Back to GetFilings.com
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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, 2000, OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER 0-21055
------------------------
TELETECH HOLDINGS, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 84-1291044
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1700 LINCOLN STREET,
SUITE 1400, DENVER, COLORADO 80203
(Address of Principal Executive (Zip Code)
Offices)
(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 23, 2001, there were 74,907,151 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 $311,988,284 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 24, 2001, are incorporated by
reference into Part III of this Form 10-K, as indicated.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PART I
Item 1. Business.
OVERVIEW
TeleTech Holdings, Inc., a Delaware Corporation (together with its wholly and
majority owned subsidiaries, "TeleTech" or the "Company," which may also be
referred to as "we," "us" or "our"), is a leading global provider of customer
relationship management ("CRM") services and solutions for large domestic,
foreign and multinational companies. Utilizing a number of technologies, we help
our clients acquire, serve, retain and grow their customers by strategically
managing inbound telephone, e-mail and Internet-based inquiries on their behalf.
By compiling and maintaining a database of customer activity, we also offer
comprehensive analytical reports to help clients better understand and retain
their customers. By providing high quality, technologically advanced services
through state-of-the-art customer interaction centers, we have the ability to
completely assume our clients' CRM functions through an outsourcing relationship
that is transparent to the customer.
Our offerings are scaleable, with a variety of service packages to meet our
clients' specific CRM requirements. We provide services from 50 state-of-the-art
customer interaction centers around the world. We also offer consulting services
for clients seeking to optimize internal CRM functions.
Since 1996, we have expanded our international presence and we currently have
operations in 11 different countries. Our international reach provides increased
business opportunities with non-U.S. clients, as well as opportunities to expand
our relationship with existing multinational clients based in the U.S. In 2000,
our international operations represented 36% of our total revenues.
CUSTOMER RELATIONSHIP MANAGEMENT SOLUTIONS
Our fully integrated, CRM solutions encompass 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;
- - 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.
We design, develop and implement large-scale programs built around each
client's unique set of requirements and specific business needs. The programs
may incorporate voice, e-mail or Internet-based technologies, and are designed
to allow for system expansion. We provide services from customer interaction
centers leased, equipped and staffed by us (fully outsourced programs) and
customer interaction centers leased and equipped by our clients and staffed by
us (facilities management programs).
Through our acquisition of Newgen Results Corporation ("Newgen") in December
2000, we now also offer database marketing and consulting services.
OUTSOURCED
With a fully outsourced program, we provide comprehensive CRM solutions from
customer interaction centers leased, equipped and staffed by us. Our fully
outsourced customer interaction centers are utilized to serve either multiple
clients (shared centers) or one dedicated client (dedicated centers). Our
domestic and international outsourced business segments currently represent
approximately 77% of total 2000 revenues.
2
FACILITIES MANAGEMENT
With our facilities management program the client owns or leases the
customer interaction center and the equipment and we provide the staff and
knowledge to operate the center. Our facilities management segment has declined
as a percentage of total revenue, but it still accounted for approximately 13.5%
of our total 2000 revenues.
DATABASE MARKETING AND CONSULTING
Through our database marketing and consulting segment, we provide outsourced
database management, direct marketing and related customer retention services
for the service department of automobile dealerships and manufacturers.
Additionally, we provide consulting services related to the CRM development and
implementation of new techniques and programs that enable automobile dealerships
to grow their business, streamline inefficient processes and more effectively
market their services. Our database marketing and consulting segment accounted
for approximately 8.7% of our total 2000 revenues.
CRM SOLUTIONS
Our CRM solutions include:
- - CUSTOMER SERVICE AND RETENTION PROGRAMS: Once a business gains a customer,
generally through the purchase of a product or service, it can begin working
to service and retain that individual. We generate the majority of our
revenues through programs designed to provide customer service and help in
retention efforts. A sampling of these services includes providing technical
help desk, product or service support; responding to billing, warranty and
other account inquiries; managing customer churn, or turnover; and resolving
complaints and product or service problems.
- - CUSTOMER ACQUISITION PROGRAMS: We help some clients secure new customers
through an assortment of customer acquisition programs, which generally build
the customer's knowledge about a product or service. A sampling of these
services includes processing and fulfulling pre-sale information requests;
verifying sales, activating services and directing customers to product or
service sources; and providing initial post-sale support, including operating
instructions for new product or service use.
- - CUSTOMER SATISFACTION AND LOYALTY PROGRAMS: Through customer satisfaction and
loyalty programs, we help clients gather important information, build brand
loyalty and reward customers for repeat business. A sampling of these services
includes supporting promotional campaigns; developing and implementing
client-branded loyalty programs; and conducting satisfaction assessments.
- - OTHER CUSTOMER-RELATED PROGRAMS: Our CRM solutions may also include other
services, including aiding in collections, collecting market research from
customers, and performing outbound-call campaigns.
MARKETS AND CLIENTS
To target our sales and marketing efforts in North America, we created
Strategic Business Units ("SBUs"), which are responsible for developing and
implementing customized industry-specific CRM solutions in vertical markets.
Within this framework, we focus on large multinational corporations in the
communications industry, the transportation industry, the financial services
industry, and the government. These industries account for 42%, 21%, 14% and 9%,
respectively, of our 2000 revenue. Sales into other industries, including
technology, healthcare and various others, accounted for 14% of our 2000
revenues. Our two largest clients in 2000 were Verizon Communications
("Verizon") and United Parcel Service which accounted for 20% and 8%,
respectively, of our revenue.
COMMUNICATIONS
The communications industry encompasses a wide range of businesses,
including broadband, cable, long-distance, local and wireless service providers.
In addition to traditional product and service support solutions, we deliver
advanced order management through our Order Works program. We have also
developed specific end-to-end solutions for Internet service providers and
wireless service providers.
FINANCIAL SERVICES
Regulatory changes have allowed financial service providers to expand their
product offerings, placing an increased importance on CRM. As industry leaders
integrate services provided by newly created or recently acquired divisions, we
help align delivery channels and
3
ensure service quality through our financial services technology solutions,
which integrate contact channels such as voice and e-mail while providing
full-feature support for customers and clients alike. In addition, our financial
services technology solutions integrate with most legacy and third-party
industry oriented systems. We have also developed specific end-to-end solutions
for Internet, retail banking services and card services.
TRANSPORTATION
We provide a variety of CRM services to clients in the transportation
industry, including package delivery and travel companies, as well as automobile
dealers and manufacturers. In 2000, we significantly expanded our solution set
for the transportation sector with the launch of Percepta, LLC ("Percepta"), our
joint venture with Ford Motor Company ("Ford") and the acquisition of Newgen
(see "Recent Developments" below).
GOVERNMENT
Leveraging nearly 20 years of experience, we streamline the CRM function for
government organizations. By utilizing well-managed customer interaction centers
for traditional CRM solutions such as customer support, we allow various
government agencies to maintain a focus on conducting their primary business.
SALES AND MARKETING
We employ a consultative sales approach and hire business development
professionals with experience in industries relating to our key SBUs. Once a
potentially significant client is identified, a team of TeleTech employees,
usually consisting of applications and systems specialists, operations experts,
human resources professionals and other appropriate management personnel,
thoroughly examines the potential client's operations and assess its current and
prospective CRM needs, goals and strategies. We invest significant resources
during the development of a client relationship, although our technological
capabilities enable us to generally develop working prototypes of proposed
solutions with minimal capital investment by the client.
We work with our clients to generate a set of detailed requirements, a
development plan and a deployment strategy tailored to the client's specific
needs. After the initial solution is deployed, we conduct regular reviews of the
relationship to ensure client satisfaction and we watch for areas to expand the
relationship.
We generally provide CRM solutions pursuant to written contracts with terms
ranging from one to seven years. Often, the contracts contain renewal or
extension options. Under substantially all of our significant contracts, we
generate revenue based on the amount of time representatives devote to a
client's program. In addition, clients typically are required to pay ongoing
fees relating to 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. Many of the contracts also have
price adjustment terms allowing for cost of living adjustments and market
changes in agent labor costs. Our client contracts generally contain provisions
that (i) allow us or the client to terminate the contract upon the occurrence of
certain events, (ii) designate the manner by which we receive payment for our
services and (iii) protect the confidentiality and ownership of information and
materials used in connection with the performance of the contract. Some of our
contracts also require our clients to pay a fee in the event of early
termination.
OPERATIONS
We provide CRM services through the operation of 50 state-of-the-art customer
interaction centers located in the United States, Argentina, Australia, Brazil,
Canada, China, Mexico, New Zealand, Singapore, Spain and the United Kingdom. As
of December 31, 2000, we leased 44 customer interaction centers and also managed
6 customer interaction centers on behalf of three clients. In 2001, we expect to
open four or five new customer interaction centers, most likely internationally.
We apply predetermined site selection criteria to identify locations conducive
to operating large-scale, sophisticated customer management facilities in a
cost-effective manner. We maintain databases covering demographic statistics and
the commercial real estate markets. These are used to produce a project-specific
short list on demand. We also aggressively pursue incentives such as tax
abatements, cash grants, low-interest loans, training grants and low cost
utilities. Following comprehensive site evaluations and cost analyses, as well
as client considerations, a specific site is located and a lease is negotiated
and finalized.
4
Once we take occupancy of a site, we use a standardized development process to
minimize the time it takes to open a new customer interaction center, control
costs and eliminate elements that might compromise success. The site is
retrofitted to exacting requirements that incorporate value engineering, cost
control and schedule concepts while placing emphasis on the quality of the work
environment. Upon completion, we integrate the new customer interaction center
into the corporate facility and asset management programs. Throughout the
development process, we conduct critical reviews to evaluate the overall
effectiveness and efficiency of the development. Generally, we can establish a
new, fully operational inbound customer interaction center containing 450 or
more workstations within 120 days after a lease is finalized and signed.
QUALITY ASSURANCE
We monitor and measure the quality and accuracy of our customer interactions
through a quality assurance department located at each customer interaction
center. Each department evaluates, on a real-time basis, a statistically
significant percentage of the customer interactions in a day, across all of the
mediums utilized within the center. Each center also has the ability to enable
its clients to monitor customer interactions as they occur. Using criteria
mutually determined by the client and us, quality assurance professionals
monitor, evaluate, and provide feedback to the representatives on a weekly
basis. As appropriate, representatives are recognized for superior performance
or scheduled for additional training and coaching.
To fulfill client quality requirements, we have received and maintained ISO
9002 certification for two of our customer interaction centers in the United
States and three in Australia and New Zealand.
TECHNOLOGY
Our CRM solution set is built upon complex, state-of-the-art technology, which
helps maximize the utilization of customer interaction centers and increase the
efficiency of representatives. Interaction routing technology is designed for
rapid response rates while tracking and workforce management systems facilitate
efficient staffing levels, reflecting historical demands. In addition, our
infrastructure and object-oriented software allows for tracking of each customer
interaction, filing the information within a relational database and generating
reports on demand.
In 2000, we initiated technological efforts designed to improve the
utilization and productivity of our worldwide network of customer interaction
centers. We began the deployment of the Universal Desktop system, which allows
multiple clients to be served from a single workstation, and has the potential
to boost capacity in our shared customer interaction centers.
We expect to realize further efficiencies in 2001 with continued deployment of
the Universal Desktop system and the rollout of our new centralized customer
interaction center architecture. This new framework, built around centralized
data centers, is designed for increased control over productivity and
utilization while decreasing system redundancies. We also plan to further
develop workstation tools; implement quality management systems to improve
technological productivity and utilization within customer interaction centers;
and explore system enhancements to support the unique needs of specific business
units.
We do not know if we will be successful in deploying the Universal Desktop
system, the centralized customer interaction center architecture or other
technological systems, or if deployed we do not know if we will realize the
anticipated benefits.
We have invested significant resources in designing and developing
industry-specific open-systems software applications and tools and, as a result,
maintain a library of reusable software code for use in future developments. We
run our applications software on open-system, client-server architecture and use
a variety of products developed by Lucent, IBM, Cisco, Microsoft, Oracle and
others. We continue to invest significant resources into the development and
implementation of emerging customer management and technical support
technologies.
HUMAN RESOURCES
Our ability to provide high quality comprehensive customer management
solutions hinges upon our success in recruiting, hiring and training large
numbers of skilled employees. We primarily offer full-time positions with
competitive salaries and wages and a full range of
5
employee benefits. To aid in employee retention, we also provide viable career
paths.
To sustain a high level of service and support to our clients, our
representatives undergo intensive training before managing customer interactions
and receive ongoing training on a regular basis. In addition to learning about
the client's corporate culture and specific product or service offerings,
representatives receive training in the numerous media we use to effectively
execute our client's customer management program.
We are committed to the continued education and development of our employees
and believe that providing employees with access to new learning opportunities
contributes to job satisfaction, ensures a higher quality labor force and
fosters loyalty between our employees and the clients we serve.
As of December 31, 2000, we had over 21,000 employees in 11 countries, with
approximately 95% holding full-time positions. Although our industry is very
labor-intensive and has experienced significant personnel turnover, we seek to
manage employee turnover through proactive initiatives. A small percentage of
our non-U.S. employees are subject to collective bargaining agreements mandated
under national labor laws. We believe our relations with our employees are good.
INTERNATIONAL OPERATIONS
During 2000, we continued our international expansion, which will allow us the
opportunity to build a broader client base, increase the services we can offer
existing multinational clients and leverage our international employee base in
response to business demands.
As of December 31, 2000, we operated seven customer interaction centers in
Spain; seven customer interaction centers in Canada; four customer interaction
centers in Australia; two customer interaction centers in each of Argentina,
Mexico and New Zealand; and one customer interaction center in each of Brazil,
China, Singapore and the United Kingdom.
In 2000, we expanded our reach into Asia and Europe through two acquisitions.
In August, we acquired Contact Center Holding, S.A., of Spain, enhancing our
Spanish-language capabilities and our presence in Europe. In October, we
acquired Hong Kong-based iCcare Limited, one of greater China's leading CRM
service providers. Also in 2000, TeleTech strengthened its operations in the
Americas with state-of-the-art customer interaction centers in North Bay,
Ontario, Canada and Leon, Mexico. We also announced plans to develop a new
40,000 square foot customer interaction center in Timmins, Ontario and a new
58,000 square foot customer interaction center in Belfast, Northern Ireland.
Future international expansion plans may include joint venture or strategic
partnering alliances, as well as the acquisition of businesses with products or
technologies that extend or complement our existing businesses. From time to
time, we engage in discussions regarding restructurings, 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 our financial condition
and results of operations. We cannot assure that any such discussions will
result in the consummation of any such transaction.
COMPETITION
We believe that we compete primarily with the in-house CRM operations of our
current and potential clients. We also compete with certain companies that
provide CRM services on an outsourced basis, including APAC Customer Services,
Convergys Corporation, SITEL Corporation, Sykes Enterprises Incorporated,
TeleSpectrum Worldwide, Inc. and West Corporation. We compete primarily on the
basis of quality and scope of services provided, speed and flexibility of
implementation, and technological expertise. Although the CRM industry is very
competitive and highly fragmented with numerous small participants, we believe
that TeleTech generally does not directly compete with traditional telemarketing
companies, which primarily provide outbound "cold calling" services.
RECENT DEVELOPMENTS
On March 14, 2001, we announced that Verizon agreed to honor the terms of its
long-term contract with us, whereby we have been providing services for its
Competitive Local Exchange Carrier ("CLEC") business. As agreed, Verizon will
redirect business from its CLEC operations to other Verizon strategic units. We
had previously
6
disclosed Verizon's notification of a change in its CLEC strategy. We do not
believe the new business with Verizon will initially reach the same revenue
levels as the CLEC business, which had been operating in excess of Verizon's
contractual commitments. Future revenue levels will be dependent upon the timing
of the replacement of the remaining CLEC business. Verizon's CLEC business
accounted for 14% and 21% of the Company's revenues for the years ending
December 31, 2000 and 1999, respectively.
On March 14, 2001, we named Kenneth D. Tuchman as interim chief executive
officer replacing former CEO Scott Thompson who resigned from that position.
Additionally, we announced that Larry Kessler resigned from the position of
chief operating officer.
On December 20, 2000, we consummated a business combination with Newgen that
included the exchange of 8,283,325 shares of our common stock for all of
Newgen's common stock. We accounted for this business combination as a
pooling-of-interests, and our financial statements have been restated to include
the financial statements of Newgen for all periods presented.
On December 14, 2000, we amended our existing Revolving Credit Agreement with
a syndicate of banks in order to increase our line of credit to $87.5 million
from $75.0 million.
During the fourth quarter of 2000, we transferred all of our common stock of
enhansiv, inc., a Colorado corporation ("enhansiv"), to enhansiv
holdings, inc., a Delaware corporation ("EHI"), in exchange for 100 shares of
Series A Preferred Stock of EHI. At the time of the transfer, enhansiv's
holdings included a subsidiary formerly known as Cygnus Computer
Associates Ltd., a division formerly known as Intellisystems, and a division
consisting of the Freefire assets which we acquired from Information Management
Associates. Our preferred shares of EHI are convertible into 1,000,000 shares of
EHI common stock. As part of this transaction, EHI sold 2,333,333 shares of
common stock to a group of investors. One of those investors, Kenneth D.
Tuchman, is our Chairman and Chief Executive Officer. We have an option to buy
back approximately 95% of the common stock sold in the transaction. However,
given the terms of the option it is unlikely we will exercise the option until
February 2002. We also agreed to a revenue commitment for enhansiv services of
$2.3 million per year over a four-year period either through business referrals
or direct purchases, and we agreed to make a $7.0 million line of credit
available to enhansiv. While enhansiv's independent status allows it to pursue
other business opportunities, we expect to maintain a close relationship with
enhansiv and we plan to use enhansiv's technological systems in our global
network of customer interaction centers.
On November 7, 2000, we acquired the customer care division of Boston
Communications Group, Inc. ("BCGI") for approximately $15 million, consisting of
$13 million in cash and $2 million in assumed liabilities, in an asset purchase
transaction accounted for under the purchase method of accounting. BCGI could
receive additional cash payments, totaling up to an additional $20 million over
four years, based on achievement of certain predetermined revenue targets.
On October 27, 2000, we acquired iCcare Limited, a Hong Kong based CRM
company, for approximately $4 million, consisting of $2 million in cash and
$2 million in stock, in a transaction accounted for under the purchase method of
accounting. The former shareholder of iCcare could receive additional amounts
over the next two years based upon achievement of predetermined revenue targets.
On August 31, 2000, we acquired Contact Center Holdings, S.L. ("CCH"), through
the exchange of 3,264,000 shares of our common stock for all of the issued share
capital of CCH. We accounted for this business combination as a
pooling-of-interests, and our financial statements have been restated to include
the financial statements of CCH for all periods presented.
In March 2000, we entered into a lease agreement with State Street Bank and
Trust Company ("State Street") whereby State Street acquired 12 acres of land in
Arapahoe County, Colorado for the purpose of constructing a new corporate
headquarters for us ("the planned headquarters building"). Subsequently, we
decided it was likely that we would terminate the lease agreement as we
determined that the planned headquarters building would be unable to accommodate
our anticipated growth. We have recorded a $9 million loss on the termination of
the lease, which is included in the accompanying consolidated statements of
income.
In March 2001, we agreed to acquire the planned headquarters building on
March 31, 2001 if the building cannot be sold before that time. We anticipate
that the purchase price will be approximately $15 million. In addition, to
complete construction of the building we will
7
incur approximately $11 million in additional capital expenditures. We plan to
sell the building upon completion. The estimated fair value of the building,
less anticipated selling costs, will approximate our cost for the building less
the $9 million accrued loss on the termination of the lease.
In December 2000, we consummated a lease transaction with State Street for our
new corporate headquarters, whereby State Street acquired the property at 9197
South Peoria, Street, Englewood, Colorado (the "Property"). Simultaneously,
State Street leased the Property to our wholly owned subsidiary, TeleTech
Services Corporation ("TSC"), and TSC subleased the Property to an affiliate of
the seller, pursuant to a short-term sublease, prior to occupancy by us. The
rent expense and corresponding sublease payments are reflected in the lease
commitments. See Note 8 of the consolidated financial statements.
During the first quarter of 2000, TeleTech and Ford launched Percepta, which
provides CRM services to Ford's customers. In addition to consolidating Ford's
customer interaction functions, Percepta is expanding its service offerings.
Percepta also markets its services to other auto-related product and service
providers. We currently hold a 55% interest in Percepta and Ford holds the
remainder.
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 we believe our expectations are based on reasonable assumptions within
the bounds of our knowledge of our 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:
Dependence on the Success of Our Clients' Products. In substantially all of our
client programs, we generate revenues based, in large part, on the amount of
time that our personnel devote to a client's customers. Consequently, and due to
the inbound nature of our 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 our
expected revenues and planned capacity utilization relate to recently introduced
product or service offerings of our clients. For example, in August 2000 Verizon
announced that it was discontinuing its CLEC business. Verizon's CLEC business
accounted for 14% and 21% of our 2000 and 1999 revenues, respectively. There can
be no assurance as to the number of consumers who will be attracted to the
products and services of our clients, and who will therefore need our services,
or that our clients will develop new products or services that will require our
services.
Risks Associated with an Economic Downturn. Our ability to enter into new
multi-year contracts, particularly large, high-end opportunities, may be
dependent upon the general macroeconomic environment in which our clients and
their customers are operating. A weakening of the U.S. and/or global economy
could cause longer sales cycles, delays in closing new business opportunities
and slower growth in existing contracts.
Risks Associated with Financing Activities. From time to time, we may need to
obtain debt or equity financing for capital expenditures for payment of existing
obligations and to replenish cash reserves. There can be no assurance that we
will be able to obtain such debt or equity financing, or that any such financing
would be on terms acceptable to us.
Reliance on a Few Major Clients. We strategically focus our marketing efforts on
developing long-term relationships with large and multinational companies in
targeted industries. As a result, we derive a substantial portion of our
revenues from relatively few clients. There can be no assurance that we will not
become more dependent on a few significant clients, that we will be able to
retain any of our largest clients, that the volumes
8
or profit margins of our most significant programs will not be reduced, or that
we 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 our significant clients could have a material adverse effect on our
business, results of operations or financial condition.
Risks Associated with Our Contracts. Our contracts do not ensure that we 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 we seek to sign multiyear contracts with our clients, our
contracts generally enable the clients to terminate the contract, or terminate
or reduce customer interaction volumes, on relatively short notice. Although
some contracts require the client to pay a contractually agreed amount in the
event of early termination, there can be no assurance that we will be able to
collect such amount or that such amount, if received, will sufficiently
compensate us for our investment in the canceled program or for the revenues we
may lose as a result of the early termination. We are usually not designated as
our client's exclusive service provider; however, we believe that meeting our
clients' expectations can have a more significant impact on revenues generated
by us than the specific terms of our client contracts. In addition, some of our
contracts limit the aggregate amount we can charge for our services, and some
prohibit us from providing services to the client's direct competitor that are
similar to the services we provide to such client.
Risks Associated with Cost and Price Increases. A few of our contracts allow us
to increase our service fees if and to the extent certain cost or price indices
increase; however, most of our significant contracts do not contain such
provisions and some contracts require us to decrease our service fees if, among
other things, we do not achieve certain performance objectives. Increases in our
service fees that are based upon increases in cost or price indices may not
fully compensate us for increases in labor and other costs incurred in providing
services.
Difficulties of Managing Capacity Utilization. Our profitability is influenced
significantly by our customer interaction center capacity utilization. We
attempt to maximize utilization; however, because almost all of our business is
inbound, we have significantly higher utilization during peak (weekday) periods
than during off-peak (night and weekend) periods. We have experienced periods of
idle capacity, particularly in our shared customer interaction centers. In
addition, we have experienced, and in the future may experience, at least
short-term, idle peak period capacity when we open a new customer interaction
center or terminate or complete a large client program. From time to time we
assess the expected long-term capacity utilization of our centers. Accordingly,
we may, if deemed necessary, consolidate or shutdown under-performing centers in
order to maintain or improve targeted utilization and margins. There can be no
assurance that we will be able to achieve or maintain optimal customer
interaction center capacity utilization.
Difficulties of Managing Rapid Growth. We have experienced rapid growth over the
past several years. Continued future growth will depend on a number of factors,
including the general macroeconomic conditions of the global economy and our
ability to (i) initiate, develop and maintain new client relationships and
expand our 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
the buildout of such facilities in a timely and economic fashion; and
(iv) maintain the high quality of the services and products that we provide to
our clients. There can be no assurance that we will be able to effectively
manage our expanding operations or maintain our profitability. If we are unable
to effectively manage our growth, our business, results of operations or
financial condition could be materially adversely affected.
Risks Associated with Rapidly Changing Technology. Our business is highly
dependent on our computer and telecommunications equipment and software
capabilities. Our failure to maintain the superiority of our technological
capabilities or to respond effectively to technological changes could have a
material adverse effect on our business, results of operations or financial
condition. Our continued growth and future profitability will be highly
dependent on a number of factors, including our ability to (i) expand our
existing service offerings; (ii) achieve cost efficiencies in our existing
customer interaction center operations; and (iii) introduce new services and
products that leverage and respond to changing
9
technological developments. There can be no assurance that technologies or
services developed by our competitors will not render our products or services
non-competitive or obsolete, that we 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
our ability to maintain our leadership infrastructure by recruiting and
retaining qualified, experienced executive personnel. We recently named Kenneth
D. Tuchman, our founder and Chairman of our board, as interim Chief Executive
Officer following the resignations of our former CEO and COO. Competition in our
industry for executive-level personnel is fierce and there can be no assurance
that we will be able to hire, motivate and retain highly effective executive
employees, or that we can do so on economically feasible terms.
Dependence on Labor Force. Our success is largely dependent on our ability to
recruit, hire, train and retain qualified employees. Our industry is very
labor-intensive and has experienced high personnel turnover. A significant
increase in our employee turnover rate could increase our recruiting and
training costs and decrease operating effectiveness and productivity. Also, if
we obtain several significant new clients or implement several new, large-scale
programs, we may need to recruit, hire and train qualified personnel at an
accelerated rate. We 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 our operating costs relate to labor
costs, an increase in wages, costs of employee benefits or employment taxes
could have a material adverse effect on our business, results of operations or
financial condition. In addition, certain of our 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. We believe that the market in which we operate is
fragmented and highly competitive and that competition is likely to intensify in
the future. We compete 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 us. Similarly, there
can be no assurance that additional competitors with greater resources than us
will not enter our market. Because our primary competitors are the in-house
operations of existing or potential clients, our performance and growth could be
adversely affected if our existing or potential clients decide to provide
in-house customer management services that they currently outsource, 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 our services to lose market acceptance or result in significant price
erosion, which could have a material adverse effect upon our business, results
of operations or financial condition.
Difficulties of Completing and Integrating Acquisitions and Joint Ventures. In
the past, we have pursued, and in the future we may continue to pursue strategic
acquisitions of companies that have services, technologies, industry
specializations or geographic coverage that extend or complement our existing
business. There can be no assurance that we will be successful in acquiring such
companies on favorable terms or in integrating such companies into our existing
businesses, or that any completed acquisition will enhance our business, results
of operations or financial condition. We have faced, and in the future may
continue to face, increased competition for acquisition opportunities, which may
inhibit our ability to consummate suitable acquisitions on favorable terms. We
may require additional debt or equity financing for future acquisitions, such
financing may not be available on terms favorable to us, if at all. As part of
our growth strategy, we 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 ventures.
There can be no assurance that we will successfully manage these risks.
Risk of Business Interruption. Our operations are dependent upon our ability to
protect our customer interaction centers, computer and telecommunications
equipment and software systems against damage from
10
fire, power loss, telecommunications interruption or failure, natural disaster
and other similar events. In the event we experience a temporary or permanent
interruption at one or more of our customer interaction centers, through
casualty, operating malfunction or otherwise, our business could be materially
adversely affected and we may be required to pay contractual damages to some
clients or allow some clients to terminate or renegotiate their contracts with
us. We maintain property and business interruption insurance; however, such
insurance may not adequately compensate us for any losses we may incur.
Risks Associated with International Operations and Expansion. We currently
conduct business in Argentina, Australia, Brazil, Canada, China, Mexico, New
Zealand, Singapore, Spain, the United Kingdom and the United States. In
addition, a key component of our growth strategy is continued international
expansion. There can be no assurance that we will be able to (i) increase our
market share in the international markets in which we currently conduct business
or (ii) successfully market, sell and deliver our 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 these factors could have a material
adverse effect on our international operations and, consequently, on our
business, results of operations or financial condition.
Variability of Quarterly Operating Results. We have experienced and could
continue to experience quarterly variations in operating results because of a
variety of factors, many of which are outside our control. Such factors include
the timing of new contracts; labor strikes and slowdowns; reductions or other
modifications in our 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
among our various service offerings; and the seasonal pattern of certain
businesses serviced by us. In addition, we make decisions regarding staffing
levels, investments and other operating expenditures based on our revenue
forecasts. If our revenues are below expectations in any given quarter, our
operating results for that quarter would likely be materially adversely
affected.
Foreign currency exchange risk. With our expanding global reach we are
increasingly exposed to the market risk associated with foreign currency
exchange fluctuations. Although we have entered into forward financial
instruments to manage and reduce the impact of changes in foreign currency
rates, there can be no assurance that such instruments will protect us from
foreign currency fluctuations or that we have or will have instruments in place
with respect to the most volatile currencies.
Dependence on Key Industries. We generate a majority of our revenues from
clients in the telecommunications, transportation, financial services and
government services industries. Our growth and financial results are largely
dependent on continued demand for our 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 our
business, results of operations or financial condition.
You should not construe these cautionary statements as an exhaustive list. We
cannot always predict what factors would cause actual results to differ
materially from those indicated in our forward-looking statements. All
cautionary statements should be read as being applicable to all forward-looking
statements wherever they appear. We do 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.
Item 2. Properties.
Our corporate headquarters are located in Denver, Colorado, in approximately
39,000 square feet of leased office space. In second quarter of 2001, we plan to
move
11
our corporate headquarters, see "Recent Developments" and Notes 14 and 15 of the
consolidated financial statements. As of December 31, 2000, we leased (unless
otherwise noted) and operated the following customer interaction centers:
Number of Number of Total
Year Opened Production Training Number of
or Acquired Workstations Workstations(1) Workstations
Location
U.S. OUTSOURCED CENTERS
Birmingham, Alabama 1999 450 113 563
Burbank, California 1995 416 60 476
Deland, Florida 2000 285 0 285
Enfield, Connecticut 1998 411 60 471
Hollywood, California 2000 697 0 697
Kansas City, Kansas 1998 500 230 730
Lowell, Massachusetts 2000 100 0 100
Melbourne, Florida 2000 525 0 525
Morgantown, West Virginia 2000 550 110 660
Moundsville, West Virginia 1998 400 104 504
Niagara Falls, New York 1997 570 96 666
Stockton, California 2000 428 0 428
Thornton, Colorado, Center 1(2) 1996 574 100 674
Thornton, Colorado, Center 2(2) 1996 415 58 473
Topeka, Kansas 1999 510 100 610
Uniontown, Pennsylvania 1998 570 80 650
Van Nuys, California 1996 355 38 393
DATABASE MARKETING AND CONSULTING
San Diego, California 2000 262 28 290
INTERNATIONAL OUTSOURCED CENTERS
Auckland, New Zealand 1996 256 42 298
Barcelona, Spain, Center 1 2000 203 1 204
Barcelona, Spain, Center 2 2000 234 3 237
Buenos Aires, Argentina, Center 1 1999 606 25 631
Buenos Aires, Argentina, Center 2 1999 237 25 262
Canberra, Australia 2000 125 0 125
Casebridge, Canada 1998 94 0 94
Glasgow, Scotland 1996 680 20 700
Hong Kong, China 2000 300 0 300
Leon, Mexico 2000 550 0 550
London, Ontario 2000 556 0 556
Madrid, Spain, Center 1 2000 457 0 457
Madrid, Spain, Center 2 2000 255 0 255
Melbourne, Australia 1997 506 99 605
Mexico City, Mexico 1997 1,050 96 1,146
North Bay, Ontario 2000 304 0 304
Perth, Australia 1999 48 12 60
Sao Paulo, Brazil 1998 509 26 535
Seville, Spain 2000 229 0 229
Sheppard, Ontario 1998 228 39 267
Sudbury, Ontario 1999 917 60 977
Sydney, Australia 1996 317 32 349
12
Tampines, Singapore 1998 141 26 167
Toronto, Ontario 2000 530 66 596
Valencia, Spain 2000 141 0 141
Zaragoza, Spain 2000 185 2 187
MANAGED CENTERS(3)
Christchurch, New Zealand 2000 44 0 44
Greenville, South Carolina 1996 611 105 716
Montbello, Colorado 1996 486 182 668
Tampa, Florida 1996 652 90 742
Toronto, Ontario 1998 332 80 412
Tucson, Arizona 1996 795 90 885
Total number of workstations 20,596 2,298 22,894
(1) Training workstations are fully operative as production workstations should
the Company require additional capacity.
(2) 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.
(3) 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 our U.S. customer interaction centers have terms ranging from 1
to 15 years and generally contain renewal options. We believe that our existing
customer interaction centers are suitable and adequate for our current
operations. We target capacity utilization in our fully outsourced centers at
85% of our available workstations during peak (weekday) periods. In 2000, we
deployed two dedicated centers in the United States in Melbourne, Florida and
Stockton, California, and five shared centers in the United States in Deland,
Florida, Hollywood, California, Lowell, Massachusetts, Morgantown, West Virginia
and San Diego, California. Additionally in 2000, we deployed a dedicated center
in New Zealand and shared centers in Canberra, Australia; Spain (seven centers);
Hong Kong; Leon, Mexico; and London, North Bay and Toronto, Ontario, Canada. Our
plans for 2001 include four or five additional international centers.
Due to the inbound nature of our business, we experience significantly higher
capacity utilization during peak periods than during off-peak (night and
weekend) periods. We 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 idle
capacity during peak periods until any new or expanded program is implemented
fully.
Item 3. Legal Proceedings.
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.
13
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, 2000.
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
Kenneth D. Tuchman(1) Chairman and Chief Executive Officer 41 2001
Chris Batson(2) Vice President--Treasurer 33 2001
Richard S. Erickson(3) President and General Manager--North America 39 1997
Michael E. Foss(4) President of the TeleTech Companies Group 43 1999
James B. Kaufman(5) Executive Vice President, General Counsel and 39 1999
Secretary
Margot O'Dell(6) Chief Financial Officer and Executive Vice 36 2000
President of Administration
Jeffrey S. Sperber(7) Vice President--Controller 36 2001
(1) Mr. Tuchman founded TeleTech and has served as the Chairman of the Board of
Directors since its formation in 1994. Mr. Tuchman served as the Company's
President and Chief Executive Officer from the Company's inception until the
appointment of Scott Thompson as Chief Executive Officer and President in
October of 1999. Mr. Tuchman recently resumed the position of interim Chief
Executive Officer following the resignation of Mr. Thompson in March of
2001. Mr. Tuchman has also held various board and officer positions with a
number of TeleTech's affiliates, and Mr. Tuchman serves on the board of
Ocean Journey and the Boy Scouts of America. Mr. Tuchman is also a member of
the Governor's Commission on Science and Technology.
(2) Before joining TeleTech in January 2001, Mr. Batson served as an Account
Director within the Teradata Division of NCR Corporation, a data warehousing
and customer relationship management solution provider. During his four
years with NCR, Mr. Batson also held several financial management positions
within NCR's Treasury Department, including Director of Capital Markets &
Corporate Finance and Manager of Mergers & Acquisitions. Before joining NCR
in 1997, Mr. Batson was a Senior Consultant with Deloitte Consulting.
(3) 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.
(4) Before joining TeleTech in 1999, Mr. Foss served as Chief Executive Officer
of Picture Vision, Inc., a subsidiary of Eastman Kodak that focussed 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, Mr. Foss was General Manager of Components, Services and Media for
Kodak's Business Imaging Systems Division. Before joining Kodak, Mr. Foss
served as Senior 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.
14
(5) 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.
(6) Before joining TeleTech in 2000, Ms. O'Dell served as Senior Vice President
of Finance for Global Network Operations at Qwest, formerly U S WEST. Prior
to that position, Ms. O'Dell served as Vice President of Human Resources,
Employee and Retiree Services and as Executive Director of Corporate
Benefits for U S WEST. Prior to U S WEST, Ms. O'Dell was Vice President
Finance and Operations for FHP Healthcare's Eastern Division.
(7) Before joining TeleTech in March of 2001, Mr. Sperber served as Chief
Financial Officer of USOL Holdings, Inc., a publicly held company providing
bundled video, voice and data services to residents of multi-family housing
units. Prior to joining USOL in 1997, Mr. Sperber served as the Controller
for TCI Wireline, Inc., a subsidiary of TCI that focused on launching local
telephone service and managing TCI's telephone investments in Sprint PCS and
Teleport Communications Group.
15
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 2000 $43.69 $ 23.38
Second Quarter 2000 41.19 27.13
Third Quarter 2000 38.31 19.75
Fourth Quarter 2000 30.25 16.125
First Quarter 1999 $12.38 $ 5.56
Second Quarter 1999 10.25 5.56
Third Quarter 1999 14.94 9.69
Fourth Quarter 1999 34.38 11.13
As of March 23, 2001, there were 74,907,151 shares of common stock
outstanding, held by approximately 101 shareholders of record.
TeleTech did not declare or pay any dividends on its common stock in 2000 or
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.
On October 27, 2000, the Company issued 74,688 restricted shares of common
stock to Pacific Lifestyle Group Incorporated in consideration for the
acquisition of all of the outstanding shares of iCcare Limited in an offering
exempt under Section 4(2) of the Securities Act of 1933.
16
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 2000 have
been restated to reflect the August 2000 business combination with Contact
Center Holdings, S.L. and the December 2000 business combination with Newgen
Results Corporation. The financial information for years prior to 1998 have been
restated to reflect the June 1998 business combinations with EDM Electronic
Direct Marketing Ltd. and Digital Creators, Inc. All of the mentioned business
combinations were accounted for using the pooling-of-interests method of
accounting.
Year Ended December 31,
(in thousands, except per share and operating data)
2000 1999 1998 1997 1996
Statement of Operations Data:
Revenues $885,349 $604,264 $424,877 $311,097 $182,894
Costs of services 560,826 406,149 282,689 202,906 114,293
SG&A expenses 251,606(4) 147,918 111,808 76,535 49,444
-------- -------- -------- -------- --------
Income from operations 72,917 50,197 30,380 31,656 19,157
Other income (expense) 49,386(3) 7,561(2) 68(1) 1,881 (211)
Provision for income taxes 46,938 20,978 13,344 14,206 9,773
Minority interest (1,559) -- -- -- --
-------- -------- -------- -------- --------
Net income. $ 73,806 $ 36,780 $ 17,104 $ 19,331 $ 9,173
======== ======== ======== ======== ========
Net income per share:
Basic $ 1.00 $ 0.51 $ 0.24 $ 0.30 $ 0.16
Diluted $ 0.93 $ 0.49 $ 0.24 $ 0.27 $ 0.15
Average shares outstanding:
Basic 74,171 70,557 66,228 64,713 57,536
Diluted 79,108 74,462 71,781 70,969 61,166
Operating Data:
Number of production workstations 20,600 13,800 10,100 6,800 5,600
Number of customer interaction centers 50 33 26 20 16
Balance Sheet Data:
Working capital $164,123 $111,850 $ 68,137 $ 88,445 $ 88,995
Total assets 589,899 362,579 251,729 207,249 152,503
Long-term debt, net of current portion 74,906 27,404 7,660 11,001 11,408
Redeemable convertible preferred stock -- -- 16,050 14,679 5,422
Total stockholders' equity. 363,365 253,145 157,931 132,586 104,851
(1) Includes non-recurring $1.3 million of business combination expenses
relating to two pooling-of-interest transactions.
(2) Includes a non-recurring $6.7 million pretax net gain from a contract
settlement payment made by a former client.
(3) Includes the following non-recurring items: a $57.0 million gain on the sale
of securities, $10.5 million of business combination expenses relating to
two pooling-of-interest transactions, and a $4.0 million gain on the sale of
a subsidiary.
(4) Includes the following non-recurring items: an $8.1 million loss on the
closures of a subsidiary and three customer interaction centers and a
$9.0 million loss on the termination of a lease on the Company's planned
corporate headquarters building.
17
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 8 for additional factors relating to such statements.
OVERVIEW
TeleTech generates its revenues primarily by providing CRM 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 serve either multiple clients
(shared centers) or one dedicated client (dedicated centers). 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
termination fee. 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 and the Company's operations outside of North America are
characterized by shorter-term contracts. The Company's ability to enter into new
multiyear contracts, particularly large high-end opportunities, may be dependent
upon the macroeconomic environment in general and the specific industry
environments in which its customers are operating. A weakening of the U.S.
and/or global economy could cause longer sales cycles or delays in closing new
business opportunities. As a result of recent economic uncertainties during the
fourth quarter of 2000 and the first quarter of 2001, the Company is
encountering delays in both the ramp up of some existing client programs as well
as the closing of sales opportunities for large customer care programs.
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 idle 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 idle 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
semi-fixed 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 idle 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
18
programs, TeleTech may be required to commit to additional capacity prior to the
contracting of additional business, which may result in idle capacity. TeleTech
targets capacity utilization in its fully outsourced centers at 85% of its
available workstations during the weekday period. From time to time the Company
assesses the expected long-term capacity utilization of its centers.
Accordingly, the Company may, if deemed necessary, consolidate or shutdown
under-performing centers in order to maintain or improve targeted utilization
and margins.
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. 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
semi-variable 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. Additionally, the cost characteristics
of the Company's dedicated centers differ from the cost characteristics of its
shared centers. Dedicated centers have lower operating expenses than shared
centers as they do not require as many resources for management and other
administrative functions. Accordingly, shared centers have higher operating
expenses as a percentage of revenues than dedicated centers. 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
13.5%, 15.6% and 20.2% of consolidated revenues in 2000, 1999 and 1998,
respectively. Based on sales forecast data as of December 31, 2000, 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 to extend its product line and
vertical market presence. The following is a summary of this activity.
19
International Operations:
Consideration
Locations Shares Cash Date
iCcare Limited Hong Kong, China 74,688(1) $2.0 million(1) October 2000
Contact Center Holdings, S.L Barcelona, Spain 3,264,000 -- August 2000
Smart Call, S.A. & Connect, S.A Buenos Aires, Argentina -- $4.7 million(1) March &
October 1999
Outsource Informatica, Ltda. Sao Paulo, Brazil 606,343 -- August 1998
EDM Electronic Direct Marketing, Toronto, Ontario, Canada 1,783,444 -- June 1998
Ltd.
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
(1) The former shareholders of these entities have the opportunity to earn
additional amounts pursuant to an earnout provision
Technology and Services:
Consideration
Company Description Shares Cash Date
Newgen Results Corporation Database marketing and 8,283,325 -- December 2000
consulting
Assets of the customer care Provider of CRM support -- $13.0 million(c) November 2000
division of Boston Communications for the wireless
Group industry
FreeFire assets of Information Marketing and software -- $ 1.0 million June 2000
Management Associates(b) solutions
Pamet River, Inc.(a) Database marketing and 285,711 $ 1.8 million March 1999
consulting
Cygnus Computer Associates(b) Provider of systems 324,744 $ 0.7 million December 1998
integration and call
center software
solutions
Digital Creators, Inc Developer of Web-based 1,069,000 -- June 1998
applications and
distance-based learning
and education
Intellisystems, Inc.(b) Developer of automated 344,487 $ 2.0 million February 1998
product support systems
(a) Pamet River was closed in September of 2000. See note 14 of the Financial
Statements for further discussion.
(b) These entities were transferred to the Company's enhansiv subsidiary. The
common stock of enhansiv was then sold to a group of investors during the
fourth quarter of 2000. See Note 14 of the Financial Statements for further
discussion.
(c) Boston Communication Group has the opportunity to earn additional amounts
pursuant to an earnout provision. Additionally, the Company assumed
approximately $2.0 million of liabilities.
20
RESULTS OF OPERATIONS
The following table sets forth certain income statement data as a percentage
of revenues:
2000 1999 1998
Revenues 100.0% 100.0% 100.0%
Costs of services 63.3 67.2 66.5
SG&A expenses 26.5 24.5 26.3
Income from operations 8.2 8.3 7.2
Other income 5.6 1.3 --
Provision for income taxes 5.3 3.5 3.1
Net income 8.3 6.1 4.0
2000 Compared to 1999
Revenues. Revenues increased $281.0 million, or 46.5%, to $885.3 million in 2000
from $604.3 million in 1999. The revenue increase resulted from growth in new
and existing client relationships offset in part by contract expirations and
other client reductions. On a segment basis, outsourced revenue increased 29.8%
to $388.7 million in 2000 from $299.4 million in 1999. The increase resulted
from growth in new and existing client relationships. Revenues for 2000 include
approximately $119.5 million from facilities management contracts, an increase
of 26.5%, as compared with $94.5 million during 1999, resulting from increased
revenue from existing clients. International outsourced revenues increased
116.7% to $291.3 million in 2000 from $134.4 million in 1999. The increase in
international outsourced revenues resulting from significant growth in the
Company's Canadian operations as a result of the commencement of operations of
Percepta and an increasing number of United States clients utilizing the
Company's Canadian locations. Revenues from database marketing and consulting
increased 40.4% to $77.5 million in 2000 from $55.2 in 1999. This increase was
due primarily to the increase in database marketing and consulting customers and
an acquisition that was completed by Newgen in the fourth quarter of 1999.
Revenues from corporate activities consist of consulting services, automated
customer support, systems integration, database management, Web-based
applications and distance-based learning and education. These revenues totaled
$8.3 million in 2000, a decrease of $12.5 million from $20.8 million in 1999.
The decrease in revenue from corporate activities was primarily due to the
closure of the Company's Pamet River subsidiary in September 2000 and the sale
of the common stock of the Company's enhansiv subsidiary to a group of investors
in the fourth quarter of 2000.
Costs of Services. Costs of services increased $154.7 million, or 38.1%, to
$560.8 million in 2000 from $406.1 million in 1999. Costs of services as a
percentage of revenues decreased from 67.2% in 1999 to 63.3% in 2000. This
decrease in costs of services as a percentage of revenues is primarily the
result of strong growth from both new and existing clients, increased operating
efficiencies and the decline in the percentage of revenues generated from
facilities management programs. Cost of services as a percentage of revenue was
positively impacted by contract restructurings with two clients in the fourth
quarter of 2000.
Selling, General and Administrative. SG&A expenses increased $86.6 million, or
58.6%, to $234.5 million in 2000, from $147.9 million in 1999 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 increased from 24.5% in 1999 to 26.5% in 2000. This
increase is primarily the result of an increase in the percentage of revenue
generated from shared center client programs.
Income from Operations. As a result of the foregoing factors, income from
operations increased $22.7 million, or 45.2%, to $72.9 million in 2000 from
$50.2 million in
21
1999. Income from operations as a percentage of revenues decreased to 8.2% in
2000 from 8.3% in 1999. Included in operating income are the following
non-recurring items: an $8.1 million loss on the closure of a subsidiary and
three customer interaction centers and a $9.0 million loss on the termination of
a lease on the Company's planned corporate headquarters building. From time to
time the Company assesses the expected long-term capacity utilization of its
centers. Accordingly, the Company may, if deemed necessary, consolidate or
shutdown under-performing centers in order to maintain or improve targeted
utilization and margins. Income from operations, exclusive of non-recurring
items, increased $39.8 million or 79.3%, to $90 million in 2000. Income from
operations as a percentage of revenues, exclusive of non-recurring items,
increased to 10.2% in 2000.
Other Income (Expense). Other income increased $41.8 million to $49.4 million in
2000 compared to $7.6 in 1999. Included in other income in 2000 are the
following non-recurring items: a $57.0 million gain on the sale securities, a
$4.0 million gain on the sale of a subsidiary and $10.5 million in business
combination expenses related to two business combinations accounted for under
the pooling-of-interest method. 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. Interest expense increased $2.3 million to
$5.1 million in 2000 compared to $2.8 million in 1999. This increase is
primarily the result of increased borrowings on the Company's lines of credit.
Income Taxes. Taxes on income increased $25.9 million to $46.9 in 2000 from
$21.0 million in 1999 primarily due to higher pre-tax income. The Company's
effective tax rate was 38.4% in 2000 compared to 36.3% in 1999. The lower
effective tax rate in 1999 was due to an acquisition accounted for under the
pooling-of-interest method.
Net Income. As a result of the foregoing factors, net income increased
$37.0 million, or 101%, to $73.8 million in 2000 from $36.8 million in 1999.
Diluted earnings per share increased from $0.49 to $0.93. Excluding
non-recurring items in 2000 and the non-recurring gain in 1999 from the
long-term contract settlement, net income in 2000 was $52.4 million, compared
with net income in 1999 of $32.7 million, an increase of 60.2%. Diluted earnings
per share excluding non-recurring items was $0.66 in 2000 compared to $0.44 in
1999.
Included in 2000 net income is $3.9 million of losses related to the
operations of enhansiv prior to its sale to a group of investors in the fourth
quarter of 2000. As further discussed in footnote 14 to the consolidated
financial statements, the Company would have to commence recording enhansiv
losses in the event that the cumulative losses (subsequent to the sale) exceed
the value of all equity investments in enhansiv that are subordinate to the
Company's preferred stock investment. In the event that additional subordinate
equity is not raised by enhansiv, the recording of enhansiv losses would have a
material impact on the Company's consolidated financial statements. Management
believes that this may occur sometime during the first half of 2001.
1999 Compared to 1998
Revenues. Revenues increased $179.4 million, or 42.2%, to $604.3 million in 1999
from $424.9 million in 1998. The increase resulted from new clients and existing
client relationships. 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%, from $85.7 million in 1998, resulting from increased number of customer
interactions. International outsourced revenues increased 49.7% to
$134.4 million in 1999 from $89.8 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 a decrease in revenues in the
Company's Canadian operations resulting from the expiration of a client
contract. Revenues from database marketing and consulting increased 37.6% to
$55.2 million in 1999 from $40.1 million in 1998, primarily due to increased
customers from the Company's
22
Newgen subsidiary's, RESULTS program. Revenues from corporate activities consist
of consulting services, automated customer support, systems integration,
database management, 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 $123.5 million, or 43.7%, to
$406.1 million in 1999 from $282.7 million in 1998. Costs of services as a
percentage of revenues increased from 66.5% in 1998 to 67.2% 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.
Selling, General and Administrative. SG&A expenses increased $36.1 million, or
32.3%, to $147.9 million in 1999, from $111.8 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 26.3% in 1998 to 24.5% in 1999. This
decrease was 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 as well as improvements
in the Company's database marketing and consulting segment primarily resulting
from the leverage obtained by spreading new customer installation costs over a
large revenue base.
Income from Operations. As a result of the foregoing factors, income from
operations increased $19.8 million, or 65.2%, to $50.2 million in 1999 from
$30.4 million in 1998. Income from operations as a percentage of revenues
increased to 8.3% in 1999 from 7.2% in 1998.
Other Income (Expense). Other income increased $7.5 million to $7.6 million in
1999 compared to $68,000 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. Also 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 $1.2 million to $2.8 million in 1999 compared to $1.6 million
in 1998. This increase is primarily the result of increased borrowings. Interest
income increased $221,000 to $3.4 million in 1999 compared to $3.2 million in
1998. This increase is the result of the increase in short-term investments
during 1999.
Income Taxes. Taxes on income increased $7.6 million to $21.0 million in 1999
from $13.3 in 1998 primarily due to higher pre-tax income. The Company's
effective tax rate was 36.3% in 1999 compared with 43% in 1998. The higher
effective tax rate in 1998 was due to a decrease in pre-tax income from an
acquisition accounted for under the pooling-of-interest method.
Net Income. As a result of the foregoing factors, net income increased
$19.7 million, or 115%, to $36.8 million in 1999 from $17.1 million in 1998.
Diluted earnings per share increased from $0.24 to $0.49. 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 was $32.7 million, compared
with net income in 1998 of $18.4 million, an increase of 63.6%. Diluted earnings
per share excluding these one-time items was $0.44 in 1999 compared to $0.26 in
1998.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities was $36.3 million in 2000 as compared to
$64.3 million in 1999. Cash provided by operating activities for 2000 consists
of $93.1 million of total net income before depreciation and amortization, bad
debt, deferred income taxes, tax benefit from exercise of stock options, gain on
sales of securities and a subsidiary and net loss on disposals, offset in part
by $56.8 million of changes in working capital. The change in working capital is
primarily the result of an increase in accounts receivable. Accounts receivable
increased as a result of an increase in revenue between years as well as slower
paying customers. The Company's days sales outstanding increased from 52 days in
1999 to
23
73 days in 2000. The Company believes that it can reduce these days sales
outstanding in 2001 through changes in billing arrangements and more aggressive
collection procedures.
The Company used $54.3 million in investing activities during 2000. In 2000,
the Company's capital expenditures (exclusive of $3.0 million in assets acquired
under capital leases) were $118.0 million, and the Company used $15.7 million in
cash for the Boston Communication Group, FreeFire and iCcare Limited
acquisitions. The Company also invested $8.0 million in a customer relationship
management software company. These expenditures were offset in part by the
reduction of $23.9 million in short-term investments and proceeds from the sale
of available-for-sale securities of $64.9 million. Included in capital
expenditures for 2000 was $22.1 million relating to Percepta. Ford Motor Company
funds 45% of all capital requirements of Percepta. Cash used in investing
activities was $76.7 million for 1999, resulting primarily from $60.4 million in
capital expenditures, $18.1 million for acquisitions and $4.3 million decrease
in short-term investments.
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
practice, 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
2001 to be approximately $105 million to $115 million, The Company expects its
capital expenditures will be used primarily to open up approximately 4 or 5 new
international customer interaction centers during 2001. Such expenditures will
be financed with internally generated funds, existing cash balances and
additional borrowings. The level of capital expenditures incurred in 2001 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 2000 was $34.1 million. This
primarily resulted from the net increase in the line of credit, offset by
payments on long-term notes payable and capital lease obligations. Additional
proceeds from financing activities were generated by the exercise of stock
options and employee stock purchases. In 1999, cash provided by financing
activities of $50.9 million resulted primarily from issuance of common stock and
proceeds from lines of credit.
During the first and fourth quarters of 2000, the Company completed amendments
to its unsecured revolving line of credit with a syndicate of banks. The
amendments increased the line of credit to approximately $87 million from
$50 million. 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 $62 million in borrowings under the line of credit at
December 31, 2000.
As discussed in Note 15 of the consolidated financial statements, subsequent
to year end, the Company entered into a commitment to acquire the Company's
planned headquarters building and terminate the existing lease agreement. This
transaction is expected to close on March 31, 2001. The purchase of the
building, together with the capital required to finish construction is estimated
to be approximately $26.0 million. These funds will likely be provided by
existing cash and cash equivalents on hand. This transaction, together with
significant declines in the market value of the Company's E.piphany stock
investment subsequent to year end, will require the Company to seek additional
debt financing to replenish its cash reserves and reduce outstanding borrowings
under the lines of credit. The Company is seeking to raise $50 to $70 million in
a private placement of long-term debt. There can be no assurance that this
financing will be obtained or if obtained, it will have terms acceptable to the
Company.
From time to time, the Company engages in discussions regarding restructuring,
dispositions, mergers, 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
24
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.
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, foreign
currency exchange rates as measured against the U.S. dollar and changes in the
market value of its investment portfolio. These exposures are directly related
to its normal operating and funding activities. As of December 31, 2000, the
Company has entered into forward financial instruments to manage and reduce the
impact of changes in foreign currency rates with a major financial institution.
The Company has also entered into an interest rate swap agreement to manage
interest rate risk.
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, 2000,
there was $62 million outstanding on the Company's line of credit and
approximately $42,000 in borrowings outstanding on the operating loan. At
December 31, 2000, the Company has an outstanding variable to fixed interest
rate swap agreement with a notional amount of $20.0 million, a fixed rate of
6.37%, and a floating rate of LIBOR. The swap agreement dated December 12, 2000
has a six-year term. If interest rates were to increase 10% from year-end
levels, the Company would have incurred $2.0 in additional interest expense, net
of the effect of the swap agreement.
Foreign Currency Risk
The Company has wholly-owned subsidiaries in Argentina, Australia, Brazil,
Canada, China, Mexico, New Zealand, Singapore, Spain 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. For the years ended
December 31, 2000, 1999, and 1998, revenues from non-U.S. countries represented
36.1%, 25.3%, and 21.1% of consolidated revenues, respectively.
The Company's Spanish subsidiary has factoring lines of credit under which it
may borrow up to ESP 1,600 million. At December 31, 2000, there was
$8.3 million outstanding under these factoring lines. If the U.S./Spanish Peseta
exchange rate were to increase 10% from year-end levels, the obligation would
increase by $828,000.
The Company's Canadian subsidiary receives payment in U.S. dollars for certain
of its larger customer contracts. As all of its expenditures are in Canadian
dollars, the Company must acquire Canadian currency on a monthly basis.
Accordingly, the Company has contracted with a Commercial bank at no material
cost, to acquire a total of $30.0 million Canadian dollars during the first six
months of 2001 at a fixed price in U.S. dollars of $20.0 million. There is no
material difference between the fixed exchange ratio and the current exchange
ratio of the U.S./Canadian dollar. If the U.S./Canadian dollar exchange rates
were to increase 10% from year-end levels, the Company would have incurred a
loss of $460,000.
Fair Value of Debt and Equity Securities
The Company's investments in debt and equity securities are short-term and not
subject to significant fluctuations in fair value. If interest rates and equity
prices were to decrease 10% from year-end levels, the fair value of the
Company's debt and equity securities would have decreased $4.6 million.
25
Item 8. Financial Statements and Supplementary Data.
The financial statements required by this item are located beginning on page
34 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 14, 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 our definitive proxy statement
for our 2001 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 our
definitive proxy statement for our 2001 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 our definitive proxy
statement for our 2001 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 34 of this report.
(2) Financial Statement Schedules
(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** Intentionally omitted
10.2** Intentionally omitted
10.3** Intentionally omitted
10.4 TeleTech Holdings, Inc. Stock Plan, as amended and restated
[1] {Exhibit 10.7}
10.5 Intentionally omitted
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** Intentionally omitted
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** Intentionally omitted
10.16** Intentionally omitted
10.17** Intentionally omitted
28
- --------------------------------------------------------------------------------
Exhibit No. Description
- --------------------- -----------
10.18** Intentionally omitted
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}
10.22** Amendment to Non-Qualified Stock Option Agreement (1999
Stock Option and Incentive Plan) between Scott D. Thompson
and TeleTech [8] {Exhibit 10.22}
10.23** Amendment to Non-Qualified Stock Option Agreement (1995
Stock Plan) between Scott D. Thompson and TeleTech [8]
{Exhibit 10.23}
10.24 Amended and Restated Revolving Credit Agreement dated as of
March 24, 2000 [8] {Exhibit 10.24}
10.25 Operating Agreement for Ford Tel II, LLC effective February
24, 2000 by and among Ford Motor Company and TeleTech
Holdings, Inc. [8] {Exhibit 10.25}
10.26** Non-Qualified Stock Option Agreement dated October 27, 1999
between Michael E. Foss and TeleTech [8] {Exhibit 10.26}
10.27** Employment Agreement dated December 6, 1999 between Michael
E. Foss and TeleTech [8] {Exhibit 10.27}
10.28** Letter Agreement dated March 27, 2000 between Larry Kessler
and TeleTech [9] {Exhibit 10.28}
10.29** Stock Option Agreement dated March 27, 2000 between Larry
Kessler and TeleTech [9] {Exhibit 10.29}
10.30** Promissory Note dated April 3, 2000 by Larry Kessler for the
benefit of TeleTech [9] {Exhibit 10.30}
10.31 Lease and Deed of Trust Agreement dated June 22, 2000 [9]
{Exhibit 10.31}
10.32 Participation Agreement dated June 22, 2000 [9] {Exhibit
10.32}
10.33** Offer letter between TeleTech Holdings, Inc. and Margot
O'Dell dated August 6, 2000 [10] {Exhibit 10.33}
10.34** Stock Option Agreement between TeleTech Holdings, Inc. and
Margot O'Dell dated September 11, 2000 [10] {Exhibit 10.34}
10.35 Asset purchase agreement among TeleTech Holdings, Inc.,
TeleTech Customer Care Management (Colorado), Inc., Boston
Communications Group Inc., Cellular Express, Inc., and
Wireless Teleservices Corp. dated as of October 11, 2000
[10] {Exhibit 10.35}
10.36 Agreement and Plan of Merger dated as of August 2000 among
the Company, NG Acquisition Corp and Newgen [11] {Exhibit
2.1}
10.37 Share Purchase Agreement dated as of August 31, 2000 among
the Company, 3i Group PLC, 3i Europartners II, LP, Milletti,
S.L., and Albert Olle Bartolomie [12] {Exhibit 2.1}
10.38 TeleTech Holdings, Inc. Amended and Restated Employee Stock
Purchase Plan [13] {Exhibit 99.1}
10.39 TeleTech Holdings, Inc. Amended and Restated 1999 Stock
Option and Incentive Plan [13] {Exhibit 99.2}
29
- --------------------------------------------------------------------------------
Exhibit No. Description
- --------------------- -----------
10.40 Newgen Results Corporation 1996 Equity Incentive Plan [14]
{Exhibit 99.1}
10.41 Newgen Results Corporation 1998 Equity Incentive Plan [14]
{Exhibit 99.3}
10.42 Participation Agreement dated as of December 27, 2000 among
the Company Teletech Service Corporation ("TSC"), State
Street Bank and Trust Company of Connecticut, N.A., (the
"Trust"), First Security Bank, N.A., ("First Security") and
the financial institutions named on Schedules I and II (the
"Certificate Holders and Lenders") thereto [15] {Exhibit
2.2}
10.43 Lease and Deed of Trust dated as of December 27, 2000 among
TSC, the Trust and the Public Trustee of Douglas County,
Colorado [15] {Exhibit 2.3}
10.44 Participant Guarantee dated December 27, 2000 made by the
Company in favor of First Security, the Certificate Holders
and Lenders [15] {Exhibit 2.4}
10.45 Lessee Guarantee dated December 27, 2000 made by TeleTech in
favor of the Trust First Security, the Certificate Holders
and Lenders [15] {Exhibit 2.5}
10.46 Contract dated December 26, 2000 between TCI Realty, LLC and
TSC [15] {Exhibit 2.6}
10.47* First Amendment to Amended and Restated Revolving Credit
Agreement and Waiver dated December 14, 2000 among the
Company, the financial institutions from time to time party
to the Credit Agreement and Bank of America, N.A.
10.48* ** Employment Agreement dated February 8, 2001 between Margot
O'Dell and TeleTech
10.49* ** Stock Option Agreement dated February 8, 2001 between Margot
O'Dell and TeleTech
10.50* ** Stock Option Agreement dated March 21, 2001 between Margot
O'Dell and TeleTech
10.51* ** Stock Option Agreement dated December 6, 2000 between
Michael Foss and TeleTech
10.52* ** Stock Option Agreement dated August 16, 2000 between Sean
Erickson and TeleTech
10.53* ** Stock Option Agreement dated August 16, 2000 between James
Kaufman and TeleTech
10.54* ** Letter Agreement dated January 11, 2000 between Chris Batson
and TeleTech
10.55* ** Stock Option Agreement dated January 29, 2001 between Chris
Batson and TeleTech
10.56* ** Letter Agreement dated January 26, 2001 between Jeffrey
Sperber and TeleTech
10.57* ** Stock Option Agreement dated March 5, 2001 between Jeffrey
Sperber and TeleTech
10.58* ** Separation Agreement and Mutual General Release dated
March 13, 2001 between Scott Thompson and TeleTech
10.59* ** Separation Agreement and Mutual General Release dated
March 12, 2001 between Larry Kessler and TeleTech
10.60* ** Promissory Note dated January 15, 2001 by Scott Thompson for
the benefit of TeleTech
10.61* ** Loan and Security Agreement dated January 15, 2001 between
Scott Thompson and TeleTech
10.62* ** Promissory Note dated November 28, 2000 by Sean Erickson for
the benefit of TeleTech
21.1* List of subsidiaries
23.1* Consent of Arthur Andersen LLP.
* 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.
30
- --------------------------------------------------------------------------------
[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.
[8] TeleTech's Quarterly Report on Form 10-Q for the quarter ended March 31,
2000.
[9] TeleTech's Quarterly Report on Form 10-Q for the quarter ended June 30,
2000.
[10] TeleTech's Quarterly Report on Form 10-Q for the quarter ended
September 30, 2000.
[11] TeleTech's Report on Form 8-K filed August 25, 2000.
[12] TeleTech's Current Report on Form 8-K filed September 6, 2000.
[13] TeleTech's Registration Statement on Form S-8 filed October 2, 2000
(Registration Statement No. 333-47142).
[14] TeleTech's Registration Statement on Form S-8 filed December 20, 2000
(Registration Statement No. 333-52352).
[15] TeleTech's Current Report on Form 8-K filed January 16, 2001.
(b) Reports on Form 8-K
TeleTech filed the following reports on Form 8-K during the fourth quarter of
2000 and through the filing of this Form 10-K:
(i) Report dated August 31, 2000 attaching Selected Financial Data,
Management's Discussion and Analysis of Financial Condition and Results
of Operation and Supplemental Consolidated Financial Statements, which
give effect to the Company's business combination with Contact Center
Holdings, S.L., which was accounted for as a pooling-of-interests.
(ii) Report dated December 20, 2000 providing notification of a press
release entitled "TeleTech closes acquisition of Newgen Results
Corporation" and disclosing a lease transaction and incorporating
certain financial statements and pro forma information by reference.
(iii) Report dated December 20, 2000 attaching the Selected Financial Data,
Management's Discussion and Analysis of Financial Condition and
Results of Operation and Supplemental Consolidated Financial
Statements, which give effect to the Company's business combination
with Newgen Results Corporation, which was accounted for as a
pooling-of-interests.
31
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 29, 2001.
TELETECH HOLDINGS, INC.
By: /s/ KENNETH D. TUCHMAN
-----------------------------------------------
Kenneth D. Tuchman
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed on March 29, 2001, by the following persons on behalf of
the registrant and in the capacities indicated:
Signature Title
- --------- -----
PRINCIPAL EXECUTIVE OFFICER
/s/ KENNETH D. TUCHMAN
- -------------------------------------------- Chief Executive Officer
Kenneth D. Tuchman
PRINCIPAL FINANCIAL
AND ACCOUNTING OFFICER
/s/ MARGOT O'DELL Chief Financial Officer
- --------------------------------------------
Margot O'Dell
DIRECTOR
/s/ KENNETH D. TUCHMAN
- -------------------------------------------- Chairman of the Board
Kenneth D. Tuchman
DIRECTOR
/s/ JAMES E. BARLETT
- --------------------------------------------
James E. Barlett
DIRECTOR
/s/ ROD DAMMEYER
- --------------------------------------------
Rod Dammeyer
DIRECTOR
/s/ GEORGE HEILMEIER
- --------------------------------------------
George Heilmeier
32
- --------------------------------------------------------------------------------
Signature Title
- --------- -----
DIRECTOR
/s/ MORTON H. MEYERSON
- --------------------------------------------
Morton H. Meyerson
DIRECTOR
/s/ ALAN SILVERMAN
- --------------------------------------------
Alan Silverman
33
INDEX TO FINANCIAL STATEMENTS
TELETECH HOLDINGS, INC.
- --------------------------------------------------------------------------------
Page
--------
Report of Independent Public Accountants.................... 35
Consolidated Balance Sheets as of December 31, 2000 and
1999...................................................... 36
Consolidated Statements of Income for the Years Ended
December 31, 2000, 1999 and 1998.......................... 38
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 2000, 1999 and 1998.............. 40-41
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2000, 1999 and 1998.......................... 42-43
Notes to Consolidated Financial Statements for the Years
Ended December 31, 2000, 1999 and 1998.................... 44-62
34
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, 2000
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, 2000. 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, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2000, in conformity with accounting principles generally accepted
in the United States.
ARTHUR ANDERSEN LLP
Denver, Colorado
February 8, 2001, except for Note 15, as to which the date is March 15, 2001
35
TeleTech Holdings, Inc. and Subsidiaries
Consolidated Balance Sheets
- --------------------------------------------------------------------------------
December 31 December 31
2000 1999
(Amounts in thousands except per share amounts) ------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 58,797 $ 48,278
Investment in available-for-sale securities 16,774 --
Short-term investments 8,904 32,838
Accounts receivable, net of allowance for doubtful
accounts of $9,264 and $4,270, respectively 193,351 101,450
Prepaids and other assets 17,737 6,334
Deferred tax asset 5,858 4,889
-------- --------
Total current assets 301,421 193,789
-------- --------
PROPERTY AND EQUIPMENT, net of accumulated depreciation of
$97,199 and $70,823 respectively 178,760 117,363
-------- --------
OTHER ASSETS:
Long-term accounts receivable 3,749 3,930
Goodwill, net of accumulated amortization of $3,461 and
$3,210, respectively 41,311 32,077
Contract acquisition cost, net of accumulated amortization
of $3,915 and $1,614, respectively 15,335 9,286
Deferred tax asset 1,862 550
Other assets 47,461 5,584
-------- --------
Total assets $589,899 $362,579
======== ========
36
- --------------------------------------------------------------------------------
December 31 December 31
2000 1999
(Amounts in thousands except per share amounts) ------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt and capital lease
obligations $ 12,529 $ 6,759
Bank overdraft -- 1,323
Accounts payable 19,740 16,822
Accrued employee compensation and benefits 41,177 35,061
Accrued income taxes 21,946 4,397
Accrued loss on termination of lease 9,000 --
Other accrued expenses 29,885 13,067
Customer advances, deposits and deferred income 3,021 4,510
-------- --------
Total current liabilities 137,298 81,939
-------- --------
LONG-TERM DEBT, net of current portion:
Capital lease obligations 7,943 3,755
Revolving line of credit 62,000 18,000
Other long-term debt 4,963 5,649
Other liabilities 1,521 91
-------- --------
Total liabilities 213,725 109,434
-------- --------
MINORITY INTEREST 12,809 --
-------- --------
STOCKHOLDERS' EQUITY:
Stock purchase warrants 5,100 --
Common stock; $.01 par value; 150,000,000 shares
authorized; 74,683,858 and 73,113,938 shares,
respectively, issued and outstanding 747 731
Additional paid-in capital 200,268 174,299
Deferred compensation (603) (1,104)
Notes receivable from stockholders (283) (56)
Accumulated other comprehensive loss 4,828 (1,398)
Retained earnings 153,308 80,673
-------- --------
Total stockholders' equity 363,365 253,145
-------- --------
Total liabilities and stockholders' equity $589,899 $362,579
======== ========
The accompanying notes are an integral part of these consolidated balance
sheets.
37
TeleTech Holdings, Inc. and Subsidiaries
Consolidated Statements of Income
- --------------------------------------------------------------------------------
Year Ended Year Ended Year Ended
December 31 December 31 December 31
2000 1999 1998
(Amounts in thousands except per share data) ------------ ------------ ------------
REVENUES $885,349 $604,264 $424,877
-------- -------- --------
OPERATING EXPENSES:
Costs of services 560,826 406,149 282,689
Selling, general and administrative expenses 234,524 147,918 111,808
Loss on closures of subsidiary and customer interaction
centers 8,082 -- --
Loss on termination of lease on corporate building 9,000 -- --
-------- -------- --------
Total operating expenses 812,432 554,067 394,497
-------- -------- --------
INCOME FROM OPERATIONS 72,917 50,197 30,380
-------- -------- --------
OTHER INCOME (EXPENSE):
Interest expense (5,065) (2,849) (1,658)
Interest income 5,436 3,438 3,217
Gain on sale of securities 56,985 -- --
Equity in income of affiliate -- -- 70
Business combination expenses (10,548) -- (1,321)
Gain on settlement of long-term contract -- 6,726 --
Other 2,578 246 (240)
-------- -------- --------
49,386 7,561 68
-------- -------- --------
INCOME BEFORE INCOME TAXES AND MINORITY INTEREST 122,303 57,758 30,448
Provision for income taxes 46,938 20,978 13,344
-------- -------- --------
INCOME BEFORE MINORITY INTEREST 75,365 36,780 17,104
Minority interest (1,559) -- --
-------- -------- --------
NET INCOME 73,806 36,780 17,104
Adjustment for accretion of
redeemable convertible preferred stock -- (487) (1,371)
-------- -------- --------
Net income (loss) applicable to common stockholders $ 73,806 $ 36,293 $ 15,733
======== ======== ========
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 74,171 70,557 66,228
Diluted 79,108 74,462 71,781
NET INCOME PER SHARE
Basic $ 1.00 $ .51 $ .24
======== ======== ========
Diluted $ .93 $ .49 $ .24
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements
38
(This page has been left blank intentionally.)
39
TeleTech Holdings, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
For the years ended December 31, 2000, 1999 and 1998
- --------------------------------------------------------------------------------
Additional
Treasury Stock Common Stock Paid-in
Shares Amount Shares Amount Capital
(Amounts in thousands) -------- -------- -------- -------- -----------
BALANCES, January 1, 1998 99 $(988) 65,540 $656 $108,597
Comprehensive income:
Net income -- -- -- -- --
Translation adjustments -- -- -- -- --
Comprehensive income -- -- -- -- --
Acquisition of Intellisystems (99) 988 245 2 2,089
Employee stock purchase plan -- -- 28 -- 334
Acquisition of Cygnus -- -- 325 3 2,658
Combination with Outsource -- -- 606 6 --
Brokerage fee on EDM combination -- -- 42 -- 485
Exercise of stock options -- -- 249 3 1,457
Issuances of common stock -- -- 13 -- 1,096
Deferred compensation related to options
granted -- -- -- -- 749
Year-end change for EDM -- -- -- -- --
Compensation expense on restricted stock -- -- -- -- --
Accretion of redeemable preferred stock -- -- -- -- --
Amortization of deferred compensation -- -- -- -- --
------- ----- ------- ---- --------
BALANCES, December 31, 1998 -- -- 67,048 670 117,465
Comprehensive income:
Net income -- -- -- -- --
Other comprehensive income, net of tax
Unrealized gains on securities -- -- -- -- --
Translation adjustments -- -- -- -- --
Other comprehensive income (loss) -- -- -- -- --
Comprehensive income -- -- -- -- --
Employee stock purchase plan -- -- -- -- 131
Acquisition of Pamet -- -- 286 3 1,750
Exercise of stock options -- -- 850 8 8,237
Exercise of warrants -- -- 23 -- 6
Issuances of common stock -- -- 2,180 22 32,083
Conversion of preferred stock -- -- 2,727 28 14,515
Deferred compensation related to options
granted -- -- -- -- 112
Accretion of redeemable preferred stock -- -- -- -- --
Amortization of deferred compensation -- -- -- -- --
------- ----- ------- ---- --------
BALANCES, December 31, 1999 -- -- 73,114 731 174,299
Comprehensive income:
Net income -- -- -- -- --
Other comprehensive income, net of tax
Unrealized gains on securities -- -- -- -- --
Translation adjustments -- -- -- -- --
Other comprehensive income (loss) -- -- -- -- --
Comprehensive income -- -- -- -- --
Employee stock purchase plan -- -- 70 1 1,895
Acquisition of iCcare -- -- 75 1 1,999
Exercise of stock options -- -- 1,384 14 17,355
Issuances of common stock -- -- 41 -- 2,920
CCH acquisition costs -- -- -- -- 1,800
Amortization of deferred compensation -- -- -- -- --
Issuance of warrants -- -- -- -- --
Distribution to stockholder -- -- -- -- --
------- ----- ------- ---- --------
BALANCES, December 31, 2000 -- $ -- 74,684 $747 $200,268
======= ===== ======= ==== ========
The accompanying notes are an integral part of these consolidated financial
statements.
40
- --------------------------------------------------------------------------------
Accumulated Unearned Notes
Other Compensation Receivable Stock
Comprehensive Restricted Deferred from Purchase Retained
Income (loss) Stock Compensation Stockholder Warrants Earnings
(Amounts in thousands) ------------- ------------ ------------- ------------ --------- ---------
BALANCES, January 1, 1998 $ (774) $(127) $ (901) -- -- $ 26,123
Comprehensive income:
Net income -- -- -- -- -- 17,104
Translation adjustments (426) -- -- -- -- --
Comprehensive income -- -- -- -- -- --
Acquisition of Intellisystems -- -- -- -- -- --
Employee stock purchase plan -- -- -- -- -- --
Acquisition of Cygnus -- -- -- -- -- --
Combination with Outsource -- -- -- -- -- 804
Brokerage fee on EDM combination -- -- -- -- -- --
Exercise of stock options -- -- -- -- -- --
Issuances of common stock -- -- -- -- -- --
Deferred compensation related to options
granted -- -- (749) -- -- --
Year-end change for EDM -- -- -- -- -- (270)
Compensation expense on restricted stock -- 127 -- -- -- --
Accretion of redeemable preferred stock -- -- -- -- -- (1,371)
Amortization of deferred compensation -- -- 256 -- -- --
------- ----- ------- ----- -------- --------
BALANCES, December 31, 1998 (1,200) -- (1,394) -- -- 42,390
Comprehensive income:
Net income -- -- -- -- -- 36,780
Other comprehensive income, net of tax
Unrealized gains on securities 3 -- -- -- -- --
Translation adjustments (201) -- -- -- -- --
Other comprehensive income (loss) -- -- -- -- -- --
Comprehensive income -- -- -- -- -- --
Employee stock purchase plan -- -- -- -- -- --
Acquisition of Pamet -- -- -- -- -- --
Exercise of stock options -- -- -- (56) -- --
Exercise of warrants -- -- -- -- -- --
Issuances of common stock -- -- -- -- -- --
Conversion of preferred stock -- -- -- -- -- 1,990
Deferred compensation related to options
granted -- -- (112) -- -- --
Accretion of redeemable preferred stock -- -- -- -- -- (487)
Amortization of deferred compensation -- -- 402 -- -- --
------- ----- ------- ----- -------- --------
BALANCES, December 31, 1999 (1,398) -- (1,104) (56) 80,673
Comprehensive income:
Net income -- -- -- -- -- 73,806
Other comprehensive income, net of tax
Unrealized gains on securities 9,519 -- -- -- -- --
Translation adjustments (3,293) -- -- -- -- --
Other comprehensive income (loss) -- -- -- -- -- --
Comprehensive income -- -- -- -- -- --
Employee stock purchase plan -- -- -- -- --
Acquisition of iCcare -- -- -- -- -- --
Exercise of stock options -- -- -- (227) -- --
Issuances of common stock -- -- -- -- -- --
CCH acquisition costs -- -- -- -- -- --
Amortization of deferred compensation -- -- 501 -- -- --
Issuance of warrants -- -- -- -- 5,100 --
Distribution to stockholder -- -- -- -- -- (1,171)
------- ----- ------- ----- -------- --------
BALANCES, December 31, 2000 $ 4,828 $ -- $ (603) $(283) $ 5,100 $153,308
======= ===== ======= ===== ======== ========
Total
Comprehensive Stockholders'
Income Equity
(Amounts in thousands) -------------- -------------
BALANCES, January 1, 1998 $132,586
Comprehensive income:
Net income $17,104 17,104
Translation adjustments (426) (426)
-------
Comprehensive income $16,678 --
=======
Acquisition of Intellisystems 3,079
Employee stock purchase plan 334
Acquisition of Cygnus 2,661
Combination with Outsource 810
Brokerage fee on EDM combination 485
Exercise of stock options 1,460
Issuances of common stock 1,096
Deferred compensation related to options
granted --
Year-end change for EDM (270)
Compensation expense on restricted stock 127
Accretion of redeemable preferred stock (1,371)
Amortization of deferred compensation 256
------- --------
BALANCES, December 31, 1998 157,931
Comprehensive income:
Net income $36,780 36,780
Other comprehensive income, net of tax
Unrealized gains on securities 3 3
Translation adjustments (201) (201)
-------
Other comprehensive income (loss) (198) --
-------
Comprehensive income $36,582 --
=======
Employee stock purchase plan 131
Acquisition of Pamet 1,753
Exercise of stock options 8,189
Exercise of warrants 6
Issuances of common stock 32,105
Conversion of preferred stock 16,533
Deferred compensation related to options
granted --
Accretion of redeemable preferred stock (487)
Amortization of deferred compensation 402
------- --------
BALANCES, December 31, 1999 253,145
Comprehensive income:
Net income $73,806 73,806
Other comprehensive income, net of tax
Unrealized gains on securities 9,519 9,519
Translation adjustments (3,293) (3,293)
-------
Other comprehensive income (loss) 6,226 --
-------
Comprehensive income $80,032 --
=======
Employee stock purchase plan 1,896
Acquisition of iCcare 2,000
Exercise of stock options 17,142
Issuances of common stock 2,920
CCH acquisition costs 1,800
Amortization of deferred compensation 501
Issuance of warrants 5,100
Distribution to stockholder (1,171)
------- --------
BALANCES, December 31, 2000 $363,365
======= ========
The accompanying notes are an integral part of these consolidated financial
statements.
41
TeleTech Holdings, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
- --------------------------------------------------------------------------------
Year Ended Year Ended Year Ended
December 31 December 31 December 31
2000 1999 1998
(Amounts in thousands) ------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 73,806 $ 36,780 $ 17,104
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 48,001 32,661 20,856
Allowance for doubtful accounts 5,067 904 705
Deferred rent (52) (44) 25
Gain on sale of securities (56,985) -- --
Deferred compensation 501 402 383
Deferred income taxes (2,281) (2,620) (1,235)
Minority interest 1,559 -- --
Equity in income of affiliate -- -- (70)
Loss on closure of customer interaction centers 8,082 -- --
Loss on termination of lease 9,000 -- --
Net gain on sale of division of subsidiary (3,964) 509 --
Business combination expenses paid in stock -- -- 485
Non-cash acquisition costs 1,800 -- --
Tax benefit from stock option exercises 8,573 2,923 452
Changes in assets and liabilities:
Accounts receivable (102,000) (17,340) (32,579)
Prepaid and other assets (14,780) (1,235) 159
Accounts payable and accrued expenses 61,424 11,654 14,761
Customer advances, deposits and deferred income (1,489) (281) 2,030
--------- -------- --------
Net cash provided by operating activities 36,262 64,313 23,076
--------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (118,013) (60,446) (39,624)
Acquisitions, net of cash acquired (15,700) (18,099) (2,308)
Contract acquisition costs -- -- (10,900)
Proceeds from sale of available-for-sale securities 64,912 -- --
Proceeds from sale of businesses 4,950 -- 981
Proceeds from minority interest in subsidiary 11,250 -- --
Investment in customer relationship management software
company (7,989) (2,500) --
Changes in other assets, accounts payable and accrued
liabilities related to investing activities (17,616) 105 (2,127)
Decrease in short-term investments 23,934 4,269 32,527
--------- -------- --------
Net cash used in investing activities (54,272) (76,671) (21,451)
--------- -------- --------
The accompanying notes are an integral part of these consolidated financial
statements.
42
- --------------------------------------------------------------------------------
Year Ended Year Ended Year Ended
December 31 December 31 December 31
2000 1999 1998
(Amounts in thousands) ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in bank overdraft (1,323) 545 (316)
Net increase (decrease) in short-term borrowings -- (1,887) 30
Proceeds from line-of-credit 44,000 18,000 593
Proceeds from long-term debt borrowings 700 5,000 3,227
Payments on long-term debt borrowings (7,182) (1,692) (1,126)
Payments on capital lease obligations (11,358) (6,403) (8,201)
Proceeds from common stock issuances 1,896 32,101 1,514
Proceeds from exercise of stock options 8,569 5,272 1,008
Distribution to stockholder (1,171) -- --
--------- -------- --------
Net cash provided by (used in) financing
activities 34,131 50,936 (3,271)
--------- -------- --------
Effect of exchange rate changes on cash (5,602) (583) (178)
--------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 10,519 37,995 (1,824)
CASH AND CASH EQUIVALENTS, beginning of period 48,278 10,283 12,107
--------- -------- --------
CASH AND CASH EQUIVALENTS, end of period $ 58,797 $ 48,278 $ 10,283
========= ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest $ 1,510 $ 2,859 $ 1,657
Cash paid for income taxes $ 22,497 $ 23,647 $ 11,202
The accompanying notes are an integral part of these consolidated financial
statements.
43
Notes to Consolidated Financial Statements
For the years ended December 31, 2000, 1999 and 1998
TeleTech Holdings, Inc. ("TeleTech" or the "Company") is a leading global
provider of customer relationship management solutions for large multinational
companies in the United States, Argentina, Australia, Brazil, Canada, China,
Mexico, New Zealand, Spain, Singapore and the United Kingdom. Customer
relationship 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.
NOTE 1:
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION. The consolidated financial statements are composed of
the accounts of TeleTech and its wholly owned subsidiaries, as well as its
55 percent owned subsidiary, Percepta, LLC ("Percepta"). All intercompany
balances and transactions have been eliminated in consolidation.
During August 2000 and December 2000, the Company entered into business
combinations with Contact Center Holdings, S.L. ("CCH") and Newgen Results
Corporation ("Newgen"), respectively. The business combinations have been
accounted for as poolings-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 CCH and Newgen.
The consolidated financial statements of the Company include reclassifications
made to conform the financial statement presentation of CCH and Newgen 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 2000 and 1999, the Mexican economy was
no longer considered highly inflationary, and therefore translation gains and
losses were included as a component of stockholders' equity for 2000 and 1999.
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:
Buildings 27.5 years
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
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, where title to the leased assets passes to the Company upon
termination of the lease).
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. The Company has
classified its short-term investments as available-for-sale securities. At
December 31, 2000,
44
short-term investments consist of commercial paper, corporate securities,
government securities and other securities. These short-term investments are
carried at fair value based on quoted market prices with unrealized gains and
losses, if any, net of tax, reported in accumulated other comprehensive income.
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 9 to 25 years. Amortization of
goodwill for the years ended December 31, 2000, 1999 and 1998 was $4,794,000,
$1,611,000 and $1,012,000, respectively.
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 of these costs for the years ended December 31, 2000 and 1999, was
$2,301,000 and $1,614,000, respectively. There was no amortization expense
during 1998.
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 estimated to be insufficient to recover the carrying amount. If
impaired, an asset is written down to its fair value.
Software Development Costs. The Company accounts for software development costs
in accordance with the American Institute of Certified Public Accountants
("AICPA") Statement of Position 98-1, "Accounting for the Cost of Computer
Software Developed or Obtained for Internal Use," which requires that certain
costs related to the development or purchase of internal-use software be
capitalized. At December 31, 2000, the Company has approximately $8.0 million of
software costs capitalized, which are included in other assets in the
accompanying balance sheet. These costs will be amortized over the expected
useful life of the software. There has been no amortization expense as of
December 31, 2000, as the software is in the development stage.
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 other liabilities.
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 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.
Gross deferred tax assets then may be reduced by a valuation allowance for
amounts that do not satisfy the realization criteria of SFAS 109.
Comprehensive Income. Comprehensive income includes the following components:
Year ended Year ended Year ended
December 31, December 31, December 31,
2000 1999 1998
(amounts in thousands) ------------ ------------ ------------
Unrealized gains on securities, net of reclassification
adjustments $14,644 $ 4 $ --
Foreign currency translation adjustments (3,293) (201) (426)
Income tax (expense) benefit related to items of other
comprehensive income (5,125) (1) --
------- ----- -----
Other comprehensive income, net of tax $ 6,226 $(198) $(426)
======= ===== =====
45
Disclosure of reclassification amount:
Year ended Year ended Year ended
December 31, December 31, December 31,
2000 1999 1998
------------ ------------ ------------
Unrealized holding gains arising during the period $ 71,629 $4 $ --
Less: reclassification adjustment for gains included in
net income (56,985) -- --
Provision for income taxes (5,125) (1) --
-------- -- ---------
Net unrealized gains on securities $ 9,519 $3 $ --
======== == =========
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.
Year ended Year ended Year ended
December 31, December 31, December 31,
2000 1999 1998
(Amounts in thousands except per share data) ------------ ------------ ------------
Shares used in basic per share calculation 74,171 70,557 66,228
Effects of dilutive securities:
Warrants 444 74 92
Conversion of preferred stock -- 1,046 2,727
Stock options 4,493 2,785 2,734
------ ------ ------
Shares used in diluted per share calculation 79,108 74,462 71,781
====== ====== ======
At December 31, 2000, 1999 and 1998 options to purchase 2,403,718, 2,739,299
and 2,422,719 shares of common stock, respectively, were outstanding but were
not included in the computation of diluted EPS because the effect would be
antidilutive.
Use of Estimates. The preparation of financial statements in conformity with
accounting principles generally accepted in the United States 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.
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
$3.8 million and $2.9 million at December 31, 2000 and 1999, respectively.
Fair Value of Financial Instruments Fair values of cash equivalents and other
current accounts receivable and payable approximate the carrying amounts because
of their short-term nature. Short-term investments include 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, 2000 and 1999 have a carrying value that is not
significantly different from 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
46
short-term debt approximates its recorded value because of its short-term
nature.
The fair value of the derivative instruments held as of December 31, 2000 is
$670,000 below the carrying value.
Derivatives. The Company entered into an interest rate swap agreement to
effectively convert a portion of its floating-rate borrowings into fixed rate
obligations. The interest rate differential to be received or paid is recognized
as a current period adjustment to interest expense. The Company entered into the
interest rate swap on December 12, 2000. The swap matures on December 12, 2006.
The contract is for an aggregate notional amount of $20 million with a fixed
interest rate of 6.37% payable by the Company and the floating interest rate
payable by the third party. The difference between the Company's fixed rates and
the floating rates, which is reset monthly, is received or paid by the Company
in arrears monthly and recognized as an adjustment to interest expense. The
contract was entered into for the purpose of hedging interest rate risk.
Effects of Recently Issued Accounting Pronouncements. SFAS No. 133, "Accounting
for Derivative Instrument and Hedging Activities," establishes fair value
accounting and reporting standards for derivative instruments and hedging
activities. TeleTech adopted SFAS No. 133 on January 1, 2001. SFAS No. 133
requires every derivative instrument (including certain derivative instruments
embedded in other contracts) to be recorded in the balance sheet as either an
asset or liability measured at its fair value. SFAS No. 133 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 the 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 treatment. Accordingly upon adoption of SFAS
No. 133 on January 1, 2001, the Company recorded a decrease in fair value of
approximately $400,000 (net of tax effect of $270,000) in other comprehensive
income for the derivative contracts designated as hedges. A corresponding entry
of $775,000 was recorded to recognize a liability and $105,000 to recognize an
asset on the balance sheet. SFAS No. 133 could impact TeleTech's financial
position and could increase volatility in earnings and accumulated other
comprehensive income.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101 ("SAB 101"), Revenue Recognition in Financial
Statements, which provides guidance on the recognition, presentation and
disclosure of revenue in financial statements. SAB 101 outlines the basic
criteria that must be met to recognize revenue and provides guidance for
disclosures related to revenue recognition policies. The Company has adopted SAB
101 in the fourth quarter of fiscal 2000. The adoption of this bulletin had no
material impact on the financial position or results of operations of the
Company.
Reclassifications Certain prior year amounts have been reclassified to conform
to current year presentation.
NOTE 2:
SEGMENT INFORMATION AND CUSTOMER CONCENTRATIONS
The Company classifies its business activities into five fundamental areas:
outsourced operations in the United States, facilities management operations,
international outsourced operations, database marketing and consulting and
technology services and consulting. These areas are separately managed and each
has significant differences in capital requirements and cost structures.
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
deferred income taxes. Segment accounting policies are the same as those used in
the consolidated financial statements except capital expenditures are reported
including assets acquired under capital lease. There are no significant
transactions between the reported segments for the periods presented.
47
2000 1999 1998
(Amounts in thousands) -------- -------- ---------
Revenues:
Outsourced $388,739 $299,379 $200,514
Facilities management 119,529 94,461 85,694
International outsourced 291,341 134,416 89,791
Database marketing & consulting 77,468 55,188 40,106
Corporate activities 8,272 20,820 8,772
-------- -------- --------
Total $885,349 $604,264 $424,877
======== ======== ========
Operating Income (Loss):
Outsourced $ 82,190 $ 69,463 $ 41,495
Facilities management 16,144 6,849 11,648
International outsourced 45,776 10,467 7,451
Database marketing & consulting 9,987 4,240 (3,134)
Corporate activities (81,180) (40,822) (27,080)
-------- -------- --------
Total $ 72,917 $ 50,197 $ 30,380
======== ======== ========
Depreciation and Amortization Included in Operating Income:
Outsourced $ 20,190 $ 16,514 $ 12,688
Facilities management 618 483 239
International outsourced 15,579 7,861 5,324
Database marketing & consulting 5,145 2,160 1,293
Corporate activities 6,469 5,643 1,312
-------- -------- --------
Total $ 48,001 $ 32,661 $ 20,856
======== ======== ========
Assets:
Outsourced $147,238 $ 76,401 $101,105
Facilities management 19,457 11,290 18,121
International outsourced 198,185 106,397 65,614
Database marketing & consulting 63,524 51,095 12,772
Corporate activities 161,495 117,396 54,117
-------- -------- --------
Total $589,899 $362,579 $251,729
======== ======== ========
Goodwill (Included in Total Assets):
International outsourced goodwill, net $ 14,181 $ 10,496 $ 6,803
Database marketing & consulting goodwill, net 15,244 11,443 --
Corporate activities goodwill, net 11,886 10,138 8,219
-------- -------- --------
Total $ 41,311 $ 32,077 $ 15,022
======== ======== ========
Capital Expenditures (Including Capital Leases):
Outsourced $ 39,841 $ 22,570 $ 29,874
Facilities management 826 434 1,169
International outsourced 66,230 21,344 5,580
Database marketing & consulting 6,840 3,422 1,129
Corporate activities 7,267 16,520 7,047
-------- -------- --------
Total $121,004 $ 64,290 $ 44,799
======== ======== ========
48
The following geographic data includes revenues based on the location where
the services are provided and gross property and equipment based on the physical
location.
2000 1999 1998
(Amounts in thousands) --------- --------- ---------
Revenues:
United States $565,519 $449,329 $321,183
Australia 64,411 49,925 36,958
Canada 112,842 35,814 36,852
Europe 82,664 46,786 21,051
Latin America 58,975 21,388 8,833
Rest of world 938 1,022 --
-------- -------- --------
Total $885,349 $604,264 $424,877
======== ======== ========
Gross Property and Equipment:
United States $174,821 $136,526 $ 91,922
Australia 19,814 16,684 11,956
Canada 33,678 8,943 5,645
Europe 15,155 11,416 3,207
Latin America 31,355 14,547 8,694
Rest of world 1,136 70 2,294
-------- -------- --------
Total $275,959 $188,186 $123,718
======== ======== ========
All other long-lived assets:
United States $ 46,248 $ 3,730 $ 3,868
Australia 507 296 365
Canada 367 3,640 252
Europe 469 309 2,007
Latin America 3,619 1,539 139
Rest of world -- -- --
-------- -------- --------
Total $ 51,210 $ 9,514 $ 6,631
======== ======== ========
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:
2000 1999 1998
---- ---- ----
Customer A 8% 8% 11%
Customer B 20% 23% 22%
--- -- --
28% 31% 33%
=== == ==
At December 31, 2000, accounts receivable from Customers A and B were
$6.8 million and $14.3 million, respectively. At December 31, 1999, accounts
receivable from Customers A and B were $4.7 million and $8.2 million,
respectively. There were no other customers with receivable balances in excess
of 10% of consolidated accounts receivable. Customer A is included in the
facilities management reporting segment. Customer B is included in the
outsourced 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. The Company does not require collateral from its customers. 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 impacted by economic conditions in the
telecommunications, transportation, financial services and government services
industries, management does not believe significant credit risk exists at
December 31, 2000.
49
NOTE 3:
PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31, 2000 and
1999 (in thousands):
2000 1999
--------- ---------
Land $ 51 $ 51
Buildings 306 202
Computer equipment and
software 94,779 83,700
Telephone equipment 24,996 12,631
Furniture and fixtures 66,177 33,005
Leasehold improvements 83,943 56,946
CIP 2,306 --
Other 3,401 1,651
-------- --------
275,959 188,186
Less accumulated
depreciation (97,199) (70,823)
-------- --------
$178,760 $117,363
======== ========
Included in the cost of property and equipment is the following equipment
obtained through capitalized leases as of December 31, 2000 and 1999 (in
thousands):
2000 1999
-------- --------
Computer equipment and
software $23,833 $16,895
Telephone equipment 3,567 1,615
Furniture and fixtures 5,677 2,470
------- -------
33,077 20,980
Less accumulated
depreciation (21,700) (14,728)
------- -------
$11,377 $ 6,252
======= =======
Depreciation expense was $40.9 million, $29.5 million and $19.8 million for
the years ended December 31, 2000, 1999 and 1998, respectively. Depreciation
expense related to equipment under capital leases was $5.2 million,
$5.9 million and $5.6 million for the years ended December 31, 2000, 1999 and
1998, respectively.
NOTE 4
CAPITAL LEASE OBLIGATIONS
The Company has financed property and equipment under non-cancelable capital
lease obligations of $2,991,000, $3,844,000 and $5,175,000 in 2000, 1999 and
1998, respectively. Accordingly, the fair value of the equipment has been
capitalized and the related obligation recorded. The average implicit interest
rate on these leases was 7.1% at December 31, 2000. Interest is charged to
expense at a level rate applied to declining principal over the period of the
obligation.
The future minimum lease payments under capitalized lease obligations as of
December 31, 2000, are as follows (in thousands):
Year Ended December 31,
2001 $ 3,355
2002 4,993
2003 2,991
2004 426
------------
11,765
Less amount representing interest (789)
------------
10,976
Less current portion (3,033)
------------
$ 7,943
============
Interest expense on the outstanding obligations under such leases was
$1.2 million, $1.1 million and $1.2 million for the years ended December 31,
2000, 1999 and 1998, respectively.
50
NOTE 5
OTHER LONG-TERM DEBT
As of December 31, 2000 and 1999, other long-term debt consisted of the
following notes (in thousands):
2000 1999
------------ ------------
Note payable, interest at 8% per annum, principal and
interest payable quarterly, maturing March 2001, unsecured $ 194 $ 1,090
Note payable, interest at 8% per annum, principal and
interest payable monthly, maturing January 2001, unsecured 57 842
Note payable, interest at 5% per annum, principal and
interest payable monthly, maturing November 2009,
collaterlaized by certain assets of the Company 4,567 4,935
Note payable, interest at 7% per annum, principal and
interest payable monthly, maturing July 2002, unsecured 324 271
Note payable, interest at 7% per annum, principal and
interest payable monthly, maturing May 2004, unsecured 260 348
Note payable, interest at 6% per annum, principal and
interest payable monthly, maturing June 2002, unsecured 265 --
Other notes payable 470 881
------------ ------------
6,137 8,367
Less current portion (1,174) (2,718)
------------ ------------
$ 4,963 $ 5,649
============ ============
Annual maturities of the long-term debt are as follows (in thousands):
Year Ended December 31,
2001 $ 1,174
2002 793
2003 563
2004 591
2005 550
Thereafter 2,466
--------------
$ 6,137
==============
NOTE 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 $50.0 million. In the first and fourth quarters of 2000, the
Company amended its unsecured revolving line of credit with a syndicate of four
banks. The amendment increased the line of credit to approximately
$87.5 million from $50.0 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 $25.0 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, 2000 and 1999, there was $62 million and
$18 million outstanding under this agreement, respectively. 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
51
has voluntarily pledged $15 million of short-term investments at December 31,
2000, which is included in cash and cash equivalents in the accompanying balance
sheet, 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. The
agreement requires the Company to maintain, among other restrictions, prescribed
financial ratios.
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 7.5% at December 31, 2000. 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, 2000 and 1999, there was
$42,000 and $1.3 million, respectively, outstanding under this operating loan.
The Company's Spanish subsidiary has factoring lines of credit under which it
may borrow up to ESP$1,600 million at December 31, 2000 and 1999. As of
December 31, 2000 and 1999, there was $8.3 million and $2.8 million outstanding
under these factoring lines, included in current portion of long-term debt in
the accompanying balance sheet.
NOTE 7
INCOME TAXES
The components of income before income taxes are as follows (in thousands):
2000 1999 1998
--------- -------- --------
Domestic $ 68,368 $46,619 $20,315
Foreign 53,935 11,139 10,133
-------- ------- -------
Total $122,303 $57,758 $30,448
======== ======= =======
The components of the provision for income taxes are as follows (in
thousands):
2000 1999 1998
-------- -------- --------
Current provision:
Federal $ 24,942 $ 14,888 $ 8,297
State 2,838 3,378 1,865
Foreign 21,439 5,131 4,417
-------- -------- --------
49,219 23,397 14,579
-------- -------- --------
Deferred provision:
Federal (941) (1,724) (834)
State (132) (303) (195)
Foreign (1,208) (392) (206)
-------- -------- --------
(2,281) (2,419) (1,235)
-------- -------- --------
$ 46,938 $ 20,978 $ 13,344
======== ======== ========
The following reconciles the Company's effective tax rate to the federal
statutory rate for the years ended December 31, 2000, 1999, and 1998 (in
thousands):
2000 1999 1998
-------- -------- --------
Income tax expense
per federal
statutory rate $42,806 $18,634 $10,063
State income taxes,
net of federal
deduction 3,840 2,181 908
Tax benefit of
operating loss
carryforward
acquired (1,800) -- --
Miscellaneous credits (716) -- --
Transaction costs 420 -- --
Other 200 (1,706) 966
Foreign income taxed
at higher rate 2,188 1,869 1,407
------- ------- -------
$46,938 $20,978 $13,344
======= ======= =======
52
The Company's deferred income tax assets and liabilities are summarized as
follows (in thousands):
2000 1999
-------- --------
Deferred tax assets:
Allowance for doubtful
accounts $ 2,588 $ 1,417
Vacation accrual 1,672 1,377
Compensation 162 1,025
Insurance reserves 604 796
State tax credits 300 510
Net operating loss
carryforward -- 981
Other 532 431
------- --------
5,858 6,537
------- --------
Long-term deferred tax assets:
Depreciation and
amortization 1,862 746
------- --------
Total 7,720 7,283
Less valuation allowance -- (1,844)
------- --------
Net deferred income tax asset $ 7,720 $ 5,439
======= ========
A valuation allowance has been recorded to the extent that the Company expects
the deferred tax assets not to be realized in the future.
NOTE 8
COMMITMENTS AND CONTINGENCIES
Leases. The Company has various operating leases for equipment, customer
interaction centers and office space. Rent expense under operating leases was
approximately $21.6 million, $16.6 million and $13.1 million for the years ended
December 31, 2000, 1999 and 1998, respectively.
The future minimum rental payments required under non-cancelable operating
leases as of December 31, 2000, are as follows (in thousands):
Year ended December 31,
2001 $ 22,257
2002 16,700
2003 15,218
2004 14,275
2005 8,882
Thereafter 25,606
--------
$102,938
========
Legal Proceedings. In July 1999, the Company reached a settlement with
CompuServe Incorporated whereby the Company received $12.0 million in final
settlement in 1999. As a result, the Company recorded a gain of $6.7 million
during 1999, which is included in other income in the accompanying consolidated
statements of income.
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.
NOTE 9
EMPLOYEE BENEFIT PLAN
The Company has a 401(k) profit-sharing plan that covers employees who have
completed six months 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 also eligible for a matching contribution by the Company of 50%
of the first 6% of compensation a participant contributes to the plan.
Participants vest in matching contributions over a four-year period.
NOTE 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
53
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 were granted at fair market value at the date of grant. Options vested
as of the date of the option but were 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 510,250, 423,000, and 418,750
shares outstanding at December 31, 2000, 1999, and 1998, respectively. In
May 2000, the Company terminated future grants under this plan. From that point
on, Directors received options under the Company's 1999 Stock Option and
Incentive Plan.
In July 1996, the Company adopted an employee stock purchase plan (the
"ESPP"). Pursuant to the ESPP, an aggregate of 400,000 shares of common stock of
the Company is available for issuance under the ESPP. Employees are eligible to
participate in the ESPP after three months of service. The price per share
purchased in any offering period is equal to the lesser of 85% 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. Stock
purchased under the plan for the years ended December 31, 2000, 1999 and 1998
were $1,895,000, $131,000 and $334,000 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 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) 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
10 million shares of common stock has been reserved for issuance under the 1999
Option Plan, which permits the award of incentive stock options, non-qualified
stock options, stock appreciation rights and shares of restricted common stock.
As previously discussed, the 1999 Option Plan also provides annual stock option
grants to Directors.
In connection with the acquisition of Newgen, which was accounted for under
the pooling-of-interests method, the Company has assumed all of the options
outstanding under Newgen's 1998 and 1996 Equity Incentive Plans.
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:
2000 1999 1998
--------- --------- ---------
Risk-free interest
rate 4.9% 5.9% 5.2%
Expected dividend
yield 0% 0% 0%
Expected lives 3.1 years 5.3 years 6.0 years
Expected volatility 81% 79% 70%
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)
2000 1999 1998
-------- -------- --------
As reported $73,806 $36,780 $17,104
Pro forma $55,680 $31,024 $11,733
54
PER SHARE AMOUNTS
2000 1999 1998
----- ----- -----
As reported:
Basic $1.00 $0.51 $0.24
Diluted $0.93 $0.49 $0.24
Pro forma:
Basic $0.75 $0.41 $0.16
Diluted $0.70 $0.41 $0.16
A summary of the status of the Company's four stock option plans for the three
years ended December 31, 2000, together with changes during each of the years
then ended, is presented in the following table:
Weighted
Average
Price Per
Shares Share
----------- ---------
Outstanding,
January 1, 1998 5,443,198 $ 7.02
Grants 3,496,090 11.37
Exercises (249,840) 4.02
Forfeitures (1,669,562) 13.02
----------
Outstanding,
December 31, 1998 7,019,886 7.94
Grants 7,246,933 8.70
Exercises (850,802) 6.40
Forfeitures (1,853,792) 10.17
----------
Outstanding,
December 31, 1999 11,562,225 8.43
Grants 4,827,832 28.04
Exercises (1,384,022) 6.19
Forfeitures (1,283,995) 11.41
----------
Outstanding,
December 31, 2000 13,722,040 $15.10
==========
Options exercisable at
year-end:
2000 4,545,244 $ 8.64
1999 2,578,417 $ 4.71
1998 2,165,742 $ 5.43
Weighted average fair
value of options
granted during the
year:
2000 $15.27
1999 $ 4.90
1998 $ 7.93
55
The following table sets forth the exercise price range, number of shares,
weighted average exercise price and remaining contractual lives at December 31,
2000:
Outstanding Exercisable
Weighted
Number of Weighted Average Number of Weighted
Range of Exercise Shares Average Contractual Shares Average
Prices Outstanding Exercise Price Life (years) Exercisable Exercise Price
$ 0.63 - $1.29 1,011,601 $ 1.25 5 1,011,601 $ 1.25
$ 2.00 - $6.00 1,416,692 $ 5.23 7 815,910 $ 4.84
$ 6.13 - $6.13 1,095,079 $ 6.13 8 258,581 $ 6.13
$ 6.19 - $8.00 1,280,107 $ 7.07 7 452,948 $ 7.43
$ 8.06 - $9.75 1,062,708 $ 9.51 8 256,551 $ 9.50
$ 9.87 - $13.06 1,567,304 $11.93 8 641,720 $11.45
$13.13 - $13.13 1,020,000 $13.13 9 504,000 $13.13
$13.20 - $20.94 1,065,122 $16.47 8 337,124 $15.27
$21.41 - $30.81 2,099,710 $26.32 9 130,883 $24.75
$30.88 - $39.81 2,103,717 $32.23 9 135,926 $31.68
NOTE 11
RELATED PARTY TRANSACTIONS
The Company has entered into agreements pursuant to which Avion, LLC and
AirMax LLC provide certain aviation flight services to and as requested by the
Company. Such services include the use of an aircraft and flight crew. Kenneth
D. Tuchman, chairman of the board of the Company, has a direct or indirect
beneficial ownership interest in Avion, LLC. During 2000 and 1999 the Company
paid an aggregate of $677,000 and $35,000 respectively, to Avion, LLC for
services provided to the Company. Mr. Tuchman directly or indirectly also
purchases services from AirMax LLC and from time to time provides short-term
loans to AirMax LLC. During 2000, 1999 and 1998 the Company paid to AirMax LLC
an aggregate of $460,000, $405,000 and $480,000 respectively, for services
provided to the Company.
During the fourth quarter of 2000, the Company and its enhansiv subsidiary
executed a transaction pursuant to which all the common stock of enhansiv was
sold to a group of investors. One of the investors, Kenneth Tuchman, also serves
as the Chairman of the Company's Board of Directors. Mr. Tuchman purchased
approximately 43% of enhansiv's common stock for $3 million.
56
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.
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, was until recently the managing partner of Equity Group
Investments, Inc., and Samuel Zell, a former director of the Company, was
chairman of the board. During the years ended December 31, 2000, 1999 and 1998,
the Company incurred $1,127,000, $3,521,000 and $2,288,000, respectively, for
such services.
NOTE 12
ACQUISITIONS
On August 31, 2000, the Company and CCH entered into a definitive Share
Purchase Agreement, which included the exchange of 3,264,000 shares of the
Company's common stock for all of the issued share capital of CCH. The business
combination was accounted for as a pooling of interest, and accordingly, the
historical financial statements of the Company have been restated to include the
financial statements of CCH for all periods presented.
On December 20, 2000, the Company consummated a business combination with
Newgen that included the exchange of 8,283,325 shares of the Company's common
stock for all of the issued shares of Newgen. The business combination was
accounted for as a pooling of interest, and accordingly, the historical
financial statements of the Company have been restated to include the financial
statements of Newgen for all periods presented.
The consolidated financial statements have been prepared to give retroactive
effect to the business combinations with CCH and Newgen.
The table below sets forth the results of operations of the previously
separate enterprises for the period prior to the consummation of the
August 2000 and December 2000 business combinations during the periods ended
December 31, 2000, 1999 and 1998 (in thousands):
TeleTech CCH Newgen Combined
--------- -------- -------- ---------
2000 (prior to the consummation of the business
combinations)
Revenues $750,782 $38,540 $77,468 $866,790
Net income 64,477 2,259 5,919 72,655
1999
Revenues $509,268 $39,808 $55,188 $604,264
Net income 29,090 2,855 4,835 36,780
1998
Revenues $369,045 $15,726 $40,106 $424,877
Net income 19,202 1,105 (3,203) 17,104
On October 27, 2000, TeleTech acquired iCcare Limited ("iCcare"); a Hong Kong
based CRM company, in a transaction accounted for under the purchase method of
accounting. The Company purchased iCcare for approximately $4.0 million
consisting of $2.0 million in cash and $2.0 million in stock. On the basis of
achievement of
57
predetermined revenue targets, iCcare could also receive additional stock or
cash payments over the next two years. The operations of iCcare 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 November 7, 2000, the Company acquired the customer care division of Boston
Communications Group ("BCG") in an asset purchase transaction accounted for
under the purchase method of accounting. BCG's customer care division provides
24x7 inbound customer care solutions for the wireless industry. The Company
purchased the customer care division in a cash transaction valued at
$15 million, including a $13 million cash payment and assumption of
approximately $2 million of liabilities. Under the terms of the agreement, BCG
could receive additional cash payments, totaling up to an additional
$20 million over four years, based upon achievement of certain predetermined
revenue targets. The operations of the customer care division of Boston
Communications Group 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 18, 1999, the Company acquired 100% of the common stock of Pamet
River, Inc. ("Pamet") for approximately $1.8 million in cash and 285,711 shares
of common stock in the Company. Pamet was a global marketing company offering
end-to-end marketing solutions by leveraging Internet and database technologies.
The transaction was accounted for as a purchase and goodwill was 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. In
September 2000, the Company closed Pamet. See note 14 for further discussion.
On March 31, 1999, the Company acquired 100% of the common stock of Smart Call
S.A. ("Smart Call") for approximately $2.4 million 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 was accounted for as a purchase and
goodwill is 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.
On October 12, 1999, the Company acquired 100% of the common stock of Connect
for approximately $2.3 million in cash including costs related to the
acquisition. The former owners of Connect are entitled to an earn-out premium
based on the results of the Company's consolidated operations in Argentina in
2000. This earn-out premium will be calculated in the first quarter of 2001 and
the Company anticipates it to be between $3.5 and $4.0 million. 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 was accounted for as a purchase and goodwill is
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 $2.5 million during 2001. The
contingent payment is based on reaching revenue and profitability targets.
On November 30, 1999, the Company's subsidiary Newgen acquired the partnership
interest, including certain net assets and liabilities of Computer Care, a New
York general partnership and wholly owned operation of Automatic Data
Processing, Inc ("ADP") in a transaction accounted for under the purchase method
of accounting. Per the terms of the partnership agreement Newgen acquired a
100 percent interest in Computer Care for a purchase price of approximately
$11.0 million in cash, excluding transaction costs, and up to an additional
$9.0 million earn-out which may be paid based upon certain earn-out criteria. In
February 2001, the Company paid $4.4 million to ADP in full satisfaction of the
earn-out provision.The operations of Computer Care 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 December 15, 1999, the Company invested $2.5 million in a customer
relationship management software company. On January 27, 2000, an additional
investment of $8.0 million was made in the same customer relationship management
software company. In
58
May 2000, this software company merged with E.piphany, Inc., a publicly traded
customer relationship management company. As a result of the merger, TeleTech
received 1,238,400 shares of E.piphany common stock. During the year ended
December 31, 2000 the Company sold approximately 909,300 shares of E.piphany for
total proceeds of $64.9 million, which resulted in a realized gain of
$57.0 million. The remaining 329,100 shares of E.piphany, of which approximately
116,000 shares are held in escrow, has a cost basis of $2.2 million. These
shares are reflected in the accompanying balance sheet as an available-for-sale
security, at their fair market value of $16.8 million at December 31, 2000. The
unrealized gain of $9.5 million is shown net of tax of $5.1 million, as a
component of other comprehensive income in the accompanying consolidated
statements of stockholders' equity.
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 was a leading
developer of patented automated product support systems. The acquisition was
accounted for as a purchase. The operations of Intellisystems 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 assets of
Intellisystems have since been transferred to enhansiv, the common stock of
which the Company sold to a group of investors during the fourth quarter of
2000.
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 issuance of 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. Subsequent to year-end, certain operations
and personnel of Digital were absorbed by other groups within the Company.
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.
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 period ended December 31, 1998 (in thousands):
TeleTech Digital EDM Adjustments Combined
1998 (prior to the business combinations)
Revenues $136,244 $2,038 $10,258 $(1,171) $147,369
Net income 6,972 136 654 -- 7,762
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 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 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 was accounted for
as a purchase and goodwill is amortized using the straight-line method over
10 years. The Company will pay approximately $1.6 million in contingent
consideration based on certain levels of operating income achieved by
59
Cygnus in 1999 and 2000. This amount will be determined and paid in the first
quarter of 2001. 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. The shares of Cygnus have since
been transferred to enhansiv, the common stock of which the Company sold to a
group of investors during the fourth quarter of 2000.
NOTE 13
FORD JOINT VENTURE
During the first quarter of 2000, the Company and Ford Motor Company ("Ford")
formed Percepta. In connection with this formation, the Company issued stock
purchase warrants to Ford entitling Ford to purchase 750,000 shares of TeleTech
common stock. These warrants were valued at $5.1 million using the Black-Scholes
Option model.
Ford has the right to earn additional warrants based upon Percepta's
achievement of certain revenue thresholds through 2004. Such threshold was not
achieved for 2000. The value of the warrants to be issued is subject to a
formula based upon the profitability of Percepta, among other factors. The
exercise price of any warrants issued under the agreement will be a 5% premium
over the Company's stock price at the date the warrants are issued.
NOTE 14
ASSET ACQUISITIONS AND DISPOSITIONS
In the fourth quarter of 2000, the Company and its enhansiv subsidiary
executed a transaction, whereby the Company transferred all of its shares of
common stock of enhansiv, inc., a Colorado corporation ("enhansiv"), to enhansiv
holdings, inc., a Delaware corporation ("EHI") in exchange for 100 shares of
Series A Preferred Stock of EHI. enhansiv's holdings at the time of the transfer
included a technology-oriented subsidiary of enhansiv (formerly known as Cygnus
Computer Associates Ltd.) and two divisions (Intellisystems and the Freefire
assets the Company acquired from Information Management Associates). As a part
of the transaction, EHI sold 2,333,333 shares of common stock to a group of
investors. These shares represent 100% of the existing common shares of EHI,
which in turn owns 100% of the common shares of enhansiv. The Company's
Preferred Stock is convertible into 1,000,000 shares of EHI common stock. In
addition, the Company has an option to reacquire approximately 95% of the common
stock of EHI. Prior to November 18, 2002 the option can be exercised only under
certain circumstances. The Company has also agreed to make available to enhansiv
a $7.0 million line of credit and $2.3 million per year to purchase enhansiv
services over a four-year period commencing in 2001. The Company's investment in
EHI is accounted for under the equity method and is included in other assets in
the accompanying consolidated balance sheets. One of the investors in EHI is a
related party to TeleTech. See Note 11 for additional information.
The Company accounts for its investment in EHI under the equity method of
accounting. Under the equity method, the investor records its pro rata share of
earnings or loss of the investee. The Company has invested in the preferred
stock of EHI. As a result, the Company has the option of either recording its
pro forma share (on an as converted basis) of EHI's losses commencing from the
date of investment or, waiting until the cumulative EHI losses exceed the value
of all subordinate equity investments in EHI (common stock). The Company has
elected to record EHI's losses cumulatively once the losses exceed the value of
the subordinate equity. However, in the event that the Company has to begin
recording the losses of EHI in its consolidated statements of operations, it
would record 100 percent of such losses until the losses exceeded the value of
its preferred investment ($18.0 million) plus any other amounts advanced under
the line of credit. During 2000, the Company did not record any losses from EHI,
subsequent to the sale of the common stock, in the accompanying consolidated
statements of income.
In March 2000, the Company and State Street Bank and Trust Company ("State
Street") entered into a lease agreement whereby State Street acquired 12 acres
of land in Arapahoe County, Colorado for the purpose of constructing a new
corporate headquarters for the Company ("the planned headquarters building").
Subsequently, management of the Company decided it would likely terminate the
lease agreement as it was determined that the planned headquarters building
would be unable
60
to accommodate the Company's anticipated growth. The Company has recorded a
$9 million loss on the termination of the lease, which is included in the
accompanying consolidated statements of income.
In December 2000, the Company and State Street consummated a lease transaction
for the Company's new corporate headquarters, whereby State Street acquired the
property at 9197 South Peoria, Street, Englewood, Colorado (the "Property").
Simultaneously, State Street leased the property to TeleTech Services
Corporation ("TSC"), a wholly owned subsidiary of the Company, and TSC subleased
the Property to an affiliate of the seller, pursuant to a short-term sublease,
prior to occupancy by the Company. The rent expense and corresponding sublease
payments are reflected in the lease commitments.
In July 2000, the Company sold a division of its Australian subsidiary, which
provides services in the healthcare industry, for cash of approximately
$4.9 million. This sale resulted in a gain recognized in the third quarter of
2000 of approximately $4.0 million, which is included in other income in the
accompanying consolidated statements of income. The operating results, assets
and liabilities of this division were not material to the consolidated operating
results, assets and liabilities of the Company.
In September 2000, the Company closed its Pamet River subsidiary, which
provided marketing solutions by leveraging Internet and database technologies.
The Company closed the subsidiary because of weak operating performance and
incompatibility with the Company's key strategic initiatives. It was more cost
effective to close the operation than to seek a buyer. The disposal resulted in
a $3.4 million loss, which is included as an operating expense in the
accompanying consolidated statements of income.
In December 2000, the Company identified three customer interaction centers in
California, which were older and under-performing and decided to consolidate
them into one new center. As a result, the Company accrued a $4.7 million loss
on the closure of these sites consisting of future rent and occupancy costs and
loss on the disposal of assets, which is included as an operating expense in the
accompanying consolidated statements of income. No amounts have been paid
through year-end.
NOTE 15
SUBSEQUENT EVENTS
In March 2001, the Company agreed to acquire the planned headquarters building
being constructed on its behalf in lieu of terminating the lease. The building
will be acquired on March 31, 2001 if not sold before that date. The Company
anticipates that the purchase price will be approximately $15 million. In
addition, to complete construction of the building the Company will incur
approximately $11 million in additional capital expenditures. The Company plans
to sell the building upon completion. The estimated fair value of the building,
less costs to sell, will approximate the Company's cost of the building less the
$9 million accrued loss on termination of the lease.
61
NOTE 16
QUARTERLY FINANCIAL DATA (UNAUDITED)
First Second Third Fourth
(Amounts in thousands, except per share data) Quarter Quarter Quarter Quarter
Year ended December 31, 2000:
Revenues $192,326 $217,375 $231,806 $243,842
Income from operations 17,679 20,609 19,604 15,025
Net income 11,246 21,635 32,382 8,543
Net income per common share:
Basic $ 0.15 $ 0.29 $ 0.44 $ 0.11
Diluted $ 0.14 $ 0.27 $ 0.41 $ 0.11
First Second Third Fourth
Quarter Quarter Quarter Quarter
Year ended December 31, 1999:
Revenues $131,579 $142,994 $148,862 $180,829
Income from operations 9,989 11,720 12,931 15,557
Net income 6,301 7,557 12,943 9,979
Net income per common share:
Basic $ 0.09 $ 0.11 $ 0.18 $ 0.14
Diluted $ 0.09 $ 0.10 $ 0.17 $ 0.13
62