Back to GetFilings.com
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
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 000-21771
WEST TELESERVICES CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 47-0777362
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NO.)
INCORPORATION OF ORGANIZATION)
68134
9910 MAPLE STREET, OMAHA, NEBRASKA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE
OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (402) 571-7700
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE.
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK (PAR VALUE $0.01 PER SHARE)
(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K.
At March 17, 1998, 63,330,000 shares of common stock of the registrant were
outstanding. The aggregate market value (based upon the closing price of these
shares on the Nasdaq National Market at March 17, 1998) of the voting stock
held by nonaffiliates was approximately $121.71 million.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held on May 13, 1998, are incorporated into Part III.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
TABLE OF CONTENTS
PART I
PAGE
----
ITEM 1. BUSINESS....................................................... 3
ITEM 2. PROPERTIES..................................................... 13
ITEM 3. LEGAL PROCEEDINGS.............................................. 15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............ 16
EXECUTIVE OFFICERS OF THE REGISTRANT..................................... 16
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS....................................................... 18
ITEM 6. SELECTED FINANCIAL DATA........................................ 19
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION.......................................... 20
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..... 26
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................... 26
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.......................................... 26
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............. 27
ITEM 11. EXECUTIVE COMPENSATION......................................... 27
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. 27
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................. 27
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K...................................................... 27
SIGNATURES............................................................... 30
2
PART I
ITEM 1. BUSINESS
GENERAL
West TeleServices Corporation (the "Company") is one of the largest
independent teleservices companies in the United States, and provides a full
range of customized telecommunications-based services to business clients on
an outsourced basis. The Company is a leading provider in each of inbound
operator services, automated voice response services and outbound direct
teleservices. Inbound operator services consist of live operator call-
processing applications such as order capture, customer service and product
support. Inbound was established in 1986 with the goal of becoming the leading
inbound teleservices operation in the United States and represented
approximately 32.7% of the Company's revenue in 1997. Automated voice response
services consist of computerized call-processing applications such as
automated product information requests, computerized surveys and polling, and
secure automated credit card activation. Interactive began operations in 1989
with the goal of establishing the leadership position in automated voice
response services and represented approximately 34.8% of the Company's
revenues in 1997. Outbound direct teleservices consist of live operator direct
marketing applications such as product sales and customer acquisition and
retention campaigns. Outbound began operations in 1990 with the goal of
becoming one of the leading teleservices organizations in the United States
and represented approximately 32.5% of the Company's revenue in 1997. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Overview" for a discussion of the Company's 1997 revenue
allocations. The Company has developed proprietary technology platforms
designed to provide a high degree of automation and reliability in all three
of its businesses. This technology also enables the Company to efficiently
integrate a range of its services. The Company believes that its ability to
offer integrated services for its clients distinguishes it from most of its
competitors.
The Company targets businesses in highly competitive, consumer-based
industries, including telecommunications, insurance, banking, pharmaceuticals,
public utilities, consumer goods and computer software services, that require
large volume applications. Representative clients include: AT&T Corp.
("AT&T"), Commonwealth Edison Company, MBNA Corporation, Merck & Co., Inc.,
Time-Life, Inc. and Turner Broadcasting System, Inc. The Company's revenue and
pro forma net income for the year ended December 31, 1996 were $317.2 million
and $28.7 million, respectively. The Company's revenue and net income for the
year ended December 31, 1997 were $398.8 million and $37.4 million,
respectively.
The Company operated approximately 5,900 telephone workstations as of
December 31, 1997 in twelve state-of-the-art call centers located in Nebraska,
Texas, Virginia, Oklahoma and Alabama which it uses for inbound and outbound
services, and maintained approximately 8,100 proprietary interactive voice
response ports as of December 31, 1997 for its automated voice response
services. The Company has deployed multiple automatic call distributors,
predictive dialers, a proprietary interactive voice response platform and
multiple mainframe computer systems, in combination with an intelligent
workstation environment, in order to fully automate and manage the Company's
information-processing requirements. The Company believes it has designed and
implemented a sophisticated technology platform, permitting it to provide
flexible, high-quality and cost-effective service solutions for its clients.
The Company conducts its business principally through three wholly-owned
subsidiaries: West Telemarketing Corporation ("Inbound"); West Telemarketing
Corporation Outbound ("Outbound"); and West Interactive Corporation
("Interactive"). The Company, Inbound, Outbound, Interactive and all other
direct or indirect subsidiaries of the Company are collectively referred to
herein as the "West Affiliates."
3
INDUSTRY OVERVIEW
The teleservices industry facilitates direct communication between companies
and their current and prospective customers through telecommunications-based
systems. Industry sources estimate that total media advertising expenditures
(including teleservices expenditures) in the United States were approximately
$263.9 billion in 1997. Industry sources also estimate that teleservices
expenditures in the United States were approximately $95.0 billion in 1997.
ADVANTAGES OF TELESERVICES
Many industries, including telecommunications, pharmaceuticals, consumer
goods, banking and insurance, are experiencing increased competition to
attract and retain customers, and accordingly many businesses are seeking to
expand their direct contact with current and prospective customers. Many of
these businesses are allocating more of their advertising and customer service
expenditures to teleservices which effectively complement other marketing
media such as television, radio and print advertising and enables businesses
to quantify and evaluate the effectiveness of specific marketing expenditures.
Teleservices is estimated to be the leading direct marketing medium by which
approximately $451 billion of goods and services were sold via the telephone
in 1997.
EVOLUTION OF THE TELESERVICES INDUSTRY
The teleservices industry has evolved during the past ten years from
primarily single-facility, low technology environments to large, full service
organizations with multi-location, large volume call-processing centers
utilizing advanced systems. Certain independent teleservices providers have
invested an increasing amount of capital in large volume state-of-the-art call
centers and advanced network technology. Larger service providers, which can
achieve greater economies of scale, can more easily justify ongoing investment
in sophisticated call management software, predictive dialers and automatic
call distributors, to better provide premium quality and cost-effective
services. Businesses are seeking to provide greater information for consumers
to make informed purchase decisions as product and service offerings become
more complex and varied. As an example, it is estimated that in the mid-1980's
only 5% of United States companies offered toll-free lines as compared to
approximately 75% today. These toll-free lines are estimated to handle an
average of 60 million calls per day. Finally, businesses are increasingly
recognizing the economic benefits of expanding relationships with existing
customers through teleservices such as customer retention campaigns.
ROLE OF OUTSOURCING
Businesses historically have relied on in-house personnel to provide most
telephone-based services. Industry sources estimate that expenditures for the
"non-captive" portion of the industry, which is serviced on an outsourced
basis by independent teleservices companies, were approximately $6.4 billion
in 1997 (or 8% of the estimated total industry). Based on discussions with its
clients and prospective clients, the Company believes that businesses are
increasingly outsourcing their teleservices activities in order to focus their
internal resources on their core competencies, to increase the productivity of
their marketing services and to reduce overall teleservices expenditures.
Providers of outsourced teleservices can offer clients lower overall
teleservices costs due to economies of scale in sharing the cost of new
technology among a larger base of users and higher capacity utilization rates.
The overall teleservices market is estimated to grow at approximately 8% per
year for the next five years.
4
COMPANY STRATEGY
The Company believes that it is one of the leading providers in the
teleservices industry and is well positioned to benefit from the continued
growth in outsourced teleservices. The Company's objective is to enhance its
leading position in each of inbound, automated voice response and outbound
services. The principal elements of the Company's strategy are:
I. LEVERAGE ABILITY TO PROVIDE INTEGRATED SERVICE SOLUTIONS
The Company seeks to apply its operating expertise in inbound, automated
voice response and outbound services to develop customized service solutions
which utilize the resources of each division on an integrated basis. The
Company is able to integrate its service offerings by utilizing its voice and
data networking technology and its proprietary software systems and hardware
platforms. The Company is able to design and implement highly flexible
applications which combine the large volume call capacity of automated voice
response with the specialized customer service capabilities of inbound
services. As an additional component of integration, customer follow-up can be
scheduled and initiated through the Company's outbound services. This
integrated offering provides a cost effective solution for the client and
increases the productivity of the Company's live operators. Furthermore, the
Company leverages its ability to provide integrated services by cross-selling
its services to its clients to capture an increasing share of their outsourced
business. The Company believes that its integrated service capabilities are a
significant competitive advantage.
II. PURSUE RECURRING AND LARGE VOLUME APPLICATIONS
The Company has developed its facilities and operations specifically to
provide effective service to clients which generate large and recurring call
volumes. The Company has established a strong track record in successfully
managing client programs which produce such volumes. The consistent revenue
streams derived from these large volume and recurring applications help the
Company manage its long-term growth.
III. CAPITALIZE ON STATE-OF-THE-ART TECHNOLOGY
The Company seeks to capitalize on its state-of-the-art technology, which
enables the Company to offer premium quality, flexible and cost-effective
service solutions to its clients. The Company believes that its significant
and continuing investment in sophisticated call center technology, including
proprietary interactive voice response technology, proprietary scheduling
systems, computer telephony integration systems, advanced call management
software systems and high speed, fault-tolerant computer systems, is a
competitive advantage. In addition, the Company's proprietary software
systems, hardware platforms and extensive networking technology allow it to
provide customized client applications and integrate two or more of its
inbound, automated voice response and outbound services. The Company
continually seeks to improve its technological capabilities.
IV. PROVIDE PREMIUM QUALITY SERVICES
The Company believes that service quality is a critical factor in a
potential client's decision to outsource its teleservices. The Company
differentiates the quality of its services through its ability to quickly
respond to new applications and short-term volume fluctuations, efficiently
address staffing needs, and effectively employ operating systems that can
process client campaign data and provide sophisticated reports. The Company
also seeks to provide premium quality services through an extensive training
program and an experienced management team. The Company believes that it
provides premium quality service to its clients and that the quality of its
service is one of its competitive advantages.
5
V. DEVELOP LONG-TERM CLIENT RELATIONSHIPS
The Company focuses on developing long-term client relationships. Since the
Company manages programs that interface with its clients' current or
prospective customers, the Company seeks to develop a detailed understanding
of each of its clients' specialized businesses. This process enables the
Company to create customized solutions which meet clients' needs and minimize
client turnover. As a result, the Company is better positioned to cross-sell
its services and proactively offer new applications.
VI. LEVERAGE STRONG MANAGEMENT EXPERIENCE
The Company's management team possesses extensive industry experience in
inbound, automated voice response and outbound services. The Company's
management team has proven experience managing the rapid growth of the
business. The founders of the Company are among the pioneers of key areas of
the teleservices industry and the members of the management team have
continued to contribute to the development of the teleservices industry. The
Company believes that it has distinguished itself through its ability to
attract and retain some of the most talented managers in the industry.
DESCRIPTION OF SERVICES
The Company's organizational structure is outlined below:
[FLOWCHART OF THE COMPANY'S ORGANIZATIONAL STRUCTURE APPEARS HERE]
I. OPERATOR TELESERVICES ("INBOUND")
Inbound provides live operator call-processing services, including order
capture and customer service applications. Inbound was established in 1986
with the goal of becoming the leading inbound teleservices operation in the
United States. It was one of the first service providers to fully automate its
operations and to develop proprietary software systems to service the
customized needs of its clients. In 1997, Inbound represented approximately
32.7% of the Company's revenue. The two divisions of Inbound are Direct
Response Services and Custom Operator Services.
DIRECT RESPONSE SERVICES. This division provides large volume inbound call-
processing services. Inbound custom designs applications to meet client
specifications for order capture, lead generation, customer service, dealer
referral and other information processing campaigns. Direct Response Services
receives incoming calls 24 hours per day, 365 days per year. Clients measure
this division's service quality by its ability to (i) process a large volume
of simultaneous incoming calls and (ii) to minimize the number of calls which
receive a busy signal. Although this division processes call volume from other
media such as radio, print and direct mail advertisements, most of its call
volume is generated via toll-free numbers appearing in television
advertisements. This type of inbound campaign requires the capability to
handle increases in call volumes over short periods of time.
6
The Company utilizes automatic call distributors and digital switches to
identify the toll-free number dialed by each caller. The toll-free number
specifies the particular client campaign and designates customer, product, and
service information to the operator and provides a highly structured script
designed to aid in processing the transaction. Each individual operator may
receive a call for one of hundreds of different client campaigns at any given
time. Furthermore, the Company can immediately report information captured
during the call to its client, the client's advertising agency and the
client's designated fulfillment company. Caller information and campaign call
volume summary reports are customized and may be transmitted to the client via
magnetic tape, electronic transfer or facsimile per the client's instructions.
Clients also have the ability to access real-time on-line program results by
media source. Immediate access to call volume data allows the Company's
clients to quickly determine the cost effectiveness of various campaigns and
to adjust their media expenditures accordingly.
CUSTOM OPERATOR SERVICES. This division provides customized teleservices
solutions on a dedicated basis to large business clients. The Company believes
that many businesses are finding it increasingly difficult to provide high
quality customer service and product support without diverting resources from
their core businesses. In addition, it is expensive for these businesses to
own, operate and maintain state-of-the-art call-processing facilities. The
Company believes there are significant growth opportunities in outsourced
teleservices for companies that can provide customized solutions on a
dedicated basis. The Company's objective for this division is to provide a
wide range of inbound telephone-based services including: (i) programs
designed to enhance or maximize customer acquisition and retention; (ii)
customer service and support; (iii) product support; (iv) collection services;
(v) customer complaint resolution; and (vi) client satisfaction information.
II. INTERACTIVE TELESERVICES ("INTERACTIVE")
Interactive provides large volume automated voice response services which
allow a caller to access information by means of a touch-tone telephone or
voice prompt. Interactive began operations in 1989 with the goal of
establishing the leadership position in automated voice response services. The
Company believes that Interactive is currently the largest, fully automated
call-processing operation in the United States. In 1997, Interactive
represented approximately 34.8% of the Company's revenues. Interactive has
developed proprietary software systems and hardware platforms to service the
diverse needs of its clients and complements the Company's live operator
service offerings.
Interactive provides automated voice response services for a broad range of
applications, which include secure automated credit card activation,
information and entertainment services, polling and surveying, cellular fraud
prevention service, automated product information requests, database
management and enhancement, multiple caller conferencing, customer service and
third-party caller transfers. Interactive is measured by its ability to
process a large volume of simultaneous transactions. Additionally, Interactive
designs customized applications to meet stated client specifications and
offers a variety of voice recording services to aid in the design of an
interactive voice application.
Interactive specializes in processing large volumes of telephone
transactions generated by print, direct mail, radio and television broadcast
advertisements. Interactive's clients typically advertise a toll-free or pay
per call number designed to generate a prompt response. Interactive's
automated voice-processing platforms may be accessed 24 hours per day, 365
days per year. Interactive's proprietary software systems and hardware
platforms integrate the use of automated call distributors, digital switches
and decentralized computers for database management with remote host computer
interfaces and other peripheral processing activities. Interactive's
proprietary technology systems along with inbound and outbound services,
permit a caller to connect to a live operator to process data already captured
through automated Voice Response Units ("VRUs"). Interactive utilizes VRU's or
digital switches to identify the specific toll-free number dialed by the
caller. The toll-free number will identify the specific client campaign and
direct the call to the appropriate VRU's, switches, database machines,
7
and other required hardware and software needed to fulfill the requirements of
the client's application. Interactive was the first large scale platform to
incorporate advanced services such as voice recognition for callers with
rotary phones, and near real time transcription for quick data dissemination.
Interactive's clients have remote access capability to modify their scripts
and obtain instantaneous call count and program information. Interactive
reports all information captured or disseminated during a transaction to its
clients. Campaign information, summary reports and statistics are customized
to meet a client's specifications.
In connection with the provision of interactive teleservices, the Company
offers an accounts receivable financing program for certain qualified clients
designed to advance a portion of revenue created by the client's program prior
to receipt of these funds through the normal collection cycle. These advances
are collateralized by the client's billed receivables. The purpose of the
program is to provide clients with working capital on a weekly basis instead
of having them rely on the normal monthly collection cycle.
III. DIRECT TELESERVICES ("OUTBOUND")
Outbound provides live operator direct marketing services. Outbound began
operations in 1990 with the goal of becoming one of the leading teleservices
organizations in the United States. In 1997, Outbound represented
approximately 32.5% of the Company's revenue. Since Outbound operates in a
more mature and competitive environment than Inbound and Interactive, Outbound
focuses exclusively on high volume projects. The two divisions of Outbound are
Consumer Direct Services and Business Direct Services.
CONSUMER DIRECT SERVICES. This division provides business-to-consumer
marketing services. While client applications may include product
registration, customer acquisition and retention campaigns, lead generation,
database enhancement and management, customer service and verification
activities, the division's primary service is product sales. Outbound is
typically measured by its ability to generate the highest net revenue per
billable hour for its clients.
The Company typically initiates contact with consumers that have been
identified by a client as existing or potential customers. Integrated call
management systems utilizing large-scale predictive dialers systematically
call consumers and transfer successful connections to a designated marketing
representative. As a call is presented to a marketing representative who has
been trained for specific client applications, the consumer's name, address
and other available information are simultaneously presented along with the
client's customized script. The Company's proprietary software systems permit
clients to immediately access on-line program results and shadow monitor the
performance of all designated marketing representatives. The Company can
report information captured, summary results and more detailed statistical
analyses in a customized format for each of its clients.
BUSINESS DIRECT SERVICES. This division provides business-to-business
marketing services for clients whose target markets include thousands of small
to medium sized businesses. These applications are designed to enhance and
grow their database of information about their prospects and clients, schedule
appointments for their regional and national sales forces, and sell services
to accounts that may not warrant a face-to-face sales presentation.
FACILITIES AND SERVICE FORTIFICATION
The Company recognizes the importance of providing uninterrupted service for
its clients. The Company has invested significant resources to develop,
install and maintain facilities and systems designed to be highly reliable.
All of the Company's service facilities and systems are designed to maximize
system in-service time and minimize the possibility of telecommunications
outage, commercial power loss or equipment failure. The Company believes that
this level of reliability provides an important competitive advantage.
8
The Company utilizes redundant network architecture which substantially
reduces the possibility of a system failure and the interruption of
telecommunications service. As depicted in the diagram below, Inbound's and
Interactive's call centers are served by redundant long distance and local
access facilities. Each call center is serviced by dual central office
switches, providing split access flexible egress routing capabilities, as well
as backup access into each facility, using dual fiber ring SONET-based self-
healing network architectures. All inbound numbers directed to a Company
facility are appended with dual routing instructions in the event of an error
on the primary network path. These capabilities allow incoming calls to be
redirected via an alternate long distance switch and/or through a backup
access line in the unlikely event of a long distance or local network failure.
[FLOWCHART OF THE COMPANY'S NETWORK ARCHITECTURE APPEARS HERE]
The Company's systems also feature operational redundancy. The Company uses
automatic call distributors with dual processors and online automatic backup
and fault-tolerant mainframe computers with spontaneous dual backup for all
processors, disk management and mechanical functions. Copies of all
proprietary Company software systems and client application software reside in
a secure off-site storage facility. The Company actively monitors all critical
components of its call-processing facilities 24 hours per day, 365 days per
year. Each facility also has a stand-alone primary power system and both
battery backup and diesel generator backup power systems.
PERSONNEL AND TRAINING
The Company believes that a key component of its success is the quality of
its employees. As a large-scale service provider, the Company is continually
refining its approach to recruiting, training and managing its employees. The
Company has established procedures for the efficient weekly hiring and
training of hundreds of qualified employees. These procedures, coupled with
the Company's proprietary scheduling system, enable the Company to provide
flexible scheduling and staffing solutions to meet a client's needs for
additional resources.
The Company offers extensive classroom and on-the-job training programs for
personnel, including instruction regarding call-processing procedures, direct
sales techniques, customer service guidelines, telephone etiquette and proper
use of voice inflections. Telephone representatives receive professional
training lasting from four to 21 days, depending upon the client's program and
the nature of the services being provided. In addition to training designed to
enhance job performance, employees are also given a detailed description of
the Company's organizational structure, standard operating procedures, and
business philosophies.
In 1997, the Company employed an average of approximately 9,000 telephone
representatives per day for its inbound services and outbound services with
peak employment of approximately 10,300 operators per day. In addition, the
Company employed as of December 31, 1997 approximately 2,100 management, staff
and administrative employees. The Company considers its relations with its
employees to be good.
CALL MANAGEMENT SYSTEMS
The Company specializes in processing large and recurring call volumes. In
each of Inbound, Interactive and Outbound, the Company works closely with its
clients to accurately project future call volumes. The Company uses the
following practices to efficiently manage its call volumes:
9
HISTORICAL TRENDS ANALYSES. The Company tracks weekly, daily and hourly
calling trends for individual client programs for Inbound, Interactive and
Outbound. The Company believes that the key to a cost efficient teleservices
program begins with the effective planning of future call volumes to determine
the optimal number of employees, workstations and calling ports that need to
be deployed each hour. Based upon the Company's experience in processing large
call volumes during the past ten years, it has accumulated the data necessary
to differentiate the calling patterns of different applications such as order
capture, lead generation and customer service.
FORECASTING CALL VOLUMES/ESTABLISHING PRODUCTION PLANS. Call volumes are
forecasted for each one-half hour increment for each day. Detailed assumptions
are made regarding average length of call, average wait time between calls,
average speed of answer, and service level targets to determine the actual
number of calls that may be processed by a workstation or voice response port
during a specific one-half hour increment. This process enables the Company to
effectively determine the number of workstations and voice response ports
needed for a given campaign.
STAFFING AND SCHEDULING PLANS. Based upon the total number of workstations
required to be staffed, a detailed schedule is created. These schedules are
typically forecasted six to eight weeks in advance to assist the Company's
personnel and training departments in hiring and training the desired number
of personnel. Operators and marketing representatives are given regular work
schedules that are designed to coincide with anticipated calling patterns and
trends.
The Company has developed a proprietary scheduling system that efficiently
identifies variances between staff scheduled and staff needed. The system
accommodates real-time adjustments to be made for personnel schedules as call
volume projections fluctuate. Telephone agent personnel directly interact with
the system to schedule additional hours or time off. The system is integrated
into all attendance and payroll processing systems.
FACILITY CALLING PLAN. Once staffing and scheduling plans have been
developed, each division determines how to efficiently allocate the projected
call volumes among its call centers. Each call center receives a detailed plan
outlining the projected call volumes for each day of the week and each one-
half hour increment of each day. Personnel schedules are produced to optimally
match the projected calling volumes.
NETWORK CONTROL. The Company interfaces directly with AT&T's nationwide long
distance network and has the ability to allocate call volumes among its
various call centers on command. Traffic control specialists within the
Company are responsible for comparing actual call volumes and trends to stated
staffing and scheduling plans. When necessary, adjustments can be made to fine
tune minor variances between actual call volumes and personnel that have been
scheduled by facility. As a result, calls are optimally directed to available
personnel. Network control monitors the status of all call-processing
activities on a minute-by-minute basis. Minor real time variances between
projected and actual calling trends are promptly input into the Company's
database and the call management cycle repeats.
TECHNOLOGY/SYSTEMS DEVELOPMENT
All proprietary software systems and hardware platforms for Inbound,
Interactive and Outbound permit the design and execution of highly integrated
service offerings which share consumer database files, source files, calling
records and calling lists. All systems provide clients with the ability to
directly interface and communicate with the Company's systems. The Company
currently employs approximately 620 systems analysts, programmers and
technicians to modify and enhance the Company's operating systems and to
design client applications.
10
QUALITY ASSURANCE
By the nature of its services, the Company establishes direct contact with
the customer base of its clients. Given the importance of this role, the
Company believes that its reputation for providing premium quality service is
critical. Both the Company and its clients shadow monitor and evaluate the
performance of telephone representatives to confirm that clients' programs are
properly implemented using clients' approved scripts and that the telephone
representatives meet clients' customer service standards. The Company
regularly measures the quality of its services by reviewing such variables as
average length of call, calls per hour, average speed of answer, sales per
hour, rate of call abandonment and order conversion percentages. The Company's
information systems enable the Company to provide clients with regular reports
on a real-time basis as to the status of an ongoing campaign and to transmit
summary data and captured information electronically to clients.
The Company maintains a quality assurance department for each of Inbound,
Interactive and Outbound that is responsible for the overall quality of the
services being provided. A comprehensive performance appraisal is typically
given to every telephone representative every six to eight weeks. The Company
uses statistical summaries of the performance appraisal information for its
training and operations departments to provide feedback and to identify
telephone representatives who may need additional training.
SALES AND MARKETING
The Company's sales and marketing strategy focuses on leveraging the
Company's teleservices expertise, integrated service capabilities and
reputation for premium quality service in order to cross-sell its services to
existing clients and to develop new long-term client relationships. The
Company also identifies industries that face increased competition, such as
telecommunications, insurance, banking, pharmaceuticals, consumer goods and
computer software, in which the Company can offer clients large-scale cost-
effective solutions on an outsourced basis.
The Company formulates detailed annual marketing plans. These plans contain
objectives and milestones which are tracked regularly throughout the year. The
sales organization consists of a vice president of sales for each division
that manages a group of national account managers. A national account
manager's primary responsibility is to solicit business from new prospects and
to enhance existing client relationships. Commissions are paid on both new
sales and incremental revenues generated from existing clients to provide the
appropriate incentives for national account managers. Once a client campaign
is initiated, a client services account manager is responsible for the daily
management of the campaign.
COMPETITION
The teleservices industry is highly fragmented and competitive. The
Company's competitors in the teleservices industry range from very small firms
catering to specialized applications and short-term projects to large
independent firms and the in-house operations of many clients and potential
clients. In addition, some of the Company's services compete with other forms
of marketing such as mail, television and radio. While the Company has various
competitors for each of its divisions, the Company believes that only a few
competitors currently have the capability to provide each of inbound,
automated voice-processing and outbound services. The Company believes that
the principal competitive factors in the teleservices industry are capacity,
flexibility of implementing customized solutions to clients' teleservices
needs, technological expertise and price.
PROPRIETARY RIGHTS AND LICENSES
The Company has made significant investments in the development of its
proprietary software systems and hardware platforms. The Company relies on a
combination of the protections provided
11
by applicable copyright, trademark and trade secret laws, as well as on
confidentiality procedures, to establish and protect its proprietary rights.
The Company does not license any of its software or hardware designs for use
by others. Despite these precautions, there can be no assurance that
misappropriation of the Company's proprietary software and hardware designs
will not occur. Although the Company believes that its intellectual property
rights do not infringe upon the proprietary rights of third-parties, there can
be no assurance that third-parties will not assert infringement claims against
the Company. Further, there can be no assurance that intellectual property
protection will be available in certain foreign countries should the Company
commence operations outside North America.
GOVERNMENT REGULATION
Teleservices sales practices are regulated at both the federal and state
level. The significant growth of the telemarketing industry in the 1980's
produced concern over the proliferation of unsolicited teleservices calls made
to private residences. In response, Congress passed the Telephone Consumer
Protection Act of 1991 (the "TCPA") as the first attempt at regulating the
telemarketing industry. The Federal Communications Commission ("FCC") enacted
rules pursuant to the TCPA in December 1992 which among other things prohibit
the initiation of telephone solicitations to residential telephone subscribers
before 8:00 a.m. and after 9:00 p.m., prohibit the use of automated telephone
dialing equipment to call certain telephone numbers, and require the
maintenance of a list of residential consumers that have stated that they do
not want to receive telephone solicitations to ensure that companies avoid
making calls to consumers on this list.
In a further effort to combat telemarketing fraud, Congress also passed the
Federal Telemarketing Consumer Fraud and Abuse Act of 1994 ("TCFAA") which
authorized the Federal Trade Commission (the "FTC") to issue regulations
designed to prevent deceptive and abusive telemarketing acts and practices. In
1995, the FTC issued its Telemarketing Sales Rule, which went into effect in
January 1996. The Telemarketing Sales Rule broadly defines telemarketing as a
plan, program or campaign conducted to induce the sale of goods, or services
through the use of one or more telephones and which involve more than one
interstate telephone call. The Telemarketing Sales Rule covers most outbound
telemarketing calls and certain inbound telemarketing calls. Generally, the
Telemarketing Sales Rule proscribes the making of outbound calls to consumers
who have previously requested not to be called, prohibits telemarketers from
making a variety of deceptive, unfair or abusive practices in telemarketing
sales, prohibits telemarketers from debiting a consumer's checking, charge or
similar account without the consumer's express written authorization.
Alternatively, a consumer may give an oral authorization if the oral
authorization is recorded and certain disclosures are made. The Telemarketing
Sales Rule also imposes potential liability on companies providing substantial
assistance to those engaged in violations of the Telemarketing Sales Rule.
In addition to the FTC's Telemarketing Sales Rule, there are numerous state
statutes and regulations governing telemarketing activities to which the
Company is subject or may be subject. For example, some state statutes impose
restrictions on auto-dialed recorded message players, on solicitations
initiated by or on behalf of the seller of goods or services and on the
monitoring of telephone calls of telemarketer employees. Some states also
require registration of any telemarketing campaign prior to any solicitation
or attempted solicitation in connection therewith and impose certain mandatory
disclosures which must be made during the course of the telephone calls. A
number of states also provide that a sale cannot be final unless a written
contract is delivered to and signed by the buyer and may be canceled within
three business days. At least one state also prohibits telemarketers from
requiring credit card payment. From time to time, bills are introduced in
states which, if enacted, would regulate the use of credit information. The
Company cannot predict whether this legislation will be enacted and what
effect, if any, it would have on the Company or its industry.
The FTC has also adopted regulations governing pay per call services (the
"900 Number Rule") pursuant to the Telephone Disclosure and Dispute Resolution
Act passed by Congress in 1992
12
("TDDRA"). In general, the 900 Number Rule prescribes the content of
advertising for such services, requires that certain introductory disclosures
be made (at no charge to the caller) and provides for the manner and content
of billing and collection for such services. The FCC supplements this
regulation by requiring that common carriers assign a telephone number to a
provider of interstate pay per call services and offer billing and collection
services to such a provider to assure compliance with the 900 Number Rule. In
March 1997, the FTC initiated a 900 Number rulemaking review proceeding to
evaluate the operation of the 900 Number Rule and to determine whether the
scope of the 900 Number Rule should be expanded to information services
provided through dialing patterns other than 900 numbers. The Company cannot
predict whether any modifications will be made to the 900 Number Rule, and, if
so, what impact they would have on the Company or its industry.
The Telecommunications Act of 1996 also contains certain provisions which
may impact upon the Company. In general, the 1996 Act eliminated the tariffed
service exception from the pay per call rules and required the FCC to adopt
new and more stringent rules for the use of toll free numbers for pay per call
services because of abuses that arose from pay per call services offering toll
free numbers. The FCC has proposed rules for the use of toll free numbers for
pay per call services. The FCC has proposed rules designed to restrict the use
of toll free numbers in connection with pay per call information programming.
Among the most significant changes to the toll free number rules are that
presubscription agreements now must be executed in writing, require the use of
a PIN or other identifier unique to the subscriber and provide subscribers
with a choice of billing method direct remit, debit prepaid account phone bill
or credit or calling card. As an alternative, information providers may charge
information services provided via toll free numbers with a prepaid account or
debit, credit, charge or calling card if there is a preamble disclosing the
costs, the point when the charges begin and billing methods. There are also
corresponding disclosure requirements for soliciting presubscription
agreements and for consumers' billing statements.
The industries served by the Company are also subject to varying degrees of
government regulation. Generally, the Company relies on its clients and their
advisors to develop the scripts to be used by the Company in making consumer
solicitations. The Company generally requires its clients to indemnify the
Company against claims and expenses arising with respect to the Company's
services performed on its clients' behalf. The Company employees who complete
sales for insurance companies are required to be licensed by various state
insurance commissions and participate in regular continuing education
programs, which are currently provided in-house by the Company. A state
insurance department is reviewing certain practices and procedures used by the
Company. The Company is working with the insurance department to comply with
all regulations. The Company has never been held financially responsible, or
been assessed any penalty, in any material respect for regulatory
noncompliance. The Company may be subject to the payment of penalties in this
matter, but based on its experience in other states, its understanding of the
resolutions of similar reviews of other companies and the advice of legal
counsel, the Company believes that this matter is not likely to have a
material adverse effect on the Company. The Company believes it is in
compliance in all material respects with all federal and state regulations.
The Company specifically trains its marketing representatives to handle calls
in an approved manner, and maintains "do not call" lists.
There can be no assurance, however, that the Company would not be subject to
regulatory challenge for a violation of federal or state law by any of its
clients.
ITEM 2. PROPERTIES
The Company operated four automated voice response facilities with
approximately 8,100 ports as of December 31, 1997 and twelve state-of-the-art
call centers with approximately 5,900 workstations as of December 31, 1997.
Certain of the Company's call centers can be used interchangeably by both
Inbound and Outbound.
13
Inbound operates four large volume, automated call-processing facilities
located in Omaha, Nebraska, San Antonio, Texas, Hampton, Virginia and Tulsa,
Oklahoma. These facilities consist of approximately 2,500 computer-assisted
workstations. In 1997, Inbound employed an average of approximately 4,400
operators per day with peak employment of approximately 5,600 operators per
day.
Interactive operates five large volume, automated voice response platforms
located in Omaha, Nebraska (two platforms), San Antonio, Texas, Calgary,
Alberta (Canada) and Tulsa, Oklahoma. Interactive has a total capacity of
approximately 8,100 voice response ports. Interactive is not a labor intensive
business and currently employs approximately 240 managerial, staff and
administrative personnel.
Outbound operates eight large volume, automated facilities located in San
Antonio, Texas, Universal City, Texas, El Paso, Texas, Killeen, Texas, Waco,
Texas, Lubbock, Texas, Mobile, Alabama and Odessa, Texas. Outbound currently
maintains approximately 3,400 computer-assisted workstations and in 1997
employed an average of 4,600 marketing representatives per day with peak
employment of approximately 5,700 marketing representatives per day.
The following table summarizes the location of, and the number of telephone
workstations at each of the Company's call centers for each of Inbound,
Interactive and Outbound.
NUMBER OF NUMBER OF
CALL CENTERS TELEPHONE WORKSTATIONS VOICE RESPONSE PORTS
- ------------ ---------------------- --------------------
Inbound
Omaha, Nebraska................... 726 --
San Antonio, Texas................ 588 --
Hampton, Virginia................. 729 --
Tulsa, Oklahoma................... 443 --
Inbound Total................... 2,486 --
Interactive
Omaha, Nebraska................... -- 5,036
San Antonio, Texas................ -- 2,261
Calgary, Alberta (Canada)......... -- 391
Tulsa, Oklahoma................... -- 368
Interactive Total............... 8,056
Outbound
San Antonio, Texas................ 968 --
Universal City, Texas............. 560 --
El Paso, Texas.................... 594 --
Killeen, Texas.................... 324 --
Waco, Texas....................... 252 --
Lubbock, Texas.................... 252 --
Mobile, Alabama................... 378 --
Odessa, Texas..................... 117 --
Outbound Total.................. 3,445
Total......................... 5,931 8,056
The Company occupies approximately 964,000 square feet of office space. All
facilities described above other than the facilities located in San Antonio,
Texas are leased. The Company also owns 98,360 square feet of office space in
a corporate headquarters building in Omaha, Nebraska. The corporate
headquarters was purchased in the fourth quarter of 1997 and the Company plans
to move into the building in the second quarter of 1998.
14
The Company believes that its facilities are adequate for its foreseeable
needs and that additional space will be available as required. See Note D to
Combined Financial Statements for information regarding the Company's
obligations under its facilities leases.
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company is subject to lawsuits and claims which arise
out of its operations in the normal course of its business. The Company and
certain of its subsidiaries are defendants in various litigation matters in
the ordinary course of business, some of which involve claims for damages that
are substantial in amount. The Company believes, except for the items
discussed below for which the Company is currently unable to predict the
outcome, the disposition of claims currently pending will not have a material
adverse effect on the Company's financial position or results of operations.
West Interactive Corporation is a defendant in a case brought in the United
States District Court for the Southern District of Georgia, Augusta Division,
on September 12, 1991, captioned Lamar Andrews, Individually and as
Representative of a Class of All Other Persons Similarly Situated, Plaintiff
v. American Telephone & Telegraph Company, et al., Defendants, No. CV 191-175.
The District Court certified a master class of all persons who paid for one or
more 900 number calls pertaining to programs offering sweepstakes, games of
chance, awards, cash or other prizes, gifts or information on unclaimed funds.
These calls were billed and collected by AT&T Corp. (AT&T) and U.S. Sprint
Communications Company Limited Partnership (Sprint). The District Court also
certified a sub-class of those persons who paid, in the State of Georgia, for
one or more such calls billed and collected by AT&T or Sprint. The complaint
alleged that the programs at issue involved, among other things, acts of
unlawful gambling, mail fraud and wire fraud in violation of the Racketeering
Influenced and Corrupt Organizations Act (RICO), the Communications Act of
1934, the federal common law of communications and other state and federal
laws. Interactive provided interactive voice processing and billing services
to a customer which conducted some of the programs at issue in the litigation.
The billing services were provided through AT&T. The action sought recovery of
treble damages, punitive damages, costs and attorneys' fees. The Company's
potential liability and expenses in this matter were not covered by insurance.
On September 19, 1996, the United States Court of Appeals for the Eleventh
Circuit reversed the District Court's order certifying the classes on the
ground that the class action would be unmanageable and, on December 4, 1996,
it denied the plaintiffs' subsequent petition for rehearing. On February 19,
1997, a Motion to Amend Class Definition and a Renewed Motion for Class
Certification was filed by the plaintiffs in the District Court. On July 14,
1997, plaintiffs' motions were denied and the plaintiffs were ordered to amend
the pleadings to eliminate all allegations as to class representation. On
August 4, 1997, the plaintiffs filed a second amended complaint which deleted
all class allegations. In addition to claims previously asserted, the second
amended complaint includes an express claim based on the alleged collection of
illegal gambling debts, and a claim under Georgia RICO statute with a request
for actual and punitive damages under that statute.
On July 28, 1997, Schurman, Bowers, et al, individually and on behalf of a
class of all other persons similarly situated v. Horry Telephone Cooperative,
Inc., AT&T Corp., AT&T Communications, Inc., AT&T Communications of the
Southern States, Inc, and West Telemarketing Outbound Corporation (Civil
Action No. 4:97-2635-12) was filed in the Court of Common Pleas in Horry,
South Carolina and then removed by the defendants to the United States
District Court for the District of South Carolina. Plaintiffs allege, among
other things, claims of negligent misrepresentation, fraud, breach of contract
and statutory violations in connection with offers of rate programs and long
distance services to the plaintiffs. Plaintiffs seek monetary damages,
punitive damages, attorney's fees, costs and injunctive relief.
Gilchrist, individually and on behalf of a class of all other persons
similarly situated, v. Direct American Marketers, Inc., Anthony Brown,
Integretel, Inc., Troy Eaden, Gary West, West Interactive Corporation and
Bellsouth Corporation (Civil Action File No. 197-233) was filed on August 19,
1997 in
15
the Superior Court of Richmond County, Georgia and subsequently removed by the
defendants to the United States District Court for the Southern District of
Georgia. Troy Eaden, Chief Executive Officer and director of the Company, and
Gary West, Chairman of the Board of the Company, and West Interactive
Corporation are named defendants in the action. Plaintiff alleges claims under
the Georgia Racketeer Influenced and Corrupt Organizations Act in connection
with certain "900" number sweepstakes programs that were promoted by Direct
American Marketers, Inc. Plaintiff seeks to recover monetary damages, together
with expenses, attorney's fees and injunctive relief.
Richard Carney, et al. v. West TeleServices Corporation, West Telemarketing
Corporation, West Telemarketing Corporation Outbound, West Telemarketing
Insurance Agency, Inc., Hal Morris, Matt Mazzarella and John Erwin (Cause No.
97-CI-15780) was filed on October 31, 1997 in the 131st Judicial District
Court of Bexar County, Texas. Plaintiffs seek certification of a class
consisting of all hourly employees of West TeleServices Corporation, West
Telemarketing Corporation, West Telemarketing Corporation Outbound, and West
Telemarketing Insurance Agency, Inc. Plaintiffs allege that they were not paid
for all compensable work performed by them during their employment. Plaintiffs
seek recovery under the theories of quantum meruit, common law fraud, common
law debt, conversion, and civil theft.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders in the fourth quarter
of the fiscal year covered by this report.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company are as follows:
NAME AGE POSITION
- ---- --- --------
Gary L. West...................... 52 Chairman of the Board and Director
Mary E. West...................... 52 Vice Chair of the Board, Secretary and
Director
Troy L. Eaden..................... 35 Chief Executive Officer and Director
Thomas B. Barker.................. 43 President, Chief Operating Officer and
Director
Michael A. Micek.................. 48 Chief Financial Officer, Executive Vice
President--Finance and Treasurer
Nancee R. Berger.................. 37 President--Interactive Teleservices
John W. Erwin..................... 35 President--Direct Teleservices
Mark V. Lavin..................... 39 Executive Vice President--Operator
Teleservices
Michael M. Sturgeon............... 36 Executive Vice President--Sales and
Marketing
Joseph L. Bradley................. 43 Executive Vice President--Systems and
Technology
Dianne K. Ferris.................. 50 Executive Vice President--Administrative
Services and Chief Administrative Officer
GARY L. WEST co-founded WATS Marketing of America ("WATS") in 1978 and
remained with that company until 1985. Mr. West joined the Company in July
1987 after the expiration of a noncompetition agreement with WATS. Mr. West
has served as Chairman of the Board since joining the Company. Mr. West and
Mary E. West are husband and wife.
MARY E. WEST co-founded WATS and remained until December 1985. In January
1986, she and Mr. Eaden founded the Company. Mrs. West has served as Vice
Chair of the Company since 1987. Mrs. West and Mr. West are wife and husband.
16
TROY L. EADEN co-founded the Company with Mrs. West in January 1986. He has
served as the principal executive of the Company since 1989 and has formally
held the title of Chief Executive Officer since March 1995. Mr. Eaden was
employed by WATS from May 1980 to December 1985.
THOMAS B. BARKER joined the Company in 1991 as Executive Vice President of
Interactive. Mr. Barker was promoted to President and Chief Operating Officer
of the Company in March 1995. Prior to joining the Company, he served as
President and Chief Operating Officer of Cue Network Corp., a provider of
nationwide paging and satellite data distribution services.
MICHAEL A. MICEK joined the Company in 1988 and was appointed to Chief
Financial Officer, Vice President--Finance and Treasurer in 1990. In 1997, Mr.
Micek was promoted to Chief Financial Officer, Executive Vice President--
Finance and Treasurer. Prior to joining the Company, Mr. Micek was a partner
in the accounting firm of Blackman and Micek, P.C. from 1983 to 1988 and was
employed by the accounting firm of Touche Ross from 1981 to 1983.
NANCEE R. BERGER joined Interactive in 1989 as Manager of Client Services.
Ms. Berger was promoted to Vice President of Interactive in May 1994. She was
promoted to Executive Vice President of Interactive in March 1995, and to
President of Interactive Teleservices in October 1996. Before joining
Interactive, she was Senior Project Manager at Applied Communications, Inc.
JOHN W. ERWIN joined the Company in 1988 as Executive Vice President of
Outbound. In March of 1995, Mr. Erwin became President--Direct Teleservices.
Prior to joining the Company, Mr. Erwin held a management position with Dial
America Marketing and a management and ownership position with Telcom
Communications Marketing, Inc., both of which provide outbound telemarketing
services.
MARK V. LAVIN joined the Company in 1996 as Executive Vice President--
Operator TeleServices. From 1991 until 1996, he held various management
positions in reservation services for Radisson Hospitality Worldwide.
MICHAEL M. STURGEON joined the Company in 1991 as a National Account
Manager--Interactive. In September 1994, Mr. Sturgeon was promoted to Vice
President of Sales and Marketing--Interactive. In March of 1997, Mr. Sturgeon
was promoted to Executive Vice President--Sales and Marketing for the Company.
Prior to joining the Company, Mr. Sturgeon was a management consultant for
Anderson Consulting and Laventhol & Hartworth.
JOSEPH L. BRADLEY has been at the Company since its inception in 1986. Mr.
Bradley is Executive Vice President--Systems and Technology. Prior to joining
the Company, Mr. Bradley worked in information systems from 1982 to 1986 with
First Data Resources.
DIANE K. FERRIS joined the Company in 1988 as Vice President of Operations--
Inbound. In February 1991, Ms. Ferris was promoted to Chief Administrative
Officer. Prior to joining the Company, Ms. Ferris was Vice President of
Administration and Corporate Planning for Mutual of Omaha Fund Management
Company. In 1997, Ms. Ferris was promoted to Executive Vice President--
Administrative Services and Chief Administrative Officer.
17
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
On December 2, 1996, the Company completed the initial public offering (the
"Initial Public Offering") of its shares of common stock, par value $0.01 per
share (the "Common Shares" or "Shares"). The Common Shares are listed on the
Nasdaq National Market under the symbol "WTSC." The following table sets forth
for the periods indicated the high and low closing sales prices of the Common
Shares as reported on the Nasdaq National Market.
HIGH LOW
------- -------
Fourth Quarter of 1996 (from November 26, 1996).............. $25 1/2 $21
First Quarter of 1997........................................ $25 1/4 $12
Second Quarter of 1997....................................... $16 1/8 $12 3/8
Third Quarter of 1997........................................ $16 3/8 $12 1/2
Fourth Quarter of 1997....................................... $15 1/8 $10 1/8
As of March 18, 1998, there were 106 holders of record of Common Shares. As
of the same date, there were a total of 63,330,000 Common Shares issued and
outstanding. No dividends have been declared with respect to the Common Shares
since the Initial Public Offering. The Company currently intends to retain
earnings to finance the growth and development of its business and for working
capital and general corporate purposes, and does not anticipate paying cash
dividends on the Common Shares in the foreseeable future. Any payment of
dividends will be at the discretion of the Company's Board of Directors and
will depend upon earnings, financial condition, capital requirements, level of
indebtedness, contractual restrictions with respect to payment of dividends
and other factors.
18
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth, for the periods and at the dates indicated,
selected historical consolidated financial data of the Company. The selected
consolidated historical financial data has been derived from the audited
historical consolidated financial statements of the Company. The Company's
consolidated financial statements as of December 31, 1997 and 1996, and for
the years ended December 31, 1997, 1996 and 1995 and Deloitte & Touche LLP's
audit report with respect thereto have been included in this Annual Report on
Form 10-K. The information is qualified in its entirety by the detailed
information included elsewhere herein and should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business" and the "Consolidated Financial Statements" and notes
thereto included elsewhere in this Annual Report on Form 10-K.
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
1993 1994 1995 1996 1997
------------ ------------ ------------ ------------ ------------
(IN THOUSANDS, EXCEPT FOR PER SHARE AND SELECTED OPERATING DATA)
INCOME STATEMENT DATA:
Revenue............... $ 142,508 $ 186,512 $ 256,894 $ 317,210 $ 398,832
Cost of services...... 77,785 102,707 146,531 180,380 220,858
Selling, general and
administrative
expenses............. 45,041 51,904 70,575 87,499 118,878
Litigation settlement. 4,400 -- -- -- --
------------ ------------ ------------ ------------ ------------
Net operating income.. 15,282 31,901 39,788 49,331 59,096
Net other income
(expense)............ (1,419) (1,905) (3,389) (3,420) 1,716
------------ ------------ ------------ ------------ ------------
Net income before
income tax expense... 13,863 29,996 36,399 45,911 60,812
Actual income tax
expense.............. 48 269 828 4,213 23,402
Pro Forma Information
(1):
Income tax expense.. 5,234 10,900 13,130 12,950 --
------------ ------------ ------------ ------------ ------------
Net income.......... $ 8,581 $ 18,827 $ 22,441 $ 28,748 $ 37,410
============ ============ ============ ============ ============
Earnings per share:
Basic............. $ 0.16 $ 0.35 $ 0.42 $ 0.52 $ 0.59
Diluted........... $ 0.16 $ 0.35 $ 0.42 $ 0.52 $ 0.59
Weighted average
number of common
shares outstanding:
Basic............. 53,968 53,968 53,968 54,891 63,330
Diluted........... 53,968 53,968 53,968 54,966 63,346
SELECTED OPERATING DATA:
Operating margin...... 10.7% 17.1% 15.5% 15.6% 14.8%
Number of workstations
(at end of period)... 2,095 2,228 3,158 4,440 5,931
Number of ports (at
end of period)....... 2,530 3,496 3,870 5,804 8,056
DECEMBER 31,
--------------------------------------------------------------------
1993 1994 1995 1996 1997
------------ ------------ ------------ ------------ ------------
BALANCE SHEET DATA:
Working Capital....... $ (4,742) $ 5,408 $ 6,550 $ 46,169 $ 55,320
Property and
equipment, net....... 26,396 30,820 45,889 70,608 111,710
Total assets.......... 60,225 88,880 123,452 238,285 282,150
Total debt............ 23,913 32,608 41,743 22,523 21,686
Stockholders' equity.. 13,165 27,179 38,229 158,879 196,217
- --------
(1) Reflects a pro forma provision for income taxes as if the Company had been
subject to federal and state corporate income taxes for all periods. The
pro forma provision for income taxes represents a combined federal and
state tax rate.
19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis of the Company's financial condition
and results of operations should be read in conjunction with "Selected
Financial Data" and the Consolidated Financial Statements and Notes thereto
appearing elsewhere in this Annual Report on Form 10-K.
Certain statements under this caption constitute forward-looking statements
which involve risks and uncertainties. The Company's actual results in the
future could differ significantly from the results discussed or implied in
such forward-looking statements. Factors that could cause or contribute to
such differences include, but are not limited to, those discussed under the
heading "Business."
OVERVIEW
Inbound was formed in 1986 and, together with its affiliates, is one of the
largest independent teleservices companies in the United States. During the
first nine months of operations, the Company focused its resources on
designing and building an automated call-processing platform to effectively
manage large volumes of inbound calls. In January 1989, the Company began
offering automated voice response services utilizing its own proprietary
technology platform. In May 1990, the Company began offering outbound
teleservices utilizing state-of-the-art workstations staffed by highly trained
teleservices representatives. The Company is a leading provider of each of
these services to businesses on an outsourced basis. The Company also believes
it has established a distinct competitive advantage in its ability to offer a
range of services through its three operating divisions (Inbound, Interactive
and Outbound) on a fully-integrated basis.
Revenue: Revenue increased $81.6 million or 25.7% to $398.8 million in 1997
from $317.2 million in 1996. The increase in revenue included $5.8 million
derived from new clients and $75.8 million derived from existing clients. The
overall revenue increase is attributable to higher call volumes.
During the year ended December 31, 1997, the Company provided service to
more than 800 clients. Eighty percent of the Company's total revenue was
generated by 47 clients. During 1997, AT&T remained the Company's largest
client and accounted for 25% of total revenue.
During the year ended December 31, 1997, Interactive transferred calls to a
live agent at Inbound to complete a service that began on Interactive voice
response units. Inbound billed Interactive for the live operator portion of
the call and Interactive billed the entire service provided by both divisions.
Consequently, a portion of Interactive revenue reported on the Company's
reports on Form 10-Q in 1997 represents services delivered by Inbound.
Management feels that it would be more appropriate to include the revenue in
the division that provided the services rather than where the revenue is
invoiced to the client. The table below sets forth this reallocated revenue by
division by quarter for 1997:
% OF
1ST 2ND 3RD 4TH COMPANY
QUARTER QUARTER QUARTER QUARTER TOTAL REVENUE
------- ------- -------- -------- -------- -------
(AMOUNTS IN THOUSANDS)
As reported
Inbound.................... $29,882 $25,515 $ 27,928 $ 32,255 $115,580 29.0%
Interactive................ 36,564 37,762 41,249 38,188 153,763 38.5%
Outbound................... 29,200 35,103 31,316 33,870 129,489 32.5%
------- ------- -------- -------- --------
TOTAL.................... $95,646 $98,380 $100,493 $104,313 $398,832 100.0%
======= ======= ======== ======== ========
Reallocated revenue
Inbound.................... $31,759 $29,559 $ 32,176 $ 36,975 $130,469 32.7%
Interactive................ 34,687 33,718 37,001 33,468 138,874 34.8%
Outbound................... 29,200 35,103 31,316 33,870 129,489 32.5%
------- ------- -------- -------- --------
TOTAL.................... $95,646 $98,380 $100,493 $104,313 $398,832 100.0%
======= ======= ======== ======== ========
20
After giving effect to the reallocation of revenue described above, Inbound
services represented approximately 32.7% of total revenue for the year ended
December 31, 1997. Revenue for Inbound services is primarily generated at the
time calls are answered by a telemarketing representative based on the number
of calls and minutes received and processed on behalf of clients. Inbound
services also generate revenue from calls transferred to telemarketing
representatives from Interactive voice response units. The Company also
generates revenue by providing assistance to clients in the design and
implementation of new applications.
After giving effect to the reallocation of revenue described above,
Interactive services represented approximately 34.8% of total revenue for the
year ended December 31, 1997. Revenue for Interactive services is primarily
generated at the time calls are received or sent by automated voice response
units and is billed based on call duration. The Company also generates revenue
by providing billing and collection services for pay per call programs.
Outbound services represented approximately 32.5% of total revenue for the
year ended December 31, 1997. Revenue for Outbound services is generated on an
hourly basis at the time the marketing representatives place calls to
consumers on behalf of its clients. The Company also generates revenue by
providing assistance to its clients in the design and programming of
customized applications.
EXPENSES: Costs of telecommunications services incurred by the Company are
primarily comprised of long distance transmission charges. The Company
effectively manages its telecommunications costs through a long-term services
contract with AT&T which includes an established rate schedule subject to
certain call volume commitments. As one of the largest clients of AT&T, the
Company believes it has negotiated a favorable contract at an attractive
service rate. The Company has also entered into a number of equipment
maintenance and network management contracts with AT&T in order to facilitate
reliable and efficient network operations. Rates for telecommunications
services are primarily determined by total call volume and level of network
management and technical support under contract.
The Company manages its direct labor costs through its flexible staffing and
scheduling initiatives. In particular, the Company has developed its own
proprietary scheduling systems which are designed to optimize staffing and pay
levels in anticipation of fluctuating call volumes as clients' campaigns are
scheduled. The Company seeks to control its direct labor costs by
decentralizing its operations and by seeking new geographic markets which
offer attractive labor market characteristics for its Inbound and Outbound
services. Direct labor rates fluctuate based upon local market factors such as
the size and availability of a part-time workforce in addition to local
economic growth. Labor rates are adjusted, as necessary, to attract the
required number of service representatives during seasonal fluctuations.
During the year ended December 31, 1997, the Company experienced improvement
in direct cost as a percentage of revenue due in part to more favorable labor
rates realized by entering new local markets.
Selling, general and administrative expenses consist of all expenses that
support the ongoing operation of the Company. These expenses include costs
related to division management, facilities costs, equipment depreciation and
maintenance, amortization of goodwill, allowance for doubtful accounts, sales
and marketing activities, client support services, and corporate management
costs. Changes in selling, general and administrative expenses primarily
reflect the addition of new facilities over certain periods or expanded
marketing activities.
Prior to the reorganization of the Company on November 25, 1996 each of the
West Affiliates were treated for federal income tax purposes as an S
Corporation under the Internal Revenue Code. As a result, the stockholders of
each of the West Affiliates, rather than the West Affiliates, have paid all
federal income tax on the West Affiliates' income through November 25, 1996.
Each of the West
21
Affiliates has made periodic distributions to its stockholders in amounts
approximately equal to its stockholders' corresponding tax liabilities
associated with such companies' earnings plus amounts representing a portion
of retained earnings. Additionally, the Company has earned state income tax
credits in Nebraska under a job creation and investment incentive program. As
a result, the West Affiliates' stockholders have paid little, if any, state
income tax in Nebraska. On November 26, 1996, the Company became a C
Corporation for federal and state income tax purposes. The Company still is
eligible for similar tax credits in Nebraska, at least through 1998, so long
as the Company continues to create additional employment positions within that
state. As the Company opens new facilities in states without job or investment
tax credits, or in states with corporate income taxes, its effective tax rate
may increase.
RESULTS OF OPERATIONS
The following table sets forth the Consolidated Statement of Operations Data
as a percentage of revenue for the periods indicated:
YEAR ENDED
DECEMBER 31,
-------------------
1995 1996 1997
----- ----- -----
Revenue................................................. 100.0% 100.0% 100.0%
Cost of services........................................ 57.0 56.8 55.4
Selling, general and administrative expenses............ 27.5 27.6 29.8
Net operating income.................................... 15.5 15.6 14.8
Net other income (expense).............................. (1.3) (1.1) 0.5
Net income before income tax expense.................... 14.2 14.5 15.3
Actual income tax expense............................... 0.3 1.3 5.9
Pro forma provision for income taxes.................... 5.1 4.1 --
----- ----- -----
Net income and pro forma net income..................... 8.8% 9.1% 9.4%
===== ===== =====
YEARS ENDED DECEMBER 31, 1997 AND 1996
REVENUE: Revenue increased $81.6 million or 25.7% to $398.8 million in 1997
from $317.2 million in 1996. The increase in revenue included $5.8 million
derived from new clients and $75.8 million derived from existing clients. The
overall revenue increase is attributable to higher call volumes.
During the year ended December 31, 1997, the Company provided service to
more than 800 clients. Eighty percent of the Company's total revenue was
generated by 47 clients. During 1997, AT&T remained the Company's largest
client and accounted for 25% of total revenue.
COST OF SERVICES: Cost of services represents direct labor, telephone
expense and other costs directly related to teleservices activities. Costs of
services increased $40.5 million or 22.4% for the year ended December 31, 1997
to $220.9 million from $180.4 million for the comparable period of 1996. As a
percentage of revenue, cost of services decreased to 55.4% for 1997 compared
to 56.8% for 1996. The decreases are partially due to the addition of call
centers in new markets that had available, cost-effective quality labor. Call
center additions in 1997 included Tulsa, Oklahoma, Lubbock, Texas, Mobile,
Alabama, and Odessa, Texas.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SG&A"): SG&A expenses
increased by $31.4 million or 35.9% to $118.9 million for the year ended
December 31, 1997 from $87.5 million in 1996. As a percentage of revenue, SG&A
expenses increased to 29.8% for the year ended December 31, 1997 compared to
27.6% in 1996. The increase is primarily due to the increase in depreciation
expense and other costs associated with call center expansion and the
amortization of goodwill
22
recorded to account for the exchange of stock of minority shareholders in
connection with the initial public offering.
NET OPERATING INCOME: Net operating income increased by $9.8 million or
19.8% to $59.1 million in 1997 from $49.3 million in 1996. As a percentage of
revenue, net operating income decreased slightly to 14.8% for the year ended
December 31, 1997 compared to 15.6% in the 1996 period due to the factors
discussed above for Revenue, Cost of Services and SG&A Expenses.
NET OTHER INCOME (EXPENSE): Net other income (expense) includes interest
income from short-term investments, interest income from an accounts
receivable financing program (net of the related interest expense to fund the
program), interest expense from short-term and long-term borrowings under
credit facilities and capital leases, and minority interest in net income.
Other income (expense) for the year ended December 31,1997 totaled $1.7
million compared to ($3.4) million for 1996. The reduction in interest expense
is primarily due to the repayment of outstanding long term debt in December
1996 and January 1997 with the proceeds of the Company's Initial Public
Offering.
NET INCOME: Net income increased by $8.7 million or 30.1% for the year ended
December 31, 1997, to $37.4 million from pro forma net income of $28.7 million
in 1996. Net income includes a provision for actual income tax expense at a
combined effective rate of 38.5% for 1997. Pro forma net income includes a
provision for pro forma income tax expense at a combined income tax effective
rate of 36.3% for 1996. The 1996 rate reflects the combined federal and state
income tax rate of the Company as if it had been treated as a C Corporation.
YEARS ENDED DECEMBER 31, 1996 AND 1995
REVENUE: Revenue increased $60.3 million or 23.5% to $317.2 million in 1996
from $256.9 million in 1995. The increase in revenue included $18.5 million
derived from new clients and $41.8 million derived from existing clients. The
overall revenue increase is attributable to higher call volumes. Approximately
$7.0 million of the increase in revenue was attributable to the introduction
of the custom operator services offering. This new division specializes in
dedicated inbound live operator applications.
COST OF SERVICES: Cost of services represents direct labor, telephone
expense and other costs directly related to teleservices activities. Costs of
services increased $33.9 million or 23.1% in 1996 to $180.4 million from
$146.5 million for the comparable period of 1995. As a percentage of revenue,
cost of services remained relatively unchanged at 56.8% for the year ended
December 31, 1996 compared to 57.0% in 1995. The key component of direct labor
was held in check partly through the entering of new labor markets by adding
new facilities in Hampton, Virginia, Killeen, Texas, and Waco, Texas.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SG&A"): SG&A expenses
increased by $16.9 million or 24.0% to $87.5 million for the year ended
December 31, 1996 from $70.6 million in 1995. As a percentage of revenue, SG&A
expenses increased to 27.6% for the year ended December 31, 1996 compared to
27.5% in 1995.
NET OPERATING INCOME: Net operating income increased by $9.5 million or
24.0% to $49.3 million in 1996 from $39.8 million in 1995. As a percentage of
revenue, net operating income remained relatively unchanged at 15.6% for the
year ended December 31, 1996 compared to 15.5% in the 1995 period due to the
factors discussed above.
NET OTHER EXPENSE: Net other expense includes interest income from short-
term investments, interest income from an accounts receivable financing
program (net of the related interest expense to fund the program), interest
expense from short-term and long-term borrowings under credit facilities
23
and capital leases, minority interest in net income and other expense. Other
expense remained virtually unchanged at $3.4 million for the year ended
December 31, 1996.
PRO FORMA NET INCOME: Pro forma net income increased by $6.3 million or
28.1% for the year ended December 31, 1996, to $28.7 million from $22.4
million in 1995. Pro forma net income includes a provision for actual income
tax expense and pro forma income tax expense at a combined effective rate of
36.3% for 1996 and 37.2% for 1995. These rates reflect the combined federal
and state income tax rate of the Company as if it had been treated as a C
Corporation. The decrease in the effective tax rate is attributable to
increased tax credits available under a Nebraska incentive program.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary source of liquidity has been cash flow from
operations, supplemented by borrowings under its revolving bank lines of
credit.
The Company has a $10.0 million unsecured revolving credit facility.
Advances under the revolving credit facility bear interest at the prime rate
less 1.0%. The revolving credit facility expires on July 31, 1999. There were
no outstanding borrowings under this facility at December 31, 1997. The
Company's credit facility contains certain financial covenants, which were met
at December 31, 1997. The Company expects to renew the unsecured revolving
credit facility and believes it could increase the amount of the facility, if
needed.
The Company also has a $20.0 million revolving bank line used to fund an
accounts receivable financing program offered to certain customers in the pay
per call industry. Borrowings under the facility are limited to a borrowing
base of pledged accounts receivable from certain of the Company's qualified
customers which were assigned by the Company to the bank. There were no
outstanding borrowings under this facility at December 31, 1997. The credit
facility expires on June 30, 1998.
The Company purchased a new corporate headquarters building in the fourth
quarter with interim financing provided by a $13.0 million short-term
promissory note. In January of 1998, the short-term note of 1997 was replaced
with a $12.5 million real estate mortgage to be paid in 59 monthly
installments of $102,000 with the remainder of the balance to be paid on
February 1, 2003. The note bears interest at 7.625%. The Company also
purchased equipment financed through vendor notes payable over three years and
bearing interest at 3.9%.
Net cash flow from operating activities decreased $18.8 million, or 34.7%,
to $35.3 million for the year ended December 31, 1997, compared to a net cash
flow from operating activities of $54.1 and $47.6 million for the years ended
December 31, 1996 and 1995, respectively. The decrease was due principally to
cash used for accounts receivable resulting from growth in revenue, accounts
payable paid and income taxes paid, which in turn was partially offset by
higher net income, depreciation, and deferred income tax expense.
Net cash flow used in investing activities was $49.6 million for the year
ended December 31, 1997, compared to $20.6 million and $14.5 million, for the
comparable periods of 1996 and 1995, respectively. The increase was primarily
due to investments in call centers to support the growth of the business.
Net cash flow used in financing activities was $1.0 million for year ended
December 31, 1997 compared to $0.3 million and $25.2 million, for the
comparable periods of 1996 and 1995, respectively. The net cash flow used in
financing activities for the year ended December 31, 1997, was used primarily
to pay off $17.6 million in debt and capital lease obligations. In the years
ended December 31, 1996 and 1995, net cash flow from financing activities was
used primarily for distributions made to the existing stockholders to cover
their tax liabilities as S Corporation stockholders and to provide a
24
return of capital, offsetting borrowings under the Company's credit
facilities, net of repayments. Also, the Company realized net proceeds of
$107.7 million from the Initial Public Offering on December 2, 1996.
The Company used the net proceeds of the Initial Public Offering as follows:
(i) to repay total outstanding debt of $42.8 million comprised of (a) an
aggregate of $24.7 million outstanding under its revolving credit facilities,
(b) $10.9 million in term loans and (c) $7.2 million in outstanding capital
leases; (ii) approximately $44.1 million to repay the remaining balance of
promissory notes payable to certain stockholders of the Company including
interest created in connection with the declaration of a dividend to existing
stockholders as part of the conversion of the Company to a C Corporation; and
(iii) $4.8 million for capital expenditures. The balance of the net proceeds
totaling $16.0 million was used for working capital and general corporate
purposes.
The Company is subject to lawsuits and claims which arise out of the normal
course of its business. The Company and certain of its subsidiaries are
defendants in various litigation matters in the ordinary course of business,
some of which involve claims for damages that are substantial in amount.
Management believes, except for the items listed in Footnote H to the notes to
the consolidated financial statements, for which management is currently
unable to predict the outcome, the disposition of claims currently pending
will not have a material adverse effect on the Company's financial position or
results of operations.
CAPITAL EXPENDITURES
The Company's operations will continue to require significant capital
expenditures for capacity expansion and upgrades. Capital expenditures were
$60.6 million for the year ended December 31, 1997. Capital expenditures for
1997 consisted primarily of equipment purchases and the purchase of a new
corporate headquarters building for $15.6 million. The Company projects its
capital expenditures for 1998 to be approximately $40 million to $45 million,
primarily for capacity expansion and upgrades at existing facilities and the
addition of nine new call centers.
The Company believes that the cash flow from operations, together with
existing cash and cash equivalents, financing through capital or operating
leases, and available borrowings under its credit facilities will be adequate
to meet its capital requirements for the foreseeable future. The Company may
pledge additional property or assets of the Company or any of its
subsidiaries, which are not already pledged as collateral securing existing
credit facilities of the Company or any of its affiliates may be required to
guarantee any existing or additional credit facilities.
IMPACT OF THE YEAR 2000 ISSUE
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the
Company's computer programs that have date-sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result
in system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices, or engage in similar normal business activities.
Based on a recent assessment, the Company determined that it will be
required to modify or replace significant portions of its software so that its
computer systems will properly utilize dates beyond December 31, 1999. The
Company presently believes that modifications to existing software and
conversions to new hardware and software can mitigate the impact of the Year
2000 Issue. However, if such modifications and conversions are not completed
on timely basis, the Year 2000 Issue could have a material adverse impact on
the operations of the Company.
25
The Company is in the process of initiating formal communications with all
of its significant suppliers and large customers to determine the extent to
which the Company is vulnerable to those third parties' failure to remediate
their own Year 2000 Issue, and the Company's current assessments are based on
presently available information. However, there can be no guarantee that the
systems of other companies on which the Company's systems rely will be timely
converted, or that a failure to convert by another company, or a conversion
that is incompatible with the Company's systems, would not have material
adverse effect on the Company.
The Company will utilize both internal and external resources to reprogram,
or replace, and test the software for Year 2000 modifications. The Company
plans to complete the Year 2000 project by December 31, 1999. The total
remaining cost of the Year 2000 project is estimated at $4.8 million and is
being funded through operating cash flows. Of the total projected cost,
approximately $1.4 million is attributable to the purchase of new software and
hardware which will be capitalized. The remaining $3.4 million, which will be
expensed as incurred over the next two years, is not expected to have a
material effect on the results of operations.
The costs of the project and the date on which the Company plans to complete
the Year 2000 modifications and conversions are based on management's best
estimates, which were derived utilizing numerous assumptions of future events
including the continued availability of certain resources, third party
modification plans and other factors. However, there can be no guarantee that
these estimates will be achieved and actual results could differ materially
from those plans. Specific factors that might cause such material differences
include, but are not limited to, the availability and cost of personnel
trained in this area, the ability to locate and correct all relevant computer
codes, failure of third parties on which the Company relies and similar
uncertainties.
INFLATION
The Company does not believe that inflation has had a material effect on its
results of operations. However, there can be no assurance that the Company's
business will not be affected by inflation in the future.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information called for by this item is incorporated from the Company's
Consolidated Financial Statements and Notes thereto set forth on pages F-1
through F-16.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
26
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 10 is incorporated by reference from the
Company's definitive proxy statement for the 1998 annual meeting of
stockholders to be held on May 13, 1998. The definitive proxy statement will
be filed with the Securities and Exchange Commission not later than 120 days
after the end of the fiscal year covered by this Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated by reference from the
Company's definitive proxy statement for the 1998 annual meeting of
stockholders to be held on May 13, 1998. The definitive proxy statement will
be filed with the Securities and Exchange Commission not later than 120 days
after the end of the fiscal year covered by this Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is incorporated by reference from the
Company's definitive proxy statement for the 1998 annual meeting of
stockholders to be held on May 13, 1998. The definitive proxy statement will
be filed with the Securities and Exchange Commission not later than 120 days
after the end of the fiscal year covered by this Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated by reference from the
Company's definitive proxy statement for the 1998 annual meeting of
stockholders to be held on May 13, 1998. The definitive proxy statement will
be filed with the Securities and Exchange Commission not later than 120 days
after the end of the fiscal year covered by this Form 10-K.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
Financial Statements
(a) Documents filed as a part of the report:
(1) Financial Statements:
Reports of Independent Auditors...................................... F-1
Consolidated balance sheets as of December 31, 1997 and 1996......... F-2
Consolidated statement of operations for the years ended December 31,
1997, 1996 and 1995................................................. F-3
Combined statements of stockholders' equity for the years ended
December 31, 1997, 1996 and 1995.................................... F-4
Consolidated statements of cash flows for the years ended December
31, 1997, 1996 and 1995............................................. F-5
Notes to the Consolidated Financial Statements....................... F-6
(2) Financial Statement Schedules:
Report of Independent Auditors....................................... S-1
Schedule II (Consolidated valuation accounts for the three years
ended December 31, 1997)............................................ S-2
27
(3) Exhibits
Exhibits identified in parentheses below, on file with the United States
Securities and Exchange Commission, are incorporated herein by reference as
exhibits hereto.
EXHIBIT
NUMBER DESCRIPTION
------- -----------
3.01 Restated Certificate of Incorporation of the Company (Exhibit 3.01 to
Registration Statement under Form S-1 (Amendment No. 2) dated November
21, 1996, File No. 333-13991)
3.02 Restated Bylaws of the Company (Exhibit 3.02 to Registration Statement
under Form S-1 (Amendment No. 2) dated November 21, 1996, File No.
333-13991)
10.01 Form of Registration Rights Agreement (Exhibit 10.01 to Registration
Statement under Form S-1 (Amendment No. 1) dated November 12, 1996,
File No. 333-13991)
10.02 Bill of Sale & Assignment, dated October 30, 1996, from West
Telemarketing Corp. to Troy L. Eaden (Exhibit 10.02 to Registration
Statement under Form S-1 (Amendment No. 1) dated November 12, 1996,
File No. 333-13991)
10.03 Purchase Agreement, dated March 14, 1996, between West Telemarketing
Corporation and Executive Jet Sales, Inc. (Exhibit 10.03 to
Registration Statement under Form S-1 (Amendment No. 1) dated November
12, 1996, File No. 333-13991)
10.04 1996 Stock Incentive Plan (Exhibit 10.04 to Registration Statement
under Form S-1 (Amendment No. 1) dated November 12, 1996, File No.
333-13991)
10.05 Agreement and Plan of Reorganization (Exhibit 10.05 to Registration
Statement under Form S-1 (Amendment No. 2) dated November 21, 1996,
File No. 333-13991)
10.06 Employment Agreement between the Company and Thomas B. Barker dated
January 1, 1996, as amended December 9, 1997
10.07 Employment Agreement between the Company and Michael A. Micek dated
January 1, 1996, as amended December 9, 1997
10.08 Employment Agreement with Troy L. Eaden (Exhibit 10.08 to Registration
Statement under Form S-1 (Amendment No. 1) dated November 12, 1996,
File No. 333-13991)
10.09 Employment Agreement the Company and John W. Erwin dated January 1,
1996, as amended December 22, 1997
10.10 Stock Redemption Agreement, dated April 9, 1996, by and among John W.
Erwin, Gary L. West, Mary E. West and Troy L. Eaden (Exhibit 10.11 to
Registration Statement under Form S-1 (Amendment No. 1) dated November
12, 1996, File No. 333-13991)
10.11 Assignment and Assumption Agreement, dated as of November 12, 1996, by
and among Gary L. West, Mary E. West, Troy L. Eaden and the Company
(Exhibit 10.12 to Registration Statement under Form S-1 (Amendment No.
2) dated November 21, 1996, File No. 333-13991)
10.12 Personnel Company Subscription Service Agreement, dated as of November
12, 1996, between West Telemarketing Insurance Agency, Inc. and West
Telemarketing Corporation Outbound (Exhibit 10.13 to Registration
Statement under Form S-1 (Amendment No. 2) dated November 21, 1996,
File No. 333-13991)
10.13 Lease, dated September 1, 1994, by and between West Telemarketing
Corporation and 99-Maple Partnership (Exhibit 10.14 to Registration
Statement under Form S-1 (Amendment No. 1) dated November 12, 1996,
File No. 333-13991)
28
10.14 Employment Agreement between the Company and Michael M. Sturgeon, dated
March 17, 1997 (Exhibit 10.01 to Form 10Q dated May 15, 1997, File No.
000-21771)
10.15 Employee Stock Purchase Plan dated July 1, 1997 (Exhibit 10.01 to Form
10Q dated August 14, 1997, File No. 000-21771)
10.16 Employment Agreement between the Company and Mark V. Lavin dated July 1,
1996, as amended December 22, 1997
21.01 Subsidiaries of the Company (Exhibit 21.01 to Registration Statement
under Form S-1 (Amendment No. 2) dated November 21,1996, File No. 333-
13991)
27.01 Financial Data Schedule for the year ended December 31, 1997
29
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
WEST TELESERVICES CORPORATION
By: /s/ Troy L. Eaden
---------------------------------
March 24, 1998
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATE INDICATED.
SIGNATURES TITLE DATE
/s/ Gary L. West Chairman of the March 24, 1998
- ------------------------------------- Board and Director
GARY L. WEST
/s/ Mary E. West Vice Chair of the March 24, 1998
- ------------------------------------- Board and Director
MARY E. WEST
/s/ Troy L. Eaden Chief Executive March 24, 1998
- ------------------------------------- Officer and
TROY L. EADEN Director (Principal
Executive Officer)
/s/ Thomas B. Barker President and Chief March 24, 1998
- ------------------------------------- Operating Officer
THOMAS B. BARKER and Director
/s/ Michael A. Micek Chief Financial March 24, 1998
- ------------------------------------- Officer (Principal
MICHAEL A. MICEK Financial and
Accounting Officer)
/s/ William E. Fisher Director March 24, 1998
- -------------------------------------
WILLIAM E. FISHER
/s/ Greg T. Sloma Director March 24, 1998
- -------------------------------------
GREG T. SLOMA
30
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
West TeleServices Corporation
Omaha, Nebraska
We have audited the accompanying consolidated balance sheets of West
TeleServices Corporation and subsidiaries (the Company) as of December 31,
1997 and 1996 and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of West TeleServices Corporation and
subsidiaries as of December 31, 1997 and 1996 and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1997 in conformity with generally accepted accounting
principles.
/s/ Deloitte & Touche LLP
Omaha, Nebraska
February 11, 1998
F-1
WEST TELESERVICES CORPORATION
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
DECEMBER 31,
------------------
1997 1996
-------- --------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 39,820 $ 55,065
Accounts receivable, net of allowance for doubtful
accounts of $447 and $244................................ 64,325 45,982
Notes receivable.......................................... 7,486 360
Accounts receivable--financing............................ 4,971 11,805
Other..................................................... 5,017 4,049
-------- --------
Total current assets.................................... 121,619 117,261
PROPERTY AND EQUIPMENT:
Land and improvements..................................... 4,888 2,715
Buildings................................................. 23,059 8,043
Telephone and computer equipment.......................... 97,021 68,483
Office furniture and equipment............................ 18,730 14,383
Leasehold improvements.................................... 24,119 18,130
Construction in process................................... 1,182 749
-------- --------
168,999 112,503
Accumulated depreciation and amortization................. (57,289) (41,895)
-------- --------
111,710 70,608
GOODWILL, NET OF ACCUMULATED AMORTIZATION OF $1,853 AND
$168...................................................... 48,680 50,365
OTHER ASSETS............................................... 141 51
-------- --------
$282,150 $238,285
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 18,948 $ 23,271
Customer deposits and holdbacks........................... 22,475 12,662
Accrued wages and benefits................................ 8,809 5,748
Accrued phone expense..................................... 7,228 8,404
Other current liabilities................................. 3,103 2,501
Current maturities of long-term obligations............... 5,736 16,809
Income tax payable........................................ -- 1,697
-------- --------
Total current liabilities............................... 66,299 71,092
LONG TERM OBLIGATIONS, less current maturities............. 15,950 5,714
DEFERRED INCOME TAXES...................................... 3,684 2,600
COMMITMENTS AND CONTINGENCIES (Note H)..................... -- --
STOCKHOLDERS' EQUITY
Preferred stock $0.01 par value, 10,000 shares
authorized, no shares issued and outstanding............ -- --
Common stock $0.01 par value, 200,000 shares authorized,
63,330 shares issued and outstanding.................... 633 633
Additional paid-in capital............................... 157,647 157,719
Retained earnings........................................ 37,937 527
-------- --------
Total stockholders' equity.............................. 196,217 158,879
-------- --------
$282,150 $238,285
======== ========
The accompanying notes are an integral part of these financial statements.
F-2
WEST TELESERVICES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
YEARS ENDED DECEMBER 31,
----------------------------
1997 1996 1995
-------- -------- --------
REVENUE.......................................... $398,832 $317,210 $256,894
COST OF SERVICES................................. 220,858 180,380 146,531
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES..... 118,878 87,499 70,575
-------- -------- --------
NET OPERATING INCOME............................. 59,096 49,331 39,788
OTHER INCOME (EXPENSE):
Interest income................................ 1,236 577 142
Interest income--financing, net of interest
expense of $320, $1,244 and $1,784............ 1,684 669 449
Interest expense............................... (729) (2,880) (2,403)
Minority interest in net income of consolidated
subsidiaries.................................. -- (1,359) (1,167)
Other expense, net............................. (475) (427) (410)
-------- -------- --------
Net other income (expense)..................... 1,716 (3,420) (3,389)
-------- -------- --------
NET INCOME BEFORE INCOME TAX EXPENSE............. 60,812 45,911 36,399
ACTUAL INCOME TAX EXPENSE:
Current income tax expense..................... 22,392 1,701 828
Deferred income tax expense.................... 1,010 2,512 --
-------- -------- --------
Actual income tax expense...................... 23,402 4,213 828
-------- -------- --------
NET INCOME AND NET INCOME BEFORE PROFORMA INCOME
TAX EXPENSE..................................... 37,410 41,698 35,571
PROFORMA INFORMATION:
Income tax expense............................. -- 12,950 13,130
-------- -------- --------
Net income..................................... $ 37,410 $ 28,748 $ 22,441
======== ======== ========
EARNINGS PER COMMON SHARE:
Basic.......................................... $ 0.59 $ 0.52 $ 0.42
======== ======== ========
Diluted........................................ $ 0.59 $ 0.52 $ 0.42
======== ======== ========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:
Basic common shares............................ 63,330 54,891 53,968
Dilutive impact of potential common shares from
stock options................................. 16 75 --
-------- -------- --------
Diluted common shares.......................... 63,346 54,966 53,968
======== ======== ========
The accompanying notes are an integral part of these financial statements.
F-3
WEST TELESERVICES CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(AMOUNTS IN THOUSANDS)
TOTAL
COMMON PAID-IN RETAINED STOCKHOLDERS'
STOCK CAPITAL EARNINGS EQUITY
------ -------- -------- -------------
BALANCE, January 1, 1995.............. $568 $ 4,743 $ 21,798 $ 27,109
Distributions to stockholders, net
of $662 paid to minority
shareholders....................... -- -- (24,451) (24,451)
Net income.......................... -- -- 35,571 35,571
---- -------- -------- --------
BALANCE, December 31, 1995............ 568 4,743 32,918 38,229
Issuance of 6,555 shares of common
stock, net of expense.............. 65 107,658 -- 107,723
Effects of purchase accounting for
minority interest.................. -- 50,533 -- 50,533
Distributions to stockholders, net
of $2,139 paid to minority
shareholders....................... -- (5,215) (74,089) (79,304)
Net income.......................... -- -- 41,698 41,698
---- -------- -------- --------
BALANCE, December 31, 1996............ 633 157,719 527 158,879
Stock registration costs............ -- (72) -- (72)
Net income.......................... -- -- 37,410 37,410
---- -------- -------- --------
BALANCE, December 31, 1997............ $633 $157,647 $ 37,937 $196,217
==== ======== ======== ========
The accompanying notes are an integral part of these financial statements.
F-4
WEST TELESERVICES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(AMOUNTS IN THOUSANDS)
YEARS ENDED DECEMBER 31,
----------------------------
1997 1996 1995
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income...................................... $ 37,410 $ 41,698 $ 35,571
Adjustments to reconcile net income to net
cash flows from operating activities:
Depreciation and amortization.................. 20,635 13,551 10,127
(Gain) loss on sale of equipment............... 238 (131) 148
Deferred income tax expense.................... 1,010 2,512 --
Minority interest.............................. -- 1,359 1,167
Changes in operating assets and liabilities:
Accounts receivable............................ (19,457) (10,027) (10,954)
Other assets and vendor receivables............ (209) (350) (1,540)
Accounts payable............................... (4,323) 1,760 9,423
Other current liabilities and accrued
expenses...................................... 2,487 2,709 3,615
Income tax payable............................. (2,472) 1,001 --
-------- -------- --------
Net cash flows from operating activities...... 35,319 54,082 47,557
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment.............. (43,852) (21,631) (16,824)
Proceeds from disposal of property and
equipment...................................... 287 1,540 1,165
Issuance of notes receivable.................... (7,442) (1,550) --
Proceeds from payments of notes receivable...... 1,430 1,027 1,173
-------- -------- --------
Net cash flows from investing activities...... (49,577) (20,614) (14,486)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt.................. -- 10,320 7,123
Payments of debt................................ (6,468) (14,870) (3,644)
Payments of capital lease obligations........... (11,094) (11,535) (5,193)
Payments of notes to shareholder................ -- -- (975)
Net change in line of credit agreement.......... -- (6,500) (340)
Distribution to stockholders.................... -- (81,443) (25,113)
Net change in accounts receivable financing and
notes payable financing........................ 6,834 (11,281) 2,187
Proceeds from issuance of common stock, net of
expense........................................ -- 107,723 --
Payments for stock registration costs........... (72) -- --
Net change in customer deposits and holdbacks... 9,813 7,322 774
-------- -------- --------
Net cash flows from financing activities...... (987) (264) (25,181)
-------- -------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS.......... (15,245) 33,204 7,890
CASH AND CASH EQUIVALENTS, Beginning of period... 55,065 21,861 13,971
-------- -------- --------
CASH AND CASH EQUIVALENTS, End of period......... $ 39,820 $ 55,065 $ 21,861
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest........ $ 1,381 $ 4,696 $ 4,048
======== ======== ========
Cash paid during the period for income taxes.... $ 24,877 $ 702 $ 459
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING
ACTIVITIES:
Acquisition of property through assumption of
debt obligations............................... $ 16,725 $ 16,297 $ 9,592
======== ======== ========
Reduction of accounts receivable through
issuance of notes receivable................... $ 1,114 $ 61 $ 367
======== ======== ========
The accompanying notes are an integral part of these financial statements.
F-5
WEST TELESERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS DESCRIPTION--West TeleServices Corporation (WTSC) and its direct
and indirect subsidiaries (West Telemarketing Corporation (WTC), West
Interactive Corporation (WIC), West Telemarketing Corporation Outbound (WTCO),
Interactive Billing Services, Inc. (IBS) and West Interactive Canada, Inc.
(WICI)) (the "Company") provide a full range of customized telecommunications-
based services to business clients on an outsourced basis. The Company is a
leading provider of inbound operator services, automated voice response
services and outbound direct teleservices through its call centers throughout
the United States. The Company's inbound operator services ("Inbound") consist
of live operator call-processing applications such as order capture, customer
service and product support. The Company's automated voice response services
("Interactive") consist of computerized call-processing applications such as
automated product information requests, computerized surveys and polling and
secure automated credit card activation. The Company's outbound direct
teleservices ("Outbound") consist of live operator direct marketing
applications such as product sales, customer acquisition and retention
campaigns. The Company has developed proprietary technology platforms designed
to provide a high degree of automation and reliability in all three of its
businesses.
The Company targets businesses in highly competitive, consumer-based
industries, including telecommunications, insurance, banking, pharmaceuticals,
public utilities, consumer goods and computer software services, that require
large volume applications.
REORGANIZATION--Through the corporate reorganization completed on November
25, 1996, West TeleServices Corporation became the parent company for WTC,
WTCO and WIC and indirectly for IBS and WICI. These five corporations were
previously under common control and management. The corporations entered into
a reorganization with the Company whereby each of the stockholders of WTC,
WTCO and WIC exchanged their respective capital stock for 56,775,000 shares of
common stock of the Company and each of the stockholders of IBS and WICI
transferred their respective capital stock to WIC for nominal consideration.
BASIS OF CONSOLIDATION--The consolidated financial statements include the
accounts of the Company and its subsidiaries. All material intercompany
transactions and balances have been eliminated in the consolidated financial
statements.
USE OF ESTIMATES--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
REVENUE RECOGNITION--Inbound revenue is recognized at the time calls are
answered by a telemarketing representative based on the number of calls and/or
minutes received and processed on behalf of clients. Interactive revenue is
recognized at the time calls are received or sent by automated voice response
units and is billed based on call duration. Outbound revenue is recognized on
an hourly rate basis at the time the telemarketing representatives place calls
to consumers on behalf of its clients. The customer is obligated to pay for
these services when these activities have been performed.
F-6
WEST TELESERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
COST OF SERVICES--Cost of services includes labor, telephone and other
expense directly related to teleservices activities.
MINORITY INTEREST--The Company accounted for the minority interest portion
of the reorganization under the purchase method of accounting. The
consolidated financial statements for all periods presented give effect to the
reorganization referred to above. Under such reorganization, the Company
recorded the 4.945% minority interest in net income of consolidated
subsidiaries for the period from January 1, 1996 through November 25, 1996 and
for fiscal year 1995.
CASH AND CASH EQUIVALENTS--For purposes of the statement of cash flows, the
Company considers short-term investments with maturities of three months or
less at acquisition to be cash equivalents.
FINANCIAL INSTRUMENTS--Cash and cash equivalents, accounts receivable and
accounts payable are short-term in nature and the net values at which they are
recorded are considered to be reasonable estimates of their fair values. The
carrying values of notes payable are deemed to be reasonable estimates of
their fair values. Interest rates that are currently available to the Company
for the reissuance of debt with similar terms and remaining maturities are
used to estimate fair values of the notes payable.
PROPERTY AND EQUIPMENT--Property and equipment are recorded at cost.
Depreciation expense is based on the estimated useful lives of the assets and
is calculated on the straight-line method. The Company's buildings have
estimated useful lives of 31.5 years and the majority of the other assets have
estimated useful lives of five years.
GOODWILL--Goodwill represents the excess of the value of Company stock
received by minority shareholders upon their exchange of stock in WTC and WTCO
over the book value of this stock. The goodwill is being amortized over 30
years. Recoverability of these assets is evaluated periodically based on
management's estimate of future undiscounted operating income for each
respective component of goodwill.
CUSTOMER DEPOSITS AND HOLDBACKS--The Company obtains directly from the
billing and collection agent, revenue generated from its Interactive
customers' programs. The Company retains a specified amount of the revenue and
remits the remainder to its customers. The retained amount is based upon the
collection history of the customer's program success and is necessary to allow
for potential caller adjustments which may be filed within one year of the
actual phone calls.
The Company obtains security deposits from certain Inbound and Interactive
customers, which are refunded to the customers when the Company discontinues
service to the customers' programs.
INCOME TAXES--For periods subsequent to November 25, 1996, the Company and
its wholly-owned subsidiaries file a consolidated income tax return. The
Company uses an asset and liability approach for the financial reporting of
income taxes in accordance with Statement of Financial Accounting Standards
No. 109, Accounting for Income Taxes. Deferred income taxes arise from
temporary differences between financial and tax reporting.
Prior to the reorganization in November 1996, the affiliated companies
elected to be treated as "Small Business Corporations" for income tax
purposes. Under this election, all income and expense
F-7
WEST TELESERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
flowed through to the stockholders on a pro rata basis for income tax
purposes. Accordingly, no provision for actual income taxes has been provided
for during this period except for certain state taxes which are applicable to
"Small Business Corporations."
Prior to the closing of the Company's Initial Public Offering and
simultaneous to the reorganization, the five subsidiary companies terminated
their Small Business Corporation status and became subject to Federal and
state income taxes. The pro forma tax provisions were calculated using the
asset and liability approach for financial accounting and reporting of income
taxes.
BASIC EARNINGS PER SHARE AND DILUTED EARNINGS PER SHARE--In February 1997,
the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 128, Earnings Per Share (SFAS No. 128), which
specifies the computation, presentation and disclosure requirements for
earnings per share. SFAS No. 128 supercedes Accounting Principle Board Opinion
No. 15 entitled Earnings Per Share. Accordingly, all prior periods earnings
per share amounts have been restated to conform with SFAS No. 128. Basic
earnings per share excludes dilution and is computed by dividing income
available to common stockholders by the weighted-average number of common
shares outstanding for the period. Diluted earnings per share reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock or resulted in
issuance of common stock that then shared in the earnings of the entity.
PREFERRED STOCK--The Board of Directors of the Company has the authority,
without any further vote or action by the stockholders, to provide for the
issuance of up to ten million shares of preferred stock from time to time in
one or more series with such designations, rights, preferences and limitations
as the Board of Directors may determine, including the consideration received
therefor. The Board also has the authority to determine the number of shares
comprising each series, dividend rates, redemption provisions, liquidation
preferences, sinking fund provisions, conversion rights and voting rights
without approval by the holders of common stock.
RECLASSIFICATIONS--Certain reclassifications have been made to prior years
financial statements to conform to the current year presentation.
ACCOUNTING PRONOUNCEMENTS--In June 1997, the Financial Accounting Standards
Board issued Statement of Accounting Standards No. 131, Disclosures About
Segments of an Enterprise and Related Information (SFAS No. 131) which
established presentation of financial data based on the "management approach".
SFAS No. 131 is applicable for fiscal years beginning after December 15, 1997.
The Company does not expect the pronouncement to effect the Company's
reporting or its disclosures to its consolidated financial statements.
B. ACCOUNTS RECEIVABLE FINANCING PROGRAM
The Company maintains a line of credit with three participating banks in the
amount of $20,000. There were no outstanding borrowings at December 31, 1997
and 1996. Borrowings bear interest at 1.0% below the prime rate (actual rate
7.5% at December 31, 1997) to fund customer advances. Substantially all
current assets of WIC are pledged as collateral on the line of credit which
expires June 30, 1998. The Company had advances to Interactive customers
through their accounts receivable financing programs aggregating $4,971 and
$11,805 at December 31, 1997 and 1996, respectively. Under terms of the
programs, advances are collateralized by the customer's accounts receivable
from
F-8
WEST TELESERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
unrelated national billing services. The Company charges interest at the prime
rate plus 3.0% (actual rate 11.5% at December 31, 1997).
C. LONG-TERM OBLIGATIONS AND CREDIT ARRANGEMENTS
The Company has a $10,000 unsecured revolving credit facility. Advances
under the revolving credit facility bear interest at the prime rate less 1.0%
(actual rate 7.5% at December 31, 1997). The revolving credit facility expires
on July 31, 1999. At December 31, 1997 and 1996, there were no outstanding
borrowings under the revolving credit facilities. The Company's credit
facility contains certain financial covenants which contain current ratio and
tangible net worth requirements and limitations on indebtedness, among others.
These financial covenants were met at December 31, 1997.
Long-term obligations consist of the following:
DECEMBER 31,
--------------
1997 1996
------- ------
Mortgage note payable to bank, due in monthly installments
of $102 including interest at 7.625% with a balloon payment
at maturity at February 1, 2003............................ $13,000 $ --
Notes payable to vendor, due in monthly installments of $110
including interest at 3.9% maturing from March 30, 2000 to
March 1, 2001.............................................. 3,151 --
Notes payable to banks. Paid in January of 1997............. -- 5,894
Capital lease obligations (See note D)...................... 5,535 16,629
------- ------
21,686 22,523
Less current maturities:
Debt...................................................... 1,880 5,894
Capital lease obligations (See note D).................... 3,856 10,915
------- ------
Current maturities of long-term obligations ................ 5,736 16,809
Long-term obligations....................................... $15,950 $5,714
======= ======
Substantially all assets of the Companies are pledged as collateral on their
debt. The agreements contain restrictive covenants which, among other things,
require the maintenance of certain ratios and minimum tangible net worth, as
defined in the agreements.
Scheduled maturities on long-term debt without capital lease obligations
described in Note D, are as follows:
1998....................................... $1,880
1999....................................... 1,557
2000....................................... 984
2001....................................... 414
2002 and thereafter........................ 11,316
D. LEASES
The Company leases certain land, buildings and equipment under operating and
capital leases which expire at varying dates through September 2007. Rent
expense was $2,666, $2,158 and $1,807
F-9
WEST TELESERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
for the years ended December 31, 1997, 1996 and 1995, respectively. On all
real estate leases, the Company pays real estate taxes, insurance and
maintenance associated with the leased sites. Certain of the leases offer
extension options ranging from month to month to five-years. All of the
capital leases call for transfer of ownership or contain bargain purchase
options at the end of the lease term. Amortization of assets purchased through
capital lease agreements is included in depreciation expense.
DECEMBER 31,
--------------
1997 1996
------ -------
Assets under capital leases consist of:
Telephone and computer equipment........................... $9,452 $22,107
Office furniture and equipment............................. 990 3,327
Lease/building improvement................................. -- 343
------ -------
Total cost............................................... 10,442 25,777
Accumulated depreciation..................................... 3,454 5,355
------ -------
Net book value............................................... $6,988 $20,422
====== =======
Future minimum payments under non-cancellable operating and capital leases
with initial or remaining terms of one year or more and minimum future lease
payments and present value of the net minimum lease payments are as presented
below exclusive of related party leases as discussed in Note E:
OPERATING CAPITAL
LEASES LEASES
--------- -------
Year Ending December 31,
1998..................................................... $ 4,350 $4,160
1999..................................................... 4,272 1,724
2000..................................................... 4,008 --
2001..................................................... 2,717 --
2002 and thereafter...................................... 6,431 --
------- ------
Total minimum obligations.................................. $21,778 5,884
=======
Less interest at 4.4% to 9.25%............................. $ 349
------
Present value of net minimum lease payments................ 5,535
Less current portion....................................... 3,856
------
$1,679
======
E. RELATED PARTY TRANSACTIONS
The Company leases certain office space owned by a partnership whose
partners are majority stockholders of the Company. The lease expires August
31, 2004, and is accounted for as an operating lease. Required lease payments
are as follows:
Year Ending December 31,
1998................................................................. $ 773
1999................................................................. 820
2000................................................................. 869
2001................................................................. 921
2002 and thereafter.................................................. 2,729
F-10
WEST TELESERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Lease expense was $730, $691 and $649 for the years ended December 31, 1997,
1996 and 1995, respectively.
Total interest expense paid to related parties in connection with notes
payable was $0, $269 and $59 for the years ended December 31, 1997, 1996 and
1995, respectively.
F. INCOME TAXES
Prior to the reorganization in November 1996, the predecessor companies
maintained their Small Business Corporation status. Accordingly, no provision
for actual income tax has been made as it relates to periods prior to the
reorganization except for certain state taxes which are applicable to Small
Business Corporations. However, pro forma income tax expense has been
recognized in the statement of operations as if the reorganized company had
been subject to federal and state corporate income taxes for all periods. The
pro forma provision for income tax expense represents a combined federal and
state tax rate.
Components of the actual income tax expense are as follows:
YEAR ENDED
DECEMBER 31,
--------------
1997 1996
------- ------
Current income tax expense:
Federal.................................................... $20,417 $1,079
State...................................................... 1,975 622
------- ------
22,392 1,701
------- ------
Deferred income tax expense:
Federal.................................................... 966 2,446
State...................................................... 44 66
------- ------
1,010 2,512
------- ------
$23,402 $4,213
======= ======
The difference between the U.S. Federal statutory tax rate and the Company's
effective tax rate are as follows:
YEAR ENDED
DECEMBER
31,
------------
1997 1996
----- -----
Statutory rate................................................. 35.00% 35.00%
State income tax effect........................................ 3.48% 1.05%
Other.......................................................... -- 0.26%
----- -----
38.48% 36.31%
===== =====
F-11
WEST TELESERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Significant temporary differences between reported financial and taxable
earnings that give rise to deferred tax assets and liabilities were as
follows:
YEAR ENDED
DECEMBER 31,
-------------
1997 1996
------ ------
Net current deferred tax asset:
Allowance for doubtful accounts............................. $ 162 $ 88
Net long-term deferred tax liabilities:
Depreciation................................................ 3,684 2,566
Other....................................................... -- 34
------ ------
Net long-term deferred tax liabilities........................ 3,684 2,600
------ ------
Net total deferred tax liabilities............................ $3,522 $2,512
====== ======
G. EMPLOYEE BENEFITS AND INCENTIVE PLANS
The Company has a 401(k) plan which covers substantially all employees.
Under the plan, the Company will match 50% of employee contributions up to 7%
of their gross salary. The Company matching contributions are 100% vested
after the employee has attained five years of service. Total contributions
under the plan were $816, $589 and $564 for the years ended December 31, 1997,
1996 and 1995, respectively.
During September 1996, the Company adopted the 1996 Stock Incentive Plan
(the Plan). The Plan authorized granting to officers and directors the right
to purchase shares of Common Stock of the Company (Common Shares) at the fair
market value determined on the date of grant. Options to purchase a maximum of
9,499,500 Common Shares may be granted under the Plan. There were options for
3,601,000 Common Shares issued during November 1996 under such Plan. During
May of 1997, the Company amended the options granted during November 1996. The
options to purchase the 3,601,000 Common Shares at $18.00 were surrendered by
option holders in June of 1997 and new options of 4,707,400 Common Shares at
$15.625 were issued. Ten percent of the options granted to employees vest on
the first and second anniversaries of the grant date. An additional fifteen
percent of the options granted to employees vest on each of the third, fourth,
fifth and sixth anniversaries of the grant date. The final twenty percent of
the options granted to employees vest on the seventh anniversary of the grant
date. On February 14, 1997, options to purchase 28,000 Common Shares at $17.75
were issued relating to options granted to non-employee members of the board
of directors. Forty-two percent of the options granted to the board of
directors vest on the first anniversary of the grant date and twenty-nine
percent of the options granted to the board of directors vest on the second
and third anniversaries of the grant date. All options expire ten years after
the date of the grant. No options were exercisable at December 31, 1997 and
1996.
F-12
WEST TELESERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
The following table presents the activity of the stock options for each of
the fiscal years ended December 31, 1997 and 1996 and the stock options
outstanding at the end of the respective fiscal years.
STOCK OPTION OPTION PRICE AGGREGATE
SHARES PER SHARE AMOUNT
------------ -------------- ---------
Outstanding at December 31, 1995...... -- $ -- $ --
Granted............................. 3,601,000 18.00 64,818
---------- -------------- --------
Outstanding at December 31, 1996...... 3,601,000 18.00 64,818
Surrendered due to plan amendment... (3,601,000) 18.00 (64,818)
Granted............................. 4,735,400 15.625-17.75 74,050
Canceled............................ (177,100) 15.625 (2,767)
---------- -------------- --------
Outstanding at December 31, 1997...... 4,558,300 $15.625-$17.75 $ 71,283
========== ============== ========
Shares available for future grants at
December 31, 1997.................... 4,941,200
==========
The following table summarizes information about the Company's stock options
outstanding at December 31, 1997:
WEIGHTED
AVERAGE WEIGHTED
STOCK OPTION REMAINING AVERAGE
EXERCISE SHARES CONTRACTUAL EXERCISE
PRICE OUTSTANDING LIFE IN YEARS PRICE
-------- ------------ ------------- --------
$15.63 4,530,300 9.42 $15.63
17.75 28,000 9.12 17.75
------------- --------- ---- ------
$15.63-$17.75 4,558,300 9.42 $15.64
============= ========= ==== ======
During May 1997, the Company and its stockholders, adopted the 1997 Employee
Stock Purchase Plan (the Stock Purchase Plan). The Stock Purchase Plan
provides employees an opportunity to purchase Common Shares through annual
offerings to be made during the five year period commencing July 1, 1997. Each
employee participating in any offering is granted an option to purchase as
many full or fractional Common Shares as the participating employee may elect
so long as the purchase price for such Common Shares does not exceed 10% of
the compensation received by such employee from the Company during the annual
offering period or 1,000 Common Shares. The purchase price is to be paid
through payroll deductions. The purchase price for each Common Share is equal
to 100% of the fair market value of the Common Share on the date of the grant,
determined by the average of the high and low NASDAQ quoted market price ($14
5/8 at July 1, 1997). On the last day of the offering period, the option to
purchase Common Shares becomes exercisable. If at the end of the offering the
fair market value of the Common Shares is less than 100% of the fair market
value at the date of grant, then the options will not be deemed exercised and
the payroll deductions made with respect to the options will be applied to the
next offering unless the employee elects to have the payroll deductions
withdrawn from the Stock Purchase Plan. The maximum number of Common Shares
available for sale under the Stock Purchase Plan is 2,000,000 shares. No
options were exercisable at December 31, 1997.
The Company accounts for its stock-based compensation plans under the
provisions of accounting Principles Board Opinion 25, Accounting for Stock
Issued to Employees, which utilizes the
F-13
WEST TELESERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
intrinsic value method. As a result of the exercise price being equal to the
market price at the date of grant, the Company recognized no compensation
expense for the years ended December 31, 1997 and 1996.
The pro forma effect of accounting for stock-based compensation for the
Company's plans using the fair value method required by Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation on 1997
and 1996 net income was $5,659, and $304 respectively, and on basic and
diluted earnings per share was $.09 for 1997 and $.01 for 1996.
The fair value for options granted under the above described plans were
estimated at the date of grant using the Black Scholes pricing model with the
following assumptions:
1997 1996
---- ----
Risk-free interest rate.......................................... 6.5% 6.5%
Dividend yield................................................... 0.0% 0.0%
Expected volatility.............................................. 45.0% 40.0%
Expected life (years)............................................ 5.4 5.5
H. COMMITMENTS AND CONTINGENCIES
The Company is subject to lawsuits and claims which arise out of the normal
course of its business. The Company and certain of its subsidiaries are
defendants in various litigation matters in the ordinary course of business,
some of which involve claims for damages that are substantial in amount. The
Company believes, except for the items discussed below for which the Company
is currently unable to predict the outcome, the disposition of claims
currently pending will not have a material adverse effect on the Company's
financial position or results of operations.
West Interactive Corporation (Interactive) is a defendant in a case brought
in the United States District Court for the Southern District of Georgia,
Augusta Division, on September 12, 1991, captioned Lamar Andrews, Individually
and as Representative of a Class of All Other Persons Similarly Situated,
Plaintiff v. American Telephone & Telegraph Company, et al., Defendants, No.
CV 191-175. The District Court certified a master class of all persons who
paid for one or more 900 number calls pertaining to programs offering
sweepstakes, games of chance, awards, cash or other prizes, gifts or
information on unclaimed funds. These calls were billed and collected by AT&T
Corp. (AT&T) and U.S. Sprint Communications Company Limited Partnership
(Sprint). The District Court also certified a sub-class of those persons who
paid, in the State of Georgia, for one or more such calls billed and collected
by AT&T or Sprint. The complaint alleged that the programs at issue involved,
among other things, acts of unlawful gambling, mail fraud and wire fraud in
violation of the Racketeering Influenced and Corrupt Organizations Act (RICO),
the Communications Act of 1934, the federal common law of communications and
other state and federal laws. Interactive provided interactive voice
processing and billing services to a customer which conducted some of the
programs at issue in the litigation. The billing services were provided
through AT&T. The action sought recovery of treble damages, punitive damages,
costs and attorneys' fees. The Company's potential liability and expenses in
this matter were not covered by insurance. On September 19, 1996, the United
States Court of Appeals for the Eleventh Circuit reversed the District Court's
order certifying the classes on the ground that the class action would be
unmanageable and, on December 4, 1996, it denied the plaintiffs' subsequent
petition for rehearing. On February 19, 1997, a Motion to Amend Class
Definition and a Renewed Motion for
F-14
WEST TELESERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Class Certification was filed by the plaintiffs in the District Court. On July
14, 1997, plaintiffs' motions were denied and the plaintiffs were ordered to
amend the pleadings to eliminate all allegations as to class representation.
On August 4, 1997, the plaintiffs filed a second amended complaint which
deleted all class allegations. In addition to claims previously asserted, the
second amended complaint includes an express claim based on the alleged
collection of illegal gambling debts, and a claim under Georgia RICO statute
with a request for actual and punitive damages under that statute.
Schurman, Bowers, et al, individually and on behalf of a class of all other
persons similarly situated v. Horry Telephone Cooperative, Inc., AT&T Corp.,
AT&T Communications, Inc., AT&T Communications of the Southern States, Inc,
and West Telemarketing Outbound Corporation (Civil Action No. 4:97-2635-12)
was filed on July 28, 1997 in the Court of Common Pleas in Horry, South
Carolina and then removed by the defendants to the United States District
Court for the District of South Carolina. Plaintiffs allege, among other
things, claims of negligent misrepresentation, fraud, breach of contract and
statutory violations in connection with offers of rate programs and long
distance services to the plaintiffs. Plaintiffs seek monetary damages,
punitive damages, attorney's fees, costs and injunctive relief.
Gilchrist, individually and on behalf of a class of all other persons
similarly situated, v. Direct American Marketers, Inc., Anthony Brown,
Integretel, Inc., Troy Eaden, Gary West, West Interactive Corporation and
Bellsouth Corporation (Civil Action File No. 197-233) was filed on August 19,
1997 in the Superior Court of Richmond County, Georgia and subsequently
removed by the defendants to the United States District Court for the Southern
District of Georgia. Troy Eaden, Chief Executive Officer and director of the
Company, and Gary West, Chairman of the Board of the Company, and West
Interactive Corporation are named defendants in the action. Plaintiff alleges
claims under the Georgia Racketeer Influenced and Corrupt Organizations Act in
connection with certain "900" number sweepstakes programs that were promoted
by Direct American Marketers, Inc. Plaintiff seeks to recover monetary
damages, together with expenses, attorney's fees and injunctive relief.
Richard Carney, et al. v. West TeleServices Corporation, West Telemarketing
Corporation, West Telemarketing Corporation Outbound, West Telemarketing
Insurance Agency, Inc., Hal Morris, Matt Mazzarella and John Erwin (Cause No.
97-CI-15780) was filed on October 31, 1997 in the 131st Judicial District
Court of Bexar County, Texas. Plaintiffs seek certification of a class
consisting of all hourly employees of West TeleServices Corporation, West
Telemarketing Corporation, West Telemarketing Corporation Outbound, and West
Telemarketing Insurance Agency, Inc. Plaintiffs allege that they were not paid
for all compensable work performed by them during their employment. Plaintiffs
seek recovery under the theories of quantum meruit, common law fraud, common
law debt, conversion, and civil theft.
I. SIGNIFICANT CUSTOMERS
For the years ended December 31, 1997 through December 31, 1995, the Company
had 20 to 24 major customers who accounted for approximately 62% to 72% of
total revenues. The Company had two customers who accounted for 25% and 12% of
total revenue for the year ended December 31, 1997, and 18% and 12% for the
year ended December 31, 1996, and one customer who accounted for 15% of total
revenue for the year ended December 31, 1995.
F-15
WEST TELESERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
J. INITIAL PUBLIC OFFERING
In November 1996, the Company completed an initial public offering of
6,555,000 shares of common stock of the Company at an offering price of $18.00
per share. The net proceeds of the offering were used to redeem approximately
$35,549 of Company notes payable, $7,253 of capital lease obligations and
$43,879 of notes payable to shareholders.
K. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is the summary of the quarterly results of operations for the
two years ended December 31:
THREE MONTHS ENDED
---------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1997 1997 1997 1997
--------- -------- ------------- ------------
Revenue....................... $95,646 $98,380 $100,493 $104,313
Net operating income.......... 18,153 13,843 14,301 12,799
Net income before income
taxes........................ 18,522 14,222 14,550 13,518
Net income.................... 11,312 8,679 8,946 8,473
Earnings per share:
Basic....................... $ 0.18 $ 0.14 $ 0.14 $ 0.13
Diluted..................... $ 0.18 $ 0.14 $ 0.14 $ 0.13
THREE MONTHS ENDED
---------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1996 1996 1996 1996
--------- -------- ------------- ------------
Revenue....................... $79,488 $74,980 $ 80,720 $ 82,022
Net operating income.......... 15,258 11,571 11,240 11,262
Net income before income
taxes........................ 14,331 10,724 10,406 10,450
Net income and net income
before pro forma income tax
expense...................... 14,118 10,558 10,155 6,867
Pro forma information:
Net income.................. 8,954 6,696 6,441 6,657
Earnings per share:
Basic....................... $ 0.17 $ 0.12 $ 0.12 $ 0.12
Diluted..................... $ 0.17 $ 0.12 $ 0.12 $ 0.11
F-16
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
West TeleServices Corporation
We have audited the consolidated financial statements of West TeleServices
Corporation and subsidiaries (the Company) as of December 31, 1997 and 1996,
and for each of the three years in the period ended December 31, 1997, and
have issued our report thereon dated February 11, 1998; such report is
included elsewhere in this Form 10-K. Our audits also included the
consolidated financial statement schedule of West TeleServices Corporation and
subsidiaries, listed in Item 14. This consolidated financial statement
schedule is the responsibility of the Company's management. Our responsibility
is to express an opinion based on our audits. In our opinion, such
consolidated financial statement schedule, when considered in relation to the
basic financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
/s/ Deloitte & Touche LLP
Omaha, Nebraska
February 11, 1998
S-1
SCHEDULE II
WEST TELESERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED VALUATION ACCOUNTS
THREE YEARS ENDED DECEMBER 31, 1997
(AMOUNTS IN THOUSANDS)
ADDITIONS-
BALANCE CHARGED TO DEDUCTIONS-
BEGINNING COST AND AMOUNTS BALANCE
DESCRIPTION OF YEAR EXPENSES CHARGED-OFF END OF YEAR
----------- --------- ---------- ----------- -----------
December 31, 1997--Allowance for
doubtful accounts................ $ 244 $1,027 $ 824 $ 447
------ ------ ------ ------
December 31, 1996--Allowance for
doubtful accounts................ $1,557 $1,279 $2,592 $ 244
------ ------ ------ ------
December 31, 1995--Allowance for
doubtful accounts................ $1,509 $2,361 $2,313 $1,557
------ ------ ------ ------
S-2
EXHIBIT INDEX
Exhibits identified in parentheses below, on file with the United States
Securities and Exchange Commission, are incorporated herein by reference as
exhibits hereto.
SEQUENTIAL
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
------- ----------- ----------
3.01 Restated Certificate of Incorporation of the Company
(Exhibit 3.01 to Registration Statement under Form S-1
(Amendment No. 2) dated November 21, 1996, File No. 333-
13991) *
3.02 Restated Bylaws of the Company (Exhibit 3.02 to
Registration Statement under Form S-1 (Amendment No. 2)
dated November 21, 1996, File No. 333-13991) *
10.01 Form of Registration Rights Agreement (Exhibit 10.01 to
Registration Statement under Form S-1 (Amendment No. 1)
dated November 12, 1996, File No. 333-13991) *
10.02 Bill of Sale & Assignment, dated October 30, 1996, from
West Telemarketing Corp. to Troy L. Eaden (Exhibit 10.02
to Registration Statement under Form S-1 (Amendment No.
1) dated November 12, 1996, File No. 333-13991) *
10.03 Purchase Agreement, dated March 14, 1996, between West
Telemarketing Corporation and Executive Jet Sales, Inc.
(Exhibit 10.03 to Registration Statement under Form S-1
(Amendment No. 1) dated November 12, 1996, File No. 333-
13991) *
10.04 1996 Stock Incentive Plan (Exhibit 10.04 to Registration
Statement under Form S-1 (Amendment No. 1) dated November
12, 1996, File No. 333-13991) *
10.05 Agreement and Plan of Reorganization (Exhibit 10.05 to
Registration Statement under Form S-1 (Amendment No. 2)
dated November 21, 1996, File No. 333-13991) *
10.06 Employment Agreement between the Company and Thomas B.
Barker dated January 1, 1996, as amended December 9, 1997 **
10.07 Employment Agreement between the Company and Michael A.
Micek dated January 1, 1996, as amended December 9, 1997 **
10.08 Employment Agreement with Troy L. Eaden (Exhibit 10.08 to
Registration Statement under Form S-1 (Amendment No. 1)
dated November 12, 1996, File No. 333-13991) *
10.09 Employment Agreement between the Company and John W.
Erwin dated January 1, 1996, as amended December 22, 1997 **
10.10 Stock Redemption Agreement, dated April 9, 1996, by and
among John W. Erwin, Gary L. West, Mary E. West and Troy
L. Eaden (Exhibit 10.11 to Registration Statement under
Form S-1 (Amendment No. 1) dated November 12, 1996, File
No. 333-13991) *
10.11 Assignment and Assumption Agreement, dated as of November
12, 1996, by and among Gary L. West, Mary E. West, Troy
L. Eaden and the Company (Exhibit 10.12 to Registration
Statement under Form S-1 (Amendment No. 2) dated November
21, 1996, File No. 333-13991) *
10.12 Personnel Company Subscription Service Agreement, dated
as of November 12, 1996, between West Telemarketing
Insurance Agency, Inc. and West Telemarketing Corporation
Outbound (Exhibit 10.13 to Registration Statement under
Form S-1 (Amendment No. 2) dated November 21, 1996, File
No. 333-13991) *
10.13 Lease, dated September 1, 1994, by and between West
Telemarketing Corporation and 99-Maple Partnership
(Exhibit 10.14 to Registration Statement under Form S-1
(Amendment No. 1) dated November 12, 1996, File No. 333-
13991) *
10.14 Employment Agreement between the Company and Michael M.
Sturgeon, dated March 17, 1997 (Exhibit 10.01 to Form 10Q
dated May 15, 1997, File No. 000-21771) *
10.15 Employee Stock Purchase Plan dated July 1, 1997 (Exhibit
10.01 to Form 10Q dated August 14, 1997, File No. 000-
21771) *
10.16 Employment Agreement between the Company and Mark V.
Lavin dated July 1, 1996, as amended December 22, 1997 **
21.01 Subsidiaries of the Company (Exhibit 21.01 to
Registration Statement under Form S-1 (Amendment No. 2)
dated November 21,1996, File No. 333-13991) *
27.01 Financial Data Schedule for the year ended December 31,
1997. *
- -------
*Indicates that the page number for such item is not applicable.
**Filed herewith
1