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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, 1996 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
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TELETECH HOLDINGS, INC.
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(Exact name of Registrant as Specified in Its Charter)
DELAWARE 84-1291044
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
1700 LINCOLN STREET, SUITE 1400, DENVER, COLORADO 80203
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(Address of Principal Executive Offices) (Zip Code)
(303) 894-4000
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
$.01 par value per share
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
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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 7, 1997, there were 55,716,521 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 $413,711,475, based on
the closing sale price of the registrant's common stock on such date as reported
on the Nasdaq National Market.
Documents Incorporated by Reference:
Portions of TeleTech Holdings, Inc.'s proxy statement for its annual
meeting of stockholders to be held on May 20, 1997 are incorporated by
reference into Part III of this Form 10-K, as indicated.
PART I
ITEM 1. BUSINESS.
OVERVIEW
TeleTech Holdings Inc. (together with its wholly-owned subsidiaries or, for
periods prior to December 1994, TeleTech Telecommunications, Inc. and TeleTech
Teleservices, Inc., collectively, the "Company" or "TeleTech") is a leading
provider of customer care solutions for Fortune 1000 companies. TeleTech's
customer care solutions encompass a wide range of telephone- and computer-based
customer acquisition, retention and satisfaction programs designed to maximize
the long-term value of the relationships between TeleTech's clients and their
customers. Such programs involve all stages of the customer relationship and
consist of a variety of customer service and product support activities, such as
providing new product information, enrolling customers in client programs,
providing 24-hour technical and help desk support, resolving customer complaints
and conducting satisfaction surveys. TeleTech works closely with its clients to
rapidly design and implement large scale, tailored customer care programs that
provide comprehensive solutions to their specific business needs.
TeleTech delivers its customer care services primarily through
customer-initiated ("inbound") telephone calls and also over the Internet.
Services are provided by trained customer care representatives
("Representatives") in response to an inquiry that a customer makes by calling a
toll-free telephone number or by sending an Internet message. Representatives
respond to these inquiries from TeleTech call centers ("Call Centers") utilizing
state-of-the-art workstations, which operate on TeleTech's advanced technology
platform, enabling the Representatives to provide rapid, single-call resolution.
This technology platform incorporates digital switching, client/server
technology, object-oriented software modules, relational database management
systems, proprietary call tracking management software, computer telephony
integration and interactive voice response. TeleTech provides services from
Call Centers leased and equipped by TeleTech ("fully outsourced") and, since
April 1996, also from Call Centers leased and equipped by clients ("facilities
management").
TeleTech typically establishes long-term, strategic relationships,
formalized by multi-year contracts, with selected clients in the
telecommunications, technology, transportation, health care and financial
services industries. TeleTech targets clients in these industries because of
their complex product and service offerings and large customer bases, which
require frequent, often sophisticated, customer interactions. For example, in
the second half of 1995 the Company entered into a significant, multi-year
contract with United Parcel Service. In 1996, the Company obtained significant,
additional business from AT&T and entered into a multi-year contract with the
United States Postal Service (the "Postal Service").
The Company was founded in 1982 and has been providing inbound customer
care solutions since its inception. Between December 31, 1995 and March 1,
1997, the Company opened, acquired or initiated management of 11 Call Centers.
As of March 1, 1997, TeleTech leased or managed 11 Call Centers in the United
States and one in each of the United Kingdom, Australia and New Zealand,
equipped with a total of 5,500 state-of-the-art workstations.
TeleTech has signed leases for three facilities in the United States in which
it expects to open two additional Call Centers in 1997 and a third additional
Call Center by early 1998. In 1996, approximately 98% of the Company's call
handling revenues were derived from inbound customer inquiries.
SERVICES
TeleTech offers a wide range of services designed to provide superior
customer care. An integral component of these services is process
reengineering, by which the Company develops and applies improved processes
to make a client's customer service or product support processes more
cost-effective, productive and valuable. At the start of a potential new
client relationship, TeleTech assesses the client's existing capabilities,
goals and strategies, customer service or product support processes and
related software, hardware and telecommunications systems and training.
After presenting a proposed solution and being awarded a contract, TeleTech
works closely with the client to further develop, refine and implement more
efficient and productive customer interaction processes and technological
solutions that link the customer, the client and TeleTech. These processes
generally include the development of event-driven software programs for
telephone interactions, where the script being followed by a Representative
changes depending upon information contained in the customer file or on
information gathered during the Representative's interaction with the
customer.
After the Company designs and develops a customer care program,
Representatives provide a wide range of on-going voice and data communications
services incorporating one or more customer acquisition, service and retention
and satisfaction and loyalty programs. In a typical inbound customer
interaction, a customer calls a toll-free number to request product, service or
technical information or assistance. TeleTech's advanced telecommunications
system automatically identifies each inbound call by its telephone number and
routes the call to an appropriate Representative who is trained for that
particular client program. Upon receipt of the call, the Representative's
computer screen automatically displays the client's specific product, service or
technical information to enable the Representative to assist the customer.
Each customer interaction, even in its simplest form, presents TeleTech and
its clients with an opportunity to gather valuable customer information,
including the customer's demographic profile and preferences. This information
can prompt the Representative to make logical, progressive inquiries about the
customer's interest in additional services, identify additional revenue
generating and cross-selling opportunities or resolve other customer issues
relating to a client's products or services. TeleTech frequently provides
several of the services listed below in an integrated program tailored to its
clients' needs.
CUSTOMER ACQUISITION PROGRAMS. Customer acquisition programs are designed
to secure new customers and can include a wide range of activities depending
upon the customer inquiry. A sampling of these services includes:
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- providing pre-sales product or service education
- processing and fulfilling information requests for product or service
offerings
- verifying sales and activating services
- directing callers to product or service sources
- receiving orders for and processing purchases of products or services
- providing initial post-sales support, including operating instructions
for new product or service use
CUSTOMER SERVICE AND RETENTION PROGRAMS. Customer service and retention
programs are designed to maintain and extend the customer relationship and
maximize the long-term value of a client's relationships with its customers.
These programs are generally driven by the customer's purchase of a product or
service, or by the customer's need for on-going help-desk resources. The
majority of the Company's revenues are generated by the provision of customer
service and retention programs. A sampling of these services includes:
- providing technical help desk, product or service support
- activating product or service upgrades
- responding to billing and other account inquiries
- resolving complaints and product or service problems
- registering warranty information
- dispatching on-site service
CUSTOMER SATISFACTION AND LOYALTY PROGRAMS. Customer satisfaction and
loyalty programs enable clients to learn from their customers, to be more
responsive to the customer's needs and concerns and to reward customers for
their continued patronage. A sampling of these services includes:
- responding to client promotional, affinity-building programs
- developing and implementing client-branded loyalty programs
- conducting satisfaction assessments
- confirming receipt of promised products or services
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- reserving and reconfirming space at product or service seminars
An example of a client-branded loyalty program is TeleTech's Emergency Home
Assist, which it implements for many of Australia's leading insurers and
financial institutions. Under Emergency Home Assist, if, for example, a storm
damages the roof of a customer insured by a TeleTech client, the customer calls
the toll-free number provided by the client. A Representative answers the
telephone on the client's behalf and contacts, books and dispatches tradesmen to
the customer's home to make repairs, while simultaneously opening an insurance
claims file. TeleTech's insurance company client, which directly pays the
tradesmen's invoices, is positioned as a caring, total solution provider, rather
than just a reimbursement agent. In addition, the insurer is able to control
costs by its early intervention and contracting in advance with qualified
tradesmen to provide services at a reasonable price.
MARKETS AND CLIENTS
TeleTech focuses its marketing efforts on Fortune 1000 companies in the
telecommunications, technology, transportation, health care and financial
services industries, which accounted for approximately 15%, 33%, 28%, 6% and 8%,
respectively, of the Company's revenues in 1996. The Company's three largest
clients in 1996 were United Parcel Service, AT&T and CompuServe, which accounted
for approximately 28%, 27% and 14%, respectively, of the Company's revenues.
See "--Risk Factors--Reliance on a Few Major Clients." To provide effective
customer care solutions, TeleTech has developed a separate strategic business
unit (an "SBU") to serve each of these industries. Each SBU is comprised of
dedicated business development personnel and client service specialists, most of
whom have prior industry experience. The SBUs are responsible for developing
and implementing customized, industry-specific customer service and product
support for clients in their respective target industries. TeleTech's health
care and financial services SBUs were introduced only recently and are still in
the development stage. TeleTech may introduce additional SBUs in 1997 as it
develops technology for other industries and broadens its client base.
TELECOMMUNICATIONS. The Telecommunications SBU primarily services
long-distance, local and wireless telephone service providers, including AT&T
and certain regional Bell operating companies. Services include verifying
long-distance service sales, responding to customer inquiries, providing
consumer and business telephone service account management and providing
on-going product and service support. TeleTech believes that the
Telecommunications Act of 1996, which has removed barriers to competition in and
between the local and long-distance telephone markets, and the development of
new wireless products, including those utilizing personal communication services
(PCS) technology, is expanding the breadth of products and services that require
customer service and support and will create additional demand for TeleTech's
services within the telecommunications market.
TECHNOLOGY. The growth of high technology products and service, including
Internet-related products and services, has increased demand for consumer and
technical product support services. Clients include AT&T, Apple Computer, Inc.
and Novell. The Company
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currently provides telephone and real-time, on-line interactive support to
customers of AT&T and to subscribers of other Internet service providers. In
December 1996, the Company entered into a five-year agreement to provide
customer care and technical support services, through its Australian
subsidiary, to users of Telstra Multimedia's "Big Pond" Internet service.
Telstra Corporation Ltd., the parent of Telstra Multimedia, is a leading
provider of telecommunications services in Australia and provides electronic
communications and information services in 30 countries, including throughout
Australia and the Asia Pacific region. TeleTech intends to further utilize
its technological capabilities to serve customers over the Internet and is
exploring business opportunities related to new interactive media.
TRANSPORTATION. TeleTech's Transportation SBU provides a variety of
services to clients in the package delivery and travel industries. In
October 1995, TeleTech was awarded a contract to manage several Call Centers and
provide customer service and support on behalf of United Parcel Service, one of
the nation's largest parcel delivery companies. Under its five-year contract,
TeleTech provides services to United Parcel Service from three Call Centers
leased by United Parcel Service but staffed and managed by TeleTech. TeleTech
also provides reservation call handling services for Reno Air and Midway
Airlines. In September 1996, the Postal Service awarded TeleTech a contract to
staff and manage the Postal Service's Call Center in Denver, Colorado and to
provide customer service and support to Postal Service customers. The Postal
Service contract has an initial two-year term and is renewable by the Postal
Service for up to three additional one-year terms.
HEALTH CARE. TeleTech provides customer care solutions on behalf of health
care providers in the United Kingdom, Australia and New Zealand, including
Medical Benefits Funds of Australia Limited, Hospital Benefits Fund of Western
Australia, Inc., Southern Cross Medical Care Society and PPP Healthcare Group
plc ("PPP"). These services include emergency and non-emergency medical
information and referral services, information and assistance to parents of
newborns, information about drug interventions, referrals to community support
organizations such as home care, child care and counseling options, and medical
claims review services. The Company provides these services to customers by
means of telephone access to registered nurses, counselors, pharmacists, medical
librarians, dieticians and other specially trained Representatives. TeleTech
has begun to provide comparable services in the U.S. market. In November 1996,
TeleTech began providing telephone-based health care counseling and information
services to customers or members of Health Decisions International, LLC's
("HDI") clients, which include corporations and health maintenance
organizations. Pursuant to a three-year facilities management agreement with
HDI, nurses and other health care professionals employed by TeleTech answer
customers' questions regarding a variety of health care and medical concerns,
including common ailments, nutritional matters and health care options and
risks.
FINANCIAL SERVICES. From its Call Centers in Australia and New Zealand,
TeleTech provides customer care solutions to customers of insurance company and
automobile club clients, such as Mercantile Mutual Insurance (Australia) Ltd,
Zurich Australian Insurance Ltd and Royal Automobile Club of Victoria (RACV)
Insurance Pty Ltd. Solutions include providing emergency home repair
assistance, responding to customer inquiries regarding property damage and
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insurance coverage, procuring emergency roadside automobile and medical
assistance and facilitating motor vehicle insurance claims. TeleTech believes
that many of these customer care solutions are readily transferable to the U.S.
market. TeleTech also is developing new and more responsive delivery
capabilities to satisfy the demands of financial institutions seeking to reduce
customer reliance on face-to-face interactions and increase customer utilization
of electronic and telephone banking and automated teller machines. See
"--International Operations."
SALES AND MARKETING
As most companies consider the customer care function to be critical, the
Company's business development personnel generally focus their marketing efforts
on potential clients' senior executives. TeleTech hires business development
personnel for each SBU who have substantial industry expertise and can identify
and generate sales leads.
TeleTech employs a consultative approach in assessing the current and
prospective needs of a potential client. Following initial discussions with a
client, a carefully chosen TeleTech team, usually comprised of applications and
systems specialists, operations experts, human resources professionals and other
appropriate management personnel, thoroughly studies the client's operations.
The Company invests significant resources during the development of a client
relationship to understand the client's existing customer service processes,
culture, decision parameters and goals and strategies. TeleTech assesses the
client's customer care needs and, with input from the client, develops and
implements tailored customer care solutions.
As a result of its consultative approach, TeleTech can identify new revenue
generating opportunities, customer communication possibilities and product or
service improvements previously overlooked or not adequately addressed by the
client. TeleTech's technological capabilities enable it to develop working
prototypes of proposed customer care programs and to rapidly implement strategic
customer care solutions, generally with minimal capital investment by the
client.
TeleTech generally provides customer care solutions pursuant to written
contracts with terms ranging from one to five years, which often contain renewal
or extension options. Under substantially all of its significant contracts,
TeleTech generates revenues based on the amount of time Representatives devote
to a client's program. In addition, clients typically are required to pay fees
relating to TeleTech's training of Representatives to implement the client's
program, set-up and management of the program, and development of computer
software and technology. TeleTech utilizes a standard Form of Client Services
Agreement ("CSA") in contractual negotiations with its clients. The CSA
generally contains provisions that (i) allow TeleTech or the client to terminate
the contract upon the occurrence of certain events, (ii) designate the manner by
which TeleTech is to receive payment for its services, (iii) limit TeleTech's
maximum liability to the client thereunder, and (iv) protect the confidentiality
and ownership of information and materials owned by TeleTech or the client that
are used in connection with the performance of the contract. Many of TeleTech's
contracts also require the client to pay TeleTech a contractually agreed amount
in the event of early termination. TeleTech's contracts generally
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have terms of at least two years and, in some cases, contain contractual
provisions adjusting the amount of TeleTech's fees if there are significant
variances from estimated implementation expenses.
OPERATIONS
TeleTech provides its customer care services through the operation of
state-of-the-art Call Centers located in the United States, the United Kingdom,
Australia and New Zealand. As of March 1, 1997, TeleTech leased nine Call
Centers and also managed five Call Centers on behalf of three clients. TeleTech
expects to open two additional Call Centers in 1997 in Moundsville, Virginia and
Niagara Falls, New York and one additional Call Center by early 1998 in Charles
Town, West Virginia. TeleTech has received ISO 9002 certification for all of
its leased U.S. Call Centers.
TeleTech uses its standardized development procedures to minimize the time
it takes to open a new Call Center. The Company applies predetermined site
selection criteria to identify locations conducive to operating large scale,
sophisticated customer care facilities in a cost-effective manner. TeleTech can
establish a new, fully operational, inbound Call Center containing 450 or more
workstations within 90-180 days. Between December 31, 1995 and March 1, 1997,
TeleTech established or acquired six Call Centers and initiated management of
five Call Centers, containing a total of approximately 4,100 workstations.
The Company's five leased, full-scale U.S. Call Centers range in size from
26,000 to 56,000 square feet and contain between 374 and 556 production
workstations. Although the dimensions of its existing Call Centers currently
are not uniform, the Company has developed a prototype for TeleTech-leased U.S.
Call Centers. The Company expects that new U.S. Call Centers will contain
approximately 50,000 to 60,000 square feet of space and approximately 350 to 450
workstations. Call Center capacity can vary based on the complexity and type of
customer care programs provided. All TeleTech Call Centers are designed to
operate 24 hours a day, seven days a week.
CALL CENTER MANAGEMENT. TeleTech manages its U.S. Call Centers through its
Technology Command Center in Colorado (the "Command Center"). The Command
Center operates 24 hours per day, 7 days a week, and is responsible for
monitoring, coordinating and managing TeleTech's U.S. operations. Each U.S.
Call Center is connected to the Command Center and to other U.S. Call Centers
through multiple fiber optic voice/data T-1 circuits to form an integrated and
redundant wide area network. This network connectivity provides a high level of
security and redundancy that is integral to TeleTech's ability to ensure
recovery capabilities in the event of a disaster or structural failure. If a
Call Center were to experience extreme excess call volume or become
non-operational, the Command Center would coordinate the re-routing of incoming
calls to an appropriate site.
TeleTech also has established uniform operational policies and procedures
to ensure the consistent delivery of high-quality service at each Call Center.
These policies and procedures
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detail specific performance standards, productivity and profitability
objectives and daily administrative routines designed to ensure efficient
operation. TeleTech believes that recruiting, training and managing
full-time Representatives who are dedicated to a single client facilitates
integration between client and Representative, enhances service quality and
efficiency and differentiates TeleTech from its competitors.
TeleTech utilizes a number of sophisticated applications designed to
minimize administrative burdens and maximize productivity. Such applications
include a proprietary, "agent performance system" that tracks Representative
activity at each workstation and a proprietary billing system that tracks time
spent on administration, training, data processing and other processes conducted
in support of client or internal tasks.
QUALITY ASSURANCE. TeleTech monitors and measures the quality and accuracy
of its customer interactions through a quality assurance department located at
each Call Center. Each department evaluates, on a real-time basis,
approximately 1.0% of calls per day. TeleTech also has the capabilities to
enable its clients to monitor customer interactions as they occur. Quality
assurance professionals monitor customer interactions and simultaneously
evaluate Representatives according to criteria mutually determined by the
Company and the client. Representatives are evaluated and provided with
feedback on their performance on a weekly basis and, as appropriate, recognized
for superior performance or scheduled for additional training and coaching.
TECHNOLOGY
Utilizing industry standard tools and upon request, the Company creates
relational database management systems customized for a client. These
systems enable it to track the details of each customer interaction and
consolidate that information into a customer file, which can be accessed and
referred to by Representatives as they deliver services. TeleTech Call
Centers employ state-of-the-art technology that incorporates digital
switching technology, object-oriented software modules, relational database
management systems, proprietary call tracking and workforce management
systems, CTI and interactive voice response. TeleTech's digital switching
technology enables calls to be routed to the next available Representative
who has the appropriate knowledge, skill and language sets. Call tracking
and workforce management systems generate and track historical call volumes
by client, enabling the Company to schedule personnel efficiently to
accommodate anticipated fluctuations in call volume. TeleTech's technology
base enables it to provide single call resolution and decrease customer hold
times, thereby enhancing customer satisfaction.
TeleTech-leased Call Centers utilize "Universal Representative"
workstations with inbound, outbound, Internet and faxback capabilities, the
majority of which run on Pentium-Registered Trademark--based computers. All
workstations are PC-based and utilize CTI technology, which connects the
computer to a telephone switch allowing calls and computer data to be
transferred simultaneously. By using simple, intuitive graphical user
interfaces (GUI), which substitute easy to understand graphics for text,
TeleTech enables its Representatives to focus on assisting the
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customer, rather than on the technology, and obtain customer information
using significantly fewer keystrokes. The user-friendly interface also helps
to decrease training time and increase the speed of call handling.
TeleTech's applications software uses products developed by Microsoft,
Oracle, Novell, IBM and others. TeleTech has invested significant resources in
designing, developing and debugging industry-specific and open-systems software
applications and tools. As a result, TeleTech maintains an extensive library of
reusable object-oriented software codes that are used by TeleTech's applications
development professionals to develop customized customer care software.
TeleTech's systems capture and download a variety of information obtained during
each customer interaction into relational databases for real-time, daily, weekly
or monthly reporting to clients. TeleTech runs its applications software on
open-systems, client-server architecture that utilizes computer processors,
server components and hardware platforms produced by manufacturers such as
Compaq, Hewlett Packard, IBM and Sun Microsystems. TeleTech has and will
continue to invest significant resources into the development of new and
emerging customer care and technical support technologies.
HUMAN RESOURCES
TeleTech's success in recruiting, hiring and training large numbers of
skilled employees is critical to its ability to provide high-quality customer
care solutions to its clients. TeleTech generally locates its Call Centers in
metropolitan areas that have access to higher education and a major
transportation infrastructure. TeleTech generally offers a competitive pay
scale, hires primarily full-time employees who are eligible to receive the full
range of employee benefits and provides employees with a clear, viable career
path.
TeleTech is committed to the continued education and development of its
employees and believes that providing TeleTech employees with access to new
learning opportunities produces job satisfaction, ensures a higher quality labor
force and fosters loyalty between TeleTech's employees and the clients they
serve. Before taking customer calls, Representatives receive from one to five
weeks of on-site training in TeleTech's or the client's training facilities to
learn about the client's corporate culture, specific product or service
offerings and the customer care program that TeleTech and the client will be
undertaking. Representatives generally receive a minimum of six to eight hours
of on-going training per month and often receive supplemental laboratory
training as needed to provide high-quality customer service and product support.
As of March 1, 1997, TeleTech had 7,550 employees. Of its total employees,
5,239 were full-time Representatives, constituting approximately 80% of its
total Representatives. Although the Company's industry is very labor intensive
and has experienced significant personnel turnover, the Company believes that
its quality of life initiatives and its high percentage of full-time
Representatives has resulted in relative stability in its work force. None of
TeleTech's employees are subject to a collective bargaining agreement and
TeleTech believes its relations with its employees are good.
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The Company's success is largely dependent on its ability to recruit,
hire, train and retain qualified employees. The Company's industry is very
labor intensive and has experienced high personnel turnover. A significant
increase in the Company's employee turnover rate could increase the Company's
recruiting and training costs and decrease operating effectiveness and
productivity.
INTERNATIONAL OPERATIONS
TeleTech leases and operates one Call Center in each of the United Kingdom,
Australia and New Zealand, and jointly leases a Call Center located in the
United Kingdom through the Company's joint venture with PPP Healthcare Group plc
("PPP"), one of the largest private medical insurers in the United Kingdom. In
January 1996, TeleTech acquired Access 24 Service Corporation Pty. Limited
("Access 24"), a leading provider of customer care solutions to Australian and
New Zealand companies primarily in the health care and financial services
industries. The operations of Access 24 have been substantially integrated with
TeleTech's operations through the standardization of Access 24's technology,
workstation configuration, business processes and operational and financial
reporting with the Company's systems. TeleTech has begun to leverage Access
24's experience in other markets. Pursuant to its facilities management
agreement with HDI, in November 1996 the Company began to provide health care
information services in the United States similar to those offered by Access 24.
On April 30, 1996, TeleTech entered into a joint venture with PPP, which
currently serves more than 2.3 million customers throughout the United Kingdom
and owns long-term health insurance, dental care and finance companies.
TeleTech and PPP have agreed to provide, exclusively through the joint venture
and initially solely in the United Kingdom and Ireland, distinct, value-added
customer care services. The joint venture, which operates from a 64-workstation
Call Center located in London, currently provides services primarily to PPP
customers but intends to progressively increase the proportion of its services
that it provides to customers of other companies. Apart from the joint venture,
TeleTech provides traditional outsourcing services in the United Kingdom,
similar to the type TeleTech provides in the United States. TeleTech intends to
further develop its traditional customer care outsourcing business in Australia
and New Zealand.
A key component of the Company's growth strategy is to continue its
international expansion, which may include the acquisition of businesses with
products or technologies that extend or complement TeleTech's existing
businesses. The Company is engaged in ongoing evaluations of, and discussions
with, third parties regarding possible acquisitions; however, the Company
currently has no agreements, commitments or understandings with respect to any
material acquisitions.
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COMPETITION
The Company believes that it competes primarily with the in-house
teleservices and customer service operations of its current and potential
clients. TeleTech also competes with certain companies that provide
teleservices and customer services on an outsourced basis, including Access
Health, Inc., APAC Teleservices, AT&T American Transtech, Electronic Data
Systems, MATRIXX Marketing Inc., Precision Response Corporation, SITEL
Corporation, STREAM and Sykes Enterprises Incorporated. TeleTech competes
primarily on the basis of quality and scope of services provided, speed and
flexibility of implementation and technological expertise. Although the
teleservices industry is very competitive and highly fragmented with numerous
small participants, management believes that TeleTech generally does not
directly compete with traditional telemarketing companies, which provide
primarily outbound "cold calling" services.
RISK FACTORS
RELIANCE ON A FEW MAJOR CLIENTS. The Company has strategically focused its
marketing efforts on developing long-term relationships with Fortune 1000
companies in targeted industries. As a result, a substantial portion of the
Company's revenues is derived from relatively few clients. Collectively, the
Company's 10 largest clients in 1996 accounted for approximately 83% of the
Company's 1996 revenues. The Company's three largest clients in 1996, United
Parcel Service, AT&T and CompuServe, accounted for 28%, 27% and 14%,
respectively, of the Company's revenues. There can be no assurance that the
Company will be able to retain any of its largest clients or that the volumes of
its most profitable or largest programs will not be reduced, or that the Company
would be able to replace such clients or programs with clients or programs that
generate a comparable amount of revenues or profits. Consequently, the loss of
one or more of its significant clients could have a material adverse effect on
the Company's business, results of operations or financial condition. In
September 1996, the Company and CompuServe agreed to temporary limit the monthly
fees the Company charged for services it provided to users of CompuServe's WOW!
Internet service. CompuServe subsequently announced that it was withdrawing the
WOW! service from the marketplace and notified the Company that, effective
January 31, 1997, CompuServe intended to terminate all of the programs provided
to it by the Company. The Company has redeployed most of the workstations
previously dedicated to CompuServe projects to other projects and believes that
it will obtain sufficient future business to utilize all of the workstations
previously dedicated to the CompuServe programs. Consequently, the termination
of the CompuServe programs has not had, and the Company believes it will not
have, a material adverse effect on the Company's capacity utilization. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "--Risks Associated with the Company's Contracts" and "--Dependence
on Key Industries."
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Substantially all of the Company's significant arrangements with its
clients generate revenues based, in large part, on the amount of time which the
Company's personnel devotes to such clients' customers. Consequently, and due
to the primarily inbound nature of the Company's business, the amount of
revenues generated from any particular client is generally dependent upon
consumers' interest in, and use of, the client's products and/or services.
Furthermore, a significant portion of the Company's expected revenues and
planned capacity utilization relate to recently-introduced product or service
offerings of the Company's clients. There can be no assurance as to the number
of consumers who will be attracted to the products and services of the Company's
clients and who will therefore need the Company's services, or that the
Company's clients will develop new products or services that will require the
Company's services.
DIFFICULTIES OF MANAGING RAPID GROWTH. The Company has experienced rapid
growth over the past several years and anticipates continued future growth.
Continued growth depends on a number of factors, including the Company's ability
to (i) initiate, develop and maintain new client relationships and expand its
marketing operations, (ii) recruit, motivate and retain qualified management and
hourly personnel, (iii) rapidly identify, acquire or lease suitable Call Center
facilities on acceptable terms and complete build-outs of such facilities in a
timely and economic fashion, and (iv) maintain the high quality of the services
and products that it provides to its clients. The Company's continued rapid
growth may significantly strain the Company's management, operations, employees
and resources. There can be no assurance that the Company will be able to
maintain or accelerate its current growth rate, effectively manage its expanding
operations or maintain its profitability. If the Company is unable to manage
its growth effectively, its business, results of operations or financial
condition could be materially adversely affected.
The Company's profitability is significantly influenced by its Call Center
capacity utilization. The Company attempts to maximize utilization; however,
because almost all of the Company's business is inbound, the Company has
significantly higher utilization during peak (weekday) periods than during
off-peak (night and weekend) periods. In addition, the Company has experienced,
and in the future may experience, at least short-term, excess peak period
capacity when it opens a new Call Center or terminates or completes a large
client program. There can be no assurance that the Company will be able to
achieve or maintain optimal Call Center capacity utilization. See "--Reliance
on a Few Major Clients."
RISKS ASSOCIATED WITH THE COMPANY'S CONTRACTS. Although the Company
currently seeks to sign multi-year contracts with its clients, the Company's
contracts do not assure the Company a specific level of revenues and they
generally do not designate the Company as the client's exclusive service
provider. The Company believes maintaining satisfactory relationships with
its clients has a more significant impact on the Company's revenues than the
specific terms of its client contracts. Certain of the Company's current
contracts (representing approximately 12% of the Company's 1996 revenues) have
terms of one year or less and there can be no assurance that the clients will
renew or extend such contracts. In addition, the Company's contracts are
terminable by its clients on relatively short notice. Although many of such
contracts require the
-12-
client to pay a contractually agreed amount in the event of early termination,
there can be no assurance that the Company will be able to collect such amount
or that such amount, if received, will sufficiently compensate the Company for
its investment in the cancelled program or for the revenues it may lose as a
result of the early termination. In addition, some of the Company's contracts
limit the aggregate amount the Company can charge for its services and several
prohibit the Company from providing services to the client's direct competitor
that are similar to the services the Company provides to such client.
A few of the Company's more recently executed contracts allow the Company
to increase its service fees if and to the extent certain cost or price indices
increase; however, most of the Company's contracts do not contain such
provisions and some contracts require the Company to decrease its service fees
if the Company does not achieve certain performance objectives or, in at least
one case, if a specified price index decreases. Furthermore, adjustments in the
Company's service fees based upon increases in cost or price indices may not
fully compensate the Company for increases in labor and other costs incurred in
providing services. Although several of the Company's clients have elected not
to renew or extend short-term contracts, or have terminated contracts or reduced
program volumes on relatively short notice to the Company, to date none of the
foregoing types of contractual provisions has had a material adverse effect on
the Company's business, results of operations or financial condition. See
"--Reliance on a Few Major Clients," "--Sales and Marketing," "--Services" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
DEPENDENCE ON LABOR FORCE. The Company's success is largely dependent on
its ability to recruit, hire, train and retain qualified employees. The
Company's industry is very labor intensive and has experienced high personnel
turnover. A significant increase in the Company's employee turnover rate could
increase the Company's recruiting and training costs and decrease operating
effectiveness and productivity. Also, if the Company obtains several
significant new clients or implements several new large-scale programs, it would
be required to recruit, hire and train qualified personnel at an accelerated
rate. The Company may not be able to continue to hire, train and retain
sufficient qualified personnel to adequately staff new customer care programs.
Because a significant portion of the Company's operating costs relate to labor
costs, an increase in wages, costs of employee benefits or employment taxes
could have a material adverse effect on the Company's business, results of
operations or financial condition. In addition, certain of the Company's Call
Centers are located in geographic areas with relatively low unemployment rates,
which could make it more difficult and costly to hire qualified personnel. See
"--Difficulties of Managing Rapid Growth," "--Human Resources" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
DEPENDENCE ON KEY PERSONNEL. The Company's success to date has depended in
large part on the skills and efforts of Kenneth D. Tuchman, the Company's
founder, Chairman of the Board, President and Chief Executive Officer. There
can be no assurance that the Company will be able to hire or retain the services
of other officers or key employees. The loss of Mr. Tuchman or the Company's
inability to hire or retain such other officers or key employees could have a
material adverse effect on the Company's business, results of operations or
financial
-13-
condition. The Company's success and achievement of its growth plans depend
on its ability to recruit, hire, train and retain other highly qualified
technical and managerial personnel, including individuals with significant
experience in the industries targeted by the Company. The inability of the
Company to attract and retain the necessary technical and managerial personnel
could have a material adverse effect on the Company's business, results of
operations or financial condition. See "--Difficulties of Managing Rapid
Growth."
DEPENDENCE ON KEY INDUSTRIES. The Company's clients are concentrated
primarily in the telecommunications, technology and transportation industries
and, to a lesser extent, the health care and financial services industries. The
Company's business and growth is largely dependent on the continued demand for
the Company's services from clients in these industries and current trends in
such industries to outsource certain customer care 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 care services could have a
material adverse effect on the Company's business, results of operations or
financial condition. In addition, the Company's newest SBUs, health care and
financial, and are still in the development stage. There can be no assurance
that the Company can successfully develop these SBUs or that such development
can occur in accordance with the Company's current time schedule. Additionally,
a substantial percentage of the revenues generated by clients in the
telecommunications industry relate to the Company's provision of third-party
verification of long-distance service sales, which is required by the rules of
the Federal Communications Commission. Such verification services accounted for
19% and 8% of the Company's total revenues in 1995 and 1996, respectively.
Although the Company is not aware of any proposed changes to these rules, the
elimination of this requirement could have a material adverse effect on the
Company's business, results of operations or financial condition. See "--Highly
Competitive Market" and "--Markets and Clients."
RISK OF BUSINESS INTERRUPTION. The Company's operations are dependent upon
its ability to protect its Call Centers, computer and telecommunications
equipment and software systems against damage from fire, power loss,
telecommunications interruption or failure, natural disaster and other similar
events. In the event the Company experiences a temporary or permanent
interruption at one or more of its Call Centers, through casualty, operating
malfunction or otherwise, the Company's business could be materially adversely
affected and the Company may be required to pay contractual damages to some
clients or allow some clients to terminate or renegotiate their contracts with
the Company. The Company maintains property and business interruption
insurance; however, such insurance may not adequately compensate the Company for
any losses it may incur. See "--Operations."
RISKS ASSOCIATED WITH RAPIDLY CHANGING TECHNOLOGY. The Company's business
is highly dependent on its computer and telecommunications equipment and
software systems. The Company's failure to maintain the superiority of its
technological capabilities or to respond effectively to technological changes
could have a material adverse effect on the Company's business, results of
operations or financial condition. The Company's future success also is highly
dependent upon its ability to enhance existing services and introduce new
services and products to respond to changing technological developments. There
can be no assurance that the
-14-
Company can successfully develop and market any new services or products; that
any such new services or products will be commercially successful; or that
technologies or services developed by the Company's competitors will not
render the Company's products or services noncompetitive or obsolete. See
"--Highly Competitive Market" and "--Technology."
HIGHLY COMPETITIVE MARKET. The Company believes that the market in which
it operates is fragmented and highly competitive, and that competition is likely
to intensify in the future. The Company competes with small firms offering
specific applications, divisions of large entities, large independent firms and,
most significantly, the in-house operations of clients or potential clients. A
number of competitors have or may develop greater capabilities and resources
than those of the Company. Similarly, there can be no assurance that additional
competitors with greater resources than the Company will not enter the Company's
market. Because the Company's primary competitors are the in-house operations
of existing or potential clients, the Company's performance and growth could be
adversely affected if its existing or potential clients decide to provide
in-house customer care services that currently are outsourced, or retain or
increase their in-house customer service and product support capabilities. For
example, Continental Airlines, one of the Company's largest clients in 1995,
decided not to renew a program completed by the Company in March 1996 due to
Continental Airlines' excess in-house call center capacity. In addition,
competitive pressures from current or future competitors could cause the
Company's services to lose market acceptance or result in significant price
erosion, with a material adverse effect upon the Company's business, results of
operations or financial condition. See "--Competition."
DIFFICULTIES OF COMPLETING AND INTEGRATING ACQUISITIONS AND JOINT VENTURES.
One component of the Company's growth strategy is to pursue strategic
acquisitions of companies that have services, products, technologies, industry
specializations or geographic coverage that extend or complement the Company's
existing business. There can be no assurance that the Company will be
successful in identifying, acquiring on favorable terms or integrating such
companies. There can be no assurance that any completed acquisition will
enhance the Company's business, results of operations or financial condition.
The Company in the future may face increased competition for acquisition
opportunities, which may inhibit the Company's ability to consummate suitable
acquisitions on terms favorable to the Company. The Company may require
additional debt or equity financing for future acquisitions, which financing may
not be available on terms favorable to the Company, if at all. As part of its
growth strategy, the Company may also pursue opportunities to undertake
strategic alliances in the form of joint ventures. Joint ventures involve many
of the same risks as acquisitions, as well as additional risks associated with
possible lack of control of the joint ventures. See "--Difficulties of Managing
Rapid Growth."
In January 1996, the Company acquired Access 24 Service Corporation Pty
Limited, an Australian company ("Access 24"), which provides customer care
solutions to Australian and New Zealand companies, primarily in the health care
and financial services industries. In April 1996, the Company entered into a
joint venture with PPP Healthcare Group plc ("PPP") to provide services in the
United Kingdom and Ireland similar to those provided by Access 24.
-15-
Certain of the services provided by Access 24 and PPP to health care and
financial services clients differ from the traditional outsourcing services of
the Company's U.S. business. Several of the services currently provided by
Access 24 and PPP may be subject to extensive government regulation if
introduced as planned in the U.S. market. There can be no assurance that
compliance with applicable U.S. laws and regulations will not limit the scope,
or significantly increase the cost to the Company, of providing services in
the U.S. market that are comparable to such services currently provided by
Access 24 and the joint venture outside the United States. Although in
November 1996 the Company began providing health care services in the United
States for Health Decisions International, LLC ("HDI") that are similar to the
health care services provided by Access 24 and PPP, there can be no assurance
that the anticipated benefits of the Access 24 acquisition and the joint
venture with PPP will be fully achieved. See "--Health Care Regulation and
Risk Management," "--Markets and Clients--Health Care," "--Markets and
Clients--Financial Services" and "--International Operations."
RISK ASSOCIATED WITH INTERNATIONAL OPERATIONS AND EXPANSION. As a result
of the recent acquisition of Access 24 and the joint venture with PPP, the
Company now conducts business in the United Kingdom, Australia and New Zealand.
The Company's international operations accounted for approximately 8% of the
Company's revenues in 1996 and, on a pro forma basis reflecting the Company's
acquisition of Access 24 as if it had occurred on January 1, 1995, approximately
16.9% of the Company's revenues during 1995. A key component of the Company's
growth strategy is its continued international expansion. There can be no
assurance that the Company will be able successfully to market, sell and deliver
its services in international markets, or that it will be able successfully to
acquire companies, or integrate acquired companies, to expand international
operations. 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 staffing and managing foreign
operations, political instability and potentially adverse tax consequences. Any
one or more of such factors could have a material adverse effect on the
Company's international operations and, consequently, on the Company's business,
results of operations or financial condition. See "--International Operations."
VARIABILITY OF QUARTERLY OPERATING RESULTS. The Company has experienced,
and in the future could experience, quarterly variations in revenues as a result
of a variety of factors, many of which are outside the Company's control,
including: the timing of new contracts; the timing of new product or service
offerings or modifications in client strategies; the expiration or termination
of existing contracts; the timing of increased expenses incurred to obtain and
support new business; changes in the Company's revenue mix among its various
service offerings; and the seasonal pattern of certain of the businesses
serviced by the Company. In addition, the Company's planned staffing levels,
investments and other operating expenditures are based on revenue forecasts. If
revenues are below expectations in any given quarter, the Company's operating
results would likely be materially adversely affected for that quarter. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations"
-16-
HEALTH CARE REGULATION AND RISK MANAGEMENT. In November 1996, the Company
began providing telephone-based health care counseling and information services
on behalf of HDI to customers or members of HDI's clients, which include
corporations and health maintenance organizations. Pursuant to a facilities
management agreement with HDI, nurses and other health care professionals
employed by the Company will answer customers' questions regarding a variety of
health care and medical concerns, including nutritional matters, common ailments
and health care options and risks. The Company's provision of services for HDI,
and any similar services that the Company may provide for other health care
providers, may be subject to governmental regulations not applicable to other
portions of the Company's business.
The health care industry is subject to extensive and evolving Federal and
state government regulation relating to many aspects of health care delivery
services, including health care referral programs and the operation of health
maintenance organizations. Many of these statutes and regulations predate the
development of telephone-based and other interstate communication of health care
information and services. The literal language of certain of these statutes and
regulations, including those regulating the practice of nursing and the practice
of medicine, could be construed to apply to certain of the health care services
that the Company provides. If so, the Company or its employees could be
required to obtain additional licenses or registrations or the Company may be
required to modify the scope of the services it provides.
In recent years, participants in the health care industry, including nurses
and other health care professionals, have been subject to an increasing number
of lawsuits alleging malpractice, product liability and related legal theories,
many of which involve substantial claims and significant defense costs. The
Company may be exposed to the risk of professional liability claims relating to
the health care services it expects to provide. Although the Company maintains
malpractice liability insurance, there can be no assurance that claims in excess
of the Company's insurance coverage will not arise or that all claims would be
covered by such insurance.
COMPLIANCE WITH OTHER GOVERNMENT REGULATION. Because the Company's current
business consists primarily of responding to inbound telephone calls, it is not
highly regulated. However, in connection with the limited amount of outbound
telemarketing services the Company provides, the Company must comply with the
Federal Communications Commission's rules under the Federal Telephone Consumer
Protection Act of 1991 and the Federal Trade Commission's regulations under the
Federal Telemarketing and Consumer Fraud and Abuse Prevention Act of 1994, both
of which govern telephone solicitation. In the event that the Company decides
to expand its outbound telemarketing services to improve off-peak Call Center
utilization, such rules and regulations would apply to a larger percentage of
the Company's business. Under its contract with the Postal Service, the Company
has agreed to comply with the Privacy Act of 1974, which governs the recording
of telephone conversations. The Company believes that it currently is, and will
continue to be, in compliance with such statute. Furthermore, there may be
additional federal or state legislation, or changes in regulatory
implementation, that limit the activities of the Company or its clients in the
future or significantly increase the cost of compliance. Additionally, the
Company could be responsible for its failure, or the failure of its
-17-
clients, to comply with regulations applicable to its clients. See "--Health
Care Regulation and Risk Management."
ITEM 2. PROPERTIES.
TeleTech's corporate headquarters are located in Denver, Colorado in
approximately 39,000 square feet of leased office space, with an adjacent 55,000
square foot Call Center containing at least 600 workstations. As of March 1,
1997, TeleTech leased (unless otherwise noted) and operated the following Call
Centers, containing an aggregate of approximately 790,000 square feet:
YEAR NUMBER OF NUMBER OF TOTAL
OPENED OR PRODUCTION TRAINING NUMBER OF
LOCATION ACQUIRED WORKSTATIONS WORKSTATIONS(1) WORKSTATIONS
- -------- ---------- ------------ --------------- ------------
U.S. CALL CENTERS (2)
Sherman Oaks, California.......... 1985 556 90 646
Denver, Colorado.................. 1993 450 120 570
Burbank, California............... 1995 374 57 431
Thornton, Colorado--Center 1 (3).. 1996 417 58 475
Thornton, Colorado--Center 2 (3).. 1996 497 80 577
Van Nuys, California.............. 1996 137 -- 137
INTERNATIONAL CALL CENTERS
Sydney, Australia (4)............. 1996 380 40 420
Auckland, New Zealand (4)......... 1996 54 6 60
London, United Kingdom (5)........ 1996 72 20 92
MANAGED CALL CENTERS (6)
Greenville, South Carolina (7).... 1996 652 72 724
Tucson, Arizona (7)............... 1996 672 118 790
Tampa, Florida (7)................ 1996 652 116 768
Golden, Colorado (8).............. 1996 75 20 95
Montbello, Colorado (9)........... 1996 500 125 625
----- --- -----
Total number of workstations.... 5,488 922 6,410
----- --- -----
----- --- -----
______________
(1) The training workstations are fully operative as production workstations
when the Company requires additional capacity.
(2) The Company has executed leases for facilities in each of Moundsville, West
Virginia and Niagara Falls, New York, in which it intends to open Call
Centers in 1997, and in Charles Town, West Virginia, in which it intends to
open a Call Center by early 1998.
(3) TeleTech commenced operations on the second floor of the Thornton Call
Center in April 1996 and, in September 1996, commenced operations on the
first floor of the facility.
-18-
TeleTech operates each floor in the Thornton facility as an independent
Call Center and each of Thornton Call Center 1 and Thornton Call Center 2
employs its own Call Center management and Representatives.
(4) Acquired January 1, 1996 through TeleTech's acquisition of Access 24.
(5) The Company provides traditional outsourcing services in the United
Kingdom. Through its joint venture with PPP, the Company also provides
value-added services in a separate call center.
(6) Managed by TeleTech on behalf of clients pursuant to facilities management
agreements.
(7) Managed by TeleTech on behalf of United Parcel Service.
(8) In November 1996, the Company commenced management of a Call Center on
behalf of HDI.
(9) The Company began managing this Call Center on behalf of the Postal Service
in December 1996 and the Call Center will be fully utilized by mid-1997.
The leases for TeleTech's U.S. Call Centers have terms ranging from one to
15 years and generally contain renewal options. Pursuant to its agreement with
United Parcel Service, if United Parcel Service opens another U.S. call center,
TeleTech has the option to staff and manage such Call Center. TeleTech will
manage this additional Call Center pursuant to the same terms and conditions as
the three Call Centers currently managed by TeleTech for United Parcel Service,
unless the nature of the services to be provided at such Call Center is
significantly different.
The Company believes that its existing Call Centers are suitable and
adequate for its current operations and that each Call Center currently is
substantially or fully utilized during peak (weekday) periods. The Company
believes that additional Call Center capacity, including the three Call Centers
it expects to open in 1997 and early 1998, will be required to support continued
growth. Due to the inbound nature of the Company's business, the Company
experiences significantly higher capacity utilization during peak periods than
during off-peak (night and weekend) periods. The Company has been and will be
required to open or expand Call Centers to create the additional peak period
capacity necessary to accommodate new or expanded customer care programs. The
opening or expansion of a Call Center may result, at least in the short-term, in
excess capacity during peak periods until any new or expanded program is fully
implemented. The Company may enter into additional contracts to provide certain
outbound customer care services, and consider acquiring a complementary service
provider, such as a company that provides primarily outbound teleservices to
improve Call Center utilization during off-peak periods.
-19-
ITEM 3. LEGAL PROCEEDINGS.
In late November 1996, CompuServe Incorporated ("CompuServe") notified
TeleTech that CompuServe was withdrawing its WOW! Internet service from the
marketplace and that, effective January 31, 1997, it would terminate all the
TeleTech programs provided to Compuserve. Pursuant to the provisions
of its agreement with TeleTech, CompuServe is entitled to terminate the
agreement for reasonable business purposes by giving TeleTech 120 days advance
notice and by paying to TeleTech a certain amount calculated in accordance with
a formula contained in the agreement. In December 1996, TeleTech filed suit
against CompuServe in the Federal District Court for the Southern District of
Ohio to enforce these termination provisions and collect the termination fee.
CompuServe filed a counterclaim in December 1996 alleging that the Company
breached other provisions of this agreement and seeking unspecified monetary
damages. In March 1997, CompuServe asserted a right to offset certain accounts
receivable it owes to the Company for services rendered against the amount that
may be awarded to CompuServe on its counterclaim, if any. These accounts
receivable totalled $3.1 million at December 31, 1996 and had increased to
$4.3 million by March 1, 1997. The Company intends to amend its complaint to
seek recovery of the outstanding accounts receivable and to assert additional
claims for damages. While the Company believes that these legal proceedings
will not have a material adverse effect on the Company's financial condition or
results of operations, the proceedings are in an early stage and the ultimate
outcome is uncertain. See Note 9 of Notes to Consolidated and Combined
Financial Statements.
From time to time the Company is involved in litigation, most of which is
incidental to its business. In the Company's opinion, no litigation to which
the Company currently is a party is likely to have a material adverse effect on
the Company's results of operations or financial condition.
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, 1996.
-20-
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
In August 1996, the Company completed an initial public offering of the
Common Stock (the "Initial Public Offering") at an initial price to public of
$14.50 per share. The market price of the Common Stock is likely to be highly
volatile and could be subject to wide fluctuations in response to quarterly
variations in operating results, announcements of new contracts or contract
cancellations, announcements of technological innovations or new products or
services by the Company or its competitors, changes in financial estimates by
securities analysts or other events or factors. The market price of the Common
Stock also may be affected by the Company's ability to meet analysts'
expectations, and any failure to meet such expectations, even if minor, could
have a material adverse effect on the market price of the Common Stock.
The Common Stock is traded on the Nasdaq National 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 National Market:
HIGH LOW
Third Quarter 1996 (from August 1, 1996)........... 38 16-7/8
Fourth Quarter 1996 ............................... 36-1/2 25
As of December 31, 1996, there were 55,715,021 shares of Common Stock
outstanding, held by approximately 127 shareholders of record.
In 1995 TeleTech paid a dividend of approximately $452,000 to its principal
stockholder. TeleTech did not declare, nor did it pay, any dividends on its
Common Stock in 1996, nor does it expect to do so in the foreseeable future.
The Board of Directors 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.
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.
-21-
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
STATEMENT OF OPERATIONS
DATA:
ELEVEN MONTHS
YEAR ENDED ENDED YEAR ENDED DECEMBER 31,
JANUARY 31, DECEMBER 31, ----------------------------------
1993 1993 1994 1995 1996
---- ---- ---- ---- ----
REVENUES ................... $13,814 $19,520 $35,462 $50,467 $165,504
Costs of services......... 7,324 10,727 17,406 27,246 99,539
SG&A expenses ............ 6,240 7,956 15,860 18,625 42,753
------- ------- ------- ------- --------
Income from operations ..... 250 837 2,196 4,596 23,212
Other income (expense) ..... (125) (299) (481) 2,489 (1) 133
Provision for (benefit of)
income taxes ............. 73 (10) 20 2,929 9,589
------- ------- ------- ------- --------
Net income ................. $ 52 $ 548 $ 1,695 $ 4,156 (1) $ 13,756
------- ------- ------- ------- --------
Pro forma net income........ $ 299 (2) $ 1,037 (2)
Pro forma net income per
share of common stock
and equivalents .......... $ -- $ .01 (2) $ .02 (2) $ .08 (1) $ .24
Weighted average shares
outstanding .............. 43,753 43,753 43,753 54,304 56,409
OPERATING DATA:
Number of production
workstations ............. 300 560 560 960 5,500
Number of Call Centers ..... 1 2 2 3 14
BALANCE SHEET DATA:
Working capital (deficit)... $ (250) $ (228) $ (780) $11,305 $ 87,575
Total assets ............... 4,617 12,034 10,102 30,583 143,378
Long-term debt, net of
current portion .......... 1,416 3,528 2,463 3,590 9,937
Total stockholder's equity.. 394 942 2,197 3,791 106,315
- -----------
(1) Includes the $2.4 million pre-tax net proceeds of a one-time payment made
by a former client to TeleTech in connection with such client's early
termination of a contract.
(2) During 1993 and 1994, the Company was an S corporation and, accordingly,
was not subject to federal income taxes. Pro forma net income includes a
provision for income taxes at an effective rate of 44.4% for the 11 months
ended December 31, 1993, and 39.5% for the year ended December 31, 1994.
-22-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION.
OVERVIEW
TeleTech generates its revenues by providing customer care solutions, both
from TeleTech-leased Call Centers (fully outsourced) and client-owned Call
Centers (facilities management). The Company normally bills for its services
based on the amount of time Representatives devote to a client's program and
revenues are typically recognized as services are provided. The Company seeks
to enter into multi-year contracts with its clients that cannot be terminated
early except upon the payment of a contractually agreed amount. The majority of
the Company's revenues are, and the Company anticipates that the majority of its
future revenues will be from multi-year contracts. However, the Company does
provide some significant programs on a short-term basis. Short-term programs
are used to maintain call center utilization in the event that workstations
become available as a result of the unexpected termination or reduction in a
client program.
TeleTech's profitability is influenced significantly by its Call Center
capacity utilization. The Company seeks to optimize new and existing Call Center
capacity utilization during both peak (weekday) and off-peak (night and weekend)
periods to achieve maximum fixed cost absorption. The Company carefully plans
the development and opening of new Call Centers to minimize the financial impact
resulting from excess capacity. To enable the Company to respond rapidly to
changing market demands, implement new programs and expand existing programs,
TeleTech may require additional Call Center capacity. TeleTech currently has
signed leases for facilities in Moundsville, West Virginia, and Niagra Falls,
New York, in which it expects to open additional Call Centers in 1997. In
addition, the Company has signed a lease on a facility in Charles Town, West
Virginia in which it intends to open a Call Center in late 1997 or early 1998.
The Company's obligation to make lease payments under each of these leases does
not begin until the Company first occupies each facility, which gives the
Company flexibility in determining when to commence Call Center operations in
each facility. In planning the opening of new Call Centers or the expansion of
existing Call Centers, management considers numerous factors that effect 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. Management anticipates
sufficient future business to utilize the additional peak period Call Center
Capacity that will be provided by these facilities. If, prior to the opening or
expansion of a Call Center, the Company has not contracted with clients for the
provision of services that will fully utilize peak period capacity, TeleTech may
experience, at least in the short term, excess Call Center capacity. The
Company's results of operations have not been materially adversely affected by
peak period capacity underutilization other than for a brief period during 1995
following the Company's opening of its Burbank Call Center (see "1995 Compared
to 1994").
The Company records costs specifically associated with client programs as
costs of services. These costs, which include direct labor wages and benefits,
telecommunication charges,
-23-
sales commissions and certain facility costs, are primarily variable in
nature. All other expenses of operations, including expenses attributable to
technology support, sales and marketing, human resource management, and other
administrative functions and Call 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. Historically, the majority of the Company's
operating expenses have consisted of labor costs. Accordingly, 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.
The cost characteristics of TeleTech's fully outsourced programs differ
significantly from the cost characteristics of its facilities management
programs. Under facilities management programs, Call Centers are owned by the
client but are staffed and managed by TeleTech. Accordingly, facilities
management programs have higher costs of services as a percentage of revenues
and lower SG&A expenses as a percentage of revenues than fully outsourced
programs. As a result, the Company expects that its overall gross margin will
continue to fluctuate as revenues attributable to fully outsourced programs
vary in proportion to revenues attributable to facilities management
programs. Based on the foregoing, management believes that 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.
Significant operations under the Company's first facilities management
agreement, with United Parcel Service, began in the second quarter of 1996.
In the fourth quarter of 1996, the Company began operations under facilities
management agreements with the United States Postal Service and Health
Decisions International, LLC; however these operations did not have a
material impact on 1996 results of operations.
TeleTech's revenues and income from operations have grown significantly
over the past three years. During this period, the Company's revenues have grown
from $35.5 million in 1994, to $165.5 million in 1996, and operating margin has
increased from 6.2% in 1994 to 14.0% in 1996. Management attributes this growth
to the successful implementation of the Company's strategy of developing
long-term strategic relationships with large corporate clients in targeted
industries and the Company's resulting ability to spread its fixed costs over a
larger revenue base.
The Company acquired TeleTech International Pty Limited, formerly Access 24
Service Corporation Pty Limited (together with its subsidiaries, "Access 24"),
effective January 1, 1996, for consideration of $2.3 million in cash and 970,240
shares of common stock and costs of the acquisition for a total consideration of
$7.6 million. Access 24's consolidated results of operations are included in
the Company's operating results beginning with the first quarter of 1996. The
operations of Access 24, which consist of inbound, client-branded customer care
services, have been substantially integrated into TeleTech's operations through
the standardization of Access 24's technology, workstation configuration,
business processes and operational and
-24-
financial reporting with TeleTech's systems. Access 24 is headquartered in
Sydney, Australia, with Call Centers in Australia and New Zealand.
On April 30, 1996, the Company sold a 50% interest in Access 24 Limited,
the Company's United Kingdom subsidiary that leases and operates a Call Center
in London, for $3.8 million to PPP Healthcare Group plc, a large, private health
insurer in the United Kingdom. TeleTech accounts for its investment in Access 24
Limited as an unconsolidated subsidiary using the equity method of accounting.
During 1994, the Company was an S corporation and, accordingly, was not
subject to income taxes. Pro forma net income includes a provision for federal
income taxes at an effective rate of 39.5% for the year ended December 31, 1994.
RESULTS OF OPERATIONS
The following table sets forth certain income statement data as a
percentage of revenues:
1994 1995 1996
----- ---- ----
Revenues ................... 100.0% 100.0% 100.0%
Costs of services ...... 49.1 54.0 60.1
SG&A expenses .......... 44.7 36.9 25.8
Income from operations ..... 6.2 9.1 14.0
Other income (expense) ..... (1.4) 4.9 (1) 0.1
Provision for income taxes.. n 5.8 5.8
Net income ................. 4.8 8.2 (1) 8.3
Pro forma net income (2).... 2.9 -- --
- --------------------
(1) Includes the $2.4 million pre-tax net proceeds of a one-time payment
made by a former client to TeleTech in the first quarter of 1995 in
connection with such client's early termination of a contract (the
"One-Time Payment").
(2) During 1994 the Company was an S corporation and, accordingly, was
not subject to federal income taxes. Pro forma net income includes a
provision for income taxes at an effective rate of 39.5% for the year
ended December 31, 1994.
1996 COMPARED TO 1995
REVENUES. Revenues increased $115.0 million, or 228%, to $165.5 million in
1996, from $50.5 million in 1995. The increase resulted from $13.3 million in
revenues of Access 24, which was acquired in the first quarter of 1996, $55.9
million in revenues from new clients (including $48.4 million attributable to
the facilities management agreements); and $61.3 million in increased revenues
from existing clients. These increases were offset in part by contract
expirations and other client reductions, including the loss of $7.9 million in
revenues due to the expiration of the Continental Airlines contract in the first
quarter of 1996.
In September 1996, the Company and CompuServe, which accounted for
approximately 14% of the Company's 1996 revenues, agreed to limit the monthly
fees the Company charged for services it provided to users of WOW!, a recently-
introduced Internet service offered by CompuServe.
-25-
Compuserve subsequently announced that it was discontinuing its WOW! Internet
service and in December 1996, notified the Company that CompuServe intended
to terminate all of the programs provided to it by the Company. The Company
redeployed most of the workstations previously dedicated to CompuServe
projects to other projects, including a short-term project that the Company
expects will continue into the second quarter of 1997. For the three months
ended December 31, 1996, the percentage of the Company's revenue attributable
to CompuServe had declined to 7% or $4.2 million, from 15%, or $7.5 million
for the three months ended September 1996. The Company has initiated legal
proceedings against CompuServe and has not received payment of certain
accounts receivable from CompuServe for services rendered. See Item 3--Legal
Proceedings and Note 9 of Notes to the Consolidated and Combined Financial
Statements. The Company believes that it will obtain sufficient future
business to utilize all of the workstations previously dedicated to the
CompuServe programs, including those workstations dedicated to the short-term
project. Consequently, the termination of the CompuServe programs has not
had, and the Company believes it will not have, a material adverse effect on
the Company's capacity utilization.
COSTS OF SERVICES. Costs of services increased $72.3 million, or 265%, to
$99.5 million in 1996, from $27.2 million in 1995. Costs of services as a
percentage of revenues increased from 54.0% in 1995, to 60.1% in 1996. This
increase in the costs of services as a percentage of revenues is a result of the
higher proportion of revenues received in 1996 from the Company's facilities
management programs, under which the Company commenced significant operations in
April 1996. These programs have higher costs of services as a percentage of
revenues than fully outsourced programs and correspondingly lower levels of
SG&A. There were no facilities management program revenues in 1995.
SELLING, GENERAL AND ADMINISTRATIVE. SG&A expenses increased $24.1
million, or 130%, to $42.8 million in 1996, from $18.6 million in 1995. This
increase is almost entirely the result of the increased level of operations
during 1996. SG&A expenses as a percentage of revenues decreased from 36.9% in
1995, to 25.8% in 1996, primarily due to the impact of the Company's facilities
management programs, which have significantly lower levels of SG&A expenses, and
also as a result of the spreading of fixed costs over a larger revenue base.
INCOME FROM OPERATIONS. As a result of the foregoing factors, income from
operations increased $18.6 million, or 405%, to $23.2 million in 1996, from $4.6
million in 1995. Income from operations as a percentage of revenues increased
from 9.1% in 1995, to 14.0% in 1996.
OTHER INCOME (EXPENSE). Other income decreased $2.4 million to $133,000 in
1996 compared to $2.5 million in 1995, which is primarily due to the impact of
the One-Time Payment during the first quarter of 1995. Interest expense
increased $621,000 to $1.1 million in 1996, compared to $459,000 in 1995.
This increase is primarily the result of increased borrowings under capital
leases during 1996. Interest income increased $762,000 to $1.3 million in
1996, compared to $577,000 in 1995. This increase is the result of the
significant increase in invested funds arising from the proceeds of the
Company's two public stock offerings during the second half of 1996.
-26-
NET INCOME. As a result of the foregoing factors, net income increased
$9.6 million, or 231%, to $13.8 million in 1996, from $4.2 million in 1995.
Excluding the One-Time Payment, net income for the 1995, would have been $2.6
million. Accordingly net income would have increased $11.2 million, or 430%, in
1996 compared to 1995.
1995 COMPARED TO 1994
REVENUES. Revenues increased $15.0 million, or 42.3%, to $50.5 million in
1995 from $35.5 million in 1994, reflecting revenues from new clients of
approximately $17.8 million and an increase in revenues from existing clients of
approximately $6.4 million. These increases were partially offset by the
expiration without renewal of certain other client contracts (see "Other Income
(Expense)").
COSTS OF SERVICES. Costs of services increased $9.8 million, or 56.5%, to
$27.2 million in 1995 from $17.4 million in 1994. The increase in costs of
services is primarily the result of the $15.0 million increase in revenues for
the period and the related increase in direct costs. Costs of services as a
percentage of revenues increased to 54.0% in 1995 from 49.1% in 1994. The
majority of this percentage increase resulted from the start-up of the Burbank
Call Center in February 1995, which was not fully utilized immediately after
opening. Consequently, operating costs represented a comparatively higher
percentage of revenues. In addition, during 1995 a higher proportion of total
expenses were classified as costs of services as the Company was able to
allocate to specific client programs costs that previously had been allocated
among multiple client programs as SG&A expenses. The Company's enhanced ability
to identify costs related to specific programs resulted from improvements in the
Company's systems as well as from the consolidation of accounting and financial
functions at the Company's headquarters in Denver.
SELLING, GENERAL AND ADMINISTRATIVE. SG&A expenses increased $2.8 million,
or 17.4%, to $18.6 million in 1995 from $15.9 million in 1994. As a percentage
of revenues, SG&A expenses decreased to 36.9% in 1995 from 44.7% in 1994. A
substantial part of this change resulted from a 4% reduction in wage expense as
a percentage of revenues.
INCOME FROM OPERATIONS. Income from operations increased $2.4 million, or
109.3%, to $4.6 million in 1995 from $2.2 million in 1994. Operating income as a
percentage of revenues increased to 9.1% in 1995 from 6.2% in 1994.
OTHER INCOME (EXPENSE). Other income (expense) increased $3.0 million to
$2.5 million in 1995 from ($481,000) in 1994. This increase resulted from the
One-Time Payment as well as increased interest income attributable to the $12.0
million proceeds received by the Company from the sale of preferred stock in
1995.
NET INCOME AND PRO FORMA NET INCOME. Net income increased $2.5 million, or
145.2%, to $4.2 million in 1995 from $1.7 million in 1994. As a result of the
foregoing factors, net income in 1995 increased $3.1 million, or 300.8%, to $4.2
million from pro forma net income
-27-
of $1.0 million in 1994. Excluding the One-Time Payment, net income for 1995
would have been $2.6 million. Accordingly, net income for 1995 would have
increased $1.6 million, or 155%, over pro forma income of $1.0 million for
1994.
LIQUIDITY AND CAPITAL RESOURCES
In August 1996, the Company completed an initial public offering in which
it sold 4 million shares of common stock and in November 1996, the Company
completed a second public offering in which it sold 600,000 shares of common
stock. The net proceeds from these offerings totaled $69.9 million. Prior
to the offerings, TeleTech funded its operations and capital expenditures
primarily through cash flow from operations, borrowings under several lines
of credit and the sale of $12.0 million of preferred stock in January 1995.
The Company has a $15.0 million unsecured revolving operating line of
credit, which expires on May 31, 1998. Borrowings under this line bear interest
at various rates that are selected by TeleTech each time a draw is made. There
currently are no outstanding borrowings under this facility. Under this line of
credit, the Company has agreed to maintain certain financial ratios and capital
expenditure limits. The Company is in compliance with all covenants of this
agreement.
In addition, the Company has two master lease agreements. Under one
agreement, the Company may lease equipment up to an aggregate value of $15.0
million. As of December 31, 1996, amounts outstanding under this agreement were
approximately $10.6 million. Lease rates under this agreement are based upon a
125 basis points spread over three-year U.S. Treasury notes. Under the second
agreement, the Company's borrowings are approved, and specific terms are set, on
a case-by-case basis.
Cash provided by operating activities was $8.8 million in 1996. Cash
provided by operating activities consists of $21.1 million of total net income
before depreciation, amortization and other non-cash charges, offset in part by
$12.3 million of changes in working capital. Changes in working capital consist
primarily of fluctuations in accounts receivable, accounts payable and accruals
arising from the growth of the Company's operations. Cash provided by operating
activities was $3.3 million during 1995.
The amount of cash used by the Company in investing activities was $69.2
million in 1996. During 1996, the Company's capital expenditures (exclusive of
$10.2 million in assets acquired under capital leases) were $7.4 million, and
the Company used $2.5 million for the Access 24 acquisition. In addition, the
Company provided an interest bearing refundable deposit of $3.0 million to
assist the developer of one of the Company's new Call Centers in obtaining
financing. This deposit is secured by the building and is anticipated to be
repaid by March 31, 1997. The Company also received $3.9 million from the sale
of a 50% interest in Access 24 UK Limited, and short-term investments increased
by $61.2 million as a result of the public stock offerings. Cash used in
investing activities was $12.1 million for 1995 resulting from $1.7
-28-
million in capital expenditures and $10.4 million in increased short-term
investments resulting from the preferred stock sale.
Historically, capital expenditures have been, and future capital
expenditures are anticipated to be, primarily for the development of Call Center
facilities and the acquisition of equipment to support expansion of the
Company's existing Call Centers as well as expansion of and improvements to the
Company's call and data management systems and management information systems.
Capital expenditures, including new capital leases, equaled $17.6 million in
1996. The Company currently expects total capital expenditures in 1997 to be
approximately $36 million. The Company expects that approximately $9 million of
such capital expenditures will be used in connection with the expansion of two
of the Company's existing U.S. Call Centers, and that $23 million of such
capital expenditures may be used to open up to three new U.S. and two new
international Call Centers during 1997. Such expenditures will be financed with
internally generated funds, existing cash investments and additional borrowing.
As of December 31, 1996, the Company had not contractually committed to any
significant capital expenditures. The level of capital expenditures incurred in
1997 will be dependent upon new contracts obtained by the Company and the
corresponding need for additional capacity. In addition, if the Company's
future growth is generated through significant facilities management contracts,
the anticipated level of capital expenditures could be reduced significantly.
Cash provided by financing activities in 1996, was $65.9 million. This
primarily resulted from the receipt of approximately $69.9 million of net
proceeds from the public offerings and $1.6 million from the tax benefit of
stock option exercises offset in part by repayments of short-term borrowing
and capital lease payments. In 1995, cash provided by financing activities
of $8.8 million resulted primarily from the sale of $12.0 million of
preferred stock in January 1995, which was partially offset by $2.8 million
of loan repayments, tax distributions and dividends paid by the Company to
its principal stockholder.
The Company believes that existing cash and short-term investments together
with available borrowing under its line of credit and master lease agreements
will be sufficient to finance the Company's current operations, planned capital
expenditures and anticipated growth at least through 1997. However, if the
Company were to make any significant acquisitions for cash, it may be necessary
for the Company to obtain additional debt or equity financing. The Company is
engaged in ongoing evaluations of, and discussions with, third parties regarding
possible acquisitions; however the Company currently has no definitive
agreements with respect to any significant acquisitions.
FORWARD-LOOKING STATEMENTS
All statements contained in this "Management's Discussion and Analysis of
Financial Condition and Results of Operations" or elsewhere in this annual
report, that are not statements of historical facts are forward-looking
statements that involve substantial risks and uncertainties. Forward looking
statements include (i) the expected opening of additional Call Centers in 1997
and the Company's expectation that there will be sufficient business to utilize
existing and
-29-
additional Call Center capacity; (ii) the expected effect of the termination
of the CompuServe programs on the Company's capacity utilization and the
Company's expectation that it will obtain sufficient future business to
utilize all of the workstations previously dedicated to the CompuServe
programs; (iii) the amount and nature of planned capital expenditures; (iv)
the Company's belief that existing cash, short-term investments and available
borrowing will be sufficient to finance the Company near term operations; and
(v) statements relating to the Company or its operations that are preceded by
terms such as "anticipates", "expects", "believes" and similar expressions.
The Company's actual results, performance or achievements may differ
materially from those expressed or implied by such forward-looking statements.
Among the factors that could cause actual results to differ materially are the
following: TeleTech's agreements with clients may be canceled by the client on
short notice and do not ensure that TeleTech will generate a specific level of
revenue. The amount of revenue TeleTech generates from a particular client is
dependent upon customers' interest in and use of the client's products or
services, some of which are recently-introduced or untested. The loss of a
significant client or the termination, reduction or completion of a significant
client program may have a material adverse effect on TeleTech's capacity
utilization and results of operations. See "Business-Risk Factors" for other
factors that may cause actual results to differ materially from the forward-
looking statements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements required by this item are located beginning on
page 38 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
-30-
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
There is hereby incorporated by reference the information to appear
in TeleTech's definitive proxy statement for its 1997 Annual Meeting of
Stockholders under the captions "Information Concerning the Nominees for
Election as Directors," "Section 16(a) Beneficial Ownership Reporting
Compliance" and "Executive Officers."
ITEM 11. EXECUTIVE COMPENSATION.
There is hereby incorporated by reference the information to appear
under the caption "Executive Officers--Executive Compensation" in TeleTech's
definitive proxy statement for its 1997 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 or in any of the Company's previous or
future filings under the Securities Act of 1933, as amended, or the
Securities Exchange Act of 1934, as amended.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
There is hereby incorporated by reference the information to appear
under the caption "Security Ownership of Certain Beneficial Owners and
Management" in TeleTech's definitive proxy statement for its 1997 Annual
Meeting of Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS.
There is hereby incorporated by reference the information to appear
under the caption "Certain Relationships and Related Party Transactions" in
TeleTech's definitive proxy statement for its 1997 Annual Meeting of
Stockholders.
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 36 of this
report.
(2) Financial Statement Schedules
-31-
Schedule II - Valuation and Qualifying Accounts and Reserves of
TeleTech Holdings, Inc. for periods ending December 31,
1996, 1995 and 1994
(3) Exhibits
EXHIBIT
NO. DESCRIPTION
--- -----------
3.1 Restated Certificate of Incorporation of TeleTech [1] {Exhibit 3.1}
3.2 Amended and Restated By-laws of TeleTech [1] {Exhibit 3.2}
4.1 Amended and Restated Investment Agreement dated August 6, 1996 among
TeleTech, TeleTech Investors General Partnership, Alan Silverman,
Susan Silverman and Jack Silverman [1] {Exhibit 4.1}
4.2 Stock Transfer and Registration Rights Agreement dated as of
January 1, 1996 among TeleTech, Access 24 Holdings Pty Limited,
Bevero Pty Limited and Access 24 Service Corporation Pty Limited [1]
{Exhibit 4.2}
4.3 Specimen Common Stock Certificate [1] {Exhibit 4.3}
10.1 Employment Agreement dated as of January 1, 1995 between Kenneth D.
Tuchman and TeleTech [1] {Exhibit 10.1}
10.2 Employment Agreement dated as of January 1, 1995 between Joseph D.
Livingston and TeleTech [1] {Exhibit 10.2}
10.3 Amendment to the Employment Agreement between Joseph D. Livingston
and TeleTech dated May 14, 1996 [1] {Exhibit 10.3}
10.4 Employment Agreement dated as of April 1, 1996 between Steven B.
Coburn and TeleTech [1] {Exhibit 10.4}
10.5 Preferred Stock Purchase Agreement dated as of December 22, 1994
among TeleTech Teleservices, Inc., TeleTech Telecommunications, Inc.,
TeleTech, TeleTech Investors General Partnership and Essaness
Theaters Corporation [1] {Exhibit 10.5}
10.6 Subscription and Shareholders Agreement dated April 30, 1996 among
TeleTech, Access 24 Limited and Priplan Investments Limited [1]
{Exhibit 10.6}
-32-
EXHIBIT
NO. DESCRIPTION
--- -----------
10.7 TeleTech Holdings, Inc. Stock Plan [1] {Exhibit 10.7}
10.8 TeleTech Holdings, Inc. Directors Stock Option Plan [1]
{Exhibit 10.8}
10.9 Sublease Agreement dated September 26, 1994 between International
Business Machines Corporation and TeleTech Telecommunications, Inc.
[1] {Exhibit 10.9}
10.10 Agreement dated March 16, 1993 between 1700 Lincoln Limited and
TeleTech Telecommunications, Inc. and TeleTech Teleservices, Inc. [1]
{Exhibit 10.10}
10.11 Lease dated September 21, 1995 between First Union Management, Inc.
and TeleTech Teleservices and TeleTech [1] {Exhibit 10.11}
10.12 Form of Client Services Agreement [1] {Exhibit 10.12}
10.13 Agreement for Call Center Management between United Parcel General
Services Co. and TeleTech [1] {Exhibit 10.13}
10.14 Office Lease dated June 24, 1996 between Sam Menlo, Trustee of the
Menlo Trust, U.T.I. 5/2/83, and TeleTech Telecommunications [1]
{Exhibit 10.14}
10.15 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}
10.16 Stock Purchase Agreement dated as of January 1, 1996 among Access 24
Holdings Pty Limited, Bevero Pty Limited, Access 24 Service
Corporation Pty Limited and TeleTech [1] {Exhibit 10.16}
10.17 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}
10.18 Master Equipment Lease Agreement dated as of August 16, 1995 between
NationsBanc Leasing Corporation and TeleTech [1] {Exhibit 10.18}
10.19 Sublease dated as of September 28, 1995 between Norwest Bank
Colorado, National Association, and TeleTech Teleservices, Inc.,
TeleTech Telecommunications, Inc. and TeleTech Holdings, Inc. [1]
{Exhibit 10.19}
-33-
EXHIBIT
NO. DESCRIPTION
--- -----------
10.20 Sublease dated as of September 28, 1995 between Norwest Bank
Colorado, National Association, and TeleTech Teleservices, Inc.,
TeleTech Telecommunications, Inc. and TeleTech Holdings, Inc. [1]
{Exhibit 10.20}
10.21 Consulting Agreement dated as of August 15, 1996, between TeleTech
and Richard Weingarten & Company, Inc. [2] {Exhibit 10.21}
10.22 TeleTech Holdings, Inc. Employee Stock Purchase Plan
21.1 List of subsidiaries
23.1 Consent of Arthur Andersen LLP to incorporation by reference of the
financial statements into TeleTech's previously filed Registration
Statement on Form S-8 (Registration No. 333-17569)
27 Financial Data Schedule
- ---------------
[ ] Such Exhibit previously has been filed with the Securities and Exchange
Commission as exhibits to the filings indicated below, under the exhibit
number indicated in brackets { }, and is incorporated herein by reference.
[1] TeleTech's Registration Statement on Form S-1, as amended (Registration
Statement No. 333-04097).
[2] TeleTech's Registration Statements on Form S-1, as amended (Registration
Statement Nos. 333-13833 and 333-15297).
(c) Report on Form 8-K
None.
-34-
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 24, 1997.
TELETECH HOLDINGS, INC.
/s/ Kenneth D. Tuchman
--------------------------------------
By: Kenneth D. Tuchman
CHAIRMAN OF THE BOARD OF DIRECTORS,
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed on March 24, 1997 by the following persons on
behalf of the registrant and in the capacities indicated:
SIGNATURE TITLE
--------- -----
/s/ KENNETH D. TUCHMAN Chairman of the Board, President and Chief
- -------------------------- Executive Officer (Principal Executive Officer)
Kenneth D. Tuchman
/s/ STEVEN B. COBURN Chief Financial Officer (Principal Financial
- -------------------------- and Accounting Officer)
Steven B. Coburn
/s/ ROD DAMMEYER Director
- --------------------------
Rod Dammeyer
/s/ ALAN SILVERMAN Director
- --------------------------
Alan Silverman
/s/ STUART SLOAN Director
- --------------------------
Stuart Sloan
-35-
INDEX TO FINANCIAL STATEMENTS
TELETECH HOLDINGS, INC.
PAGE
----
Report of Independent Public Accountants................................. 37
Consolidated Balance Sheets as of December 31, 1995 and 1996............. 38
Consolidated and Combined Statements of Income for the Years Ended
December 31, 1994, 1995 and 1996....................................... 40
Consolidated and Combined Statements of Stockholders' Equity for
the Years Ended December 31, 1994, 1995 and 1996....................... 41
Consolidated and Combined Statements of Cash Flows for the Years Ended
December 31, 1994, 1995 and 1996....................................... 42
Notes to Consolidated and Combined Financial Statements for the Years
Ended December 31, 1994, 1995 and 1996................................. 44
-36-
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, 1995
and 1996, and the related consolidated and combined statements of income,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1996. 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 generally accepted auditing
standards. 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 consolidated and combined financial statements referred
to above present fairly, in all material respects, the consolidated financial
position of TeleTech Holdings, Inc. and subsidiaries as of December 31, 1995
and 1996, and the consolidated and combined results of their operations and
their cash flows for each of the three years in the period ended December 31,
1996, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Denver, Colorado,
March 14, 1997
-37-
TELETECH HOLDINGS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
DECEMBER 31,
ASSETS 1995 1996
------ ------- --------
CURRENT ASSETS:
Cash and cash equivalents.............................. $ 42 $ 5,564
Short-term investments................................. 10,361 71,573
Accounts receivable, net of allowance for doubtful
accounts of $789 and $1,462, respectively............. 9,786 31,731
Prepaids and other assets.............................. 458 4,141
Deferred tax asset..................................... 486 1,128
------- --------
Total current assets................................. 21,133 114,137
------- --------
PROPERTY AND EQUIPMENT, net of accumulated depreciation
of $6,059 and $11,231, respectively..................... 9,104 23,684
------- --------
OTHER ASSETS:
Deferred contract costs (net of amortization of
zero and $1,658, respectively)........................ 346 703
Goodwill (net of amortization of $238)................. - 3,257
Investment in affiliated company accounted for
under the equity method............................... - 679
Other assets........................................... - 918
------- --------
Total assets......................................... $30,583 $143,378
------- --------
------- --------
The accompanying notes are an integral part of these balance sheets.
-38-
TELETECH HOLDINGS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS EXCEPT SHARE AMOUNTS)
DECEMBER 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1995 1996
------- --------
CURRENT LIABILITIES:
Bank overdraft.................................... $ 1,427 $ -
Short-term borrowings............................. 1,000 -
Current portion of long-term debt................. 1,452 4,985
Accounts payable.................................. 2,604 6,108
Accrued employee compensation..................... 1,743 8,484
Accrued income taxes.............................. 311 2,952
Other accrued expenses............................ 951 3,246
Customer advances, deposits and deferred income... 340 787
------- --------
Total current liabilities....................... 9,828 26,562
DEFERRED TAX LIABILITIES............................ 507 564
LONG-TERM DEBT, net of current portion:
Capital lease obligations......................... 3,193 9,675
Other debt........................................ 397 262
------- --------
Total liabilities............................... 13,925 37,063
------- --------
COMMITMENTS AND CONTINGENCIES (Note 9)
MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK:
$6.45 par value; 1,860,000 shares authorized;
1,860,000, and zero shares issued and
outstanding, respectively (including
accrued dividends of $867)....................... 12,867 -
------- --------
STOCKHOLDERS' EQUITY:
Common stock; $.01 par value; 150,000,000 shares
authorized; 40,700,000 and 55,811,840 shares,
respectively, issued; and 40,700,000 and
55,713,030 shares, respectively, outstanding..... 407 558
Additional paid-in capital........................ 1,847 92,030
Cumulative translation adjustment................. - 98
Unearned compensation-restricted stock............ - (254)
Treasury stock; 98,810 shares, at cost............ - (988)
Retained earnings................................. 1,537 14,871
------- --------
Total stockholders' equity...................... 3,791 106,315
------- --------
Total liabilities and stockholders' equity...... $30,583 $143,378
------- --------
------- --------
The accompanying notes are an integral part of these balance sheets.
-39-
TELETECH HOLDINGS, INC.
AND SUBSIDIARIES
CONSOLIDATED AND COMBINED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
1994 1995 1996
------- ------- --------
REVENUES........................................... $35,462 $50,467 $165,504
------- ------- --------
OPERATING EXPENSES:
Costs of services................................ 17,406 27,246 99,539
Selling, general and administrative expenses..... 15,860 18,625 42,753
------- ------- --------
Total operating expenses....................... 33,266 45,871 142,292
------- ------- --------
INCOME FROM OPERATIONS............................. 2,196 4,596 23,212
------- ------- --------
OTHER INCOME (EXPENSE):
Interest expense................................. (481) (459) (1,080)
Interest income.................................. - 577 1,339
Equity in losses of affiliated company........... - - (70)
Other (Note 15).................................. - 2,371 (56)
------- ------- --------
(481) 2,489 133
------- ------- --------
Income before income taxes..................... 1,715 7,085 23,345
PROVISION FOR INCOME TAXES......................... 20 2,929 9,589
------- ------- --------
Net income..................................... $ 1,695 $ 4,156 $ 13,756
------- ------- --------
------- ------- --------
SHARES USED IN COMPUTING PRO FORMA NET INCOME
PER COMMON AND COMMON EQUIVALENT SHARE........... 54,304 56,409
------- --------
------- --------
PRO FORMA NET INCOME PER COMMON AND COMMON
EQUIVALENT SHARE................................. $ .08 $ .24
------- --------
------- --------
PRO FORMA NET INCOME AND EARNINGS PER COMMON
SHARE (UNAUDITED)
(Notes 1 and 8):
Historical net income before income taxes...... $ 1,715
Historical provision for income taxes.......... 20
Pro forma income tax effects................... 658
-------
Pro forma net income........................... $ 1,037
-------
-------
Pro forma common shares outstanding............ 43,753
-------
-------
Pro forma earnings per common share............ $ .02
-------
-------
The accompanying notes are an integral part of these statements.
-40-
TELETECH HOLDINGS, INC.
AND SUBSIDIARIES
CONSOLIDATED AND COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(AMOUNTS IN THOUSANDS)
MANDATORILY
REDEEMABLE, CUMU-
CONVERTIBLE LATIVE UNEARNED
PREFERRED TREASURY COMMON COMMON ADDI- TRANS- COMPEN- TOTAL
STOCK STOCK STOCK STOCK OF TIONAL LATION SATION- STOCK-
--------------- ------------- ------------- COMBINED PAID-IN ADJUST- RESTRICTED RETAINED HOLDERS'
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT ENTITIES CAPITAL MENT STOCK EARNINGS EQUITY
------ ------- ------ ------ ------ ------ -------- ------- ------- ---------- -------- --------
BALANCES, January 1,
1994................ - $ - - $ - - $ - $ 25 $ - $ - $ - $ 917 $ 942
Distribution to
stockholder......... (440) (440)
Net income............ - - - - - - - - - - 1,695 1,695
------ ------- -- ----- ------ ---- ---- ------- ---- ----- ------- --------
BALANCES, December
31, 1994............ - - - - - - 25 - - - 2,172 2,197
Issuance of preferred
stock............... 1,860 12,000 -
Adjustment to
reclassify retained
earnings to
additional paid in
capital upon
termination of S
corporation
election............ 2,172 (2,172) -
Stock exchange........ 40,700 407 (25) (325) (57) -
Distribution to
stockholder......... (1,695) (1,695)
Net income............ 4,156 4,156
Dividends accrued on
preferred stock..... 867 (867) (867)
------ ------- -- ----- ------ ---- ---- ------- ---- ----- ------- --------
BALANCES, December
31, 1995............ 1,860 12,867 - - 40,700 407 - 1,847 - - 1,537 3,791
Purchase of
Access 24........... 970 10 4,841 4,851
Cumulative translation
adjustments......... 98 98
Dividends accrued on
preferred stock..... 422 (422) (422)
Issuance of restricted
stock for
compensation........ 76 1 379 (380) -
Compensation expense
with respect to
restricted stock.... 126 126
Conversion of
mandatorily
redeemable preferred
stock to common
stock............... (1,860) (13,289) 9,300 93 13,196 13,289
Public offerings of
common stock........ 4,600 46 69,910 69,956
Acquisition of
treasury stock...... 99 (988) (988)
Exercise of stock
options............. 166 1 249 250
Tax benefit of stock
option exercises.... 1,608 1,608
Net income............ 13,756 13,756
------ ------- -- ----- ------ ---- ---- ------- ---- ----- ------- --------
BALANCES, December
31, 1996............ - $ - 99 $(988) 55,812 $558 $ - $92,030 $ 98 $(254) $14,871 $106,315
------ ------- -- ----- ------ ---- ---- ------- ---- ----- ------- --------
------ ------- -- ----- ------ ---- ---- ------- ---- ----- ------- --------
The accompanying notes are an integral part of these statements.
-41-
TELETECH HOLDINGS, INC.
AND SUBSIDIARIES
CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(AMOUNTS IN THOUSANDS)
1994 1995 1996
------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ..................................................... $ 1,695 $ 4,156 $ 13,756
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization ................................ 1,165 2,124 7,068
Allowance for doubtful accounts .............................. (20) 616 673
Deferred income taxes ........................................ - 21 (585)
Equity in loss of affiliated company ......................... - - 70
Deferred compensation expense ................................ - - 126
Changes in assets and liabilities:
Accounts receivable ........................................ 2,288 (6,104) (21,330)
Prepaids and other assets .................................. 50 (79) (1,059)
Deferred contract costs .................................... - (346) (2,015)
Accounts payable and accrued expenses ...................... (1,332) 2,730 12,044
Customer advances, deposits and deferred income ............ (681) 149 7
------- -------- --------
Net cash provided by operating activities .................. 3,165 3,267 8,755
------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment ............................. (1,932) (1,735) (7,361)
Purchase of Access 24, net of cash acquired .................... - - (2,461)
Proceeds from sale of interest in Access 24 UK Limited ......... - - 3,905
Temporary deposit on new Call Center ........................... - - (3,000)
Changes in accounts payable and accrued liabilities related
to investing activities ....................................... - - 916
Increase in short-term investments ............................. - (10,361) (61,212)
------- -------- --------
Net cash used in investing activities ...................... (1,932) (12,096) (69,213)
------- -------- --------
The accompanying notes are an integral part of these statements.
-42-
TELETECH HOLDINGS, INC.
AND SUBSIDIARIES
CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(AMOUNTS IN THOUSANDS)
1994 1995 1996
------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in bank overdraft ................ $ 479 $ 867 $ (1,427)
Net increase (decrease) in short-term borrowings ......... (840) 361 (1,000)
Payments on long-term debt ............................... (418) (625) (936)
Proceeds from long-term debt borrowings .................. 475 - -
Payments under capital lease obligations ................. (325) (971) (1,530)
Proceeds from common stock issuances ..................... - - 69,956
Proceeds from exercise of stock options .................. - - 250
Tax benefit from stock option exercises .................. - - 1,608
Acquisition of treasury stock ............................ - - (988)
Payments under subordinated notes payable to stockholder (126) (1,104) -
Distributions to stockholder ............................. (440) (1,695) -
Issuance of preferred stock .............................. - 12,000 -
------- -------- --------
Net cash provided by (used in) financing activities... (1,195) 8,833 65,933
------- -------- --------
Effect of exchange rate changes on cash .................... - - 47
NET INCREASE IN CASH AND CASH EQUIVALENTS .................. 38 4 5,522
CASH AND CASH EQUIVALENTS, beginning of period ............. - 38 42
------- -------- --------
CASH AND CASH EQUIVALENTS, end of period ................... $ 38 $ 42 $ 5,564
------- -------- --------
------- -------- --------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid for interest ................................... $ 455 $ 465 $ 1,019
------- -------- --------
------- -------- --------
Cash paid for income taxes ............................... $ 14 $ 2,424 $ 6,599
------- -------- --------
------- -------- --------
SUPPLEMENTAL SCHEDULE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
Assets acquired through capital leases ................... $ 211 $ 4,106 $ 10,247
------- -------- --------
------- -------- --------
Stock issued in purchase of Access 24 .................... $ - $ - $ 4,851
------- -------- --------
------- -------- --------
Restricted stock issued under employment agreements ...... $ - $ - $ 380
------- -------- --------
------- -------- --------
The accompanying notes are an integral part of these statements.
-43-
TELETECH HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
TeleTech Holdings, Inc. ("THI" or the "Company") is a provider of
outsourced strategic customer care solutions for Fortune 1000 corporations in
targeted industries in the United States, United Kingdom, Australia and New
Zealand. Customer care encompasses a wide range of customer acquisition,
retention and satisfaction programs designed to maximize the lifetime value of
the relationship between the Company's clients and their customers.
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements are comprised of the accounts of THI
and its wholly owned subsidiaries, including TeleTech Telecommunications, Inc.,
a California corporation ("TTC"); TeleTech Teleservices, Inc., a Colorado
corporation ("TTS"); TeleTech UK Limited, a UK corporation; and TeleTech
International Pty Ltd and subsidiaries ("Access 24"), an Australian corporation
(Note 17), (jointly, "the Group"). Prior to January 1, 1995, the Group comprised
TTC and TTS, held under the common ownership of a sole stockholder ("the
Stockholder"). Financial statements for 1994 represent the combined financial
statements of TTC and TTS.
In January 1995, a Preferred Stock Purchase Agreement and an Investment
Agreement (collectively the "Agreements") were executed by TeleTech Investors
General Partnership ("TIGP"), Essaness Theaters Corporation ("Essaness") and the
Stockholder. The Stockholder of TTC and TTS contributed 100% of his shares in
these companies to THI, a newly formed Delaware corporation, in exchange for
40,700,000 shares of THI's common stock, which constituted 100% of THI's
outstanding stock. Concurrent with this stock exchange, TIGP and Essaness
purchased an aggregate of 1,860,000 shares of THI's convertible preferred stock
("Preferred Stock") for $12 million. The Preferred Stock was initially
convertible into 9,300,000 shares of THI's common stock (Note 12). TIGP and
Essaness purchased 1,705,000 and 155,000 shares of the Preferred Stock,
respectively.
The exchange of stock constituted a reorganization of entities under common
control and the assets and liabilities of TTC and TTS are reflected in the
consolidated financial statements of THI based on their historical cost to TTC
and TTS.
All intercompany balances and transactions have been eliminated in the
consolidated and combined financial statements.
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. Foreign currency
transaction gains and losses are included in determining net income. Such gains
and losses were not material for any period presented.
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. Costs relating to
the internal development of software are expensed as incurred.
-44-
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(CONTINUED)
Depreciation is computed on the straight-line method based on the estimated
useful lives of the assets, as follows:
Computer equipment and software.............................. 5 years
Telephone equipment.......................................... 5 years
Furniture and fixtures....................................... 5-7 years
Leasehold improvements....................................... 5-7 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, of four to seven years, where title to the leased assets passes to
the Company on termination of the lease).
REVENUE RECOGNITION
The Company recognizes revenues at the time services are performed. The
Company has certain contracts that are billed in advance. Accordingly, amounts
billed but not earned under these contracts are excluded from revenues and
included in deferred income.
RESEARCH AND DEVELOPMENT
Research and development costs are charged to operations when incurred and
are included in operating expenses. Research and development costs amounted to
approximately $684,000, $458,000 and $347,000 for the years ended December 31,
1994, 1995, and 1996, respectively.
DEFERRED CONTRACT COSTS
The Company defers certain incremental direct costs incurred in connection
with preparing to provide services under certain long-term facilities management
agreements. Costs that have been deferred include the costs of hiring dedicated
personnel to manage client-owned facilities, their related payroll and other
directly associated costs from the time long-term facilities management
agreements were entered into until the beginning of providing services. Such
costs are amortized over twelve months. Deferred contract costs at December 31,
1995 and 1996, include costs incurred in preparing to provide services under a
five-year agreement entered into in October 1995, under which the Company began
providing services during April 1996. For the year ended December 31, 1996, the
Company recorded amortization expense of $1,658,000. There was no amortization
expense in prior periods.
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 15 years. Amortization of goodwill for the year
ended December 31, 1996, was $238,000. There was no amortization expense in
prior periods.
Subsequent to an acquisition, the Company continually evaluates whether
later events and circumstances have occurred that indicate the remaining
estimated useful life of an intangible asset may warrant revision or that the
remaining balance of an intangible asset may not be recoverable. When factors
indicate that an intangible asset should be evaluated
-45-
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(CONTINUED)
for possible impairment, the Company uses an estimate of the related
business' undiscounted future cash flows over the remaining life of the asset
in measuring whether the intangible asset is recoverable. Management does not
consider that any provision for impairment of intangible assets is required.
INCOME TAXES
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
109"), 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.
Net deferred tax assets may then be reduced by a valuation allowance for amounts
that do not satisfy the realization criteria of SFAS 109.
During 1994, TTC and TTS were S corporations and their income was taxable
to the Stockholder rather than the companies. Effective January 1, 1995, S
corporation status terminated and THI and its domestic subsidiaries began to
file consolidated corporate federal and state income tax returns. Access 24
will file separate tax returns in Australia, and TeleTech UK Limited will file
separate tax returns in the UK. As required by SFAS 109, this change in tax
status was recognized by establishing deferred tax assets and liabilities for
temporary differences between the tax basis and amounts reported in the
accompanying consolidated balance sheet.
EARNINGS PER SHARE
Earnings per share are computed based upon the weighted average number of
common shares and common share equivalents outstanding. The shares of
convertible Preferred Stock were considered common stock equivalents due to the
mandatory conversion provision (Note 12). Pursuant to Securities and Exchange
Commission Staff Accounting Bulletin No. 83, common stock and common stock
equivalent shares issued by the Company at prices below the initial public
offering price during the twelve month period prior to the July 1996 offering
(using the treasury stock method) have been included in the calculation as if
they were outstanding for all the periods presented regardless of whether they
are antidilutive. On May 14, 1996, the Company approved a five-for-one share
common stock split, which was effective on July 31, 1996. Common stock amounts,
equivalent share amounts and per share amounts have been adjusted retroactively
to give effect to the stock split.
For comparative purposes, the earnings per share for 1994 has been
calculated on a pro forma basis as the historical earnings per share is not
meaningful due to the Company's reorganization on January 1, 1995.
INCREASE IN AUTHORIZED SHARES
On May 14, 1996, the board of directors authorized an amendment to the
Company's Certificate of Incorporation that was effective immediately prior to
the closing of the initial public offering of the Company's common stock. The
amendment increased the authorized shares of common stock to 150,000,000 shares
and also authorized the Company to issue up to 10,000,000 shares of Preferred
Stock.
-46-
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(CONTINUED)
RESTRICTED STOCK AWARDS
In January 1996, the Company awarded 76,000 restricted shares of the
Company's common stock to certain employees as compensation to be earned over
the term of the employees' related employment agreements (three years). The
market value of the stock at the date of award was $380,000. This amount has
been recorded as unearned compensation-restricted stock and is shown as a
separate component of stockholders' equity. For the year ended December 31,
1996, the Company recognized $126,000 of compensation expense related to these
awards.
CASH AND CASH EQUIVALENTS
For the purposes of the statement of cash flows, the Company considers all
cash and investments with an original maturity of 90 days or less to be cash
equivalents.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
LONG-LIVED ASSETS
In March 1995, the Financial Accounting Standards Board issued SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of" ("SFAS 121"). SFAS 121 requires that long-lived
assets and certain identifiable intangibles to be held and used by an entity be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. SFAS 121 is
effective for financial statements for fiscal years beginning after December 15,
1995. The adoption of SFAS 121 on January 1, 1996, had no impact on the
Company's consolidated financial position or results of operations.
(2) CONCENTRATIONS
The Company's revenues from major customers (revenues in excess of 10% of
total sales) are from entities involved in the telecommunications, technology
and transportation industries. The revenues from such customers as a percentage
of total sales for each of the three years in the period ended December 31,
1996, are as follows:
1994 1995 1996
---- ---- ----
Customer A........................................ 18% 31% 27%
Customer B........................................ 5% 18% 1%
Customer C........................................ 17% 9% 2%
Customer D........................................ 13% - -
Customer E........................................ - 3% 14%
Customer F........................................ - - 28%
-- -- --
53% 61% 72%
-- -- --
-- -- --
-47-
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(CONTINUED)
At December 31, 1996 accounts receivable from Customers A, E and F were
$8.9 million, $3.1 million and $6.3 million, respectively. At December 31, 1995
accounts receivable from customer A was $4.0 million. There were no other
customers with receivable balances in excess of 10% of consolidated accounts
receivable.
The loss of one or more of its significant customers could have a material
adverse effect on the Company's business, operating results or financial
condition. To limit the Company's credit risk, management performs ongoing
credit evaluations of its customers and maintains allowances for potentially
uncollectible accounts. Although the Company is directly impacted by economic
conditions in the telecommunications, technology, transportation, healthcare and
financial services industries, management does not believe significant credit
risk exists at December 31, 1996.
GEOGRAPHIC AREA INFORMATION
Prior to the acquisition of Access 24 in January 1996, the Company operated
exclusively within the United States. Geographic area information for the year
ended December 31, 1996, is as follows (in thousands):
UNITED ASIA
STATES EUROPE PACIFIC TOTAL
-------- ------ ------- --------
Revenues............................. $151,596 $ 644 $13,264 $165,504
Income (loss) before income taxes.... 22,163 (568) 1,750 23,345
Assets............................... 131,027 2,025 10,326 143,378
(3) PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31, 1995, and
1996 (in thousands):
1995 1996
------- --------
Computer equipment and software...................... $ 9,807 $ 20,228
Telephone equipment.................................. 1,220 2,051
Furniture and fixtures............................... 2,938 7,433
Leasehold improvements............................... 1,198 5,042
Other................................................ - 161
------- --------
15,163 34,915
Less-accumulated depreciation........................ (6,059) (11,231)
------- --------
$ 9,104 $ 23,684
------- --------
------- --------
-48-
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(CONTINUED)
Included in the cost of property and equipment above is equipment
obtained through capitalized leases. The following is a summary of equipment
under capital leases as of December 31, 1995, and 1996 (in thousands):
1995 1996
------- -------
Computer equipment and software ....... $ 3,227 $12,079
Telephone equipment ................... 310 845
Furniture and fixtures ................ 2,039 5,413
Other ................................. - 92
------- -------
5,576 18,429
Less-accumulated depreciation ......... (1,292) (4,371)
------- -------
$ 4,284 $14,058
------- -------
------- -------
Depreciation expense related to leased equipment under capital leases
was $410,000, $985,000 and $3,069,000 for the years ended December 31, 1994,
1995, and 1996, respectively.
(4) CAPITAL LEASE OBLIGATIONS
On July 11, 1995, the Company negotiated a master lease agreement with a
bank under which it may lease equipment up to a value of $8 million. In May
1996, the master lease was amended to increase the lease line to $15 million.
The term of the leases are 48 months and interest is payable at the then most
recent weekly average of three-year Treasury notes plus 125 basis points. In
August 1995, the Company entered into another master lease agreement with a
bank under which it may lease equipment. Under the agreement, individual
lease terms are negotiated on a lease-by-lease basis.
The Company finances a substantial portion of its property and equipment
under non-cancelable capital lease obligations. Accordingly, the fair value
of the equipment has been capitalized and the related obligation recorded.
The average implicit interest rate on these leases was 8.3% at December 31,
1996. 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, 1996, are as follows (in thousands):
Year ending December 31,
1997 ............................................... $ 5,544
1998 ............................................... 5,039
1999 ............................................... 4,027
2000 ............................................... 1,607
2001 ............................................... -
-------
16,217
Less-amount representing interest.................... (1,691)
-------
14,526
Less-current portion of capital lease obligations ... (4,851)
-------
$ 9,675
-------
-------
-49-
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(CONTINUED)
Interest expense on the outstanding obligations under such leases was
$160,000, $313,000 and $866,000 for the years ended December 31, 1994, 1995,
and 1996, respectively.
(5) LONG-TERM DEBT
As of December 31, 1995 and 1996, long-term debt consisted of the following
unsecured notes (in thousands, except monthly payments):
1995 1996
----- -----
Note payable, interest at 8% per annum, principal and interest payable
monthly at $3,594, maturing May 2000 .................................. $ 160 $ 129
Note payable, interest at 6% per annum, principal and interest payable
monthly at $4,563, maturing January 1997 .............................. 58 4
Note payable, interest at 6% per annum, principal and interest payable
monthly at $3,598, maturing June 1997 ................................. 62 21
Note payable, interest at 5% per annum, principal and interest payable
monthly at $7,077, maturing January 2000 .............................. 313 242
----- -----
593 396
----- -----
Less-current portion .................................................... (196) (134)
----- -----
$ 397 $ 262
----- -----
----- -----
Annual maturities of the long-term debt described above are as follows
(in thousands):
Year ending December 31,
1997 ............................................... $134
1998 ............................................... 115
1999 ............................................... 122
2000 ............................................... 25
2001 ............................................... -
Thereafter .......................................... -
----
$396
----
----
(6) SHORT-TERM BORROWINGS
The Company has an unsecured revolving line of credit agreement with a
commercial bank under which it may borrow up to $15 million which expires in
May 1998. Interest is payable at various interest rates. The borrowings can
be made at (i) the bank's prime rate; (ii) a certificate of deposit rate plus
125 basis points for periods of 7 to 90 days with minimum advances of
$500,000 with $100,000 increments; (iii) LIBOR plus 125 basis points for
borrowing periods of 1, 2, 3 or 6 months; or (iv) agreed upon rates. At
December 31, 1995 and 1996, the amount outstanding under this facility was $1
million and zero, respectively.
The Company is required to comply with certain minimum financial ratios
under covenants in connection with the borrowings described above.
-50-
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(CONTINUED)
(7) SUBORDINATED NOTES PAYABLE TO COMMON STOCKHOLDER
At December 31, 1994, subordinated notes payable to the Stockholder with
interest at 8% per annum amounted to $1,104,000. These notes payable were
subordinated to the long-term debt and the short-term borrowings as specified
in the credit agreements. Interest incurred on indebtedness to the stockholder
amounted to approximately $96,000 and $11,000 for the years ended December 31,
1994 and 1995, respectively. The Company repaid these notes in February 1995.
(8) INCOME TAXES
As stated in Note 1, TTC and TTS terminated their S corporation status
effective January 1, 1995. This change in tax status was recognized by
establishing net deferred tax liabilities of approximately $213,000 on that
date for temporary differences between tax basis and amounts reported in the
accompanying combined balance sheets of TTC and TTS. The current provision
for income taxes for 1994 reflects only amounts payable to certain state tax
jurisdictions that do not recognize S corporation status. Beginning in 1995,
THI and its domestic subsidiaries filed consolidated corporate federal and
state income tax returns. Access 24 and TeleTech UK, Limited file separate
tax returns in the various countries in which they provide services.
The components of income before income taxes are as follows (in thousands):
1994 1995 1996
---- ---- ----
Domestic ........................... $1,715 $7,085 $22,163
Foreign ............................ - - 1,182
------ ------ -------
Total .............................. $1,715 $7,085 $23,345
------ ------ -------
------ ------ -------
The components of the provision for income taxes are as follows (in thousands):
1995 1996
---- ----
Current provision:
Federal ................................................... $2,473 $ 7,653
State ..................................................... 434 1,784
Foreign ................................................... - 737
------ -------
2,907 10,174
------ -------
Deferred provision:
Federal ................................................... (154) (474)
State ..................................................... (37) (111)
------ -------
(191) (585)
Change in tax status from S corporation to C corporation .. 213 -
------ -------
$2,929 $ 9,589
------ -------
------ -------
-51-
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(CONTINUED)
The following reconciles the Company's effective tax rate to the federal
statutory rate for the years ended December 31, 1995 and 1996 (in thousands):
1995 1996
------ ------
Income tax expense per federal statutory rate............ $2,408 $8,171
State income taxes, net of federal deduction............. 262 1,144
Effect of change in tax status from S corporation
to C corporation........................................ 213 -
Permanent differences.................................... 46 150
Foreign income taxed at higher rate...................... - 124
------ ------
$2,929 $9,589
------ ------
------ ------
The Company's deferred income tax assets and liabilities are summarized as
follows (in thousands):
1995 1996
----- ------
Deferred tax assets:
Allowance for doubtful accounts.................... $ 308 $ 540
Vacation accrual................................... 178 588
----- ------
486 1,128
Deferred tax liabilities:
Excess depreciation for tax........................ (507) (564)
----- ------
Net deferred income tax (liability) asset............ $ (21) $ 564
----- ------
----- ------
A valuation allowance has not been recorded as the Company expects that all
deferred tax assets will be realized in the future.
The combined statement of income for 1994 presents, on an unaudited pro
forma basis, net income as if the Company had filed consolidated C corporation
federal and state income tax returns for that year. The pro forma tax effects
assume that the deferred tax assets established effective January 1, 1995, as
described above, would have been provided for as the related temporary
differences arose. The unaudited pro forma provision for income taxes for 1994
is reconciled to the amount computed by applying the statutory federal tax rate
to income before taxes as follows (in thousands):
1994
(PRO FORMA)
-----------
Income tax expense per federal statutory rate.............. $583
State income taxes, net of federal deduction............... 82
Permanent differences...................................... 13
----
Total pro forma provision for income taxes............... 678
Historical provision for income taxes...................... 20
----
Pro forma tax effects...................................... $658
----
----
(9) COMMITMENTS AND CONTINGENCIES
The Company has various operating leases for equipment, Call Center
facilities and office space. Lease expense under operating leases was
approximately $1,366,000, $2,023,000 and $4,206,000 for the years ended
December 31, 1994, 1995, and 1996, respectively.
-52-
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(CONTINUED)
The future minimum rental payments required under non-cancelable operating
leases as of December 31, 1996, are as follows (in thousands):
Year ended December 31,
1997...................................................... $ 4,908
1998...................................................... 4,872
1999...................................................... 4,922
2000...................................................... 3,674
2001...................................................... 3,172
Thereafter................................................ 18,129
-------
$39,677
-------
-------
The Company has outstanding two irrevocable standby letters of credit
totaling approximately $1.6 million at December 31, 1996. One letter of
credit for $375,000 secures commitments under a facilities lease and expires
in February 1999. The second letter of credit for approximately $1.2 million
was issued as security to an Australian bank for any outstanding bank
borrowings of Access 24 and expired in February 1997.
LEGAL PROCEEDINGS. In late November 1996, CompuServe Incorporated
("CompuServe") notified the Company that CompuServe was withdrawing its WOW!
Internet service from the marketplace and that, effective January 31, 1997,
it would terminate all the Company programs provided to CompuServe. Pursuant
to the provisions of its agreement with the Company, CompuServe was entitled
to terminate the agreement for reasonable business purposes by giving the
Company 120 days advance notice and by paying to the Company a certain amount
calculated in accordance with a formula contained in the agreement. In
December 1996, the Company filed suit against CompuServe to enforce these
termination provisions and collect the termination fee. CompuServe filed a
counterclaim in December 1996 alleging that the Company breached other
provisions of this agreement and seeking unspecified monetary damages. In
March 1997, CompuServe asserted a right to offset certain accounts receivable
it owes to the Company for services rendered against the amount that may be
awarded to CompuServe on its counterclaim, if any. These accounts receivable
totaled $3.1 million at December 31, 1996 and $4.3 million at March 1, 1997.
The Company intends to amend its complaint to seek recovery of the
outstanding accounts receivable and to assert additional claims for damages.
While the Company believes that these legal proceedings will not have a
material adverse effect on the Company's financial condition or results of
operations, the proceedings are in an early stage and the ultimate outcome is
uncertain.
(10) COMMON STOCK OFFERINGS
In August 1996, the Company completed an initial public offering of 4
million shares of common stock at a price of $14.50 per share. Selling
shareholders sold an additional 3.2 million shares of common stock in the
Company's initial public offering. Immediately prior to the offering, the
Company acquired 98,810 shares of treasury stock at a price of $10 per share.
In November 1996, the Company completed a secondary offering of 600,000
shares of common stock at a price of $31 per share. Selling shareholders sold
an additional 4 million shares of common stock in connection with the secondary
offering of which 155,600 were shares sold upon the exercise of stock options.
-53-
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(CONTINUED)
(11) EMPLOYEE BENEFIT PLAN
The Company has a 401(k) Profit Sharing Plan that covers all employees
who have completed one year of service, as defined, and are 21 or older.
Participants may defer up to 19% of their gross pay up to a maximum limit
determined by law. Participants are always 100% vested in their
contributions.
The Company may make discretionary contributions to the plan which are
distributed to participants in accordance with the plan. Participants are
vested in these contributions at a rate of 20% per year. For the years ended
December 31, 1994, 1995, and 1996, the Company's contributions to the plan
were $64,000, $131,000 and $280,000, respectively.
(12) MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK
In January 1995, the Company issued 1,860,000 shares of convertible
preferred stock at $6.45 per share for gross proceeds of $12 million. The
1,860,000 shares of preferred stock initially were convertible, at the option
of the preferred stockholders, into 9.3 million shares of common stock. In
the event that the holders of preferred stock had not exercised their
conversion rights prior to May 18, 2002, they would have been entitled to
either convert their Preferred Stock to shares of common stock or redeem
their shares for cash. Such conversion was to have provided an internal rate
of return to the preferred stockholders of 7% per annum. Accordingly,
dividends were accrued cumulatively at the rate of 0.5833% per month. In
connection with and immediately prior to the Company's initial public
offering in July 1996, all 1,860,000 outstanding shares of Preferred Stock
together with all accrued dividends thereon were converted into 9.3 million
shares of common stock.
(13) STOCK COMPENSATION PLANS
The Company adopted a stock option plan during 1995 and amended and
restated the plan in January 1996, for directors, officers, employees,
consultants and independent contractors. The plan reserves 7.0 million shares
of common stock and permits the award of incentive stock options,
non-qualified options, stock appreciation rights and restricted stock.
Outstanding options vest over a three- or five-year period and are
exercisable for ten years from the date of grant.
In January 1996, the Company adopted a stock option plan for
non-employee directors (the "Director Plan") covering 750,000 shares of
common stock. All options are to be granted at fair market value at the date
of grant. Options vest as of the date of the option and are not exercisable
until six months after the option date. Options granted are exercisable for
ten 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 262,500 shares outstanding at December 31, 1996.
In July 1996, the Company adopted an employee stock purchase plan (the
"ESPP"). Pursuant to the ESPP, an aggregate of 200,000 shares of common
stock of the Company will be sold in periodic offerings to eligible employees
of the Company. The price per share purchased in any offering period is
equal to the lesser of 90% of the fair market value of the common stock on
the first day of the offering period or 90% of the fair market value of the
common stock on the purchase date. The offering periods have a term of six
months. The first offering period under the ESPP commenced October 1, 1996,
and will end on March 31, 1997. As of December 31, 1996, $166,000 had been
contributed to the plan.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 123 ("SFAS 123")
During 1995, the Financial Accounting Standards Board issued SFAS 123,
"Accounting for Stock Based Compensation," which defines a fair value based
method of accounting for an employee stock option, employee stock purchase
plan or similar equity instrument and encourages all entities to adopt that
method of accounting for all of their
-54-
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(CONTINUED)
employee stock compensation plans. However, it also allows an entity to
continue to measure compensation cost for those plans using the method of
accounting prescribed by the Accounting Principles Board Opinion No. 25 ("APB
25"), "Accounting for Stock Issued to Employees." Entities electing to remain
with the accounting in APB 25 must make pro forma disclosures of net income
and earnings per share, as if the fair value based method of accounting
defined in SFAS 123 has been applied.
The Company has elected to account for its stock-based compensation
plans under APB 25; however, the Company has computed for pro forma
disclosure purposes the value of all options granted during 1995 and 1996
using the Black-Scholes option pricing model as prescribed by SFAS No. 123
and the following weighted average assumptions used for grants:
Risk-free interest rate........................... 6.32%
Expected dividend yield........................... 0%
Expected lives.................................... 4.11 years
Expected volatility............................... 59%
Options were assumed to be exercised upon vesting for the purpose of this
valuation. Adjustments are made for options forfeited prior to vesting. The
pro forma compensation expense was computed to be the following approximate
amounts:
Year ended December 31, 1995..................... $341,000
Year ended December 31, 1996..................... $3,922,000
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 (IN THOUSANDS)
1995 1996
------ -------
As reported.............................. $4,156 $13,756
Pro forma................................ 3,815 11,383
PRO FORMA NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE
1995 1996
------ -------
As reported.............................. $.08 $.24
Pro forma................................ $.07 $.20
-55-
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(CONTINUED)
A summary of the status of the Company's two stock option plans at
December 31, 1995 and 1996 together with changes during the periods then ended
are presented in the following table:
1995 1996
WEIGHTED WEIGHTED
AVERAGE PRICE AVERAGE PRICE
SHARES PER SHARE SHARES PER SHARE
--------- ------------- --------- -------------
Outstanding at beginning of period...... - 2,355,000 $1.90
Grants.................................. 2,355,000 $1.90 2,929,405 8.78
Exercises............................... - - (165,600) 1.51
Forfeitures............................. - - (79,115) 9.36
--------- ---------
Outstanding at end of period............ 2,355,000 $1.90 5,039,690 $5.79
--------- ---------
--------- ---------
Options exercisable at year-end......... 285,854 990,234
--------- ---------
--------- ---------
Weighted-average fair value of options
granted during the year................ $0.82 $4.25
--------- ---------
--------- ---------
The following table sets forth the exercise price range, number of shares,
weighted average exercise price and remaining contractual lives by groups of
similar price and grant date:
WEIGHTED
AVERAGE
EXERCISE NUMBER OF WEIGHTED AVERAGE CONTRACTUAL
PRICE RANGE SHARES EXERCISE PRICE LIFE
-------------- --------- ---------------- -----------
$1.29 - $1.30 1,253,600 $1.29 9
$2.00 - $3.00 838,000 $2.53 9
$5.00 853,440 $5.00 9
$8.00 - $10.00 1,675,195 $8.20 9
$14.50 231,955 $14.50 9
$18.00 - $27.13 187,500 $21.91 10
(14) FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair values of cash equivalents and other current amounts receivable and
payable approximate the carrying amounts due to their short-term nature.
Short-term investments include primarily U.S. government Treasury bills,
investments in commercial paper, corporate bonds and other 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 carried on the Company's consolidated balance sheet of $593,000 and
$396,000 at December 31, 1995 and 1996, has a carrying value that is not
significantly different than its estimated fair value. The fair value of the
long-term portion of the Company's debt is based on discounting future cash
flows using current interest rates adjusted for risk. The fair value of the
short-term debt approximates its recorded value due to its short-term nature.
(15) OTHER INCOME
Other income for the year ended December 31, 1995, includes $2.4 million
received in settlement of a premature termination of a contract.
-56-
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(CONTINUED)
(16) RELATED PARTY TRANSACTIONS
The Company provides reservation call handling services to Midway Airlines
Corporation ("Midway"), a majority-owned subsidiary of Zell/Chilmark Fund, L.P.
Samuel Zell, a director of the Company, is an affiliate of Zell/Chilmark Fund,
L.P. and Rod Dammeyer, a director of the Company and a member of the Audit
Committee of the board of directors, is the managing director of Zell/Chilmark
Fund, L.P. During the years ended December 31, 1995 and 1996, the Company
charged Midway an aggregate of $1,292,000 and $2,324,000, respectively, for
services rendered by the Company. As of December 31, 1995 and 1996, the amount
due from Midway for services rendered by the Company was $536,000 and zero,
respectively.
In April 1996, the Company agreed to accept from Midway a promissory note
in the principal amount of $500,000 to evidence a portion of the total amount
due. The note carried interest at a rate of 8% per annum, and was payable in
12 equal installments of principal, together with interest, commencing May 1,
1996. On December 31, 1996, the note was paid in full. The Company is
continuing to provide call handling services to Midway.
The Company utilizes the services of The Riverside Agency, Inc. for
reviewing, obtaining and/or renewing various insurance policies. The Riverside
Agency, Inc. is a wholly owned subsidiary of Equity Group Investments, Inc.,
of which Samuel Zell, a director of the Company, is Chairman of the Board.
During the years ended December 31, 1995 and 1996, the Company incurred
$24,000 and $448,000, respectively, for such services.
During 1996, the Company paid an aggregate of $115,000 to various
subsidiaries of Jacor Communications, Inc., an owner and operator of radio
stations throughout the United States, for broadcasting radio advertisements
regarding employment opportunities at TeleTech. Rod Dammeyer, a director of
the Company, is a director of Jacor Communications, Inc.
On August 15, 1996, the Company entered into a one-year consulting
agreement with Richard Weingarten & Company, Inc. ("RWCO"). Under the
consulting agreement, RWCO receives a monthly consulting fee of $10,000. Mr.
Weingarten, who is the founder and president of RWCO, tendered his resignation
as a member of the Board of Directors of the Company effective as of the date
of the consulting agreement. Mr. Weingarten also received an option to acquire
55,000 shares of common stock at an exercise price of $18 per share.
In May 1996, the board of directors approved the payment of fees to the
Equity Group Investments, Inc., an affiliate of Samuel Zell, a director of the
Company, for advice and assistance in consummating the following transactions:
Access 24 purchase......................................... $ 300,000
The Company's initial public offering of stock............. 500,000
Sale of Access 24, Limited stock to PPP (Note 17).......... 200,000
----------
$1,000,000
----------
----------
Fees associated with the Access 24 purchase have been allocated to the
purchase price. Fees associated with the initial public offering of common
stock have been netted against the offering proceeds received by the Company.
Fees associated with the sale of stock to PPP have been netted against the
proceeds from this sale.
-57-
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(CONTINUED)
(17) ACQUISITIONS
On January 1, 1996, the Company acquired 100% of the common stock of
Access 24 Services Corporation Pty Limited (with its subsidiaries, "Access
24") for consideration of $7.6 million, consisting of cash of $2.27 million,
970,240 shares of common stock in the Company and expenses related to the
acquisition. Access 24 provides inbound, toll-free customer service primarily
to the healthcare and financial services sector in Australia, the United
Kingdom and New Zealand.
On April 30, 1996, the Company completed the sale of 50% of the common
stock of Access 24 Limited ("Access 24 UK") to PPP Health Care Group plc
("PPP") for $3.8 million cash. Access 24 UK was the United Kingdom subsidiary
of Access 24, acquired by the Company as part of the Access 24 acquisition,
which operates a Call Center in London, England. In addition PPP also
purchased 1.0 million preferred shares of Access 24 UK for consideration of
$1.5 million. The preferred shares have a par value of 1 British pound per
share and dividends are cumulative at the rate of 7% per annum. A portion of
the proceeds from the sale of the Preferred Stock was used to repay
outstanding advances from Access 24.
The acquisition of Access 24 has been accounted for using the purchase
method. The proceeds from the sale of 50% of the stock of Access 24 UK in
excess of the proportionate share of the carrying amounts of the Access 24 UK
assets and liabilities have been reflected as a reduction of the goodwill
arising from the Access 24 acquisition. The Company's remaining 50% interest
in Access 24 UK is being accounted for using the equity method of accounting.
Under the equity method, the Company's investment is recorded initially at
cost and is adjusted to recognize the Company's 50% share of net earnings or
losses of the affiliated company. Access 24 UK did not contribute significantly
to the results of operations of the Company for any period presented. The
excess of the cost of the investment over the underlying net assets of Access
24 UK is being amortized using the straight-line method over 15 years.
The following unaudited pro forma consolidated income statement for the
year ending December 31, 1995, gives effect to the consummation of the
acquisition as if it had occurred on January 1, 1995 (in thousands, except
per share data):
THI ACCESS 24 PRO FORMA
------- ------- ---------
Revenue ....................................... $50,467 $10,239 $60,706
------- ------- -------
------- ------- -------
Net income (loss) ............................. $ 4,156 $ (166) $ 3,990
------- ------- -------
------- ------- -------
Pro forma net income per common and common
equivalent share ............................ $ .08 $ .07
------- -------
------- -------
Shares used in computing pro forma net income
per common and common equivalent share ...... 54,304 54,304
------- -------
------- -------
-58-
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(CONTINUED)
(18) QUARTERLY FINANCIAL DATA (UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE DATA)
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
YEAR ENDED DECEMBER 31, 1996:
Revenues $22,019 $34,600 $50,057 $58,828
Income from operations 2,723 3,556 6,901 10,032
Net income 1,258 2,060 4,059 6,379
Pro forma net income per common
and common equivalent share .02 .04 .07 .11
YEAR ENDED DECEMBER 31, 1995:
Revenues 10,412 11,879 12,692 15,484
Income from operations 614 1,207 1,218 1,557
Net income 1,628(1) 793 862 873
Pro forma net income per common .03 .01 .02 .02
and common equivalent share
(1) Includes the $2.4 million pre-tax net proceeds of a one-time payment made
by a former client to TeleTech in connection with such client's early
termination of a contract.
-59-
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
To TeleTech Holdings, Inc.:
We have audited in accordance with generally accepted auditing standards the
financial statements of TeleTech Holdings, Inc. for each of the three years
in the period ended December 31, 1996 included in this Form 10-K and have
issued our report thereon dated March 14, 1997. Our audit was made for the
purpose of forming an opinion on the basic financial statements taken as a
whole. Schedule II following this report is the responsibility of the
Company's management and is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required
to be set forth therein in relation to the basic financial statements taken
as a whole.
/s/ Arthur Andersen LLP
Denver, Colorado
March 14, 1997
-60-
SCHEDULE II
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(AMOUNTS IN THOUSANDS)
ADDITIONS
BALANCE AT CHARGED
BEGINNING TO CHARGED TO DEDUCTIONS FROM BALANCE AT END
OF PERIOD INCOME OTHER ACCOUNTS RESERVES(a) OF PERIOD
---------- --------- -------------- --------------- --------------
Allowance for Doubtful Accounts:
Year Ended December 31, 1994........ $193 $145 $0 $(165) $ 173
---- ---- -- ----- ------
---- ---- -- ----- ------
Year Ended December 31, 1995........ $173 $631 $0 $ (15) $ 789
---- ---- -- ----- ------
---- ---- -- ----- ------
Year Ended December 31, 1996........ $789 $771 $0 $ (98) $1,462
---- ---- -- ----- ------
---- ---- -- ----- ------
- -------------------
(a) Uncollectible accounts written off.
-61-