UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
| (MARK ONE) | |
| ý | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2002 |
|
OR |
|
o |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number: 0-21055
TeleTech Holdings, Inc.
(Exact name of registrant as specified in its charter)
| Delaware (State or other jurisdiction of incorporation or organization) |
84-1291044 (I.R.S. Employer Identification No.) |
9197 South Peoria Street
Englewood, Colorado 80112
(Address of principal executive offices)
Registrant's telephone number, including area code: (303) 397-8100
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 ý No o
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. o
Indicate by checkmark if an accelerated filer (as defined in Rule 12b-2 of the Act). Yes ý No o
As of June 28, 2002, the last business day of the registrant's most recently completed second quarter, there were 77,705,585 shares of the registrant's common stock outstanding. The aggregate market value of the registrant's voting and non-voting common stock that was held by non-affiliates on such date was $388,674,578 based on the closing sale price of the registrant's common stock on such date as reported on the Nasdaq Stock Market.
As of March 24, 2003, there were 74,153,122 shares of the registrant's common stock outstanding. The aggregate market value of the registrant's voting and non-voting common stock that was held by non-affiliates on such date was $214,953,038 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 15, 2003, are incorporated by reference into Part III of this Form 10-K, as indicated.
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 55 customer management 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 13 different countries. Our international reach provides increased business opportunities with non-U.S. clients, as well as opportunities to expand our relationships with existing multinational clients based in the U.S. In 2002, our non-U.S. operations represented 34.7% of total revenues.
Our Internet address is www.TeleTech.com. Our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and any amendments to these reports, are available for free on our Internet website under the heading "Investors-Annual Reports" and "SEC Filings."
Customer Management Solutions
Our fully integrated, customer management solutions encompass the following capabilities:
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 management centers leased, equipped and staffed by TeleTech (fully outsourced programs) and customer management centers leased and equipped by our clients and staffed by TeleTech (facilities management programs).
1
Outsourced. With a fully outsourced solution, we provide comprehensive customer management solutions from customer management centers leased, equipped and staffed by TeleTech. Our fully outsourced customer management 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 management 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 90.8%, 92.4% and 90.2% of total 2002, 2001 and 2000 revenues, respectively, of which our North American outsourced business segment accounted for 69.5%, 66.6% and 66.8%, respectively.
Database Marketing and Consulting. Through our database marketing and consulting segment, we provide outsourced database management, direct marketing and related customer retention services for automotive 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 9.4%, 7.8% and 8.8% of total 2002, 2001 and 2000 revenues, respectively.
Our Outsourced and Database Marketing and Consulting services consist of:
2
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 50.6%, 18.1%, 9.7%, 7.9% and 7.6%, respectively, of our 2002 revenue. Sales in other industries, including technology, healthcare and various others, accounted for 6.1% of 2002 revenues. During 2002, we had two clients who represented more than 10% of total revenues: Verizon Communications and Nextel Communications, Inc. which accounted for 15.7% and 15.3% of total revenues, respectively.
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, our joint venture with Ford Motor Company, as well as through Newgen, a company we 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 management 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, and our technological capabilities enable us to develop working prototypes of proposed solutions with minimal capital investment by the client.
3
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 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. Certain contracts 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.
Operations
We provide customer management solutions through the operation of 55 customer management centers located in the United States, Argentina, Australia, Brazil, Canada, China, Northern Ireland, Mexico, New Zealand, the Philippines, Singapore, Scotland and Spain. As of December 31, 2002, we leased 41 customer management centers and managed 14 customer management 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 management 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 management 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 management center containing 450 or more workstations within 120 days after a lease is finalized and signed.
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. During 2002, we determined to close certain centers in Spain and Canada. During 2002, the Company's corporate and North American outsourcing segments recorded restructuring charges associated with the termination of approximately 400 administrative employees and the impairment of a property lease totaling approximately $7.3 million and $0.9 million, respectively. Additionally, the Company's international outsourcing segment recorded a loss on the closure of customer management centers in Spain and Canada of approximately $1.2 million. These charges are reflected on separate line items in the accompanying consolidated statements of operations.
4
Quality Assurance
We monitor and measure the quality and accuracy of our customer interactions through regional quality assurance departments. These departments evaluate, 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, sophisticated technology, which helps maximize the utilization of customer management 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.
To sustain a high level of service and support to our clients, our representatives undergo significant 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, 2002, we had over 28,000 employees in 13 countries, with approximately 88% 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 2002, revenue from non-U.S. operations represented 34.7% of total revenues. As of December 31, 2002, we operated seven customer management centers in Canada; six customer management centers in Australia; five customer management centers in Spain; three customer
5
management centers in New Zealand; two customer management centers in each of Argentina, Mexico and Scotland; and one customer management center in each of Brazil, China, Northern Ireland, the Philippines 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, Accenture, Convergys Corporation, SITEL Corporation, ICT Group, Sykes Enterprises Incorporated, West Corporation, EDS and RMH Teleservices. 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
In February 2003, we purchased our corporate headquarters building for $38.2 million, which was previously under a synthetic lease using proceeds from our revolving line of credit.
In January 2003, we announced that the United States Postal Service ("USPS") did not renew their relationship with us. We provided services to the USPS from two U.S.-based customer management centers, representing 5.5% of our 2002 revenues, or $55.7 million.
In December 2002, the Company's Board of Directors authorized the continuation of its share repurchase program to acquire up to an additional $25 million of the Company's common stock. The Company completed in the fourth quarter of 2002 its repurchase of up to $25 million of common stock previously authorized by the Board of Directors in 2001.
Risk Factors
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.
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
6
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. There can be no assurance as to the number of consumers who will be attracted to the products and services of our clients, and who will therefore need our services, or that our clients will develop new products or services that will require our services.
Risks Associated with an Economic Downturn. Our ability to enter into new multi-year contracts, particularly large, 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. Additionally, the economic downturn could negatively impact the financial condition of existing customers, thus increasing our risk of not receiving payment for our services.
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. See "Client Concentrations" in Management's Discussion and Analysis of Financial Condition and Results of Operations.
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 multi-year 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 our larger contracts generally 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 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. Additionally, our existing debt agreements
7
require us to maintain certain financial covenants. There is no assurance that we will be able to meet these covenants or, in the event of noncompliance, will be able to obtain waivers from the lenders.
Risks Associated with International Operations and Expansion. We currently conduct business in Argentina, Australia, Brazil, Canada, China, Northern Ireland, Mexico, New Zealand, the Philippines, Singapore, Scotland and Spain. 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 larger 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. The majority of our expenses are payroll or payroll related. Included in payroll related costs are healthcare costs. Over the past several years, healthcare costs have increased at a rate much greater than that of general cost or price indices. 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 management center capacity utilization. We attempt to maximize utilization; however, because the majority 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 management 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 management 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 close 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 management center capacity utilization. During 2002, we determined to close certain customer management centers in Spain and Canada due to poor operating performance and low capacity utilization.
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.
8
Difficulties of Future Growth. 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 management 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 management 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. 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 management centers are located in geographic areas with relatively low unemployment rates, which could make it more difficult and costly to hire qualified personnel.
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 integrating such companies into our existing businesses, or that any completed acquisition will enhance our business, results of operations or financial condition. We have faced, and in the future may continue to face, increased competition for acquisition opportunities, which may inhibit our ability to consummate suitable acquisitions on favorable terms. We may require additional debt or equity financing for future acquisitions, 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
9
partnerships involve many of the same risks as acquisitions, as well as additional risks associated with possible lack of control.
Risk of Business Interruption. Our operations are dependent upon our ability to protect our customer management 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 management 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 certain 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.
See Note 2 to the consolidated financial statements for information on Business Segment Reporting and Geographic Region Disclosure.
Our corporate headquarters are located in Englewood, Colorado, in approximately 272,000 square feet of leased office space. In February 2003, we purchased our corporate headquarters building for $38.2 million. As of December 31, 2002, we leased or managed customer management centers totaling approximately 23,000 production work stations in Alabama, Arizona, California, Colorado, Connecticut, Florida, Georgia, Kansas, Michigan, New York, Pennsylvania, South Carolina, Virginia, Washington, West Virginia, Argentina, Australia, Brazil, Canada, China, Northern Ireland, Mexico, New Zealand, the Philippines, Scotland, Singapore and Spain.
The leases for our U.S. customer management centers have terms ranging from three to 20 years and generally contain renewal options. We believe that our existing customer management centers are
10
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 2003 include plans for several new, or expansions of, non-U.S. 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 management centers to create the additional peak period capacity necessary to accommodate new or expanded customer management programs. The opening or expansion of a customer management center may result, at least in the short term, in idle capacity during peak periods until any new or expanded program is implemented fully.
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, 2002.
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:
| Name |
Position |
Age |
Date Position Assumed |
|||
|---|---|---|---|---|---|---|
| Kenneth D. Tuchman(1) | Chairman and Chief Executive Officer | 43 | 2001 | |||
James E. Barlett(2) |
Vice Chairman |
59 |
2001 |
|||
R. Sean Erickson(3) |
Executive Vice President, Customer Solutions |
41 |
2002 |
|||
Michael E. Foss(4) |
Executive Vice President, Business Development |
45 |
1999 |
|||
James B. Kaufman(5) |
Executive Vice President, Sales, Solutions and Marketing |
41 |
2002 |
|||
Margot M. O'De11(6) |
Chief Financial Officer and Executive Vice President of International Operations |
38 |
2000 |
|||
Sharon O'Leary(7) |
Senior Vice President, General Counsel and Secretary |
44 |
2002 |
|||
John Simon(8) |
Senior Vice President, Human Resources |
38 |
2001 |
|||
Jeffrey S. Sperber(9) |
Vice President—Controller |
38 |
2001 |
11
12
There are no family relationships between any director, executive officer, or person nominated or chosen by the registrant to become a director or executive officer.
13
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The Company's common stock is traded on the Nasdaq National 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 2002 | $ | 15.69 | $ | 10.92 | ||
| Second Quarter 2002 | $ | 14.18 | $ | 9.25 | ||
| Third Quarter 2002 | $ | 9.22 | $ | 5.35 | ||
| Fourth Quarter 2002 | $ | 9.01 | $ | 5.96 | ||
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 | ||
As of March 24, 2003, there were 74,153,122 shares of common stock outstanding, held by approximately 141 stockholders of record.
TeleTech did not declare or pay any dividends on its common stock in 2002 or 2001 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, in 2001, the Board of Directors authorized the repurchase of up to $25 million of the Company's common stock which the Company completed during 2002. In December 2002, the Board of Directors authorized the continuation of TeleTech's repurchase program authorizing the repurchase of up to an additional $25 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.
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 1998 has 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, |
|||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
2002 |
2001 |
2000 |
1999 |
1998 |
|||||||||||||
| |
(in thousands, except per share and operating data) |
|||||||||||||||||
| Statement of Operations Data: | ||||||||||||||||||
| Revenues | $ | 1,017,436 | $ | 916,144 | $ | 885,349 | $ | 604,264 | $ | 424,877 | ||||||||
| Costs of services | 712,585 | 587,423 | 557,681 | 403,648 | 282,689 | |||||||||||||
| SG&A and other operating expenses | 241,231 | (7) | 237,253 | (5) | 206,750 | (4) | 117,758 | 90,952 | ||||||||||
| Depreciation and amortization | 57,725 | 60,308 | 48,001 | 32,661 | 20,856 | |||||||||||||
| Income from operations | 5,895 | 31,160 | 72,917 | 50,197 | 30,380 | |||||||||||||
| Other income (expense) | (10,263 | )(8) | (31,401 | )(6) | 49,386 | (3) | 7,561 | (2) | 68 | (1) | ||||||||
| Provision for income taxes | 1,606 | 174 | 46,938 | 20,978 | 13,344 | |||||||||||||
| Minority interest | 760 | (1,510 | ) | (1,559 | ) | — | — | |||||||||||
| Income (loss) before cumulative effect of change in accounting principle | (5,214 | ) | (1,925 | ) | 73,806 | 36,780 | 17,104 | |||||||||||
| Cumulative effect of change in accounting principle | (11,541 | )(9) | — | — | — | — | ||||||||||||
| Net income (loss) | $ | (16,755 | ) | $ | (1,925 | ) | $ | 73,806 | $ | 36,780 | $ | 17,104 | ||||||
| Net income (loss) per share— | ||||||||||||||||||
| Basic | $ | (0.22 | ) | $ | (0.03 | ) | $ | 1.00 | $ | 0.51 | $ | 0.24 | ||||||
| Diluted | $ | (0.22 | ) | $ | (0.03 | ) | $ | 0.93 | $ | 0.49 | $ | 0.24 | ||||||
| Average shares outstanding— | ||||||||||||||||||
| Basic | 76,383 | 75,804 | 74,171 | 70,557 | 66,228 | |||||||||||||
| Diluted | 76,383 | 75,804 | 79,108 | 74,462 | 71,781 | |||||||||||||
| Operating Data: | ||||||||||||||||||
| Number of production workstations | 23,263 | 19,893 | 20,600 | 13,800 | 10,100 | |||||||||||||
| Number of customer management centers | 55 | 48 | 50 | 33 | 26 | |||||||||||||
| Balance Sheet Data: | ||||||||||||||||||
| Working capital | $ | 190,897 | $ | 185,205 | $ | 173,123 | $ | 111,850 | $ | 68,137 | ||||||||
| Total assets | 540,588 | 573,939 | 580,899 | 362,579 | 251,729 | |||||||||||||
| Long-term debt, net of current portion | 76,584 | 83,997 | 74,906 | 27,404 | 7,660 | |||||||||||||
| Redeemable convertible preferred stock | — | — | — | — | 16,050 | |||||||||||||
| Total stockholders' equity | 306,159 | 347,950 | 363,365 | 253,145 | 157,931 | |||||||||||||
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 6 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. 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 outsourcing consists of customer management services provided in the U.S. and Canada while international outsourcing consists of all other countries. Database marketing and consulting provides outsourced database management, direct marketing and related customer retention services for automobile dealerships and manufacturers. Included in corporate activities are the elimination of intercompany transactions, general corporate expenses and operational management expenses not attributable to any other segment. 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 management 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 management center and customer management technology, automated customer support, database management, systems integration and Web-based applications. These consulting and technology revenues historically have not been a significant component of the
16
Company's revenues. The Company seeks to enter into multi-year 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 multi-year 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 multi-year 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 has continued to encounter delays in both the ramp up of certain existing client programs as well as the closing of sales opportunities for large customer care programs during both 2002 and 2001.
TeleTech's profitability is significantly influenced by its customer management 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 management 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 management center are semi-fixed in nature, and absorption of these costs will be negatively impacted if the customer management center has idle capacity. The Company attempts to plan the development and opening of new customer management 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 2002 and 2001, the Company carried approximately four customer management centers of global excess capacity above and beyond normal expected levels. From time to time the Company assesses the expected long-term capacity utilization of its centers. Accordingly, the Company may, if deemed necessary, consolidate, or close under-performing centers in order to maintain or improve targeted utilization and margins. During 2002, the Company's corporate and North American outsourcing segments recorded restructuring charges associated with the termination of approximately 400 administrative employees and the impairment of a property lease totaling approximately $7.3 million and $0.9 million, respectively. Additionally, the Company's international outsourcing segment recorded a loss on the closure of customer management centers in Spain and Canada of approximately $1.2 million. These charges are reflected on separate line items in the accompanying consolidated statements of operations.
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 management center operational expenses that are not allocable to specific programs, are recorded as
17
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 management 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 with the mix of multi-client, dedicated and facility management program revenues. 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 is less subject to fluctuation from revenue mix.
Results of Operations
The following table sets forth certain income statement data as a percentage of revenues:
| |
2002 |
2001 |
2000 |
||||
|---|---|---|---|---|---|---|---|
| Revenues | 100.0 | % | 100.0 | % | 100.0 | % | |
| Costs of services | 70.0 | 64.1 | 63.0 | ||||
| SG&A expenses | 19.6 | 22.3 | 21.4 | ||||
| Depreciation and amortization | 5.7 | 6.6 | 5.4 | ||||
| Income from operations | 0.6 | 3.4 | 8.2 | ||||
| Other income (expense) | (1.0 | ) | (3.4 | ) | 5.6 | ||
| Provision for income taxes | 0.2 | 0.0 | 5.3 | ||||
| Net income (loss) | (1.6 | ) | (0.2 | ) | 8.3 |
2002 Compared to 2001
Revenues. Revenues increased $101.3 million, or 11.1%, to $1,017.4 million in 2002 from $916.1 million in 2001. The revenue increase primarily resulted from a new client program in the North American outsourcing segment. On a segment basis, North American outsourcing revenues increased $97.1 million, or 15.9% between years driven primarily from a new client program which was partially offset by losses or reductions in existing client programs. International outsourcing revenues decreased $19.6 million, or 8.3% between years primarily due to reductions in Europe and Latin America, partially offset by an increase in Asia Pacific. European revenues were impacted by the Company terminating several unprofitable contracts in Spain while Latin America was impacted primarily by the currency devaluation in Argentina. Revenues from database marketing and consulting increased $24.8 million, or 34.9%, to $96.0 million in 2002 from $71.2 in 2001. The increase between years resulted from an increase in the service reminder business.
Costs of Services. Costs of services increased $125.2 million, or 21.3%, to $712.6 million in 2002 from $587.4 million in 2001. Costs of services increased to 70.0% of revenue in 2002 from 64.1% in 2001. Costs of services as a percentage of revenue have been adversely impacted by several factors. The
18
first is the launch of the previously mentioned new North American outsourcing program. The terms of the contract contemplated work being transitioned from existing high cost locations to lower labor cost markets over time. Accordingly, the hourly rates paid by the client to the Company decline during the first two years of the contract period (eventually leveling off for the remainder of the contract) based on a transition plan. Due to higher call volumes than originally anticipated, the Company has not transitioned work to lower cost markets as quickly as the original plan contemplated. As a result, costs of services as a percentage of revenue have been negatively impacted. The Company expects the transition plan will be completed during 2003. The second factor adversely impacting costs of services has been European margins, primarily due to pricing pressure in Spain. As previously discussed, the Company did exit certain unprofitable contracts in Spain during the year, and Spain margins did improve subsequent to these actions. Finally, costs of services were adversely impacted by deterioration of margins at Percepta, primarily due to price concessions sought by Ford. Ford has advised the Company that such concessions were in line with the price concessions Ford received from its other vendors.
Selling, General and Administrative. Selling, general and administrative expenses decreased $5.0 million, or 2.5%, to $199.0 million in 2002 from $204.0 million in 2001. As a percentage of revenues, selling, general and administrative expenses decreased to 19.6% in 2002 from 22.3% in 2001. The decrease between years is the result of the restructuring actions taken by the Company during 2002 and 2001 along with the other cost containment measures.
Depreciation and Amortization. Depreciation and amortization decreased $2.6 million, or 4.3%, to $57.7 million in 2002 from $60.3 million in 2001. Depreciation and amortization decreased to 5.7% of revenue in 2002 from 6.6% in 2001. The decrease in depreciation and amortization resulted from the adoption of SFAS No. 142 which resulted in no goodwill amortization during 2002, and the adoption of EITF No. 01-09 which resulted in the amortization of contract acquisition costs being deducted from revenue (they were previously recorded as amortization expense). During 2001, these two items accounted for $5.7 million of amortization expense.
Other Operating Charges. During 2002, the Company recorded several other operating charges. First, the Company recorded a $32.8 million impairment loss during the fourth quarter to adjust the fixed asset balances of certain customer management centers in the North American and international outsourcing segments to their fair market values in accordance with Statement of Financial Accounting Standards ("SFAS") No. 144. Additionally, the Company recorded restructuring charges associated with the termination of approximately 400 administrative employees and the impairment of a property lease totaling approximately $8.2 million during the second and fourth quarters. Finally, the Company recorded a loss of $1.2 million during the second quarter related to the closure of customer management centers in the North American and international outsourcing segments.
Income from Operations. As a result of the foregoing factors, income from operations decreased $25.3 million, or 81.1%, to $5.9 million in 2002 from $31.2 million in 2001. As a percentage of revenue, income from operations decreased to 0.6% in 2002 from 3.4% in 2001. The Company believes that excluding non-recurring or infrequently occurring charges is a better measure of underlying financial results as well as a better indicator of future financial performance. Excluding the other operating charges described above, which totaled $42.3 million during 2002, and the restructuring charges ($18.5 million), loss on closure of customer management centers ($7.7 million), and loss on real estate held for sale ($7.0 million) which totaled $33.2 million during 2001, income from operations decreased $16.2 million, or 25.2%, to $48.2 million in 2002 from $64.4 million in 2001. As a percentage of revenue, exclusive of the above mentioned items, income from operations decreased to 4.7% in 2002 from 7.0% in 2001.
Other Income (Expense). Other expense decreased $21.1 million to $10.3 million in 2002 from $31.4 million in 2001. Included in 2002 other expense is approximately $2.3 million related to
19
purchasing the common stock of enhansiv holdings, inc. ("EHI") from the four remaining outside shareholders along with approximately $3.6 million of equity losses related to EHI for the period prior to when the Company began consolidating the results of EHI (prior to June 2002). Included in 2001 Other Expense is a non-recurring $16.5 million loss for the other than temporary decline in value of the Company's equity investment in EHI, as well as $7.7 million for the Company's share of losses from EHI. Additionally, net interest expense increased approximately $1.1 million in 2002 from 2001. The increase in net interest expense is primarily due to the Company's Senior Notes (which were outstanding for the entire year of 2002) bearing interest at a higher rate than the Company's previous line of credit agreement, which was the most significant debt balance in 2001.
Income Taxes. Taxes on income increased $1.4 million to $1.6 million in 2002 from $0.2 million in 2001 primarily due to the Company establishing a valuation allowance against certain deferred tax asset balances in its international outsourcing segment during 2002. This resulted in the Company recording tax expense despite reporting a book loss. During 2001, the Company also recorded tax expense while reporting a book loss due to the non-deductibility of equity losses from the investment in EHI for part of the year combined with the relatively small pre-tax loss amount. Excluding the establishment of valuation allowances in 2002 and the non-deductible EHI losses in 2001 described above, the Company's effective tax rate for 2002 was 39.2% compared with 40.0% for 2001.
Cumulative Effect of Change in Accounting Principle. Upon adoption of SFAS No. 142 in the first quarter of 2002, the Company recorded an impairment loss on the goodwill of its Latin American reporting unit of approximately $11.5 million. The impairment loss was due to the significant anticipated decline in the reporting unit's performance in 2002 and the impact of that decline on expected future cash flows.
Net Income (Loss). As a result of the foregoing factors, and including the minority interest in the Company's Percepta joint venture, the Company recorded a net loss of $16.8 million in 2002 compared to a net loss of $1.9 million in 2001. Diluted loss per share was $0.22 in 2002 compared to a loss of $0.03 per share in 2001. Excluding the effects of the other operating charges ($42.3 million), the loss on the purchase of the common stock of EHI ($2.3 million), the cumulative effect of change in accounting principle ($11.5 million), and the establishment of the deferred tax valuation allowance ($2.7 million) which totaled approximately $58.8 million during 2002, and the restructuring charges ($18.5 million), loss on closure of customer management centers ($7.7 million), loss on real estate held for sale ($7.0 million) and the other than temporary decline in value of the equity investment in EHI ($16.5 million) which totaled $49.7 million during 2002, all described above, diluted earnings per share was $0.33 per share in 2002 compared to $0.37 per share in 2001.
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. Revenues from database marketing and consulting decreased $7.1 million, or 9.1%, to $71.2 million in 2001 from $78.3 million 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.
20
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 management 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 restructuring charges ($18.5 million in 2001), the loss on closure of subsidiary or customer management centers ($7.7 million in 2001 and $8.1 million in 2000), and the loss on real estate held for sale ($7.0 million in 2001 and $9.0 million in 2000) which totaled $33.2 million and $17.1 million during 2001 and 2000, respectively 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 the above mentioned items, operating income decreased to 7.0% in 2001 from 10.2% in 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 pre-tax 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.
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
21
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 restructuring charges ($18.5 million in 2001), the loss on closure of subsidiary or customer management centers ($7.7 million in 2001 and $8.1 million in 2000), the loss on real estate held for sale ($7.0 million in 2001 and $9.0 million in 2000), the other than temporary decline in value of the equity investment in EHI ($16.5 million in 2001), the gain on sale of securities ($57.0 million in 2000), the gain on sale of a subsidiary ($4.0 million in 2000) and the business combination expenses ($10.5 million in 2000) which totaled $49.7 of net expense during 2001 and $33.4 of net gain during 2000, all described above, diluted earnings per share was $0.37 per share in 2001 compared to $0.66 per share in 2000.
Liquidity and Capital Resources
Cash provided by operating activities was $113.7 million in 2002 compared to $103.6 million in 2001. Cash provided by operating activities in 2002 consists of a net loss of $16.8 million before adjustments for the cumulative effect of change in accounting principle, impairment loss, depreciation and amortization, bad debt, working capital, and other charges primarily related to restructurings. The effect of the change in working capital accounts on the consolidated statements of cash flows between years of approximately $17.2 million is primarily the result of improved accounts receivable collections. Accounts receivable decreased as a result of more aggressive collection procedures. The Company's days sales outstanding decreased from 65 days at December 31, 2001 to 49 days at December 31, 2002.
The Company used $33.6 million in investing activities during 2002. In 2002, the Company's capital expenditures were $37.9 million, a decrease of $14.1 million from 2001. Other uses of cash for investing activities in 2002 were primarily related to capitalized software activities incurred in the database marketing and consulting segment. In 2002, investing activities that provided cash flow were the sale of available-for-sale securities and the liquidation of short-term investments.
Historically, capital expenditures have been, and future capital expenditures are anticipated to be, primarily for the development of customer management centers, technology deployment and systems integrations. The Company currently expects total capital expenditures in 2003 to be approximately $40 million to $50 million. The Company expects its capital expenditures will be used primarily to open or expand several non-U.S. customer management 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 2003 will primarily 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 used in financing activities in 2002 was $28.8 million. This primarily resulted from the stock repurchase program authorized by the Board of Directors for the purchase of up to $25 million of the Company's common stock, which the Company completed during 2002. In December 2002, the Company's Board of Directors authorized the continuation of the same repurchase program authorizing the purchase of up to an additional $25 million of the Company's common stock. Additional uses of cash were for payments under long-term debt and capital lease agreements. Proceeds from financing activities were generated by the exercise of stock options and employee stock purchases. In 2001, cash provided by financing activities of $7.6 million resulted primarily from net debt borrowings.
The Company has a revolving credit agreement (the "Revolver") with a syndicate of five banks. Under terms of the Revolver, the Company may borrow up to $85 million with the ability to increase the borrowing limit by an additional $50 million within three years from the closing date of the Revolver (October 2002). The Revolver matures on December 28, 2006 at which time a balloon payment for the principal amount is due, however there is no penalty for early prepayment. The Revolver bears interest at a variable rate based on LIBOR. The interest rate will also vary based on
22
Company leverage ratios. At December 31, 2002 the interest rate was 2.6% per annum. The Revolver is unsecured but is guaranteed by all of the Company's domestic subsidiaries. At December 31, 2002 there were no borrowings under the Revolver. Subsequent to December 31, 2002, the Company borrowed $38.2 million under the Revolver to acquire the Company's corporate headquarters building. A significant restrictive covenant under the Revolver requires the Company to maintain a minimum fixed charge coverage ratio as defined in the agreement.
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 equity and debt from a group of banks. The debt held by this entity was approximately $37.0 million at December 31, 2002. The Company's lease on the Property had a four-year term and expired in December 2004. As mentioned above, subsequent to year end, the Property lease was terminated when the Company purchased the Property from State Street for $38.2 million using proceeds from the Revolver.
Management believes the cash on hand, anticipated cash flows from operations and availability under the Revolver are sufficient to fund planned operations for the foreseeable future.
At December 31, 2002, the Company had the following contractual obligations (amounts in thousands):
| Contractual Obligations |
Less than 1 year |
2-3 years |
4-5 years |
Over 5 years |
Total |
||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Long-term debt and Senior Notes(1) | $ | 1,376 | $ | 26,987 | $ | 28,372 | $ | 20,701 | $ | 77,436 | |||||
| Capital lease obligations(1) | 3,161 | 963 | — | — | 4,124 | ||||||||||
| Operating lease commitments(2) | 39,291 | 52,750 | 31,295 | 92,968 | 216,304 | ||||||||||
| Residual value guarantee on headquarters(2)(3) | — | 31,500 | — | — | 31,500 | ||||||||||
| Total | $ | 43,828 | $ | 112,200 | $ | 59,667 | $ | 113,669 | $ | 329,364 | |||||
In the first quarter of 2002, the Company violated a financial debt covenant in its synthetic lease agreement and Revolver that required it to maintain at least one dollar of net income each quarter. The violation resulted from the goodwill impairment upon adoption of SFAS No. 142. Waivers were obtained from both the synthetic lease and Revolver lenders, and the new Revolver agreement completed in October 2002 eliminated the one dollar quarterly net income covenant.
In the fourth quarter of 2002, the Company violated two financial debt covenants in its synthetic lease agreement that required it to maintain at least one dollar of net income each quarter and a
23
certain fixed charge coverage ratio. The violations resulted from the impairment loss the Company recorded during the quarter. In February 2003, the Company prepaid, without penalty, the $38.2 million synthetic lease agreement and cured the default. Also in the fourth quarter, the Company failed to meet the fixed charge coverage ratio covenant in its Revolver agreement and the fixed charge coverage and leverage ratio covenants in its Senior Notes agreement and has obtained waivers from both lenders. There is no assurance that the Company will not violate financial covenants in the future and, in the event of a default, no assurance that the Company will be successful in obtaining waivers.
Client Concentrations
The Company's five largest clients accounted for 52.2%, 45.0% and 42.4% of its revenues for the years ended December 31, 2002, 2001 and 2000, respectively. In addition, these five clients accounted for an even greater proportional share of the Company's consolidated earnings. The profitability of these clients varies greatly based upon the specific contract terms with any particular client, and the relative contribution of any single client to consolidated earnings is not always proportional to the relative revenue contribution on a consolidated basis. The risk of this concentration is mitigated, in part, by the long-term contracts the Company has with its largest clients. The contracts with these clients expire between 2003 and 2010. Additionally, a particular client can have multiple contracts with different expiration dates. Although the Company has historically renewed its contracts with its largest customers, there is no assurance that future contracts will be renewed, or if renewed, will be on terms as favorable as the existing contracts. As with any contract driven business, the Company does experience contracts not being renewed in the normal course of its operations. In these circumstances, the Company pursues several alternatives to mitigate the impact including replacing the business with new contracts, improving operating margins through greater efficiencies and achieving other cost reductions.
As previously discussed, the USPS did not renew their relationship with the Company. Services provided to the USPS will ramp down during the first half of 2003. Revenues from the USPS totaled $55.7 million, $58.8 million and $62.0 million for the years ended December 31, 2002, 2001 and 2000, respectively. The loss of the USPS is not expected to have a material adverse effect on the Company's operations or financial position.
Under the terms of the original contract with Verizon relating to its CLEC business, there were certain minimum monthly volume commitments at pre-determined hourly billing rates ("Minimum Commitments"). As previously announced, when the CLEC work was redirected to other Verizon business units during 2001, Verizon continued to honor the contractual terms of its Minimum Commitments. While the terms negotiated by these business units were generally at lower hourly billing rates than the Minimum Commitments, Verizon has continued to meet its financial obligations associated with Minimum Commitments. In some instances, volume associated with new work is also offset against the Minimum Commitments. In addition, certain Minimum Commitments were bought out with cash, and these settlement payments have been amortized over the life of such Minimum Commitments. With the renewal of the Verizon Wireless contract in December 2002, and assuming business volume continues at its current rate, our expectation is that the Minimum Commitments will be satisfied and, accordingly, expire between 2003 and 2005. The amount of Minimum Commitments satisfied by Verizon in excess of the payments attributed to the new work, together with amortized settlement payments, was $33 million in 2002. It is expected that this amount will decline to approximately $30 million in 2003, $8 million in 2004, and will further decrease thereafter. The loss of the Minimum Commitments is not expected to have a material adverse effect on the Company's 2003 operating results or financial position. The anticipated decline could have an adverse affect on the Company's operating results in 2004 unless the profits earned from the Minimum Commitments are replaced with other business of comparable profitability, margins are improved through greater
24
operating efficiencies, and other cost reductions are achieved, all of which are being pursued by management.
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. The Company recognizes revenue at the time services are performed. In certain circumstances, the Company receives payment in advance of providing service. Accordingly, amounts billed but not earned under these contracts are excluded from revenue and included in customer advances and deferred income.
Derivatives. Mitigating 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. While the Company expects that its derivative instruments will continue to meet the conditions for hedge accounting, if hedges did not qualify as highly effective or if the Company did not believe that forecasted transactions would occur, the changes in the fair value of the derivatives used as hedges would be reflected in earnings. The Company does not believe it is exposed to more than a nominal amount of credit risk in its hedging activities, as the counterparties are established, well-capitalized financial institutions.
Foreign Currency Translation. A substantial amount of the Company's operations are conducted outside of the United States. 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. Intercompany loans are generally treated as permanently invested and settlement is not planned or anticipated in the foreseeable future.
Contract Acquisition Costs. Amounts paid to or on behalf of clients to obtain long-term contracts are capitalized (if incurred within 12 months of commencement of operations) and amortized on a straight-line basis over the term of the contract as a reduction to revenue commencing with the date of the first revenues from the contract. In certain circumstances, costs may be estimated at the inception of operations and subsequently revised based on actual costs incurred. The Company's accounting policy is to limit the amount of capitalized costs for a given contract to the lesser of the estimated ongoing future cash flows from the contract or the termination fees the Company would receive in the event of early termination of the contract by the customer. The Company's entitlement to termination fees may, however, be subject to challenge if a customer were to allege that the Company was in breach of contract.
Restructuring and Impairment Charges. The Company periodically assesses the profitability and utilization of its customer management centers along with the overall profitability of the Company. As a result, the Company has historically chosen to close under-performing centers and make reductions in force to enhance future profitability. Under the previous accounting guidance, the Company recorded the anticipated charges at the time a plan was approved by management or the Board of Directors. In
25
June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," which specifies that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred instead of upon commitment to a plan. SFAS No. 146 is effective January 1, 2003. Additionally, SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," contains a broadened definition of a discontinued operation. It is possible that future exit or disposal activities of the Company could be classified as a discontinued operation which would require restatement of historical financial statements. The Company adopted SFAS No. 144 effective January 1, 2002. The recoverability of goodwill and long-lived assets is dependent upon the Company's ability to generate sufficient future cash flow.
Recent Accounting Pronouncements
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 does not believe adoption will have a material effect on the Company's financial position.
In April 2002, the FASB issued SFAS No. 145, "Recission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections," which eliminated inconsistency between required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. This statement is effective for financial statements issued for fiscal years beginning after May 15, 2002. Management does not believe adoption will have a material effect on the Company's financial position.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," which specifies that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred instead of recognized at the date of an entity's commitment to an exit plan. This statement is effective for exit or disposal activities that are initiated after December 31, 2002. Management does not believe adoption will have a material effect on the Company's financial position.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation—Transition and Disclosure." SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. SFAS No. 148 also required that disclosures of the pro forma effect of using the fair value method of accounting for stock-based employee compensation be displayed more prominently and in a tabular format. The Company has implemented all required disclosures of SFAS 148 in this Form 10-K filing. Additionally, SFAS No. 148 requires disclosure of the pro forma effect in interim financial statements. The transition requirements of SFAS No. 148 are effective for the Company's fiscal year 2003. The Company does not plan to transition to a fair value method of accounting for stock-based employee compensation.
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, 2002, the Company has entered into forward financial instruments to manage and reduce the impact of changes in certain foreign currency rates with several financial institutions. The
26
Company has also entered into an interest rate swap agreement to manage its cash flow risk on the lease for the Property as the lease payments are based on variable monthly interest.
Interest Rate Risk
The interest on the Revolver is variable based on LIBOR and, therefore, affected by changes in market interest rates. At December 31, 2002, there were no amounts outstanding on the Revolver.
Foreign Currency Risk
The Company has operations in 12 foreign countries. 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, 2002, 2001 and 2000, revenues from non-U.S. countries represented 34.7%, 41.6% and 36.1% of consolidated revenues, respectively.
The Company has contracted with several commercial banks to acquire a total of $120.4 million Canadian dollars through November 2004 at a fixed price in U.S. dollars of $76.2 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 did not have any material investments in debt or equity securities at December 31, 2002.
Item 8. Financial Statements and Supplementary Data.
The financial statements required by this item are located beginning on page 34 of this report and incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
On May 10, 2002, Arthur Andersen LLP ("Andersen") was dismissed as the Company's independent accountant effective upon completion of its review of the Company's financial statements for the quarter ended March 31, 2002, and Ernst & Young LLP ("E&Y") was appointed as the new independent accountant for the Company to replace Andersen for the year ending December 31, 2002. The decision to dismiss Andersen and to appoint E&Y was recommended by the Audit Committee of the Board of Directors and was approved by the Board of Directors on May 10, 2002. Information with respect to this matter is included in the Company's current report on Form 8-K filed May 16, 2002, which information is incorporated herein by reference.
We have had no disagreements with our independent auditors regarding accounting or financial disclosure matters.
Item 10. Directors and Executive Officers of the Registrant.
For a discussion of our executive officers, you should refer to Part I, page 11, 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 2003 Annual Meeting of Stockholders under the caption "Election of Directors" and "Director Compensation," which we incorporate by reference into this Form 10-K.
27
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 2003 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 2003 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 2003 Annual Meeting of Stockholders.
Item 14. Controls and Procedures.
As of December 31, 2002, an evaluation was performed under the supervision and with the participation of the our management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on that evaluation, our management, including the Chief Executive Officer and Chief Financial Officer, concluded that the Company's disclosure controls and procedures were effective as of December 31, 2002. There have been no significant changes in our internal controls or in other factors that could significantly affect internal controls subsequent to December 31, 2002.
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
The Index to Financial Statements is set forth on page 30 of this report.
All schedules for TeleTech have been omitted since the required information is not present or not present in amounts sufficient to require submission of the schedule, or because the information is included in the respective financial statements or notes thereto.
| Exhibit No. |
Description |
|
|---|---|---|
| 3.1 | Restated Certificate of Incorporation of TeleTech (incorporated by reference to Exhibit 3.1 to TeleTech's Amendment No. 2 to Form S-1 Registration Statement (Registration No. 333-04097) filed on July 5, 1996) | |
3.2 |
Amended and Restated Bylaws of TeleTech (incorporated by reference to Exhibit 3.2 to TeleTech's Amendment No. 2 to Form S-1 Registration Statement (Registration No. 333-04097) filed on July 5, 1996) |
|
28
10.1 |
+ |
TeleTech Holdings, Inc. Stock Plan, as amended and restated (incorporated by reference to Exhibit 10.7 to TeleTech's Amendment No. 2 to Form S-1 Registration Statement (Registration No. 333-04097) filed on July 5, 1996) |
10.2 |
+ |
TeleTech Holdings, Inc. Amended and Restated Employee Stock Purchase Plan (incorporated by reference to Exhibit 99.1 to TeleTech's Form S-8 Registration Statement (Registration No. 333-69668) filed on September 19, 2001) |
10.3 |
+ |
TeleTech Holdings, Inc. Amended and Restated 1999 Stock Option and Incentive Plan (incorporated by reference to Exhibit 99.1 to TeleTech's Form S-8 Registration Statement (Registration No. 333-96617) filed on July 17, 2002) |
10.4 |
+ |
Newgen Results Corporation 1996 Equity Incentive Plan (incorporated by reference to Exhibit 10.1 to Newgen Results Corporation's Form S-1 Registration Statement (Registration No. 333-62703) filed on September 2, 1998) |
10.5 |
+ |
Newgen Results Corporation 1998 Equity Incentive Plan (incorporated by reference to Exhibit 10.3 to Newgen Results Corporation's Form S-1 Registration Statement (Registration No. 333-62703) filed on September 2, 1998) |
10.6 |
Form of Client Services Agreement, 1996 version (incorporated by reference to Exhibit 10.12 to TeleTech's Amendment No. 1 to Form S-1 Registration Statement (Registration No. 333-04097) filed on June 5, 1996) |
|
10.7 |
Agreement for Customer Interaction Center Management Between United Parcel General Services Co. and TeleTech (incorporated by reference to Exhibit 10.13 to TeleTech's Amendment No. 4 to Form S-1 Registration Statement (Registration No. 333-04097) filed on July 30, 1996) |
|
10.8 |
Client Services Agreement dated May 1, 1997, between TeleTech Customer Care Management (Telecommunications), Inc. and GTE Card Services Incorporated d/b/a GTE Solutions (incorporated by reference to Exhibit 10.12 to TeleTech's Annual Report on Form 10-K filed for the fiscal year ended December 31, 1997) |
|
10.9 |
Operating Agreement for Ford Tel II, LLC effective February 24, 2000 by and among Ford Motor Company and TeleTech Holdings, Inc. (incorporated by reference to Exhibit 10.25 to TeleTech's Quarterly Report on Form 10-Q filed for the fiscal quarter ended March 31, 2000) |
|
10.10 |
* |
Credit Agreement dated as of October 29, 2002 among TeleTech, Bank of America, N.A. and the other Lenders party thereto |
10.11 |
Amended and Restated Lease and Deed of Trust Agreement dated June 22, 2000 (incorporated by reference to Exhibit 10.31 to TeleTech's Quarterly Report on Form 10-Q filed for the fiscal quarter ended June 30, 2000) |
|
10.12 |
Amended and Restated Participation Agreement dated June 22, 2000 (incorporated by reference to Exhibit 10.32 to TeleTech's Quarterly Report on Form 10-Q filed for the fiscal quarter ended June 30, 2000) |
|
10.13 |
Private Placement of Senior Notes pursuant to Note Purchase Agreement dated October 30, 2001 (incorporated by reference to Exhibit 10.73 to TeleTech's Annual Report on Form 10-K filed for the fiscal year ended December 31, 2001) |
|
29
10.14 |
Participation Agreement dated as of December 27, 2000 among TeleTech, 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 (incorporated by reference to Exhibit 2.2 to TeleTech's Current Report on Form 8-K filed on January 16, 2001) |
|
10.15 |
Lease and Deed of Trust dated as of December 27, 2000 among TSC, the Trust and the Public Trustee of Douglas County, Colorado (incorporated by reference to Exhibit 2.3 to TeleTech's Current Report on Form 8-K filed on January 16, 2001) |
|
10.16 |
Participant Guarantee dated December 27, 2000 made by TeleTech in favor of First Security, the Certificate Holders and Lenders (incorporated by reference to Exhibit 2.4 to TeleTech's Current Report on Form 8-K filed on January 16, 2001) |
|
10.17 |
Lessee Guarantee dated December 27, 2000 made by TeleTech in favor of the Trust, First Security, the Certificate Holders and Lenders (incorporated by reference to Exhibit 2.5 to TeleTech's Current Report on Form 8-K filed on January 16, 2001) |
|
10.18 |
Contract dated December 26, 2000 between TCI Realty, LLC and TSC (incorporated by reference to Exhibit 2.6 to TeleTech's Current Report on Form 8-K filed on January 16, 2001) |
|
10.19 |
+ |
Employment Agreement dated as of February 26, 1998 between Morton H. Meyerson and TeleTech (incorporated by reference to Exhibit 10.14 to TeleTech's Annual Report on Form 10-K filed for the fiscal year ended December 31, 1998) |
10.20 |
+ |
Employment Agreement dated February 8, 2001 between Margot O'Dell and TeleTech (incorporated by reference to Exhibit 10.48 to TeleTech's Annual Report on Form 10-K filed for the fiscal year ended December 31, 2000) |
10.21 |
+ |
Stock Option Agreement between TeleTech Holdings, Inc. and Margot O'Dell dated September 11, 2000 (incorporated by reference to Exhibit 10.34 to TeleTech's Quarterly Report on Form 10-Q filed for the fiscal quarter ended September 30, 2000) |
10.22 |
+ |
Stock Option Agreement dated February 8, 2001 between Margot O'Dell and TeleTech (incorporated by reference to Exhibit 10.49 to TeleTech's Annual Report on Form 10-K filed for the fiscal year ended December 31, 2000) |
10.23 |
+ |
Stock Option Agreement dated March 21, 2001 between Margot O'Dell and TeleTech (incorporated by reference to Exhibit 10.50 to TeleTech's Annual Report on Form 10-K filed for the fiscal year ended December 31, 2000) |
10.24 |
+ |
Employment Agreement dated May 15, 2001 between James Kaufman and TeleTech (incorporated by reference to Exhibit 10.64 to TeleTech's Annual Report on Form 10-K filed for the fiscal year ended December 31, 2001) |
10.25 |
+ |
Stock Option Agreement dated August 16, 2000 between James Kaufman and TeleTech (incorporated by reference to Exhibit 10.53 to TeleTech's Annual Report on Form 10-K filed for the fiscal year ended December 31, 2000) |
10.26 |
+ |
Employment Agreement dated October 1, 2001 between Michael Foss and TeleTech (incorporated by reference to Exhibit 10.67 to TeleTech's Annual Report on Form 10-K filed for the fiscal year ended December 31, 2001) |
30
10.27 |
+ |
Non-Qualified Stock Option Agreement dated October 27, 1999 between Michael E. Foss and TeleTech (incorporated by reference to Exhibit 10.26 to TeleTech's Quarterly Report on Form 10-Q filed for the fiscal quarter ended March 31, 2000) |
10.28 |
+ |
Stock Option Agreement dated December 6, 2000 between Michael Foss and TeleTech (incorporated by reference to Exhibit 10.51 to TeleTech's Annual Report on Form 10-K filed for the fiscal year ended December 31, 2000) |
10.29 |
+ |
Employment Agreement dated May 21, 2001 between Sean Erickson and TeleTech (incorporated by reference to Exhibit 10.65 to TeleTech's Annual Report on Form 10-K filed for the fiscal year ended December 31, 2001) |
10.30 |
+ |
Promissory Note dated November 28, 2000 by Sean Erickson for the benefit of TeleTech (incorporated by reference to Exhibit 10.62 to TeleTech's Annual Report on Form 10-K filed for the fiscal year ended December 31, 2000) |
10.31 |
*+ |
Promissory Note dated March 28, 2001 by Sean Erickson for the benefit of TeleTech |
10.32 |
+ |
Stock Option Agreement dated August 16, 2000 between Sean Erickson and TeleTech (incorporated by reference to Exhibit 10.52 to TeleTech's Annual Report on Form 10-K filed for the fiscal year ended December 31, 2000) |
10.33 |
+ |
Employment Agreement dated October 15, 2001 between James Barlett and TeleTech (incorporated by reference to Exhibit 10.66 to TeleTech's Annual Report on Form 10-K filed for the fiscal year ended December 31, 2001) |
10.34 |
+ |
Stock Option Agreement dated October 15, 2001 between James Barlett and TeleTech (incorporated by reference to Exhibit 10.70 to TeleTech's Annual Report on Form 10-K filed for the fiscal year ended December 31, 2001) |
10.35 |
+ |
Restricted Stock Agreement dated October 15, 2001 between James Barlett and TeleTech (incorporated by reference to Exhibit 10.71 to TeleTech's Annual Report on Form 10-K filed for the fiscal year ended December 31, 2001) |
10.36 |
+ |
Restricted Stock Agreement dated October 15, 2001 between James Barlett and TeleTech (incorporated by reference to Exhibit 10.72 to TeleTech's Annual Report on Form 10-K filed for the fiscal year ended December 31, 2001) |
10.37 |
+ |
Employment Agreement dated October 15, 2001 between Ken Tuchman and TeleTech (incorporated by reference to Exhibit 10.68 to TeleTech's Annual Report on Form 10-K filed for the fiscal year ended December 31, 2001) |
10.38 |
+ |
Stock Option Agreement dated October 1, 2001 between Ken Tuchman and TeleTech (incorporated by reference to Exhibit 10.69 to TeleTech's Annual Report on Form 10-K filed for the fiscal year ended December 31, 2001) |
10.39 |
+ |
Letter Agreement dated January 11, 2001 between Chris Batson and TeleTech (incorporated by reference to Exhibit 10.54 to TeleTech's Annual Report on Form 10-K filed for the fiscal year ended December 31, 2000) |
10.40 |
+ |
Stock Option Agreement dated January 29, 2001 between Chris Batson and TeleTech (incorporated by reference to Exhibit 10.55 to TeleTech's Annual Report on Form 10-K filed for the fiscal year ended December 31, 2000) |
10.41 |
+ |
Letter Agreement dated January 26, 2001 between Jeffrey Sperber and TeleTech (incorporated by reference to Exhibit 10.56 to TeleTech's Annual Report on Form 10-K filed for the fiscal year ended December 31, 2000) |
31
10.42 |
+ |
Stock Option Agreement dated March 5, 2001 between Jeffrey Sperber and TeleTech (incorporated by reference to Exhibit 10.57 to TeleTech's Annual Report on Form 10-K filed for the fiscal year ended December 31, 2000) |
16.1 |
Representation letter from Arthur Andersen LLP (incorporated by reference to Exhibit 16.1 to TeleTech's Current Report on Form 8-K filed on May 16, 2002) |
|
21.1 |
<*> |
List of subsidiaries |
23.1 |
* |
Consent of Ernst & Young LLP |
23.2 |
* |
Information Regarding Consent of Arthur Andersen LLP |
99.1 |
* |
Certifications of Chief Executive Officer and Chief Financial Officer |
32
33
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 27, 2003.
| 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 27, 2003, by the following persons on behalf of the registrant and in the capacities indicated:
| Signature |
Title |
|
|---|---|---|
| /s/ KENNETH D. TUCHMAN Kenneth D. Tuchman PRINCIPAL EXECUTIVE OFFICER |
Chief Executive Officer and Chairman of the Board | |
/s/ MARGOT M. O'DELL Margot M. O'Dell PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER |
Chief Financial Officer |
|
/s/ JAMES E. BARLETT James E. Barlett DIRECTOR |
||
/s/ ROD DAMMEYER Rod Dammeyer DIRECTOR |
||
/s/ GEORGE HEILMEIER George Heilmeier DIRECTOR |
||
/s/ RUTH C. LIPPER Ruth C. Lipper DIRECTOR |
||
/s/ MORTON H. MEYERSON Morton H. Meyerson DIRECTOR |
||
34
/s/ ALAN SILVERMAN Alan Silverman DIRECTOR |
||
/s/ SHIRLEY YOUNG Shirley Young DIRECTOR |
35
I, Kenneth D. Tuchman, Chairman and Chief Executive Officer of TeleTech Holdings, Inc., certify that:
Date: March 27, 2003
/s/ KENNETH D. TUCHMAN Kenneth D. Tuchman Chairman and Chief Executive Officer |
36
I, Margot M. O'Dell, Chief Financial Officer and Executive Vice President of International Operations of TeleTech Holdings, Inc., certify that:
Date: March 27, 2003
/s/ MARGOT M. O'DELL Margot M. O'Dell Chief Financial Officer and Executive Vice President of International Operations |
37
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS OF TELETECH HOLDINGS, INC.
| |
Page |
|
|---|---|---|
| Report of Independent Auditor | 39 | |
| Report of Independent Public Accountants | 40 | |
| Consolidated Balance Sheets as of December 31, 2002 and 2001 | 41-42 | |
| Consolidated Statements of Operations for the Years Ended December 31, 2002, 2001 and 2000 | 43 | |
| Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2002, 2001 and 2000 | 44-45 | |
| Consolidated Statements of Cash Flows for the Years Ended December 31, 2002, 2001 and 2000 | 46-47 | |
| Notes to Consolidated Financial Statements for the Years Ended December 31, 2002, 2001 and 2000 | 48 |
38
To
the Stockholders and the
Board of Directors of TeleTech Holdings, Inc.:
We have audited the accompanying consolidated balance sheet of TeleTech Holdings, Inc. and subsidiaries as of December 31, 2002, and the related consolidated statements of operations, stockholders' equity, and cash flows for the year then ended December 31, 2002. These consolidated financial statements are the responsibility of TeleTech Holdings, Inc.'s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. The consolidated financial statements of TeleTech Holdings, Inc. for the years ended December 31, 2001 and 2000 were audited by other auditors who have ceased operations and whose report dated February 8, 2002 expressed an unqualified opinion on those statements before the revision to include the transitional disclosures included in Note 1.
We conducted our audit in accordance with auditing standards generally accepted in the United States. These 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 audit provides a reasonable basis for our opinion.
In our opinion, the 2002 consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of TeleTech Holdings, Inc. and subsidiaries as of December 31, 2002, and the consolidated results of their operations and their cash flows for the year then ended December 31, 2002, in conformity with accounting principles generally accepted in the United States.
As discussed in Note 1 to the consolidated financial statements, effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets " and Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets."
As discussed above, the consolidated financial statements of TeleTech Holdings, Inc. as of December 31, 2001 and 2000, and for the years then ended were audited by other auditors who have ceased operations. As described in Note 1, these consolidated financial statements have been revised to include the transitional disclosures required by Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets," which was adopted by the Company as of January 1, 2002. Our audit procedures with respect to the disclosures in Note 1 with respect to 2001 and 2000 included (a) agreeing the previously reported net income (loss) to the previously issued consolidated financial statements and the adjustments to reported net income (loss) representing amortization expense (including any related tax effects) recognized in those periods related to goodwill, to the Company's underlying records obtained from management, and (b) testing the mathematical accuracy of the reconciliation of adjusted net income (loss) to reported net income (loss). In our opinion, the disclosures for 2001 and 2000 in Note 1 are appropriate. However, we were not engaged to audit, review, or apply any procedures to the 2001 and 2000 consolidated financial statements of TeleTech Holdings, Inc. other than with respect to such disclosures and, accordingly, we do not express an opinion or any other form of assurance on TeleTech Holdings, Inc.'s 2001 and 2000 consolidated financial statements taken as a whole.
/s/ ERNST & YOUNG LLP
Denver,
Colorado
February 7, 2003
39
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.
/s/ ARTHUR ANDERSEN LLP
Denver,
Colorado,
February 8, 2002
This is a copy of the audit report previously issued by Arthur Andersen LLP in connection with TeleTech Holdings, Inc.'s filing on Form 10-K for the year ended December 31, 2001. This audit report has not been reissued by Arthur Andersen LLP in connection with this filing on Form 10-K. See Exhibit 23.2 for further discussion. The consolidated balance sheet as of December 31, 2000 referred to in this report has not been included in the accompanying financial statements.
40
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
| |
December 31, |
|||||||
|---|---|---|---|---|---|---|---|---|
| |
2002 |
2001 |
||||||
| ASSETS | ||||||||
CURRENT ASSETS: |
||||||||
| Cash and cash equivalents | $ | 144,792 | $ | 95,430 | ||||
| Investment in available-for-sale securities | — | 2,281 | ||||||
| Short-term investments | 23 | 6,460 | ||||||
| Accounts receivable, net | 137,598 | 162,344 | ||||||
| Prepaids and other assets | 18,867 | 21,888 | ||||||
| Income taxes receivable | 14,318 | 8,410 | ||||||
| Deferred tax asset | 11,633 | 11,613 | ||||||
| Total current assets | 327,231 | 308,426 | ||||||
PROPERTY AND EQUIPMENT, net |
123,093 |
177,959 |
||||||
OTHER ASSETS: |
||||||||
| Long-term accounts receivable | 858 | 3,249 | ||||||
| Goodwill, net of accumulated amortization of $5,147 and $6,394, respectively | 29,987 | 40,563 | ||||||
| Contract acquisition costs, net of accumulated amortization of $10,637 and $6,575, respectively | 20,768 | 12,873 | ||||||
| Deferred tax asset | 17,067 | 6,800 | ||||||
| Other assets | 21,584 | 24,069 | ||||||
| Total assets | $ | 540,588 | $ | 573,939 | ||||
The accompanying notes are an integral part of these consolidated balance sheets.
41
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Cont.)
(Amounts in thousands except share amounts)
| |
December 31, |
||||||||
|---|---|---|---|---|---|---|---|---|---|
| |
2002 |
2001 |
|||||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | |||||||||
CURRENT LIABILITIES: |
|||||||||
| Accounts payable | $ | 19,995 | $ | 17,939 | |||||
| Accrued employee compensation and benefits | 54,076 | 42,316 | |||||||
| Other accrued expenses | 22,111 | 35,991 | |||||||
| Customer advances and deferred income | 35,479 | 22,048 | |||||||
| Current portion of long-term debt and capital lease obligations | 4,673 | 4,927 | |||||||
| Total current liabilities | 136,334 | 123,221 | |||||||
LONG-TERM LIABILITIES, net of current portion: |
|||||||||
| Capital lease obligations | 524 | 4,081 | |||||||
| Senior notes | 75,000 | 75,000 | |||||||
| Other long-term debt | 1,060 | 4,916 | |||||||
| Other liabilities | 7,934 | 4,452 | |||||||
| Total liabilities | 220,852 | 211,670 | |||||||
MINORITY INTEREST |
13,577 |
14,319 |
|||||||
| STOCKHOLDERS' EQUITY: | |||||||||
| Stock purchase warrants | 5,100 | 5,100 | |||||||
| Common stock; $.01 par value; 150,000,000 shares authorized; 74,124,416 and 76,751,607 shares, respectively, issued and outstanding | 740 | 768 | |||||||
| Additional paid-in capital | 193,954 | 212,097 | |||||||
| Deferred compensation | (1,184 | ) | (2,078 | ) | |||||
| Notes receivable from stockholders | (224 | ) | (107 | ) | |||||
| Accumulated other comprehensive loss | (26,855 | ) | (19,213 | ) | |||||
| Retained earnings | 134,628 | 151,383 | |||||||
| Total stockholders' equity | 306,159 | 347,950 | |||||||
| Total liabilities and stockholders' equity | $ | 540,588 | $ | 573,939 | |||||
The accompanying notes are an integral part of these consolidated balance sheets.
42
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands except per share data)
| |
Year Ended December 31, |
|||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
2002 |
2001 |
2000 |
|||||||||
| REVENUES | $ | 1,017,436 | $ | 916,144 | $ | 885,349 | ||||||
| OPERATING EXPENSES: | ||||||||||||
| Costs of services | 712,585 | 587,423 | 557,681 | |||||||||
| Selling, general and administrative expenses | 198,959 | 204,005 | 189,668 | |||||||||
| Depreciation and amortization | 57,725 | 60,308 | 48,001 | |||||||||
| Impairment loss | 32,816 | — | — | |||||||||
| Restructuring charges | 8,243 | 18,515 | — | |||||||||
| Loss on closure of subsidiary and customer management centers | 1,213 | 7,733 | 8,082 | |||||||||
| Loss on real estate held for sale | — | 7,000 | 9,000 | |||||||||
| Total operating expenses | 1,011,541 | 884,984 | 812,432 | |||||||||
| INCOME FROM OPERATIONS | 5,895 | 31,160 | 72,917 | |||||||||
| OTHER INCOME (EXPENSE): | ||||||||||||
| Interest, net | (5,118 | ) | (3,999 | ) | 371 | |||||||
| Other than temporary decline in value of equity investment | — | (16,500 | ) | — | ||||||||
| Gain on sale of securities | 547 | 161 | 56,985 | |||||||||
| Share of losses on equity investment | (3,562 | ) | (7,702 | ) | — | |||||||
| Business combination expenses | — | — | (10,548 | ) | ||||||||
| Other | (2,130 | ) | (3,361 | ) | 2,578 | |||||||
| (10,263 | ) | (31,401 | ) | 49,386 | ||||||||
| INCOME (LOSS) BEFORE INCOME TAXES, MINORITY INTEREST AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE | (4,368 | ) | (241 | ) | 122,303 | |||||||
| Provision for income taxes | 1,606 | 174 | 46,938 | |||||||||
| INCOME (LOSS) BEFORE MINORITY INTEREST AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE | (5,974 | ) | (415 | ) | 75,365 | |||||||
| Minority interest | 760 | (1,510 | ) | (1,559 | ) | |||||||
| INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE | (5,214 | ) | (1,925 | ) | 73,806 | |||||||
| CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE | (11,541 | ) | — | — | ||||||||
| NET INCOME (LOSS) | $ | (16,755 | ) | $ | (1,925 | ) | $ | 73,806 | ||||
| WEIGHTED AVERAGE SHARES OUTSTANDING | ||||||||||||
| Basic | 76,383 | 75,804 | 74,171 | |||||||||
| Diluted | 76,383 | 75,804 | 79,108 | |||||||||
| INCOME (LOSS) PER SHARE BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE | ||||||||||||
| Basic | $ | (0.07 | ) | $ | (0.03 | ) | $ | 1.00 | ||||
| Diluted | $ | (0.07 | ) | $ | (0.03 | ) | $ | 0.93 | ||||
| NET INCOME (LOSS) PER SHARE | ||||||||||||
| Basic | $ | (0.22 | ) | $ | (0.03 | ) | $ | 1.00 | ||||
| Diluted | $ | (0.22 | ) | $ | (0.03 | ) | $ | 0.93 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
43
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Amounts in thousands)
| |
Common Stock |
|
Accumulated Other Comprehensive Income (Loss) |
|
Notes Receivable from Stockholder |
|
|
|
|
||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
Additional Paid-in Capital |
Deferred Compensation |
Stock Purchase Warrants |
Retained Earnings |
Comprehensive Income (Loss) |
Total Stockholders' Equity |
|||||||||||||||||||||||||
| |
Shares |
Amount |
|||||||||||||||||||||||||||||
| BALANCES, December 31, 1999 | 73,114 | $ | 731 | $ | 174,299 | $ | (1,398 | ) | $ | (1,104 | ) | $ | (56 | ) | $ | — | $ | 80,673 | $ | $ | 253,145 | ||||||||||
| Comprehensive income (loss): | |||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | — | 73,806 | 73,806 | 73,806 | |||||||||||||||||||||
| Other comprehensive income (loss) | |||||||||||||||||||||||||||||||
| Unrealized gains on securities, net of tax | — | — | — | 9,519 | — | — | — | — | 9,519 | 9,519 | |||||||||||||||||||||
| Translation adjustments | — | — | — | (3,293 | ) | — | — | — | — | (3,293 | ) | (3,293 | ) | ||||||||||||||||||
| Other comprehensive income | — | — | — | — | — | — | — | — | 6,226 | ||||||||||||||||||||||
| Comprehensive income | — | — | — | — | — | — | — | — | $ | 80,032 | |||||||||||||||||||||
| Employee stock purchase plan | 70 | 1 | 1,895 | — | — | — | — | — | 1,896 | ||||||||||||||||||||||
| Acquisition of iCcare | 75 | 1 | 1,999 | — | — | — | — | — | 2,000 | ||||||||||||||||||||||
| Exercise of stock options | 1,384 | 14 | 17,355 | — | — | (227 | ) | — | — | 17,142 | |||||||||||||||||||||
| Issuances of common stock | 41 | — | 2,920 | — | — | — | — | — | 2,920 | ||||||||||||||||||||||
| CCH acquisition costs | — | — | 1,800 | — | — | — | — | — | 1,800 | ||||||||||||||||||||||
| Amortization of deferred compensation | — | — | — | — | 501 | — | — | — | 501 | ||||||||||||||||||||||
| Issuance of warrants | — | — | — | — | — | — | 5,100 | — | 5,100 | ||||||||||||||||||||||
| Distribution to stockholder | — | — | — | — | — | — | — | (1,171 | ) | (1,171 | ) | ||||||||||||||||||||
| BALANCES, December 31, 2000 | 74,684 | 747 | 200,268 | 4,828 | (603 | ) | (283 | ) | 5,100 | 153,308 | 363,365 | ||||||||||||||||||||
| Comprehensive income: | |||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | — | — | (1,925 | ) | (1,925 | ) | (1,925 | ) | ||||||||||||||||||
| Other comprehensive loss | |||||||||||||||||||||||||||||||
| Unrealized losses on securities, net of tax | — | — | — | (8,577 | ) | — | — | — | — | (8,577 | ) | (8,577 | ) | ||||||||||||||||||
| Translation adjustments | — | — | — | (14,649 | ) | — | — | — | — | (14,649 | ) | (14,649 | ) | ||||||||||||||||||
| Derivative valuation, net of tax | — | — | — | (815 | ) | — | — | — | — | (815 | ) | (815 | ) | ||||||||||||||||||
| Other comprehensive loss | — | — | — | — | — | — | — | — | (24,041 | ) | |||||||||||||||||||||
| Comprehensive loss | — | — | — | — | — | — | — | — | $ | (25,966 | ) | ||||||||||||||||||||
44
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Cont.)
(Amounts in thousands)
| |
Common Stock |
|
Accumulated Other Comprehensive Income (Loss) |
|
Notes Receivable from Stockholder |
|
|
|
|
||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
Additional Paid-in Capital |
Deferred Compensation |
Stock Purchase Warrants |
Retained Earnings |
Comprehensive Income (Loss) |
Total Stockholders' Equity |
|||||||||||||||||||||||||
| |
Shares |
Amount |
|||||||||||||||||||||||||||||
| Employee stock purchase plan | 263 | 3 | 1,754 | — | — | — | — | — | 1,757 | ||||||||||||||||||||||
| Exercise of stock options | 1,840 | 18 | 7,723 | — | — | — | — | — | 7,741 | ||||||||||||||||||||||
| Grant of restricted stock | — | — | 1,961 | — | (1,927 | ) | — | — | — | 34 | |||||||||||||||||||||
| Purchase of common stock | (35 | ) | — | (213 | ) | — | — | — | — | — | (213 | ) | |||||||||||||||||||
| Amortization of deferred compensation | — | — | — | — | 452 | — | — | — | 452 | ||||||||||||||||||||||
| Other | — | — | 604 | — | — | 176 | — | — | 780 | ||||||||||||||||||||||
| BALANCES, December 31, 2001 | 76,752 | $ | 768 | $ | 212,097 | $ | (19,213 | ) | $ | (2,078 | ) | $ | (107 | ) | $ | 5,100 | $ | 151,383 | $ | $ | 347,950 | ||||||||||
| Comprehensive income (loss): | |||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | — | — | (16,755 | ) | (16,755 | ) | (16,755 | ) | ||||||||||||||||||
| Other comprehensive loss | |||||||||||||||||||||||||||||||
| Unrealized losses on securities, net of tax | — | — | — | (941 | ) | — | — | — | — | (941 | ) | (941 | ) | ||||||||||||||||||
| Translation adjustments | — | — | — | (4,668 | ) | — | — | — | — | (4,668 | ) | (4,668 | ) | ||||||||||||||||||
| Derivative valuation, net of tax | — | — | — | (2,033 | ) | — | — | — | — | (2,033 | ) | (2,033 | ) | ||||||||||||||||||
| Other comprehensive loss | — | — | — | — | — | — | — | — | (7,642 | ) | |||||||||||||||||||||
| Comprehensive loss | — | — | — | — | — | — | — | — | $ | (24,397 | ) | ||||||||||||||||||||
| Employee stock purchase plan | 293 | 3 | 1,851 | — | — | — | — | — | 1,854 | ||||||||||||||||||||||
| Exercise of stock options | 609 | 6 | 4,636 | — | — | — | — | — | 4,642 | ||||||||||||||||||||||
| Purchase of common stock | (3,530 | ) | (37 | ) | (24,747 | ) | — | — | — | — | — | (24,784 | ) | ||||||||||||||||||
| Amortization of deferred compensation | — | — | — | — | 894 | — | — | — | 894 | ||||||||||||||||||||||
| Other | — | — | 117 | — | — | (117 | ) | — | — | — | |||||||||||||||||||||
| BALANCES, December 31, 2002 | 74,124 | $ | 740 | $ | 193,954 | $ | (26,855 | ) | $ | (1,184 | ) | $ | (224 | ) | $ | 5,100 | $ | 134,628 | $ | 306,159 | |||||||||||
The accompanying notes are an integral part of these consolidated financial statements. |
|||||||||||||||||||||||||||||||
45
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
| |
Year Ended December 31, |
|||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
2002 |
2001 |
2000 |
|||||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||||||||
| Net income (loss) | $ | (16,755 | ) | $ | (1,925 | ) | $ | 73,806 | ||||||
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | ||||||||||||||
| Cumulative effect of change in accounting principle | 11,541 | — | — | |||||||||||
| Depreciation and amortization | 57,725 | 60,308 | 48,001 | |||||||||||
| Bad debt expense | 9,258 | 6,026 | 5,067 | |||||||||||
| Deferred rent | — | — | (52 | ) | ||||||||||
| Gain on sale of securities | (547 | ) | (161 | ) | (56,985 | ) | ||||||||
| Deferred compensation | 894 | 452 | 501 | |||||||||||
| Deferred income taxes | (8,931 | ) | (10,693 | ) | (2,281 | ) | ||||||||
| Minority interest | (760 | ) | 1,510 | 1,559 | ||||||||||
| Share of losses on equity investment | 3,562 | 7,702 | — | |||||||||||
| Impairment loss | 32,816 | — | — | |||||||||||
| Loss on closure of customer management centers or subsidiary | 1,213 | 7,733 | 8,082 | |||||||||||
| Loss on real estate held for sale | — | 7,000 | 9,000 | |||||||||||
| Loss on disposal of assets | 89 | — | — | |||||||||||
| Other than temporary decline in value of equity investment | — | 16,500 | — | |||||||||||
| Loss on derivatives | 94 | 909 | — | |||||||||||
| Net gain on sale of division of subsidiary | — | — | (3,964 | ) | ||||||||||
| Non-cash acquisition costs | — | — | 1,800 | |||||||||||
| Tax benefit from stock option exercises | 406 | 2,326 | 8,573 | |||||||||||
| Changes in assets and liabilities: | ||||||||||||||
| Accounts receivable | 29,058 | 16,102 | (102,000 | ) | ||||||||||
| Prepaids and other assets | (5,324 | ) | (8,233 | ) | (14,780 | ) | ||||||||
| Accounts payable and accrued expenses | (14,108 | ) | (17,131 | ) | 61,424 | |||||||||
| Customer advances and deferred income | 13,431 | 15,144 | (1,489 | ) | ||||||||||
| Net cash provided by operating activities | 113,662 | 103,569 | 36,262 | |||||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||||||||
| Purchase of property and equipment | (37,940 | ) | (52,073 | ) | (118,013 | ) | ||||||||
| Acquisitions, net of cash acquired | — | — | (15,700 | ) | ||||||||||
| Proceeds from sale of available-for-sale securities | 1,633 | 1,251 | 64,912 | |||||||||||
| Proceeds from sale of businesses | — | — | 4,950 | |||||||||||
| Proceeds from minority interest in subsidiary | — | — | 11,250 | |||||||||||
| Funding of EHI, net | 88 | (11,908 | ) | (7,989 | ) | |||||||||
| 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 | (3,821 | ) | (967 | ) | (15,211 | ) | ||||||||
| Decrease in short-term investments | 6,437 | 2,444 | 23,934 | |||||||||||
| Net cash used in investing activities | (33,603 | ) | (75,035 | ) | (54,272 | ) | ||||||||
The accompanying notes are an integral part of these consolidated financial statements.
46
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Cont.)
(Amounts in thousands)
| |
Year Ended December 31, |
||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
2002 |
2001 |
2000 |
||||||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | |||||||||||||
| Purchase of common stock | $ | (24,784 | ) | $ | (213 | ) | $ | — | |||||
| Net decrease in bank overdraft | — | — | (1,323 | ) | |||||||||
| Net increase (decrease) in line of credit | — | (62,000 | ) | 44,000 | |||||||||
| Proceeds from long-term debt borrowings | — | 75,000 | 700 | ||||||||||
| Payments on long-term debt borrowings | (5,141 | ) | (9,947 | ) | (7,182 | ) | |||||||
| Payments on capital lease obligations | (4,920 | ) | (2,452 | ) | (11,358 | ) | |||||||
| Proceeds from employee stock purchase plan | 1,854 | 1,757 | 1,896 | ||||||||||
| Proceeds from exercise of stock options | 4,236 | 5,415 | 8,569 | ||||||||||
| Distribution to stockholder | — | — | (1,171 | ) | |||||||||
| Net cash (used in) provided by financing activities | (28,755 | ) | 7,560 | 34,131 | |||||||||
| Effect of exchange rate changes on cash | (1,942 | ) | 539 | (5,602 | ) | ||||||||
| NET INCREASE IN CASH AND CASH EQUIVALENTS: | 49,362 | 36,633 | 10,519 | ||||||||||
| CASH AND CASH EQUIVALENTS, beginning of year | 95,430 | 58,797 | 48,278 | ||||||||||
| CASH AND CASH EQUIVALENTS, end of year | $ | 144,792 | $ | 95,430 | $ | 58,797 | |||||||
| SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: | |||||||||||||
| Cash paid for interest | $ | 7,796 | $ | 5,444 | $ | 1,510 | |||||||
| Cash paid for income taxes | $ | 31,075 | $ | 22,916 | $ | 22,497 | |||||||
| Assets acquired under capital leases and other financings | $ | 349 | $ | 3,358 | $ | 2,991 | |||||||
The accompanying notes are an integral part of these consolidated financial statements.
47
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements For the Years Ended
December 31, 2002, 2001 and 2000
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, the Philippines, 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 the year 2000 have been restated in the accompanying consolidated financial statements to include the financial position, results of operations and cash flows of CCH and Newgen.
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. Intercompany loans are generally treated as permanently invested and settlement is not planned or anticipated in the foreseeable future.
Cash, Cash Equivalents, Investment in Available-for-Sale Securities and Short-Term Investments. The Company considers all cash and investments with an original maturity of 90 days or less to be cash equivalents. Investment in available-for-sale securities consisted of shares of common stock of a publicly-traded company held by the Company. Short-term investments consist of commercial paper, corporate securities, government securities and other securities. Investment in available-for-sale securities and 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.
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.
48
Depreciation is computed on the straight-line method based on the following estimated useful lives:
| Computer equipment and software | 4-5 years | |
| Telephone equipment | 4-7 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 $3.8 million, $3.4 million and $5.2 million for the years ended December 31, 2002, 2001 and 2000, respectively.
Depreciation expense was $51.4 million, $51.3 million and $40.9 million for the years ended December 31, 2002, 2001 and 2000, respectively.
Long-Term Accounts Receivable. Long-term accounts receivable are receivables the Company believes will take in excess of one year to receive payment due to either extended payment terms or litigation. Long-term accounts receivable are stated at their estimated net realizable value.
Goodwill. Goodwill represents the excess of acquisition costs over the fair value of net assets of businesses acquired, and prior to the adoption of Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets," was amortized on a straight-line basis over periods ranging from nine to 25 years.
The Company adopted SFAS No. 142 on January 1, 2002. Under SFAS No. 142, goodwill is no longer required to be amortized, however, must be tested annually for impairment.
In the year of its adoption, SFAS No. 142 required a transitional goodwill impairment evaluation, which was a two-step process. The first step was to determine whether there was an indication that goodwill was impaired on January 1, 2002. SFAS No. 142 required a separate impairment evaluation of each of the Company's reporting units, which the Company determined to be the same as its operating business units. To perform the first step, the fair value of each reporting unit was estimated by a third-party appraiser by discounting the expected future cash flows and using market multiples of comparable companies. The fair value of each reporting unit was compared to its carrying value, including goodwill. This first step evaluation indicated an impairment of the goodwill recorded by its Latin American reporting unit, but no impairment of the goodwill recorded by its North American, Asia Pacific or Newgen reporting units.
Since the first step indicated an impairment of Latin American goodwill, SFAS No. 142 required a second step to determine the amount of the impairment. The amount of the impairment was determined by comparing the implied fair value of Latin American goodwill to its carrying value. The implied fair value of the goodwill was determined by allocating the fair value of Latin America to its assets and liabilities as if Latin America had been acquired and the fair value was the purchase price. The excess "purchase price" over the amounts assigned to the assets and liabilities was the implied value of goodwill. The carrying amount of Latin America goodwill exceeded the implied value by $11.5 million, which excess has been recorded as a cumulative effect of a change in accounting principle in the consolidated statements of operations for the year ended December 31, 2002. The impairment loss on the goodwill recorded by Latin America was due to the significant anticipated decline in its performance in 2002 and the impact of that decline on expected future cash flows. The
49
Company performed its impairment test on each of its reporting units again in December 2002 and concluded that there were no further indications of impairment.
The following table summarizes the Company's net income (loss) and earnings (loss) per share had the provisions of SFAS No. 142 been in effect on January 1, 2000 (in thousands, except per share amounts):
| |
December 31, |
|||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| |
2002 |
2001 |
2000 |
|||||||
| Reported net income (loss) | $ | (16,755 | ) | $ | (1,925 | ) | $ | 73,806 | ||
| Goodwill amortization, net of tax of $0.9 million in 2001 and $0.9 million in 2000 | — | 1,862 | 2,055 | |||||||
| Adjusted net income (loss) | $ | (16,755 | ) | $ | (63 | ) | $ | 75,861 | ||
| Diluted earnings (loss) per share—as reported | $ | (0.22 | ) | $ | (0.03 | ) | $ | 0.93 | ||
| Diluted earnings (loss) per share—adjusted | $ | (0.22 | ) | $ | — | $ | 0.96 | |||
Contract Acquisition Costs. Amounts paid to or on behalf of clients to obtain long-term contracts are capitalized (if incurred within 12 months of commencement of operations) and amortized on a straight-line basis over the terms of the contracts commencing with the date of the first revenues from the contract. In certain circumstances, costs may be estimated at the inception of operations and subsequently revised based on actual costs incurred. The Company's accounting policy is to limit the amount of capitalized costs for a given contract to the lesser of the estimated ongoing future cash flows from the contract or the termination fees the Company would receive in the event of early termination of the contract by the customer. The Company's entitlement to termination fees may, however, be subject to challenge if a customer were to allege that the Company was in breach of contract. Amortization of these costs for the years ended December 31, 2002, 2001 and 2000, was $4.1 million, $2.7 million and $2.3 million, respectively. During 2002, the Company adopted Emerging Issues Task Force ("EITF") No. 01-09, "Accounting for Consideration Given by a Vendor to a Customer or Reseller of the Vendor's Products," which requires certain expenses previously classified as depreciation and amortization expenses to be reclassified as deductions from revenues. Prior year results have not been restated as the impact was immaterial. Future amortization of contract acquisition costs are as follows (in thousands):
| 2003 | $ | 4,194 | |
| 2004 | 4,194 | ||
| 2005 | 2,580 | ||
| 2006 | 2,337 | ||
| 2007 | 2,329 | ||
| Thereafter | 5,134 | ||
| $ | 20,768 | ||
Long-Lived Assets. On January 1, 2002, the Company adopted SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." Under SFAS No. 144, 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. In the fourth quarter of 2002, the Company determined that the net fixed asset balances of certain customer management centers were impaired. In making its determination, the Company considered historical
50
and projected capacity utilization, pricing and operating cash flows. Accordingly, the Company's North American and international outsourcing segments recorded impairment losses of $16.7 million and $16.1 million, respectively to adjust the respective asset carrying amounts to their estimated fair market values. The Company relied on historical and recent experience in selling similar assets to third parties to determine their estimated fair market value. The above mentioned charges are reflected as an impairment loss in the accompanying consolidated statements of operations for the year ended December 31, 2002.
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, 2002 and 2001, the Company had approximately $17.5 million and $12.1 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 $5.2 and $0.6 million of amortization expense related to capitalized software costs is included in the accompanying consolidated statements of operations for the years ended December 31, 2002 and 2001, respectively. There was no amortization expense for the year ended December 31, 2000, as the software was in the development stage.
Customer Advances and Deferred Income. The Company records amounts billed or received but not earned as customer advances and deferred income. Included in customer advances and deferred income are customer prepayments, unearned grant monies received from local municipalities and amounts received to settle contractual minimum commitments in lieu of providing services. These settlement payments are amortized over the life of the original contract life that gave rise to the obligation. For the year ended December 31, 2002, the Company amortized approximately $10.8 million into revenue in the accompanying consolidated statements of operations related to settlement payments.
Income Taxes. The Company accounts for income taxes under the provisions of SFAS No. 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 No. 109.
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.
51
Comprehensive Income (Loss). Comprehensive income (loss) includes the following components:
| |
Year Ended December 31, |
||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| |
2002 |
2001 |
2000 |
||||||||
| |
(in thousands) |
||||||||||
| Net income (loss) for the period | $ | (16,755 | ) | $ | (1,925 | ) | $ | 73,806 | |||
| Other comprehensive income (loss): | |||||||||||
| Unrealized gains (losses) on securities, net of reclassification adjustments | (1,270 | ) | (13,197 | ) | 14,644 | ||||||
| Foreign currency translation adjustments | (4,668 | ) | (14,649 | ) | (3,293 | ) | |||||
| Derivative valuation, net of tax | (2,033 | ) | (1,254 | ) | — | ||||||
| Income tax (expense) benefit related to items of other comprehensive income | 329 | 5,059 | (5,125 | ) | |||||||
| Other comprehensive income (loss), net of tax | (7,642 | ) | (24,041 | ) | 6,226 | ||||||
| Comprehensive income (loss) | $ | (24,397 | ) | $ | (25,966 | ) | $ | 80,032 | |||
Disclosure of reclassification amounts:
| |
Year Ended December 31, |
|||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| |
2002 |
2001 |
2000 |
|||||||
| |
(in thousands) |
|||||||||
| Unrealized holding gains (losses) arising during the period | $ | (723 | ) | $ | (13,036 | ) | $ | 71,629 | ||
| Less: reclassification adjustment for gains included in net income (loss) | (547 | ) | (161 | ) | (56,985 | ) | ||||
| Benefit (Provision) for income taxes | 329 | 4,620 | (5,125 | ) | ||||||
| Net unrealized gains (losses) on securities | $ | (941 | ) | $ | (8,577 | ) | $ | 9,519 | ||
At December 31, 2002, accumulated comprehensive income consists of $24.0 million and $2.9 million of foreign currency translation adjustments and derivative valuation, respectively.
Earnings (Loss) Per Share. Basic earnings (loss) per share is computed by dividing the Company's net income (loss) by the weighted average number of common shares outstanding. The impact of any potentially dilutive securities is excluded. Diluted earnings per share is 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, 2002:
| |
Year Ended December 31, |
||||||
|---|---|---|---|---|---|---|---|
| |
2002 |
2001 |
2000 |
||||
| |
(in thousands) |
||||||
| Shares used in basic per share calculation | 76,383 | 75,804 | 74,171 | ||||
| Effects of dilutive securities: | |||||||
| Warrants | — | — | 444 | ||||
| Stock options | — | — | 4,493 | ||||
| Shares used in diluted per share calculation | 76,383 | 75,804 | 79,108 | ||||
52
At December 31, 2002, 2001 and 2000 options to purchase 8.1 million, 4.9 million and 2.4 million 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 $6.9 million and $4.0 million at December 31, 2002 and 2001, 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. 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, 2002 and 2001 have a carrying value that approximates their 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. The Company follows 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 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. Based on the criteria established by SFAS No. 133, all of the Company's hedges are deemed effective. While the Company expects that its derivative instruments will continue to meet the conditions for hedge accounting, if hedges did not qualify as highly effective or if the Company did not believe that forecasted transactions would occur, the changes in the fair value of the derivatives used as hedges would be reflected in earnings. The Company does not believe it is exposed to more than a nominal amount of credit risk in its hedging activities, as the counterparties are established, well-capitalized financial institutions.
At December 31, 2002, the Company has an interest rate swap designated as a cash flow hedge. The Company has an operating lease for its headquarters building whereby the required lease payments are variable based on LIBOR. On December 12, 2000, the Company entered into an interest rate swap whereby 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, 2002, the Company has a derivative liability associated with this swap of $5.0 million, which is reflected in other liabilities on the accompanying consolidated balance sheets.
53
The Company's Canadian subsidiary's functional currency is the Canadian dollar. The subsidiary has customer contracts where it is paid in U.S. dollars and the Company has contracted with several commercial banks to acquire a total of $120.4 million Canadian dollars through November 2004 at a fixed price in U.S. dollars of $76.2 million to hedge its foreign currency risk. During the year ended December 31, 2002, the Company recorded $0.1 million in its statement of operations relating to Canadian dollar forward contracts. As of December 31, 2002, the Company has a derivative liability of $0.3 million associated with these forward contracts, which is reflected in other accrued expenses on the accompanying consolidated balance sheets.
Stock Option Accounting. The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), and related interpretations in accounting for its employee stock options. Under APB 25, because the exercise price of the Company's employee stock options is generally equal to the market price of the underlying stock on the date of the grant, no compensation expense is recognized. Statement No. 123, "Accounting and Disclosure of Stock-Based Compensation" ("SFAS 123"), establishes an alternative method of expense recognition for stock-based compensation awards to employees based on fair values. The Company elected not to adopt SFAS 123 for expense recognition purposes.
Pro forma information regarding net income and earnings per share is required by SFAS 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of SFAS 123. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions: risk-free interest rate of 4.0%, 4.8% and 4.9% in 2002, 2001 and 2000, respectively; dividend yield of 0.0% during each period; volatility factor of the expected market price of the Company's common stock of 72%, 81% and 81%, for 2002, 2001 and 2000, respectively; and a weighted-average expected life of the option of 4.0 years, 5.7 years and 3.1 years for 2002, 2001 and 2000, respectively.
Option valuation models require the input of highly subjective assumptions including expected stock price characteristics significantly different from those of traded options. Because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.
The weighted-average fair value of options granted during 2002, 2001 and 2000 was $6.19, $4.00, and $15.27, respectively. For purposes of pro-forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro-forma net income (loss) and pro-forma net income (loss) per share, as if the Company had used the fair value accounting provisions of SFAS 123 are shown below.
Net Income (Loss)
| |
Years ended December 31, |
||||||||
|---|---|---|---|---|---|---|---|---|---|
| |
2002 |
2001 |
2000 |
||||||
| |
(amounts in thousands) |
||||||||
| As reported | $ | (16,755 | ) | $ | (1,925 | ) | $ | 73,806 | |
| Pro forma | $ | (27,545 | ) | $ | (12,459 | ) | $ | 55,680 | |
54
Per Share Amounts
| |
2002 |
2001 |
2000 |
|||||||
|---|---|---|---|---|---|---|---|---|---|---|
| As reported: | ||||||||||
| Basic | $ | (0.22 | ) | $ | (0.03 | ) | $ | 1.00 | ||
| Diluted | $ | (0.22 | ) | $ | (0.03 | ) | $ | 0.93 | ||
| Pro forma: | ||||||||||
| Basic | $ | (0.36 | ) | $ | (0.16 | ) | $ | 0.75 | ||
| Diluted | $ | (0.36 | ) | $ | (0.16 | ) | $ | 0.70 | ||
Effects of Recently Issued Accounting Pronouncements. In June 2001, the Financial Accounting Standards Board ("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 does not believe adoption will have a material effect on the Company's financial position.
In April 2002, the FASB issued SFAS No. 145, "Recission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections," which eliminated inconsistency between required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. This statement is effective for financial statements issued for fiscal years beginning after May 15, 2002. Management does not believe adoption will have a material effect on the Company's financial position.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," which specifies that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred instead of recognized at the date of an entity's commitment to an exit plan. This statement is effective for exit or disposal activities that are initiated after December 31, 2002. Management does not believe adoption will have a material effect on the Company's financial position.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation—Transition and Disclosure." SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. SFAS No. 148 also required that disclosures of the pro forma effect of using the fair value method of accounting for stock-based employee compensation be displayed more prominently and in a tabular format. The Company has implemented all required disclosures of SFAS 148 in this Form 10-K filing. Additionally, SFAS No. 148 requires disclosure of the pro forma effect in interim financial statements. The transition requirements of SFAS No. 148 are effective for the Company's fiscal year 2003. The Company does not plan to transition to a fair value method of accounting for stock-based employee compensation.
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, while international outsourcing consists of all other countries. Database marketing and consulting provides outsourced database management, direct marketing and related customer retention services for
55
automobile dealerships and manufacturers. Included in corporate activities are the elimination of intercompany transactions, general corporate expenses and operational management expenses not attributable to any other segment. 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.
| |
2002 |
2001 |
2000 |
|||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
(Amounts in thousands) |
|||||||||||
| Revenues: | ||||||||||||
| North American outsourcing | $ | 707,115 | $ | 609,976 | $ | 591,834 | ||||||
| International outsourcing | 217,028 | 236,651 | 206,989 | |||||||||
| Database marketing and consulting | 95,988 | 71,156 | 78,255 | |||||||||
| Corporate activities | (2,695 | ) | (1,639 | ) | 8,271 | |||||||
| Total | $ | 1,017,436 | $ | 916,144 | $ | 885,349 | ||||||
| Operating Income (Loss): | ||||||||||||
| North American outsourcing | $ | 69,084 | $ | 88,105 | $ | 110,850 | ||||||
| International outsourcing | (23,481 | ) | 12,320 | 21,900 | ||||||||
| Database marketing and consulting | 15,512 | 8,836 | 9,659 | |||||||||
| Corporate activities | (55,220 | ) | (78,101 | ) | (69,492 | ) | ||||||
| Total | $ | 5,895 | $ | 31,160 | $ | 72,917 | ||||||
| Depreciation and Amortization (Included in Operating Income): | ||||||||||||
| North American outsourcing | $ | 28,780 | $ | 31,877 | $ | 26,143 | ||||||
| International outsourcing | 14,472 | 13,937 | 10,244 | |||||||||
| Database marketing and consulting | 7,280 | 7,254 | 5,145 | |||||||||
| Corporate activities | 7,193 | 7,240 | 6,469 | |||||||||
| Total | $ | 57,725 | $ | 60,308 | $ | 48,001 | ||||||
| Assets: | ||||||||||||
| North American outsourcing | $ | 161,973 | $ | 190,239 | $ | 215,646 | ||||||
| International outsourcing | 117,382 | 167,378 | 148,775 | |||||||||
| Database marketing and consulting | 78,376 | 64,379 | 63,966 | |||||||||
| Corporate activities | 182,857 | 151,943 | 152,512 | |||||||||
| Total | $ | 540,588 | $ | 573,939 | $ | 580,899 | ||||||
| Goodwill, net (Included in Total Assets): | ||||||||||||
| North American outsourcing | $ | 11,446 | $ | 11,446 | $ | 11,886 | ||||||
| International outsourcing | 5,180 | 15,756 | 14,181 | |||||||||
| Database marketing and consulting | 13,361 | 13,361 | 15,244 | |||||||||
| Corporate activities | — | — | — | |||||||||
| Total | $ | 29,987 | $ | 40,563 | $ | 41,311 | ||||||
| Capital Expenditures (Including Capital Leases): | ||||||||||||
| North American outsourcing | $ | 19,272 | $ | 10,537 | $ | 66,197 | ||||||
| International outsourcing | 10,632 | 26,572 | 45,897 | |||||||||
| Database marketing and consulting | 6,491 | 5,091 | 6,484 | |||||||||
| Corporate activities | 1,894 | 12,477 | 2,426 | |||||||||
| Total | $ | 38,289 | $ | 54,677 | $ | 121,004 | ||||||
56
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:
| |
2002 |
2001 |
2000 |
||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| |
(Amounts in thousands) |
||||||||||
| Revenues: | |||||||||||
| United States | $ | 663,941 | $ | 535,242 | $ | 565,519 | |||||
| Asia Pacific | 90,839 | 76,952 | 65,349 | ||||||||
| Canada | 136,434 | 144,253 | 112,842 | ||||||||
| Europe | 66,907 | 86,862 | 82,664 | ||||||||
| Latin America | 59,315 | 72,835 | 58,975 | ||||||||
| Total | $ | 1,017,436 | $ | 916,144 | $ | 885,349 | |||||
| Gross Property and Equipment: | |||||||||||
| United States | $ | 174,666 | $ | 189,270 | $ | 174,821 | |||||
| Asia Pacific | 30,340 | 23,641 | 20,950 | ||||||||
| Canada | 35,542 | 34,549 | 33,678 | ||||||||
| Europe | 19,364 | 29,539 | 15,155 | ||||||||
| Latin America | 27,014 | 34,491 | 31,355 | ||||||||
| Total | $ | 286,926 | $ | 311,490 | $ | 275,959 | |||||
| All Other Long-Lived Assets: | |||||||||||
| United States | $ | 17,756 | $ | 22,455 | $ | 37,248 | |||||
| Asia Pacific | 4 | 18 | 507 | ||||||||
| Canada | 336 | 481 | 367 | ||||||||
| Europe | 4,250 | 174 | 469 | ||||||||
| Latin America | 96 | 4,190 | 3,619 | ||||||||
| Total | $ | 22,442 | $ | 27,318 | $ | 42,210 | |||||
Significant Customers
The Company has two customers who contributed in excess of 10% of total revenues. These entities are involved in the communications industry. The revenues from these customers as a percentage of total revenues for each of the three years ended December 31 are as follows:
| |
2002 |
2001 |
2000 |
||||
|---|---|---|---|---|---|---|---|
| Customer A | 16 | % | 19 | % | 20 | % | |
| Customer B | 15 | % | — | — |
At December 31, 2002, accounts receivable from customers A and B were $21.8 million and $22.5 million, respectively. There was one additional customer with a receivable balance in excess of 10% of consolidated accounts receivable. Customer C, an automotive manufacturer, had an accounts receivable balance of $19.9 million at December 31, 2002. Customers A and B are included in the North American outsourcing reporting segment. Customer C is included in the North American and international segments, as well as database marketing and consulting.
The loss of one or more of its significant customers could have a material adverse effect on the Company's business, operating results or financial condition. 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,
57
financial services and government services industries, management does not believe significant credit risk exists at December 31, 2002.
NOTE 3: DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS
Accounts Receivable
Accounts receivable consist of the following at December 31:
| |
2002 |
2001 |
||||||
|---|---|---|---|---|---|---|---|---|
| |
(in thousands) |
|||||||
| Accounts receivable | $ | 144,921 | $ | 168,675 | ||||
| Less—allowance for doubtful accounts | (7,323 | ) | (6,331 | ) | ||||
| Accounts receivable, net | $ | 137,598 | $ | 162,344 | ||||
Activity in the Company's allowance for doubtful accounts consists of the following:
| |
2002 |
2001 |
2000 |
|||||||
|---|---|---|---|---|---|---|---|---|---|---|
| |
(in thousands) |
|||||||||
| Balance, beginning of year | $ | 6,331 | $ | 6,664 | $ | 4,270 | ||||
| Provision for bad debts | 9,258 | 6,026 | 5,067 | |||||||
| Deductions for uncollectible receivables written off | (8,266 | ) | (6,359 | ) | (2,673 | ) | ||||
| Balance, end of year | $ | 7,323 | $ | 6,331 | $ | 6,664 | ||||
Property and Equipment
Property and equipment consisted of the following at December 31:
| |
2002 |
2001 |
||||||
|---|---|---|---|---|---|---|---|---|
| |
(in thousands) |
|||||||
| Land | $ | 345 | $ | 345 | ||||
| Computer equipment and software | 120,490 | 116,846 | ||||||
| Telephone equipment | 38,619 | 36,448 | ||||||
| Furniture and fixtures | 35,583 | 60,572 | ||||||
| Leasehold improvements | 88,295 | 90,234 | ||||||
| CIP | 2,481 | 3,226 | ||||||
| Other | 1,113 | 3,819 | ||||||
| 286,926 | 311,490 | |||||||
| Less—accumulated depreciation | (163,833 | ) | (133,531 | ) | ||||
| $ | 123,093 | $ | 177,959 | |||||
58
Included in the cost of property and equipment is the following equipment obtained through capitalized leases as of December 31:
| |
2002 |
2001 |
||||||
|---|---|---|---|---|---|---|---|---|
| |
(in thousands) |
|||||||
| Computer equipment and software | $ | 15,757 | $ | 15,546 | ||||
| Telephone equipment | 4,501 | 4,363 | ||||||
| Furniture and fixtures | 9,036 | 9,036 | ||||||
| 29,294 | 28,945 | |||||||
| Less—accumulated depreciation | (24,460 | ) | (20,625 | ) | ||||
| $ | 4,834 | $ | 8,320 | |||||
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 7.4% at December 31, 2002. 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, 2002 are as follows (in thousands):
| 2003 | $ | 3,161 | |||
| 2004 | 948 | ||||
| 2005 | 15 | ||||
| 4,124 | |||||
| Less—amount representing interest | (588 | ) | |||
| 3,536 | |||||
| Less—current portion | (3,012 | ) | |||
| $ | 524 | ||||
Interest expense associated with capital leases was $0.4 million, $0.6 million and $1.2 million for the years ended December 31, 2002, 2001 and 2000, respectively.
Senior Notes
Senior Notes consisted of the following as of December 31:
| |
2002 |
2001 |
||||
|---|---|---|---|---|---|---|
| |
(in thousands) |
|||||
| 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 | $ | 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 | 15,000 | ||||
| $ | 75,000 | $ | 75,000 | |||
59
The future principal amounts due for the Senior Notes are as follows (in thousands):
| 2003 | $ | — | |
| 2004 | 12,000 | ||
| 2005 | 14,143 | ||
| 2006 | 14,143 | ||
| 2007 | 14,143 | ||
| Thereafter | 20,571 | ||
| $ | 75,000 | ||
A significant restrictive covenant under the Senior Notes requires the Company to maintain a minimum fixed charge coverage ratio as defined in the agreement.
Long-Term Debt
As of December 31, 2002 and 2001, other long-term debt consisted of the following notes:
| |
2002 |
2001 |
|||||
|---|---|---|---|---|---|---|---|
| |
(in thousands) |
||||||
| Note payable, interest at 5% per annum, principal and interest payable monthly, maturing November 2009, collateralized by certain assets of the Company | $ | — | $ | 4,146 | |||
| Note payable, interest at 8% per annum, principal and interest payable monthly, maturing May 2010, unsecured | 330 | 362 | |||||
| Note payable, interest at 8% per annum, principal and interest payable quarterly, maturing April 2003, unsecured | 100 | 575 | |||||
| Note payable, interest at 7% per annum, principal and interest payable monthly, maturing May 2004, unsecured | 135 | 199 | |||||
| Other notes payable | 1,871 | 567 | |||||
| 2,436 | 5,849 | ||||||
| Less—current portion | (1,376 | ) | (933 | ) | |||
| $ | 1,060 | $ | 4,916 | ||||
Annual maturities of the long-term debt are as follows (in thousands):
| Year ended December 31, | ||||
| 2003 | $ | 1,376 | ||
| 2004 | 801 | |||
| 2005 | 40 | |||
| 2006 | 43 | |||
| 2007 | 46 | |||
| Thereafter | 130 | |||
| $ | 2,436 | |||
Revolving Line of Credit
The Company entered into a revolving credit agreement (the "Revolver") with a syndicate of five banks in October 2002. Under the terms of the Revolver, the Company may borrow up to $85 million with the ability to increase the borrowing limit by an additional $50 million within three years from the
60
closing date of the Revolver (October 2002). The Revolver matures on December 28, 2006 at which time a balloon payment for the principal amount is due, however there is no penalty for early prepayment. The Revolver bears interest at a variable rate based on LIBOR. The interest rate will also vary based on Company leverage ratios. At December 31, 2002 the interest rate was 2.6% per annum. The Revolver is unsecured but is guaranteed by all of the Company's domestic subsidiaries. At December 31, 2002 there were no borrowings under the Revolver. A significant restrictive covenant under the Revolver requires the Company to maintain a minimum fixed charge coverage ratio as defined in the agreement.
In the first quarter of 2002, the Company violated a financial debt covenant in its synthetic lease agreement and previous revolving line of credit ("Old Revolver") that required it to maintain at least one dollar of net income each quarter. The violation resulted from the goodwill impairment upon adoption of SFAS No. 142. Waivers were obtained from both the synthetic lease and Old Revolver lenders, and the Revolver agreement completed in October 2002 eliminated the one dollar quarterly net income covenant.
In the fourth quarter of 2002, the Company violated two financial debt covenants in its synthetic lease agreement that required it to maintain at least one dollar of net income each quarter and a certain fixed charge coverage ratio. The violations resulted from the impairment loss the Company recorded during the quarter. In February 2003, the Company prepaid, without penalty, the $38.2 million synthetic lease agreement and cured the default. Also in the fourth quarter, the Company failed to meet the fixed charge coverage ratio covenant in its Revolver agreement and the fixed charge coverage and leverage ratio covenants in its Senior Notes agreement and has obtained waivers from both lenders. There is no assurance that the Company will not violate financial covenants in the future and, in the event of a default, no assurance that the Company will be successful in obtaining waivers.
The Company's Spanish and Brazilian subsidiaries have lines of credit under which they may borrow up to EUR8.6 million and R1.4 million, respectively. As of December 31, 2002 and 2001, there was $0.3 million and $0 million outstanding under these factoring lines, included in current portion of long-term debt in the accompanying consolidated balance sheet.
NOTE 5: INCOME TAXES
The components of income (loss) before income taxes are as follows for the years ended December 31 (in thousands):
| |
2002 |
2001 |
2000 |
||||||
|---|---|---|---|---|---|---|---|---|---|
| Domestic | $ | (1,168 | ) | $ | (53,805 | ) | $ | 66,809 | |
| Foreign | (2,440 | ) | 52,054 | 53,935 | |||||
| Total | $ | (3,608 | ) | $ | (1,751 | ) | $ | 120,744 | |
61
The components of the provision (benefit) for income taxes are as follows for the years ended December 31 (in thousands):
| |
2002 |
2001 |
2000 |
||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Current provision: | |||||||||||
| Federal | $ | (6,241 | ) | $ | (12,550 | ) | $ | 24,942 | |||
| State | (844 | ) | (2,051 | ) | 2,838 | ||||||
| Foreign | 21,908 | 23,926 | 21,439 | ||||||||
| 14,823 | 9,325 | 49,219 | |||||||||
| Deferred provision: | |||||||||||
| Federal | (10,932 | ) | (6,687 | ) | (941 | ) | |||||
| State | (1,306 | ) | (842 | ) | (132 | ) | |||||
| Foreign | (979 | ) | (1,622 | ) | (1,208 | ) | |||||
| (13,217 | ) | (9,151 | ) | (2,281 | ) | ||||||
| $ | 1,606 | $ | 174 | $ | 46,938 | ||||||
The following reconciles the Company's effective tax rate to the federal statutory rate for the years ended December 31 (in thousands):
| |
2002 |
2001 |
2000 |
|||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Income tax (benefit) expense per federal statutory rate | $ | (1,263 | ) | $ | (613 | ) | $ | 42,806 | ||
| State income taxes, net of federal deduction | (1,456 | ) | (94 | ) | 3,840 | |||||
| Tax benefit of operating loss carryforward acquired | — | — | (1,800 | ) | ||||||
| Miscellaneous credits | (675 | ) | (600 | ) | (716 | ) | ||||
| Transaction costs | — | — | 420 | |||||||
| Valuation allowance | 2,800 | — | — | |||||||
| Foreign income taxed at different rate | 867 | 2,714 | 2,188 | |||||||
| Other | 1,333 | (1,233 | ) | 200 | ||||||
| $ | 1,606 | $ | 174 | $ | 46,938 | |||||
61
The Company's deferred income tax assets and liabilities are summarized as follows as of December 31 (in thousands):
| |
2002 |
2001 |
|||||||
|---|---|---|---|---|---|---|---|---|---|
| Current deferred tax assets: | |||||||||
| Allowance for doubtful accounts | $ | 2,865 | $ | 2,501 | |||||
| Vacation accrual | 3,002 | 2,061 | |||||||
| Compensation | 1,901 | 395 | |||||||
| Insurance reserves | 793 | 1,644 | |||||||
| Accrued restructuring charges | 1,744 | 1,278 | |||||||
| Unrealized losses on securities and derivatives | — | 1,543 | |||||||
| Warrant accrual | — | 616 | |||||||
| Deferred revenue | — | 182 | |||||||
| Other | 1,328 | 1,393 | |||||||
| 11,633 | 11,613 | ||||||||
| Long-term deferred tax assets: | |||||||||
| Depreciation and amortization | — | 1,472 | |||||||
| Other than temporary loss on equity investment | 7,440 | 6,518 | |||||||
| Deferred revenue | 7,546 | 3,441 | |||||||
| Unrealized losses on securities and derivatives | 2,208 | — | |||||||
| Lease write down | 677 | — | |||||||
| Asset impairment | 12,231 | — | |||||||
| 30,102 | 11,431 | ||||||||
| Long-term deferred tax liability: | |||||||||
| Capitalized software | (5,652 | ) | (4,631 | ) | |||||
| Depreciation and amortization | (466 | ) | — | ||||||
| Severance accrual | (4,059 | ) | — | ||||||
| Other | (58 | ) | — | ||||||
| (10,235 | ) | (4,631 | ) | ||||||
| Valuation allowance | (2,800 | ) | — | ||||||
| Total | $ | 28,700 | $ | 18,413 | |||||
During 2002, the Company established a valuation allowance for certain deferred tax assets in its international outsourcing segment.
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 $2.0 million, $2.4 million and $2.3 million for the years ended December 31, 2002, 2001 and 2000, 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
62
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, 472,250 and 510,250 shares outstanding at December 31, 2002, 2001 and 2000, 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, 2002, 2001 and 2000 were $1.9 million, $1.8 million and $1.9 million, respectively.
In February 1999, the Company adopted the TeleTech Holdings, Inc. 1999 Stock Option and Incentive Plan (the "1999 Option Plan"). The purpose of the 1999 Option Plan is to enable the Company to continue to (a) attract and retain high quality directors, officers, employees and potential employees, consultants and independent contractors of the Company or any of its subsidiaries; (b) motivate such persons to promote the long-term success of the business of the Company and its subsidiaries and (c) induce employees of companies that are acquired by TeleTech to accept employment with TeleTech following such an acquisition. The 1999 Option Plan supplements the 1995 Option Plan. An aggregate of 14 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.
63
A summary of the status of the Company's stock option plans for the three years ended December 31, 2002, together with changes during each of the years then ended, is presented in the following table:
| |
Shares |
Weighted Average Price Per Share |
||||
|---|---|---|---|---|---|---|
| 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 | |||
| Grants | 2,884,550 | $ | 10.94 | |||
| Exercises | (609,247 | ) | $ | 6.20 | ||
| Forfeitures | (1,250,974 | ) | $ | 17.89 | ||
| Outstanding, December 31, 2002 | 11,717,590 | $ | 13.06 | |||
| Options exercisable at year end: | ||||||
| 2002 | 5,657,494 | $ | 13.11 | |||
| 2001 | 4,385,403 | $ | 12.92 | |||
| 2000 | 4,545,244 | $ | 8.64 | |||
| Weighted average fair value of options granted during the year: | ||||||
| 2002 | $ | 6.19 | ||||
| 2001 | $ | 4.00 | ||||
| 2000 | $ | 15.27 | ||||
The following table sets forth the exercise price range, number of shares, weighted average exercise price and remaining contractual lives at December 31, 2002:
| |
Outstanding |
Exercisable |
||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Range of Exercise Prices |
Number of Shares Outstanding |
Weighted Average Exercise Price |
Weighted Average Contractual Life (years) |
Number of Shares Exercisable |
Weighted Average Exercise Price |
|||||||
| $ 0.63 - $ 3.98 | 332,172 | $ | 1.49 | 2.7 | 332,108 | $ | 1.49 | |||||
| $ 3.99 - $ 7.96 | 3,874,281 | $ | 6.70 | 7.5 | 1,783,875 | $ | 6.52 | |||||
| $ 7.97 - $11.94 | 3,642,143 | $ | 10.74 | 7.3 | 1,381,961 | $ | 9.83 | |||||
| $11.95 - $15.92 | 1,381,603 | $ | 13.38 | 6.7 | 814,902 | $ | 13.41 | |||||
| $15.93 - $19.91 | 413,718 | $ | 17.18 | 7.4 | 190,461 | $ | 17.36 | |||||
| $19.92 - $23.89 | 171,599 | $ | 20.83 | 7.9 | 83,626 | $ | 20.83 | |||||
| $23.90 - $27.87 | 317,500 | $ | 25.30 | 6.3 | 220,325 | $ | 25.25 | |||||
| $27.88 - $31.85 | 1,011,574 | $ | 30.53 | 7.3 | 571,186 | $ | 30.67 | |||||
| $31.86 - $35.83 | 508,000 | $ | 33.29 | 7.0 | 249,350 | $ | 33.27 | |||||
| $35.84 - $39.81 | 65,000 | $ | 37.82 | 7.3 | 29,700 | $ | 37.80 | |||||
| 11,717,590 | 5,657,494 | |||||||||||
64
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 2002, 2001 and 2000 the Company paid an aggregate of $1.8 million, $0.7 million and $0.7 million, 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 2002, 2001 and 2000 the Company paid to AirMax an aggregate of $1.0 million, $0.5 million and $0.5 million, 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 represented 100% of the existing common shares of EHI, which in turn owned 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 stated that for as long as Mr. Tuchman owned 50% of EHI's common stock, all action requiring stockholder approval shall require approval of holders of at least 662/3% of EHI common stock. The remaining equity of $4.0 million, which represented approximately 17% of the fair value of the assets at inception, came from unrelated third parties and was 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. The Company funded $4.8 million of this additional commitment.
As a preferred stockholder, the Company accounted for its investment in EHI under the equity method of accounting. Accordingly, the Company recorded 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 and continued to do so through May 31, 2002. These losses totaled $3.6 million and $7.7 million for the years ended December 31, 2002 and 2001, respectively, and 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.
On May 31, 2002, Mr. Tuchman transferred his 55% ownership of EHI's common stock to the Company and received no consideration in return. The Company placed nominal value on this
65
transaction based on a third-party appraisal. As a result, the Company began consolidating the results of EHI effective June 1, 2002. During the fourth quarter of 2002, the Company purchased the remaining common stock of EHI held by the outside shareholders for approximately $2.3 million. The Company expensed the consideration paid based on the above mentioned third-party appraisal. The loss on this transaction is reflected in other expense in the accompanying consolidated statements of operations for the year ended December 31, 2002. Notwithstanding the appraised valuation of the shares acquired, the Company places value on retaining the intellectual property that justified the payment of the purchase price. As a result of this transaction, the Company now owns 100% of EHI.
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 had no outside debt or other outstanding borrowings other than that owed to the Company.
During 2000 and 2001, the Company loaned an officer $1.0 million. The loan bears interest at an annual rate of 8% and is secured by all future bonus payments, the proceeds from the exercise of any stock options, and any severance compensation payable to this officer. As of December 31, 2002, the loan balance was in default and has an outstanding balance of approximately $0.9 million. In addition to the repayment mechanisms described above, the Company is pursuing perfecting a security interest in the officer's salary and the Company and the officer are also working on a monthly payment plan. This loan is included in Other Assets in the accompanying consolidated balance sheets.
During 2000, 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, 2002, 2001 and 2000, the Company paid $0, $0 and $1.1 million, respectively, to EGI primarily for insurance policy premiums.
During 2002 and 2001, the Company utilized the services of Korn Ferry International ("KFI") for executive search projects. James Barlett, Vice Chairman and a director of the Company is a director of KFI. During the years ended December 31, 2002, 2001 and 2000, the Company paid $0.7 million, $0.3 million and $0, respectively, to KFI for executive search services.
During 2001 and 2000, 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 and 2000, the Company paid $0.1 million and $0.1 million, 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.
66
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 period ended December 31, 2000 (in thousands):
| |
TeleTech |
CCH |
Newgen |
Combined |
||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Revenues | $ | 750,782 | $ | 38,540 | $ | 77,468 | $ | 866,790 | ||||
| Net income | 64,477 | 2,259 | 5,919 | 72,655 | ||||||||
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 2002 and 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 2002 and 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.
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, 2002, 2001 and 2000, the Company sold approximately 229,100, 100,000 and 909,300 shares, respectively, of E.piphany for total proceeds of $1.6 million, $1.3 million and $64.9 million, which resulted in realized gains of $0.6 million, $0.2 million and $57.0 million, respectively. As of December 31, 2002, the Company had sold all of its Epiphany shares.
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 for $12.47 per share. These warrants were valued at $5.1 million using the Black-Scholes Option model. The warrants expire on December 31, 2005.
67
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 2002, 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.
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 2002, the Company's corporate and North American outsourcing segments recorded restructuring charges associated with the termination of approximately 400 administrative employees and the impairment of a property lease totaling approximately $7.3 million and $0.9 million, respectively. Additionally, the Company's international outsourcing segment recorded a loss on the closure of customer management centers in Spain and Canada of approximately $1.2 million. These charges are reflected on separate line items in the accompanying consolidated statements of operations.
68
During 2001, the Company recorded a $7.7 million loss in its North American outsourcing segment on the closure of a customer management 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.
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.
In December 2000, the Company identified three customer management 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.
A rollforward of the activity in the above mentioned restructuring accruals for the years ended December 31, 2002 and 2001 follows (in thousands):
| |
Closure of CICs |
Reduction in Force |
Total |
||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Balances, December 31, 1999 | $ | — | $ | — | $ | — | |||||
| Expenses | 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 | ||||||||
| Expense | 1,213 | 8,243 | 9,456 | ||||||||
| Writedown of assets | (1,201 | ) | — | (1,201 | ) | ||||||
| Payments | (1,360 | ) | (4,147 | ) | (5,507 | ) | |||||
| Balances, December 31, 2002 | $ | 2,181 | $ | 6,728 | $ | 8,909 | |||||
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 management centers and office space. Rent expense under operating leases was approximately $33.3 million, $31.1 million and $21.6 million for the years ended December 31, 2002, 2001 and 2000, 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, 2002. 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,
69
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 $3.2 million and $2.6 million for the years ended December 31, 2002 and 2001, respectively, is reflected in selling, general and administrative expense in the accompanying consolidated statements of operations. Future lease payments are reflected in the lease commitments disclosed within this Note. 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 based on the debt payments which are variable based on LIBOR. However, the Company has an interest rate swap agreement in place to hedge any fluctuations in LIBOR. Subsequent to year end, the Company purchased the Property from State Street for $38.2 million using proceeds from the Revolver to finance the transaction.
The future minimum rental payments required under non-cancelable operating leases as of December 31, 2002 are as follows (in thousands):
| Year ended December 31, | ||||
| 2003 | $ | 39,291 | ||
| 2004 | 25,717 | |||
| 2005 | 27,033 | |||
| 2006 | 18,655 | |||
| 2007 | 12,640 | |||
| Thereafter | 92,968 | |||
| $ | 216,304 | |||
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.
Sales and Use Taxes. The Company has recently received inquires from several states regarding the applicability of sales or use taxes to the services provided by its North American outsourcing and database marketing and consulting segments. The Company has taken the position that the services in question are not subject to the aforementioned taxes. The Company is working with the inquiring states to explain and support the Company's position. At this time, the Company does not expect the outcome to have a material adverse effect on the Company's results of operations or financial condition.
70
NOTE 14: QUARTERLY FINANCIAL DATA (UNAUDITED)
| |
First Quarter |
Second Quarter |
Third Quarter |
Fourth Quarter |
|||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
(Amounts in thousands, except per share data) |
||||||||||||||
| Year ended December 31, 2002: | |||||||||||||||
| Revenues | $ | 254,031 | $ | 253,685 | $ | 251,889 | $ | 257,831 | |||||||
| Income (loss) from operations | 15,300 | 7,654 | 10,718 | (27,777 | ) | ||||||||||
| Net income (loss) | (4,779 | ) | 3,913 | 6,217 | (22,106 | ) | |||||||||
| Net income (loss) per common share: | |||||||||||||||
| Basic | $ | (0.06 | ) | $ | 0.05 | $ | 0.08 | $ | (0.29 | ) | |||||
| Diluted | $ | (0.06 | ) | $ | 0.05 | $ | 0.08 | $ | (0.29 | ) | |||||
| 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 | |||||
The Company has restated net loss and net loss per common share for the first and fourth quarters of 2002 to properly reflect no tax effect on the cumulative effect of change in accounting principle recorded in the first quarter of 2002. Upon adoption of SFAS No. 142 on January 1, 2002, the Company recorded a loss on transition of $11.5 million which it tax effected in its Form 10-Q for the three months ended March 31, 2002. The Company believed that the goodwill would eventually be deducted for tax purposes, but later came of the opinion that the realizability of the future benefit was uncertain. As a result, in the fourth quarter of 2002 the Company wrote off the deferred tax asset associated with the adoption of SFAS No. 142 that had been created in the first quarter of 2002. The financial data above reflects this activity as if the tax benefit was never recorded. The Company did not file amended 10-Q's for the previous quarters of 2002 as there was no impact to income before cumulative effect of change in accounting principle, which the Company believes its shareholders used to analyze the Company's 2002 profitability, and the balance sheet impact of $4.0 million was immaterial to consolidated total assets in any given quarter.
71