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: March 31, 1999 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 April 30, 1999 Common Stock, par value $.01 per share 61,056,760
TELETECH HOLDINGS, INC. AND SUBSIDIARIES FORM 10-Q INDEX <TABLE> <CAPTION> PAGE NUMBER PART I. FINANCIAL INFORMATION - ---------------------------------- <S> <C> Item 1. Financial Statements (Unaudited) Condensed consolidated balance sheets--December 31, 1998 and March 31, 1999 3 Condensed consolidated statements of income--Three months ended March 31, 1999 and 1998 5 Condensed consolidated statements of cash flows--Three months ended March 31, 1999 and 1998 6 Notes to condensed consolidated financial statements--March 31, 1999 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 Item 3. Quantitative and Qualitative Disclosures about Market Risk 13 PART II . OTHER INFORMATION - ------------------------------- Item 1. Legal Proceedings 14 Item 6. Exhibits and Reports on Form 8-K 14 SIGNATURES 15 - ---------- </TABLE> 2
Item 1. TELETECH HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) <TABLE> <CAPTION> DECEMBER 31, MARCH 31, ASSETS 1998 1999 ------ ------------ ------------ (Unaudited) <S> <C> <C> CURRENT ASSETS: Cash and cash equivalents $ 8,796 $ 13,747 Short-term investments 37,082 36,230 Accounts receivable, net of allowance for doubtful accounts of $2,900 and $3,167, respectively 68,830 75,423 Prepaids and other assets 2,811 3,479 Deferred tax asset 3,855 3,621 --------- -------- Total current assets 121,374 132,500 --------- -------- PROPERTY AND EQUIPMENT, net of accumulated depreciation of $38,432 and $43,790, respectively 77,546 86,233 --------- -------- OTHER ASSETS: Long-term accounts receivable 4,274 6,575 Goodwill, net of amortization of $1,599 and $1,923, respectively 15,022 20,010 Contract acquisition cost, net of amortization of zero and $251, respectively 10,900 10,649 Other assets 1,794 1,973 --------- -------- Total assets $230,910 $257,940 --------- -------- </TABLE> The accompanying notes are an integral part of these consolidated balance sheets. 3
TELETECH HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) <TABLE> <CAPTION> DECEMBER 31, MARCH 31, LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1999 ------------------------------------ ------------ ----------- (Unaudited) <S> <C> <C> CURRENT LIABILITIES: Current portion of long-term debt $ 7,989 $ 12,833 Bank overdraft 778 434 Accounts payable 11,814 9,166 Accrued employee compensation 18,134 20,400 Accrued income taxes 4,191 2,341 Other accrued expenses 11,520 11,586 Customer advances, deposits and deferred income 3,803 2,933 ------------ ----------- Total current liabilities 58,229 59,693 DEFERRED TAX LIABILITIES 835 1,037 LONG-TERM DEBT, net of current portion: Capital lease obligations 4,208 3,845 Line of credit -- 20,000 Other debt 2,145 1,148 ------------ ----------- Total liabilities 65,417 85,723 ------------ ----------- STOCKHOLDERS' EQUITY: Common stock; $.01 par value; 150,000,000 shares authorized; 60,769,724 and 61,056,760 shares, respectively, issued and outstanding 606 609 Additional paid-in capital 111,080 112,872 Accumulated other comprehensive income (1,610) (1,492) Retained earnings 55,417 60,228 ------------ ----------- Total stockholders' equity 165,493 172,217 ------------ ----------- Total liabilities and stockholders' equity $230,910 $257,940 ------------ ----------- ------------ ----------- </TABLE> The accompanying notes are an integral part of these consolidated balance sheets. 4
TELETECH HOLDINGS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) (UNAUDITED) <TABLE> <CAPTION> THREE MONTHS ENDED MARCH 31, --------------------- 1998 1999 ---------- --------- <S> <C> <C> REVENUES $80,244 $110,638 ---------- --------- OPERATING EXPENSES: Costs of services 51,856 74,368 Selling, general and administrative Expenses 21,262 28,404 ---------- --------- Total operating expenses 73,118 102,772 ---------- --------- INCOME FROM OPERATIONS 7,126 7,866 OTHER INCOME (EXPENSE): Interest expense (302) (416) Interest income 889 554 Equity in income of affiliate 14 -- Other (94) 65 ---------- --------- 507 203 ---------- --------- INCOME BEFORE INCOME TAXES 7,633 8,069 Provision for income taxes 3,081 3,258 ---------- --------- NET INCOME $ 4,552 $ 4,811 ---------- --------- WEIGHTED AVERAGE SHARES OUTSTANDING Basic 59,423 60,770 ---------- --------- Diluted 61,666 62,450 ---------- --------- NET INCOME PER SHARE Basic $ .08 $ .08 ---------- --------- Diluted $ .07 $ .08 ---------- --------- </TABLE> The accompanying notes are an integral part of these consolidated balance sheets. 5
TELETECH HOLDINGS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (AMOUNTS IN THOUSANDS) (UNAUDITED) <TABLE> <CAPTION> THREE MONTHS ENDED MARCH 31, --------------------- 1998 1999 ---------- --------- <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 4,552 $ 4,811 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 3,858 6,307 Allowance for doubtful accounts 155 192 Deferred income taxes (4) 235 Equity in income of affiliate (14) -- Deferred compensation expense 32 -- Changes in assets and liabilities: Accounts receivable (2,855) (5,783) Prepaids and other assets 217 (2,246) Accounts payable and accrued expenses 4,434 (2,309) Customer advances, deposits and deferred income (429) (1,254) ---------- --------- Net cash provided by (used in) operating activities 9,946 (47) ---------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment (9,533) (13,440) Purchase of Intellisystems (2,000) -- Purchase of Pamet River, net of $339 cash acquired -- (1,462) Purchase of Smart Call -- (2,650) Changes in accounts payable and accrued liabilities related to investing activities (781) (55) Decrease in short-term investments 2,646 852 ---------- --------- Net cash used in investing activities (9,668) (16,755) ---------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Net decrease in bank overdraft $(1,094) $ (344) Net increase in short-term borrowings 2,191 25,000 Payments on long-term debt and capital leases (1,365) (2,001) Proceeds from exercise of stock options 413 41 ---------- --------- Net cash provided by financing activities 145 22,696 ---------- --------- Effect of exchange rate changes on cash 133 (943) ---------- --------- NET INCREASE IN CASH AND CASH EQUIVALENTS 556 4,951 CASH AND CASH EQUIVALENTS, beginning of period 7,338 8,796 ---------- --------- CASH AND CASH EQUIVALENTS, end of period $ 7,894 $13,747 ---------- --------- ---------- --------- </TABLE> The accompanying notes are an integral part of these consolidated balance sheets. 6
TELETECH HOLDINGS, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1999 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 March 31, 1999 and 1998 and for the periods then ended. Operating results for the three months ended March 31, 1999 are not necessarily indicative of the results that may be expected for the year ended December 31, 1999. The unaudited condensed consolidated financial statements should be read in conjunction with the consolidated and combined financial statements and footnotes thereto included in the Company's Form 10-K for the year ended December 31, 1998. 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. <TABLE> <CAPTION> THREE MONTHS ENDED MARCH 31, --------------------- (in thousands) 1998 1999 ---------- --------- <S> <C> <C> REVENUES: Outsourced $ 43,930 $ 62,914 Facilities Management 17,328 23,666 International Outsourced 17,349 18,137 Corporate Activities 1,637 5,921 ---------- --------- Total $ 80,244 $110,638 ---------- --------- ---------- --------- OPERATING INCOME (LOSS): Outsourced $ 8,772 $ 12,329 Facilities Management 2,099 3,072 International Outsourced 1,284 601 Corporate Activities (5,029) (8,136) ---------- --------- Total $ 7,126 $ 7,866 ---------- --------- ---------- --------- </TABLE> 7
TELETECH HOLDINGS, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1999 - CONTINUED <TABLE> <CAPTION> BALANCE AS OF ------------- DECEMBER 31 MARCH 31, (in thousands) 1998 1999 ----------- --------- <S> <C> <C> ASSETS: Outsourced Assets $101,105 $114,944 Facilities Management Assets 18,121 20,229 International Outsourced Assets 50,764 54,727 Corporate Activities Assets 45,898 68,040 ----------- --------- Total $230,910 $257,940 ----------- --------- ----------- --------- GOODWILL: International Outsourced Goodwill, Net $ 6,803 $ 9,106 Corporate Activities Goodwill, Net 8,219 10,904 ----------- --------- Total $ 15,022 $ 20,010 ----------- --------- ----------- --------- </TABLE> The following geographic data include revenues based on the location the services are provided (in thousands). <TABLE> <CAPTION> THREE MONTHS ENDED MARCH 31, --------- 1998 1999 ----------- --------- <S> <C> <C> REVENUES: United States $ 62,545 $ 87,592 Australia 9,190 10,719 Canada 6,254 8,920 Rest of world 2,255 3,407 ----------- --------- Total $ 80,244 $110,638 ----------- --------- ----------- --------- </TABLE> NOTE (3)--SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION AND NONCASH INVESTING AND FINANCING ACTIVITIES (IN THOUSANDS): <TABLE> <CAPTION> Three Months Ended March 31, ---------------------------- 1998 1999 ------------ ------------- <S> <C> <C> Cash paid for interest $ 301 $ 416 Cash paid for income taxes $ 375 $ 5,108 Noncash investing and financing activities: Stock issued in purchase of Intellisystems $ 3,389 $ -- Stock issued in purchase of Pamet River, Inc. $ -- $ 1,753 </TABLE> NOTE (4)--ACQUISITIONS On March 18, 1999, the Company acquired 100% of the common stock of Pamet River, Inc. ("Pamet") for approximately $1,821,000 in cash and 285,711 shares of common stock in the Company. Pamet is a global marketing company offering end-to-end marketing solutions by leveraging Internet and database technologies. The transaction has been accounted for as a purchase and goodwill will be amortized using the straight-line 8
TELETECH HOLDINGS, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1999 - CONTINUED method over 20 years. The operations of Pamet for all periods prior to the acquisition are immaterial to the results of the Company and, accordingly, no pro forma financial information has been presented. On March 31, 1999, the Company acquired 100% of the common stock of Smart Call S.A. ("Smart Call") for approximately $2,350,000 in cash including costs related to the acquisition. Smart Call is based in Buenos Aires, Argentina and provides a wide range of customer management solutions to Latin American and multinational companies. The transaction has been accounted for as a purchase and goodwill will be amortized using the straight-line method over 20 years. The operations of Smart Call for all periods prior to the acquisition are immaterial to the results of the Company and, accordingly, no pro forma financial information has been presented. As a part of the Smart Call acquisition, the Company paid $300,000, including costs associated with the transaction, for the option to acquire Connect S.A. ("Connect"), a sister company with additional customer service and systems integration capabilities. The option has been accounted for as an other asset. TeleTech may be required to purchase Connect for $4.3 million to $4.8 million in total consideration if Connect achieves certain operating objectives. NOTE (5)--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 only item of other comprehensive income reported by the Company is the cumulative translation adjustment. The Company's comprehensive income for the three months ended March 31, 1998 and 1999 was as follows (in thousands): <TABLE> <CAPTION> Three Months Ended March 31, ---------------------------- 1998 1999 ------------ ------------- <S> <C> <C> Net income for the period $ 4,552 $ 4,811 Change in cumulative translation adjustment 278 118 ------------ ------------- Comprehensive income $ 4,830 $ 4,929 ------------ ------------- ------------ ------------- </TABLE> 9
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998 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 risk factors included in the Company's Form 10-K for the year ended December 31, 1998. 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. In addition, the Company has concentrated its marketing efforts towards obtaining larger, more complex, strategic customer care programs. As a result, the time required to negotiate and execute an agreement with the client has increased. This may lead to short-term delays in the anticipated start-up of new client programs and in the Company achieving full capacity utilization. RESULTS OF OPERATIONS THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31, 1998 Revenues increased $30.4 million or 38% to $110.6 million for the three months ended March 31, 1999 from $80.2 million for the three months ended March 31, 1998. The increase resulted primarily from $12.3 million in revenues from new clients and $25.4 million in increased revenue from existing clients. These increases were offset in part by contract expirations and other client reductions. Revenues for the three months ended March 31, 1999 include approximately $23.7 million from facilities management contracts as compared with $17.3 million for the three months ended March 31, 1998. Costs of services increased $22.5 million, or 43%, to $74.4 million for the three months ended March 31, 1999 from $51.9 million for the three months ended March 31, 1998. Costs of services as a percentage of revenues increased from 64.6% for the three months ended March 31, 1998 to 67.2% for the three months ended March 31, 1999. The increase in the costs of services as a percentage of revenues is a result of higher costs of services as a percentage of revenues associated with the Company's Latin American operations and unused capacity in several of the Company's domestic and foreign customer interaction centers. Operations in Latin America were negatively impacted by economic conditions. Selling, general and administrative expenses increased $7.1 million, or 34% to $28.4 million for the three months ended March 31, 1999 from $21.3 million for the three months ended March 31, 1998. Selling, general and administrative expenses as a percentage of revenues decreased from 26.5% for the three months ended March 31, 1998 to 25.7% for the three months ended March 31, 1999 primarily as a result of revenue increases in certain large client programs which have increased revenues without a proportionate increase in selling, general and administrative expenses. Expense reductions were offset by Y2K expenditures totaling approximately $500,000 during the first quarter 1999. As a result of the foregoing factors, income from operations increased $740,000 or 10%, to $7.9 million for the three months ended March 31, 1999 from $7.1 million for the three months ended March 31, 1998. Operating income as a percentage of revenues decreased from 8.9% for the three months ended March 31, 1998 to 7.1% for the three months ended March 31, 1999. Other income totaled $203,000 for the three months ended March 31, 1999 compared with $507,000 10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998 -- CONTINUED during the three months ended March 31, 1998. This is primarily related to decreased investment income of $335,000 resulting from the decrease in cash investments from $67.6 million at March 31, 1998 to $36.2 million at March 31, 1999. As a result of the foregoing factors, net income increased $259,000 or 5.7%, to $4.8 million for the three months ended March 31, 1999 from $4.6 million for the three months ended March 31, 1998. LIQUIDITY AND CAPITAL RESOURCES As of March 31, 1999 the Company had cash and cash equivalents of $13.7 million and short-term investments of $36.2 million. Cash used by operating activities was $47,000 for the three months ended March 31, 1999, which primarily resulted from increased accounts receivable during the period. Cash used in investing activities was $16.8 million for the three months ended March 31, 1999 resulting primarily from $13.4 million in capital expenditures, $1.5 million toward the purchase of Pamet River and $2.7 million toward the purchase of Smart Call (see Note 4 accompanying the condensed financial statements), offset in part by a decrease of $852,000 in short term investments. Cash provided by financing activities was $22.7 million resulting from the increase in borrowings of $25.0 million offset in part by pay downs of capital leases and other debt. The Company has a $50.0 million unsecured revolving line of credit with a syndicate of five banks. The Company also 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 $25.0 million at March 31, 1999 of which $15.0 million was secured at the Company's option with temporary short term investments disclosed on the balance sheet. Interest rates under these borrowings averaged 5.5% at March 31, 1999. Under this line of credit, the Company has agreed to maintain certain financial ratios and capital expenditure limits. The Company is in compliance with all covenants of this agreement as of March 31, 1999. The Company currently expects total capital expenditures in 1999 to be approximately $50 to $65 million of which $13.4 million was expended in the first three months. The Company believes that existing cash on hand and available borrowings under the line of credit together with cash from operations will be sufficient to finance the Company's operations, planned capital expenditures and anticipated growth through 1999. POTENTIAL YEAR 2000 PROBLEMS The Year 2000 problem results from date-sensitive computer programs being written using two digits, rather than four digits, to define the applicable year. Computer programs that are not Year 2000 compliant will be unable, for example, to determine whether date references to "00" refers to the year 1900 or 2000. Determining whether the Company's and its clients' systems are Year 2000 compliant is critical because the Company utilizes a significant number of software programs and operating systems throughout its organization, and the Company's systems regularly interface with the various information systems of its clients. The Company's or its clients' failure to detect and remediate Year 2000 related problems in its or their computer and information systems could have a material adverse effect on the business, results of operations or financial condition of the Company. 11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998 -- CONTINUED The Company, in conjunction with an outside consulting firm, has implemented a multiphased program to inventory, assess, remediate and test its systems for Year 2000 compliance (the "Program"). The Company has nearly completed the enterprisewide inventory, and the target date for the completion of the assessment, analysis and remediation associated with the Year 2000 issues is September 1999. The targeted completion date includes addressing the technology and non-technology interfaces with its clients and suppliers. The consulting firm works with full-time Company employees who are dedicated to the Program. The assessments completed to date have led to the need to migrate several human resource- and payroll-oriented applications to Year 2000 compliant software, upgrade several telephone switches and procure several hundred replacement workstations. Analysis and testing of Company-generated software applications have been initiated. The Company anticipates that the need for software conversion caused by Year 2000 issues is not anticipated to be significant, given the Company's extensive use of off-the-shelf products. While the cost to address Year 2000 issues continues to be developed as the assessment phase nears completion, the Company currently anticipates that the total cost of assessment and remediation will be between $5 million and $10 million. Of this total approximately 50% is anticipated to be new capital expenditures to replace non-compliant computer hardware and software. For the quarter ended March 31, 1999, the Company has incurred approximately $2.2 million in inventory and assessment work and equipment and software replacement work on Year 2000 issues, $500,000 which was expensed in the accompanying statement of operations and were funded by cash flow from operations. Expenditures in 1999 will be funded primarily through cash flow from operations and available cash on hand. FORWARD-LOOKING STATEMENTS All statements contained in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" or elsewhere in this quarterly report, that are not statements of historical facts are forward-looking statements that involve substantial risks and uncertainties. Forward-looking statements include (i) the anticipated level of capital expenditures for 1999; (ii) the Company's belief that existing cash, available borrowings and cash from operations will be sufficient to finance the Company's near term operations; (iii) the Company's estimate of the impact of the Year 2000 issues; (iv) the Company's belief that near-term interest rate fluctuations will not result in a material effect on future earnings, fair values or cash flows of the Company; (v) the Company's belief that foreign currency rate fluctuations may positively or negatively affect revenues and net income attributable to the Company's foreign subsidiaries; and (vi) statements relating to the Company or its operations that are preceded by terms such as "anticipates", "expects", "believes" and similar expressions. The Company's actual results, performance or achievements may differ materially from those implied by such forward-looking statements as a result of various factors, including the following: TeleTech's agreements with its clients do not ensure that TeleTech will generate a specific level of revenue and may be canceled by the clients on short notice. The amount of revenue TeleTech generates from a particular client is dependent upon customers' interest in and use of the client's products or services, some of which are recently introduced or untested. The loss of a significant client or the termination or completion of a significant client program may have a material adverse effect on TeleTech's capacity utilization and results of operations. There can be no assurance that the Company will be successful in integrating acquired companies into the Company's existing businesses, or that any completed acquisition will enhance the Company's business, results of operations or financial condition. There are certain risks inherent in conducting international business, including without limitation exposure to currency fluctuations, longer payment cycles and greater difficulties in accounts receivable collection. 12
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK FOR THE THREE MONTHS ENDED MARCH 31, 1999 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. Historically, and as of March 31, 1999, the Company has not used derivative instruments or engaged in hedging 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 March 31, 1999, there was approximately $434,000 in borrowings outstanding on the operating loan and $25.0 million outstanding on the line of credit. The Company monitors interest rates frequently and has sufficient cash balances to pay off the line of credit and any early termination penalties, 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. 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. 13
PART II. OTHER INFORMATION Item 1. Legal Proceedings As disclosed in the Company's 1998 Annual Report on Form 10-K, in late November 1996, CompuServe notified TeleTech that CompuServe was withdrawing its WOW! Internet service from the marketplace and that effective January 31, 1997, it would terminate all the programs TeleTech provided to CompuServe. Pursuant to its agreement with TeleTech, CompuServe was entitled to terminate the agreement for reasonable business purposes upon 120 days' advance notice and payment to TeleTech of a termination fee calculated in accordance with the agreement. In December 1996, TeleTech filed suit against CompuServe in the Federal District Court for the Southern District of Ohio to enforce these termination provisions and collect the termination fee. CompuServe filed a counterclaim in December 1996 alleging that the Company breached other provisions of this agreement and seeking unspecified monetary damages. In March 1997, CompuServe asserted a right to offset certain accounts receivable it owes to the Company for services rendered against the amount that may be awarded to CompuServe on its counterclaim, if any. These accounts receivable total $4.3 million. In mid-1997, because of the proposed acquisition of CompuServe by WorldCom, the parties agreed to delay proceedings in the lawsuit. In December 1997, proceedings related to the lawsuit were recommenced and then stayed again pending settlement negotiations, which currently are moving forward. Although the Company believes that these legal proceedings will not have a material adverse effect on the Company's financial condition or results of operations, the ultimate outcome of the proceedings is uncertain. 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 6. Exhibits and Reports on Form 8-K (a) Exhibits The following documents are filed as an exhibit to this report: 10.15 Employment Agreement dated March 2, 1998 between Joseph Livingston and TeleTech 10.16 Employment Agreement dated February 25, 1999 between Steven B. Coburn and TeleTech 10.17 Employment Agreement dated March 11, 1998 between Deborah C. Gentry and TeleTech 10.18 Employment Agreement dated March 16, 1999 between Vincent Cipolla and TeleTech 27.1 Financial Data Schedule 14
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: May 11, 1999 /s/ KENNETH D. TUCHMAN ---------------------------- --------------------------------- Kenneth D. Tuchman Chairman of the Board, and Chief Executive Officer Date: May 11, 1999 /s/ STEVEN B. COBURN ---------------------------- --------------------------------- Steven B. Coburn, Chief Financial Officer 15