, including personalized customer care,
billing and technical support, on-line sales, loyalty and affinity programs,
real-time product availability and delivery status, Web site support,
up-selling, cross-selling, and more.
During 1999 TeleTech completed the integration of many of its technology
acquisitions from 1998 into a global delivery organization. This organization
has completed many challenging solutions engagements integrating technologies
such as Web- and telephone-based, real-time transaction processing solutions,
complex interactive voice response integration with CORBA legacy environments
and Web-based distance learning solutions. Many of the projects have been
deployed on an international basis leveraging expertise gained in the US and
around the world to create world class solutions. The global delivery
organization has also established key alliances with external systems
integration organization to augment TeleTech resources and meet client demands
for rapid implementation.
During 1999 the TeleTech information technology group, in conjunction with
an outside consulting firm, executed a Year 2000 multiphased program to
inventory, assess, remediate and test its systems for Year 2000 compliance. The
consulting firm worked with full-time Company employees who were dedicated to
the Program. The assessments completed led to the need to migrate several human
resource- and payroll-oriented applications to Year 2000 compliant software,
upgrade several telephone switches and procure several hundred replacement
workstations. Analysis and testing of Company-generated software applications
were completed, and the turn of the century had no significant impact on the
Company. In addition, the impact on the Company related to third parties was
also insignificant.
HUMAN RESOURCES
TeleTech's success in recruiting, hiring and training large numbers of
skilled employees is critical to its ability to provide high quality customer
management solutions to its clients. TeleTech generally offers a competitive pay
scale, hires primarily full-time employees who are eligible to receive the full
range of employee benefits and provides employees with a clear, viable career
path.
TeleTech is committed to the continued education and development of its
employees and believes that providing TeleTech employees with access to new
learning opportunities produces job satisfaction, ensures a higher quality labor
force and fosters loyalty between TeleTech's employees and the clients they
serve. Before managing customer interactions, representatives receive from one
to five weeks of on-site training in TeleTech's or the client's training
facilities, coupled with online training and education through the Company's
Digital Creators subsidiary, to learn about the client's corporate culture,
specific product or service offerings, numerous media used in managing customer
interactions, and the customer management program that TeleTech and the client
will be undertaking. Representatives generally receive a minimum of six to eight
hours of ongoing training per month and often receive supplemental training as
needed to provide high quality customer service and product support.
As of December 31, 1999, TeleTech had approximately 14,000 representatives,
of which approximately 90% were full time. Although the Company's industry is
very labor-intensive and has experienced significant personnel turnover, the
Company seeks to manage employee turnover through proactive
9
initiatives. None of TeleTech's employees are subject to a collective bargaining
agreement, and TeleTech believes its relations with its employees are good.
INTERNATIONAL OPERATIONS
TeleTech operates four customer interaction centers in Canada; three
customer interaction centers in Australia; and one customer interaction center
in each of Argentina, Brazil, Mexico, New Zealand, Singapore and the United
Kingdom.
In May 1997, TeleTech acquired Telemercadeo Integral (TeleTech Mexico), a
Mexico-based provider of customer management services. TeleTech Mexico employs
more than 1,200 customer management representatives and provides services
including customer acquisition, support and satisfaction to major Mexican and
U.S. companies. In May of 2000 a new customer interaction center will be
deployed in the Mexican city of Leon. This expansion will allow TeleTech Mexico
to continue providing services to large Mexican companies as well as to aid U.S.
companies in serving their Spanish-speaking customers.
In 1998 and 1999, TeleTech entered four new countries through new client
relationships and acquisitions. In June 1998, TeleTech acquired EDM Electronic
Direct Marketing (EDM), one of Canada's largest providers of customer management
solutions to expand the Company's presence in Canada. EDM specializes in
software technical support, customer service, fulfillment, and outbound
telemarketing. In August 1998, TeleTech acquired Outsource Informatica, a
Brazilian customer management provider. Outsource specializes in customer
management and technical support for leading multinational and Brazilian
corporations in the technology, transportation and financial services
industries. In early 1999, TeleTech entered Singapore with the launch of a
customer loyalty program on behalf of a Singapore-based transportation client.
Finally, in 1999, TeleTech acquired Smart Call S.A. and Connect S.A., two
Argentine customer service and systems integration companies. Smart Call's
business focuses on customer care for large Argentine and multinational
corporations. Connect is a systems integration and IT support company that has
leveraged its relationships with Argentina's premier corporations to expand its
service offering into customer care.
A key component of the Company's growth strategy is to continue its
international expansion, which may include the acquisition of businesses with
products or technologies that extend or complement TeleTech's existing
businesses. From time to time, the Company engages in discussions regarding
restructuring, dispositions, acquisitions and other similar transactions. Any
such transaction could include, among other things, the transfer, sale or
acquisition of significant assets, businesses or interests, including joint
ventures, or the incurrence, assumption or refinancing of indebtedness, and
could be material to the financial condition and results of operations of the
Company. There is no assurance that any such discussions will result in the
consummation of any such transaction.
COMPETITION
The Company believes that it competes primarily with the in-house customer
relationship management operations of its current and potential clients.
TeleTech also competes with certain companies that provide customer relationship
management services on an outsourced basis, including APAC Customer Services,
Convergys Corporation, Precision Response Corporation, SITEL Corporation, Sykes
Enterprises Incorporated, TeleSpectrum Worldwide, Inc. and West TeleServices
Corporation. TeleTech competes primarily on the basis of quality and scope of
services provided, speed and flexibility of implementation, and technological
expertise. Although the customer relationship management industry is very
competitive and highly fragmented with numerous small participants, management
believes that TeleTech generally does not directly compete with traditional
telemarketing companies, which provide primarily outbound "cold calling"
services.
10
FORWARD LOOKING INFORMATION MAY PROVE INACCURATE
Some of the information presented in this Annual Report on Form 10-K
constitutes "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. These forward-looking statements
include, but are not limited to, statements that include terms such as "may,"
"will," "intend," "anticipate," "estimate," "expect," "continue," "believe,"
"plan," or the like, as well as all statements that are not historical facts.
Forward-looking statements are inherently subject to risks and uncertainties
that could cause actual results to differ materially from current expectations.
Although TeleTech believes its expectations are based on reasonable assumptions
within the bounds of its knowledge of its business and operations, there can be
no assurance that actual results will not differ materially from expectations.
Factors that could cause actual results to differ from expectations include:
RELIANCE ON A FEW MAJOR CLIENTS. The Company strategically focuses its
marketing efforts on developing long-term relationships with large and
multinational companies in targeted industries. As a result, the Company derives
a substantial portion of its revenues from relatively few clients. There can be
no assurance that the Company will not become more dependent on a few
significant clients, that the Company will be able to retain any of its largest
clients, that the volumes or profit margins of its most significant programs
will not be reduced, or that the Company would be able to replace such clients
or programs with clients or programs that generate a comparable amount of
profits. Consequently, the loss of one or more of the Company's significant
clients could have a material adverse effect on the business, results of
operations or financial condition of the Company.
RISKS ASSOCIATED WITH THE COMPANY'S CONTRACTS. The Company's contracts do
not ensure that it will generate a minimum level of revenues, and the
profitability of each client program may fluctuate, sometimes significantly,
throughout the various stages of such program. Although the Company seeks to
sign multiyear contracts with its clients, the Company's contracts generally
enable the clients to terminate the contract, or terminate or reduce customer
interaction volumes, on relatively short notice. Although many of such contracts
require the client to pay a contractually agreed amount in the event of early
termination, there can be no assurance that the Company will be able to collect
such amount or that such amount, if received, will sufficiently compensate the
Company for its investment in the canceled program or for the revenues it may
lose as a result of the early termination. The Company usually is not designated
as its client's exclusive service provider; however, the Company believes that
meeting its clients' expectations can have a more significant impact on revenues
generated by the Company than the specific terms of its client contracts. In
addition, some of the Company's contracts limit the aggregate amount the Company
can charge for its services, and several prohibit the Company from providing
services to the client's direct competitor that are similar to the services the
Company provides to such client.
RISKS ASSOCIATED WITH COST AND PRICE INCREASES A few of the Company's
contracts allow the Company to increase its service fees if and to the extent
certain cost or price indices increase; however, most of the Company's
significant contracts do not contain such provisions and some contracts require
the Company to decrease its service fees if, among other things, the Company
does not achieve certain performance objectives. Increases in the Company's
service fees that are based upon increases in cost or price indices may not
fully compensate the Company for increases in labor and other costs incurred in
providing services.
DIFFICULTIES OF MANAGING CAPACITY UTILIZATION. The Company's profitability
is influenced significantly by its customer interaction center capacity
utilization. The Company attempts to maximize utilization; however, because
almost all of the Company's business is inbound, the Company has significantly
higher utilization during peak (weekday) periods than during off-peak (night and
weekend) periods. The Company has experienced periods of excess capacity,
particularly in its shared customer interaction centers, and occasionally has
accepted short-term assignments to utilize the excess capacity. In addition, the
Company has experienced, and in the future may experience, at least short-term,
excess peak period capacity when it opens a new customer interaction center or
terminates or completes a large client
11
program. There can be no assurance that the Company will be able to achieve or
maintain optimal customer interaction center capacity utilization.
DIFFICULTIES OF MANAGING RAPID GROWTH. The Company has experienced rapid
growth over the past several years. Continued future growth will depend on a
number of factors, including the Company's ability to (i) initiate, develop and
maintain new client relationships and expand its existing client programs;
(ii) recruit, motivate and retain qualified management and hourly personnel;
(iii) rapidly identify, acquire or lease suitable customer interaction center
facilities on acceptable terms and complete buildouts of such facilities in a
timely and economic fashion; and (iv) maintain the high quality of the services
and products that it provides to its clients. There can be no assurance that the
Company will be able to effectively manage its expanding operations or maintain
its profitability. If the Company is unable to effectively manage its growth,
its business, results of operations or financial condition could be materially
adversely affected.
RISKS ASSOCIATED WITH RAPIDLY CHANGING TECHNOLOGY. The Company's business
is highly dependent on its computer and telecommunications equipment and
software capabilities. The Company's failure to maintain the superiority of its
technological capabilities or to respond effectively to technological changes
could have a material adverse effect on the Company's business, results of
operations or financial condition. The Company's continued growth and future
profitability will be highly dependent on a number of factors, including the
Company's ability to (i) expand its existing service offerings; (ii) achieve
cost efficiencies in the Company's existing customer interaction center
operations; and (iii) introduce new services and products that leverage and
respond to changing technological developments. There can be no assurance that
technologies or services developed by the Company's competitors will not render
the Company's products or services non-competitive or obsolete, that the Company
can successfully develop and market any new services or products, that any such
new services or products will be commercially successful or that the integration
of automated customer support capabilities will achieve intended cost
reductions.
DEPENDENCE ON KEY PERSONNEL. Continued growth and profitability will depend
upon the Company's ability to maintain its leadership infrastructure by
recruiting and retaining qualified, experienced executive personnel. Competition
in the Company's industry for executive-level personnel is fierce and there can
be no assurance that the Company will be able to hire, motivate and retain
highly effective executive employees, or that the Company can do so on
economically feasible terms.
DEPENDENCE ON LABOR FORCE. The Company's success is largely dependent on
its ability to recruit, hire, train and retain qualified employees. The
Company's industry is very labor-intensive and has experienced high personnel
turnover. A significant increase in the Company's employee turnover rate could
increase the Company's recruiting and training costs and decrease operating
effectiveness and productivity. Also, if the Company obtains several significant
new clients or implements several new, large-scale programs, it would be
required to recruit, hire and train qualified personnel at an accelerated rate.
The Company may not be able to continue to hire, train and retain sufficient
qualified personnel to adequately staff new customer management programs.
Because a significant portion of the Company's operating costs relate to labor
costs, an increase in wages, costs of employee benefits or employment taxes
could have a material adverse effect on the Company's business, results of
operations or financial condition. In addition, certain of the Company's
customer interaction centers are located in geographic areas with relatively low
unemployment rates, which could make it more difficult and costly to hire
qualified personnel.
HIGHLY COMPETITIVE MARKET. The Company believes that the market in which it
operates is fragmented and highly competitive and that competition is likely to
intensify in the future. The Company competes with small firms offering specific
applications, divisions of large entities, large independent firms and, most
significantly, the in-house operations of clients or potential clients. A number
of competitors have or may develop greater capabilities and resources than those
of the Company. Similarly, there can be no assurance
12
that additional competitors with greater resources than the Company will not
enter the Company's market. Because the Company's primary competitors are the
in-house operations of existing or potential clients, the Company's performance
and growth could be adversely affected if its existing or potential clients
decide to provide in-house customer management services that currently are
outsourced, or retain or increase their in-house customer service and product
support capabilities. In addition, competitive pressures from current or future
competitors also could cause the Company's services to lose market acceptance or
result in significant price erosion, with a material adverse effect upon the
Company's business, results of operations or financial condition.
DIFFICULTIES OF COMPLETING AND INTEGRATING ACQUISITIONS AND JOINT
VENTURES. One component of the Company's growth strategy is to pursue strategic
acquisitions of companies that have services, technologies, industry
specializations or geographic coverage that extend or complement the Company's
existing business. There can be no assurance that the Company will be successful
in acquiring such companies on favorable terms or in integrating such companies
into the Company's existing businesses, or that any completed acquisition will
enhance the Company's business, results of operations or financial condition.
The Company has faced, and in the future may continue to face, increased
competition for acquisition opportunities, which may inhibit the Company's
ability to consummate suitable acquisitions on favorable terms. The Company may
require additional debt or equity financing for future acquisitions, which
financing may not be available on terms favorable to the Company, if at all. As
part of its growth strategy, the Company also may pursue strategic alliances in
the form of joint ventures. Joint ventures involve many of the same risks as
acquisitions, as well as additional risks associated with possible lack of
control of the joint ventures.
RISK OF BUSINESS INTERRUPTION. The Company's operations are dependent upon
its ability to protect its customer interaction centers, computer and
telecommunications equipment and software systems against damage from fire,
power loss, telecommunications interruption or failure, natural disaster and
other similar events. In the event the Company experiences a temporary or
permanent interruption at one or more of its customer interaction centers,
through casualty, operating malfunction or otherwise, the Company's business
could be materially adversely affected and the Company may be required to pay
contractual damages to some clients or allow some clients to terminate or
renegotiate their contracts with the Company. The Company maintains property and
business interruption insurance; however, such insurance may not adequately
compensate the Company for any losses it may incur.
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS AND EXPANSION. The Company
currently conducts business in Argentina, Australia, Brazil, Canada, Mexico, New
Zealand, Singapore and the United Kingdom. In addition, a key component of the
Company's growth strategy is continued international expansion. There can be no
assurance that the Company will be able to (i) increase its market share in the
international markets in which the Company currently conducts business and
(ii) successfully market, sell and deliver its services in additional
international markets. In addition, there are certain risks inherent in
conducting international business, including exposure to currency fluctuations,
longer payment cycles, greater difficulties in accounts receivable collection,
difficulties in complying with a variety of foreign laws, unexpected changes in
regulatory requirements, difficulties in managing capacity utilization and in
staffing and managing foreign operations, political instability and potentially
adverse tax consequences. Any one or more of such factors could have a material
adverse effect on the Company's international operations and, consequently, on
the Company's business, results of operations or financial condition.
VARIABILITY OF QUARTERLY OPERATING RESULTS. The Company has experienced and
could continue to experience quarterly variations in revenues as a result of a
variety of factors, many of which are outside the Company's control. Such
factors include the timing of new contracts; labor strikes and slowdowns;
reductions or other modifications in its clients' marketing and sales
strategies; the timing of new product or service offerings; the expiration or
termination of existing contracts or the reduction in existing programs; the
timing of increased expenses incurred to obtain and support new business;
changes in the revenue mix
13
among the Company's various service offerings; and the seasonal pattern of
certain of the businesses serviced by the Company. In addition, the Company
makes decisions regarding staffing levels, investments and other operating
expenditures based on its revenue forecasts. If the Company's revenues are below
expectations in any given quarter, its operating results for that quarter would
likely be materially adversely affected.
DEPENDENCE ON KEY INDUSTRIES. The Company generates a majority of its
revenues from clients in the telecommunications, technology, transportation,
financial services and government services industries. The Company's growth and
financial results are largely dependent on continued demand for the Company's
services from clients in these industries and current trends in such industries
to outsource certain customer management services. A general economic downturn
in any of these industries or a slowdown or reversal of the trend in any of
these industries to outsource certain customer management services could have a
material adverse effect on the Company's business, results of operations or
financial condition. The Company also provides services to clients in the
healthcare and utilities industries; however, these SBUs are still in the
development stage and there can be no assurance that the Company can
successfully develop them.
DEPENDENCE ON THE SUCCESS OF ITS CLIENTS' PRODUCTS. In substantially all of
its client programs, the Company generates revenues based, in large part, on the
amount of time that the Company's personnel devotes to a client's customers.
Consequently, and due to the inbound nature of the Company's business, the
amount of revenues generated from any particular client program is dependent
upon consumers' interest in, and use of, the client's products and/or services.
Furthermore, a significant portion of the Company's expected revenues and
planned capacity utilization relate to recently introduced product or service
offerings of the Company's clients. There can be no assurance as to the number
of consumers who will be attracted to the products and services of the Company's
clients and who will therefore need the Company's services, or that the
Company's clients will develop new products or services that will require the
Company's services.
You should not construe these cautionary statements as an exhaustive list.
TeleTech cannot always predict what factors would cause actual results to differ
materially from those indicated by its forward-looking statements. All
cautionary statements should be read as being applicable to all forward-looking
statements wherever they appear. TeleTech does not undertake any obligation to
publicly update or revise any forward-looking statements, whether as a result of
new information, future events or otherwise. In light of these risks,
uncertainties and assumptions, the forward-looking events discussed herein might
not occur.
14
ITEM 2. PROPERTIES.
TeleTech's corporate headquarters are located in Denver, Colorado, in
approximately 39,000 square feet of leased office space. As of December 31,
1999, TeleTech leased (unless otherwise noted) and operated the following
customer interaction centers:
YEAR NUMBER OF TOTAL
OPENED PRODUCTION NUMBER OF TRAINING NUMBER OF
LOCATION OR ACQUIRED WORKSTATIONS WORKSTATIONS(1) WORKSTATIONS
- -------- ----------- ------------ ------------------ ------------
U.S. OUTSOURCED CENTERS
Birmingham, Alabama....................... 1999 450 125 575
Burbank, California....................... 1995 416 60 476
Enfield, Connecticut...................... 1998 322(2) 60 382
Kansas City, Kansas....................... 1998 500 230 730
Moundsville, West Virginia................ 1998 400 104 504
Niagara Falls, New York................... 1997 570 96 666
Sherman Oaks, California.................. 1985 350 48 398
Thornton, Colorado, Center 1(3)........... 1996 572 100 672
Thornton, Colorado, Center 2(3)........... 1996 415 20 435
Topeka, Kansas............................ 1999 510 100 610
Uniontown, Pennsylvania................... 1998 570 80 650
Van Nuys, California...................... 1996 355 38 393
INTERNATIONAL OUTSOURCED CENTERS
Auckland, New Zealand..................... 1996 277 45 322
Buenos Aires, Argentina................... 1999 471 36 507
Casebridge, Canada........................ 1998 74 0 74
Glasgow, Scotland......................... 1996 300 20 320
Melbourne, Australia...................... 1997 367 36 403
Mexico City, Mexico(4).................... 1997 1,050 96 1,146
Perth, Australia.......................... 1999 48 12 60
Sao Paulo, Brazil......................... 1998 137 0 137
Sheppard, Canada.......................... 1998 245 18 263
Sudbury, Ontario.......................... 1999 350 60 410
Sydney, Australia......................... 1996 325 32 357
Tampines, Singapore....................... 1998 68 20 88
MANAGED CENTERS(5)
Greenville, South Carolina................ 1996 611 105 716
Montbello, Colorado....................... 1996 500 182 682
Tampa, Florida............................ 1996 601 90 691
Toronto, Canada........................... 1998 400 80 480
Tucson, Arizona........................... 1996 654 90 744
Total number of workstations.............. 11,908 1,983 13,891
- ------------------------
(1) Training workstations are fully operative as production workstations should
the Company require additional capacity.
(2) The Enfield customer interaction center is expected to have 450 seats when
fully operational.
(3) TeleTech operates each floor in the Thornton facility as an independent
customer interaction center, and each of Thornton center 1 and Thornton
center 2 employs its own management and representatives.
15
(4) In May of 2000 a new customer interaction center will be completed in Leon,
Mexico.
(5) Centers are leased or owned by TeleTech's clients, and managed by TeleTech
on behalf of such clients pursuant to facilities management agreements.
The leases for TeleTech's U.S. customer interaction centers have terms
ranging from one to 15 years and generally contain renewal options. The Company
believes that its existing customer interaction centers are suitable and
adequate for its current operations and targets capacity utilization in its
fully outsourced centers at 85% of its available workstations during peak
(weekday) periods. In 1999, the Company deployed two dedicated centers in the
United States: one in Topeka, Kansas; and a second in Birmingham, Alabama.
Additionally in 1999, the Company deployed shared centers in Perth, Australia;
Buenos Aires, Argentina; and Sudbury, Ontario, Canada. Plans for 2000 include
five or six additional shared centers.
Due to the inbound nature of the Company's business, the Company experiences
significantly higher capacity utilization during peak periods than during
off-peak (night and weekend) periods. The Company may be required to open or
expand customer interaction centers to create the additional peak period
capacity necessary to accommodate new or expanded customer management programs.
The opening or expansion of a customer interaction center may result, at least
in the short term, in excess capacity during peak periods until any new or
expanded program is implemented fully.
ITEM 3. LEGAL PROCEEDINGS.
In July 1999, the Company reached a settlement with CompuServe whereby the
Company would receive $12.0 million of which $5.5 million was received on
August 10, 1999, and the remainder was paid in the fourth quarter of 1999. (See
Note 8 of "Notes to Consolidated Financial Statements").
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.
16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the Company's stockholders during the
fourth quarter of its fiscal year ended December 31, 1999.
EXECUTIVE OFFICERS OF TELETECH HOLDINGS, INC.
In accordance with General Instruction G(3) of this Form 10-K, the following
information is included as an additional item in Part I:
DATE
POSITION
NAME POSITION AGE ASSUMED
- ---- ------------------------------------------------ -------- --------
Scott D. Thompson(1).......... Chief Executive Officer and President 43 1999
Richard S. Erickson(2)........ Senior Vice President and General Manager of 38 1997
Customer Interaction Management
Michael E. Foss(3)............ Chief Financial Officer and President of the 42 1999
TeleTech Companies Group
James B. Kaufman(4)........... Senior Vice President, General Counsel and 38 1999
Secretary
Joseph D. Livingston(5)....... Executive Vice President--Office of 55 1992
CEO/President
- ------------------------
(1) Before joining TeleTech in October, 1999, Mr. Thompson served as President
of the Netcare Professional Services Division of Lucent Technologies. Prior
to Lucent, Mr. Thompson was Executive Vice President of Global Integration
Services for Ascend Communications, which was acquired by Lucent in 1999.
Before joining Ascend in 1998, Mr. Thompson was Vice President of Global
Service and Solutions for Compaq Computer Corporation, President of Tandem's
Global Services Division and President and General Manager of Tandem's
Asia/Pacific operations.
(2) Before joining TeleTech in 1997, Mr. Erickson served in a variety of
customer service and operations strategy positions at
TeleCommunications, Inc. (TCI) including Chief Operating Officer of a call
center joint venture between TCI and Primestar Satellite, Inc. Before
joining TCI in 1995, Mr. Erickson held numerous sales, marketing, and
customer service positions at MCI Telecommunications, including Director of
Customer Retention Marketing, Director of Operator Services, and Executive
Director of Mass Markets Customer Service with responsibility for 12 call
centers and 5,000 employees, nationwide.
(3) Before joining TeleTech in 1999, Mr. Foss served as Chief Executive Officer
of Picture Vision, Inc., a subsidiary of Eastman Kodak that focused on
Internet imaging. Mr. Foss was also General Manager of Online Digital
Services and Vice President of Consumer Imaging for Kodak. Prior to this
position, Michael was General Manager of Components, Services and Media for
Kodak's Business Imaging Systems Division. Before joining Kodak, Michael
served as Vice President and Chief Financial Officer for Rally's and held
numerous positions with IBM, including Director of Financial Planning,
Worldwide Sales and Services, and Director of Corporate Treasury Operations.
(4) Before joining TeleTech in 1999, Mr. Kaufman served as Vice President--Law
at Orion Network Systems (renamed Loral Cyberstar following its acquisition
by Loral Space & Communications in March 1998), an international
satellite-based communications company. Before joining Orion in 1994,
Mr. Kaufman was engaged in private law practice, most recently with
Proskauer Rose, a national law firm with more than 500 attorneys.
(5) Mr. Livingston has been with TeleTech since February 1992 in various
capacities, including Chief Operating Officer and Vice President of
Operations and Technology. From 1989 to 1992, Mr. Livingston was the
director of MIS Systems & Operations of Livestone Corporation, a division of
American Eastern Securities, and from 1985 to 1989 he was employed by
Coopers & Lybrand LLP, an international accounting firm, as Director of West
Region MIS and Strategic Management Services for International Business.
17
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's common stock is traded on the Nasdaq Stock Market under the
symbol "TTEC." The following table sets forth the range of the high and low
closing sale prices of the common stock for the fiscal quarters indicated as
reported on the Nasdaq Stock Market:
HIGH LOW
----------- ------------
First Quarter 1998.......................................... 14 1/2 8 1/2
Second Quarter 1998......................................... 17 12
Third Quarter 1998.......................................... 12 6 3/8
Fourth Quarter 1998......................................... 11 3/8 8
First Quarter 1999.......................................... 12 1/8 5 9/16
Second Quarter 1999......................................... 10 1/8 5 5/8
Third Quarter 1999.......................................... 14 3/8 9 7/8
Fourth Quarter 1999......................................... 34 1/16 11 13/16
As of December 31, 1999, there were 61,823,645 shares of common stock
outstanding, held by approximately 125 shareholders of record, representing what
the Company believes to be approximately 5,600 beneficial owners.
TeleTech did not declare or pay any dividends on its common stock in 1999
and it does not expect to do so in the foreseeable future. Management
anticipates that all cash flow generated from operations in the foreseeable
future will be retained and used to develop and expand TeleTech's business. Any
future payment of dividends will depend upon TeleTech's results of operations,
financial condition, cash requirements and other factors deemed relevant by the
board of directors.
In March 1999, the Company issued 285,711 restricted shares of common stock
to the following persons in consideration for the acquisition of all of the
outstanding shares of Pamet River, Inc. in an offering exempt under
Section 4(2) of the Securities Act of 1933 (the Securities Act):
NUMBER OF SHARES
----------------
Morton H. Meyerson.......................................... 94,350
Roger Kennedy............................................... 21,492
Paul Klingenstein........................................... 12,924
Prosper Partners............................................ 8,568
Vin Cipolla................................................. 47,022
Arthur Ivey................................................. 72,068
Steven Cousineau............................................ 7,889
Thomas McDonald............................................. 12,534
Marian Dunshee.............................................. 4,384
Bruno Henry................................................. 4,480
18
ITEM 6. SELECTED FINANCIAL DATA.
The following selected financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Financial Statements and the related notes appearing
elsewhere in this report. The financial information for years prior to 1998 has
been restated to reflect the June 1998 business combinations with EDM Electronic
Direct Marketing Ltd. and Digital Creators, Inc., accounted for using the
pooling of interests method of accounting.
YEAR ENDED DECEMBER 31,
----------------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
STATEMENT OF OPERATIONS DATA:
Revenues................................. $54,933 $171,265 $279,057 $369,045 $509,268
Costs of services...................... 30,941 104,142 178,702 241,230 339,946
SG&A expenses.......................... 19,230 43,504 67,208 96,077 127,758
------- -------- -------- -------- --------
Income from operations................... 4,762 23,619 33,147 31,738 41,564
Other income (expense)................... 2,468(1) 18 2,310 159(2) 6,851(3)
Provision for income taxes............... 2,992 9,773 14,123 12,695 19,325
------- -------- -------- -------- --------
Net income............................... $ 4,238(1) $ 13,864 $ 21,334 $ 19,202 $ 29,090
======= ======== ======== ======== ========
Net income per share:
Basic.................................. $ 0.08(1) $ 0.25 $ 0.37 $ 0.32 $ 0.48
Diluted................................ $ 0.08(1) $ 0.24 $ 0.35 $ 0.31 $ 0.46
Average shares outstanding:
Basic.................................. 52,624 54,522 58,435 59,950 61,183
Diluted................................ 55,882 58,152 61,646 62,052 63,406
OPERATING DATA:
Number of production workstations........ 1,040 5,600 6,800 9,400 11,900
Number of customer interaction centers... 5 16 20 24 29
BALANCE SHEET DATA:
Working capital surplus.................. $11,305 $ 88,511 $ 81,750 $ 63,145 $ 81,737
Total assets............................. 30,583 147,011 192,367 230,910 293,730
Long-term debt, net of current portion... 3,590 10,144 9,891 6,353 25,166
Total stockholders' equity............... 4,068 108,530 138,252 165,493 205,036
- ------------------------
(1) Includes the $2.4 million pretax net proceeds of a one-time payment made by
a former client to TeleTech in connection with such client's early
termination of a contract.
(2) Includes $1.3 million of business combination expenses relating to the
pooling of interests transactions.
(3) Includes $6.7 million pretax net proceeds of a one-time contract settlement
payment made by a former client.
19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
SPECIAL NOTE: Certain statements set forth below under this caption
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. See "Forward-Looking Information May
Prove Inaccurate" on page 11 for additional factors relating to such statements.
OVERVIEW
TeleTech generates its revenues primarily by providing customer management
solutions, both from TeleTech-leased customer interaction centers (fully
outsourced) and client-owned customer interaction centers (facilities
management). The Company's fully outsourced customer interaction centers are
utilized to serve either multiple clients (shared centers) or one dedicated
client (dedicated centers). The Company currently has dedicated centers only in
the United States. The Company bills for its services based primarily on the
amount of time TeleTech representatives devote to a client's program, and
revenues are recognized as services are provided. The Company also derives
revenues from consulting services, including the sale of customer interaction
center and customer management technology, automated customer support, database
management, systems integration, Web-based applications and distance-based
learning and education. These consulting and technology revenues historically
have not been a significant component of the Company's revenues. The Company
seeks to enter into multiyear contracts with its clients that cannot be
terminated for convenience except upon the payment of a contractually agreed
amount. The majority of the Company's revenues are, and the Company anticipates
that the majority of its future revenues will continue to be, from multiyear
contracts. However, the Company does provide some programs on a short-term
basis.
TeleTech's profitability is significantly influenced by its customer
interaction center capacity utilization. The Company seeks to optimize new and
existing capacity utilization during both peak (weekday) and off-peak (night and
weekend) periods to achieve maximum fixed cost absorption. Historically, the
majority of the Company's revenues have been generated during peak periods.
TeleTech may be adversely impacted by excess capacity in its fully outsourced
centers if prior to the opening or expansion of a customer interaction center,
the Company has not contracted for the provision of services or if a client
program does not reach its intended level of operations on a timely basis. In
addition, the Company can also be adversely impacted by excess capacity in its
facilities management contracts. In a facilities management contract, the
Company does not incur the costs of the facilities and equipment; however, the
costs of the management team supporting the customer interaction center are
semifixed in nature, and absorption of these costs will be negatively impacted
if the customer interaction center has idle capacity. The Company attempts to
plan the development and opening of new customer interaction centers to minimize
the financial impact resulting from excess capacity. In planning the opening of
new centers or the expansion of existing centers, management considers numerous
factors that affect its capacity utilization, including anticipated expirations,
reductions, terminations or expansions of existing programs, and the size and
timing of new client contracts that the Company expects to obtain. The Company
continues to concentrate its marketing efforts toward obtaining larger, more
complex, strategic customer management programs. As a result, the time required
to negotiate and execute an agreement with the client can be significant. To
enable the Company to respond rapidly to changing market demands, implement new
programs and expand existing programs, TeleTech may be required to commit to
additional capacity prior to the contracting of additional business, which may
result in excess capacity. TeleTech targets capacity utilization in its fully
outsourced centers at 85% of its available workstations during the weekday
period.
The Company was adversely impacted by excess capacity in its fully
outsourced centers during late 1997, 1998 and 1999 that has resulted in a
decline in operating margins from those achieved during 1997. During 1998 and
1999, the Company experienced excess capacity in newly constructed shared
centers in Moundsville, West Virginia; Uniontown, Pennsylvania; and Mexico City,
which were completed prior to the contracting of minimum targeted revenue.
Capacity utilization was also adversely affected in the second half of 1997 and
throughout 1998 when one of the Company's telecommunications clients
20
significantly reduced the number of customer interactions managed by the Company
for this client. The Company also has incurred reduced operating margins in 1998
and 1999 on one of its significant facilities management contracts due to
reduced volumes and excess capacity in certain centers operated by the Company.
However, this trend has reversed, and based on capacity and existing client
commitments as of December 31, 1999, the Company believes its existing capacity
may not be sufficient. As a result, in 2000, the Company plans to deploy five or
six new shared centers.
The Company records costs specifically associated with client programs as
costs of services. These costs, which include direct labor wages and benefits,
telecommunication charges and certain facility costs, are primarily variable in
nature. Labor costs represent in excess of 80% of costs of services. All other
expenses of operations, including technology support, depreciation and
amortization, sales and marketing, human resource management and other
administrative functions and customer interaction center operational expenses
that are not allocable to specific programs, are recorded as selling, general
and administrative (SG&A) expenses. SG&A expenses tend to be either semivariable
or fixed in nature. The majority of the Company's operating expenses have
consisted of labor costs. Representative wage rates, which comprise the majority
of the Company's labor costs, have been and are expected to continue to be a key
component of the Company's expenses. A significant portion of the Company's
contracts with its clients contain clauses allowing adjustment of billing rates
in accordance with wage inflation.
The cost characteristics of TeleTech's fully outsourced programs differ
significantly from the cost characteristics of its facilities management
programs. Under facilities management programs, customer interaction centers and
the related equipment are owned by the client but are staffed and managed by
TeleTech. Accordingly, facilities management programs have higher costs of
services as a percentage of revenues and lower SG&A expenses as a percentage of
revenues than fully outsourced programs. As a result, the Company expects its
overall gross margin will continue to fluctuate on a quarter-to-quarter basis as
revenues attributable to fully outsourced programs vary in proportion to
revenues attributable to facilities management programs. Management believes the
Company's operating margin, which is income from operations expressed as a
percentage of revenues, is a better measure of "profitability" on a
period-to-period basis than gross margin. Operating margin may be less subject
to fluctuation as the proportion of the Company's business portfolio
attributable to fully outsourced programs versus facilities management programs
changes. Revenue from facilities management contracts represented 30%, 23% and
19% of consolidated revenues in 1997, 1998 and 1999, respectively. Based on
sales pipeline data as of December 31, 1999, the Company expects its facilities
management programs to continue to decline as a percentage of overall revenues.
The Company has used business combinations and acquisitions to expand the
Company's international customer management operations and to obtain
complementary technology solution offerings. The following is a summary of this
activity.
INTERNATIONAL OPERATIONS:
CONSIDERATION
------------------------
LOCATIONS SHARES CASH DATE
------------------------ --------- ------------ ---------------------
Smart Call, S.A. & Connect, S.A.......... Buenos Aires, Argentina -- $5.0 million March & October 1999
Outsource Informatica, Ltda.............. Sao Paulo, Brazil 606,343 -- August 1998
EDM Electronic Direct Marketing Ltd...... Toronto, Ontario, Canada 1,783,444 -- June 1998
Telemercadeo Integral, S.A............... Mexico City, Mexico 100,000 $2.4 million May 1997
TeleTech International Pty Limited....... Sydney, Australia, and 970,240 $2.3 million January 1996
Auckland, New Zealand
21
TECHNOLOGY AND SERVICES:
CONSIDERATION
------------------------
COMPANY DESCRIPTION SHARES CASH DATE
-------------------------------------- --------- ------------ --------------
Pamet River, Inc................. Database marketing and consulting 285,711 $1.8 million March 1999
Cygnus Computer Associates....... Provider of systems integration and 324,744 $0.7 million December 1998
call center software solutions
Digital Creators, Inc............ Developer of Web-based applications 1,069,000 -- June 1998
and distance-based learning and
education
Intellisystems, Inc.............. Developer of automated product support 344,487 $2.0 million February 1998
systems
RESULTS OF OPERATIONS
The following table sets forth certain income statement data as a percentage
of revenues:
1997 1998 1999
-------- -------- --------
Revenues........................................ 100.0% 100.0% 100.0%
Costs of services............................... 64.0 65.4 66.8
SG&A expenses................................... 24.1 26.0 25.1
Income from operations.......................... 11.9 8.6 8.2
Other income.................................... 0.8 -- 1.4
Provision for income taxes...................... 5.1 3.4 3.8
Net income...................................... 7.6 5.2 5.7
1999 COMPARED TO 1998
REVENUES. Revenues increased $140.2 million, or 38%, to $509.3 million in
1999 from $369.0 million in 1998. The revenue increase resulted from
$22.3 million in revenues from new clients and $140.8 million in increased
revenues from existing clients. These increases were offset in part by contract
expirations and other client reductions. On a segment basis, outsourced revenue
increased 49.3% to $299.4 million in 1999 from $200.5 million in 1998. The
increase resulted from $22.3 million in revenues from new clients and
$111.9 million in increased revenues from existing clients offset in part by
contract expirations and other client reductions. Revenues for 1999 include
approximately $94.5 million from facilities management contracts, an increase of
10.2%, as compared with $85.7 million during 1998, resulting from increased
number of customer interactions. International outsourced revenues increased
27.7% to $94.6 million in 1999 from $74.1 million in 1998. The increase in
international outsourced revenues resulting from the 1999 Argentina acquisitions
of Smart Call, S.A. and Connect, S.A. was $6.6 million. The remaining increase
resulted primarily from continued expansion in the Company's Mexican and
Australian operations. These increases were offset by reductions in revenue in
the Company's Canadian operations resulting from the expiration of a client
contract. Revenues from corporate activities consist of consulting services,
automated customer support, database management, systems integration, Web-based
applications and distance-based learning and education. These revenues totaled
$20.8 million in 1999, an increase of $12.0 million from $8.8 million in 1998.
Approximately $8.4 million of this increase resulted from the Cygnus acquisition
in December 1998 and the Pamet acquisition in 1999.
COSTS OF SERVICES. Costs of services increased $98.7 million, or 40.9%, to
$339.9 million in 1999 from $241.2 million in 1998. Costs of services as a
percentage of revenues increased from 65.4% in 1998 to 66.8% in 1999. This
increase in costs of services as a percentage of revenues is primarily the
result of reduced margins in two of the Company's facilities management
contracts in 1999 and gross margin being favorably impacted by a non-recurring
technology sale in 1998. These factors more than offset the costs of services
benefit resulting from the decline in the percentage of revenues generated from
facilities management programs.
22
SELLING, GENERAL AND ADMINISTRATIVE. SG&A expenses increased
$31.7 million, or 33.0%, to $127.8 million in 1999, from $96.1 million in 1998
primarily resulting from the Company's increased number of customer interaction
centers, global expansion and increased investment in technology. SG&A expenses
as a percentage of revenues decreased from 26.0% in 1998 to 25.1% in 1999. This
decrease is driven by an increase in revenues as a result of improvements in
capacity utilization in the second half of 1999 in the Company's outsourced
domestic and international customer interaction centers.
INCOME FROM OPERATIONS. As a result of the foregoing factors, income from
operations increased $9.8 million, or 31%, to $41.6 million in 1999 from
$31.7 million in 1998. Income from operations as a percentage of revenues
decreased to 8.2% in 1999 from 8.6% in 1998.
OTHER INCOME (EXPENSE). Other income increased $6.7 million to
$6.8 million in 1999 compared to $159,000 in 1998. Included in other income in
1999 is a $6.7 million gain on the settlement of a long-term contract which was
terminated by a client in 1996. Included in other income (expense) in 1998 is
$1.3 million in business combination expenses relating to the business
combinations accounted for under the pooling of interests method. Interest
expense increased $914,000 to $2.2 million in 1999 compared to $1.3 million in
1998. This increase is primarily the result of increased borrowings. Interest
income decreased $702,000 to $2.4 million in 1999 compared to $3.1 million in
1998. This decrease is the result of the decrease in short-term investments
during 1999.
INCOME TAXES. The Company's effective tax rate was 39.9% in 1999 and 39.8%
in 1998. It is anticipated that the effective rate will decrease slightly in
2000, resulting from the Company's increased state tax incentives.
NET INCOME. As a result of the foregoing factors, net income increased
$9.9 million, or 51.4%, to $29.1 million in 1999 from $19.2 million in 1998.
Diluted earnings per share increased from 31 cents to 46 cents. Excluding the
one-time business combination expenses in 1998 and the one-time gain in 1999
from the long-term contract settlement, net income in 1999 would have been
$25.1 million, compared with net income in 1998 of $20.0 million, an increase of
25.3%. Diluted earnings per share excluding these one-time items would have been
40 cents in 1999 compared to 32 cents in 1998.
1998 COMPARED TO 1997
REVENUES. Revenues increased $89.9 million, or 32.2%, to $369.0 million in
1998 from $279.1 million in 1997. The increase resulted from $56.0 million in
revenues from new clients and $81.0 million in increased revenues from existing
clients. These increases were offset in part by contract expirations and other
client reductions. Client reductions reflect a $35.6 million decline in 1998
revenue from two significant clients. Revenues for 1998 include a $5.0 million
sale of technology consulting and call center technology products to an existing
client for use in its internal call centers. The Company has not historically
sold its technology or significant levels of consulting services as a separate
product and only provided such services to clients as part of a long-term
outsourcing agreement. Revenues for 1998 include approximately $85.7 million
from facilities management contracts as compared with $84.0 million during 1997.
Total international revenues represent 24% of consolidated revenues during 1998
as compared with 18% during 1997.
COSTS OF SERVICES. Costs of services increased $62.5 million, or 35.0%, to
$241.2 million in 1998 from $178.7 million in 1997. Costs of services as a
percentage of revenues increased from 64.0% in 1997 to 65.4% in 1998. This
increase in costs of services as a percentage of revenues is primarily the
result of reduced volumes in one of the Company's facilities management
contracts. This reduced volume resulted in excess capacity in three customer
interaction centers managed by the Company and reduced gross margins on the
client program. This resulted in a $4.5 million decrease in operating income
from the Company's facilities management business. The increase in costs of
services as a percent of revenues relating to this was partially offset by the
favorable impact of the technology sale discussed earlier. This
23
sale had significantly lower costs of services as a percentage of revenues when
compared with the Company's recurring revenues from outsourcing.
SELLING, GENERAL AND ADMINISTRATIVE. SG&A expenses increased
$28.9 million, or 43.0%, to $96.1 million in 1998, from $67.2 million in 1997
resulting from the Company's increased number of customer interaction centers,
global expansion and increased investment in technology. SG&A expenses as a
percentage of revenues increased from 24.1% in 1997 to 26.0% in 1998. This
increase is the result of excess capacity in several of the Company's outsourced
domestic and international customer interaction centers discussed earlier.
INCOME FROM OPERATIONS. As a result of the foregoing factors, income from
operations decreased $1.4 million, or 4.3%, to $31.7 million in 1998 from
$33.1 million in 1997. Income from operations as a percentage of revenues
decreased from 11.9% in 1997 to 8.6% in 1998. Operating income as a percentage
of revenues in 1998 has been favorably impacted by approximately 700 basis
points resulting from the technology sale discussed earlier. Operating income as
a percentage of revenues is not anticipated to significantly improve until the
Company increases capacity utilization.
OTHER INCOME (EXPENSE). Other income decreased $2.2 million to $159,000 in
1998 compared to $2.3 million in 1997. Included in other income (expense) in
1998 is $1.3 million in business combination expenses relating to the business
combinations accounted for under the pooling of interests method. Interest
expense increased $104,000 to $1.3 million in 1998 compared to $1.2 million in
1997. This increase is primarily the result of increased borrowings in the
Company's international locations offset by debt reductions in the United
States. Interest income decreased $325,000 to $3.1 million in 1998 compared to
$3.4 million in 1997. This decrease is the result of the decrease in short-term
investments during 1998.
INCOME TAXES. The Company's effective tax rate was 39.8% in 1997 and 1998.
This resulted from a slight increase in the effective rate due primarily to
higher taxes on the Company's operations in Canada offset by increases in state
income tax credits received from certain states for employment incentives. It is
anticipated that the effective rate will increase slightly in 1999 as a result
of the Company's increased international operations.
NET INCOME. As a result of the foregoing factors, net income decreased
$2.1 million, or 10.0%, to $19.2 million in 1998 from $21.3 million in 1997.
Diluted earnings per share decreased from 35 cents to 31 cents. Excluding the
one-time business combination expenses, net income in 1998 would have been
$20.0 million, representing a $1.3 million decrease from 1997, and diluted
earnings per share would have been 32 cents.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities was $52.2 million in 1999 as compared
to $24.8 million in 1998. Cash provided by operating activities consists of
$57.2 million of total net income before depreciation and amortization, bad debt
and deferred income taxes offset in part by $5.0 million of changes in working
capital.
The amount of cash used by the Company in investing activities was
$70.3 million in 1999. During 1999, the Company's capital expenditures
(exclusive of $538,000 in assets acquired under capital leases) were
$56.6 million, and the Company used $6.5 million in cash for the Pamet, Smart
Call and Connect acquisitions. The Company also invested $2.5 million in a
customer relationship management software company. These expenditures were
offset in part by the reduction of $4.5 million in short-term investments. Cash
used in investing activities was $19.7 million for 1998, resulting primarily
from $38.2 million in capital expenditures, $2.3 million for acquisitions and
$10.9 million for contract acquisition costs offset by reductions in the
Company's short-term investments.
24
Historically, capital expenditures have been, and future capital
expenditures are anticipated to be, primarily for the development of customer
interaction centers, as well as expansion of the Company's customer management
consulting, technology deployment and systems integration, Web-based education
platforms, Internet customer relationship management and customer-centric
marketing solutions. The Company currently expects total capital expenditures in
2000 to be approximately $60 million to $80 million, excluding any capital
expenditures for the joint venture with Ford Motor Company (Ford), which the
Company anticipates to be $10 million to $15 million in 2000. The Company
expects its capital expenditures will be used primarily to open up five or six
new shared customer interaction centers during 2000. Such expenditures will be
financed with internally generated funds, stock option exercises and the related
tax benefit, existing cash balances and additional borrowings. The level of
capital expenditures incurred in 2000 will be dependent upon new client
contracts obtained by the Company and the corresponding need for additional
capacity. In addition, if the Company's future growth is generated through
facilities management contracts, the anticipated level of capital expenditures
could be reduced significantly.
Cash provided by financing activities in 1999 was $24.4 million. This
primarily resulted from an increase in borrowings against the revolving line of
credit and long-term notes payable offset by capital lease and long-term debt
payments. Additional proceeds from financing activities were generated by the
exercise of stock options and the related tax benefit. In 1998, cash used in
financing activities of $3.5 million resulted from payments under capital lease
obligations and long-term debt offset by the exercise of stock options and the
related tax benefit.
In November 1998, the Company obtained a three-year, $50 million, unsecured
revolving line of credit with a syndicate of five banks. The Company also has
the option to secure at any time up to $25 million of the line with available
cash investments. The Company has two interest rate options: an offshore rate
option or a bank base rate option. The Company will pay interest at a spread of
50 to 150 basis points over the applicable offshore or bank base rate, depending
upon the Company's leverage. Interest on the secured portion is based on the
applicable rate plus 22.5 basis points. The Company had $18 million in
borrowings under the line of credit at December 31, 1999. The Company recently
expanded its credit facility to $75 million.
The Company believes that existing cash and short-term investments together
with stock option exercises and the related tax benefit and available borrowings
under its line of credit will be sufficient to finance the Company's current
operations, planned capital expenditures and anticipated growth through 2000.
However, if the Company were to make any significant acquisitions for cash, it
may be necessary for the Company to obtain additional debt or equity financing.
From time to time, the Company engages in discussions regarding restructuring,
dispositions, acquisitions and other similar transactions. Any such transaction
could include, among other things, the transfer, sale or acquisition of
significant assets, businesses or interests, including joint ventures, or the
incurrence, assumption or refinancing of indebtedness, and could be material to
the financial condition and results of operations of the Company. There is no
assurance that any such discussions will result in the consummation of any such
transaction.
YEAR 2000
To date, TeleTech's computer-based systems have not experienced any critical
failures as a result of the Year 2000, and the Company has not experienced any
disruption in its operations or impairment in its ability to bill or collect
revenues due to the Year 2000.
During 1999, the Company incurred approximately $3.9 million in inventory
and assessment work on Year 2000 issues, of which $2.3 million was capitalized
and the remainder expensed in the accompanying statement of operations and were
funded by cash flow from operations. Project-to-date costs totaled $4.5 million
of which $2.3 million was capitalized and the remainder expensed. The Company
does not plan on spending any additional amounts on Year 2000 issues.
25
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk represents the risk of loss that may impact the financial
position, results of operations or cash flows of the Company due to adverse
changes in financial and commodity market prices and rates. The Company is
exposed to market risk in the areas of changes in U.S. interest rates and
changes in foreign currency exchange rates as measured against the U.S. dollar.
These exposures are directly related to its normal operating and funding
activities. Historically, and as of December 31, 1999, the Company has not used
derivative instruments or engaged in hedging activities.
INTEREST RATE RISK
The interest on the Company's line of credit and its Canadian subsidiary's
operating loan is variable based on the bank's base rate or offshore rate, and
therefore, affected by changes in market interest rates. At December 31, 1999,
there were approximately $1,323,000 in borrowings outstanding on the operating
loan. The Company monitors interest rates frequently and has sufficient cash
balances as of December 31, 1999, to pay off the line of credit and any early
termination penalties should interest rates increase significantly. The
Company's investments are typically short-term in nature and as a result do not
expose the Company to significant risk from interest rate fluctuations.
Therefore, the Company does not believe that reasonably possible near-term
changes in interest rates will result in a material effect on future earnings,
fair values or cash flows of the Company.
FOREIGN CURRENCY RISK
The Company has wholly-owned subsidiaries in Argentina, Australia, Brazil,
Canada, Mexico, New Zealand, Singapore and the United Kingdom. Revenues and
expenses from these operations are typically denominated in local currency,
thereby creating exposures to changes in exchange rates. The changes in the
exchange rate may positively or negatively affect the Company's revenues and net
income attributed to these subsidiaries. The impact of foreign currency
fluctuations was immaterial for the years presented. However, the Company
intends to expand overseas thereby increasing foreign currency risk in future
years.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements required by this item are located beginning on page
33 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
26
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
For a discussion of our executive officers, you should refer to Part I, Page
17, after Item 4 under the caption "Executive Officers of TeleTech
Holdings, Inc."
For a discussion of our Directors, you should refer to our definitive Proxy
Statement under "Election of Directors" and "Director Compensation," which we
incorporate by reference into this Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION.
We hereby incorporate by reference the information to appear under the
caption "Executive Officers--Executive Compensation" in TeleTech's definitive
proxy statement for its 2000 Annual Meeting of Stockholders, provided, however,
that neither the Report of the Compensation Committee on Executive Compensation
nor the performance graph set forth therein shall be incorporated by reference
herein.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
We hereby incorporate by reference the information to appear under the
caption "Security Ownership of Certain Beneficial Owners and Management" in
TeleTech's definitive proxy statement for its 2000 Annual Meeting of
Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS.
We hereby incorporate by reference the information to appear under the
caption "Certain Relationships and Related Party Transactions" in TeleTech's
definitive proxy statement for its 2000 Annual Meeting of Stockholders.
27
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) THE FOLLOWING DOCUMENTS ARE FILED AS PART OF THIS REPORT:
(1) Consolidated Financial Statements
The Index to Financial Statements is set forth on page 32 of this report.
(2) None.
(3) Exhibits
EXHIBIT
NO. DESCRIPTION
------- -----------
3.1 Restated Certificate of Incorporation of TeleTech[1]
{Exhibit 3.1}
3.2 Amended and Restated Bylaws of TeleTech[1] {Exhibit 3.2}
10.1** Employment Agreement dated as of January 1, 1995, between
Joseph D. Livingston and TeleTech[1] {Exhibit 10.2}
10.2** Amendment to the Employment Agreement between Joseph D.
Livingston and TeleTech dated May 14, 1996[1]
{Exhibit 10.3}
10.3** Employment Agreement dated as of April 1, 1996, between
Steven B. Coburn and TeleTech[1] {Exhibit 10.4}
10.4** TeleTech Holdings, Inc. Stock Plan, as amended and
restated[1] {Exhibit 10.7}
10.5** TeleTech Holdings, Inc. Directors Stock Option Plan[1]
{Exhibit 10.8}
10.6 Form of Client Services Agreement, 1996 version[1]
{Exhibit 10.12}
10.7 Agreement for Customer Interaction Center Management Between
United Parcel General Services Co. and TeleTech[1]
{Exhibit 10.13}
10.8 Business Loan Agreement dated March 29, 1996, among TeleTech
Telecommunications, Inc.; TeleTech Teleservices, Inc.; and
TeleTech, as borrower, and First Interstate Bank of
California, as lender; addendum dated March 29, 1996[1]
{Exhibit 10.15}
10.9 Master Lease Agreement dated as of July 11, 1995, among
First Interstate Bank of California; TeleTech; TeleTech
Telecommunications, Inc.; and TeleTech Teleservices, Inc.[1]
{Exhibit 10.17}
10.10** TeleTech Holdings, Inc. Employee Stock Purchase Plan[3]
{Exhibit 10.22}
10.11** Employment Agreement dated as of January 1, 1998, between
Kenneth D. Tuchman and TeleTech[4] {Exhibit 10.11}
10.12 Client Services Agreement dated May 1, 1997, between
TeleTech Customer Care Management (Telecommunications), Inc.
and GTE Card Services Incorporated d/b/a GTE Solutions[4]
{Exhibit 10.12}
10.13 $50.0 Million Revolving Credit Agreement dated as of
November 20, 1998[5] {Exhibit 10.13}
10.14** Employment Agreement dated as of February 26, 1998 between
Morton H. Meyerson and TeleTech[5] {Exhibit 10.14}
10.15** Employment Agreement dated March 2, 1998 between Joseph
Livingston and TeleTech[6] (Exhibit 10.15}
10.16** Employment Agreement dated February 25, 1999 between
Steven B. Coburn and TeleTech[6] {Exhibit 10.16}
28
EXHIBIT
NO. DESCRIPTION
------- -----------
10.17** Employment Agreement dated March 11, 1998 between
Deborah C. Gentry and TeleTech[6] {Exhibit 10.17}
10.18** Employment Agreement dated March 16, 1999 between Vincent
Cipolla and TeleTech[6] {Exhibit 10.18}
10.19** Employment Agreement dated October 2, 1999 between Scott D.
Thompson and TeleTech[7] {Exhibit 10.18}
10.20** Stock Option Agreement dated October 18, 1999 between
Scott D. Thompson and TeleTech[7] {Exhibit 10.20}
10.21** Stock Option Agreement dated October 18, 1999 between
Scott D. Thompson and TeleTech[7] {Exhibit 10.21}
21.1* List of subsidiaries
23.1* Consent of Arthur Andersen LLP to incorporation by reference
of the financial statements into TeleTech's previously filed
Registration Statements on Form S-8 and Form S-3.
27* Financial Data Schedule
- ------------------------
* Filed herewith.
** Management contract or compensatory plan or arrangement filed pursuant to
Item 14(c) of this report.
[ ] Such exhibit previously filed with the Securities and Exchange Commission as
exhibits to the filings indicated below, under the exhibit number indicated
in brackets { }, and is incorporated by reference.
[1] TeleTech's Registration Statement on Form S-1, as amended (Registration
Statement No. 333-04097).
[2] TeleTech's Registration Statements on Form S-1, as amended (Registration
Statement Nos. 333-13833 and 333-15297).
[3] TeleTech's Annual Report on Form 10-K for the year ended December 31, 1996.
[4] TeleTech's Annual Report on Form 10-K for the year ended December 31, 1997.
[5] TeleTech's Annual Report on Form 10-K for the year ended December 31, 1998.
[6] TeleTech's Quarterly Report on Form 10-Q for the quarter ended March 31,
1999.
[7] TeleTech's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999.
(b) REPORTS ON FORM 8-K
None.
29
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in the City of Denver,
State of Colorado, on March 28, 1999.
TELETECH HOLDINGS, INC.
By: /s/ SCOTT D. THOMPSON
-----------------------------------------
Scott D. Thompson
CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed on March 28, 1999, by the following persons on behalf of
the registrant and in the capacities indicated:
SIGNATURE TITLE
--------- -----
PRINCIPAL EXECUTIVE OFFICER
/s/ SCOTT D. THOMPSON
------------------------------------------- Chief Executive Officer and President
Scott D. Thompson
PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER
/s/ MICHAEL E. FOSS
------------------------------------------- Chief Financial Officer and President TeleTech
Michael E. Foss Companies Group
DIRECTORS
/s/ KENNETH D. TUCHMAN
------------------------------------------- Chairman of the Board
Kenneth D. Tuchman
/s/ JAMES E. BARLETT
-------------------------------------------
James E. Barlett
30
SIGNATURE
---------
/s/ ROD DAMMEYER
-------------------------------------------
Rod Dammeyer
/s/ GEORGE HEILMEIER
-------------------------------------------
George Heilmeier
/s/ JOHN T. MCLENNAN
-------------------------------------------
John T. McLennan
/s/ MORTON H. MEYERSON
-------------------------------------------
Morton H. Meyerson
/s/ ALAN SILVERMAN
-------------------------------------------
Alan Silverman
/s/ SCOTT D. THOMPSON
-------------------------------------------
Scott D. Thompson
31
INDEX TO FINANCIAL STATEMENTS
TELETECH HOLDINGS, INC.
PAGE
--------
Report of Independent Public Accountants.................... 33
Consolidated Balance Sheets as of December 31, 1998 and
1999...................................................... 34
Consolidated Statements of Income for the Years Ended
December 31, 1997, 1998 and 1999.......................... 35
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1997, 1998 and 1999.............. 36
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1998 and 1999.......................... 37
Notes to Consolidated Financial Statements for the Years
Ended December 31, 1997, 1998 and 1999.................... 39
32
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To TeleTech Holdings, Inc.:
We have audited the accompanying consolidated balance sheets of TELETECH
HOLDINGS, INC. (a Delaware corporation) and subsidiaries as of December 31, 1998
and 1999, and the related consolidated statements of income, stockholders'
equity and cash flows for each of the three years in the period ended
December 31, 1999. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of TeleTech Holdings, Inc. and
subsidiaries as of December 31, 1998 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States.
ARTHUR ANDERSEN LLP
Denver, Colorado
February 14, 2000.
33
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS EXCEPT SHARE AMOUNTS)
DECEMBER 31,
-------------------
1998 1999
-------- --------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 8,796 $ 14,663
Short-term investments.................................... 37,082 41,599
Accounts receivable, net of allowance for doubtful
accounts of $2,900 and $3,787, respectively............. 68,830 78,753
Prepaids and other assets................................. 2,811 5,361
Deferred tax asset........................................ 3,855 4,889
-------- --------
Total current assets.................................... 121,374 145,265
-------- --------
PROPERTY AND EQUIPMENT, net of accumulated depreciation of
$38,432 and $65,083, respectively......................... 77,546 108,945
-------- --------
OTHER ASSETS:
Long-term accounts receivable............................. 4,274 3,930
Goodwill, net of accumulated amortization of $1,599 and
$3,103, respectively.................................... 15,022 20,633
Contract acquisition cost, net of accumulated amortization
of zero and $1,614, respectively........................ 10,900 9,286
Deferred tax asset........................................ -- 550
Other assets.............................................. 1,794 5,121
-------- --------
Total assets............................................ $230,910 $293,730
======== ========
LIABILITIES AND STOCKHOLDERS EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt and capital lease
obligations............................................. $ 7,989 $ 4,842
Bank overdraft............................................ 778 1,323
Accounts payable.......................................... 11,814 8,217
Accrued employee compensation............................. 18,134 26,282
Accrued income taxes...................................... 4,191 1,523
Other accrued expenses.................................... 11,520 16,831
Customer advances, deposits and deferred income........... 3,803 4,510
-------- --------
Total current liabilities............................... 58,229 63,528
DEFERRED TAX LIABILITIES.................................... 835 --
LONG-TERM DEBT, net of current portion:
Capital lease obligations................................. 4,208 1,697
Revolving line-of-credit.................................. -- 18,000
Other debt................................................ 2,145 5,469
-------- --------
Total liabilities....................................... 65,417 88,694
-------- --------
COMMITMENTS AND CONTINGENCIES (Note 8)
STOCKHOLDERS' EQUITY:
Common stock; $.01 par value; 150,000,000 shares
authorized; 60,769,724 and 61,823,645 shares,
respectively, issued; and outstanding................... 606 617
Additional paid-in capital................................ 111,080 121,060
Accumulated other comprehensive loss...................... (1,610) (1,148)
Retained earnings......................................... 55,417 84,507
-------- --------
Total stockholders' equity.............................. 165,493 205,036
-------- --------
Total liabilities and stockholders' equity.............. $230,910 $293,730
======== ========
The accompanying notes are an integral part of these consolidated balance
sheets.
34
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
1997 1998 1999
-------- -------- --------
REVENUES.................................................... $279,057 $369,045 $509,268
-------- -------- --------
OPERATING EXPENSES:
Costs of services......................................... 178,702 241,230 339,946
Selling, general and administrative expenses.............. 67,208 96,077 127,758
-------- -------- --------
Total operating expenses................................ 245,910 337,307 467,704
-------- -------- --------
INCOME FROM OPERATIONS...................................... 33,147 31,738 41,564
OTHER INCOME (EXPENSE):
Interest expense.......................................... (1,166) (1,270) (2,185)
Interest income........................................... 3,399 3,074 2,372
Equity in income of affiliate............................. 302 70 --
Business combination expenses............................. -- (1,321) --
Gain on settlement of long-term contract.................. -- -- 6,726
Other..................................................... (225) (394) (62)
-------- -------- --------
2,310 159 6,851
-------- -------- --------
INCOME BEFORE INCOME TAXES.................................. 35,457 31,897 48,415
Provision for income taxes................................ 14,123 12,695 19,325
-------- -------- --------
NET INCOME.................................................. $ 21,334 $ 19,202 $ 29,090
======== ======== ========
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic..................................................... 58,435 59,950 61,183
======== ======== ========
Diluted................................................... 61,646 62,052 63,406
======== ======== ========
NET INCOME PER SHARE
Basic..................................................... $ .37 $ .32 $ .48
======== ======== ========
Diluted................................................... $ .35 $ .31 $ .46
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
35
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(AMOUNTS IN THOUSANDS)
ACCUMULATED UNEARNED
TREASURY STOCK COMMON STOCK ADDITIONAL OTHER COMPENSATION-
------------------- ------------------- PAID-IN COMPREHENSIVE RESTRICTED
SHARES AMOUNT SHARES AMOUNT CAPITAL INCOME STOCK
-------- -------- -------- -------- ---------- -------------- --------------
BALANCES, December 31, 1996........ 99 $(988) 57,156 $571 $ 94,059 $ 98 $(254)
Employee stock purchase plan..... 28 440
Acquisition of TMI............... 100 1 1,797
Translation adjustments.......... (1,020)
Compensation expense on
restricted stock............... 127
Exercise of stock options........ 470 5 5,072
Issuance of common stock......... 1,508 15 2,648
Net income.......................
Comprehensive income.............
Distribution to stockholder......
--- ----- ------ ---- -------- ------- -----
BALANCES, December 31, 1997........ 99 (988) 59,262 592 104,016 (922) (127)
Employee stock purchase plan..... 28 334
Acquisition of Intellisystems.... (99) 988 245 2 2,089
Acquisition of Cygnus............ 325 3 2,658
Combination with Outsource....... 606 6
Translation adjustments.......... (688)
Brokerage fee on EDM
combination.................... 42 485
Year-end change for EDM..........
Exercise of stock options........ 249 3 1,457
Other stock issuances............ 13 41
Compensation expense on
restricted stock............... 127
Net income.......................
Comprehensive income.............
--- ----- ------ ---- -------- ------- -----
BALANCES, December 31, 1998........ -- -- 60,770 606 111,080 (1,610) --
Employee stock purchase plan..... 131
Acquisition of Pamet............. 286 3 1,750
Translation adjustments............ 462
Exercise of stock options........ 767 8 8,099
Net income.......................
Comprehensive income...............
--- ----- ------ ---- -------- ------- -----
BALANCES, December 31, 1999........ -- $ -- 61,823 $617 $121,060 $(1,148) $ --
=== ===== ====== ==== ======== ======= =====
TOTAL
RETAINED COMPREHENSIVE STOCKHOLDERS'
EARNINGS INCOME EQUITY
-------- -------------- -------------
BALANCES, December 31, 1996........ $15,044 $108,530
Employee stock purchase plan..... 440
Acquisition of TMI............... 1,798
Translation adjustments.......... $(1,020) (1,020)
Compensation expense on
restricted stock............... 127
Exercise of stock options........ 5,077
Issuance of common stock......... 2,663
Net income....................... 21,334 21,334 21,334
-------
Comprehensive income............. $20,314 --
=======
Distribution to stockholder...... (697) (697)
------- --------
BALANCES, December 31, 1997........ 35,681 138,252
Employee stock purchase plan..... 334
Acquisition of Intellisystems.... 3,079
Acquisition of Cygnus............ 2,661
Combination with Outsource....... 804 810
Translation adjustments.......... $ (688) (688)
Brokerage fee on EDM
combination.................... 485
Year-end change for EDM.......... (270) (270)
Exercise of stock options........ 1,460
Other stock issuances............ 41
Compensation expense on
restricted stock............... 127
Net income....................... 19,202 19,202 19,202
-------
Comprehensive income............. $18,514 --
------- ======= --------
BALANCES, December 31, 1998........ 55,417 165,493
Employee stock purchase plan..... 131
Acquisition of Pamet............. 1,753
Translation adjustments............ 462 462
Exercise of stock options........ 8,107
Net income....................... 29,090 29,090 29,090
-------
Comprehensive income............... $29,552
------- ======= --------
BALANCES, December 31, 1999........ $84,507 $205,036
======= ========
The accompanying notes are an integral part of these consolidated financial
statements.
36
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(AMOUNTS IN THOUSANDS)
1997 1998 1999
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 21,334 $ 19,202 $ 29,090
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization........................... 11,331 19,293 29,887
Allowance for doubtful accounts......................... 865 573 887
Deferred income taxes................................... (1,169) (1,235) (2,620)
Equity in income of affiliate........................... (302) (70) --
Deferred compensation expense........................... 127 127 --
Business combination expenses paid in stock............. -- 485 --
Changes in assets and liabilities:
Accounts receivable................................... (15,421) (24,585) (7,304)
Prepaids and other assets............................. 175 (799) (496)
Accounts payable and accrued expenses................. 12,012 9,827 3,005
Customer advances, deposits and deferred income....... 455 2,030 (281)
-------- -------- --------
Net cash provided by operating activities............. $ 29,407 $ 24,848 $ 52,168
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment........................ $(34,803) $(38,246) $(56,629)
Acquisitions, net of cash acquired........................ (2,440) (2,308) (9,048)
Contract acquisition costs................................ -- (10,900) --
Proceeds from sale of interest in Access 24 UK Limited.... -- 981 --
Temporary deposit......................................... 3,000 -- --
Changes in accounts payable and accrued liabilities
related to investing activities......................... (190) (1,762) (112)
Decrease (increase) in short-term investments............. 2,841 32,551 (4,517)
-------- -------- --------
Net cash used in investing activities................. $(31,592) $(19,684) $(70,306)
-------- -------- --------
The accompanying notes are an integral part of these consolidated financial
statements.
37
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(AMOUNTS IN THOUSANDS)
1997 1998 1999
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in bank overdraft................. $ 745 $ (316) $ 545
Net increase (decrease) in short-term borrowings.......... -- 351 (351)
Proceeds from line-of-credit.............................. -- -- 18,000
Payments on long-term debt................................ (216) (1,126) (1,692)
Proceeds from long-term debt borrowings................... 593 3,227 5,000
Payments under capital lease obligations.................. (4,933) (7,466) (5,176)
Proceeds from common stock issuances...................... 3,240 375 --
Proceeds from exercise of stock options................... 1,917 1,008 5,184
Tax benefit from stock option exercises................... 3,160 452 2,923
Payments under subordinated notes payable to
stockholder............................................. 29 -- --
Distributions to stockholder.............................. (678) -- --
------- ------- -------
Net cash provided by (used in) financing activities... 3,857 (3,495) 24,433
------- ------- -------
Effect of exchange rate changes on cash..................... 102 (211) (428)
------- ------- -------
NET INCREASE IN CASH AND CASH EQUIVALENTS................... 1,774 1,458 5,867
CASH AND CASH EQUIVALENTS, beginning of period.............. 5,564 7,338 8,796
------- ------- -------
CASH AND CASH EQUIVALENTS, end of period.................... $ 7,338 $ 8,796 $14,663
======= ======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest.................................... $ 1,296 $ 1,269 $ 2,185
======= ======= =======
Cash paid for income taxes................................ $12,189 $10,553 $21,994
======= ======= =======
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:
Assets acquired through capital leases.................... $ 5,229 $ 2,811 $ 538
======= ======= =======
Stock issued in purchase of TMI........................... $ 1,798 $ -- $ --
======= ======= =======
Stock issued in purchase of Intellisystems................ $ -- $ 3,079 $ --
======= ======= =======
Stock issued in pooling of EDM (brokerage fee)............ $ -- $ 485 $ --
======= ======= =======
Stock issued in purchase of Cygnus........................ $ -- $ 2,661 $ --
======= ======= =======
Stock issued in purchase of Pamet......................... $ -- $ -- $ 1,753
======= ======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
38
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
TeleTech Holdings, Inc. (THI or the Company) is a provider of outsourced
customer management solutions for large and multinational companies in the
United States, Australia, Brazil, Canada, Mexico, New Zealand, Singapore and the
United Kingdom. Customer management encompasses a wide range of customer
acquisition, retention and satisfaction programs designed to maximize the
lifetime value of the relationship between the Company's clients and their
customers.
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements are composed of the accounts of THI
and its wholly-owned subsidiaries. All intercompany balances and transactions
have been eliminated in consolidation.
As more fully discussed in Note 14, during June 1998, the Company entered
into business combinations with Digital Creators, Inc. (Digital) and EDM
Electronic Direct Marketing Ltd. (EDM). The business combinations have been
accounted for as pooling of interests, and the historical consolidated financial
statements of the Company for all years prior to the business combination have
been restated in the accompanying consolidated financial statements to include
the financial position, results of operations and cash flows of Digital and EDM.
The consolidated financial statements of the Company include
reclassifications made to conform the financial statement presentation of
Digital and EDM to that of the Company.
FOREIGN CURRENCY TRANSLATION
The assets and liabilities of the Company's foreign subsidiaries, whose
functional currency is other than the U.S. dollar, are translated at the
exchange rates in effect on the reporting date, and income and expenses are
translated at the weighted average exchange rate during the period. The net
effect of translation gains and losses is not included in determining net
income, but is accumulated as a separate component of stockholders' equity.
During 1998, the net effect of translation gains on the Company's Mexican
subsidiary was included in determining net income, as Mexico was considered a
highly inflationary economy. Foreign currency transaction gains and losses are
included in determining net income. Such gains and losses were not material for
any period presented. In 1999, the Mexican economy was no longer considered
highly inflationary, and therefore translation gains and losses were included as
a component of stockholders' equity.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation.
Additions, improvements and major renewals are capitalized. Maintenance, repairs
and minor renewals are expensed as incurred. Amounts paid for software licenses
and third-party packaged software are capitalized.
Depreciation is computed on the straight-line method based on the estimated
useful lives of the assets, as follows:
Computer equipment and software............................. 4-5 years
Telephone equipment......................................... 5-7 years
Furniture and fixtures...................................... 5-7 years
Leasehold improvements...................................... 5-10 years
Vehicles.................................................... 5 years
39
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Assets acquired under capital lease obligations are amortized over the life
of the applicable lease of four to seven years (or the estimated useful lives of
the assets, of four to seven years, where title to the leased assets passes to
the Company upon termination of the lease).
REVENUE RECOGNITION
The Company recognizes revenues at the time services are performed. The
Company has certain contracts that are billed in advance. Accordingly, amounts
billed but not earned under these contracts are excluded from revenues and
included in deferred income.
The Company maintains ongoing training programs for its employees. The cost
of this training is expensed as incurred. In addition, certain contracts require
clients to reimburse the Company for specific training. These costs are billed
to the clients as incurred.
RESEARCH AND DEVELOPMENT
Research and development costs are charged to operations when incurred and
are included in operating expenses. Research and development costs were not
material for any period presented.
INTANGIBLE ASSETS
The excess of cost over the fair market value of tangible net assets and
trademarks of acquired businesses is amortized on a straight-line basis over the
periods of expected benefit of nine to 25 years. Amortization of goodwill for
the years ended December 31, 1997, 1998 and 1999, was $349,000, $1,012,000 and
$1,504,000, respectively.
Subsequent to an acquisition, the Company continually evaluates whether
later events and circumstances have occurred that indicate the remaining
estimated useful life of an intangible asset may warrant revision or that the
remaining balance of an intangible asset may not be recoverable. When factors
indicate that an intangible asset should be evaluated for possible impairment,
the Company uses an estimate of the related business' undiscounted future cash
flows over the remaining life of the asset in measuring whether the intangible
asset is recoverable. Management does not believe that any provision for
impairment of intangible assets is required.
CONTRACT ACQUISITION COSTS
Amounts paid to a client to obtain a long-term contract are being amortized
on a straight-line basis over the term of the contract commencing with the date
of the first revenues from the contract. Amortization expense for the year ended
December 31, 1999, was $1,614,000. There was no amortization expense during
1998.
INCOME TAXES
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards (SFAS) 109, "Accounting for Income Taxes," which
requires recognition of deferred tax assets and liabilities for the expected
future income tax consequences of transactions that have been included in the
financial statements or tax returns. Under this method, deferred tax assets and
liabilities are
40
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
determined based on the difference between the financial statement and tax bases
of assets and liabilities using enacted tax rates in effect for the year in
which the differences are expected to reverse. Net deferred tax assets then may
be reduced by a valuation allowance for amounts that do not satisfy the
realization criteria of SFAS 109.
EARNINGS PER SHARE
Earnings per share are computed based upon the weighted average number of
common shares and common share equivalents outstanding.
Basic earnings per share are computed by dividing reported earnings
available to common stockholders by weighted average shares outstanding. No
dilution for any potentially dilutive securities is included. Diluted earnings
per share reflect the potential dilution assuming the issuance of common shares
for all dilutive potential common shares outstanding during the period. The
difference between diluted and basic shares outstanding relates to outstanding
stock options.
CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
For the purposes of the statement of cash flows, the Company considers all
cash and investments with an original maturity of 90 days or less to be cash
equivalents.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
SEGMENT REPORTING
In June 1997, the Financial Accounting Standards Board (FASB) issued
SFAS 131, "Disclosures About Segments of an Enterprise and Related Information,"
which establishes standards for the way public business enterprises report
information about operating segments in annual financial statements and requires
those enterprises report selected information about operating segments in
interim financial reports issued to stockholders. It also establishes standards
for related disclosures about products and services, geographic areas and major
customers. SFAS 131 requires that a public business enterprise report financial
and descriptive information about its reportable operating segments. Operating
segments are components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief operating
decision-maker in deciding how to allocate resources and in assessing
performance.
LONG-LIVED ASSETS
Long-lived assets and certain identifiable intangibles to be held and used
by the Company are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. An asset is considered impaired when future undiscounted cash flows
are
41
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
estimated to be insufficient to recover the carrying amount. If impaired, an
asset is written down to its fair value.
SELF-INSURANCE PROGRAM
The Company self-insures for certain levels of workers' compensation and
employee health insurance. Estimated costs of these self-insurance programs were
accrued at the projected settlements for known and anticipated claims.
Self-insurance liabilities of the Company amounted to $3.2 million and
$2.9 million at December 31, 1998 and 1999, respectively.
EFFECTS OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities," effective for fiscal years beginning after
June 15, 2000. SFAS 133 establishes accounting and reporting standards requiring
that every derivative instrument (including certain derivative instruments
embedded in other contracts) be recorded in the balance sheet as either an asset
or liability measured at its fair value. It also requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the hedged
item in the income statement and requires that a company must formally document,
designate and assess the effectiveness of transactions that receive hedge
accounting. SFAS 133 may not be applied retroactively and must be applied to
(a) derivative instruments and (b) certain derivative instruments embedded in
hybrid contracts that were issued, acquired or substantively modified after
December 31, 1997 (and, at the Company's election, before January 1, 1998).
Management believes that the impact of SFAS 133 will not significantly affect
its financial reporting.
In December 1999, the staff of the Securities and Exchange Commission issued
its Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition." SAB No. 101
provides guidance on the measurement and timing of revenue recognition in
financial statements of public companies. Changes in accounting policies to
apply the guidance of SAB No. 101 must be adopted by recording the cumulative
effect of the change in the fiscal quarter ending March 31, 2000. Management has
not yet determined the effect SAB No. 101 will have on its accounting policies
or the amount of the cumulative effect to be recorded from adopting SAB
No. 101, if any.
(2) SEGMENT INFORMATION AND CUSTOMER CONCENTRATIONS
The Company classified its business activities into four fundamental areas:
outsourced operations in the United States, facilities management operations,
international outsourced operations, and technology services and consulting.
These areas are separately managed and each has significant differences in
capital requirements and cost structures. Outsourced, facilities management and
international outsourced operations are reportable business segments with their
respective financial performance detailed herein. Technology services and
consulting is included in corporate activities as it is not a material business
segment. Also included in corporate activities are general corporate expenses
and overall operational management expenses. Assets of corporate activities
include unallocated cash, short-term investments and
42
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(2) SEGMENT INFORMATION AND CUSTOMER CONCENTRATIONS (CONTINUED)
deferred income taxes. There are no significant transactions between the
reported segments for the periods presented.
(AMOUNTS IN THOUSANDS) 1997 1998 1999
- ---------------------- -------- -------- --------
REVENUES:
Outsourced.................................... $143,627 $200,514 $299,379
Facilities Management......................... 84,033 85,694 94,461
International Outsourced...................... 50,314 74,065 94,608
Corporate Activities.......................... 1,083 8,772 20,820
-------- -------- --------
Total..................................... $279,057 $369,045 $509,268
======== ======== ========
OPERATING INCOME (LOSS):
Outsourced.................................... $ 30,243 $ 41,495 $ 69,463
Facilities Management......................... 16,159 11,648 6,849
International Outsourced...................... 4,258 5,675 6,074
Corporate Activities.......................... (17,513) (27,080) (40,822)
-------- -------- --------
Total..................................... $ 33,147 $ 31,738 $ 41,564
======== ======== ========
DEPRECIATION AND AMORTIZATION
INCLUDED IN OPERATING INCOME:
Outsourced.................................... $ 7,463 $ 12,688 $ 16,514
Facilities Management......................... 522 239 483
International Outsourced...................... 3,102 5,054 7,247
Corporate Activities.......................... 244 1,312 5,643
-------- -------- --------
Total..................................... $ 11,331 $ 19,293 $ 29,887
======== ======== ========
ASSETS:
Outsourced.................................... $ 88,829 $101,105 $ 76,401
Facilities Management......................... 6,759 18,121 11,290
International Outsourced...................... 42,229 57,567 88,643
Corporate Activities.......................... 54,550 54,117 117,396
-------- -------- --------
Total..................................... $192,367 $230,910 $293,730
======== ======== ========
GOODWILL (INCLUDED IN TOTAL ASSETS):
International Outsourced Goodwill, Net........ $ 7,295 $ 6,803 $ 10,496
Corporate Activities Goodwill, Net............ -- 8,219 10,137
-------- -------- --------
Total..................................... $ 7,295 $ 15,022 $ 20,633
======== ======== ========
CAPITAL EXPENDITURES (INCLUDING CAPITAL
LEASES):
Outsourced.................................... $ 22,337 $ 28,144 $ 23,562
Facilities Management......................... 50 1,169 434
International Outsourced...................... 15,963 4,697 19,261
Corporate Activities.......................... 1,682 7,047 16,520
-------- -------- --------
Total..................................... $ 40,032 $ 41,057 $ 59,777
======== ======== ========
43
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(2) SEGMENT INFORMATION AND CUSTOMER CONCENTRATIONS (CONTINUED)
The following geographic data includes revenues based on the location the
services are provided and gross property and equipment based on the physical
location (in thousands).
1997 1998 1999
-------- -------- --------
REVENUES:
United States................................. $228,743 $281,077 $394,141
Australia..................................... 29,790 36,958 49,925
Canada........................................ 14,497 36,852 35,814
Rest of world................................. 6,027 14,158 29,388
-------- -------- --------
Total..................................... $279,057 $369,045 $509,268
======== ======== ========
GROSS PROPERTY AND EQUIPMENT:
United States................................. $ 54,912 $ 86,189 $125,969
Australia..................................... 10,622 11,956 16,684
Canada........................................ 4,790 5,645 8,943
Rest of world................................. 5,226 12,188 22,432
-------- -------- --------
Total..................................... $ 75,550 $115,978 $174,028
======== ======== ========
The Company's revenues from major customers (revenues in excess of 10% of
total sales) are from entities involved in the telecommunications and
transportation industries. The revenues from such customers as a percentage of
total revenues for each of the three years ended December 31 are as follows:
1997 1998 1999
-------- -------- --------
Customer A................................................ 18% 8% 8%
Customer B................................................ 23% 13% 10%
Customer C................................................ 15% 25% 27%
----- ----- -----
56% 46% 45%
===== ===== =====
At December 31, 1999, accounts receivable from Customers A, B and C were
$5.2 million, $4.7 million and $8.2 million, respectively. At December 31, 1998,
accounts receivable from Customers A, B and C were $7.1 million, $7.3 million,
and $13.4 million, respectively. There were no other customers with receivable
balances in excess of 10% of consolidated accounts receivable. Customers A and C
are included in the outsourced reporting segment. Customer B is included in the
facilities management reporting segment.
The loss of one or more of its significant customers could have a materially
adverse effect on the Company's business, operating results or financial
condition. To limit the Company's credit risk, management performs ongoing
credit evaluations of its customers and maintains allowances for potentially
uncollectible accounts. Although the Company is directly impacted by economic
conditions in the telecommunications, technology, transportation, healthcare,
financial services and government services industries, management does not
believe significant credit risk exists at December 31, 1999.
44
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(3) PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31, 1998 and
1999 (in thousands):
1998 1999
-------- --------
Computer equipment and software......................... $ 55,547 $ 75,085
Telephone equipment..................................... 7,773 12,631
Furniture and fixtures.................................. 23,350 28,880
Leasehold improvements.................................. 29,280 56,264
Other................................................... 28 1,168
-------- --------
115,978 174,028
Less accumulated depreciation........................... (38,432) (65,083)
-------- --------
$ 77,546 $108,945
======== ========
Included in the cost of property and equipment is the following equipment
obtained through capitalized leases as of December 31, 1998 and 1999 (in
thousands):
1998 1999
-------- --------
Computer equipment and software......................... $ 16,928 $ 14,974
Telephone equipment..................................... 1,906 1,615
Furniture and fixtures.................................. 8,071 2,381
-------- --------
26,905 18,970
Less accumulated depreciation........................... (14,160) (14,377)
-------- --------
$ 12,745 $ 4,593
======== ========
Depreciation expense was $10.3 million, $18.3 million and $26.8 million for
the years ended December 31, 1997, 1998 and 1999, respectively. Depreciation
expense related to leased equipment under capital leases was $4.7 million,
$5.1 million and $4.6 million for the years ended December 31, 1997, 1998 and
1999, respectively.
(4) CAPITAL LEASE OBLIGATIONS
The Company has financed property and equipment under non-cancelable capital
lease obligations. Accordingly, the fair value of the equipment has been
capitalized and the related obligation recorded. The average implicit interest
rate on these leases was 8.3% at December 31, 1999. Interest is charged to
expense at a level rate applied to declining principal over the period of the
obligation.
45
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(4) CAPITAL LEASE OBLIGATIONS (CONTINUED)
The future minimum lease payments under capitalized lease obligations as of
December 31, 1999, are as follows (in thousands):
Year Ended December 31,
2000.................................................... $ 3,358
2001.................................................... 697
2002.................................................... 496
-------
4,551
Less amount representing interest....................... (433)
-------
4,118
Less current portion.................................... (2,421)
-------
$ 1,697
=======
Interest expense on the outstanding obligations under such leases was
$1,106,000, $1,015,000 and $818,000 for the years ended December 31, 1997, 1998
and 1999, respectively.
(5) LONG-TERM DEBT
As of December 31, 1998 and 1999, long-term debt consisted of the following
notes (in thousands):
1998 1999
-------- --------
Note payable, interest at 8% per annum, principal and
interest payable monthly, maturing May 2000............... $ 58 $ --
Note payable, interest at 5% per annum, principal and
interest payable quarterly, maturing December 1999........ 222 --
Note payable, interest at 8% per annum, principal and
interest payable quarterly, maturing March 2001........... 1,673 1,090
Note payable, interest at 7% per annum, principal and
interest payable quarterly, maturing December 1999........ 449 --
Note payable, interest at 8% per annum, principal and
interest payable monthly, maturing January 2001........... 1,448 842
Note payable, interest at 5% per annum, principal and
interest payable monthly, maturing November 2009.......... -- 4,935
Note payable, interest at 7% per annum, principal and
interest payable monthly, maturing July 2002.............. -- 271
Note payable, interest at 7% per annum, principal and
interest payable monthly, maturing May 2002............... -- 348
Other notes payable......................................... 580 404
------- -------
4,430 7,890
Less current portion........................................ (2,285) (2,421)
------- -------
$ 2,145 $ 5,469
======= =======
46
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(5) LONG-TERM DEBT (CONTINUED)
Annual maturities of the long-term debt are as follows (in thousands):
Year Ended December 31,
2000.................................................... $2,421
2001.................................................... 1,017
2002.................................................... 648
2003.................................................... 529
2004.................................................... 551
Thereafter.............................................. 2,724
------
$7,890
======
(6) REVOLVING LINE OF CREDIT
In November 1998, the Company entered into a three-year unsecured revolving
line of credit agreement with a syndicate of five commercial banks under which
it may borrow up to $50 million. Interest is payable at various interest rates.
The borrowings can be made at (a) the bank's base rate or (b) the bank's
offshore rate (approximating LIBOR) plus a margin ranging from 50 to 150 basis
points depending upon the Company's leverage. In addition, the Company, at its
option, can elect to secure up to $25 million of the line with existing cash
investments. Advances under the secured portion will be made at a margin of 22.5
basis points. At December 31, 1999, there was $18 million outstanding under this
agreement. At December 31, 1998, there were no amounts outstanding under this
facility. The Company is required to comply with certain minimum financial
ratios under covenants in connection with the agreement described above, the
most restrictive of which requires the Company to maintain a fixed charge
coverage ratio of 3 to 1. Under this agreement, the Company has voluntarily
pledged $15 million of short-term investments at December 31, 1999, as
collateral to reduce the interest rate on short-term borrowings. The Company may
at its option, elect to unsecure the borrowings at any time. As of December 31,
1998 and 1999, the Company was in compliance with all covenants under the
agreement.
The Company's Canadian subsidiary has available an operating loan of
CDN$2.0 million, which is due on demand and bears interest at the bank's prime
rate, which was 6.75% at December 31, 1998 and 1999. The operating loan is
collateralized by a general security agreement, a partial assignment of accounts
receivable insurance in the amount of CDN$500,000, a partial assignment of life
insurance on the former majority shareholder in the amount of CDN$400,000 and an
assignment of fire insurance. As of December 31, 1998 and 1999, there was
$778,000 and $1,323,000, respectively, outstanding under this operating loan.
47
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(7) INCOME TAXES
The components of income before income taxes are as follows (in thousands):
1997 1998 1999
-------- -------- --------
Domestic......................................... $31,325 $23,518 $41,653
Foreign.......................................... 4,132 8,379 6,762
------- ------- -------
Total............................................ $35,457 $31,897 $48,415
======= ======= =======
The components of the provision for income taxes are as follows (in
thousands):
1997 1998 1999
-------- -------- --------
Current provision:
Federal........................................ $11,116 $ 8,297 $14,776
State.......................................... 2,490 1,865 3,359
Foreign........................................ 1,686 3,768 3,609
------- ------- -------
15,292 13,930 21,744
------- ------- -------
Deferred provision:
Federal........................................ (1,036) (834) (1,724)
State.......................................... (190) (195) (303)
Foreign........................................ 57 (206) (392)
------- ------- -------
(1,169) (1,235) (2,419)
------- ------- -------
$14,123 $12,695 $19,325
======= ======= =======
The following reconciles the Company's effective tax rate to the federal
statutory rate for the years ended December 31, 1997, 1998 and 1999 (in
thousands):
1997 1998 1999
-------- -------- --------
Income tax expense per federal statutory rate.... $12,410 $11,152 $16,945
State income taxes, net of federal deduction..... 1,491 1,100 1,883
Permanent differences............................ (100) (315) 150
Foreign income taxed at higher rate.............. 322 758 347
------- ------- -------
$14,123 $12,695 $19,325
======= ======= =======
48
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(7) INCOME TAXES (CONTINUED)
The Company's deferred income tax assets and liabilities are summarized as
follows (in thousands):
1998 1999
-------- --------
Deferred tax assets:
Allowance for doubtful accounts........................... $1,024 $1,278
Vacation accrual.......................................... 1,202 1,265
Compensation.............................................. 954 1,025
Insurance reserves........................................ 644 796
State tax credits......................................... -- 502
Other..................................................... 31 23
------ ------
3,855 4,889
Long-term deferred tax assets:
Depreciation and amortization............................. -- 550
Deferred tax liabilities:
Depreciation and amortization............................. (835) --
------ ------
Net deferred income tax asset............................... $3,020 $5,439
====== ======
A valuation allowance has not been recorded as the Company expects that all
deferred tax assets will be realized in the future.
(8) COMMITMENTS AND CONTINGENCIES
LEASES. The Company has various operating leases for equipment, customer
interaction centers and office space. Lease expense under operating leases was
approximately $8,163,000, $12,336,000 and $15,368,000 for the years ended
December 31, 1997, 1998 and 1999, respectively.
The future minimum rental payments required under non-cancelable operating
leases as of December 31, 1999, are as follows (in thousands):
Year ended December 31,
2000...................................................... $15,469
2001...................................................... 12,833
2002...................................................... 10,052
2003...................................................... 8,908
2004...................................................... 6,890
Thereafter................................................ 30,844
-------
$84,996
=======
LEGAL PROCEEDINGS. In November 1996, the Company received notice that
CompuServe Incorporated (CompuServe) was withdrawing its WOW! Internet service
from the marketplace and that effective January 31, 1997, it would terminate all
the programs provided to CompuServe by the Company. Pursuant to the terms of its
agreement with the Company, CompuServe was entitled to terminate the agreement
for reasonable business purposes upon 120 days advance notice and by payment of
a termination fee
49
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(8) COMMITMENTS AND CONTINGENCIES (CONTINUED)
calculated in accordance with the agreement. In December 1996, the Company filed
suit against CompuServe to enforce these termination provisions and collect the
termination fee. CompuServe filed a counterclaim in December 1996 alleging that
the Company breached other provisions of this agreement and seeking unspecified
monetary damages. In March 1997, CompuServe asserted a right to offset, against
the amount that may be awarded to CompuServe on its counterclaim, if any,
certain accounts receivable it owed to the Company for services rendered. These
accounts receivable totaled $4.3 million.
In mid-1997, CompuServe announced it had agreed to sell its worldwide
on-line services business to America Online, Inc. and its network services
business to a wholly owned subsidiary of WorldCom, Inc. In July 1999, the
Company reached a settlement with CompuServe and other parties whereby the
Company would receive $12.0 million in final settlement, of which $5.5 million
was received on August 10, 1999, and the remainder was paid in the fourth
quarter of 1999. As a result, the Company recorded a gain of $6.7 million during
1999.
(9) EMPLOYEE BENEFIT PLAN
The Company has a 401(k) profit-sharing plan that covers all employees who
have completed one year of service, as defined, and are 21 or older.
Participants may defer up to 15% of their gross pay up to a maximum limit
determined by law. Participants are always 100% vested in their contributions.
Participants are also eligible for a matching contribution by the Company of 50%
of the first 5% of compensation a participant contributes to the plan.
Participants vest in all matching contributions over a four-year period.
(10) STOCK COMPENSATION PLANS
The Company adopted a stock option plan during 1995 and amended and restated
the plan in January 1996 for directors, officers, employees, consultants and
independent contractors. The plan reserves 7.0 million shares of common stock
and permits the award of incentive stock options, non-qualified options, stock
appreciation rights and restricted stock. Outstanding options vest over a three-
to five-year period and are exercisable for 10 years from the date of grant.
In January 1996, the Company adopted a stock option plan for non-employee
directors (the Director Plan), covering 750,000 shares of common stock. All
options are to be granted at fair market value at the date of grant. Options
vest as of the date of the option and are not exercisable until six months after
the option date. Options granted are exercisable for 10 years from the date of
grant unless a participant is terminated for cause or one year after a
participant's death. The Director Plan had options to purchase 423,000, 418,750
and 337,500 shares outstanding at December 31, 1999, 1998 and 1997,
respectively.
In July 1996, the Company adopted an employee stock purchase plan (the
ESPP). Pursuant to the ESPP, an aggregate of 200,000 shares of common stock of
the Company will be sold in periodic offerings to eligible employees of the
Company. The price per share purchased in any offering period is equal to the
lesser of 90% of the fair market value of the common stock on the first day of
the offering period or on the purchase date. The offering periods have a term of
six months. Contributions to the plan for the years ended December 31, 1997,
1998 and 1999 were $419,000, $334,000 and $279,000, respectively.
In February 1999, the Company adopted the TeleTech Holdings, Inc. 1999 Stock
Option and Incentive Plan (the 1999 Option Plan). The purpose of the 1999 Option
Plan is to enable the Company to continue to (a) attract and retain high quality
directors, officers, employees and potential employees, consultants
50
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(10) STOCK COMPENSATION PLANS (CONTINUED)
and independent contractors of the Company or any of its subsidiaries,
(b) motivate such persons to promote the long-term success of the business of
the Company and its subsidiaries and (c) to induce employees of companies that
are acquired by TeleTech to accept employment with TeleTech following such an
acquisition. The 1999 Option Plan supplements the TeleTech Holdings, Inc. Stock
Plan, as amended and restated, which was adopted by the Company in
January 1995.
An aggregate of 5.0 million shares of common stock have been reserved for
issuance under the 1999 Option Plan and permits the award of incentive stock
options, non-qualified stock options and shares of restricted common stock. The
1999 Option Plan also authorizes the award of phantom stock and appreciation
rights (SARs).
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 123 (SFAS 123). The FASB's
SFAS 123, "Accounting for Stock Based Compensation," defines a fair value based
method of accounting for an employee stock option, employee stock purchase plan
or similar equity instrument and encourages all entities to adopt that method of
accounting for all of their employee stock compensation plans. However, it also
allows an entity to continue to measure compensation cost for those plans using
the method of accounting prescribed by the Accounting Principles Board Opinion
No. 25 (APB 25), "Accounting for Stock Issued to Employees." Entities electing
to remain with the accounting in APB 25 must make pro forma disclosures of net
income and earnings per share as if the fair value based method of accounting
defined in SFAS 123 has been applied.
The Company has elected to account for its stock-based compensation plans
under APB 25; however, the Company has computed, for pro forma disclosure
purposes, the value of all options granted using the Black-Scholes option
pricing model as prescribed by SFAS 123 and the following weighted average
assumptions used for grants:
1997 1998 1999
--------- --------- ---------
Risk-free interest rate....................... 5.4% 5.2% 5.9%
Expected dividend yield....................... 0% 0% 0%
Expected lives................................ 3.2 years 6.0 years 5.3 years
Expected volatility........................... 70% 70% 79%
The pro forma compensation expense was computed to be the following
approximate amounts:
Year ended December 31, 1997................................ $4,121,000
Year ended December 31, 1998................................ $8,652,000
Year ended December 31, 1999................................ $8,196,000
51
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(10) STOCK COMPENSATION PLANS (CONTINUED)
If the Company had accounted for these plans in accordance with SFAS 123,
the Company's net income and pro forma net income per share would have been
reported as follows:
NET INCOME (AMOUNTS IN THOUSANDS)
1997 1998 1999
-------- -------- --------
As reported...................................... $21,334 $19,202 $29,090
Pro forma........................................ $18,820 $14,010 $24,008
PRO FORMA NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE
1997 1998 1999
-------- -------- --------
As reported:
Basic................................................... $.37 $.32 $.48
Diluted................................................. $.35 $.31 $.46
Pro forma:
Basic................................................... $.32 $.23 $.39
Diluted................................................. $.31 $.23 $.38
52
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(10) STOCK COMPENSATION PLANS (CONTINUED)
A summary of the status of the Company's three stock option plans for the
three years ended December 31, 1999, together with changes during each of the
years then ended, is presented in the following table:
WEIGHTED
AVERAGE PRICE
SHARES PER SHARE
---------- -------------
Outstanding, December 31, 1996...................... 5,039,690 $ 5.79
Grants.............................................. 880,500 17.79
Exercises........................................... (470,272) 4.08
Forfeitures......................................... (519,600) 9.95
---------- ------
Outstanding, December 31, 1997...................... 4,930,318 7.61
========== ------
Grants.............................................. 3,163,074 12.03
Exercises........................................... (249,440) 4.03
Forfeitures......................................... (1,563,802) 13.73
---------- ------
Outstanding, December 31, 1998...................... 6,280,150 8.54
========== ------
Grants.............................................. 6,735,643 8.40
Exercises........................................... (768,210) 6.91
Forfeitures......................................... (1,800,384) 10.29
---------- ------
Outstanding, December 31, 1999...................... 10,447,199 8.55
========== ------
Options exercisable at year-end:
1997.............................................. 1,498,425 $ 4.90
========== ======
1998.............................................. 2,076,578 $ 5.62
========== ======
1999.............................................. 2,385,596 $ 6.04
========== ======
Weighted average fair value of options granted
during the year:
1997.............................................. $ 7.68
======
1998.............................................. $ 8.14
======
1999.............................................. $ 4.81
======
53
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(10) STOCK COMPENSATION PLANS (CONTINUED)
The following table sets forth the exercise price range, number of shares,
weighted average exercise price and remaining contractual lives at December 31,
1999:
WEIGHTED WEIGHTED
EXERCISE PRICE NUMBER OF AVERAGE AVERAGE
RANGE SHARES EXERCISE PRICE CONTRACTUAL LIFE
- -------------- --------- -------------- ----------------
$ 1.29-$ 5.00 1,594,296 $ 2.34 6
$ 5.62-$ 6.00 587,084 $ 5.88 9
$ 6.13-$ 6.13 1,380,684 $ 6.13 9
$ 6.18-$ 7.00 1,630,000 $ 6.56 9
$ 7.06-$ 9.50 1,698,273 $ 8.72 8
$ 9.56-$12.75 1,494,608 $11.50 9
$12.88-$14.50 1,507,754 $13.46 9
$15.50-$34.06 554,500 $19.43 9
(11) FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair values of cash equivalents and other current accounts receivable and
payable approximate the carrying amounts due to their short-term nature.
Short-term investments include primarily U.S. government Treasury bills,
investments in commercial paper, short-term corporate bonds and other short-term
corporate obligations. These investments are classified as held to maturity
securities and are measured at amortized cost. The carrying values of these
investments approximate their fair values.
Debt and long-term receivables carried on the Company's consolidated balance
sheet at December 31, 1998 and 1999 have a carrying value that is not
significantly different than its estimated fair value. The fair value is based
on discounting future cash flows using current interest rates adjusted for risk.
The fair value of the short-term debt approximates its recorded value due to its
short-term nature.
(12) RELATED PARTY TRANSACTIONS
The Company has entered into agreements pursuant to which the Company uses
aircraft services which Kenneth D. Tuchman, chairman of the board of the
Company, has a direct or indirect beneficial interest. During 1998 and 1999, the
Company paid an aggregate of $480,000 and $440,000, respectively, for use of the
aircraft services.
During 1998, the Company entered into an employment agreement with Morton H.
Meyerson, a director of the Company, pursuant to which Mr. Meyerson has agreed
to render certain advisory and consulting services to the Company. As
compensation for such services, the Company has granted to Mr. Meyerson an
option with an exercise price of $9.50 per share. The option vests over five
years and is subject to accelerated vesting if and to the extent that the
closing sales price of the common stock during the term equals or exceeds
certain levels. Under the terms of the option, the exercise price is required to
be paid by delivery of TeleTech shares to the Company and provides that
Mr. Meyerson will receive no more than 200,000 shares of common stock, net of
the shares received by the Company for exercise consideration.
54
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(12) RELATED PARTY TRANSACTIONS (CONTINUED)
The Company utilizes the services of EGI Risk Services, Inc. for reviewing,
obtaining and/or renewing various insurance policies. EGI Risk Services, Inc. is
a wholly-owned subsidiary of Equity Group Investments, Inc. Rod Dammeyer, a
director of the Company, is the managing partner of Equity Group
Investments, Inc., and Samuel Zell, a former director of the Company, is
chairman of the board. During the years ended December 31, 1997, 1998 and 1999,
the Company incurred $1,166,000, $2,288,000 and $3,521,000, respectively, for
such services.
The Company provided reservation call handling services to Midway Airlines
Corporation (Midway), a majority-owned subsidiary of Zell/Chilmark Fund, L.P.
Samuel Zell, a former director of the Company, is an affiliate of Zell/Chilmark
Fund, L.P., and Rod Dammeyer, a director of the Company and a member of the
Audit Committee of the board of directors, is the managing director of
Zell/Chilmark Fund, L.P. During the years ended December 31 1997, the Company
charged Midway an aggregate of $841,000 for services rendered by the Company.
Services to Midway were discontinued in 1997.
(13) CONTRACT ACQUISITION COSTS
In September 1998, the Company paid $10.9 million to obtain a long-term
contract with a significant client in the telecommunications industry. This
amount is recorded as contract acquisition cost in the accompanying balance
sheet and is being amortized over the six-year term of the contract commencing
with the opening of the first customer interaction center in the first quarter
of 1999. Amortization expense for the year ended December 31, 1999, was
$1,614,000.
(14) ACQUISITIONS
On March 18, 1999, the Company acquired 100% of the common stock of Pamet
River, Inc. (Pamet) for approximately $1,821,000 in cash and 285,711 shares of
common stock in the Company. Pamet is a global marketing company offering
end-to-end marketing solutions by leveraging Internet and database technologies.
The transaction has been accounted for as a purchase and goodwill will be
amortized using the straight-line method over 20 years. The operations of Pamet
for all periods prior to the acquisition are immaterial to the results of the
Company and, accordingly, no pro forma financial information has been presented.
On March 31, 1999, the Company acquired 100% of the common stock of Smart
Call S.A. (Smart Call) for approximately $2,350,000 in cash including costs
related to the acquisition. Smart Call is based in Buenos Aires, Argentina, and
provides a wide range of customer management solutions to Latin American and
multinational companies. The transaction has been accounted for as a purchase
and goodwill will be amortized using the straight-line method over 20 years. The
operations of Smart Call for all periods prior to the acquisition are immaterial
to the results of the Company and, accordingly, no pro forma financial
information has been presented.
As a part of the Smart Call acquisition, the Company paid $300,000,
including costs associated with the transaction, for the option to acquire
Connect S.A. (Connect), a sister company with additional customer management
systems integration capabilities. The option has been accounted for as an other
asset.
On October 12, 1999, the Company acquired 100% of the common stock of
Connect for approximately $2,300,000 in cash including costs related to the
acquisition. The former owners of Connect will also
55
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(14) ACQUISITIONS (CONTINUED)
be entitled to an earn-out premium based on the results of the Company's
consolidated operations in Argentina in 2000. Connect is located in Buenos
Aires, Argentina, and provides customer relationship management solutions to
Latin American and multinational companies in a variety of industries. The
transaction has been accounted for as a purchase and goodwill will be amortized
using the straight-line method over 20 years. The operations of Connect for all
periods prior to the acquisition are immaterial to the results of the Company
and, accordingly, no pro forma financial information has been presented.
The previous owners of Smart Call and Connect have the ability to earn a
contingent payment of between $250,000 and $2,500,000 during 2000 and 2001. The
contingent payment is based on reaching revenue and profitability targets.
On December 15, 1999, the Company invested $2.5 million in a customer
relationship management software company. On January 27, 2000, an additional
investment of $7.1 million was made in the same customer relationship management
software company. The total ownership interest after the two investments is in
excess of 7%. This investment is accounted for in long-term other assets.
On February 17, 1998, the Company acquired the assets of
Intellisystems, Inc. (Intellisystems) for $2.0 million in cash and 344,487
shares of common stock, which included 98,810 shares of treasury stock.
Intellisystems is a leading developer of patented automated product support
systems. Intellisystems' products can electronically resolve a significant
percentage of customer interactions coming into customer interaction centers
through telephone, Internet or fax-on-demand. The acquisition has been accounted
for as a purchase.
On June 8, 1998, and June 17, 1998, the Company consummated business
combinations with Digital Creators, Inc. (Digital), which included the issuance
of 1,069,000 shares of Company common stock, and Electronic Direct
Marketing, Ltd. (EDM), which included the obligation to issue 1,783,444 shares
of Company common stock. These business combinations were accounted for as
poolings of interests and, accordingly, the historical financial statements of
the Company have been restated to include the financial statements of Digital
and EDM for all periods presented.
The consolidated balance sheet of the Company as of December 31, 1997,
includes the balance sheet of EDM for the fiscal year ended February 28, 1998.
Accordingly, the Company's retained earnings have been adjusted during the
quarter ended March 31, 1998, for the effect of utilizing different fiscal
year-ends for this period. During 1998, the fiscal year-end of EDM has been
changed from February to December to conform to the Company's year-end.
The consolidated financial statements have been prepared to give retroactive
effect to the business combinations with Digital and EDM.
56
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(14) ACQUISITIONS (CONTINUED)
The table below sets forth the results of operations of the previously
separate enterprises for the period prior to the consummation of the June 1998
business combinations during the periods ended December 31, 1998 and 1997 (in
thousands):
TELETECH 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.................................... $263,477 $2,521 $14,497 $(1,438) $279,057
Net income.................................. 20,273 276 785 -- 21,334
On August 26, 1998, the Company consummated a business combination with
Outsource Informatica Ltda. (Outsource), a leading Brazilian customer management
provider, which included the issuance of 606,343 shares of Company common stock.
This business combination was accounted for as a pooling of interests. The
operations of Outsource prior to the acquisition are immaterial to all periods
presented.
On December 31, 1998, the Company acquired 100% of the common stock of
Cygnus Computer Associates Ltd. (Cygnus) for approximately $660,000 in cash and
324,744 shares of common stock in the Company. Cygnus is a Canadian provider of
systems integration and call center solutions. The transaction has been
accounted for as a purchase and goodwill will be amortized using the
straight-line method over 10 years. The Company has also agreed to pay
contingent consideration of up to CDN$4.8 million if Cygnus achieves certain
levels of operating income in 1999 and 2000. Due to the uncertainty surrounding
the achievement of these targets, none of the contingent consideration has been
reflected as a liability in the accompanying financial statements. The
operations of Cygnus for all periods prior to the acquisition are immaterial to
the results of the Company and, accordingly, no pro forma financial information
has been presented.
In May 1997, the Company acquired 100% of the common stock of Telemercadeo
Integral, S.A. (TMI) for total consideration of $4.2 million, consisting of
100,000 shares of the Company's common stock and cash of $2.4 million. TMI is a
customer management provider in Mexico. The acquisition was accounted for using
the purchase method. The excess of cost of the acquisition over the underlying
net assets of $4.4 million is being amortized using the straight-line method
over 25 years.
(15) SALE OF JOINT VENTURE
On September 21, 1998, the Company sold its 50% interest in Access 24 UK to
Priplan Investments, Ltd. for cash consideration of approximately $1.0 million.
The Company incurred $129,000 in costs relating to the disposal of this joint
venture in the third quarter 1998.
57
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(16) QUARTERLY FINANCIAL DATA (UNAUDITED) (AMOUNTS IN THOUSANDS, EXCEPT PER
SHARE DATA)
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
YEAR ENDED DECEMBER 31, 1999:
Revenues............................................ $110,638 $120,565 $126,131 $151,934
Income from operations.............................. 7,866 9,165 10,988 13,545
Net income.......................................... 4,811 5,454 10,831 7,993
Net income per common share:
Basic............................................. .08 .09 .18 .13
======== ======== ======== ========
Diluted........................................... .08 .09 .17 .12
======== ======== ======== ========
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
YEAR ENDED DECEMBER 31, 1998:
Revenues............................................ $ 80,244 $ 88,099 $ 92,366 $108,336
Income from operations.............................. 7,126 7,646 8,138 8,828
Net income.......................................... 4,552 4,464 4,715 5,471
Net income per common share:
Basic............................................. .08 .07 .08 .09
======== ======== ======== ========
Diluted........................................... .07 .07 .08 .09
======== ======== ======== ========
58