UNITED STATES SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549
Form 10-Q
For the quarterly period ended June 30, 2002
OR
For the transition period from to
Commission File Number 0-21055
TeleTech Holdings, Inc.(Exact name of Registrant as specified in its charter)
9197 South Peoria StreetEnglewood, Colorado 80112(Address of principal executive offices)
Registrant’s telephone number, including area code: (303) 397-8100
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 o
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
TELETECH HOLDINGS, INC. AND SUBSIDIARIES
FORM 10-Q
INDEX
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Item 1.
TELETECH HOLDINGS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS(Amounts in thousands except share amounts)
The accompanying notes are an integral part of these condensed consolidated balance sheets.
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TELETECH HOLDINGS, INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS(Amounts in thousands except per share data)(Unaudited)
The accompanying notes are an integral part of these condensed consolidated financial statements.
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TELETECH HOLDINGS, INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(Amounts in thousands)(Unaudited)
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TELETECH HOLDINGS, INC. AND SUBSIDIARIESNOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTSJUNE 30, 2002
(1) OVERVIEW AND BASIS OF PRESENTATION
Overview
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, Mexico, New Zealand, Northern Ireland, 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 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 entries) which, in the opinion of management, are necessary to present fairly the financial position at June 30, 2002, and the results of operations and cash flows of the Company and its subsidiaries for the six months ended June 30, 2002 and 2001. Operating results for the three and six months ended June 30, 2002 are not necessarily indicative of the results that may be expected for the year ended December 31, 2002.
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, 2001. Certain 2001 and first quarter 2002 amounts have been reclassified to conform to June 30, 2002 presentation.
(2) EFFECTS OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
On January 1, 2002, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 142 “Goodwill and Other Intangible Assets.” SFAS No. 142 provides guidance on the accounting for goodwill and other intangibles specifically relating to identifying and allocating purchase price to specific identifiable intangible assets. Additionally, SFAS No. 142 provides guidance for the amortization of identifiable intangible assets and states that goodwill shall not be amortized, but rather tested for impairment, at least annually, using a fair value approach. In connection with the adoption of SFAS No. 142, the Company recorded a pre-tax impairment of approximately $11.5 million related to the goodwill of its Latin American reporting unit. The impairment is reflected as the cumulative effect of a change in accounting principle in the accompanying condensed consolidated statements of operations for the six months ended June 30, 2002.
In June 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations,” which establishes accounting standards for recognition and measurement of a liability for an asset retirement obligation and the associated asset retirement cost. This statement is effective for financial statements issued for fiscal years beginning after June 15, 2002. Management has not yet determined the effect SFAS No. 143 will have on its financial position, if any.
On January 1, 2002, the Company adopted SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” The statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS No. 144 supersedes SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of.” SFAS No. 144 also supersedes the accounting and reporting provisions of APB No. 30, “Reporting the Results of Operations—Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions,” for the disposal of a segment of a business. SFAS No. 144 also amends APB No. 51, “Consolidated Financial Statements,” to eliminate the exception to consolidation for a subsidiary for which control is likely to be temporary. The provisions of this statement are generally to be applied prospectively. The adoption of this pronouncement did not have a material effect on the financial position of the Company.
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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 eliminates consistency 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 has not yet determined the effect SFAS No. 145 will have on its financial position, if any.
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 has not yet determined the effect SFAS No. 146 will have on its financial position, if any.
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,” was effective for the Company beginning January 1, 2002, requiring certain expenses previously classified as depreciation and amortization expenses to be reclassified as deductions from revenues. The Company began applying the provisions of EITF No. 01-09 effective April 1, 2002. Prior year results and the results for the three months ended March 31, 2002 have not been restated as the impact was immaterial.
(3) SEGMENT INFORMATION
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 provide 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.
In December 2001, the Company changed its internal reporting structure, which caused the composition of the reportable segments to change. The information for the three and six months ended June 30, 2001 has been restated to reflect this change.
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The following data includes revenues based on the geographic location in which the services are provided (in thousands):
(4) SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION AND NONCASH INVESTING AND FINANCING ACTIVITIES
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(5) COMPREHENSIVE INCOME (LOSS)
The Company’s comprehensive income (loss) for the three and six months ended June 30, 2002 and 2001 was as follows (in thousands):
(6) EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share are 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 are computed by dividing the Company’s net income (loss) by the weighted average number of shares and dilutive potential shares outstanding during the period. The following table sets forth the computation of basic and diluted weighted average shares for the periods indicated.
For the three and six months ended June 30, 2002, 4.2 million and 3.9 million options, respectively, to purchase shares of common stock were outstanding but were not included in the computation of diluted earnings per share because the effect would have been anti-dilutive. For the three and six months ended June 30, 2001, basic and diluted weighted average shares are the same as the effect of including common stock equivalents would have been anti-dilutive.
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(7) DERIVATIVES
On January 1, 2001, the Company adopted SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”). 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, with changes in the fair value of qualifying hedges recorded in other comprehensive income. SFAS 133 requires that changes in the derivatives 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.
At June 30, 2002, the Company has an interest rate swap designated as a cash flow hedge. The Company has an operating lease for its headquarters building for which the required lease payments are variable based on LIBOR. On December 12, 2000, the Company entered into an interest rate swap in which 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 June 30, 2002, the Company has a derivative liability associated with this swap of $3.0 million.
The Company’s Canadian subsidiary’s functional currency is the Canadian dollar. The subsidiary has contracts payable in U.S. dollars and the Company has contracted with several commercial banks for $0.4 million to acquire a total of $79.7 million Canadian dollars through May 31, 2003, at a fixed price in U.S. dollars of $50.5 million, to hedge its foreign currency risk. During the six months ended June 30, 2002 and 2001, the Company recorded a $0.1 million gain and a $0.2 million loss, respectively, in its condensed statements of operations relating to Canadian dollar forward contracts. As of June 30, 2002, the Company has a derivative asset of $1.9 million associated with these contracts.
(8) RESTRUCTURING CHARGES
During the second quarter of 2002, the Company implemented certain cost cutting measures. In connection with these actions, the Company’s corporate segment recorded a $2.1 million pre-tax charge for severance and other termination benefits related to a reduction in force of approximately 100 employees, as well as $1.9 million in lease termination charges. The Company’s North American and international outsourcing segments recorded $0.3 million and $0.9 million, respectively, of pre-tax charges associated with the closure of customer interaction centers. These restructuring charges are included in operating expenses as separate line items in the accompanying condensed consolidated statement of operations.
During the first quarter of 2001, the Company implemented certain cost cutting measures. In connection with these actions, the Company’s corporate segment recorded a $12.5 million pre-tax charge for severance and other termination benefits related to a reduction in force of approximately 300 employees and the Company’s North American outsourcing segment recorded a $7.7 million pre-tax charge associated with the closure of a customer interaction center located in Thornton, Colorado. These restructuring charges are included in operating expenses as separate line items in the accompanying condensed consolidated statements of operations.
A rollforward of the activity of the Company’s restructuring accruals is as follows (in thousands):
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(9) EQUITY INVESTMENT
On May 31, 2002, Kenneth D. Tuchman, the Company’s Chairman and CEO, transferred his 55% ownership of enhansiv holdings, inc. (“EHI”) common stock to the Company and received no consideration in return. The Company placed nominal value on this contribution based on a third-party appraisal. As a result, the Company began consolidating the results of EHI effective June 1, 2002 (the Company had previously accounted for its preferred stock investment in EHI under the equity method of accounting). For the six months ended June 30, 2002 and 2001, the Company recorded $3.6 million and $0.7 million, respectively, for EHI losses which are reflected as a separate line item in other income (expense) in the accompanying condensed consolidated statements of operations.
Please see the Company’s Form 10-K for the year ended December 31, 2001 and Form 10-Q for the three months ended March 31, 2002 for a more complete description of the formation of, and transactions between, EHI and the Company.
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 pre-tax charge to adjust the investment’s carrying value down to its estimated fair value.
(10) LOSS ON REAL ESTATE HELD FOR SALE
During the three months ended June 30, 2001, the Company determined that the estimated cost to complete and sell its former planned headquarters building (“Planned Headquarters Building”) exceeded the fair value of the building. The Company made this determination after receiving various offers for the Planned Headquarters Building. Accordingly, the Company recorded a loss of $7.0 million to write-down the property to its estimated fair value. The Company subsequently sold the Planned Headquarters Building in the fourth quarter of 2001. The Company did not record a material gain or loss on the sale.
Item 2.
MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONSFOR THE PERIODS ENDED JUNE 30, 2002 AND 2001
INTRODUCTION
This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains certain forward-looking statements that involve risks and uncertainties. The Company has set forth in its Form 10-K for the year ended December 31, 2001 a detailed discussion of risks and uncertainties relating to the Company’s business. The projections and statements contained in these forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the Company’s actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. The Company’s future results of operations and performance are subject to numerous factors including: weakening of the global economy; the Company’s ability to obtain financing; the Company’s ability to manage rapid growth; rapidly changing technology; dependence on key personnel and labor force; relatively few of the Company’s customers are responsible for a significant portion of earnings and therefore, the loss of any one of these customers could significantly impact the earnings of the Company; difficulties of completing and integrating acquisitions and joint ventures; risk of business interruptions; risks associated with doing business internationally, including foreign currency risk; lower than anticipated customer interaction center capacity utilization; transitioning work from high cost centers to lower cost markets; the loss or delay in implementation of a customer management program; the Company’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; higher than anticipated start-up costs associated with new business opportunities; certain agreements with clients may be canceled
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on relatively short notice without significant penalties; and the Company’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. 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 weakening of the global economy; 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. Readers should review this quarterly report in combination with the Company’s Form 10-K for the year ended December 31, 2001. The Company assumes no obligation to update its forward-looking statements to reflect actual results or changes in factors affecting such forward-looking statements.
RESULTS OF OPERATIONS
Three-Month Period Ended June 30, 2002 Compared to June 30, 2001
Revenues. Revenues increased $28.5 million or 12.6% to $253.7 million for the three months ended June 30, 2002 from $225.2 million for the three months ended June 30, 2001. This increase resulted primarily from an increase in North American outsourcing revenues. On a segment basis, revenues from North American outsourcing increased $25.2 million or 16.6% to $177.3 million for the three months ended June 30, 2002 from $152.1 million for the three months ended June 30, 2001. The increase in North American outsourcing revenues primarily resulted from a new client program launched in the first quarter of 2002 which was partially offset by the loss or ramp-down of certain programs from the prior year. The economics of this new North American contract are highly dependent upon the Company transitioning a substantial amount of the work from existing high cost centers to lower cost markets. Revenues from international outsourcing decreased $2.3 million or 4.1% to $54.1 million for the three months ended June 30, 2002 from $56.4 for the three months ended June 30, 2001. This decrease primarily resulted from lower revenues in Spain and Argentina. Spanish revenues were impacted by the termination of an unprofitable contract during the first quarter of 2002 while Argentina was affected primarily by the currency devaluation taking place in that country. Database marketing and consulting revenues increased $6.1 million or 35.4% for the three months ended June 30, 2002 primarily due to an increase in active customers in the service reminder business.
Costs of Services. Costs of services, which are primarily variable with revenue, increased $33.1 million, or 22.7% to $178.9 million for the three months ended June 30, 2002 from $145.8 million for the three months ended June 30, 2001. Costs of services as a percentage of revenues increased from 64.8% for the three months ended June 30, 2001 to 70.5% for the three months ended June 30, 2002. The increase in costs of services as a percentage of revenues is primarily the result of a deterioration of margin at Percepta, deterioration of international outsourced margins (primarily Europe), and the launch of the previously mentioned North American outsourcing program in the first quarter of 2002.
Selling, General and Administrative. Selling, general and administrative expenses decreased $1.3 million, or 2.7% to $48.2 million for the three months ended June 30, 2002, from $49.6 million for the three months ended June 30, 2001 primarily resulting from the Company’s cost cutting measures taken during the third quarter of 2001 and second quarter of 2002. Selling, general and administrative expenses as a percentage of revenues decreased from 22.0% for the three months ended June 30, 2001 to 19.0% for the three months ended June 30, 2002.
Depreciation and Amortization. Depreciation and amortization expense decreased $0.8 million, or 5.4% to $13.7 million for the three months ended June 30, 2002, from $14.5 million for the three months ended June 30, 2001. Depreciation and amortization expense as a percentage of revenues decreased to 5.4% for the three months ended June 30, 2002 from 6.4% for the three months ended June 30, 2001. The three months ended June 30, 2002 benefited from the adoption of SFAS No. 142, as there was no goodwill amortization for that period. Goodwill amortization was $0.7 million for the three months ended June 30, 2001. Additionally, amortization expense for the three months ended June 30, 2002 was also impacted by 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).
Income from Operations. As a result of the foregoing factors, in combination with the restructuring charges of $5.2 million in 2002, and the loss on real estate held for sale of $7.0 million in the quarter ended June 30, 2001, income from operations decreased $0.7 million from $8.3 million for the three months ended June
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30, 2001, to $7.7 million for the three months ended June 30, 2002. Operating income as a percentage of revenues decreased from 3.7% for the three months ended June 30, 2001 to 3.0% for the three months ended June 30, 2002. Income from operations, exclusive of nonrecurring items, decreased $2.5 million or 16.1% to $12.9 million for the three months ended June 30, 2002 from $15.3 million for the three months ended June 30, 2001. Income from operations as a percentage of revenues, exclusive of nonrecurring items, decreased to 5.1% for the three months ended June 30, 2002 from 6.8% for the three months ended June 30, 2001.
Other Income (Expense). Other expense decreased $17.7 million to $1.5 million for the three months ended June 30, 2002 compared to $19.2 million for the three months ended June 30, 2001. This decrease primarily resulted from the Company recording a loss for the other than temporary decline in value of its investment in EHI of $16.5 million during the three months ended June 30, 2001.
Income Taxes. Taxes on income changed $6.5 million to $2.4 million for the three months ended June 30, 2002 from a benefit of $4.0 million for the three months ended June 30, 2001. The Company’s effective tax rate was 39.5% for the three months ended June 30, 2002 and 37.0% for the three months ended June 30, 2001.
Net Income (Loss). As a result of the foregoing factors, net income increased $11.3 million or 153.1%, to $3.9 million for the three months ended June 30, 2002 from a loss of $7.4 million for the three months ended June 30, 2001. Net income, exclusive of nonrecurring items, increased $0.2 million or 3.0% to $7.1 million for the three months ended June 30, 2002 from $6.9 million for the three months ended June 30, 2001.
Six-Month Period Ended June 30, 2002 Compared to June 30, 2001
Revenues. Revenues increased $44.6 million or 9.6% to $507.7 million for the six months ended June 30, 2002 from $463.1 million for the six months ended June 30, 2001. This increase resulted primarily from an increase in North American outsourcing revenues. On a segment basis, revenues from North American outsourcing increased $43.6 million or 14.0% to $354.4 million for the three months ended June 30, 2002 from $310.9 million for the three months ended June 30, 2001. The increase in North American outsourcing revenues primarily resulted from a new client program launched in the first quarter of 2002 which was partially offset by the loss or ramp-down of certain programs from the prior year. The economics of this new North American contract are highly dependent upon the Company transitioning a substantial amount of the work from existing high cost centers to lower cost markets. Revenues from international outsourcing decreased $6.5 million or 5.6% to $110.7 million for the six months ended June 30, 2002 from $117.2 for the six months ended June 30, 2001. This decrease primarily resulted from lower revenues in Spain and Argentina. Spanish revenues were impacted by the termination of an unprofitable contract during the first quarter of 2002 while Argentina was affected primarily by the currency devaluation taking place in that country. Database marketing and consulting revenues increased $9.0 million or 25.5% for the six months ended June 30, 2002 primarily due to an increase in active customers in the service reminder business.
Costs of Services. Costs of services, which are primarily variable with revenue, increased $58.3 million, or 19.7% to $354.4 million for the six months ended June 30, 2002 from $296.1 million for the six months ended June 30, 2001. Costs of services as a percentage of revenues increased from 63.9% for the six months ended June 30, 2001 to 69.8% for the six months ended June 30, 2002. The increase in costs of services as a percentage of revenues is primarily the result of a deterioration of margin at Percepta, deterioration of international outsourced margins (primarily Europe), and the launch of the previously mentioned North American program in the first quarter of 2002.
Selling, General and Administrative. Selling, general and administrative expenses decreased $10.2 million, or 9.5% to $96.5 million for the six months ended June 30, 2002, from $106.6 million for the six months ended June 30, 2001 primarily resulting from the Company’s cost cutting measures taken during 2001 and 2002, along with reductions in other discretionary spending such as consulting and travel between periods. Selling, general and administrative expenses as a percentage of revenues decreased from 23.0% for the six months ended June 30, 2001 to 19.0% for the six months ended June 30, 2002.
Depreciation and Amortization.Depreciation and amortization expense decreased $0.8 million, or 2.6% to $28.6 million for the six months ended June 30, 2002, from $29.4 million for the six months ended June 30, 2001. Depreciation and amortization expense as a percentage of revenues decreased to 5.6% for the six months ended June 30, 2002 from 6.3% for the six months ended June 30, 2001. The six months ended June 30, 2002 benefited from the adoption of SFAS No. 142, as there was no goodwill amortization for that period. Goodwill amortization was $1.2 million for the six months ended June 30, 2001.
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Income from Operations. As a result of the foregoing factors, in combination with restructuring and impairment charges of $5.2 million and $27.3 million for the six months ended June 30, 2002 and 2001, respectively, income from operations increased $19.3 million from $3.7 million for the six months ended June 30, 2001, to $23.0 million for the six months ended June 30, 2002. Operating income as a percentage of revenues increased from 0.8% for the six months ended June 30, 2001 to 4.5% for the six months ended June 30, 2002. Income from operations, exclusive of nonrecurring items, decreased $2.8 million or 8.9% to $28.2 million for the six months ended June 30, 2002 from $30.9 million for the six months ended June 30, 2001. Income from operations as a percentage of revenues, exclusive of nonrecurring items, decreased to 5.5% for the six months ended June 30, 2002 from 6.7% for the six months ended June 30, 2001.
Other Income (Expense). Other expense decreased $14.9 million to $5.5 million for the six months ended June 30, 2002 compared to $20.4 million for the six months ended June 30, 2001. This decrease primarily resulted from the Company recording a loss for the other than temporary decline in value of its investment in EHI of $16.5 million during the six months ended June 30, 2001.
Income Taxes. Taxes on income changed $13.2 million to $6.9 million for the six months ended June 30, 2002 from a benefit of $6.3 million for the six months ended June 30, 2001. The Company’s effective tax rate was 39.5% for the six months ended June 30, 2002 and 37.9% for the six months ended June 30, 2001.
Cumulative Effect of Change in Accounting Principle. Upon adoption of SFAS No. 142 in the first quarter of 2002, the Company recorded a pre-tax impairment of approximately $11.5 million related to the goodwill of its Latin American reporting unit. Taxes of approximately $4.0 million were netted against the impairment using a tax rate of 35%, which is the Company’s effective rate in the countries where the goodwill was recorded. The impairment was due to the economic risk and uncertainty associated with that region, particularly Argentina, and the corresponding discount rate used in the SFAS No. 142 calculation.
The effect of no longer amortizing goodwill is expected to result in a benefit to 2002 earnings of approximately $2.9 million on an annual basis, or $0.02 per diluted share, compared to 2001.
Net Income (Loss). As a result of the foregoing factors, net income increased $14.4 million or 128.2%, to $3.2 million for the six months ended June 30, 2002 from a loss of $11.2 million for the six months ended June 30, 2001. Net income, exclusive of nonrecurring items, decreased $1.4 million or 9.3% to $13.8 million for the six months ended June 30, 2002 from $15.2 million for the six months ended June 30, 2001.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2002, the Company had cash and cash equivalents of $96.4 million, securities available for sale of $0.7 million and short-term investments of $4.9 million. Cash and cash equivalents increased $1.0 million from December 31, 2001. Net cash provided by operating activities was $18.3 million for the six months ended June 30, 2002 as compared to net cash provided of $36.0 million for the six months ended June 30, 2001. The decrease in net operating cash flow of $17.7 million primarily resulted from working capital used to launch the previously mentioned new North American outsourcing program.
Cash used in investing activities was $16.9 million for the six months ended June 30, 2002 as compared to $65.0 million for the six months ended June 30, 2001. For the six months ended June 30, 2002, the Company had capital expenditures of $16.8 million compared to $39.1 million for the six months ended June 30, 2001. In addition, 2001 investing activities included $20.4 million of expenditures on the Company’s former planned headquarters building, which was subsequently sold in the fourth quarter of 2001, and funding of EHI of $7.8 million.
Cash provided by financing activities was $0.1 million for the six months ended June 30, 2002 as compared to $13.3 million provided for the six months ended June 30, 2001. The cash provided by financing activities for 2002 primarily related to proceeds from employee stock purchases and option exercises offset by payments under capital leases and the purchase of treasury stock. The cash flow in 2001 was primarily generated from borrowings under the line of credit.
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Historically, capital expenditures have been, and future capital expenditures are anticipated to be, primarily for the development of customer interaction centers, technology deployment and systems integrations. The Company currently expects total capital expenditures in 2002 to be approximately $45.0 million to $55.0 million. The Company expects its capital expenditures will be used primarily to open several new non-U.S. customer interaction centers, maintenance capital for existing centers and internal technology projects. Such expenditures will be financed with internally generated funds and existing cash balances. The level of capital expenditures incurred in 2002 will be dependent upon new client contracts obtained by the Company and the corresponding need for additional capacity. In addition, if the Company’s future growth is generated through facilities management contracts, the anticipated level of capital expenditures could be reduced.
In the fourth quarter of 2001, the Company completed a $75.0 million offering of unsecured Senior Notes. The Senior Notes consist of two tranches; $60.0 million bearing interest at 7% per annum with a seven-year term and $15.0 million bearing interest at 7.4% per annum with a 10-year term. Additionally, the Company has an unsecured revolving line of credit agreement with a syndicate of five commercial banks under which it may borrow up to $87.5 million. At June 30, 2002, there were no borrowings under the line of credit. The line of credit expires in November 2002. It is management’s intent to renegotiate the line and extend the maturity date. There is no assurance that the line of credit will be renegotiated or extended. The Company believes that existing cash on hand, along with internally generated cash flows and availability under its revolving line of credit are sufficient to fund planned operations for the foreseeable future.
From time to time, the Company engages in discussions regarding restructurings, dispositions, mergers, acquisitions and other similar transactions. Any such transaction could include, among other things, the transfer, sale or acquisition of significant assets, businesses or interests, including joint ventures, or the incurrence, assumption or refinancing of indebtedness, and could be material to the financial condition and results of operations of the Company. There is no assurance that any such discussions will result in the consummation of any such transaction.
In December 2000, the Company and State Street Bank and Trust Company (“State Street”) consummated a lease transaction for the Company’s new corporate headquarters, whereby State Street acquired the property at 9197 South Peoria Street, Englewood, Colorado (the “Property”). Simultaneously, State Street leased the Property to TeleTech Services Corporation (“TSC”), a wholly owned subsidiary of the Company. As part of the transaction, State Street formed a special purpose entity to purchase the Property and hold the associated equity and debt from a group of banks. The debt held by this entity was approximately $37.0 million at June 30, 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, 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 potential liability, if any, resulting from a residual payment has not been reflected on the accompanying condensed consolidated balance sheets. This arrangement is not expected to have a material effect on liquidity or availability of or requirements for capital resources. A significant restrictive covenant under this agreement requires the Company to maintain at least one dollar of net income each quarter. Additionally, the lease payments are variable based on LIBOR. However, the Company has an interest rate swap agreement in place to hedge any fluctuations in LIBOR.
As of June 30, 2002, the Company had the following contractual obligations (amounts in thousands):
1 Reflected on accompanying condensed consolidated balance sheets.
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2 Not reflected on accompanying condensed consolidated balance sheets.
Critical Accounting Policies
The Company has identified the policies below as critical to its business and results of operations. The impact and any associated risks related to these policies on the Company’s business is discussed throughout Management’s Discussion and Analysis of Financial Condition and Results of Operations where such policies affect reported and expected financial results. For a detailed discussion on the application of these and other accounting policies, see Note 1 to the consolidated financial statements in the Company’s Form 10-K for the year ended December 31, 2001.
Revenue Recognition. The revenue recognition policy is significant because revenue is a key component of operating results. The Company follows very specific and detailed guidelines in measuring revenue. In addition, revenue recognition sometimes determines the timing of certain expenses, such as certain sales commissions.
Derivatives. Being able to mitigate economic risk associated with changes in foreign currencies is important to the Company. The ability to qualify for hedge accounting allows the Company to match the gains and losses from changes in the fair market value of the derivative securities used for hedging activities with the operating results being hedged.
NEW ACCOUNTING PRONOUNCEMENTS
Item 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK FOR THE PERIOD ENDED JUNE 30, 2002
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 June 30, 2002, the Company has entered into forward financial instruments to manage and reduce the impact of changes in foreign currency rates with a major financial institution. The Company has also entered into an interest rate swap agreement to manage 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 Company’s line of credit is variable based on the bank’s base rate or offshore rate, and therefore,
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affected by changes in market interest rates. At June 30, 2002, there were no amounts outstanding on the line of credit.
Foreign Currency Risk
The Company has wholly owned subsidiaries in Argentina, Australia, Brazil, Canada, China, Mexico, New Zealand, Northern Ireland, the Philippines, Scotland, Singapore, and Spain. 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 six months ended June 30, 2002, revenues from non-U.S. countries represented 35.0% of consolidated revenues.
The Company has contracted with several commercial banks for $.4 million to acquire a total of $79.7 million Canadian dollars from July 2002 to May 2003 at a fixed price in U.S. dollars of $50.5 million. There is no material difference between the fixed exchange ratio and the current exchange U.S./Canadian dollar ratio. If the U.S./Canadian dollar exchange rate were to increase 10% from period-end levels, the Company would not incur a material loss on the contract.
Fair Value of Debt and Equity Securities
The Company’s investments in debt and equity securities are short-term and not subject to significant fluctuations in fair value. If interest rates and equity prices were to decrease 10% from period-end levels, the fair value of the Company’s debt and equity securities would have decreased $0.6 million.
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 23, 2002. As of April 10, 2002, the record date for the Annual Meeting, approximately 77,107,822 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:
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Item 6. Exhibits and Reports on Form 8-K
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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.
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