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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Form 10-K
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(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, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 0-21055
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TeleTech Holdings, Inc.
(Exact name of registrant as specified in its charter)
Delaware 84-1291044
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9197 South Peoria Street
Englewood, Colorado 80112
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (303) 397-8100
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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
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of March 25, 2002, there were 76,921,588 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 $516,330,238 based on the
closing sale price of the registrant's common stock on such date as reported on
the Nasdaq Stock Market.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of TeleTech Holdings, Inc.'s definitive proxy statement for its
annual meeting of stockholders to be held on May 23, 2002, are incorporated by
reference into Part III of this Form 10-K, as indicated.
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PART I
Item 1. Business.
Overview
TeleTech Holdings, Inc., a Delaware corporation (together with its wholly
and majority owned subsidiaries, "TeleTech" or the "Company," which may also be
referred to as "we" "us" or "our"), is a leading global provider of customer
management solutions for large domestic, foreign and multinational companies.
TeleTech, or for periods prior to 1994, its predecessors, was formed in 1982.
TeleTech helps its clients manage the customer experience by providing
customer-centric solutions from strategy to execution across the entire customer
lifecycle. By leveraging world-class operations across its global platform of
people, process, infrastructure, and technology, TeleTech provides front- and
back-office customer management services that help clients build greater brand
loyalty. In addition, TeleTech offers value-added services designed to optimize
the experience of each customer and maximize the value of every interaction.
Our offerings are scaleable, with a variety of solution alternatives to
meet our clients' specific requirements. We provide our solutions from 48
state-of-the-art customer interaction centers around the world and offer
consulting services for clients seeking to optimize internal customer management
functions.
Since 1996, we have expanded our international presence and currently have
operations in 12 different countries. Our international reach provides increased
business opportunities with non-U.S. clients, as well as opportunities to expand
our relationship with existing multinational clients based in the U.S. In 2001,
our non-U.S. operations represented 42% of total revenues.
Customer Management Solutions
Our fully integrated, customer management solutions encompass the following
capabilities:
. strategic consulting and process redesign;
. infrastructure deployment, including the securing, designing and
building of world-class customer interaction centers;
. recruitment, education and management of client-dedicated customer
service representatives;
. engineering operational process controls and quality systems;
. technology consulting and implementation, including the integration of
hardware, software, network and computer-telephony technology; and
. database management, which involves the accumulation, management and
analysis of customer information to deliver actionable marketing
solutions.
We design, develop and implement large-scale solutions built around each
client's unique set of requirements and specific business needs. The solutions
may incorporate voice, email or Internet-based technologies, and are designed to
allow for expansion. We provide services from customer interaction centers
leased, equipped and staffed by TeleTech (fully outsourced programs) and
customer interaction centers leased and equipped by our clients and staffed by
TeleTech (facilities management programs).
In December 2000, TeleTech acquired Newgen Results Corporation ("Newgen"),
a leading business-to-business application service provider specializing in
customer management for the automotive industry. Newgen combines expertise in
marketing and customer retention with in-depth knowledge of automotive service
department operations to deliver highly targeted, custom marketing solutions.
1
Outsourced. With a fully outsourced solution, we provide comprehensive
customer management solutions from customer interaction centers leased, equipped
and staffed by TeleTech. Our fully outsourced customer interaction centers are
utilized to serve either multiple clients (multi-client centers) or one
dedicated client (dedicated centers). We also provide facilities management
solutions whereby the client owns or leases the customer interaction center and
equipment and we provide the staff and knowledge to operate the center. Our
North American and international outsourced business segments accounted for
approximately 92% of total 2001 revenues, of which our North American outsourced
business segment accounted for 67%.
Database Marketing and Consulting. Through our database marketing and
consulting segment, we provide outsourced database management, direct marketing
and related customer retention services for the service department of automobile
dealerships and manufacturers. Additionally, we provide consulting services
related to the development and implementation of new techniques and programs
that enable automobile dealerships to grow their businesses, streamline
inefficient processes and more effectively market their services. Our database
marketing and consulting segment accounted for approximately 8% of total 2001
revenues.
Our Outsourced and Database Marketing and Consulting services consist of:
. Customer Targeting Solutions: We use data analytics and mining
capabilities to help clients identify top-tier customers and key
prospects for future sales opportunities. This information helps drive
more targeted lead generation programs and marketing initiatives.
. Customer Acquisition Solutions: From customer education, to inquiry
follow-ups, to processing new accounts, we help clients get customers
up and running quickly and efficiently-while speeding their overall
time to market. A sampling of these services includes processing and
fulfilling pre-sale information requests; verifying sales, activating
services and directing customers to product or service sources; and
providing initial post-sale support, including operating instructions
for new product or service use.
. Customer Provisioning Solutions: Getting off to the right start is
critical to creating a lifelong customer. Whether turning on service,
trouble shooting installation or sending out a physical product, we
help clients streamline provisioning processes by managing every
aspect of the front- and back-office, from order to installation.
. Customer Support Solutions: We help ensure the ongoing satisfaction of
all customers through the accurate, timely and efficient handling of
every interaction, from complex transactions such as brokerage trades
and insurance claims processing, to more basic services such as
billing support, account maintenance and complaint resolution.
. Customer Development Solutions: Through a combination of technology
and highly trained customer service representatives, we help clients
identify high-value customers and increase customer value through
up-selling, cross-selling, and, perhaps most importantly, first call
resolution.
. Customer Retention Programs: We work with clients to develop targeted
customer satisfaction and loyalty programs as well as other proactive
strategies that deliver greater value to customers on a day-to-day
basis. For example, TeleTech offers strategies and services to help
manage customer attrition or turnover.
. Other Customer-Related Programs: Our customer management solutions may
include aiding in collections, collecting market research from
customers, and performing outbound-call campaigns.
Markets and Clients
Strategic Business Units ("SBUs"), responsible for developing and
implementing customized industry-specific customer management solutions in
specific vertical markets, have primary responsibility for sales and marketing
efforts in North America. Within this framework, we focus on large multinational
corporations in the communications, automotive, financial services,
transportation, and government industries. These industries accounted for
approximately 47%, 16%, 11%, 9% and 9%, respectively, of our 2001 revenue. Sales
in other industries, including technology, healthcare and various others,
accounted for 8% of 2001 revenues. Our largest client in 2001 was Verizon
Communications ("Verizon") which accounted for 19% of 2001 revenue.
2
Communications. The communications industry encompasses a wide range of
businesses, including broadband, cable, digital broadcast satellite,
long-distance, local and wireless service providers. In addition to traditional
product and service support solutions, we deliver advanced order management, and
have developed specific end-to-end solutions for Internet service providers and
wireless service providers.
Automotive. In 2000, we significantly expanded our solution set for the
automotive sector with Percepta, LLC ("Percepta"), our joint venture with Ford
Motor Company ("Ford"), as well as through Newgen, acquired in 2000. We help the
world's largest automotive companies through industry-specific, proprietary
solutions, from service reminder programs to warranty management to strategic
up-selling.
Financial Services. Regulatory changes have allowed financial service
providers to expand their product offerings, placing an increased importance on
customer management. As industry leaders integrate new and existing services, we
help align delivery channels and ensure service quality through our financial
services technology solutions, which integrate contact channels such as voice
and email while providing full-feature support for clients and their customers.
In addition, our financial services technology solutions integrate with most
legacy and third-party industry oriented systems. We have also developed
specific end-to-end solutions for Internet, retail banking services and card
services.
Transportation. We provide a variety of customer management solutions to
clients in the transportation industry, including package delivery and travel
companies. In partnership with our clients, our goal is to make customer care a
competitive advantage and increase customer loyalty while managing complex
enterprise-wide systems. Specific solutions include package tracking and
tracing, customer complaint resolution, account inquiries, reservations and VIP
services.
Government. Leveraging nearly 20 years of experience, we streamline the
customer management function for government organizations. By utilizing
well-managed customer interaction centers for traditional customer management
solutions, we allow various government agencies to focus on conducting their
primary business.
Sales and Marketing
We employ a consultative sales approach and hire business development
professionals with experience in industries relating to our key SBUs. Once a
potential client is identified, a team of TeleTech employees, typically
consisting of applications and systems specialists, operations experts, human
resources professionals and other appropriate management personnel, thoroughly
examines the potential client's operations and assesses its current and
prospective customer management goals, needs and strategies. We invest
significant resources during the development of a client relationship, although
our technological capabilities enable us to develop working prototypes of
proposed solutions with minimal capital investment by the client.
We work with our clients to generate a set of detailed requirements, a
development plan and a deployment strategy tailored to the client's specific
needs. After the initial solution is deployed, we conduct regular reviews of the
relationship to ensure client satisfaction, while continually looking for areas
to expand the relationship.
We typically provide customer management solutions pursuant to written
contracts with terms ranging from one to eight years. Often, the contracts
contain renewal or extension options. Under virtually all of our significant
contracts, we generate revenue based on the amount of time customer service
representatives devote to a client's program. In addition, clients are typically
required to pay ongoing fees relating to the education and training of
representatives to implement the client's program, setup and management of the
program, and development and integration of computer software and technology.
Many of the contracts also have price adjustment terms allowing for cost of
living adjustments and/or market changes in agent labor costs. Our client
contracts generally contain provisions that (i) allow us or the client to
terminate the contract upon the occurrence of certain events, (ii) designate the
manner by which we receive payment for our services and (iii) protect the
confidentiality and ownership of information and materials used in connection
with the performance of the contract. Some of our contracts also require our
clients to pay a fee in the event of early termination.
3
Operations
We provide customer management solutions through the operation of 48
state-of-the-art customer interaction centers located in the United States,
Argentina, Australia, Brazil, Canada, China, Northern Ireland, Mexico, New
Zealand, Singapore, Scotland and Spain. As of December 31, 2001, we leased 40
customer interaction centers and managed 8 customer interaction centers.
We apply predetermined site selection criteria to identify locations
conducive to operating large-scale, sophisticated customer management facilities
in a cost-effective manner. We maintain databases covering demographic
statistics and the commercial real estate markets, which are used to produce a
project specific short list on demand. We also aggressively pursue incentives
such as tax abatements, cash grants, low-interest loans, training grants and low
cost utilities. Following comprehensive site evaluations and cost analyses, as
well as client considerations, a specific site is located and a lease is
negotiated and finalized.
Once we take occupancy of a site, we use a standardized development process
to minimize the time it takes to open a new customer interaction center, control
costs and eliminate elements that might compromise success. The site is
retrofitted to exacting requirements that incorporate value engineering, cost
control and scheduling concepts while placing emphasis on the quality of the
work environment. Upon completion, we integrate the new customer interaction
center into the corporate facility and asset management programs. Throughout the
development process, we conduct critical reviews to evaluate the overall
effectiveness and efficiency of the development. Generally, we can establish a
new, fully operational inbound customer interaction center containing 450 or
more workstations within 120 days after a lease is finalized and signed.
During 2001, we closed the first floor of our center in Thornton, Colorado
and subsequently determined to close the second floor as well due to poor
operating performance and low capacity utilization of the location. From time to
time, we assess the expected long-term capacity utilization of our centers.
Accordingly, we may, if deemed necessary, consolidate or shutdown
underperforming centers in order to maintain or improve targeted utilization and
margins.
Quality Assurance
We monitor and measure the quality and accuracy of our customer
interactions through a quality assurance department located at each customer
interaction center. Each department evaluates, on a real-time basis, a
statistically significant percentage of the customer interactions in a day,
across all of the customer interaction mediums utilized within the center. Each
center has the ability to enable its clients to monitor customer interactions as
they occur. Using criteria mutually determined with the client, quality
assurance professionals monitor, evaluate, and provide feedback to the
representatives on a weekly basis. As appropriate, representatives are
recognized for superior performance or scheduled for additional training and
coaching.
Technology
Our customer management solution set is built upon complex,
state-of-the-art technology, which helps maximize the utilization of customer
interaction centers and increase the efficiency of representatives. Interaction
routing technology is designed for rapid response rates while tracking and
workforce management systems facilitate efficient staffing levels, reflecting
historical demands. In addition, our infrastructure and object-oriented software
allows for tracking of each customer interaction, filing the information within
a relational database and generating reports on demand.
We have invested significant resources in designing and developing
industry-specific open-systems software applications and tools and, as a result,
maintain a library of reusable software code for use in future developments. We
run our applications software on open-system, client-server architecture and use
a variety of products developed by third party vendors. We continue to invest
significant resources into the development and implementation of emerging
customer management and technical support technologies.
Human Resources
Our ability to provide high quality comprehensive customer management
solutions hinges largely upon our success in recruiting, hiring and training
large numbers of skilled employees. We primarily offer full-time positions with
competitive salaries and wages and a full range of employee benefits. To aid in
employee retention, we also provide viable career paths.
4
To sustain a high level of service and support to our clients, our
representatives undergo intensive training before managing customer interactions
and receive ongoing training on a regular basis. In addition to learning about
the clients' corporate culture and specific product or service offerings,
representatives receive training in the numerous media we use to effectively
execute our clients' customer management program.
We are committed to the continued education and development of our
employees and believe that providing employees with access to new learning
opportunities contributes to job satisfaction, ensures a higher quality labor
force and fosters loyalty between our employees and the clients we serve.
As of December 31, 2001, we had over 27,000 employees in 12 countries, with
approximately 90% holding full-time positions. Although our industry is very
labor-intensive and traditionally experiences significant personnel turnover, we
seek to manage employee turnover through proactive initiatives. A small
percentage of our non-U.S. employees are subject to collective bargaining
agreements mandated under national labor laws. We believe our relations with our
employees are good.
International Operations
During 2001, we continued our international expansion, which will allow us
the opportunity to build a broader client base, increase the services we can
offer existing multinational clients and leverage our international employee
base in response to business demands.
As of December 31, 2001, we operated seven customer interaction centers in
Spain; six customer interaction centers in Canada; five customer interaction
centers in Australia; three customer interaction centers in New Zealand; two
customer interaction centers in each of Argentina and Mexico; and one customer
interaction center in each of Brazil, China, Northern Ireland, Scotland and
Singapore.
Future international expansion plans may include joint venture or strategic
partnering alliances, as well as the acquisition of businesses with products or
technologies that extend or complement our existing businesses. From time to
time, we engage in discussions regarding restructurings, dispositions,
acquisitions and other similar transactions. Any such transaction could include,
among other things, the transfer, sale or acquisition of significant assets,
businesses or interests, including joint ventures, or the incurrence, assumption
or refinancing of indebtedness, and could be material to our financial condition
and results of operations. We cannot assure that any such discussions will
result in the consummation of any such transaction.
Competition
We believe that we compete primarily with the in-house customer management
operations of our current and potential clients. We also compete with certain
companies that provide customer management services on an outsourced basis,
including APAC Customer Services, Convergys Corporation, SITEL Corporation,
Sykes Enterprises Incorporated, West Corporation, EDS and RMH. We compete
primarily on the basis of quality and scope of services provided, speed and
flexibility of implementation, technological expertise and price. Although the
customer management industry is very competitive and highly fragmented with
numerous small participants, we believe that TeleTech generally does not
directly compete with traditional telemarketing companies, which primarily
provide outbound "cold calling" services.
Recent Developments
On March 14, 2001, we announced that Verizon agreed to honor the terms of
its long-term contract with us, whereby we have been providing services for its
Competitive Local Exchange Carrier ("CLEC") business. As agreed, Verizon has
redirected business from its CLEC operations to other Verizon business units. We
had previously disclosed Verizon's notification of a change in its CLEC
strategy. We cannot assure the new business with Verizon will maintain the same
revenue levels as the CLEC business, which had been operating in excess of
Verizon's contractual commitments. Future revenue levels will be dependent upon
Verizon's decision around the level of volumes that will be directed to the
dedicated Company centers. Verizon's CLEC business accounted for approximately
4% and 14% of the Company's revenues for the years ending December 31, 2001 and
2000, respectively. Verizon's total business accounted for 19% and 20% of the
Company's revenues for the years ended December 31, 2001 and 2000, respectively.
5
On March 14, 2001, we named Kenneth D. Tuchman as chief executive officer
replacing former CEO Scott Thompson who resigned from that position.
Additionally, we announced that Larry Kessler resigned from the position of
chief operating officer.
On May 18, 2001 and August 10, 2001, we amended our existing Revolving
Credit Agreement with a syndicate of banks in order to adjust certain financial
covenants contained in the Revolving Credit Agreement.
On September 17, 2001, pursuant to the SEC's September 14, 2001 Emergency
Order Pursuant to Section 12 (k)(2) of the Securities and Exchange Act of 1934,
"Taking Temporary Action to Respond to Market Developments," the Company issued
a press release announcing that the Company's Board of Directors authorized a
stock repurchase program whereby the Company could repurchase up to 10% of the
Company's common stock. The Company issued a press release on February 19, 2002
announcing that the Company's Board of Directors authorized a stock repurchase
program whereby the Company could repurchase up to $5 million of the Company's
common stock. In September of 2001, TeleTech executed $213,100 of repurchases
acquiring 35,000 shares of the Company's common stock. During February of 2002,
the Company executed an additional $1.1 million of repurchases acquiring 97,811
shares of the Company's common stock.
On October 17, 2001, we named James E. Barlett as Vice Chairman of the
Company.
On October 30, 2001, the Company completed a private debt placement of
$75.0 million (the "Placement") of senior notes. The Placement consists of two
tranches: $60.0 million bearing interest at 7% per annum with a seven-year term
and $15.0 million bearing interest at 7.4% per annum with a 10-year term. Both
tranches are unsecured.
On January 18, 2002, the Company announced an eight-year, $1.2 billion
customer management outsourcing contract with International Business Machines
Corporation ("IBM") to manage and enhance Nextel's customer care centers.
In the fourth quarter of 2000, the Company and its enhansiv subsidiary
executed a transaction, whereby the Company transferred all of its shares of
common stock of enhansiv, inc., a Colorado corporation ("enhansiv"), to enhansiv
holdings, inc., a Delaware corporation ("EHI") in exchange for Series A
Convertible Preferred Stock of EHI. EHI is developing a centralized, open
architecture, customer management solution that incorporates a contact
management database across all customer contact channels. The Company believes
that the EHI technology will allow it to move to a more centralized technology
platform, allowing it to provide more cost effective solutions in a more
efficient manner. As part of the transaction, EHI sold shares of common stock to
a group of investors. These shares represent 100% of the existing common shares
of EHI, which in turn owns 100% of the common shares of enhansiv. In addition,
the Company received an option to purchase approximately 95% of the common stock
of EHI. The Company also agreed to make available to EHI a convertible $7.0
million line of credit, which was fully drawn in the second quarter of 2001.
One of the EHI investors was Kenneth D. Tuchman, the Company's Chairman and
Chief Executive Officer, who acquired 14.4 million shares of EHI common stock
for $3.0 million, representing 42.9% of EHI in the initial transaction.
Subsequent to the initial sale of common stock, EHI sold 9.6 million shares to
Mr. Tuchman for $2.0 million, giving him an additional 12.1% interest in EHI.
Upon Mr. Tuchman's second investment, he entered into a confirmation joinder and
amendment agreement which states that for as long as Mr. Tuchman owns 50% of
EHI's common stock, all action requiring stockholder approval shall require
approval of holders of at least 66-2/3% of EHI common stock. The remaining
equity of $4.0 million, which represents approximately 17% of the fair value of
the assets at inception, comes from unrelated third parties and is at risk.
In June 2001, the Company entered into a transaction whereby the Company
agreed to fund an additional $5.0 million for certain development activities in
exchange for a licensing agreement and the right to convert this additional
investment into Series B Preferred Stock that is convertible at the option of
the Company into EHI's common stock. As of December 31, 2001, $4.9 million of
this additional commitment had been funded. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources."
As discussed above, the Company's Series A Convertible Preferred Stock, its
$7.0 million line of credit and its additional $5.0 million investment are each
convertible into EHI common stock under certain circumstances. Additionally, the
Company's option to purchase 95% of the common stock of EHI is also allowed only
under certain circumstances, none of which currently exist. There is no
assurance that the Company will either convert its convertible securities or
exercise its purchase option.
6
As a preferred stockholder, the Company accounts for its investment in EHI
under the equity method of accounting. Accordingly, the Company records all of
EHI's losses in excess of the value of all subordinate equity investments in EHI
(common stock). The Company began reflecting EHI losses during the second
quarter of 2001. These losses, which totaled $7.7 million, are included as a
separate line item in other income (expense) in the accompanying consolidated
statements of operations. During 2000, the Company did not record any losses
from EHI subsequent to the sale of common stock.
During the second quarter of 2001, after EHI was unsuccessful in raising
additional outside capital, the Company concluded that its investment in EHI
exceeded its fair value and such decline was other than temporary. As a result,
the Company recorded a $16.5 million charge to adjust the investment's carrying
value down to its estimated fair value. The Company's net investment in EHI of
$3.8 million at December 31, 2001 is included in other assets in the
accompanying consolidated balance sheets. EHI has no outside debt or other
outstanding borrowings other than that owed to the Company.
Management of EHI believe that they have sufficient cash reserves and
working capital to fund EHI through at least March 31, 2002, however, EHI
expects to require an additional $5 to $6 million of funding during 2002. If the
Company authorizes additional funding for EHI, it is not expected to materially
affect the Company's liquidity or the availability of or requirements for
capital resources. There can be no assurance that the Company will authorize
additional funding for EHI, or that EHI will obtain funding from other sources.
In March 2000, the Company and State Street Bank and Trust Company ("State
Street") entered into a lease agreement whereby State Street acquired 12 acres
of land in Arapahoe County, Colorado for the purpose of constructing a new
corporate headquarters for the Company (the "Planned Headquarters Building").
Subsequently, management of the Company decided to terminate the lease agreement
as it was determined that the Planned Headquarters Building would be unable to
accommodate the Company's anticipated growth. The Company recorded a $9.0
million loss on the termination of the lease in 2000, which is included in the
accompanying consolidated statements of operations.
In March 2001, the Company acquired from State Street the Planned
Headquarters Building being constructed on its behalf for approximately $15.0
million and incurred additional capital expenditures to complete construction of
the building. During the second quarter of 2001, after receiving various offers
for the Planned Headquarters Building that were less than the estimated
completed cost, the Company determined that the fair value of the building, less
the cost to complete and sell, exceeded the carrying amount by $7.0 million.
Accordingly, the Company recorded a loss on real estate for sale of $7.0
million, which is included in the accompanying consolidated statements of
operations. In October 2001, the Company completed and sold the Planned
Headquarters Building to a third party receiving net proceeds of approximately
$11.8 million.
Forward-Looking Information May Prove Inaccurate
Some of the information presented in this Annual Report on Form 10-K
constitutes "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. These forward-looking statements
include, but are not limited to, statements that include terms such as "may,"
"will," "intend," "anticipate," "estimate," "expect," "continue," "believe,"
"plan," or the like, as well as all statements that are not historical facts.
Forward-looking statements are inherently subject to risks and uncertainties
that could cause actual results to differ materially from current expectations.
Although we believe our expectations are based on reasonable assumptions within
the bounds of our knowledge of our business and operations, there can be no
assurance that actual results will not differ materially from expectations.
Factors that could cause actual results to differ from expectations include:
Dependence on the Success of Our Clients' Products. In substantially all of
our client programs, we generate revenues based, in large part, on the amount of
time that our personnel devote to a client's customers. Consequently, and due to
the inbound nature of our business, the amount of revenues generated from any
particular client program is dependent upon consumers' interest in, and use of,
the client's products and/or services. Furthermore, a significant portion of our
expected revenues and planned capacity utilization relate to recently introduced
product or service offerings of our clients. For example, in August 2000 Verizon
announced that it was discontinuing its CLEC business. Verizon's CLEC business
accounted for approximately 4% and 14% of our 2001 and 2000 revenues,
respectively. All Verizon business accounted for 19% and 20% of our 2001 and
2000 revenues, respectively. There can be no assurance as to the number of
consumers who will be attracted to the products and services of our clients, and
who will therefore need our services, or that our clients will develop new
products or services that will require our services.
7
Risks Associated with an Economic Downturn. Our ability to enter into new
multi-year contracts, particularly large, complex client agreements, may be
dependent upon the general macroeconomic environment in which our clients and
their customers are operating. Continued weakening of the U.S. and/or global
economy could cause longer sales cycles, delays in closing new business
opportunities and slower growth in existing contracts.
Risks Associated with Financing Activities. From time to time, we may need
to obtain debt or equity financing for capital expenditures for payment of
existing obligations and to replenish cash reserves. There can be no assurance
that we will be able to obtain such debt or equity financing, or that any such
financing would be on terms acceptable to us.
Reliance on a Few Major Clients. We strategically focus our marketing
efforts on developing long-term relationships with large, multinational
companies in targeted industries. As a result, we derive a substantial portion
of our revenues from relatively few clients. There can be no assurance that we
will not become more dependent on a few significant clients, that we will be
able to retain any of our largest clients, that the volumes or profit margins of
our most significant programs will not be reduced, or that we would be able to
replace such clients or programs with clients or programs that generate
comparable profits. Consequently, the loss of one or more of our significant
clients could have a material adverse effect on our business, results of
operations or financial condition.
Risks Associated with Our Contracts. Most of our contracts do not ensure
that we will generate a minimum level of revenues, and the profitability of each
client program may fluctuate, sometimes significantly, throughout the various
stages of such program. Although we seek to sign multiyear contracts with our
clients, our contracts generally enable the clients to terminate the contract,
or terminate or reduce customer interaction volumes, on relatively short notice.
Although some contracts require the client to pay a contractually agreed amount
in the event of early termination, there can be no assurance that we will be
able to collect such amount or that such amount, if received, will sufficiently
compensate us for our investment in the canceled program or for the revenues we
may lose as a result of the early termination. We are usually not designated as
our client's exclusive service provider, however, we believe that meeting our
clients' expectations can have a more significant impact on revenues generated
by us than the specific terms of our client contracts. In addition, some of our
contracts limit the aggregate amount we can charge for our services, and some
prohibit us from providing services to the client's direct competitors that are
similar to the services we provide to such client.
Risks Associated with International Operations and Expansion. We currently
conduct business in Argentina, Australia, Brazil, Canada, China, Northern
Ireland, Mexico, New Zealand, Singapore, Scotland, Spain and the United States.
One component of our growth strategy is continued international expansion. There
can be no assurance that we will be able to (i) increase our market share in the
international markets in which we currently conduct business or (ii)
successfully market, sell and deliver our services in additional international
markets. In addition, there are certain risks inherent in conducting
international business, including exposure to currency fluctuations, longer
payment cycles, greater difficulties in accounts receivable collection,
difficulties in complying with a variety of foreign laws, including foreign
labor laws, unexpected changes in regulatory requirements, difficulties in
managing capacity utilization and in staffing and managing foreign operations,
political instability and potentially adverse tax consequences. Any one or more
of these factors could have a material adverse effect on our international
operations and, consequently, on our business, results of operations or
financial condition.
Risks Associated with Cost and Price Increases. A few of our contracts
allow us to increase our service fees if and to the extent certain cost or price
indices increase; however, most of our contracts do not contain such provisions
and some contracts require us to decrease our service fees if, among other
things, we do not achieve certain performance objectives. Increases in our
service fees that are based upon increases in cost or price indices may not
fully compensate us for increases in labor and other costs incurred in providing
services.
Difficulties of Managing Capacity Utilization. Our profitability is
influenced significantly by our customer interaction center capacity
utilization. We attempt to maximize utilization; however, because almost all of
our business is inbound, we have significantly higher utilization during peak
(weekday) periods than during off-peak (night and weekend) periods. We have
experienced periods of idle capacity, particularly in our multi-client customer
interaction centers. In addition, we have experienced, and in the future may
experience, at least in the short-term, idle peak period capacity when we open a
new customer interaction center or terminate or complete a large client program.
From time to time we assess the expected long-term capacity utilization of our
centers. Accordingly, we may, if deemed necessary, consolidate or shutdown
under-performing centers in order to maintain or improve targeted utilization
and margins. There can be no assurance that we will be able to achieve or
maintain optimal customer interaction center capacity utilization. During 2001,
we determined to close our center in Thornton, Colorado due to poor operating
performance and low capacity utilization.
8
Difficulties of Managing Rapid Growth. With the exception of 2001, we have
experienced rapid growth over the past several years. Continued future growth
will depend on a number of factors, including the general macroeconomic
conditions of the global economy and our ability to (i) initiate, develop and
maintain new client relationships and expand our existing client programs; (ii)
recruit, motivate and retain qualified management and front-line personnel;
(iii) rapidly identify, acquire or lease suitable customer interaction center
facilities on acceptable terms, and complete the buildout of such facilities in
a timely and economic fashion; and (iv) maintain the high quality of the
solutions we provide to our clients. There can be no assurance we will be able
to effectively manage our expanding operations or maintain our profitability. If
we are unable to effectively manage our growth, our business, results of
operations or financial condition could be materially adversely affected.
Risks Associated with Rapidly Changing Technology. Our business is highly
dependent on our computer and telecommunications equipment and software
capabilities. Our failure to maintain the superiority of our technological
capabilities or to respond effectively to technological changes could have a
material adverse effect on our business, results of operations or financial
condition. Our continued growth and future profitability will be highly
dependent on a number of factors, including our ability to (i) expand our
existing solutions offerings; (ii) achieve cost efficiencies in our existing
customer interaction center operations; and (iii) introduce new solutions that
leverage and respond to changing technological developments. There can be no
assurance that technologies or services developed by our competitors will not
render our products or services non-competitive or obsolete, that we can
successfully develop and market any new services or products, that any such new
services or products will be commercially successful or that the integration of
automated customer support capabilities will achieve intended cost reductions.
Dependence on Key Personnel. Continued growth and profitability will depend
upon our ability to maintain our leadership infrastructure by recruiting and
retaining qualified, experienced executive personnel. In March 2001, we named
Kenneth D. Tuchman, founder and Chairman of our board, as Chief Executive
Officer following the resignations of our former CEO and COO. In October 2001,
we named James E. Barlett as Vice Chairman of the Company. Competition in our
industry for executive-level personnel is strong and there can be no assurance
that we will be able to hire, motivate and retain highly effective executive
employees, or that we can do so on economically feasible terms.
Dependence on Labor Force. Our success is largely dependent on our ability
to recruit, hire, train and retain qualified employees. Our industry is very
labor-intensive and has experienced high personnel turnover. A significant
increase in the employee turnover rate could increase recruiting and training
costs and decrease operating effectiveness and productivity. Also, if we obtain
several significant new clients or implement several new, large-scale programs,
we may need to recruit, hire and train qualified personnel at an accelerated
rate. We may not be able to continue to hire, train and retain sufficient
qualified personnel to adequately staff new customer management programs.
Because a significant portion of our operating costs relate to labor costs, an
increase in wages, costs of employee benefits or employment taxes could have a
material adverse effect on our business, results of operations or financial
condition. In addition, certain of our customer interaction centers are located
in geographic areas with relatively low unemployment rates, which could make it
more difficult and costly to hire qualified personnel.
Highly Competitive Market. We believe the market in which we operate is
fragmented and highly competitive and competition is likely to intensify in the
future. We compete with small firms offering specific applications, divisions of
large entities, large independent firms and, most significantly, the in-house
operations of clients or potential clients. A number of competitors may develop
greater capabilities and resources than ours. Similarly, there can be no
assurance that additional competitors with greater resources than us will not
enter our market. Because our primary competitors are the in-house operations of
existing or potential clients, our performance and growth could be adversely
affected if our existing or potential clients decide to provide in-house
customer management services they currently outsource, or retain or increase
their in-house customer service and product support capabilities. In addition,
competitive pressures from current or future competitors also could cause our
services to lose market acceptance or result in significant price erosion, which
could have a material adverse effect upon our business, results of operations or
financial condition.
Difficulties of Completing and Integrating Acquisitions and Joint Ventures.
In the past, we have pursued, and in the future we may continue to pursue,
strategic acquisitions of companies with services, technologies, industry
specializations or geographic coverage that extend or complement our existing
business. There can be no assurance that we will be successful in acquiring such
companies on favorable terms or in integrating such companies into our existing
businesses, or that any completed acquisition will enhance our business, results
of operations or financial condition. We have faced, and in the future may
continue to face, increased competition for acquisition opportunities, which may
inhibit our ability to consummate suitable acquisitions on favorable terms. We
may require additional debt or
9
equity financing for future acquisitions, and such financing may not be
available on terms favorable to us, if at all. As part of our growth strategy,
we also may pursue strategic alliances in the form of joint ventures and
partnerships. Joint ventures and partnerships involve many of the same risks as
acquisitions, as well as additional risks associated with possible lack of
control. There can be no assurance that we will successfully manage these risks.
Risk of Business Interruption. Our operations are dependent upon our
ability to protect our customer interaction centers, computer and
telecommunications equipment and software systems against damage from fire,
power loss, telecommunications interruption or failure, natural disaster and
other similar events. In the event we experience a temporary or permanent
interruption at one or more of our customer interaction centers, through
casualty, operating malfunction or otherwise, our business could be materially
adversely affected and we may be required to pay contractual damages to some
clients or allow some clients to terminate or renegotiate their contracts with
us. We maintain property and business interruption insurance; however, such
insurance may not adequately compensate us for any losses we may incur.
Variability of Quarterly Operating Results. We have experienced and could
continue to experience quarterly variations in operating results because of a
variety of factors, many of which are outside our control. Such factors include
the timing of new contracts; labor strikes and slowdowns in the business of our
clients; reductions or other modifications in our clients' marketing and sales
strategies; the timing of new product or service offerings; the expiration or
termination of existing contracts or the reduction in existing programs; the
timing of increased expenses incurred to obtain and support new business;
changes in the revenue mix among our various service offerings; and the seasonal
pattern of certain businesses served by us. In addition, we make decisions
regarding staffing levels, investments and other operating expenditures based on
our revenue forecasts. If our revenues are below expectations in any given
quarter, our operating results for that quarter would likely be materially
adversely affected.
Foreign Currency Exchange Risk. With an expanding global reach, we are
increasingly exposed to the market risk associated with foreign currency
exchange fluctuations. Although we have entered into forward financial
instruments to manage and reduce the impact of changes in foreign currency
rates, there can be no assurance that such instruments will protect us from
foreign currency fluctuations or that we have or will have instruments in place
with respect to the most volatile currencies.
Dependence on Key Industries. We generate a majority of our revenues from
clients in the communications, automotive, transportation, financial services
and government services industries. Our growth and financial results are largely
dependent on continued demand for our services from clients in these industries
and current trends in such industries to outsource certain customer management
services. A general economic downturn in any of these industries or a slowdown
or reversal of the trend in any of these industries to outsource certain
customer management services could have a material adverse effect on our
business, results of operations or financial condition.
You should not construe these cautionary statements as an exhaustive list.
We cannot always predict what factors would cause actual results to differ
materially from those indicated in our forward-looking statements. All
cautionary statements should be read as being applicable to all forward-looking
statements wherever they appear. We do not undertake any obligation to publicly
update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise. In light of these risks, uncertainties
and assumptions, the forward-looking events discussed herein might not occur.
See Note 2 to the consolidated financial statements for information on
Business Segment Reporting and Geographic Region Disclosure.
10
Item 2. Properties.
Our corporate headquarters are located in Englewood, Colorado, in
approximately 264,000 square feet of leased office space. As of December 31,
2001, we leased (unless otherwise noted) and operated the following customer
interaction centers:
Number of Total
------------ ------------
Year Opened Production Number of Training Number of
----------- ------------ ------------------ ------------
Location or Acquired Workstations Workstations/1/ Workstations
- --------------------------------- ----------- ------------ --------------- ------------
U.S. Outsourced Centers
Birmingham, Alabama 1999 450 113 563
Deland, Florida 2000 285 60 345
Enfield, Connecticut 1998 411 81 492
North Hollywood, California 2000 697 125 822
Kansas City, Kansas 1998 500 230 730
Melbourne, Florida 2000 525 75 600
Morgantown, West Virginia 2000 550 115 665
Moundsville, West Virginia 1998 400 59 459
Niagara Falls, New York 1997 570 96 666
Stockton, California 2000 450 80 530
Thornton, Colorado, Second Floor 1996 416 58 474
Topeka, Kansas 1999 510 100 610
Uniontown, Pennsylvania 1998 570 76 646
Database Marketing and Consulting
San Diego, California 2000 272 28 300
International Outsourced Centers
Auckland, New Zealand 1996 274 73 347
Barcelona, Spain, Center 1 2000 209 0 209
Barcelona, Spain, Center 2 2001 183 0 183
Belfast, Ireland 2001 583 116 699
Buenos Aires, Argentina, Center 1 1999 606 31 637
Buenos Aires, Argentina, Center 2 1999 194 0 194
Canberra, Australia 2000 102 0 102
Glasgow, Scotland 1996 757 42 799
Hong Kong, China 2000 268 0 268
Leon, Mexico 2000 1,200 100 1,300
London, Ontario 2000 556 120 676
Madrid, Spain, Center 1 2000 209 0 209
Madrid, Spain, Center 2 2000 82 0 82
Melbourne, Australia 1997 606 99 705
Mexico City, Mexico 1997 940 96 1,036
New Castle, Australia 2001 112 0 112
North Bay, Ontario 2000 304 48 352
Sao Paulo, Brazil 1998 365 24 389
Seville, Spain 2000 217 0 217
Shepard, Ontario 1998 251 40 291
Sudbury, Ontario 1999 538 71 609
Sydney, Australia 1996 338 47 385
Tampines, Singapore 1998 197 20 217
11
Number of Total
------------ ------------
Year Opened Production Number of Training Number of
----------- ------------ ------------------ ------------
Location or Acquired Workstations Workstations/1/ Workstations
- --------------------------------- ----------- ------------ --------------- ------------
International Outsourced Centers (cont.)
Toronto, Ontario 2000 594 60 654
Valencia, Spain 2000 138 0 138
Zaragoza, Spain 2000 114 0 114
Managed Centers/2/
Christchurch, New Zealand 2000 80 0 80
Greenville, South Carolina 1996 611 105 716
La Trobe Valley, Australia 2001 251 24 275
Montbello, Colorado 1996 486 182 668
Tampa, Florida 1996 652 90 742
Toronto, Ontario 1998 400 80 480
Tucson, Arizona 1996 795 90 885
Wellington, New Zealand 2001 75 0 75
Total number of workstations 19,893 2,854 22,747
/1/ Training workstations are fully operative as production workstations should
the Company require additional capacity.
/2/ Centers are leased or owned by TeleTech's clients, and managed by TeleTech
on behalf of such clients pursuant to facilities management agreements.
The leases for our U.S. customer interaction centers have terms ranging
from three to 20 years and generally contain renewal options. We believe that
our existing customer interaction centers are suitable and adequate for our
current operations. We target capacity utilization in our fully outsourced
centers at 85% of our available workstations during peak (weekday) periods. Our
plans for 2002 include plans for several new international centers.
Due to the inbound nature of our business, we experience significantly
higher capacity utilization during peak periods than during off-peak (night and
weekend) periods. We may be required to open or expand customer interaction
centers to create the additional peak period capacity necessary to accommodate
new or expanded customer management programs. The opening or expansion of a
customer interaction center may result, at least in the short term, in idle
capacity during peak periods until any new or expanded program is implemented
fully.
Item 3. Legal Proceedings.
From time to time, the Company is involved in litigation, most of which is
incidental to its business. In the Company's opinion, no litigation to which the
Company currently is a party is likely to have a material adverse effect on the
Company's results of operations or financial condition.
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, 2001.
12
Executive Officers of TeleTech Holdings, Inc.
In accordance with General Instruction G(3) of this Form 10-K, the
following information is included as an additional item in Part I:
Date
--------
Position
--------
Name Position Age Assumed
- ------------------------ ---------------------------------------------------------------------- --- --------
Kenneth D. Tuchman/1/ Chairman and Chief Executive Officer 42 2001
James E. Barlett/2/ Vice Chairman 58 2001
Christopher J. Batson/3/ Vice President--Treasurer 34 2001
R. Sean Erickson/4/ President and General Manager--North America Operations and Technology 40 1997
Michael E. Foss/5/ Executive Vice President--Corporate Development 44 1999
James B. Kaufman/6/ Executive Vice President, General Counsel and Secretary 40 1999
Margot M. O'Dell/7/ Chief Financial Officer and Executive Vice President of Administration 37 2000
Jeffrey S. Sperber/8/ Vice President--Controller 37 2001
/1/ Mr. Tuchman founded TeleTech's predecessor company in 1982 and has served
as the Chairman of the Board of Directors since TeleTech's formation in
1994. Mr. Tuchman served as the Company's President and Chief Executive
Officer from the Company's inception until the appointment of Scott
Thompson as Chief Executive Officer and President in October of 1999. In
March 2001, Mr. Tuchman resumed the position of Chief Executive Officer
following the resignation of Mr. Thompson in March of 2001. Mr. Tuchman has
also held various board and officer positions with a number of TeleTech's
affiliates, and Mr. Tuchman serves on the board of Ocean Journey and the
Boy Scouts of America. Mr. Tuchman is also a member of the State of
Colorado Governor's Commission on Science and Technology.
/2/ Mr. Barlett has served as a director of TeleTech since February 2000 and
Vice Chairman of TeleTech since October 2001. Before joining TeleTech as
Vice Chairman, Mr. Barlett served as the President and Chief Executive
Officer of Galileo International, Inc. from 1994 to 2001, was elected
Chairman in 1997 and served until 2001. Prior to joining Galileo, Mr.
Barlett served as Executive Vice President of Worldwide Operations and
Systems for MasterCard International Corporation, where he was also a
member of the MasterCard International Operations Committee. Previously,
Mr. Barlett was Executive Vice President of Operations for NBD Bankcorp,
Vice Chairman of Cirrus, Inc., and a partner with Touche Ross and Co.,
currently known as Deloitte and Touche. Mr. Barlett also serves on the
board of Korn/Ferry International.
/3/ Before joining TeleTech in January 2001, Mr. Batson served as an Account
Director within the Teradata Division of NCR Corporation, a data
warehousing and customer relationship management solution provider. During
his four years with NCR, Mr. Batson also held several financial management
positions within NCR's Treasury Department, including Director of Capital
Markets & Corporate Finance and Manager of Mergers & Acquisitions. Before
joining NCR in 1997, Mr. Batson was a Senior Consultant with Deloitte
Consulting.
/4/ Before joining TeleTech in 1997, Mr. Erickson served in a variety of
customer service and operations strategy positions at TeleCommunications,
Inc. ("TCI") including Chief Operating Officer of a call center joint
venture between TCI and Primestar Satellite, Inc. Before joining TCI in
1995, Mr. Erickson held numerous sales, marketing, and customer service
positions at MCI Telecommunications, including Director of Customer
Retention Marketing, Director of Operator Services, and Executive Director
of Mass Markets Customer service with responsibility for 12 call centers
and 5,000 employees, nationwide.
/5/ Before joining TeleTech in 1999, Mr. Foss served as Chief Executive Officer
of Picture Vision, Inc., a subsidiary of Eastman Kodak that focused on
Internet imaging. Mr. Foss was also General Manager of online digital
services and Vice President of consumer imaging for Kodak. Prior to this
position, Mr. Foss was General Manager of Components, Services and Media
for Kodak's Business Imaging Systems Division. Before joining Kodak, Mr.
Foss served as Senior Vice President and Chief Financial Officer for
Rally's and held numerous positions with IBM, including Director of
Financial Planning, Worldwide Sales and Services, and Director of Corporate
Treasury Operations.
13
/6/ Before joining TeleTech in 1999, Mr. Kaufman served as Vice President--Law
at Orion Network Systems (renamed Loral Cyberstar following its acquisition
by Loral Space & Communications in March 1998), a publicly traded
international satellite-based communications company. Before joining Orion
in 1994, Mr. Kaufman was engaged in private law practice, most recently
with Proskauer Rose, a national law firm.
/7/ Before joining TeleTech in 2000, Ms. O'Dell served as Senior Vice President
of Finance for Global Network Operations at Qwest, formerly U S WEST. Prior
to that position, Ms. O'Dell served as Vice President of Human Resources,
Employee and Retiree Services and as Executive Director of Corporate
Benefits for U S WEST. Prior to U S WEST, Ms. O'Dell was Vice President
Finance and Operations for FHP Healthcare's Eastern Division.
/8/ Before joining TeleTech in March of 2001, Mr. Sperber served as Chief
Financial Officer of USOL Holdings, Inc., a publicly held company providing
bundled video, voice and data services to residents of multi-family housing
units. Prior to joining USOL in 1997, Mr. Sperber served as the Controller
for TCI Wireline, Inc., a subsidiary of TCI that focused on launching local
telephone service and managing TCI's telephone investments in Sprint PCS
and Teleport Communications Group.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The Company's common stock is traded on the Nasdaq Stock Market under the
symbol "TTEC." The following table sets forth the range of the high and low
sales prices per share of the common stock for the fiscal quarters indicated as
reported on the Nasdaq Stock Market:
High Low
------ ------
First Quarter 2001 $21.31 $ 7.25
Second Quarter 2001 $ 9.85 $ 6.25
Third Quarter 2001 $ 9.00 $ 5.39
Fourth Quarter 2001 $14.75 $ 6.92
First Quarter 2000 $43.69 $23.38
Second Quarter 2000 $41.19 $27.13
Third Quarter 2000 $38.31 $19.75
Fourth Quarter 2000 $30.25 $16.13
As of March 25, 2002, there were 76,921,588 shares of common stock
outstanding, held by approximately 166 stockholders of record.
TeleTech did not declare or pay any dividends on its common stock in 2001
or 2000 and it does not expect to do so in the foreseeable future. Management
anticipates that all cash flow generated from operations in the foreseeable
future will be retained and used to develop and expand TeleTech's business
however, the Board of Directors has authorized the repurchase of up to $5
million of the Company's common stock. 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.
Additionally, TeleTech's Revolving Credit Agreement and Senior Notes described
under "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Liquidity and Capital Resources" both restrict TeleTech's ability
to pay dividends.
14
Item 6. Selected Financial Data.
The following selected financial data should be read in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of
Operations and the Financial Statements and the related notes appearing
elsewhere in this report. The financial information for years prior to 2000 have
been restated to reflect the August 2000 business combination with Contact
Center Holdings, S.L. and the December 2000 business combination with Newgen
Results Corporation. The financial information for years prior to 1998 have been
restated to reflect the June 1998 business combinations with Electronic Direct
Marketing Ltd. and Digital Creators, Inc. All of the mentioned business
combinations were accounted for using the pooling-of-interests method of
accounting.
Year Ended December 31,
-----------------------------------------------------------------
2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
(in thousands, except per share and operating data)
Statement of Operations Data:
Revenues $916,144 $885,349 $604,264 $424,877 $311,097
Costs of services 587,423 557,681 403,648 282,689 202,906
SG&A and other operating expenses 237,253/5/ 206,750/4/ 117,758 90,952 65,204
Depreciation and amortization 60,308 48,001 32,661 20,856 11,331
Income from operations 31,160 72,917 50,197 30,380 31,656
Other income (expense) (31,401)/6/ 49,386/3/ 7,561/2/ 68/1/ 1,881
Provision for income taxes 174 46,938 20,978 13,344 14,206
Minority interest (1,510) (1,559) -- -- --
Net income (loss) $ (1,925) $ 73,806 $ 36,780 $ 17,104 $ 19,331
Net income (loss) per share--
Basic $ (0.03) $ 1.00 $ 0.51 $ 0.24 $ 0.30
Diluted $ (0.03) $ 0.93 $ 0.49 $ 0.24 $ 0.27
Average shares outstanding--
Basic 75,804 74,171 70,557 66,228 64,713
Diluted 75,804 79,108 74,462 71,781 70,969
Operating Data:
Number of production workstations 19,893 20,600 13,800 10,100 6,800
Number of customer interaction centers 48 50 33 26 20
Balance Sheet Data:
Working capital $185,205 $173,123 $111,850 $ 68,137 $ 88,445
Total assets 573,939 580,899 362,579 251,729 207,249
Long-term debt, net of current portion 83,997 74,906 27,404 7,660 11,001
Redeemable convertible preferred stock -- -- -- 16,050 14,679
Total stockholders' equity 347,950 363,365 253,145 157,931 132,586
/1/ Includes non-recurring $1.3 million of business combination expenses
relating to two pooling-of-interest transactions.
/2/ Includes a non-recurring $6.7 million gain from a contract settlement
payment made by a former client.
/3/ Includes the following non-recurring items: a $57.0 million gain on the
sale of securities, $10.5 million of business combination expenses relating
to two pooling-of-interest transactions, and a $4.0 million gain on the
sale of a subsidiary.
/4/ Includes the following non-recurring items: an $8.1 million loss on the
closure of a subsidiary and three customer interaction centers and a $9.0
million loss on the termination of a lease on the Company's planned
headquarters building.
/5/ Includes the following non-recurring items: $18.5 million of restructuring
charges related to the termination of approximately 500 employees, a $7.7
million loss on the closure of a customer interaction center and a $7.0
million loss on the sale of the Company's planned headquarters building.
/6/ Includes a non-recurring loss of $16.5 million for an other than temporary
decline in value of an equity investment and a $0.7 million charge for a
workforce reduction for a non-consolidated subsidiary.
15
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Special Note: Certain statements set forth below under this caption constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. See "Forward Looking Information May Prove
Inaccurate" on page 7 for additional factors relating to such statements.
Overview
The Company classifies its business activities into four fundamental
segments: North American outsourcing, international outsourcing, database
marketing and consulting, and corporate activities. North American outsourcing
consists of customer management services provided in the U.S. and Canada. North
American and international outsourcing also include facilities management
arrangements (client owned centers). These segments are consistent with the
Company's management of the business and generally reflect its internal
financial reporting structure and operating focus. North American and
international outsourcing provide comprehensive customer management solutions.
Database marketing and consulting provide outsourced database management, direct
marketing and related customer retention services for automobile dealerships and
manufacturers. Included in corporate activities are general corporate expenses,
operational management expenses not attributable to any other segment and
technology services. Segment accounting policies are the same as those used in
the consolidated financial statements. There are no significant transactions
between the reported segments for the periods presented.
TeleTech generates its revenues primarily by providing customer management
solutions. The Company's fully outsourced customer interaction centers serve
either multiple clients (multi-client centers) or one dedicated client
(dedicated centers). The Company bills for its services based primarily on the
amount of time TeleTech representatives devote to a client's program, and
revenues are recognized as services are provided. The Company also derives
revenues from consulting services, including the sale of customer interaction
center and customer management technology, automated customer support, database
management, systems integration, Web-based applications and distance-based
learning and education. These consulting and technology revenues historically
have not been a significant component of the Company's revenues. The Company
seeks to enter into multiyear contracts with its clients that cannot be
terminated for convenience except upon the payment of a termination fee. The
majority of the Company's revenues are, and the Company anticipates that the
majority of its future revenues will continue to be, from multiyear contracts.
However, the Company does provide some programs on a short-term basis and the
Company's operations outside of North America are characterized by shorter-term
contracts. The Company's ability to enter into new multiyear contracts,
particularly large complex opportunities, may be dependent upon the
macroeconomic environment in general and the specific industry environments in
which its customers are operating. A weakening of the U.S. and/or global economy
could cause longer sales cycles or delays in closing new business opportunities.
As a result of a weakening global economy, the Company encountered delays in
both the ramp up of some existing client programs as well as the closing of
sales opportunities for large customer care programs during 2001.
TeleTech's profitability is significantly influenced by its customer
interaction center capacity utilization. The Company seeks to optimize new and
existing capacity utilization during both peak (weekday) and off-peak (night and
weekend) periods to achieve maximum fixed cost absorption. Historically, the
majority of the Company's revenues have been generated during peak periods.
TeleTech may be adversely impacted by idle capacity in its fully outsourced
centers if prior to the opening or expansion of a customer interaction center,
the Company has not contracted for the provision of services or if a client
program does not reach its intended level of operations on a timely basis. In
addition, the Company can also be adversely impacted by idle capacity in its
facilities management contracts. In a facilities management contract, the
Company does not incur the costs of the facilities and equipment; however, the
costs of the management team supporting the customer interaction center are
semi-fixed in nature, and absorption of these costs will be negatively impacted
if the customer interaction center has idle capacity. The Company attempts to
plan the development and opening of new customer interaction centers to minimize
the financial impact resulting from idle capacity. In planning the opening of
new centers or the expansion of existing centers, management considers numerous
factors that affect its capacity utilization, including anticipated expirations,
reductions, terminations or expansions of existing programs, and the size and
timing of new client contracts that the Company expects to obtain. The Company
continues to concentrate its marketing efforts toward obtaining larger, more
complex, strategic customer management programs. As a result, the time required
to negotiate and execute an agreement with the client can be significant. To
enable the Company to respond rapidly to changing market demands, implement new
programs and expand existing programs, TeleTech may be required to commit to
additional capacity prior to the contracting of additional business, which may
result in idle capacity. TeleTech targets capacity utilization in its fully
outsourced centers at 85% of its available workstations during the weekday
period. During 2001, the Company carried approximately four customer interaction
centers of excess capacity above and beyond normal expected levels. From time to
time the
16
Company assesses the expected long-term capacity utilization of its centers.
Accordingly, the Company may, if deemed necessary, consolidate or shutdown
under-performing centers in order to maintain or improve targeted utilization
and margins.
The Company records costs specifically associated with client programs as
costs of services. These costs, which include direct labor wages and benefits,
telecommunication charges and certain facility costs are primarily variable in
nature. All other expenses of operations, including technology support, sales
and marketing, human resource management and other administrative functions and
customer interaction center operational expenses that are not allocable to
specific programs, are recorded as selling, general and administrative ("SG&A")
expenses. SG&A expenses tend to be either semi-variable or fixed in nature. The
majority of the Company's operating expenses have consisted of labor costs.
Representative wage rates, which comprise the majority of the Company's labor
costs, have been and are expected to continue to be a key component of the
Company's expenses. Some of the Company's contracts with its clients contain
clauses allowing adjustment of billing rates in accordance with wage inflation.
The cost characteristics of TeleTech's fully outsourced programs differ
significantly from the cost characteristics of its facilities management
programs. Under facilities management programs, customer interaction centers and
the related equipment are owned by the client but are staffed and managed by
TeleTech. Accordingly, facilities management programs have higher costs of
services as a percentage of revenues and lower SG&A expenses as a percentage of
revenues than fully outsourced programs. Additionally, the cost characteristics
of the Company's dedicated centers differ from the cost characteristics of its
multi-client centers. Dedicated centers have lower SG & A expenses than
multi-client centers as they do not require as many resources for management and
other administrative functions. Accordingly, multi-client centers have higher SG
& A as a percentage of revenues than dedicated centers. As a result, the Company
expects its overall gross margin will continue to fluctuate on a
quarter-to-quarter basis as revenues attributable to fully outsourced programs
vary in proportion to revenues attributable to facilities management programs.
Management believes the Company's operating margin, which is income from
operations expressed as a percentage of revenues, is a better measure of
"profitability" on a period-to-period basis than gross margin. Operating margin
may be less subject to fluctuation as the proportion of the Company's business
portfolio attributable to fully outsourced programs versus facilities management
programs changes. Revenue from facilities management contracts represented
11.8%, 13.5% and 15.6% of consolidated revenues in 2001, 2000 and 1999,
respectively.
The Company has used business combinations and acquisitions to expand the
Company's international customer management operations and to obtain
complementary technology solution offerings to extend its product line and
vertical market presence. The following is a summary of this activity.
International Operations
Consideration
------------------------
Locations Shares Cash Date
------------------------------- --------- ------------ ------------
iCcare Limited Hong Kong, China 74,688 $2.0 million October 2000
Contact Center Holdings, S.L. Barcelona, Spain 3,264,000 -- August 2000
Smart Call, S.A. & Connect, S.A. Buenos Aires, Argentina -- $8.5 million March 1999 &
October 1999
Outsource Informatica, Ltda. Sao Paulo, Brazil 606,343 -- August 1998
EDM Electronic Direct Marketing, Ltd. Toronto, Ontario, Canada 1,783,444 -- June 1998
Telemercadeo Integral, S.A. Mexico City, Mexico 100,000 $2.4 million May 1997
TeleTech International Pty Limited Sydney, Australia and Auckland,
New Zealand 970,240 $2.3 million January 1996
17
Technology and Services
Consideration
-------------------------
Company Description Shares Cash Date
---------------------------------- --------- ------------- -------------
Newgen Results Corporation Database marketing and
consulting 8,283,325 -- December 2000
Assets of the customer care division of Provider of CRM support for the
Boston Communications Group/c/ wireless industry -- $13.0 million November 2000
FreeFire assets of Information
Management Associates/b/ Marketing and software solutions -- $ 1.0 million June 2000
Pamet River, Inc./a/ Database marketing and
consulting 285,711 $ 1.8 million March 1999
Cygnus Computer Associates/b/ Provider of systems integration
and call center software solutions 324,744 $ 0.7 million December 1998
Digital Creators, Inc./d/ Developer of Web-based
applications and distance-based
learning and education 1,069,000 -- June 1998
Intellisystems, Inc./b/ Developer of automated product
support systems 344,487 $ 2.0 million February 1998
/a/ Pamet River was closed in September of 2000. See Note 11 of the Financial
Statements for further discussion.
/b/ These entities were transferred to the Company's enhansiv subsidiary. The
common stock of enhansiv was then sold to a group of investors during the
fourth quarter of 2000. See Note 8 of the Financial Statements for further
discussion.
/c/ Boston Communication Group has the opportunity to earn additional amounts
pursuant to an earnout provision. Additionally, the Company assumed
approximately $2.0 million of liabilities.
/d/ Digital Creators, Inc. was closed in the first quarter of 2001 and its
operations were merged into the Company. See Note 11 of the Financial
Statements for further discussion.
Results of Operations
The following table sets forth certain income statement data as a
percentage of revenues:
2001 2000 1999
----- ----- -----
Revenues 100.0% 100.0% 100.0%
Costs of services 64.1 63.0 66.8
SG&A expenses 22.3 21.4 19.5
Depreciation and amortization 6.6 5.4 5.4
Income from operations 3.4 8.2 8.3
Other income (expense) (3.4) 5.6 1.3
Provision for income taxes 0.0 5.3 3.5
Net income (loss) (0.2) 8.3 6.1
18
2001 Compared to 2000
Revenues. Revenues increased $30.8 million, or 3.5%, to $916.1 million in
2001 from $885.3 million in 2000. The revenue increase resulted from net growth
in existing client relationships driven by increases in North American and
international outsourcing programs. On a segment basis, international
outsourcing revenues increased $29.7 million, or 14.3% between years driven
primarily from growth in the Company's Mexican operations. North American
outsourcing revenues increased $18.1 million, or 3.1% between years primarily
due to growth in the Company's Canadian operations partially offset by contract
expirations and other client reductions. The Company's percentage of outsourced
revenues derived from facilities management contracts decreased to 11.8% in 2001
from 13.5% in 2000. Revenues from database marketing and consulting decreased
$7.1 million, or 9.1%, to $71.2 million in 2001 from $78.3 in 2000. The decrease
between years resulted from a decrease in clients for the service reminder
business and a decrease in consulting revenue. Revenues from corporate
activities decreased by approximately $9.9 million due to the closure of the
Company's Pamet River subsidiary in September 2000, the sale of the Company's
enhansiv subsidiary to a group of investors in the fourth quarter of 2000 and
the closure of its Digital Creators subsidiary in the first quarter of 2001.
Costs of Services. Costs of services increased $29.7 million, or 5.3%, to
$587.4 million in 2001 from $557.7 million in 2000. Costs of services increased
to 64.1% of revenue in 2001 from 63.0% in 2000. The increase in costs of
services as a percentage of revenue between years is primarily due to
deterioration in European margins and the benefit of certain one-time contract
restructurings that positively impacted 2000 margins.
Selling, General and Administrative. Selling, general and administrative
expenses increased $14.3 million, or 7.6%, to $204.0 million in 2001 from $189.7
million in 2000. As a percentage of revenues, selling, general and
administrative expenses increased to 22.3% in 2001 from 21.4% in 2000. The
increase between years as a percentage of revenue was primarily the result of an
increase in excess capacity in the Company's multi-client centers between years.
During 2001, the Company took certain cost cutting measures including two
reductions in force and the closing of one customer interaction center. In
connection with these actions, the Company took charges of $18.5 million and
$7.7 million, respectively. As a result, the Company saw selling, general and
administrative expenses decrease sequentially the last three quarters of 2001 as
a percentage of revenue with the fourth quarter at 21.4% of revenue.
Depreciation and Amortization. Depreciation and amortization increased
$12.3 million, or 25.6%, to $60.3 million in 2001 from $48.0 million in 2000.
Depreciation and amortization increased to 6.6% of revenue in 2001 from 5.4% in
2000. The increase in depreciation and amortization resulted from increases in
property and equipment and intangible asset balances between years.
Income from Operations. As a result of the foregoing factors, income from
operations decreased $41.8 million, or 57.2%, to $31.2 million in 2001 from
$72.9 million in 2000. As a percentage of revenue, operating income decreased to
3.4% in 2001 from 8.2% in 2000. Excluding the effect of non-recurring items,
operating income decreased $25.6 million, or 28.4%, to $64.4 million in 2001
from $90.0 million in 2000. As a percentage of revenue, exclusive of
non-recurring items, operating income decreased to 7.0% in 2001 from 10.2% in
2000. The Company considered its charges for restructuring, closing facilities
or subsidiaries and the loss on its Planned Headquarters Building as
non-recurring charges in 2001 and 2000.
Other Income (Expense). Other income decreased $80.8 million to a loss of
$31.4 million in 2001 from income of $49.4 million in 2000. Included in 2001
other expense is a non-recurring $16.5 million loss for the other than temporary
decline in value of its equity investment in enhansiv, as well as $7.7 million
for the Company's share of losses from enhansiv ($0 in 2000). Included in 2000
other income is a non-recurring $57.0 million gain on the sale of securities, a
non-recurring $4.0 million gain on the sale of a subsidiary and $10.5 million in
business combination expenses related to two business combinations accounted for
under the pooling-of-interest method. Additionally, net interest expense
increased approximately $4.4 million in 2001 from 2000, primarily due to higher
outstanding debt balances during 2001.
Income Taxes. Taxes on income decreased $46.7 million to $0.2 million in
2001 from $46.9 million in 2000 primarily due to a decrease in taxable income of
$122.5 million between years as a result of the factors described above. The
Company's effective tax rate was 72.2% in 2001 compared to 38.4% in 2000. The
2001 effective tax rate was impacted by the non-deductibility of equity losses
from the investment in enhansiv for part of the year combined with the
relatively small net loss amount. Excluding the non-recurring items described
above, the Company's effective tax rate for 2001 was 40.0% compared with 39.3%
for 2000. The increase in effective tax rate between years was primarily due to
the non-deductible equity losses mentioned above.
19
Net Income (Loss). As a result of the foregoing factors, and the minority
interest in the Company's Percepta joint venture, the Company recorded a net
loss of $1.9 million in 2001 compared to net income of $73.8 million in 2000.
Diluted loss per share was $0.03 in 2001 compared to earnings of $0.93 per share
in 2000. Excluding the effects of the non-recurring items described above,
diluted earnings per share was $0.37 per share in 2001 compared to $0.66 per
share in 2000.
2000 Compared to 1999
Revenues. Revenues increased $281.0 million, or 46.5%, to $885.3 million in
2000 from $604.3 million in 1999. The revenue increase resulted from growth in
new and existing client relationships offset in part by contract expirations and
other client reductions. On a segment basis, North American outsourcing revenue
increased 44.7% to $591.8 million in 2000 from $409.1 million in 1999. The
increase resulted from growth in new and existing client relationships,
primarily in Canada. International outsourcing revenues increased 73.8% to
$207.0 million in 2000 from $119.1 million in 1999. The increase in
international outsourcing revenues resulted primarily from growth in the
Company's European and Latin American operations. Revenues from database
marketing and consulting increased 41.8% to $78.3 million in 2000 from $55.2
million in 1999. This increase was due primarily to the increase in database
marketing and consulting clients and an acquisition that was completed by Newgen
in the fourth quarter of 1999. Revenues from corporate activities consist of
consulting services, automated customer support, systems integration, database
management, Web-based applications and distance-based learning and education.
These revenues totaled $8.3 million in 2000, a decrease of $12.5 million from
$20.8 million in 1999. The decrease in revenue from corporate activities was
primarily due to the closure of the Company's Pamet River subsidiary in
September 2000 and the sale of the common stock of the Company's enhansiv
subsidiary to a group of investors in the fourth quarter of 2000.
Costs of Services. Costs of services increased $154.0 million, or 38.2%, to
$557.7 million in 2000 from $403.6 million in 1999. Costs of services as a
percentage of revenues decreased from 66.8% in 1999 to 63.0% in 2000. This
decrease in costs of services as a percentage of revenues is primarily the
result of strong growth from both new and existing clients, increased operating
efficiencies and the decline in the percentage of revenues generated from
facilities management programs. Additionally, cost of services as a percentage
of revenue was positively impacted by contract restructurings with two clients
in the fourth quarter of 2000.
Selling, General and Administrative. SG&A expenses increased $71.9 million,
or 61.1%, to $189.7 million in 2000, from $117.8 million in 1999 primarily
resulting from the Company's increased number of customer interaction centers,
global expansion and increased investment in technology. SG&A expenses as a
percentage of revenues increased from 19.5% in 1999 to 21.4% in 2000. This
increase is primarily the result of an increase in the percentage of revenue
generated from multi-client center programs.
Depreciation and Amortization. Depreciation and amortization increased
$15.3 million, or 47.0%, to $48.0 million in 2000 from $32.7 million in 1999. As
a percentage of revenue, depreciation and amortization was 5.4% for both 2000
and 1999. The increase in depreciation and amortization between years is due to
increases in property and equipment and intangible assets.
Income from Operations. As a result of the foregoing factors, income from
operations increased $22.7 million, or 45.3%, to $72.9 million in 2000 from
$50.2 million in 1999. Income from operations as a percentage of revenues
decreased to 8.2% in 2000 from 8.3% in 1999. Included in 2000 operating income
are the following non-recurring items: an $8.1 million loss on the closure of a
subsidiary and three customer interaction centers and a $9.0 million loss on the
termination of a lease on the Company's planned headquarters building. Income
from operations, exclusive of non-recurring items, increased $39.8 million or
79.3%, to $90.0 million in 2000. Income from operations as a percentage of
revenues, exclusive of non-recurring items, increased to 10.2% in 2000 from 8.3%
in 1999.
Other Income (Expense). Other income increased $41.8 million to $49.4
million in 2000 compared to $7.6 million in 1999. Included in other income in
2000 are the following non-recurring items: a $57.0 million gain on the sale of
securities, a $4.0 million gain on the sale of a subsidiary and $10.5 million in
business combination expenses related to two business combinations accounted for
under the pooling-of-interest method. Included in other income in 1999 is a $6.7
million gain on the settlement of a long-term contract, which was terminated by
a client in 1996.
Income Taxes. Taxes on income increased $25.9 million to $46.9 million in
2000 from $21.0 million in 1999 primarily due to higher pre-tax income. The
Company's effective tax rate was 38.4% in 2000 compared to 36.3% in 1999. The
lower effective tax rate in 1999 was due to an acquisition accounted for under
the pooling-of-interest method.
20
Net Income. As a result of the foregoing factors, net income increased
$37.0 million, or 101%, to $73.8 million in 2000 from $36.8 million in 1999.
Diluted earnings per share increased from $0.49 to $0.93. Excluding
non-recurring items in 2000 and the non-recurring gain in 1999 from the
long-term contract settlement, net income in 2000 was $52.4 million, compared
with net income in 1999 of $32.7 million, an increase of 60.2%. Diluted earnings
per share excluding non-recurring items was $0.66 in 2000 compared to $0.44 in
1999.
Liquidity and Capital Resources
Cash provided by operating activities was $103.6 million in 2001 compared
to $36.3 million in 2000. Cash provided by operating activities for 2001
consists of a net loss of $1.9 million before adjustments for depreciation and
amortization, bad debt, working capital, and other charges primarily related to
restructurings and its equity investment in enhansiv. The change in cash flows
from working capital between years of approximately $60.0 million is primarily
the result of a decrease in accounts receivable, partially offset by a decrease
in accounts payable and accrued expenses. Accounts receivable decreased as a
result of more aggressive collection procedures. The Company's days sales
outstanding decreased from 73 days in 2000 to 65 days in 2001.
The Company used $75.2 million in investing activities during 2001. In
2001, the Company's capital expenditures (exclusive of expenditures on the
Company's planned headquarters building) were $52.1 million, a decrease of $65.9
million from 2000. Other 2001 investing cash flows were primarily uses of $13.8
million, representing net expenditures on the planned headquarters building and
$11.9 million of funding for enhansiv.
Historically, capital expenditures have been, and future capital
expenditures are anticipated to be, primarily for the development of customer
interaction centers, technology deployment and systems integrations. The Company
currently expects total capital expenditures in 2002 to be approximately $70
million to $75 million. The Company expects its capital expenditures will be
used primarily to open several new non-U.S. customer interaction centers,
maintenance capital for existing centers and internal technology projects. Such
expenditures will be financed with internally generated funds and existing cash
balances. The level of capital expenditures incurred in 2002 will be dependent
upon new client contracts obtained by the Company and the corresponding need for
additional capacity. In addition, if the Company's future growth is generated
through facilities management contracts, the anticipated level of capital
expenditures could be reduced.
Cash provided by financing activities in 2001 was $7.8 million. This
primarily resulted from proceeds received from the Senior Notes issuance in the
amount of $75.0 million offset by repaying the revolving line of credit in the
amount of $62.0 million. Additional proceeds from financing activities were
generated by the exercise of stock options and employee stock purchases and
other uses were for payments on long-term notes and capital lease obligations.
In 2000, cash provided by financing activities of $34.1 million resulted
primarily from net borrowings from the line of credit.
As mentioned above, in the fourth quarter of 2001, the Company completed a
$75.0 million offering of unsecured Senior Notes. The Senior Notes consist of
two tranches; $60.0 million bearing interest at 7% per annum with a seven-year
term and $15.0 million bearing interest at 7.4% per annum with a 10-year term.
Additionally, the Company has an unsecured revolving line of credit agreement
with a syndicate of five commercial banks under which it may borrow up to $87.5
million. At December 31, 2001, there were no borrowings under the line of
credit. The line of credit expires in November 2002. It is management's intent
to renegotiate the line and extend the maturity date. There is no assurance that
the line of credit will be renegotiated or extended. The Company believes that
existing cash on hand, along with internally generated cash flows and
availability under its revolving line of credit are sufficient to fund planned
operations for the foreseeable future.
From time to time, the Company engages in discussions regarding
restructurings, dispositions, mergers, acquisitions and other similar
transactions. Any such transaction could include, among other things, the
transfer, sale or acquisition of significant assets, businesses or interests,
including joint ventures, or the incurrence, assumption or refinancing of
indebtedness, and could be material to the financial condition and results of
operations of the Company. There is no assurance that any such discussions will
result in the consummation of any such transaction.
In December 2000, the Company and State Street Bank and Trust Company
("State Street") consummated a lease transaction for the Company's new corporate
headquarters, whereby State Street acquired the property at 9197 South Peoria
Street, Englewood, Colorado (the "Property"). Simultaneously, State Street
leased the Property to TeleTech Services Corporation ("TSC"), a wholly owned
subsidiary of the Company. As part of the transaction, State Street formed a
special purpose entity to purchase the Property and hold the associated
21
equity and debt from a group of banks. The debt held by this entity was
approximately $37.0 million at December 31, 2001. The Company's lease on the
Property has a four-year term and expires in December 2004. At expiration, the
Company has three options: 1) renew the lease for two one-year periods at the
same monthly rate paid during the original term, 2) purchase the Property for
approximately $38.2 million, or 3) vacate the Property. In the event the Company
vacates the Property, the Company must sell the Property. If the Property is
sold for less than $38.2 million, the Company has guaranteed State Street a
residual payment upon sale of the building based on a percentage of the
difference between the selling price and appraised fair market value of the
Property. If the Company were to vacate the Property prior to the original
four-year term, the Company has guaranteed State Street a residual value of
approximately $31.5 million upon sale of the Property. The Company has no plans
to vacate the Property prior to the original term. The potential liability, if
any, resulting from a residual payment has not been reflected on the
accompanying consolidated balance sheet. The rent expense of $2.6 million in
2001 and future lease payments are reflected in the lease commitments disclosed
in Note 13 to the consolidated financial statements. This arrangement is not
expected to have a material effect on liquidity or availability of or
requirements for capital resources. A significant restrictive covenant under
this agreement requires the Company to maintain at least one dollar of net
income each quarter. Additionally, the lease payments are variable based on
LIBOR. However, the Company has an interest rate swap agreement in place to
hedge any fluctuations in LIBOR.
As more fully described in Note 8 to the consolidated financial statements,
the Company has provided approximately $11.9 million of funding to enhansiv
holdings, inc. ("EHI") an entity being accounted for under the equity method of
accounting. EHI is developing a centralized, open architecture, customer
management solution that incorporates a contact management database across all
customer contact channels. The Company believes that the EHI technology will
allow it to move to a more centralized technology platform, allowing it to
provide more cost effective solutions in a more timely manner. During 2001, the
Company recorded approximately $7.7 million of pro rata losses related to this
equity investment. EHI has been dependent upon the Company for its recent
financing requirements. The Company's board of directors has authorized a total
of $12.0 million of funding for EHI which was reached subsequent to year end.
Management of EHI believe that they have sufficient cash reserves and working
capital to fund EHI through at least March 31, 2002, however, EHI expects to
require an additional $5 million to $6 million of funding during 2002. If the
Company authorizes additional funding of EHI, it is not expected to materially
affect the Company's liquidity or the availability of or requirements for
capital resources. There can be no assurance that the Company will authorize
additional funding for EHI, or that EHI will obtain funding from other sources.
At December 31, 2001, the Company had the following contractual obligations
(amounts in thousands):
Less than Over
Contractual Obligations 1 year 2-3 years 4-5 years 5 years Total
- ------------------------------------------- --------- --------- --------- -------- --------
Long-term debt and Senior Notes/1/ $ 933 $ 13,899 $29,412 $ 36,605 $ 80,849
Capital lease obligations/1/ 4,268 4,268 -- -- 8,536
Operating lease commitments/2/ 27,030 50,455 34,644 94,532 206,661
Residual value guarantee on headquarters/2/ -- 31,500 -- -- 31,500
------- -------- ------- -------- --------
Total $32,231 $100,122 $64,056 $131,137 $327,546
======= ======== ======= ======== ========
/1/ Reflected on accompanying consolidated balance sheets.
/2/ Not reflected on accompanying consolidated balance sheets.
Critical Accounting Policies
The Company has identified the policies below as critical to its business
and results of operations. The impact and any associated risks related to these
policies on the Company's business is discussed throughout Management's
Discussion and Analysis of Financial Condition and Results of Operations where
such policies affect reported and expected financial results. For a detailed
discussion on the application of these and other accounting policies, see Note 1
to the consolidated financial statements.
Revenue Recognition. The revenue recognition policy is significant because
revenue is a key component of operating results. The Company follows very
specific and detailed guidelines in measuring revenue. In addition, revenue
recognition sometimes determines the timing of certain expenses, such as certain
sales commissions.
22
Derivatives. Being able to mitigate economic risk associated with changes
in foreign currencies is important to the Company. The ability to qualify for
hedge accounting allows the Company to match the gains and losses from changes
in the fair market value of the derivative securities used for hedging
activities with the operating results being hedged.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Market risk represents the risk of loss that may impact the financial
position, results of operations or cash flows of the Company due to adverse
changes in financial and commodity market prices and rates. The Company is
exposed to market risk in the areas of changes in U.S. interest rates, foreign
currency exchange rates as measured against the U.S. dollar and changes in the
market value of its investment portfolio. These exposures are directly related
to its normal operating and funding activities. As of December 31, 2001, the
Company has entered into forward financial instruments to manage and reduce the
impact of changes in certain foreign currency rates with a major financial
institution. The Company has also entered into an interest rate swap agreement
to manage its cash flow risk on the lease for the Property described above as
the lease payments are based on variable monthly interest.
Interest Rate Risk
The interest on the Company's line of credit is variable based on the
bank's base rate or offshore rate, and therefore, affected by changes in market
interest rates. At December 31, 2001, there were no amounts outstanding on the
Company's line of credit.
Foreign Currency Risk
The Company has wholly owned subsidiaries in Argentina, Australia, Brazil,
Canada, China, Northern Ireland, Mexico, New Zealand, Scotland, Singapore and
Spain. Revenues and expenses from these operations are typically denominated in
local currency, thereby creating exposures to changes in exchange rates. The
changes in the exchange rate may positively or negatively affect the Company's
revenues and net income attributed to these subsidiaries. For the years ended
December 31, 2001, 2000 and 1999, revenues from non-U.S. countries represented
41.6%, 36.1% and 25.6% of consolidated revenues, respectively.
The Company has contracted with a commercial bank at no material cost, to
acquire a total of $36.0 million Canadian dollars during the first six months of
2002 at a fixed price in U.S. dollars of $23.3 million. There is no material
difference between the fixed exchange ratio and the current exchange ratio of
the U.S./Canadian dollar. If the U.S./Canadian dollar exchange rates were to
change 10% from year-end levels, the Company would not incur a material loss on
the contract.
Fair Value of Debt and Equity Securities
The Company's investments in debt and equity securities are short-term and
not subject to significant fluctuations in fair value. If interest rates and
equity prices were to decrease 10% from year-end levels, the fair value of the
Company's debt and equity securities would have decreased $678,000.
Item 8. Financial Statements and Supplementary Data.
The financial statements required by this item are located beginning on
page 31 of this report and incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
23
PART III
Item 10. Directors and Executive Officers of the Registrant.
For a discussion of our executive officers, you should refer to Part I,
Page 13, after Item 4 under the caption "Executive Officers of TeleTech
Holdings, Inc."
For a discussion of our Directors, you should refer to our definitive Proxy
Statement for our 2002 Annual Meeting of Stockholders under the caption
"Election of Directors" and "Director Compensation," which we incorporate by
reference into this Form 10-K.
Item 11. Executive Compensation.
We hereby incorporate by reference the information to appear under the
caption "Executive Officers--Executive Compensation" in our definitive Proxy
Statement for our 2002 Annual Meeting of Stockholders, provided, however, that
neither the Report of the Compensation Committee on Executive Compensation nor
the performance graph set forth therein shall be incorporated by reference
herein.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
We hereby incorporate by reference the information to appear under the
caption "Security Ownership of Certain Beneficial Owners and Management" in our
definitive Proxy Statement for our 2002 Annual Meeting of Stockholders.
Item 13. Certain Relationships and Related Party Transactions.
We hereby incorporate by reference the information to appear under the
caption "Certain Relationships and Related Party Transactions" in our definitive
Proxy Statement for our 2002 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 29 of this report.
(2) Financial Statement Schedules
(3) Exhibits
Exhibit No. Description
- ---------- -----------------------------------------------------------------
3.1 Restated Certificate of Incorporation of TeleTech [1] (*)Exhibit
3.1(*)
3.2* Amended and Restated Bylaws of TeleTech [1] (*)Exhibit 3.2(*)
10.1** Intentionally omitted
10.2** Intentionally omitted
10.3** Intentionally omitted
10.4 TeleTech Holdings, Inc. Stock Plan, as amended and restated [1]
(*)Exhibit 10.7(*)
10.5 Intentionally omitted
10.6 Form of Client Services Agreement, 1996 version [1] (*)Exhibit
10.12(*)
24
Exhibit No. Description
- ---------- -----------------------------------------------------------------
10.7 Agreement for Customer Interaction Center Management Between
United Parcel General Services Co. and TeleTech [1] (*)Exhibit
10.13(*)
10.8 Intentionally omitted
10.9 Intentionally omitted
10.10 TeleTech Holdings, Inc. Employee Stock Purchase Plan [3]
(*)Exhibit 10.22(*)
10.11** Intentionally omitted
10.12 Client Services Agreement dated May 1, 1997, between TeleTech
Customer Care Management (Telecommunications), Inc. and GTE Card
Services Incorporated d/b/a GTE Solutions [4] (*)Exhibit 10.12(*)
10.13 Intentionally omitted
10.14** Employment Agreement dated as of February 26, 1998 between Morton
H. Meyerson and TeleTech [5] (*)Exhibit 10.14(*)
10.15 Intentionally omitted
10.16 Intentionally omitted
10.17 Intentionally omitted
10.18 Intentionally omitted
10.19** Employment Agreement dated October 2, 1999 between Scott D.
Thompson and TeleTech [7] (*)Exhibit 10.18(*)
10.20** Stock Option Agreement dated October 18, 1999 between Scott D.
Thompson and TeleTech [7] (*)Exhibit 10.20(*)
10.21** Stock Option Agreement dated October 18, 1999 between Scott D.
Thompson and TeleTech [7] (*)Exhibit 10.21(*)
10.22** Amendment to Non-Qualified Stock Option Agreement (1999 Stock
Option and Incentive Plan) between Scott D. Thompson and
TeleTech[8] (*)Exhibit 10.22(*)
10.23** Amendment to Non-Qualified Stock Option Agreement (1995 Stock
Plan) between Scott D. Thompson and TeleTech [8] (*)Exhibit
10.23(*)
10.24 Amended and Restated Revolving Credit Agreement dated as of March
24, 2000 [8] (*)Exhibit 10.24(*)
10.25 Operating Agreement for Ford Tel II, LLC effective February 24,
2000 by and among Ford Motor Company and TeleTech Holdings,
Inc.[8] (*)Exhibit 10.25(*)
10.26** Non-Qualified Stock Option Agreement dated October 27, 1999
between Michael E. Foss and TeleTech [8] (*)Exhibit 10.26(*)
10.27** Intentionally omitted
10.28** Letter Agreement dated March 27, 2000 between Larry Kessler and
TeleTech [9] (*)Exhibit 10.28(*)
10.29** Stock Option Agreement dated March 27, 2000 between Larry Kessler
and TeleTech [9] (*)Exhibit 10.29(*)
10.30** Promissory Note dated April 3, 2000 by Larry Kessler for the
benefit of TeleTech [9] (*)Exhibit 10.30(*)
10.31 Lease and Deed of Trust Agreement dated June 22, 2000 [9]
(*)Exhibit 10.31(*)
10.32 Participation Agreement dated June 22, 2000 [9] (*)Exhibit
10.32(*)
10.33** Intentionally omitted
10.34** Stock Option Agreement between TeleTech Holdings, Inc. and Margot
O'Dell dated September 11, 2000 [10] (*)Exhibit 10.34(*)
10.35 Asset purchase agreement among TeleTech Holdings, Inc., TeleTech
Customer Care Management (Colorado), Inc., Boston Communications
Group Inc., Cellular Express, Inc., and Wireless Teleservices
Corp. dated as of October 11, 2000 [10] (*)Exhibit 10.35(*)
10.36 Agreement and Plan of Merger dated as of August 2000 among the
Company, NG Acquisition Corp and Newgen [11] (*)Exhibit 2.1(*)
10.37 Share Purchase Agreement dated as of August 31, 2000 among the
Company, 3I Group PLC, 3I Europartners II, LP, Milletti, S.L.,
and Albert Olle Bartolomie [12] (*)Exhibit 2.1(*)
10.38 TeleTech Holdings, Inc. Amended and Restated Employee Stock
Purchase Plan[13] (*)Exhibit 99.1(*)
10.39 TeleTech Holdings, Inc. Amended and Restated 1999 Stock Option
and Incentive Plan [13] (*)Exhibit 99.2(*)
10.40 Newgen Results Corporation 1996 Equity Incentive Plan [14]
(*)Exhibit 99.1(*)
10.41 Newgen Results Corporation 1998 Equity Incentive Plan [14]
(*)Exhibit 99.3(*)
10.42 Participation Agreement dated as of December 27, 2000 among the
Company Teletech Service Corporation ("TSC"), State Street Bank
and Trust Company of Connecticut, N.A., (the "Trust"), First
Security Bank, N.A., ("First Security") and the financial
institutions named on Schedules I and II (the "Certificate
Holders and Lenders") thereto [15] (*)Exhibit 2.2(*)
25
Exhibit No. Description
- ---------- -----------------------------------------------------------------
10.43 Lease and Deed of Trust dated as of December 27, 2000 among TSC,
the Trust and the Public Trustee of Douglas County, Colorado [15]
(*)Exhibit 2.3(*)
10.44 Participant Guarantee dated December 27, 2000 made by the Company
in favor of First Security, the Certificate Holders and Lenders
[15] (*)Exhibit 2.4(*)
10.45 Lessee Guarantee dated December 27, 2000 made by TeleTech in
favor of the Trust First Security, the Certificate Holders and
Lenders [15] (*)Exhibit 2.5(*)
10.46 Contract dated December 26, 2000 between TCI Realty, LLC and TSC
[15] (*)Exhibit 2.6(*)
10.47* First Amendment to Amended and Restated Revolving Credit
Agreement and Waiver dated December 14, 2000 among the Company,
the financial institutions from time to time party to the Credit
Agreement and Bank of America, N.A.
10.48** Employment Agreement dated February 8, 2001 between Margot O'Dell
and TeleTech
10.49** Stock Option Agreement dated February 8, 2001 between Margot
O'Dell and TeleTech
10.50** Stock Option Agreement dated March 21, 2001 between Margot O'Dell
and TeleTech
10.51** Stock Option Agreement dated December 6, 2000 between Michael
Foss and TeleTech
10.52** Stock Option Agreement dated August 16, 2000 between Sean
Erickson and TeleTech
10.53** Stock Option Agreement dated August 16, 2000 between James
Kaufman and TeleTech
10.54** Letter Agreement dated January 11, 2000 between Chris Batson and
TeleTech
10.55** Stock Option Agreement dated January 29, 2001 between Chris
Batson and TeleTech
10.56** Letter Agreement dated January 26, 2001 between Jeffrey Sperber
and TeleTech
10.57** Stock Option Agreement dated March 5, 2001 between Jeffrey
Sperber and TeleTech
10.58** Separation Agreement and Mutual General Release dated March 13,
2001 between Scott Thompson and TeleTech
10.59** Separation Agreement and Mutual General Release dated March 12,
2001 between Larry Kessler and TeleTech
10.60** Promissory Note dated January 15, 2001 by Scott Thompson for the
benefit of TeleTech
10.61** Loan and Security Agreement dated January 15, 2001 between Scott
Thompson and TeleTech
10.62** Promissory Note dated November 28, 2000 by Sean Erickson for the
benefit of TeleTech
10.63** Promissory Note dated March 28, 2001 by Sean Erickson for the
benefit of TeleTech
10.64* ** Employment Agreement dated May 15, 2001 between James Kaufman and
TeleTech
10.65* ** Employment Agreement dated May 21, 2001 between Sean Erickson and
TeleTech
10.66* ** Employment Agreement dated October 15, 2001 between James Barlett
and TeleTech
10.67* ** Employment Agreement dated February 13, 2002 between Michael Foss
and TeleTech
10.68* ** Employment Agreement dated October 15, 2001 between Ken Tuchman
and TeleTech
10.69* ** Stock Option Agreement dated October 1, 2001 between Ken Tuchman
and TeleTech
10.70* ** Stock Option Agreement dated October 15, 2001 between James
Barlett and TeleTech
10.71* ** Restricted Stock Agreement dated October 15, 2001 between James
Barlett and TeleTech
10.72* ** Restricted Stock Agreement dated October 15, 2001 between James
Barlett and TeleTech
10.73* ** Private Placement of Debt pursuant to Note Purchase Agreement
dated October 30, 2001
10.74* Second amendment to the amended and restated Revolving Credit
Agreement dated May 18, 2001
10.75* Third amendment to the amended and restated Revolving Credit
Agreement dated August 10, 2001
21.1* List of subsidiaries
23.1* Consent of Arthur Andersen LLP
99* Arthur Andersen Audit Representation Letter
- ----------
* Filed herewith.
** Management contract or compensatory plan or arrangement filed pursuant to
Item 14(c) of this report.
[ ] Such exhibit previously filed with the Securities and Exchange Commission
as exhibits to the filings indicated below, under the exhibit number
indicated in brackets (*)(*), and is incorporated by reference.
26
[1] TeleTech's Registration Statement on Form S-1, as amended (Registration
Statement No. 333-04097).
[2] TeleTech's Registration Statements on Form S-1, as amended (Registration
Statement Nos. 333-13833 and 333-15297).
[3] TeleTech's Annual Report on Form 10-K for the year ended December 31, 1996.
[4] TeleTech's Annual Report on Form 10-K for the year ended December 31, 1997.
[5] TeleTech's Annual Report on Form 10-K for the year ended December 31, 1998.
[6] TeleTech's Quarterly Report on Form 10-Q for the quarter ended March 31,
1999.
[7] TeleTech's Quarterly Report on Form 10-Q for the quarter ended June 30,
1999
[8] TeleTech's Quarterly Report on Form 10-Q for the quarter ended September
30, 1999.
[9] TeleTech's Annual Report on Form 10-K for the year ended December 31, 1999
[10] TeleTech's Quarterly Report on Form 10-Q for the quarter ended March 31,
2000.
[11] TeleTech's Quarterly Report on Form 10-Q for the quarter ended June 30,
2000.
[12] TeleTech's Quarterly Report on Form 10-Q for the quarter ended September
30, 2000.
[13] TeleTech's Annual Report on Form 10-K for the year ended December 31, 2000.
[14] TeleTech's Current Report on Form 8-K filed August 25, 2000.
[15] TeleTech's Current Report on Form 8-K filed September 6, 2000.
[16] TeleTech's Registration Statement on Form S-8 filed October 2, 2000
(Registration Statement No. 333-47142).
[17] TeleTech's Registration Statement on Form S-8 filed December 20, 2000
(Registration Statement No. 333-52352).
[18] TeleTech's Current Report on Form 8-K filed January 16, 2001.
[19] TeleTech's Quarterly Report on Form 10-Q for the quarter ended March 31,
2001.
[20] TeleTech's Quarterly Report on Form 10-Q for the quarter ended June 30,
2001.
[21] TeleTech's Quarterly Report on Form 10-Q for the quarter ended September
30, 2001.
[22] TeleTech's Current Report on Form 8-K filed on January 18, 2002.
[23] TeleTech's Registration Statement on Form S-8 filed September 19, 2001
(Registration Statement No. 333-69668).
(b) Reports on Form 8-K
None.
27
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned; thereunto duly authorized, in the City of Denver,
State of Colorado, on March 29, 2002.
TELETECH HOLDINGS, INC.
By:
/s/ Kenneth D. Tuchman
-----------------------
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed on March 29, 2002, by the following persons on behalf of
the registrant and in the capacities indicated:
Signature Title
- -------------------------------- -----------------------
Kenneth D. Tuchman Chief Executive Officer
PRINCIPAL EXECUTIVE OFFICER
/s/ Kenneth D. Tuchman
Margot M. O'Dell
PRINCIPAL FINANCIAL Chief Financial Officer
AND ACCOUNTING OFFICER
/s/ Margot M. O'Dell
Kenneth D. Tuchman
DIRECTOR Chairman of the Board
/s/ Kenneth D. Tuchman
James E. Barlett
DIRECTOR
/s/ James E. Barlett
Rod Dammeyer
DIRECTOR
/s/ Rod Dammeyer
George Heilmeier
DIRECTOR
/s/ George Heilmeier
Morton Meyerson
DIRECTOR
/s/ Morton Meyerson
Alan Silverman
DIRECTOR
/s/ Alan Silverman
28
INDEX TO FINANCIAL STATEMENTS OF TELETECH HOLDINGS, INC.
Page
-----
Report of Independent Public Accountants.................................................................. 30
Consolidated Balance Sheets as of December 31, 2001 and 2000.............................................. 31-32
Consolidated Statements of Operations for the Years Ended December 31, 2001, 2000 and 1999................ 33
Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2001, 2000 and 1999...... 34-35
Consolidated Statements of Cash Flows for the Years Ended December 31, 2001, 2000 and 1999................ 36-37
Notes to Consolidated Financial Statements for the Years Ended December 31, 2001, 2000 and 1999........... 38
29
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, 2001
and 2000, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 2001. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of TeleTech Holdings, Inc. and
subsidiaries as of December 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001, in conformity with accounting principles generally accepted
in the United States.
ARTHUR ANDERSEN LLP
Denver, Colorado,
February 8, 2002.
30
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands except share amounts)
December 31,
-------------------
2001 2000
-------- --------
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 95,430 $ 58,797
Investment in available-for-sale securities 2,281 16,774
Short-term investments 6,460 8,904
Accounts receivable, net 162,344 193,351
Prepaids and other assets 21,888 17,737
Income taxes receivable 8,410 --
Deferred tax asset 11,613 5,858
-------------------
Total current assets 308,426 301,421
-------------------
PROPERTY AND EQUIPMENT, net 177,959 178,760
-------------------
OTHER ASSETS:
Long-term accounts receivable 3,249 3,749
Goodwill, net of accumulated amortization of $6,394 and $3,461, respectively 40,563 41,311
Contract acquisition costs, net of accumulated amortization of $6,575 and $3,915, respectively 12,873 15,335
Deferred tax asset 6,800 1,862
Other assets 24,069 38,461
-------------------
Total assets $573,939 $580,899
===================
The accompanying notes are an integral part of these consolidated balance
sheets.
31
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Cont.)
(Amounts in thousands except share amounts)
December 31,
-------------------
2001 2000
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 17,939 $ 19,740
Accrued employee compensation and benefits 42,316 41,177
Accrued income taxes payable -- 21,946
Other accrued expenses 35,991 29,885
Customer advances and deferred income 22,048 3,021
Current portion of long-term debt and capital lease obligations 4,927 12,529
-------------------
Total current liabilities 123,221 128,298
-------------------
LONG-TERM DEBT, net of current portion:
Capital lease obligations 4,081 7,943
Senior notes 75,000 --
Revolving line of credit -- 62,000
Other long-term debt 4,916 4,963
Other liabilities 4,452 1,521
-------------------
Total liabilities 211,670 204,725
-------------------
MINORITY INTEREST 14,319 12,809
-------------------
STOCKHOLDERS' EQUITY:
Stock purchase warrants 5,100 5,100
Common stock; $.01 par value; 150,000,000 shares authorized; 76,751,607 and
74,683,858 shares, respectively, issued and outstanding 768 747
Additional paid-in capital 212,097 200,268
Deferred compensation (2,078) (603)
Notes receivable from stockholders (107) (283)
Accumulated other comprehensive income (loss) (19,213) 4,828
Retained earnings 151,383 153,308
-------------------
Total stockholders' equity 347,950 363,365
-------------------
Total liabilities and stockholders' equity $573,939 $580,899
===================
The accompanying notes are an integral part of these consolidated balance
sheets.
32
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands except per share data)
Year Ended December 31,
-------------------------------
2001 2000 1999
-------- -------- --------
REVENUES $916,144 $885,349 $604,264
-------------------------------
OPERATING EXPENSES:
Costs of services 587,423 557,681 403,648
Selling, general and administrative expenses 204,005 189,668 117,758
Depreciation and amortization 60,308 48,001 32,661
Restructuring charges 18,515 -- --
Loss on closure of subsidiary and customer interaction centers 7,733 8,082 --
Loss on real estate held for sale 7,000 9,000 --
-------------------------------
Total operating expenses 884,984 812,432 554,067
-------------------------------
INCOME FROM OPERATIONS 31,160 72,917 50,197
-------------------------------
OTHER INCOME (EXPENSE):
Interest, net (3,999) 371 589
Other than temporary decline in value of equity investment (16,500) -- --
Gain on sale of securities 161 56,985 --
Share of losses on equity investment (7,702) -- --
Business combination expenses -- (10,548) --
Gain on settlement of long-term contract -- -- 6,726
Other (3,361) 2,578 246
-------------------------------
(31,401) 49,386 7,561
-------------------------------
INCOME (LOSS) BEFORE INCOME TAXES AND MINORITY INTEREST (241) 122,303 57,758
Provision for income taxes 174 46,938 20,978
-------------------------------
INCOME (LOSS) BEFORE MINORITY INTEREST (415) 75,365 36,780
Minority interest (1,510) (1,559) --
-------------------------------
NET INCOME (LOSS) (1,925) 73,806 36,780
===============================
Adjustment for accretion of redeemable convertible preferred stock -- -- (487)
Net income (loss) applicable to common stockholders $ (1,925) $ 73,806 $ 36,293
===============================
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 75,804 74,171 70,557
Diluted 75,804 79,108 74,462
NET INCOME (LOSS) PER SHARE
Basic $ (0.03) $ 1.00 $ 0.51
Diluted $ (0.03) $ 0.93 $ 0.49
The accompanying notes are an integral part of these consolidated
financial statements.
33
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Amounts in thousands)
Other Notes
Additional Accumulated Receivable
Common Stock Paid-in Comprehensive Deferred from
Shares Amount Capital Income (Loss) Compensation Stockholder
-------------------------------------------------------------------------
BALANCES, January 1, 1999 67,048 $670 $117,465 $ (1,200) $(1,394) $ --
Comprehensive income:
Net income -- -- -- -- -- --
Other comprehensive income (loss), net of
tax
Unrealized gains on securities -- -- -- 3 -- --
Translation adjustments -- -- -- (201) -- --
Other comprehensive loss -- -- -- -- -- --
Comprehensive income -- -- -- -- -- --
Employee stock purchase plan -- -- 131 -- -- --
Acquisition of Pamet 286 3 1,750 -- -- --
Exercise of stock options 850 8 8,237 -- -- (56)
Exercise of warrants 23 -- 6 -- -- --
Issuances of common stock 2,180 22 32,083 -- -- --
Conversion of preferred stock 2,727 28 14,515 -- -- --
Deferred compensation related to options -- -- 112 -- (112) --
granted
Accretion of redeemable preferred stock -- -- -- -- -- --
Amortization of deferred compensation -- -- -- -- 402 --
----------------------------------------------------------------------
BALANCES, December 31, 1999 73,114 731 174,299 (1,398) (1,104) (56)
Comprehensive income:
Net income -- -- -- -- -- --
Other comprehensive income (loss), net of
tax
Unrealized gains on securities -- -- -- 9,519 -- --
Translation adjustments -- -- -- (3,293) -- --
Other comprehensive income -- -- -- -- -- --
Comprehensive income -- -- -- -- -- --
Employee stock purchase plan 70 1 1,895 -- -- --
Acquisition of iCcare 75 1 1,999 -- -- --
Exercise of stock options 1,384 14 17,355 -- -- (227)
Issuances of common stock 41 -- 2,920 -- -- --
CCH acquisition costs -- -- 1,800 -- -- --
Amortization of deferred compensation -- -- -- -- 501 --
Issuance of warrants -- -- -- -- -- --
Distribution to stockholder -- -- -- -- -- --
----------------------------------------------------------------------
BALANCES, December 31, 2000 74,684 747 200,268 4,828 (603) (283)
Comprehensive income:
Net loss -- -- -- -- -- --
Other comprehensive loss, net of tax
Unrealized losses on securities -- -- -- (8,577) -- --
Translation adjustments -- -- -- (14,649) -- --
Derivative valuation -- -- -- (815) -- --
Other comprehensive loss -- -- -- -- -- --
Comprehensive loss -- -- -- -- -- --
Stock Total
Purchase Retained Comprehensive Stockholders'
Warrants Earnings Income (Loss) Equity
---------------------------------------------------
BALANCES, January 1, 1999 $ -- $ 42,390 $157,931
Comprehensive income:
Net income -- 36,780 $ 36,780 36,780
Other comprehensive income (loss), net of
tax
Unrealized gains on securities -- -- 3 3
Translation adjustments -- -- (201) (201)
--------
Other comprehensive loss -- -- (198)
--------
Comprehensive income -- -- $ 36,582
========
Employee stock purchase plan -- -- 131
Acquisition of Pamet -- -- 1,753
Exercise of stock options -- -- 8,189
Exercise of warrants -- -- 6
Issuances of common stock -- -- 32,105
Conversion of preferred stock -- 1,990 16,533
Deferred compensation related to options -- -- --
granted
Accretion of redeemable preferred stock -- (487) (487)
Amortization of deferred compensation -- -- 402
BALANCES, December 31, 1999 -- 80,673 253,145
Comprehensive income:
Net income -- 73,806 $ 73,806 73,806
Other comprehensive income (loss), net of
tax
Unrealized gains on securities -- -- 9,519 9,519
Translation adjustments -- -- (3,293) (3,293)
-------- --------
Other comprehensive income -- -- 6,226
--------
Comprehensive income -- -- $ 80,032
========
Employee stock purchase plan -- -- 1,896
Acquisition of iCcare -- -- 2,000
Exercise of stock options -- -- 17,142
Issuances of common stock -- -- 2,920
CCH acquisition costs -- -- 1,800
Amortization of deferred compensation -- -- 501
Issuance of warrants 5,100 -- 5,100
Distribution to stockholder -- (1,171) (1,171)
-------------------------------------------------
BALANCES, December 31, 2000 5,100 153,308 363,365
Comprehensive income:
Net loss -- (1,925) $ (1,925)
(1,925)
Other comprehensive loss, net of tax
Unrealized losses on securities -- -- (8,577) (8,577)
Translation adjustments -- -- (14,649) (14,649)
Derivative valuation -- -- (815) (815)
--------
Other comprehensive loss -- -- (24,041)
--------
Comprehensive loss -- -- $(25,966)
========
34
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Cont.)
(Amounts in thousands)
Accumulated Notes
Additional Other Receivable
Common Stock Paid-in Comprehensive Deferred from
Shares Amount Capital Income (Loss) Compensation Stockholder
-------------------------------------------------------------------------
Employee stock purchase plan 263 $ 3 $ 1754 $ -- $ -- $ --
Exercise of stock options 1,840 18 7,723 -- -- --
Grant of restricted stock -- -- 1,961 -- (1,927) --
Purchase of treasury stock (35) -- (213) -- -- --
Amortization of deferred compensation -- -- -- -- 452 --
Other -- -- 604 -- -- 176
-------------------------------------------------------------------------
BALANCES, December 31, 2001 76,752 $768 $212,097 $(19,213) $(2,078) $(107)
=========================================================================
Stock Total
Purchase Retained Comprehensive Stockholders'
Warrants Earnings Income (Loss) Equity
---------------------------------------------------
Employee stock purchase plan $ -- $ -- $ 1,757
Exercise of stock options -- -- 7,741
Grant of restricted stock -- -- 34
Purchase of treasury stock -- -- (213)
Amortization of deferred compensation -- -- 452
Other -- -- 780
---------------------------------------------------
BALANCES, December 31, 2001 $5,100 $151,383 $347,950
===================================================
The accompanying notes are an integral part of these consolidated
financial statements.
35
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
Year Ended December 31,
---------------------------------
2001 2000 1999
---------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (1,925) $ 73,806 $ 36,780
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization 60,308 48,001 32,661
Bad debt expense 6,026 5,067 904
Deferred rent -- (52) (44)
Gain on sale of securities (161) (56,985) --
Deferred compensation 452 501 402
Deferred income taxes (10,693) (2,281) (2,620)
Minority interest 1,510 1,559 --
Share of losses on equity investment 7,702 -- --
Loss on closure of customer interaction centers or subsidiary 7,733 8,082 --
Loss on real estate held for sale 7,000 9,000 --
Other than temporary decline in value of equity investment 16,500 -- --
Loss on derivatives 909 -- --
Net gain on sale of division of subsidiary -- (3,964) 509
Non-cash acquisition costs -- 1,800 --
Tax benefit from stock option exercises 2,326 8,573 2,923
Changes in assets and liabilities:
Accounts receivable 16,102 (102,000) (17,340)
Prepaids and other assets (8,233) (14,780) (1,235)
Accounts payable and accrued expenses (17,131) 61,424 11,654
Customer advances and deferred income 15,144 (1,489) (281)
---------------------------------
Net cash provided by operating activities 103,569 36,262 64,313
---------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (52,073) (118,013) (60,446)
Acquisitions, net of cash acquired -- (15,700) (18,099)
Proceeds from sale of available-for-sale securities 1,251 64,912 --
Proceeds from sale of businesses -- 4,950 --
Proceeds from minority interest in subsidiary -- 11,250 --
Investment in customer management software company (11,908) (7,989) (2,500)
Investment in real estate held for sale, net of proceeds received (13,782) (2,405) --
Changes in other assets, accounts payable and accrued liabilities related
to investing activities (967) (15,211) 105
Purchase of treasury stock (213) -- --
Decrease in short-term investments 2,444 23,934 4,269
---------------------------------
Net cash used in investing activities (75,248) (54,272) (76,671)
---------------------------------
The accompanying notes are an integral part of these consolidated
financial statements.
36
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Cont.)
(Amounts in thousands)
Year Ended December 31,
--------------------------------
2001 2000 1999
--------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in bank overdraft $ -- $ (1,323) $ 545
Net decrease in short-term borrowings -- -- (1,887)
Net increase (decrease) in line of credit (62,000) 44,000 18,000
Proceeds from long-term debt borrowings 75,000 700 5,000
Payments on long-term debt borrowings (9,947) (7,182) (1,692)
Payments on capital lease obligations (2,452) (11,358) (6,403)
Proceeds from common stock issuances 1,757 1,896 32,101
Proceeds from exercise of stock options 5,415 8,569 5,272
Distribution to stockholder -- (1,171) --
-------------------------------
Net cash provided by financing activities 7,773 34,131 50,936
-------------------------------
Effect of exchange rate changes on cash 539 (5,602) (583)
NET INCREASE IN CASH AND CASH EQUIVALENTS: 36,633 10,519 37,995
CASH AND CASH EQUIVALENTS, beginning of period 58,797 48,278 10,283
-------------------------------
CASH AND CASH EQUIVALENTS, end of period $ 95,430 $ 58,797 $48,278
===============================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest $ 5,444 $ 1,510 $ 2,859
Cash paid for income taxes $ 22,916 $ 22,497 $23,647
Assets acquired under capital leases and other financings $ 3,358 $ 2,991 $ 3,844
The accompanying notes are an integral part of these consolidated
financial statements.
37
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements For the Years Ended
December 31, 2001, 2000 and 1999
NOTE 1: OVERVIEW AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Overview of Company. TeleTech Holdings, Inc. ("TeleTech" or the "Company") is a
leading global provider of customer management solutions for large multinational
companies in the United States, Argentina, Australia, Brazil, Canada, China,
Northern Ireland, Mexico, New Zealand, Scotland, Singapore and Spain. Customer
management encompasses a wide range of customer acquisition, retention and
satisfaction programs designed to maximize the lifetime value of the
relationship between the Company's clients and their customers.
Basis of Presentation. The consolidated financial statements are composed of the
accounts of TeleTech and its wholly owned subsidiaries, as well as its 55% owned
subsidiary, Percepta, LLC ("Percepta"). All intercompany balances and
transactions have been eliminated in consolidation.
During August 2000 and December 2000, the Company entered into business
combinations with Contact Center Holdings, S.L. ("CCH") and Newgen Results
Corporation ("Newgen"), respectively. The business combinations have been
accounted for as poolings-of-interests, and the historical consolidated
financial statements of the Company for all years prior to the business
combinations have been restated in the accompanying consolidated financial
statements to include the financial position, results of operations and cash
flows of CCH and Newgen.
The consolidated financial statements of the Company include
reclassifications made to conform the financial statement presentation of CCH
and Newgen to that of the Company.
Foreign Currency Translation. The assets and liabilities of the Company's
foreign subsidiaries, whose functional currency is other than the U.S. dollar,
are translated at the exchange rates in effect on the reporting date, and income
and expenses are translated at the weighted average exchange rate during the
period. The net effect of translation gains and losses is not included in
determining net income, but is accumulated as a separate component of
stockholders' equity. 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.
Depreciation is computed on the straight-line method based on the following
estimated useful lives:
Buildings 27.5 years
Computer equipment and software 4-5 years
Telephone equipment 5-7 years
Furniture and fixtures 5-7 years
Leasehold improvements 5-10 years
Vehicles 5 years
Assets acquired under capital lease obligations are amortized over the life
of the applicable lease of four to seven years (or the estimated useful lives of
the assets, where title to the leased assets passes to the Company upon
termination of the lease). Depreciation expense related to equipment under
capital leases was $3.4 million, $5.2 million and $5.9 million for the years
ended December 31, 2001, 2000 and 1999, respectively.
Depreciation expense was $51.3 million, $40.9 million and $29.5 million for
the years ended December 31, 2001, 2000 and 1999, respectively.
38
Cash, Cash Equivalents and Short-Term Investments. The Company considers all
cash and investments with an original maturity of 90 days or less to be cash
equivalents. The Company has classified its short-term investments as
available-for-sale securities. At December 31, 2001, short-term investments
consist of commercial paper, corporate securities, government securities and
other securities. These short-term investments are carried at fair value based
on quoted market prices with unrealized gains and losses, if any, net of tax,
reported in accumulated other comprehensive income.
Goodwill. The excess of cost over the fair market value of tangible net assets
and identifiable intangibles of acquired businesses is amortized on a
straight-line basis over the periods of expected benefit of 9 to 25 years.
Amortization of goodwill for the years ended December 31, 2001, 2000 and 1999
was $2.9 million, $3.0 million and $1.6 million, respectively.
Contract Acquisition Costs. Amounts paid to clients to obtain long-term
contracts are being amortized on a straight-line basis over the terms of the
contracts commencing with the date of the first revenues from the contract.
Amortization of these costs for the years ended December 31, 2001, 2000 and
1999, was $2.7 million, $2.3 million and $1.6 million, respectively.
Long-Lived Assets. Long-lived assets and identifiable intangibles held and used
by the Company are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. An asset is considered impaired when future undiscounted cash flows
are estimated to be insufficient to recover the carrying amount. If impaired, an
asset is written down to its fair value.
Software Development Costs. The Company accounts for software development costs
in accordance with the American Institute of Certified Public Accountants
("AICPA") Statement of Position 98-1, "Accounting for the Cost of Computer
Software Developed or Obtained for Internal Use," which requires that certain
costs related to the development or purchase of internal-use software be
capitalized. At December 31, 2001 and 2000, the Company had approximately $12.1
million and $8.0 million, respectively, of capitalized software costs, which are
included in other assets in the accompanying consolidated balance sheets. These
costs will be amortized over the expected useful life of the software.
Approximately $632,212 of amortization expense related to capitalized software
costs is included in the accompanying consolidated statements of operations for
the year ended December 31, 2001. There was no amortization expense for the
years ended December 31, 2000 and 1999, as the software was in the development
stage.
Revenue Recognition. The Company recognizes revenues at the time services are
performed. The Company has certain contracts that are billed in advance.
Accordingly, amounts billed but not earned under these contracts are excluded
from revenues and included in customer advances and deferred income.
Income Taxes. The Company accounts for income taxes under the provisions of
Statement of Financial Accounting Standards ("SFAS") 109, "Accounting for Income
Taxes," which requires recognition of deferred tax assets and liabilities for
the expected future income tax consequences of transactions that have been
included in the financial statements or tax returns. Under this method, deferred
tax assets and liabilities are determined based on the difference between the
financial statement and tax bases of assets and liabilities using enacted tax
rates in effect for the year in which the differences are expected to reverse.
Gross deferred tax assets then may be reduced by a valuation allowance for
amounts that do not satisfy the realization criteria of SFAS 109.
Comprehensive Income (Loss). Comprehensive income (loss) includes the following
components (in thousands):
Year Ended December 31,
------------------------------
2001 2000 1999
-------- ------- -------
Net income (loss) for the period $ (1,925) $73,806 $36,780
Other comprehensive income (loss):
Unrealized gains (losses) on securities, net of reclassification
adjustments (13,197) 14,644 4
Foreign currency translation adjustments (14,649) (3,293) (201)
Derivative valuation (1,254) -- --
Income tax (expense) benefit related to items of other comprehensive
income 5,059 (5,125) (1)
------------------------------
Other comprehensive income (loss), net of tax (24,041) 6,226 (198)
------------------------------
Comprehensive income (loss) $(25,966) $80,032 $36,582
==============================
39
Disclosure of reclassification amounts:
Year Ended December 31,
---------------------------
2001 2000 1999
-------- -------- ----
(in thousands)
Unrealized holding gains (losses) arising during the period $(13,036) $ 71,629 $ 4
Less: reclassification adjustment for gains included in net income (loss) (161) (56,985) --
Benefit (Provision) for income taxes 4,620 (5,125) (1)
---------------------------
Net unrealized gains (losses) on securities $ (8,577) $ 9,519 $ 3
===========================
Earnings (Loss) Per Share. Basic earnings per share are computed by dividing net
income (loss) available to common stockholders by the weighted average number of
common shares outstanding. The impact of any potentially dilutive securities is
excluded. Diluted earnings per share are computed by dividing the Company's net
income (loss) by the weighted average number of shares and dilutive potential
common shares outstanding during the period. The following table sets forth the
computation of basic and diluted shares for the three years ending December 31,
2001:
Year Ended December 31,
------------------------
2001 2000 1999
----- ------ ------
(in thousands)
Shares used in basic per share calculation 75,804 74,171 70,557
Effects of dilutive securities:
Warrants -- 444 74
Conversion of preferred stock -- -- 1,046
Stock options -- 4,493 2,785
------------------------
Shares used in diluted per share calculation 75,804 79,108 74,462
========================
At December 31, 2001, 2000 and 1999 options to purchase 4,880,874,
2,403,718 and 2,739,299 shares of common stock, respectively, were outstanding
but were not included in the computation of diluted earnings per share because
the effect would be antidilutive.
Use of Estimates. The preparation of financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions in determining the reported amounts
of assets and liabilities, disclosure of contingent liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting period. Actual results could differ from those estimates.
Self-Insurance Program. The Company self-insures for certain levels of workers'
compensation and employee health insurance. Estimated costs of these
self-insurance programs were accrued at the projected settlements for known and
anticipated claims. Self-insurance liabilities of the Company amounted to $4.0
million and $3.8 million at December 31, 2001 and 2000, respectively, and are
included in accrued employee compensation and benefits on the accompanying
consolidated balance sheets.
Fair Value of Financial Instruments. Fair values of cash equivalents and other
current accounts receivable and payable approximate the carrying amounts because
of their short-term nature. Short-term investments include U.S. Government
Treasury Bills, investments in commercial paper, short-term corporate bonds and
other short-term corporate obligations. These investments are classified as held
to maturity securities. The carrying values of these investments approximate
their fair values.
Debt and long-term receivables carried on the Company's consolidated
balance sheets at December 31, 2001 and 2000 have a carrying value that
approximates its estimated fair value. The fair value is based on discounting
future cash flows using current interest rates adjusted for risk. The fair value
of the short-term debt approximates its recorded value because of its short-term
nature.
Derivatives. On January 1, 2001, the Company adopted SFAS No. 133, "Accounting
for Derivative Instrument and Hedging Activities," which establishes fair value
accounting and reporting standards for derivative instruments and hedging
activities. SFAS No. 133 requires every derivative instrument (including certain
derivative instruments embedded in other contracts) to be recorded in the
balance sheet as either an asset or liability measured at its fair value. SFAS
No. 133 requires that changes in the derivative's fair value be recognized
40
currently in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and losses to
offset the related results on the hedged item in the income statement, and
requires that a company must formally document, designate and assess the
effectiveness of transactions that receive hedge accounting treatment.
At December 31, 2001, the Company has an interest rate swap designated as a
cash flow hedge. The Company has an operating lease for its headquarters
building whereas the required lease payments are variable based on the LIBOR. On
December 12, 2000, the Company entered into an interest rate swap whereas the
Company receives LIBOR and pays fixed rate interest of 6.12%. The swap agreement
has a notional amount of approximately $38.2 million and has a six-year term. As
of December 31, 2001, the Company has a derivative liability associated with
this swap of $2.1 million.
The Company's Canadian subsidiary's functional currency is the Canadian
dollar. The subsidiary has contracts payable in U.S. dollars and the Company has
contracted with a commercial bank, at no material cost, to acquire a total of
$36.0 million Canadian dollars during the first six months of 2002 at a fixed
price in U.S. dollars of $23.3 million to hedge its foreign currency risk.
During the year ended December 31, 2001, the Company recorded $910,100 in its
statement of operations relating to Canadian dollar forward contracts. As of
December 31, 2001, the Company has a derivative liability of $683,249 associated
with these forward contracts.
Effects of Recently Issued Accounting Pronouncements. Effective June 30, 2001,
the Financial Accounting Standards Board issued Statements on Financial
Accounting Standards ("SFAS") Nos. 141, "Business Combinations" and 142,
"Goodwill and Other Intangible Assets." SFAS No. 141 was effective for
acquisitions occurring after June 30, 2001 and provides guidance in accounting
for business combinations including allowing use of the purchase method of
accounting as the only acceptable method to account for business combinations.
The Company adopted SFAS No. 142 on January 1, 2002. SFAS No. 142 provides
guidance on the accounting for goodwill and other intangibles specifically
relating to identifying and allocating purchase price to specific identifiable
intangible assets. Additionally, SFAS No. 142 provides guidance for the
amortization of identifiable intangible assets and states that goodwill shall
not be amortized, but rather tested for impairment, at least annually, using a
fair value approach. SFAS No. 142 is required to be adopted in the first quarter
of the fiscal year beginning after December 15, 2001. Management has not yet
determined the effect adopting these standards will have on the Company's
financial statements.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations," which establishes accounting standards for recognition
and measurement of a liability for an asset retirement obligation and the
associated asset retirement cost. This statement is effective for financial
statements issued for fiscal years beginning after June 15, 2002. Management has
not yet determined the effect SFAS No. 143 will have on the Company's financial
statements, if any.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." The statement addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and Long-Lived Assets to be Disposed Of." SFAS No. 144 also
supersedes the accounting and reporting provisions of APB No. 30, "Reporting the
Results of Operations -- Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions," for the disposal of a segment of business. SFAS No. 144 also
amends APB No. 51, "Consolidated Financial Statements," to eliminate the
exception to consolidation for a subsidiary for which control is likely to be
temporary. SFAS No. 144 is effective for fiscal years beginning after December
15, 2001. The provisions of this statement are generally to be applied
prospectively. Management has not yet determined the effect SFAS No. 144 will
have on the Company's financial statements, if any.
Reclassifications. Certain prior year amounts have been reclassified to conform
to current year presentation.
NOTE 2: SEGMENT INFORMATION AND CUSTOMER CONCENTRATIONS
The Company classifies its business activities into four fundamental
segments: North American outsourcing, international outsourcing, database
marketing and consulting, and corporate activities. These segments are
consistent with the Company's management of the business and generally reflect
its internal financial reporting structure and operating focus. North American
and international outsourcing provide comprehensive customer management
solutions. North American outsourcing consists of customer management services
provided in the United States and Canada. Database marketing and consulting
provide outsourced database management, direct marketing and related customer
retention services for automobile dealerships and manufacturers. Included in
corporate activities are general corporate expenses, operational management
expenses not attributable to any other segment and technology services. Segment
41
accounting policies are the same as those used in the consolidated financial
statements. There are no significant transactions between the reported segments
for the periods presented.
In 2001, the Company changed its internal reporting structure, which caused
the composition of the reportable segments to change. The information for the
years ended December 31, 2000 and 1999 have been restated to reflect this
change.
2001 2000 1999
--------------------------------
(Amounts in thousands)
Revenues:
North American outsourcing $609,976 $591,834 $409,136
International outsourcing 236,651 206,989 119,121
Database marketing and consulting 71,156 78,255 55,188
Corporate activities (1,639) 8,271 20,819
--------------------------------
Total $916,144 $885,349 $604,264
================================
Operating Income (Loss):
North American outsourcing $ 88,105 $110,850 $ 73,884
International outsourcing 12,320 21,900 11,702
Database marketing and consulting 8,836 9,659 4,240
Corporate activities (78,101) (69,492) (39,629)
--------------------------------
Total $ 31,160 $ 72,917 $ 50,197
================================
Depreciation and Amortization (Included in Operating Income):
North American outsourcing $ 31,877 $ 26,143 $ 18,265
International outsourcing 13,937 10,244 6,572
Database marketing and consulting 7,254 5,145 2,160
Corporate activities 7,240 6,469 5,664
--------------------------------
Total $ 60,308 $ 48,001 $ 32,661
================================
Assets:
North American outsourcing $190,239 $215,646 $ 96,229
International outsourcing 167,378 148,775 97,842
Database marketing and consulting 64,379 63,966 51,139
Corporate activities 151,943 152,512 117,369
--------------------------------
Total $573,939 $580,899 $362,579
================================
Goodwill, net (Included in Total Assets):
North American outsourcing $ 11,446 $ 11,886 $ --
International outsourcing 15,756 14,181 10,496
Database marketing and consulting 13,361 15,244 11,443
Corporate activities -- -- 10,138
--------------------------------
Total $ 40,563 $ 41,311 $ 32,077
================================
Capital Expenditures (Including Capital Leases):
North American outsourcing $ 10,537 $ 66,197 $ 25,922
International outsourcing 26,572 45,897 18,426
Database marketing and consulting 5,091 6,484 3,422
Corporate activities 12,477 2,426 16,520
--------------------------------
Total $ 54,677 $121,004 $ 64,290
================================
42
The following data includes revenues and gross property and equipment based
on the geographic location where services are provided or the physical location
of the equipment:
2001 2000 1999
-------- -------- --------
(Amounts in thousands)
Revenues:
United States $535,242 $565,519 $449,329
Asia Pacific 76,952 65,349 50,947
Canada 144,253 112,842 35,814
Europe 86,862 82,664 46,786
Latin America 72,835 58,975 21,388
------------------------------
Total $916,144 $885,349 $604,264
==============================
Gross Property and Equipment:
United States $189,270 $174,821 $136,526
Asia Pacific 23,641 20,950 16,754
Canada 34,549 33,678 8,943
Europe 29,539 15,155 11,416
Latin America 34,491 31,355 14,547
------------------------------
Total $311,490 $275,959 $188,186
==============================
All Other Long-Lived Assets:
United States $ 22,455 $ 37,248 $ 3,730
Asia Pacific 18 507 296
Canada 481 367 3,640
Europe 174 469 309
Latin America 4,190 3,619 1,539
------------------------------
Total $ 27,318 $ 42,210 $ 9,514
==============================
Significant Customers
- ---------------------
The Company has one customer who contributed in excess of 10% of total
revenues. This entity is involved in the communications industry. The revenues
from this customer as a percentage of total revenues for each of the three years
ended December 31 are as follows:
2001 2000 1999
---- ---- ----
Customer A 19% 20% 23%
At December 31, 2001 and 2000, accounts receivable from this customer were
$11.6 million and $14.3 million, respectively. There were no other customers
with receivable balances in excess of 10% of consolidated accounts receivable.
Customer A is included in the North American outsourcing reporting segment.
The loss of one or more of its significant customers could have a
materially adverse effect on the Company's business, operating results or
financial condition. The Company does not require collateral from its customers.
To limit the Company's credit risk, management performs ongoing credit
evaluations of its customers and maintains allowances for potentially
uncollectible accounts. Although the Company is impacted by economic conditions
in the communications, transportation, automotive, financial services and
government services industries, management does not believe significant credit
risk exists at December 31, 2001.
43
NOTE 3: DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS
Accounts Receivable
- -------------------
Accounts receivable consist of the following at December 31 (in thousands):
2001 2000
-------- --------
Accounts receivable $168,675 $200,015
Less- allowance for doubtful accounts (6,331) (6,664)
-------------------
Accounts receivable, net $162,344 $193,351
===================
Activity in the Company's allowance for doubtful accounts consists of the
following (in thousands):
2001 2000
Balance, beginning of year $ 6,664 $ 4,270
Provision for bad debts 6,026 5,067
Deductions for uncollectible receivables written off (6,359) (2,673)
-----------------
Balance, end of year $ 6,331 $ 6,664
=================
Property and Equipment
- ----------------------
Property and equipment consisted of the following at December 31 (in
thousands):
2001 2000
--------- ---------
Land $ 345 $ 345
Buildings 45 12
Computer equipment and software 116,846 94,779
Telephone equipment 36,448 24,996
Furniture and fixtures 60,572 66,177
Leasehold improvements 90,234 83,943
CIP 3,226 2,306
Other 3,774 3,401
---------------------
311,490 275,959
Less- accumulated depreciation (133,531) (97,199)
---------------------
$ 177,959 $ 178,760
=====================
Included in the cost of property and equipment is the following equipment
obtained through capitalized leases as of December 31 (in thousands):
2001 2000
--------- ---------
Computer equipment and software $ 15,546 $ 15,175
Telephone equipment 4,363 4,212
Furniture and fixtures 9,036 6,954
--------------------
28,945 26,341
Less- accumulated depreciation (20,625) (20,391)
--------------------
$ 8,320 $ 5,950
====================
44
NOTE 4: LONG-TERM DEBT
Capital Lease Obligations
- -------------------------
The Company has financed certain property and equipment under
non-cancelable capital leases. Accordingly, the fair value of the equipment has
been capitalized and the related obligation recorded. The average implicit
interest rate on these leases was 7.7% at December 31, 2001. Interest is charged
to expense at a constant rate applied to declining principal over the period of
the obligation.
The future minimum lease payments under capitalized lease obligations as of
December 31, 2001 are as follows (in thousands):
2002 $ 4,268
2003 3,662
2004 606
--------
8,536
Less- amount representing interest (461)
--------
8,075
Less- current portion (3,994)
--------
$ 4,081
========
Interest expense associated with capital leases was $644,000, $1.2 million
and $1.1 million for the years ended December 31, 2001, 2000 and 1999,
respectively.
Senior Notes
- ------------
Senior Notes consisted of the following as of December 31 (in thousands):
2001 2000
-------- --------
Series A notes payable, interest at 7% per annum, interest payable semi-annually,
principal payable annually commencing October 30, 2004, maturing October 30, 2008,
unsecured $60,000 $ --
Series B notes payable, interest at 7.4% per annum, interest payable
semi-annually, principal payable annually commencing October 30, 2005,
maturing October 30, 2011,
unsecured 15,000 --
-------------------
$75,000 $ --
===================
The future principal amounts due for the Senior Notes are as follows (in
thousands):
2002 $ --
2003 --
2004 12,000
2005 14,143
2006 14,143
Thereafter 34,714
-------
$75,000
=======
45
Long-Term Debt
- --------------
As of December 31, 2001 and 2000, other long-term debt consisted of the
following notes (in thousands):
2001 2000
------ -------
Note payable, interest at 8% per annum, principal and interest payable
quarterly, paid in full March 2001, unsecured $ -- $ 194
Note payable, interest at 8% per annum, principal and interest payable monthly,
paid in full January 2001, unsecured -- 57
Note payable, interest at 5% per annum, principal and interest payable monthly,
maturing November 2009, collateralized by certain assets of the Company 4,146 4,567
Note payable, interest at 7% per annum, principal and interest payable monthly,
maturing July 2002, unsecured 362 391
Note payable, interest at 8% per annum, principal and interest payable
quarterly, maturing April 2003, unsecured 575 --
Note payable, interest at 7% per annum, principal and interest payable monthly,
maturing May 2004, unsecured 199 260
Note payable, interest at 6% per annum, principal and interest payable monthly,
maturing June 2002, unsecured, paid in full -- 265
Other notes payable 567 403
-----------------
5,849 6,137
Less- current portion (933) (1,174)
-----------------
$4,916 $ 4,963
=================
Annual maturities of the long-term debt are as follows (in thousands):
Year ended December 31,
2002 $ 933
2003 761
2004 1,138
2005 549
2006 577
Thereafter 1,891
------
$5,849
======
Revolving Line of Credit
- ------------------------
The Company has an unsecured revolving line of credit agreement with a
syndicate of five commercial banks under which it may borrow up to $87.5
million. The Company has two interest rate options: (a) the bank's base rate or
(b) the bank's offshore rate (approximating LIBOR) plus a margin ranging from
112.5 to 200.0 basis points depending upon the Company's leverage. An annual fee
ranging from 0.30% to 0.45% is charged on any undrawn balances and is payable
quarterly. At December 31, 2001 and 2000, there was $0 and $62 million
outstanding under this agreement, respectively. Additionally, the Company is
required to comply with certain minimum financial ratios under covenants in
connection with the agreement described above, the most restrictive of which
requires the Company to maintain at least one dollar of net income each quarter.
During several quarters of 2001, the Company was out of compliance with this
covenant but waivers were obtained from the lenders. The revolving line of
credit expires in November 2002.
The Company's Spanish subsidiary has factoring lines of credit under which
it may borrow up to ESP$1.6 billion at December 31, 2001 and 2000. As of
December 31, 2001 and 2000, there was $0 million and $8.3 million outstanding
under these factoring lines, included in current portion of long-term debt in
the accompanying consolidated balance sheet.
46
NOTE 5: INCOME TAXES
The components of income before income taxes are as follows for the years
ended December 31 (in thousands):
2001 2000 1999
-------- -------- -------
Domestic $(53,805) $ 66,809 $46,619
Foreign 52,054 53,935 11,139
-----------------------------
Total $ (1,751) $120,744 $57,758
=============================
The components of the provision for income taxes are as follows for the
years ended December 31 (in thousands):
2001 2000 1999
-------- ------- -------
Current provision:
Federal $(12,550) $24,942 $14,888
State (2,051) 2,838 3,378
Foreign 23,926 21,439 5,131
----------------------------
$ 9,325 $49,219 $23,397
============================
Deferred provision:
Federal $ (6,687) $ (941) $(1,724)
State (842) (132) (303)
Foreign (1,622) (1,208) (392)
----------------------------
(9,151) (2,281) (2,419)
----------------------------
$ 174 $46,938 $20,978
============================
The following reconciles the Company's effective tax rate to the federal
statutory rate for the years ended December 31 (in thousands):
2001 2000 1999
------- ------- ------
Income tax (benefit) expense per federal statutory
rate $ (613) $42,806 $18,634
State income taxes, net of federal deduction (94) 3,840 2,181
Tax benefit of operating loss carryforward acquired -- (1,800) --
Miscellaneous credits (600) (716) --
Transaction costs -- 420 --
Other (1,233) 200 (1,706)
Foreign income taxed at higher rate 2,714 2,188 1,869
---------------------------
$ 174 $46,938 $20,978
===========================
47
The Company's deferred income tax assets and liabilities are summarized as
follows as of December 31 (in thousands):
2001 2000
------- ------
Current deferred tax assets:
Allowance for doubtful accounts $ 2,501 $2,588
Vacation accrual 2,061 1,672
Compensation 395 162
Insurance reserves 1,644 604
State tax credits -- 300
Accrued restructuring charges 1,278 --
Unrealized losses on securities and derivatives 1,543 --
Warrant accrual 616 --
Deferred revenue 182 --
Other 1,393 532
----------------
11,613 5,858
Long-term deferred tax assets:
Depreciation and amortization 1,472 1,862
Other than temporary loss on equity investment 6,518 --
Deferred revenue 3,441 --
Long-term deferred tax liability:
Capitalized software (4,631) --
----------------
Total $18,413 $7,720
================
NOTE 6: EMPLOYEE BENEFIT PLAN
The Company has a 401(k) profit-sharing plan that allows participation by
employees who have completed six months of service, as defined, and are 21 or
older. Participants may defer up to 15% of their gross pay up to a maximum limit
determined by law. Participants are also eligible for a matching contribution by
the Company of 50% of the first 6% of compensation a participant contributes to
the plan. Participants vest in matching contributions over a four-year period.
Company matching contributions to the 401(k) plan totaled $2.4 million, $2.3
million and $1.4 million for the years ended December 31, 2001, 2000 and 1999,
respectively.
NOTE 7: STOCK COMPENSATION PLANS
The Company adopted a stock option plan during 1995 (the "1995 Option
Plan") and amended and restated the plan in January 1996 for directors,
officers, employees, consultants and independent contractors. The plan reserved
7.0 million shares of common stock and permits the award of incentive stock
options, non-qualified options, stock appreciation rights and restricted stock.
Outstanding options vest over a three- to five-year period and are exercisable
for 10 years from the date of grant.
In January 1996, the Company adopted a stock option plan for non-employee
directors (the "Director Plan"), covering 750,000 shares of common stock. All
options were granted at fair market value at the date of grant. Options vested
as of the date of the option but were not exercisable until six months after the
option date. Options granted are exercisable for 10 years from the date of grant
unless a participant is terminated for cause or one year after a participant's
death. The Director Plan had options to purchase 472,250, 510,250 and 423,000
shares outstanding at December 31, 2001, 2000 and 1999, respectively. In May
2000, the Company terminated future grants under this plan. From that point on,
Directors received options under the Company's 1999 Stock Option and Incentive
Plan.
In July 1996, the Company adopted an employee stock purchase plan (the
"ESPP"). Pursuant to the ESPP, as amended, an aggregate of 1,000,000 shares of
common stock of the Company is available for issuance under the ESPP. Employees
are eligible to participate in the ESPP after three months of service. The price
per share purchased in any offering period is equal to the lesser of 85% of the
fair market value of the common stock on the first day of the offering period or
on the purchase date. The offering periods have a term of six months. Stock
purchased under the plan for the years ended December 31, 2001, 2000 and 1999
were $1,757,000, $1,896,000 and $131,000, respectively.
48
In February 1999, the Company adopted the TeleTech Holdings, Inc. 1999
Stock Option and Incentive Plan (the "1999 Option Plan"). The purpose of the
1999 Option Plan is to enable the Company to continue to (a) attract and retain
high quality directors, officers, employees and potential employees, consultants
and independent contractors of the Company or any of its subsidiaries; (b)
motivate such persons to promote the long-term success of the business of the
Company and its subsidiaries and (c) induce employees of companies that are
acquired by TeleTech to accept employment with TeleTech following such an
acquisition. The 1999 Option Plan supplements the 1995 Option Plan. An aggregate
of 10 million shares of common stock has been reserved for issuance under the
1999 Option Plan, which permits the award of incentive stock options,
non-qualified stock options, stock appreciation rights and shares of restricted
common stock. As previously discussed, the 1999 Option Plan also provides annual
stock option grants to Directors. Outstanding options vest over a period of one
to nine years and are exercisable for ten years from the date of grant.
In connection with the acquisition of Newgen, which was accounted for under
the pooling-of-interests method, the Company assumed all of the options
outstanding under Newgen's 1998 and 1996 Equity Incentive Plans.
The Company has elected to account for its stock-based compensation plans
under APB 25; however, the Company has computed, for pro forma disclosure
purposes, the value of all options granted using the Black-Scholes option
pricing model as prescribed by SFAS 123 and the following weighted average
assumptions used for grants:
Years ended December 31,
---------------------------------
2001 2000 1999
--------- --------- ---------
Risk-free interest rate 4.8% 4.9% 5.9%
Expected dividend yield 0% 0% 0%
Expected lives 5.7 years 3.1 years 5.3 years
Expected volatility 81% 81% 79%
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
- ----------
Years ended December 31,
----------------------------
2001 2000 1999
-------- ------- -------
(amounts in thousands)
As reported $ (1,925) $73,806 $36,780
Pro forma $(12,459) $55,680 $31,024
Per Share Amounts
- -----------------
2001 2000 1999
-------- ------- --------
As reported:
Basic $(0.03) $1.00 $0.51
Diluted $(0.03) $0.93 $0.49
Pro forma:
Basic $(0.16) $0.75 $0.41
Diluted $(0.16) $0.70 $0.41
49
A summary of the status of the Company's stock option plans for the three
years ended December 31, 2001, together with changes during each of the years
then ended, is presented in the following table:
Weighted
Average
Price Per
Shares Share
---------- ---------
Outstanding, January 1, 1999 7,019,886 $ 7.94
Grants 7,246,933 $ 8.70
Exercises (850,802) $ 6.40
Forfeitures (1,853,792) $10.17
Outstanding, December 31, 1999 11,562,225 $ 8.43
Grants 4,827,832 $28.04
Exercises (1,384,022) $ 6.19
Forfeitures (1,283,995) $11.41
Outstanding, December 31, 2000 13,722,040 $15.10
Grants 3,121,085 $ 8.13
Exercises (1,840,082) $ 4.36
Forfeitures (4,309,782) $17.59
Outstanding, December 31, 2001 10,693,261 $13.98
Options exercisable at year end:
2001 4,385,403 $12.92
2000 4,545,244 $ 8.64
1999 2,578,417 $ 4.71
Weighted average fair value of options granted
during the year:
2001 $ 4.00
2000 $15.27
1999 $ 4.90
The following table sets forth the exercise price range, number of shares,
weighted average exercise price and remaining contractual lives at December 31,
2001:
Outstanding Exercisable
------------------------------------------- ----------------------------
Weighted
Number of Weighted Average Number of Weighted
Range of Exercise Shares Average Contractual Shares Average
Prices Outstanding Exercise Price Life (years) Exercisable Exercise Price
----------- -------------- ------------ ----------- --------------
$ 0.63 - $5.50 502,532 $ 2.31 4 495,732 $ 2.32
$ 5.51 - $6.50 1,524,096 $ 6.10 6 647,933 $ 6.07
$ 6.51 - $7.00 1,915,394 $ 6.97 9 482,018 $ 6.94
$ 7.01 - $9.50 1,707,437 $ 8.48 8 693,163 $ 8.84
$ 9.51 - $13.50 1,497,035 $11.65 6 755,054 $11.67
$13.51 - $21.50 1,077,515 $16.86 8 436,993 $16.24
$21.51 - $31.50 1,417,452 $28.71 8 509,435 $27.96
$31.51 - $39.81 1,051,800 $33.15 9 365,075 $32.69
50
NOTE 8: RELATED PARTY TRANSACTIONS
The Company has entered into agreements pursuant to which Avion, LLC
("Avion") and AirMax, LLC ("AirMax") provide certain aviation flight services to
and as requested by the Company. Such services include the use of an aircraft
and flight crew. Kenneth D. Tuchman, Chief Executive Officer and Chairman of the
Board of the Company, has a direct beneficial ownership interest in Avion.
During 2001, 2000 and 1999 the Company paid an aggregate of $712,000, $677,000
and $35,000, respectively, to Avion for services provided to the Company. Mr.
Tuchman also purchases services from AirMax and from time to time provides
short-term loans to AirMax. During 2001, 2000 and 1999 the Company paid to
AirMax an aggregate of $543,000, $460,000 and $405,000, respectively, for
services provided to the Company. The Audit Committee of the Board of Directors
reviews these transactions quarterly and has determined that the fees charged by
Avion and AirMax are at fair market value.
In the fourth quarter of 2000, the Company and its enhansiv subsidiary
executed a transaction, whereby the Company transferred all of its shares of
common stock of enhansiv, inc., a Colorado corporation ("enhansiv"), to enhansiv
holdings, inc., a Delaware corporation ("EHI") in exchange for Series A
Convertible Preferred Stock of EHI. EHI is developing a centralized, open
architecture, customer management solution that incorporates a contact
management database across all customer contact channels. The Company believes
that the EHI technology will allow it to move to a more centralized technology
platform, allowing it to provide more cost effective solutions in a more timely
manner. As part of the transaction, EHI sold shares of common stock to a group
of investors. These shares represent 100% of the existing common shares of EHI,
which in turn owns 100% of the common shares of enhansiv. In addition, the
Company received an option to purchase approximately 95% of the common stock of
EHI. The Company also agreed to make available to EHI a convertible $7.0 million
line of credit, which was fully drawn in the second quarter of 2001.
One of the investors was Kenneth D. Tuchman, who acquired 14.4 million
shares of EHI common stock for $3.0 million, representing 42.9% of EHI in the
initial transaction. Subsequent to the initial sale of common stock, EHI sold
9.6 million shares to Mr. Tuchman for $2.0 million, giving him an additional
12.1% interest in EHI. Upon Mr. Tuchman's second investment, he entered into a
confirmation joinder and amendment agreement which states that for as long as
Mr. Tuchman owns 50% of EHI's common stock, all action requiring stockholder
approval shall require approval of holders of at least 66-2/3% of EHI common
stock. The remaining equity of $4.0 million, which represents approximately 17%
of the fair value of the assets at inception, comes from unrelated third parties
and is at risk.
In June 2001, the Company entered into another transaction whereby the
Company agreed to fund an additional $5.0 million for certain development
activities in exchange for a licensing agreement and the right to convert this
additional investment into Series B Preferred Stock that is convertible at the
option of the Company into EHI's common stock. As of December 31, 2001, $4.9
million of this additional commitment had been funded.
As discussed above, the Company's Series A Preferred Stock, its $7.0
million line of credit and its additional $5.0 million investment are each
convertible into EHI common stock under certain circumstances. Additionally, the
Company's option to purchase 95% of the common stock of EHI is also allowed only
under certain circumstances, none of which currently exist. There is no
assurance that the Company will either convert its convertible securities or
exercise its purchase option.
As a preferred stockholder, the Company accounts for its investment in EHI
under the equity method of accounting. Accordingly, the Company records all of
EHI's losses in excess of the value of all subordinate equity investments in EHI
(common stock). The Company began reflecting EHI losses during the second
quarter of 2001. These losses, which totaled $7.7 million in 2001, are included
as a separate line item in other income (expense) in the accompanying
consolidated statements of operations. During 2000, the Company did not record
any losses from EHI subsequent to the sale of common stock.
During the second quarter of 2001, after EHI was unsuccessful in raising
additional outside capital, the Company concluded that its investment in EHI
exceeded its fair value and such decline was other than temporary. The Company's
determination of fair market value was based on pre-money valuations used by
third parties during discussions to raise outside capital. The Company
considered current and anticipated market conditions in its determination that
the decline in value was other than temporary. As a result, the Company recorded
a $16.5 million charge to adjust the investment's carrying value down to its
estimated fair value. The Company's net investment in EHI of $3.8 million at
December 31, 2001 is included in other assets in the accompanying consolidated
balance sheets. Net assets of EHI, excluding the Company's loan to EHI, were
$15.0 million at December 31, 2001. EHI has no outside debt or other outstanding
borrowings other than that owed to the Company.
51
During 2000 and 1999, the Company utilized the services of EGI Risk
Services, Inc. ("EGI") for reviewing, obtaining and/or renewing various
insurance policies. EGI is a wholly owned subsidiary of Equity Group
Investments, Inc. Rod Dammeyer, a director of the Company, was formerly the
managing partner of Equity Group Investments, Inc., and Samuel Zell, a former
director of the Company, was chairman of the board. During the years ended
December 31, 2001, 2000 and 1999, the Company paid $0, $1.1 million and $3.5
million respectively, to EGI primarily for insurance policy premiums.
During 2001, the Company utilized the services of Korn Ferry International
("KFI") for two executive search projects. James Barlett, Vice Chairman and a
director of the Company is a director of KFI. During the years ended December
31, 2001, 2000 and 1999 the Company paid $305,331, $0 and $0, respectively, to
KFI for executive search services.
During 2001, the Company purchased cable and wiring materials from Anixter
International, Inc. Rod Dammeyer, a director of the Company, served as Vice
Chairman and a director for Anixter International, Inc. until February 2001.
During the years ended December 31, 2001, 2000 and 1999 the Company paid
$77,000, $83,000 and $60,000, respectively, to Anixter International, Inc.
NOTE 9: ACQUISITIONS
On August 31, 2000, the Company and CCH entered into a definitive Share
Purchase Agreement, which included the exchange of 3,264,000 shares of the
Company's common stock for all of the issued share capital of CCH. The business
combination was accounted for as a pooling-of-interest, and accordingly, the
historical financial statements of the Company have been restated to include the
financial statements of CCH for all periods presented prior to the acquisition.
On December 20, 2000, the Company consummated a business combination with
Newgen that included the exchange of 8,283,325 shares of the Company's common
stock for all of the issued shares of Newgen. The business combination was
accounted for as a pooling-of-interest, and accordingly, the historical
financial statements of the Company have been restated to include the financial
statements of Newgen for all periods presented prior to the acquisition.
The table below sets forth the results of operations of the previously
separate enterprises for the period prior to the consummation of the August 2000
and December 2000 business combinations during the periods ended December 31,
2000 and 1999 (in thousands):
TeleTech CCH Newgen Combined
-------- -------- -------- --------
2000 (prior to consummation of the business combinations)
Revenues $750,782 $38,540 $77,468 $866,790
Net income 64,477 2,259 5,919 72,655
1999
Revenues $509,268 $39,808 $55,188 $604,264
Net income 29,090 2,855 4,835 36,780
On October 27, 2000, TeleTech acquired iCcare Limited ("iCcare"), a Hong
Kong based customer management company, in a transaction accounted for under the
purchase method of accounting. The Company purchased iCcare for approximately
$4.0 million consisting of $2.0 million in cash and $2.0 million in stock. On
the basis of achievement of predetermined revenue targets, iCcare could also
receive additional stock or cash payments over a two-year period. During 2001,
iCcare did not achieve the target. The operations of iCcare for all periods
prior to the acquisition are immaterial to the results of the Company, and
accordingly no pro forma financial information has been presented.
On November 7, 2000, the Company acquired the customer care division of
Boston Communications Group ("BCG") in an asset purchase transaction accounted
for under the purchase method of accounting. BCG's customer care division
provides 24x7 inbound customer care solutions for the wireless industry. The
Company purchased the customer care division in a cash transaction valued at $15
million, including a $13 million cash payment and assumption of approximately $2
million of liabilities. Under the terms of the agreement, BCG could receive
additional cash payments, totaling up to an additional $20 million over four
years, based upon achievement of certain predetermined revenue targets. During
2001, the revenue targets were not achieved. The operations of the customer care
division of BCG for all periods prior to the acquisition are immaterial to the
results of the Company, and accordingly no pro forma financial information has
been presented.
52
On March 18, 1999, the Company acquired 100% of the common stock of Pamet
River, Inc. ("Pamet") for approximately $1.8 million in cash and 285,711 shares
of common stock in the Company. Pamet was a global marketing company offering
end-to-end marketing solutions by leveraging Internet and database technologies.
The transaction was accounted for as a purchase and goodwill was amortized using
the straight-line method over 20 years. The operations of Pamet for all periods
prior to the acquisition are immaterial to the results of the Company, and
accordingly no pro forma financial information has been presented. In September
2000, the Company closed Pamet. See Note 11 for further discussion.
On March 31, 1999, the Company acquired 100% of the common stock of Smart
Call S.A. ("Smart Call") for approximately $2.4 million in cash including costs
related to the acquisition. Smart Call is based in Buenos Aires, Argentina, and
provides a wide range of customer management solutions to Latin American and
multinational companies. The transaction was accounted for as a purchase and
goodwill is amortized using the straight-line method over 20 years. The
operations of Smart Call for all periods prior to the acquisition are immaterial
to the results of the Company, and accordingly no pro forma financial
information has been presented.
On October 12, 1999, the Company acquired 100% of the common stock of
Connect S.A. ("Connect") for approximately $2.3 million in cash including costs
related to the acquisition. The former owners of Connect were entitled to an
earn-out premium based on the results of the Company's consolidated operations
in Argentina in 2000. This earn-out premium totaled $3.8 million and was
recorded as goodwill on the accompanying consolidated balance sheets. Connect is
located in Buenos Aires, Argentina, and provides customer management solutions
to Latin American and multinational companies in a variety of industries. The
transaction was accounted for as a purchase and goodwill is amortized using the
straight-line method over 20 years. The operations of Connect for all periods
prior to the acquisition are immaterial to the results of the Company, and
accordingly no pro forma financial information has been presented.
The previous owners of Smart Call and Connect had the ability to earn an
additional contingent payment of between $250,000 and $2.5 million during 2001
based on reaching revenue and profitability targets. These targets were not
achieved.
On November 30, 1999, the Company's subsidiary Newgen acquired the
partnership interest, including certain net assets and liabilities of Computer
Care, a New York general partnership and wholly owned operation of Automatic
Data Processing, Inc. ("ADP") in a transaction accounted for under the purchase
method of accounting. Per the terms of the partnership agreement Newgen acquired
a 100 % interest in Computer Care for a purchase price of approximately $11.0
million in cash, excluding transaction costs, and up to an additional $9.0
million earn-out which may be paid based upon certain earn-out criteria. In
February 2001, the Company paid $4.4 million to ADP in full satisfaction of the
earn-out provision. The operations of Computer Care for all periods prior to the
acquisition are immaterial to the results of the Company, and accordingly no pro
forma financial information has been presented.
On December 15, 1999, the Company invested $2.5 million in a customer
management software company. On January 27, 2000, an additional investment of
$8.0 million was made in the same customer management software company. In May
2000, this software company merged with E.piphany, Inc., a publicly traded
customer management company. As a result of the merger, TeleTech received
1,238,400 shares of E.piphany common stock. During the years ended December 31,
2001 and 2000, the Company sold approximately 100,000 and 909,300 shares,
respectively, of E.piphany for total proceeds of $1.3 million and $64.9 million,
which resulted in realized gains of $161,000 and $57.0 million, respectively. As
of December 31, 2001, the remaining 268,000 shares of E.piphany had a cost basis
of $1.1 million. These shares are reflected in the accompanying consolidated
balance sheets as an available-for-sale security, at their fair market value of
$2.3 million. The unrealized gain of $900,000 is shown net of tax of $300,000,
as a component of other comprehensive income in the accompanying consolidated
statements of stockholders' equity.
NOTE 10: FORD JOINT VENTURE
During the first quarter of 2000, the Company and Ford Motor Company
("Ford") formed Percepta. Percepta was formed to provide global customer
management solutions for Ford and other automotive companies. Percepta is
currently providing such services in the United States, Canada, Australia and
Scotland. In connection with this formation, the Company issued stock purchase
warrants to Ford entitling Ford to purchase 750,000 shares of TeleTech common
stock. These warrants were valued at $5.1 million using the Black-Scholes Option
model.
Ford has the right to earn additional warrants based upon Percepta's
achievement of certain revenue thresholds through 2004. Such thresholds were not
achieved for 2001 or 2000. The number of warrants to be issued is subject to a
formula based upon the profitability of Percepta, among other factors. The
exercise price of any warrants issued under the agreement will be a 5% premium
over the Company's stock price at the date the warrants are issued.
53
NOTE 11: ASSET DISPOSITIONS
In March 2000, the Company and State Street Bank and Trust Company ("State
Street") entered into a lease agreement whereby State Street acquired 12 acres
of land in Arapahoe County, Colorado for the purpose of constructing a new
corporate headquarters for the Company (the "Planned Headquarters Building").
Subsequently, management of the Company decided to terminate the lease agreement
as it was determined that the Planned Headquarters Building would be unable to
accommodate the Company's anticipated growth. The Company recorded a $9.0
million loss on the termination of the lease in 2000, which is included in the
accompanying consolidated statements of operations.
In March 2001, the Company acquired the Planned Headquarters Building being
constructed on its behalf for approximately $15.0 million and incurred
additional capital expenditures to complete construction of the building. During
the second quarter of 2001, after receiving various offers for the Planned
Headquarters Building that were less than the estimated completed cost, the
Company determined that the fair value of the building, less the cost to
complete and sell, exceeded the carrying amount by $7.0 million. Accordingly,
the Company recorded a loss on real estate held for sale of $7.0 million, which
is included in the accompanying consolidated statements of operations. In
October 2001, the Company completed and sold the Planned Headquarters Building
to a third party receiving net proceeds of approximately $11.8 million.
In March 2001, the Company shut down its Digital Creators subsidiary. The
Company closed the subsidiary because of weak operating performance. It was more
cost effective to close the operation than to seek a buyer. There was no
significant loss associated with the disposal of this business as the majority
of assets and people were absorbed by the Company.
In July 2000, the Company sold a division of its Australian subsidiary,
which provides services in the healthcare industry, for cash of approximately
$4.9 million. This sale resulted in a gain recognized in the third quarter of
2000 of approximately $4.0 million, which is included in other income in the
accompanying consolidated statements of operations. The operating results,
assets and liabilities of this division were not material to the consolidated
operating results, assets and liabilities of the Company.
In September 2000, the Company closed its Pamet subsidiary, which provided
marketing solutions by leveraging Internet and database technologies. The
Company closed the subsidiary because of weak operating performance and
incompatibility with the Company's key strategic initiatives. It was more cost
effective to close the operation than to seek a buyer. The disposal resulted in
a $3.4 million loss, which is included as an operating expense in the
accompanying consolidated statements of operations.
NOTE 12: RESTRUCTURING CHARGES
During 2001, the Company recorded a $7.7 million loss in its North American
outsourcing segment on the closure of a customer interaction center ("CIC")
located in Thornton, Colorado, consisting of future rent and occupancy costs and
loss on disposal of assets, which is reflected as a separate line item in the
accompanying consolidated statements of operations.
In December 2000, the Company identified three customer interaction centers
in California, which were older and under-performing and decided to consolidate
them into one new center. As a result, the Company accrued a $4.7 million loss
in its North American outsourcing segment on the closure of these sites
consisting of future rent and occupancy costs and loss on the disposal of
assets, which is included as an operating expense in the accompanying
consolidated statements of operations.
During 2001, the Company implemented certain cost cutting measures. In
connection with these actions, the Company recorded $18.5 million of charges in
its corporate segment for severance and other termination benefits related to a
reduction in force of approximately 500 employees, which are reflected as a
separate line item in the accompanying consolidated statements of operations.
54
A rollforward of the activity in the above mentioned restructuring accruals
for the years ended December 31, 2001 and 2000 follows (in thousands):
Closure Reduction in
of CICs Force Total
------- ------------ ---------
Balances, January 1, 2000 $ -- $ -- $ --
Expense 4,779 -- 4,779
Payments (4,304) -- (4,304)
-----------------------------------
Balances, December 31, 2000 475 -- 475
Expense 7,733 18,515 26,248
Payments (4,679) (15,883) (20,562)
-----------------------------------
Balances, December 31, 2001 $ 3,529 $ 2,632 $ 6,161
===================================
The restructuring accrual is included in other accrued expenses in the
accompanying consolidated balance sheets.
NOTE 13: COMMITMENTS AND CONTINGENCIES
Leases. The Company has various operating leases for equipment, customer
interaction centers and office space. Rent expense under operating leases was
approximately $31.1 million, $21.6 million and $16.6 million for the years ended
December 31, 2001, 2000 and 1999, respectively.
In December 2000, the Company and State Street consummated a lease
transaction for the Company's new corporate headquarters, whereby State Street
acquired the property at 9197 South Peoria Street, Englewood, Colorado (the
"Property"). Simultaneously, State Street leased the Property to TeleTech
Services Corporation ("TSC"), a wholly owned subsidiary of the Company. As part
of the transaction, State Street formed a special purpose entity to purchase the
Property and hold the associated debt and equity from a group of banks. The debt
held by this entity was approximately $37.0 million at December 31, 2001. The
Company's lease on the Property has a four-year term and expires in December
2004. At expiration, the Company has three options: 1) renew the lease for two
one-year periods at the same monthly rate paid during the original term, 2)
purchase the Property for approximately $38.2 million, or 3) vacate the
Property. In the event the Company vacates the Property, the Company must sell
the Property. If the Property is sold for less than $38.2 million, the Company
has guaranteed State Street a residual payment upon sale of the building based
on a percentage of the difference between the selling price and appraised fair
market value of the Property. If the Company were to vacate the Property prior
to the original four-year term, the Company has guaranteed State Street a
residual value of approximately $31.5 million upon sale of the Property. The
Company has no plans to vacate the Property prior to the original term. The
potential liability, if any, resulting from a residual payment has not been
reflected on the accompanying consolidated balance sheet. The rent expense of
$2.6 million in 2001 and future lease payments are reflected in the lease
commitments disclosed within this Note. This arrangement is not expected to have
a material effect on liquidity or availability of or requirements for capital
resources. A significant restrictive covenant under this agreement requires the
Company to maintain at least one dollar of net income each quarter.
Additionally, the lease payments are variable based on LIBOR. However, the
Company has an interest rate swap agreement in place to hedge any fluctuations
in LIBOR.
The future minimum rental payments required under non-cancelable operating
leases as of December 31, 2001 are as follows (in thousands):
Year ended December 31,
2002 $ 27,030
2003 25,737
2004 24,718
2005 19,244
2006 15,400
Thereafter 94,532
--------
$206,661
========
55
Legal Proceedings. In July 1999, the Company reached a settlement with
CompuServe Incorporated whereby the Company received $12.0 million. As a result,
the Company recorded a gain of $6.7 million during 1999, which is included in
other income in the accompanying consolidated statements of operations.
From time to time, the Company is involved in litigation, most of which is
incidental to its business. In the Company's opinion, no litigation to which the
Company currently is a party is likely to have a material adverse effect on the
Company's results of operations or financial condition.
NOTE 14: QUARTERLY FINANCIAL DATA (UNAUDITED)
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- -------- -------- --------
(Amounts in thousands, except per share data)
Year ended December 31, 2001:
Revenues $237,880 $225,211 $222,818 $230,235
Income (loss) from operations (4,665) 8,324 10,256 17,245
Net income (loss) (3,866) (7,368) 2,126 7,183
Net income (loss) per common share:
Basic $ (0.05) $ (0.10) $ 0.03 $ 0.09
Diluted $ (0.05) $ (0.10) $ 0.03 $ 0.09
Year ended December 31, 2000:
Revenues $192,326 $217,375 $231,806 $243,842
Income from operations 17,679 20,609 19,604 15,025
Net income 11,246 21,635 32,382 8,543
Net income per common share:
Basic $ 0.15 $ 0.29 $ 0.44 $ 0.11
Diluted $ 0.14 $ 0.27 $ 0.41 $ 0.11
56