10-Q 1 a10-q.txt FORM 10-Q FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended: June 30, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 0-21055 TELETECH HOLDINGS, INC. ----------------------- (Exact name of registrant as specified in its charter) DELAWARE 84-1291044 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1700 LINCOLN STREET, SUITE 1400 DENVER, COLORADO 80203 (Address of principal (Zip Code) executive office) (303) 894-4000 (Registrant's telephone number, including area code) Not Applicable (Former name, former address and former fiscal year, if changed since last report) 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, and (2) has been subject to such filing requirements for the past 90 days. YES X NO --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Outstanding at Class of Common Stock August 4, 2000 Common Stock, par value $.01 per share 62,793,509 TELETECH HOLDINGS, INC. AND SUBSIDIARIES FORM 10-Q INDEX
PAGE NUMBER PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Condensed consolidated balance sheets--December 31, 1999 and June 30, 2000 3 Condensed consolidated statements of income--Three months ended June 30, 2000 and 1999 5 Condensed consolidated statements of income--Six months ended June 30, 2000 and 1999 6 Condensed consolidated statements of cash flows--Six months ended June 30, 2000 and 1999 7 Notes to condensed consolidated financial statements--June 30, 2000 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 Item 3. Quantitative and Qualitative Disclosures about Market Risk 16 PART II. OTHER INFORMATION Item 1. Legal Proceedings 17 Item 4. Submission of Matters to a Vote of Security Holders 17 Item 5. Recent Developments 18 Item 6. Exhibits and Reports on Form 8-K 19 SIGNATURES 20
2 Item 1. TELETECH HOLDINGS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
December 31, June 30, ASSETS 1999 2000 ---------- -------- (Unaudited) CURRENT ASSETS: Cash and cash equivalents $ 14,663 $ 6,119 Short-term investments 41,599 47,359 Investment in common stock -- 70,839 Accounts receivable, net of allowance for doubtful accounts of $3,787 and $4,388, respectively 78,753 123,601 Prepaids and other assets 5,361 7,852 Deferred tax asset 4,889 -- ------- ------- Total current assets 145,265 255,770 ------- ------- PROPERTY AND EQUIPMENT, net of accumulated depreciation of $65,083 and $80,120, respectively 108,945 136,912 ------- ------- OTHER ASSETS: Long-term accounts receivable 3,930 2,290 Investment in customer relationship management software company, at cost 2,500 -- Goodwill, net of amortization of $3,103 and $3,862, respectively 20,633 22,296 Contract acquisition cost, net of amortization of $1,614 and $2,607, respectively 9,286 13,893 Deferred tax asset 550 550 Other assets 2,621 6,602 ------- ------- Total assets $293,730 $438,313 ======== ========
The accompanying notes are an integral part of these condensed consolidated balance sheets. 3 TELETECH HOLDINGS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
December 31, June 30, LIABILITIES AND STOCKHOLDERS' EQUITY 1999 2000 ----------- -------- (Unaudited) CURRENT LIABILITIES: Current portion of long-term debt $ 4,842 $ 7,755 Bank overdraft 1,323 930 Accounts payable 8,217 9,782 Accrued employee compensation 26,282 29,066 Accrued income taxes 1,523 5,069 Deferred income taxes -- 16,733 Other accrued expenses 16,831 23,509 Customer advances, deposits and deferred income 4,510 3,199 --------- -------- Total current liabilities 63,528 96,043 LONG-TERM DEBT, net of current portion: Capital lease obligations 1,697 23 Line of credit 18,000 43,000 Other debt 5,469 3,359 --------- -------- Total liabilities 88,694 142,425 --------- -------- MINORITY INTEREST, in consolidated subsidiaries -- 5,499 --------- -------- STOCKHOLDERS' EQUITY: Stock purchase warrants -- 5,100 Common stock; $.01 par value; 150,000,000 shares authorized; 61,823,645 and 62,745,671 shares, respectively, issued and outstanding 617 627 Additional paid-in capital 121,060 136,318 Accumulated other comprehensive income (1,148) 37,555 Retained earnings 84,507 110,789 --------- -------- Total stockholders' equity 205,036 290,389 --------- -------- Total liabilities and stockholders' equity $ 293,730 $438,313 ========= ========
The accompanying notes are an integral part of these condensed consolidated balance sheets. 4 TELETECH HOLDINGS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) (UNAUDITED)
Three Months Ended June 30, ---------------------------- 1999 2000 --------- --------- REVENUES $ 120,565 $ 181,846 --------- --------- OPERATING EXPENSES: Costs of services 79,835 117,913 Other operating expenses 31,565 46,660 --------- --------- Total operating expenses 111,400 164,573 --------- --------- INCOME FROM OPERATIONS 9,165 17,273 OTHER INCOME (EXPENSE): Interest expense (477) (1,087) Interest income 648 688 Gain on sale of securities -- 12,762 Other (170) (675) --------- --------- 1 11,688 --------- --------- INCOME BEFORE INCOME TAXES AND MINORITY INTEREST 9,166 28,961 Provision for income taxes 3,712 10,952 --------- --------- INCOME BEFORE MINORITY INTEREST 5,454 18,009 Minority interest, net of income taxes -- (399) --------- --------- NET INCOME $ 5,454 $ 17,610 ========= ========= WEIGHTED AVERAGE SHARES OUTSTANDING Basic 61,095 62,607 ========= ========= Diluted 62,692 66,700 ========= ========= NET INCOME PER SHARE Basic $ .09 $ .28 ========= ========= Diluted $ .09 $ .26 ========= =========
The accompanying notes are an integral part of these condensed consolidated financial statements. 5 TELETECH HOLDINGS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) (UNAUDITED)
Six Months Ended June 30, ---------------------------- 1999 2000 --------- --------- REVENUES $ 231,203 $ 340,340 --------- --------- OPERATING EXPENSES: Costs of services 154,203 222,915 Other operating expenses 59,969 85,723 --------- --------- Total operating expenses 214,172 308,638 --------- --------- INCOME FROM OPERATIONS 17,031 31,702 OTHER INCOME (EXPENSE): Interest expense (894) (1,893) Interest income 1,202 1,322 Gain on sale of securities -- 12,762 Other (104) (657) --------- --------- 204 11,534 --------- --------- INCOME BEFORE INCOME TAXES AND MINORITY INTEREST 17,235 43,236 Provision for income taxes 6,970 16,555 --------- --------- INCOME BEFORE MINORITY INTEREST 10,265 26,681 Minority interest, net of income taxes -- (399) --------- --------- NET INCOME $ 10,265 $ 26,282 ========= ========= WEIGHTED AVERAGE SHARES OUTSTANDING Basic 60,933 62,299 ========= ========= Diluted 62,371 66,716 ========= ========= NET INCOME PER SHARE Basic $ .17 $ .42 ========= ========= Diluted $ .16 $ .39 ========= =========
The accompanying notes are an integral part of these condensed consolidated financial statement 6 TELETECH HOLDINGS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (AMOUNTS IN THOUSANDS) (UNAUDITED)
Six Months Ended June 30, -------------------------- 1999 2000 -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 10,265 $ 26,282 Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization 13,983 18,197 Minority interest -- 399 Allowance for doubtful accounts 311 601 Gain on sale of securities -- (12,762) Deferred income taxes (64) (459) Changes in assets and liabilities: Accounts receivable (1,005) (45,449) Prepaids and other assets (2,207) (2,657) Accounts payable and accrued expenses (5,391) 12,707 Customer advances, deposits and deferred income (130) 785 -------- -------- Net cash provided by (used in) operating activities 15,762 (2,356) -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment (30,835) (45,818) Acquisitions, net of $339 cash acquired (4,052) -- Contract acquisition costs -- (1,356) Investment in customer relationship management software company -- (7,989) Proceeds from minority interest in subsidiary -- 5,100 Changes in accounts payable and accrued liabilities related to investing activities (55) (600) Decrease in short-term investments 2,969 8,961 -------- -------- Net cash used in investing activities (31,973) (41,702) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Net increase (decrease) in bank overdraft 499 (393) Net increase in short-term borrowings 22,000 25,000 Net decrease on long-term debt and capital leases (2,326) (1,102) Proceeds from exercise of stock options including tax benefit (675) 13,468 -------- -------- Net cash provided by financing activities 19,498 36,973 -------- -------- Effect of exchange rate changes on cash (1,860) (1,459) -------- -------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,427 (8,544) CASH AND CASH EQUIVALENTS, beginning of period 8,796 14,663 -------- -------- CASH AND CASH EQUIVALENTS, end of period $ 10,223 $ 6,119 ======== ========
The accompanying notes are an integral part of these condensed consolidated financial statements. 7 TELETECH HOLDINGS, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2000 NOTE (1)--BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared without audit pursuant to the rules and regulations of the Securities and Exchange Commission. The condensed consolidated financial statements reflect all adjustments (consisting of only normal recurring accruals) which, in the opinion of management, are necessary to present fairly the financial position, results of operations and cash flows of TeleTech Holdings, Inc. and subsidiaries as of June 30, 2000 and 1999 and for the periods then ended. Operating results for the three and six months ended June 30, 2000 are not necessarily indicative of the results that may be expected for the year ended December 31, 2000. The unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in the Company's Form 10-K for the year ended December 31, 1999. Certain 1999 amounts have been reclassified to conform to 2000 presentation. NOTE (2)-- SEGMENT INFORMATION AND CUSTOMER CONCENTRATIONS The Company classified its business activities into four fundamental areas: outsourced operations in the United States, facilities management operations, international outsourced operations, and technology services and consulting. These areas are separately managed and each has significant differences in capital requirements and cost structures. Outsourced, facilities management and international outsourced operations are reportable business segments with their respective financial performance detailed herein. Technology services and consulting is included in corporate activities as it is not a material business segment. Also included in corporate activities are general corporate expenses and overall operational management expenses. Assets of corporate activities include unallocated cash, short-term investments and deferred income taxes. There are no significant transactions between the reported segments for the periods presented.
Three Months Ended June 30, (in thousands) 1999 2000 --------- --------- REVENUES: Outsourced $ 72,530 $ 94,790 Facilities Management 20,399 28,304 International Outsourced 20,690 55,420 Corporate Activities 6,946 3,332 --------- --------- Total $ 120,565 $ 181,846 ========= ========= OPERATING INCOME (LOSS): Outsourced $ 16,801 $ 21,032 Facilities Management 1,406 3,547 International Outsourced 532 8,046 Corporate Activities (9,574) (15,352) --------- --------- Total $ 9,165 $ 17,273 ========= =========
8 TELETECH HOLDINGS, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2000 - CONTINUED
Six Months Ended June 30, (in thousands) 1999 2000 --------- --------- REVENUES: Outsourced $ 138,776 $ 184,794 Facilities Management 40,733 55,208 International Outsourced 38,826 94,159 Corporate Activities 12,868 6,179 --------- --------- Total $ 231,203 $ 340,340 ========= ========= OPERATING INCOME (LOSS): Outsourced $ 30,555 $ 42,081 Facilities Management 3,054 6,510 International Outsourced 1,132 12,802 Corporate Activities (17,710) (29,691) --------- --------- Total $ 17,031 $ 31,702 ========= =========
Balance as of December 31, June 30, (in thousands) 1999 2000 ---------- -------- ASSETS: Outsourced Assets $ 76,401 $103,178 Facilities Management Assets 11,290 13,417 International Outsourced Assets 88,643 129,486 Corporate Activities Assets 117,396 192,232 -------- -------- Total $293,730 $438,313 ======== ======== GOODWILL: International Outsourced Goodwill, Net $ 10,496 $ 10,554 Corporate Activities Goodwill, Net 10,137 11,742 -------- -------- Total $ 20,633 $ 22,296 ======== ========
The following geographic data include revenues based on the location the services are provided (in thousands).
Three Months Ended June 30, 1999 2000 -------- -------- REVENUES: United States $ 95,062 $120,887 Canada 7,484 23,726 Australia 13,228 16,484 Latin America 3,500 14,632 Rest of world 1,291 6,117 -------- -------- Total $120,565 $181,846 ======== ========
9 TELETECH HOLDINGS, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2000 - CONTINUED
Six Months Ended June 30, 1999 2000 -------- -------- REVENUES: United States $182,653 $235,335 Canada 16,404 36,453 Australia 23,947 31,396 Latin America 5,745 27,012 Rest of world 2,454 10,144 -------- -------- Total $231,203 $340,340 ======== ========
NOTE (3)--SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION AND NONCASH INVESTING AND FINANCING ACTIVITIES (IN THOUSANDS):
Six Months Ended June 30, ------------------------- 1999 2000 ------ ------ Cash paid for interest $ 533 $1,087 Cash paid for income taxes $5,218 $2,909 Noncash investing and financing activities: Stock issued in purchase of Pamet River, Inc. $1,753 $ -- Issuance of stock purchase warrants in connection with formation of joint venture $ -- $5,100
NOTE (4)--COMPREHENSIVE INCOME In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"). The purpose of SFAS 130 is to report a measure of all changes in equity that result from recognized transactions and other economic events of the period other than transactions with owners in their capacity as owners. The Company's comprehensive income for the three months and six months period ended June 30, 1999 and 2000 was as follows (in thousands):
Three Months Ended June 30, --------------------------- 1999 2000 ------ -------- Net income for the period $5,454 $ 17,610 Change in cumulative translation adjustment 558 (970) Unrealized gain on securities available for sale, less related tax effect -- 40,303 ------ -------- Comprehensive income $6,012 $ 56,943 ====== ========
10 TELETECH HOLDINGS, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2000 - CONTINUED
Six Months Ended June 30, ------------------------- 1999 2000 ------- -------- Net income for the period $10,265 $ 26,282 Change in cumulative translation adjustment 676 (1,600) Unrealized gain on securities available for sale, less related tax effect -- 40,303 ------- -------- Comprehensive income $10,941 $ 64,985 ======= ========
NOTE (5)--FORD JOINT VENTURE During the first quarter of 2000, the Company and Ford Motor Company ("Ford") formed the Percepta LLC. In connection with this formation, the Company issued stock purchase warrants to Ford entitling Ford to purchase 750,000 shares of TeleTech common stock. These warrants were valued at $5.1 million using the Black Scholes Option model. NOTE (6)--LEASE COMMITMENT In March, 2000 the Company and State Street Bank and Trust Company of Connecticut ("State Street") entered into a lease agreement (the "Agreement") whereby State Street acquired 12 acres of land in Arapahoe County, Colorado for approximately $5.2 million for the purpose of constructing a new corporate headquarters for the Company. In June, 2000 the Agreement was amended to provide for the construction of the building. The total estimated cost of the land and building provided for under the Agreement is $30 million. Rent expense will commence upon completion of the building, which is estimated to be in the first quarter of 2001. The rental expense will be based upon the total project costs times a floating rate factor based on a spread of 100 to 175 basis points over LIBOR. NOTE (7)--INVESTMENT IN COMMON STOCK In December 1999 and January 2000, the Company invested a total of $9.6 million in a privately held customer relationship management software company which resulted in an ownership of approximately 7%. In June, 2000, this company merged with E.piphany, Inc., a publicly traded customer relationship management company. As a result of the merger, TeleTech received 825,000 shares of E.piphany common stock. Prior to June 30, 2000, TeleTech sold 152,500 shares of E.piphany for total proceeds fo $14.7 million, which resulted in a realized gain of $12.7 million. The remaining 673,400 shares of E.piphany are reflected in the accompanying June 30, 2000 balance sheet as an available for sale security. Accordingly, they are reflected at their market value with the corresponding unrealized income reflected in other comprehensive income net of tax. Subsequent to June 30, 2000 TeleTech has sold an additional 290,000 shares for $35.9 million which resulted in a realized gain of $32 million. NOTE (8)--SUBSEQUENT EVENT In July 2000, the Company sold a division of its Australian subsidiary which provides services in the healthcare industry for cash of approximately $5.4 million. This sale will result in a gain recognized in the third quarter of 2000 of approximately $3.0 million. The operating results, assets and liabilities of this division are not significant to the consolidated operating results, assets and liabilities of the Company. 11 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE PERIOD ENDED JUNE 30, 2000 AND 1999 INTRODUCTION Management's discussion and analysis of financial condition and results of operations in this Form 10-Q should be read in conjunction with the note regarding Forward Looking Information included in the Company's Form 10-K for the year ended December 31, 1999. Specifically, the Company has experienced, and in the future could experience, quarterly variations in revenues and earnings as a result of a variety of factors, many of which are outside the Company's control, including: the timing of new contracts; the timing of new product or service offerings or modifications in client strategies; the expiration or termination of existing contracts; the timing of increased expenses incurred to obtain and support new business; and the seasonal pattern of certain of the businesses serviced by the Company. RESULTS OF OPERATIONS THREE MONTH PERIOD ENDED JUNE 30, 2000 COMPARED TO JUNE 30, 1999 Revenues increased $61.3 million or 51% to $181.8 million for the three months ended June 30, 2000 from $120.6 million for the three months ended June 30, 1999. Outsourced revenues increased $22.3 million, resulting from $9.8 million in new customers and $12.4 million in increased revenues from existing clients. Revenues for the three months ended June 30, 2000 include approximately $28.3 million from facilities management contracts as compared with $20.4 million for the three months ended June 30, 1999. This increase is a result of significantly increased call volumes from one of the company's facility management clients. International outsourced revenues increased $34.7 million. This is due to significant increases in Canada as a result of the commencement of operations of Percepta and an increasing number of United States clients utilizing the Company's Canadian locations. In addition, revenues in Latin America grew by $11.1 million as a result of an acquisition in the fourth quarter of 1999, and increased capacity utilization. Costs of services increased $38.1 million, or 48%, to $117.9 million for the three months ended June 30, 2000 from $79.8 million for the three months ended June 30, 1999. Costs of services as a percentage of revenues decreased from 66.2% for the three months ended June 30, 1999 to 64.8% for the three months ended June 30, 2000. The decrease in the costs of services as a percentage of revenues is a result of increased capacity utilization in several of the Company's domestic and foreign customer interaction centers. Selling, general and administrative expenses increased $15.1 million, or 48% to $46.7 million for the three months ended June 30, 2000 from $31.6 million for the three months ended June 30, 1999. Selling, general and administrative expenses as a percentage of revenues decreased from 26.2% for the three months ended June 30, 1999 to 25.7% for the three months ended June 30, 2000 primarily as a result of increased capacity utilization in the Company's customer interaction centers As a result of the foregoing factors, income from operations increased $8.1 million or 88%, to $17.3 million for the three months ended June 30, 2000 from $9.2 million for the three months ended June 30, 1999. Operating income as a percentage of revenues increased from 7.6% for the three months ended June 30, 1999 to 9.5% for the three months ended June 30, 2000. 12 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE PERIOD ENDED JUNE 30, 2000 AND 1999 - CONTINUED Other income totaled $11.7 million for the three months ended June 30, 2000 compared with other income of $1,000 during the three months ended June 30, 1999. This is primarily related to a one-time gain of $12.8 million on the sale of securities offset by increased interest expense of $610,000 resulting from the increased levels in borrowings on the line of credit from $22.0 million at June 30, 1999 to $43.0 million at June 30, 2000. In addition, the Company incurred a loss of $660,000 resulting from litigation with an equipment supplier concerning cancellation of a contract. As a result of the foregoing factors, net income increased $12.2 million or 223%, to $17.6 million for the three months ended June 30, 2000 from $5.5 million for the three months ended June 30, 1999. SIX MONTH PERIOD ENDED JUNE 30, 2000 COMPARED TO JUNE 30, 1999 Revenues increased $109.1 million or 47% to $340.3 million for the six months ended June 30, 2000 from $231.2 million for the six months ended June 30, 1999. Outsourced revenues increased $46.0 million, resulting from $16 million in new customers and $30 million in increased revenues from existing clients. Revenues for the six months ended June 30, 2000 include approximately $55.2 million from facilities management contracts as compared with $40.7 million for the six months ended June 30, 1999. This increase is a result of significantly increased call volumes from one of the Company's facility management clients. International outsourced revenues increased $55.3 million. This is due to significant increases in Canada as a result of the commencement of operations of Percepta and an increasing number of United States clients utilizing the company's Canadian locations. In addition, revenues in Latin America grew by $21.3 million as a result of acquisitions in the first quarter and fourth quarter of 1999 and increased capacity utilization. Costs of services increased $68.7 million, or 45%, to $222.9 million for the six months ended June 30, 2000 from $154.2 million for the six months ended June 30, 1999. Costs of services as a percentage of revenues decreased from 66.7% for the six months ended June 30, 1999 to 65.5% for the six months ended June 30, 2000. The decrease in the costs of services as a percentage of revenues is a result of increased capacity utilization in several of the Company's domestic and foreign customer interaction centers. Selling, general and administrative expenses increased $25.8 million, or 43% to $85.7 million for the six months ended June 30, 2000 from $60.0 million for the six months ended June 30, 1999. Selling, general and administrative expenses as a percentage of revenues decreased from 25.9% for the six months ended June 30, 1999 to 25.2% for the six months ended June 30, 2000 primarily as a result of increased capacity utilization in the Company's customer interaction centers. As a result of the foregoing factors, income from operations increased $14.7 million or 86%, to $31.7 million for the six months ended June 30, 2000 from $17.0 million for the six months ended June 30, 1999. Operating income as a percentage of revenues increased from 7.4% for the six months ended June 30, 1999 to 9.3% for the six months ended June 30, 2000. Other income totaled $11.5 million for the six months ended June 30, 2000 compared with other income of $204,000 during the six months ended June 30, 1999. This is primarily related to a one-time gain of $12.8 million on the sale of securities offset by increased interest expense of $1.0 million resulting from the increased levels in borrowings on the line of credit from $22.0 million at June 30, 1999 (of which the entire amount was not outstanding during the period) to $43.0 million at June 30, 2000. In addition, the Company incurred a loss of $660,000 resulting from litigation with an equipment supplier concerning cancellation of a contract. As a result of the foregoing factors, net income increased $16.0 or 156%, to $26.3 million for the six months ended June 30, 2000 from $10.3 million for the six months ended June 30, 1999. 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE PERIOD ENDED JUNE 30, 2000 AND 1999 -- CONTINUED LIQUIDITY AND CAPITAL RESOURCES As of June 30, 2000 the Company had cash and cash equivalents of $6.1 million, short-term investments of $47.4 million and an investment in common stock of $70.8 million. Cash used by operating activities was $2.4 million for the six months ended June 30, 2000, which primarily resulted from increased accounts receivable due to unscheduled early payments in 1999 totaling approximately $15.0 million the Company was expecting to receive in January 2000. This helped the Company achieve cash flow from operations of $14.0 million in the fourth quarter of 1999. Cash used in investing activities was $41.7 million for the six months ended June 30, 2000 resulting primarily from $9.0 million decrease in short-term investments, $5.1 million in capital contribution from a minority interest partner offset by $45.8 million toward the purchase of property and equipment and $8.0 million towards an investment in a customer relationship management software company. Cash provided by financing activities was $37.0 million resulting from the increase in borrowings of $25.0 million and $13.5 million from stock option exercises and their related tax benefit offset in part by pay downs of capital leases and other debt. During the first quarter of 2000, the Company completed an amendment to its unsecured revolving line of credit with a syndicate of four banks. The amendment increased the line of credit to $75.0 million from $50.0 million. The Company has the option to secure at any time up to $25.0 million of the line with available cash investments. The Company has two interest rate options: an offshore rate option or a bank base rate option. The Company will pay interest at a spread of 50 to 150 basis points over the applicable offshore or bank base rate, depending upon the Company's leverage. Interest on the secured portion is based on the applicable rate plus 22.5 basis points. Borrowings under this agreement totaled $43.0 million at June 30, 2000 of which $20.0 million was secured at the Company's option with temporary short term investments disclosed on the balance sheet. Interest rates under these borrowings ranged from 6.7% to 9.5% at June 30, 2000. Under this line of credit, the Company has agreed to maintain certain financial ratios and capital expenditure limits. The Company currently expects total capital expenditures in 2000 to be approximately $80 to $90 million of which $45.8 million was expended in the first six months. The Company believes that existing cash on hand and available borrowings under the line of credit together with cash from operations and proceeds from the sale of E.piphany common stock will be sufficient to finance the Company's operations, planned capital expenditures and anticipated growth through 2000. FORWARD-LOOKING STATEMENTS All statements not based on historical fact are forward-looking statements that involve substantial risks and uncertainties. In accordance with the Private Securities Litigation Reform Act of 1995, following are important factors that could cause TeleTech's actual results to differ materially from those expressed or implied by such forward-looking statements: lower than anticipated customer interaction center capacity utilization; the loss or delay in implementation of a customer management program; TeleTech's ability to build-out facilities in a timely and economic manner; greater than anticipated competition from new entrants into the customer care market, causing increased price competition or loss of clients; the loss of one or more significant clients; higher than anticipated start-up costs associated with new business opportunities; TeleTech's ability to predict the potential volume or profitability of any future technology or consulting sales; TeleTech's agreements with clients may be canceled on relatively short notice; and TeleTech's ability to generate a specific level of revenue is dependent upon customer interest in and use of the Company's clients' products and services. Readers are encouraged to review TeleTech's 1999 Annual Report on Form 10-K, which describes other important factors that may impact TeleTech's business, results of operations and financial condition. However, these factors 14 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE PERIOD ENDED JUNE 30, 2000 AND 1999 -- CONTINUED should not be construed as an exhaustive list. TeleTech cannot always predict which factors could cause actual results to differ materially from those in its forward-looking statements. In light of these risks and uncertainties the forward-looking statements might not occur. TeleTech assumes no obligation to update its forward-looking statements to reflect actual results or changes in factors affecting such forward-looking statements. 15 Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK FOR THE PERIOD ENDED JUNE 30, 2000 Market risk represents the risk of loss that may impact the financial position, results of operations or cash flows of the Company due to adverse changes in financial and commodity market prices and rates. The Company is exposed to market risk in the areas of changes in U.S. interest rates and changes in foreign currency exchange rates as measured against the U.S. dollar. These exposures are directly related to its normal operating and funding activities. INTEREST RATE RISK The interest on the Company's line of credit and its Canadian subsidiary's operating loan is variable based on the bank's base rate or offshore rate, and therefore, affected by changes in market interest rates. At June 30, 2000, there was approximately $930,000 in borrowings outstanding on the operating loan and $43.0 million outstanding on the Company's line of credit. The Company monitors interest rates frequently and has sufficient cash balances to significantly reduce the line of credit, should interest rates increase significantly. The Company's investments are typically short-term in nature and as a result do not expose the Company to significant risk from interest rate fluctuations. Therefore, the Company does not believe that reasonably possible near-term changes in interest rates will result in a material effect on future earnings, fair values or cash flows of the Company. FOREIGN CURRENCY RISK The Company has wholly owned subsidiaries in Argentina, Australia, Brazil, Canada, Mexico, New Zealand, Singapore and the United Kingdom. The substantial majority of revenues and expenses from these operations are 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 three and six months ended June 30, 2000, revenues from non-U.S. countries represented 34% and 31% of consolidated revenues, respectively. The Company's Canadian subsidiary receives payment in U.S. dollars for certain of its larger customer contracts. As all its expenditures are in Canadian dollars, the Company must acquire Canadian currency on a monthly basis. Accordingly, the Company has contracted with a Commercial bank at no material cost, to acquire a total of $27 million Canadian dollars during the last 6 months of 2000 at a fixed price in U.S. dollars of $18.3 million. There is no material differences between the fixed exchange ratio and the current exchange ratio of the U.S./Canadian dollar. OTHER ITEMS From time to time, the Company engages in discussions regarding restructuring, dispositions, acquisitions and other similar transactions. Any such transaction could include, among other things, the transfer, sale or acquisition of significant assets, businesses or interests, including joint ventures, or the incurrence, assumption or refinancing of indebtedness, and could be material to the Company's financial condition and results of operations. There is no assurance that any such discussions will result in the consummation of any such transaction. 16 PART II. OTHER INFORMATION Item 1. Legal Proceedings From time to time, the Company is involved in litigation, most of which is incidental to its business. In the Company's opinion, no litigation to which the Company currently is a party is likely to have a material adverse effect on the Company's results of operations or financial condition. Item 4. Submission of Matters to a Vote of Security Holders The Company held its annual meeting of shareholders ("Annual Meeting") on May 3, 2000. As of March 24, 2000, the record date for the Annual Meeting, approximately 62,338,826 shares of common stock were outstanding. Each matter submitted to a vote of the shareholders at the Annual Meeting received a number of votes sufficient for approval. The following items were submitted to a vote of the Company's shareholders at the Annual Meeting: (a) Election of Directors
VOTES FOR VOTES ABSTAINED Kenneth D. Tuchman 53,054,481 15,547 Scott Thompson 53,054,481 15,547 James Barlett 53,054,481 15,547 Rod Dammeyer 53,054,481 15,547 George Heilmeier 53,054,481 15,547 Morton Meyerson 53,054,481 15,547 Alan Silverman 53,054,481 15,547
(b) Ratification of appointment of Arthur Andersen LLP as the Company's independent auditors for fiscal year 2000:
VOTES FOR VOTES AGAINST VOTES ABSTAINED 53,062,122 5,174 2,732
17 (c) A proposal to adopt the Company's Amended and Restated 1999 Stock Option and Incentive Plan:
VOTES FOR VOTES AGAINST VOTES ABSTAINED 40,399,166 7,001,740 3,690
(d) A proposal to adopt the Company's Amended and Restated Employee Stock Purchase Plan:
VOTES FOR VOTES AGAINST VOTES ABSTAINED 47,035,869 364,961 3,766
Item 5. Recent Developments New Corporate Headquarters In March, 2000 the Company and State Street Bank and Trust Company of Connecticut ("State Street") entered into a lease agreement (the "Agreement") whereby State Street acquired 12 acres of land in Arapahoe County, Colorado for approximately $5.2 million for the purpose of constructing a new corporate headquarters for the Company. In June, 2000 the Agreement was amended to provide for the construction of the building. The total estimated cost of the land and building provided for under the Agreement is $30 million. Rent expense will commence upon completion of the building, which is estimated to be in the first quarter of 2001. Investment in Common Stock In December 1999 and January 2000, the Company invested a total of $9.6 million in Octane Software, Inc., a privately held customer relationship management software company. In June, 2000, Octane merged with E.piphany, Inc., a publicly traded customer relationship management company. As a result of the merger, TeleTech received 825,000 shares of E.piphany common stock. Prior to June 30, 2000, TeleTech sold 152,500 shares of E.piphany, and subsequent to June 30, 2000 TeleTech has sold an additional 290,000 shares. 18 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits filed through the filing of this Form 10-Q 3.1 Restated Certificate of Incorporation of TeleTech[1] {Exhibit 3.1} 3.2 Amended and Restated Bylaws of TeleTech[1] {Exhibit 3.2} 10.28* Letter Agreement dated March 27, 2000 between Larry Kessler and TeleTech 10.29* Stock Option Agreement dated March 27, 2000 between Larry Kessler and TeleTech 10.30* Promissory Note dated April 3, 2000 by Larry Kessler for the benefit of TeleTech 10.31* Lease and Deed of Trust Agreement dated June 22, 2000 10.32* Participation Agreement dated June 22, 2000 27.1 * Financial Data Schedule
(b) Reports on Form 8-K None ------------------- * Filed Herewith [ ] Such exhibit previously filed with the Securities and Exchange Commission as exhibits to the filings indicated below, under the exhibit number indicated in brackets { }, and is incorporated by reference. [1] TeleTech's Registration Statement on Form S-1, as amended (Registration Statement No. 333-04097). 19 SIGNATURES Pursuant to the requirements 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. TELETECH HOLDINGS, INC. (Registrant) Date: August 11, 2000 By: /s/ SCOTT D. THOMPSON ------------------------------- Scott D. Thompson Chief Executive Officer and President Date: August 11, 2000 By: /s/ MICHAEL E. FOSS ------------------------------- Michael E. Foss Chief Financial Officer and President TeleTech Companies Group 20