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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, 1998
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)
68154
11808 Miracle Hills Drive, Omaha, (Zip Code)
Nebraska
(Address of principal executive
offices)
Registrant's telephone number, including area code: (402) 963-1500
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 19, 1999, 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 19, 1999) of the voting stock
held by non-affiliates was approximately $77.34 million.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held on May 12, 1999, are incorporated into Part III.
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TABLE OF CONTENTS
PART I
Page
----
ITEM 1. BUSINESS....................................................... 3
ITEM 2. PROPERTIES..................................................... 14
ITEM 3. LEGAL PROCEEDINGS.............................................. 15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............ 17
EXECUTIVE OFFICERS OF THE REGISTRANT..................................... 17
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS....................................................... 19
ITEM 6. SELECTED FINANCIAL DATA........................................ 20
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION.......................................... 21
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..... 27
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................... 27
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.......................................... 27
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............. 28
ITEM 11. EXECUTIVE COMPENSATION......................................... 28
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. 28
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................. 28
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K...................................................... 28
SIGNATURES............................................................... 31
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 conducts its business on a fully-integrated
basis principally through three wholly-owned subsidiaries: West Telemarketing
Corporation ("Inbound"); West Telemarketing Corporation Outbound ("Outbound");
and West Interactive Corporation ("Interactive"). The Company is a leading
provider in each of inbound operator services, automated voice response
services and outbound direct teleservices. The Company was incorporated in
1994 under the laws of the State of Delaware.
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
38.6% of the Company's revenue in 1998. Automated voice response services
consist of computerized call-processing applications such as automated product
information requests, prepaid calling card services, internet services 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 25.4% of the Company's
revenues in 1998. 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 outbound teleservices organizations in the United
States and represented approximately 36.0% of the Company's revenue in 1998.
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. In
1998, 59% of the Company's revenue was derived from clients using more than
one service.
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. The Company's revenue and net income for the year
ended December 31, 1998 were $482.8 million and $46.0 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. For information regarding
the Registrants last three fiscal years, see the "Consolidated Financial
Statements" and notes thereto appearing elsewhere in this Annual Report on
Form 10-K.
The Company operated 7,624 telephone workstations as of December 31, 1998 in
21 state-of-the-art call centers located in Nebraska, Texas, Virginia,
Oklahoma, Alabama, Arkansas, Illinois, Louisiana and Nevada which it uses for
inbound and outbound services, and maintained 11,160 proprietary interactive
voice response ports as of December 31, 1998 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.
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Industry Overview
The teleservices industry facilitates direct communication between companies
and their current and prospective customers through telecommunications-based
systems. Wharton Economic Forecasting Associates ("WEFA Group") in its 1998
Economic Impact: US Direct Marketing Today forecasted that teleservices would
be the leading direct marketing medium by which approximately $482.2 billion
of goods and services would be sold via the telephone in 1998.
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. 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.
The American Teleservices Association states that nearly 100 million Americans
(one out of three) purchase goods and services over the phone each year.
Evolution of the Teleservices Industry
The teleservices industry has evolved during the past 14 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. 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. 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. Bain and Company, Inc. in
its November 1997 Teleservices Outsourcing Directory forecasted that
approximately 22% of American corporations were expected to outsource
teleservices by 2000, representing a 200% increase from 1995. Further, this
report forecasted that this portion of the teleservices market would exceed
$20 billion by 2002.
Company Strategy
The Company 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:
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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
that 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. In 1998, 77% of the Company's revenue
growth was derived from existing clients.
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.
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.
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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:
[CHART APPEARS HERE]
I. Operator Teleservices (Inbound)
Inbound provides large volume inbound 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 1998, Inbound represented approximately
38.6% of the Company's revenue. The two divisions of Inbound are Direct
Response Services and Custom Operator Services.
Direct Response Services. This division 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.
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
6
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. 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 provides 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; (vi) client satisfaction information; and (vii)
technical support. Our clients critical success factors are program specific,
such as exceeding goals for call conversion, reduced average length of call,
reduced average speed of answer, increased call quality, and successfully
resolving the customer's concerns in a single contact.
In 1998, the Custom Operator Services Division introduced the Company's new
desktop application to the call center, Agent Desktop Environment ("ADE"), a
graphical user interface based application. The ADE application uses, the same
technology that can be found on the Internet to present the agent scripting.
The application supports computer telephony integration, and allows all
transactions to be accomplished from a personal computer. A majority of the
divisions' clients have their own host applications on the Company's desktop
computer system. ADE allows integration with outside host systems, and allows
agent access to multiple systems.
II. Interactive Teleservices (Interactive)
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. Interactive was ranked as the number one
interactive teleservices company in 1997 and 1998 by Call Center Solutions
magazine. In 1998, Interactive represented approximately 25.4% 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 large volume automated voice response services which
allow a caller to access information by means of a touch-tone telephone or
voice prompt. Interactive provides automated voice response services for a
broad range of applications, which include secure automated credit card
activation, information and entertainment services, prepaid calling card
services, automated product information requests, database management and
enhancement, 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 digital switches and decentralized
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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 the technology to identify the
specific toll-free number dialed by the caller. The toll-free number will
identify the specific client campaign and directs the call to the appropriate
switches, database machines, and other 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.
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 outbound
teleservices operations in the United States. In 1996, 1997 and 1998, Outbound
was named the top outbound teleservices company by Call Center Solutions
magazine. In 1998, Outbound represented approximately 36.0% of the Company's
revenue. 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 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 and necessary 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 call
centers are served by redundant long distance and local access facilities.
Most call centers are 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. Most inbound numbers directed to a Company call center 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. Inbound and Interactive facilities also have a stand-alone primary power
systems 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
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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 1998, the Company employed an average of approximately 11,935 telephone
representatives per day for its inbound services and outbound services with
peak employment of approximately 14,147 operators per day. In addition, the
Company employed as of December 31, 1998 approximately 2,711 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 the Inbound, Interactive and Outbound divisions, 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:
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 sites, 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 in
Inbound 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 excused time.
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 Corp.'s
nationwide long distance network and has the ability to allocate call volumes
among its various inbound call centers on command assisted by sophisticated
third party routing products. Traffic control specialists within the
10
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, inbound calls are optimally directed to
available personnel which maximizes the utilization of personnel and improves
efficiency. Network control monitors the status of all inbound call-processing
activities on a minute-by-minute basis. Minor real time variances between
projected and actual calling trends are promptly entered 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. All systems provide clients with the ability to directly
interface and communicate with the Company's systems. The Company employs
approximately 782 systems analysts, programmers and technicians to modify and
enhance the Company's operating systems and to design client applications.
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 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 the live
agent divisions 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 sales and marketing plans. These
plans contain objectives and milestones which are tracked regularly throughout
the year. The sales organization is a group of sales professionals organized
by divisions who are trained to focus on specific industries and overall
client needs. The objective is to sell integrated teleservice solutions to
prospective and existing clients. Commissions are paid on both new sales and
incremental revenues generated from new and existing clients to provide the
appropriate incentives for the sales professionals. Once a client campaign is
initiated, a client services account manager is responsible for the daily
management of the campaign.
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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, internet and radio. While the Company
has various competitors for each of its divisions, the Company believes that
only a few competitors 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 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.
Reliance on Major Clients
A significant portion of the Company's revenue is generated from relatively
few clients. The loss of the largest client or a number of its largest clients
could have a material adverse effect on the Company. The Company's largest
client, AT&T Corp., accounted for approximately 33%, and the Company's 41
largest clients in the aggregate accounted for approximately 80% of the
Company's revenue in 1998. AT&T Corp. revenue was generated by over 20
different teleservices programs. The Company generally operates under
contracts with these clients which may be terminated on 30-day notice and
generally the contracts are for a term of less than one-year. Subsequent
contracts may be subject to open bidding among the Company and its
competitors.
Government Regulation
Teleservices sales practices are regulated at both the federal and state
level. The Telephone Consumer Protection Act which was enacted in 1991
authorized and directed the Federal Communications Commission (the "FCC") to
enact rules to regulate the telemarketing industry. In December 1992, the FCC
enacted rules which place restrictions on the methods and timing of
telemarketing sales calls.
The Federal Telemarketing Consumer Fraud and Abuse Act of 1994 (the "TCFAA")
authorizes the Federal Trade Commission (the "FTC") to issue regulations
designed to prevent deceptive and abusive telemarketing acts and practices.
The FTC issued its Telemarketing Sales Rule (the "TSR"), which went into
effect in January 1996. The TSR applies to most outbound telemarketing calls
and certain inbound telemarketing calls and generally prohibits a variety of
deceptive, unfair or abusive practices in telemarketing sales.
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. In general, the 900 Number Rule prescribes the
content of advertising for such services, requires that
12
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 Rule 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. As part of this rulemaking review proceeding, the FTC
has issued proposed revisions to the 900 Number Rule which, among other
things, would expand the scope of the 900 Number Rule to information services
provided through other dialing patterns, impose more stringent requirements on
the establishment of pre-subscription arrangements governing the use of toll
free numbers for pay per call services and require express verifiable
authorization from a telephone subscriber in order for purchases to be billed
to the telephone subscriber's telephone bill. The industry filed written
comments to the FTC's proposed revisions in March 1999. The FTC has scheduled
a workshop for May 1999. In addition to commenting on the FTC's proposed
changes, the industry has requested certain other reforms which would help
reduce the charge-back rates. The Company cannot predict what final
modifications to the 900 Number Rule will be implemented and what impact those
modifications will have on the Company or the industry. 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 have an impact upon the Company. In general, this 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 also 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 pre-subscription agreements now must be executed in
writing, require the use of a personal identification number (PIN), or other
identifier unique to the subscriber and provide subscribers with a choice of
the following billing methods: 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 in time when the charges begin and billing methods. There are
also corresponding disclosure requirements for soliciting pre-subscription
agreements and for consumers' billing statements.
In addition to the federal legislation and regulations, there are numerous
state statutes and regulations governing telemarketing activities which do or
may apply to the Company. For example, some states also place restrictions on
the methods and timing of telemarketing calls and require that certain
mandatory disclosures be made during the course of a telemarketing call.
The Company employees who are involved in certain types of sales activity,
such as activity regarding insurance or mortgage loans, are required to be
licensed by various state commissions or regulatory bodies and to comply with
regulations enacted by those entities.
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 scripts
provided by its clients.
The Company specifically trains its marketing representatives to handle
calls in an approved manner and believes it is in compliance in all material
respects with all federal and state regulations. 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.
13
ITEM 2. PROPERTIES
The Company operated five automated voice response facilities with 11,160
ports as of December 31, 1998 and 21 state-of-the-art call centers with 7,624
workstations as of December 31, 1998. Certain of the Company's call centers
can be used interchangeably by both Inbound and Outbound.
Inbound operates seven large volume, automated call-processing facilities
located in Nebraska, Texas, Virginia, Oklahoma, Nevada, Louisiana, and
Illinois. These facilities consist of 3,333 computer-assisted workstations. In
1998, Inbound employed an average of approximately 6,063 operators per day
with peak employment of approximately 7,834 operators per day.
Interactive operates five large volume, automated voice response facilities
located in Nebraska, Texas, Alberta (Canada), Oklahoma, and Virginia.
Interactive has a total capacity of 11,160 voice response ports. Interactive
is not a labor intensive business and employs approximately 253 managerial,
staff and administrative personnel.
Outbound operates 14 large volume, automated facilities located in Texas,
Alabama, Arkansas, Louisiana and Illinois. Outbound maintains 4,291 computer-
assisted workstations and in 1998 employed an average of 5,872 marketing
representatives per day with peak employment of approximately 6,313 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 as December 31, 1998.
14
Number of Number of
Call Centers Telephone Workstations Voice Response Ports
- ------------ ---------------------- --------------------
Inbound
Omaha, Nebraska................... 726 --
San Antonio, Texas................ 510 --
Hampton, Virginia................. 708 --
Tulsa, Oklahoma................... 435 --
Reno, Nevada...................... 318 --
Baton Rouge, Louisiana............ 364 --
Rockford, Illinois................ 272 --
Inbound Total................... 3,333 --
Interactive
Omaha, Nebraska................... -- 7,128
San Antonio, Texas................ -- 2,717
Calgary, Alberta (Canada)......... -- 391
Tulsa, Oklahoma................... -- 556
Hampton, Virginia................. -- 368
Interactive Total............... 11,160
Outbound
San Antonio, Texas................ 1,064 --
Universal City, Texas............. 640 --
El Paso, Texas.................... 594 --
Killeen, Texas.................... 252 --
Waco, Texas....................... 252 --
Lubbock, Texas.................... 252 --
Odessa, Texas..................... 117 --
McAllen, Texas.................... 120 --
Mobile, Alabama................... 378 --
Texarkana, Arkansas............... 117 --
Fayetteville, Arkansas............ 120 --
Lafayette, Louisiana.............. 151 --
Carbondale, Illinois.............. 117 --
Outbound Total.................. 4,291 --
Total......................... 7,624 11,160
The Company occupied approximately 1,070,000 square feet of office space on
December 31, 1998. All facilities described above other than the facilities
located in San Antonio, Texas (which are owned) 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. The Company moved into the corporate headquarters throughout
1998.
The Company believes that its facilities are adequate for its current
requirements and that additional space will be available as required. See Note
D to the Company's consolidated 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.
15
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. This case is currently captioned Lamar Andrews, et al.,
Plaintiff v. American Telephone & Telegraph Company, et al., Defendants, No.
CV 191-175. The seven named plaintiffs allege that they 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.
West Interactive Corporation provided interactive voice processing and other
services to one or more customers which conducted some of the programs at
issue in the litigation. The billing and collection services were provided
through AT&T and US Sprint Communication Company Limited Partnership. The
plaintiffs' second amended complaint alleges that the programs at issue
involved, among other things, acts of unlawful gambling and the collection of
illegal gambling debts, 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, the
Georgia RICO statute, and other state and federal laws. AT&T has asserted a
cross-claim against West Interactive Corporation seeking contractual and
common law indemnity and contribution. The action seeks recovery of treble
damages, punitive damages, costs and attorneys' fees. On October 2, 1998, the
court heard argument on cross-motions for summary judgment by all parties.
Those motions remain pending.
West Interactive Corporation, and Troy Eaden and Gary West, Co-Chairmen of
the Board and directors of the Company, are named as defendants in a case
filed on August 19, 1997, which is pending in the United States District Court
for the Southern District of Georgia. The case is captioned Janie 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, File
No. CV197-233. 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.
West Interactive Corporation provided interactive voice processing and other
services with regard to some of the programs. Plaintiff seeks to recover
treble damages and punitive damages, together with expenses, attorney's fees
and injunctive relief. The plaintiff filed a motion for class certification on
November 17, 1997. The court has not ruled on that motion, and no class has
been certified.
West Telemarketing Corporation Outbound is a defendant in a case filed on
July 28, 1997, entitled 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,
pending in the United States District Court for the District of South Carolina
at Civil Action No. 4:97-2635-12. West Telemarketing Corporation Outbound is
also named as a defendant in a Fourth Amended Complaint filed on October 26,
1998, in the case of Chris Bone, et al., individually and as class
representatives, vs. Horry Telephone Cooperative, Inc.; AT&T Corp.; AT&T
Communications, Inc.; AT&T Communications of Southern States, Inc.; and West
Telemarketing Outbound Corporation, which is also pending in United States
District Court for the District of South Carolina, at Civil Action No. 4:96-
3527-22. Plaintiffs in both cases allege claims of negligent
misrepresentation, fraud, breach of contract and statutory violations in
connection with offers by AT&T of rate programs and long distance services
which were allegedly either unavailable or not provided to plaintiffs. West
Telemarketing Corporation Outbound provided telemarketing services to AT&T in
connection with AT&T's marketing of its programs and services. Plaintiffs seek
monetary damages, punitive damages, attorney's fees, costs and injunctive
relief. No class has been certified in either case. The federal judge to whom
both cases are assigned has consolidated the cases and referred all issues in
both cases to the Federal Communications Commission (FCC). The judge also
stayed both cases pending the outcome of the FCC referral.
16
Richard Carney, et al. v. West TeleServices, Inc., 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.......... 53 Co-Chairman of the Board and Director
Mary E. West.......... 53 Vice Chair of the Board, Secretary and Director
Troy L. Eaden......... 36 Co-Chairman of the Board and Director
Thomas B. Barker...... 44 President, Chief Executive Officer and Director
Nancee Shannon Berger. 38 Chief Operating Officer
Michael A. Micek...... 49 Chief Financial Officer, Executive Vice President--
Finance and Treasurer
John W. Erwin......... 36 President--Direct Teleservices
Mark V. Lavin......... 40 President--Operator Teleservices
Steven M. Stangl...... 40 Executive Vice President--Interactive Teleservices
Michael M. Sturgeon... 37 Executive Vice President--Sales and Marketing
Joseph L. Bradley..... 44 Executive Vice President--Systems and Technology
Dianne K. Ferris...... 51 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.
Troy L. Eaden co-founded the Company with Mrs. West in January 1986. Mr.
Eaden has served as Co-Chairman of the Board since September 1998. He served
as the principal executive of the Company since 1989 and formally held the
title of Chief Executive Officer from March 1995 to September 1998. Mr. Eaden
was employed by WATS from May 1980 to December 1985.
17
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. Mr. Barker was promoted to President and Chief
Executive Officer in September 1998. 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.
Nancee Shannon 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. She was
promoted to Chief Operating Officer of the Company in September 1998. Before
joining Interactive, she was Senior Project Manager at Applied Communications,
Inc.
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.
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. In September 1998, Mr. Lavin was promoted to
President--Operator Teleservices. From 1991 until 1996, he held various
management positions in reservation services for Radisson Hospitality
Worldwide.
Steve M. Stangl joined Interactive in 1993 as Controller. Mr. Stangl was
promoted to Vice President of Accounting in 1996. He was promoted to Executive
Vice President of Interactive in September 1998. Before joining Interactive,
he was an audit manager with the accounting firm of Deloitte & Touche.
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.
18
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"). 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 sales prices of the Common Shares as
reported on the Nasdaq National Market.
High Low
------- -------
First Quarter of 1997........................................ $25 1/4 $12
Second Quarter of 1997....................................... $16 1/4 $12 3/8
Third Quarter of 1997........................................ $16 3/8 $12 1/2
Fourth Quarter of 1997....................................... $15 1/8 $10 1/8
First Quarter of 1998........................................ $17 3/8 $11 1/2
Second Quarter of 1998....................................... $18 1/4 $11 1/4
Third Quarter of 1998........................................ $15 1/4 $ 9 1/4
Fourth Quarter of 1998....................................... $14 1/4 $ 8 3/8
As of March 1, 1999, there were 100 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.
19
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth, for the periods on and at the dates
indicated, selected historical consolidated financial data of 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, 1998 and 1997,
and for the years ended December 31, 1998, 1997 and 1996 and Deloitte & Touche
LLP's audit report with respect thereto have been included elsewhere 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,
--------------------------------------------------------------------
1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------
(in thousands, except for per share and selected operating data)
Income Statement Data:
Revenue............... $ 482,823 $ 398,832 $ 317,210 $ 256,894 $ 186,512
Cost of services...... 256,494 220,858 180,380 146,531 102,707
Selling, general and
administrative
expenses............. 152,838 118,878 87,499 70,575 51,904
------------ ------------ ------------ ------------ ------------
Net operating income.. 73,491 59,096 49,331 39,788 31,901
Net other income
(expense)............ 1,269 1,716 (3,420) (3,389) (1,905)
------------ ------------ ------------ ------------ ------------
Net income before
income tax expense... 74,760 60,812 45,911 36,399 29,996
Actual income tax
expense.............. 28,769 23,402 4,213 828 269
Pro Forma Information
(1):
Income tax expense.. -- -- 12,950 13,130 10,900
------------ ------------ ------------ ------------ ------------
Net income.......... $ 45,991 $ 37,410 $ 28,748 $ 22,441 $ 18,827
============ ============ ============ ============ ============
Earnings per share:
Basic............. $ 0.73 $ 0.59 $ 0.52 $ 0.42 $ 0.35
Diluted........... $ 0.73 $ 0.59 $ 0.52 $ 0.42 $ 0.35
Weighted average
number of common
shares outstanding:
Basic............. 63,330 63,330 54,891 53,968 53,968
Diluted........... 63,353 63,346 54,966 53,968 53,968
Selected Operating Data:
Operating margin...... 15.2% 14.8% 15.6% 15.5% 17.1%
Number of workstations
(at end of period)... 7,624 5,931 4,440 3,158 2,228
Number of ports (at
end of period)....... 11,160 8,056 5,804 3,870 3,496
December 31,
--------------------------------------------------------------------
1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------
Balance Sheet Data:
Working Capital....... $ 70,699 $ 55,320 $ 46,169 $ 6,550 $ 5,408
Property and
equipment, net....... 144,139 111,710 70,608 45,889 30,820
Total assets.......... 326,139 282,150 238,285 123,452 88,880
Total debt............ 30,952 21,686 22,523 41,743 32,608
Stockholders' equity.. 242,208 196,217 158,879 38,229 27,179
- --------
(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.
20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The Company conducts its business principally through three wholly-owned
subsidiaries: Inbound, Interactive and Outbound. 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, the effect on financial
performance of increased competition in the teleservices industry, potential
future competition, competitive pricing for services, potential future
competing technologies and trends, dependence on technology and phone service,
dependence on the Company's labor force, reliance on major clients, the
success of new product innovations, legal proceedings and government
regulation.
Overview
The Company is a leading provider of teleservices to businesses on an
outsourced basis. The Company 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: Inbound services represented approximately 38.6% of total revenue
for the year ended December 31, 1998. Revenue for Inbound services is
primarily generated 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. Inbound services also generated revenue from
calls transferred to telemarketing representatives from interactive voice
response units. Inbound services also generated revenue by providing
assistance to clients in the design and implementation of new applications.
Interactive services represented approximately 25.4% of total revenue for
the year ended December 31, 1998. 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.
Outbound services represented approximately 36.0% of total revenue for the
year ended December 31, 1998. Revenue for Outbound services is generated on an
hourly basis at the time the marketing representatives place calls to
consumers on behalf of it clients. Outbound services also generated 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 AT&T's largest clients, 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, 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
21
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, 1998, the Company experienced
improvement in direct costs 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 in November 1996, Inbound, Interactive and
Outbound elected to be treated as "Small Business Corporations" for income tax
purposes. Under this election, all income and expense 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 subsidiary companies terminated
their Small Business Corporation status and became subject to Federal and
state income taxes. The pro forma tax provision included in the 1996 statement
of operations was calculated using the asset and liability approach for
financial accounting and reporting of income taxes and reflects the combined
Federal and state income tax rate as if the Company had been treated as a C
Corporation prior to reorganization.
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,
-------------------
1998 1997 1996
----- ----- -----
Revenue................................................. 100.0% 100.0% 100.0%
Cost of services........................................ 53.1 55.4 56.8
Selling, general and administrative expenses............ 31.7 29.8 27.6
Net operating income.................................... 15.2 14.8 15.6
Net other income (expense).............................. 0.3 0.5 (1.1)
Net income before income tax expense.................... 15.5 15.3 14.5
Actual income tax expense............................... 6.0 5.9 1.3
Pro forma income tax expense............................ -- -- 4.1
----- ----- -----
Net income and pro forma net income..................... 9.5% 9.4% 9.1%
===== ===== =====
Years Ended December 31, 1998 and 1997
Revenue: Revenue increased $84.0 million or 21.1% to $482.8 million in 1998
from $398.8 million in 1997. The increase in revenue included $19.6 million
derived from new clients and $64.4 million derived from existing clients. The
overall revenue increase is attributable to higher call volumes.
22
During the year ended December 31, 1998, the Company provided service to
more than 800 clients. Eighty percent of the Company's total revenue was
generated by 41 clients. During 1998, AT&T remained the Company's largest
client and accounted for 33% of total revenue up from 25% in 1997.
Cost of Services: Cost of services represents direct labor, telephone
expense and other costs directly related to teleservices activities. Costs of
services increased $35.6 million or 16.1% for the year ended December 31, 1998
to $256.5 million from $220.9 million for the comparable period of 1997. As a
percentage of revenue, cost of services decreased to 53.1% for 1998 compared
to 55.4% for 1997. The decreases in cost of services as a percentage of
revenue can be attributed to the Company's ability to continue to hire cost-
effective quality labor as it enters new markets through the addition of call
centers and the shift in the overall service mix from Interactive services to
more Outbound and Inbound services. Outbound and Inbound services
traditionally have lower direct costs as a percentage of revenue. Call center
additions in 1998 included Rockford, Illinois; Reno, Nevada; Baton Rouge,
Louisiana; Texarkana, Arkansas; Carbondale, Illinois; Lafayette, Louisiana;
Ft. Smith, Arkansas; McAllen, Texas and Fayetteville, Arkansas.
Selling, General and Administrative Expenses ("SG&A"): SG&A expenses
increased by $33.9 million or 28.6% to $152.8 million for the year ended
December 31, 1998, from $118.9 million in 1997. As a percentage of revenue,
SG&A expenses increased to 31.7% for the year ended December 31, 1998,
compared to 29.8% in 1997. The increase can be attributed to increased
depreciation expense and other costs associated with call center expansion and
the shift in the overall service mix from Interactive services to more
Outbound and Inbound services. Outbound and Inbound services traditionally
have higher SG&A expenses as a percentage of revenue.
Net Operating Income: Net operating income increased by $14.4 million or
24.4% to $73.5 million in 1998 from $59.1 million in 1997. As a percentage of
revenue, net operating income increased to 15.2% for the year ended December
31, 1998, compared to 14.8% in 1997, 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 income from customer notes receivable and interest expense
from short-term and long-term borrowings under credit facilities and capital
leases. Other income (expense) for the year ended December 31, 1998, totaled
$1.3 million compared to $1.7 million for 1997.
Net Income: Net income increased by $8.6 million or 22.9% for the year ended
December 31, 1998, to $46.0 million from net income of $37.4 million in 1997.
Net income includes a provision for income tax expense at a combined effective
rate of 38.5% for 1998 and 1997.
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. Cost of
services increased $40.5 million or 22.4% for the year
23
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 recorded to account for the exchange of stock of
minority shareholders in connection with the Company's 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 1996, 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.
Liquidity and Capital Resources
The Company's primary source of liquidity has been cash flow from
operations, supplemented by proceeds from notes payable, capital leases and
borrowings under its revolving bank lines of credit.
The Company has a $20.0 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 June 29, 1999. Outstanding
borrowings under this facility at December 31, 1998, were $2.0 million. The
Company's credit facility contains certain financial and other covenants,
which were met at December 31, 1998. The Company expects to renew the
unsecured revolving credit facility when it expires and believes it could
increase the amount of the facility, if needed.
The Company also has a $15.0 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. Outstanding
borrowings under this facility at December 31, 1998 were $344,000. The credit
facility expires on June 29, 1999. The Company expects to renew the revolving
bank line when it expires and believes it could increase the amount of the
facility, if needed.
24
The Company also purchased $15.2 million of furniture and telephone and
computer equipment financed through notes payable to vendors and banks and
capital leases over three years which are bearing interest from 4.6% to 6.2%.
Net cash flow from operating activities was $11.9 million for the year ended
December 31, 1998, compared to net cash flow from operating activities of
$45.1 and $61.4 million for the years ended December 31, 1997 and 1996,
respectively. The decrease was due principally to increases in accounts
receivable and other current assets resulting from growth in revenue, customer
deposits and holdbacks refunded and accounts payable paid, which was partially
offset by higher net income and depreciation.
Net cash flow used in investing activities was $43.5 million for the year
ended December 31, 1998, compared to $49.6 million and $20.6 million, for the
comparable periods of 1997 and 1996, respectively. The net cash flow used in
investing activities was primarily due to investments in call centers to
support the growth of the Company's business.
Net cash flow used in financing activities was $1.3 million for the year
ended December 31, 1998, compared to $10.8 million and $7.6 million, for the
comparable periods of 1997 and 1996, respectively. The net cash flow used in
financing activities for the year ended December 31, 1998, was due primarily
to pay off $6.0 million in long-term debt obligations offset partially by $2.7
million in cash borrowings under existing lines of credit and the net change
in the accounts receivable financing program. 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 offset by $6.8
million in cash received from the accounts receivable financing program. The
net cash flow used in financing activities for the year ended December 31,
1996, was used primarily for distributions made to the existing stockholders
to cover their tax liabilities as S Corporation stockholders and to provide a
return of capital, offsetting borrowings under the Company's credit
facilities, net of repayments.
The Company also 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
$59.8 million for the year ended December 31, 1998. Capital expenditures for
1998 consisted primarily of furniture and telephone and computer equipment
purchases. The Company projects its capital expenditures for 1999 to be
approximately $45 million to $55 million, primarily for capacity expansion and
upgrades at existing facilities and the addition of seven new call centers.
25
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. The Company or any
of its affiliates may be required to guarantee any existing or additional
credit facilities.
Impact of Year 2000 Issue
The Year 2000 Issue is a result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs having date-sensitive software may calculate "00" as 1900
instead of the desired 2000. This could result in system failure or
miscalculations causing disruptions in operation, including, among other
things, a temporary inability to process transactions, send invoices or engage
in similar normal business activities.
Based on hardware and software assessments, the Company is in the process of
modifying or replacing portions of its information and non-information
technology systems. These adaptations will prepare the Company for continued
operation beyond December 31, 1999. The Company believes that the
modifications to existing software and conversions to new hardware and
software should mitigate the impact of the Year 2000 Issue. The Company is
also in the process of validating non-information technology systems utilized
to support the Company's operations. The Company is requesting compliance data
from vendors and is modifying or replacing equipment if necessary. Internal
testing of the non-information technology systems is being conducted where
possible. However, if the modifications and the conversions are not completed,
the Year 2000 Issue could subject the Company to potential liability claims
from its customers and could have a material adverse impact on the operations
of the Company. Contingency plans are being developed and put into place to
control the impact of single point failures. A major contingency already in
place is backup power capabilities within the Company's call centers. Each
call center is equipped with both battery and generator power availability
protecting the Company in the event of local utility company failures.
The Company is communicating with all of its significant suppliers and
customers to determine the extent to which the Company is vulnerable to those
third parties' failure to remediate their own Year 2000 Issues. The Company's
current assessment is based on presently available information. However, there
can be no guarantee that the systems of other companies on which the Company's
system relies, will be converted on a timely basis, or that failure to convert
by another company, or a conversion is incompatible with the Company's
systems, would not have material adverse effect on the Company. In the event
the Company is unable to initiate phone calls or receive phone calls on behalf
of its clients, loss of revenue will result, the extent and materiality of
which would depend on the length of the time required to restore access.
The Company is utilizing both internal and external resources to reprogram
or replace incompatible hardware and software. The Company has targeted the
third quarter of 1999 to be compliant on all critical production systems and
overall completion of the year 2000 project before the end of 1999. The
Company has implemented a year 2000 test lab facility which is dedicated to
testing systems for year 2000 compliance. The test lab is designed to
replicate, as closely as possible, the Company production environments in each
of the Company's divisions, allowing testing of all systems without impacting
the production or normal development systems. The Company is also conducting
internal system testing and, where possible, external system compatibility
testing to validate operational capabilities beyond December 31, 1999.
The total cost of the year 2000 project was estimated at $5.6 million for
the Company's critical systems and is being funded through operating cash
flows. Of the total projected cost, approximately
26
$1.9 million is attributable to the purchase of new hardware and software
which is being capitalized. To date, the Company has expended $1.2 million
towards the purchase of new hardware and software. The remaining $3.7 million
is to cover personnel and non-capital expenses which will be expensed as
incurred and is not expected to have a material effect on the results of
operations. To date, the Company has expended $1.1 million of the $3.7 million
to cover personnel and non-capital expense. The costs of the project and 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
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, the effect on financial
performance of increased competition in the teleservices industry, potential
future competition, competitive pricing for services, potential future
competing technologies and trends, dependence on technology and phone service,
dependence on the Company's labor force, reliance on major clients, the
success of new product innovations, legal proceedings and government
regulation.
The Company does not use derivative financial and commodity instruments. The
Company's other financial instruments include cash and cash equivalents,
accounts and notes receivable, accounts and notes payable and long-term
obligations. The Company's cash and cash equivalents, accounts and notes
receivable and accounts and notes payable balances are generally short-term in
nature and do not expose the Company to material market risk. The Company has
$31.0 million of long-term obligations and $35.0 million of credit facilities.
At December 31, 1998, approximately $2.3 million was outstanding under these
variable rate credit facilities. Management does not believe that changes in
future interest rates on these fixed and variable rate long-term obligations
and credit facilities would have a material effect on the Company's results of
operations given the Company's currently existing obligations under such long-
term obligations and credit facilities.
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-18.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
27
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 1999 annual meeting of
stockholders to be held on May 12, 1999. 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 1999 annual meeting of
stockholders to be held on May 12, 1999. 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 1999 annual meeting of
stockholders to be held on May 12, 1999. 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 1999 annual meeting of
stockholders to be held on May 12, 1999. 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, 1998 and 1997......... F-2
Consolidated statement of operations for the years ended December 31,
1998, 1997 and 1996................................................. F-3
Combined statements of stockholders' equity for the years ended
December 31, 1998, 1997 and 1996.................................... F-4
Consolidated statements of cash flows for the years ended December
31, 1998, 1997 and 1996............................................. 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, 1998)............................................ S-2
28
(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 September 1, 1998 (Exhibit 10.01 to Form
10-Q dated November 12, 1998, File No. 000-21771)
10.07 Employment Agreement between the Company and Michael A. Micek dated
January 1, 1996, as amended September 1, 1998 (Exhibit 10.02 to Form
10-Q dated November 12, 1998, File No. 000-21771)
10.08 Employment Agreement with Troy L. Eaden dated June 30, 1991, as
amended October 1, 1998
10.09 Employment Agreement the Company and John W. Erwin dated January 1,
1996, as amended September 1, 1998 (Exhibit 10.03 to Form 10-Q dated
November 12, 1998, File No. 000-21771)
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)
29
10.14 Employment Agreement between the Company and Nancee R. Berger, dated
January 1, 1996 amended September 1, 1998 (Exhibit 10.05 to Form 10-Q
dated November 12, 1998, 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 September 1, 1998 (Exhibit 10.04 to Form 10-Q dated
November 12, 1998, File No. 000-21771)
10.17 Employment Agreement between the Company and Steven M. Stangl dated
January 1, 1996, as amended September 1, 1998 (Exhibit 10.06 to Form 10-
Q dated November 12, 1998, File No. 000-21771)
10.18 Employment Agreement between the Company and Michael M. Sturgeon, dated
March 17, 1997, as amended February 22, 1999
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)
23.01 Consent of Deloitte & Touche LLP
27.01 Financial Data Schedule for the year ended December 31, 1998
30
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
/s/ Thomas B. Barker
By: _________________________________
Thomas B. Barker
President and Chief Executive
Officer
(Principal Executive Officer)
March 31, 1999
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 Co-Chairman of the Board March 31, 1999
______________________________________ and Director
Gary L. West
/s/ Mary E. West Vice Chair of the Board March 31, 1999
______________________________________ and Director
Mary E. West
/s/ Troy L. Eaden Co-Chairman of the Board March 31, 1999
______________________________________ and Director
Troy L. Eaden
/s/ Thomas B. Barker President and Chief March 31, 1999
______________________________________ Executive Officer and
Thomas B. Barker Director (Principal
Executive Officer)
/s/ Michael A. Micek Chief Financial Officer March 31, 1999
______________________________________ (Principal Financial and
Michael A. Micek Accounting Officer)
/s/ William E. Fisher Director March 31, 1999
______________________________________
William E. Fisher
/s/ Greg T. Sloma Director March 31, 1999
______________________________________
Greg T. Sloma
31
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,
1998 and 1997 and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1998. 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, 1998 and 1997 and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1998 in conformity with generally accepted accounting
principles.
/s/ Deloitte & Touche LLP
Omaha, Nebraska
February 5, 1999
F-1
WEST TELESERVICES CORPORATION
CONSOLIDATED BALANCE SHEETS
(Amounts in Thousands Except Per Share Amounts)
December 31,
------------------
1998 1997
-------- --------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................ $ 6,928 $ 39,820
Accounts receivable, net of allowance for doubtful
accounts of $1,870 and $447............................. 98,300 64,325
Notes receivable......................................... 3,462 7,486
Accounts receivable--financing........................... 2,637 4,971
Other.................................................... 14,798 5,017
-------- --------
Total current assets................................... 126,125 121,619
PROPERTY AND EQUIPMENT:
Land and improvements.................................... 5,183 4,888
Buildings................................................ 27,746 23,059
Telephone and computer equipment......................... 124,950 97,021
Office furniture and equipment........................... 25,982 18,730
Leasehold improvements................................... 34,703 24,119
Construction in process.................................. 7,117 1,182
-------- --------
Total property and equipment........................... 225,681 168,999
Accumulated depreciation and amortization................ (81,542) (57,289)
-------- --------
Total property and equipment, net...................... 144,139 111,710
GOODWILL, net of accumulated amortization of $3,537 and
$1,853.................................................... 46,996 48,680
NOTES RECEIVABLE AND OTHER ASSETS.......................... 8,879 141
-------- --------
TOTAL ASSETS............................................... $326,139 $282,150
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable--bank...................................... $ 2,000 $ --
Notes payable--financing................................. 344 --
Accounts payable......................................... 12,857 18,948
Customer deposits and holdbacks.......................... 13,476 22,475
Accrued wages and benefits............................... 5,305 8,809
Accrued phone expense.................................... 9,052 7,228
Other current liabilities................................ 4,146 3,103
Current maturities of long-term obligations.............. 8,246 5,736
-------- --------
Total current liabilities.............................. 55,426 66,299
LONG-TERM OBLIGATIONS, less current maturities............. 22,706 15,950
DEFERRED INCOME TAXES...................................... 5,799 3,684
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............................... 157,647 157,647
Retained earnings........................................ 83,928 37,937
-------- --------
Total stockholders' equity............................. 242,208 196,217
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY................. $326,139 $282,150
======== ========
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,
----------------------------
1998 1997 1996
-------- -------- --------
REVENUE.......................................... $482,823 $398,832 $317,210
COST OF SERVICES................................. 256,494 220,858 180,380
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES..... 152,838 118,878 87,499
-------- -------- --------
NET OPERATING INCOME............................. 73,491 59,096 49,331
OTHER INCOME (EXPENSE):
Interest income................................ 3,762 3,240 2,490
Interest expense--including interest expense--
financing of $772, $320 and $1,244............ (1,627) (1,049) (4,124)
Minority interest in net income of consolidated
subsidiaries.................................. -- -- (1,359)
Other expense, net............................. (866) (475) (427)
-------- -------- --------
Net other income (expense)................... 1,269 1,716 (3,420)
-------- -------- --------
INCOME BEFORE INCOME TAX EXPENSE................. 74,760 60,812 45,911
ACTUAL INCOME TAX EXPENSE:
Current income tax expense..................... 27,340 22,392 1,701
Deferred income tax expense.................... 1,429 1,010 2,512
-------- -------- --------
Actual income tax expense.................... 28,769 23,402 4,213
-------- -------- --------
NET INCOME AND NET INCOME BEFORE PRO FORMA INCOME
TAX EXPENSE..................................... 45,991 37,410 41,698
PRO FORMA INFORMATION:
Income tax expense............................. -- -- 12,950
-------- -------- --------
Net income..................................... $ 45,991 $ 37,410 $ 28,748
======== ======== ========
EARNINGS PER COMMON SHARE:
Basic.......................................... $ 0.73 $ 0.59 $ 0.52
======== ======== ========
Diluted........................................ $ 0.73 $ 0.59 $ 0.52
======== ======== ========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:
Basic common shares............................ 63,330 63,330 54,891
Dilutive impact of potential common shares from
stock options................................. 23 16 75
-------- -------- --------
Diluted common shares.......................... 63,353 63,346 54,966
======== ======== ========
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, 1996.............. $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
Net income.......................... -- -- 45,991 45,991
---- -------- -------- --------
BALANCE, December 31, 1998............ $633 $157,647 $ 83,928 $242,208
==== ======== ======== ========
The accompanying notes are an integral part of these financial statements.
F-4
WEST TELESERVICES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in Thousands)
Years Ended December 31,
----------------------------
1998 1997 1996
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income..................................... $ 45,991 $ 37,410 $ 41,698
Adjustments to reconcile net income to net cash
flows from operating activities:
Depreciation and amortization................ 27,284 20,635 13,551
(Gain) loss on sale of equipment............. 58 238 (131)
Deferred income tax expense.................. 1,429 1,010 2,512
Minority interest............................ -- -- 1,359
Changes in operating assets and liabilities:
Accounts receivable.......................... (36,699) (19,457) (10,027)
Other assets and vendor receivables.......... (11,139) (209) (350)
Accounts payable............................. (6,091) (4,323) 1,760
Other current liabilities and accrued
expenses.................................... (637) 2,487 2,709
Income tax payable........................... 706 (2,472) 1,001
Customer deposits and holdbacks.............. (8,999) 9,813 7,322
-------- -------- --------
Net cash flows from operating activities... 11,903 45,132 61,404
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment............. (44,551) (43,852) (21,631)
Proceeds from disposal of property and
equipment..................................... 1,684 287 1,540
Issuance of notes receivable................... (6,990) (7,442) (1,550)
Proceeds from payments of notes receivable..... 6,338 1,430 1,027
-------- -------- --------
Net cash flows from investing activities... (43,519) (49,577) (20,614)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt................. -- -- 10,320
Payments of long-term obligations.............. (5,954) (17,562) (26,405)
Net change in line of credit agreement......... 2,000 -- (6,500)
Distribution to stockholders................... -- -- (81,443)
Net change in accounts receivable financing and
notes payable financing....................... 2,678 6,834 (11,281)
Proceeds from issuance of common stock, net of
expense....................................... -- -- 107,723
Payments for stock registration costs.......... -- (72) --
-------- -------- --------
Net cash flows from financing activities... (1,276) (10,800) (7,586)
-------- -------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS.......... (32,892) (15,245) 33,204
CASH AND CASH EQUIVALENTS, Beginning of period... 39,820 55,065 21,861
-------- -------- --------
CASH AND CASH EQUIVALENTS, End of period......... $ 6,928 $ 39,820 $ 55,065
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest....... $ 1,627 $ 1,381 $ 4,696
======== ======== ========
Cash paid during the period for income taxes... $ 26,366 $ 24,877 $ 702
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING
ACTIVITIES:
Acquisition of property through assumption of
long-term obligations......................... $ 15,220 $ 16,725 $ 16,297
======== ======== ========
Reduction of accounts receivable through
issuance of notes receivable.................. $ 2,724 $ 1,114 $ 61
======== ======== ========
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, 1998, 1997 and 1996
(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 located
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, pre-
paid call card services 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 agreement 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. Both Inbound and
Outbound also generate revenue by providing assistance to their clients in the
F-6
WEST TELESERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
(Dollars in Thousands Except Per Share Amounts)
design and programming of customized applications which are generally
recognized on a hourly basis at the time the services are provided.
Cost of Services--Cost of services includes labor, telephone and other
expense directly related to teleservices activities.
Selling, General and Administrative Expenses--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.
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.
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 and long-term obligations 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 and
long-term obligations.
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. 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 adjustments which may be filed within one year of the actual
transactions.
The Company obtains security deposits from certain customers, which are
refunded to the customers when the Company discontinues service to the
customers' programs.
F-7
WEST TELESERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
(Dollars in Thousands Except Per Share Amounts)
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 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 provision included in the 1996 statement
of operations was calculated using the asset and liability approach for
financial accounting and reporting of income taxes and reflects the combined
Federal and state income tax rate of the Company as if the Company had been
treated as a C Corporation prior to the reorganization.
Earnings Per Common Share--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.
Current Accounting Pronouncements--Effective January 1, 1998, the Company
adopted the provisions of Financial Accounting Standards No. 131, Disclosure
About Segments of an Enterprise and Related Information (SFAS No. 131). SFAS
No. 131 establishes standards for reporting information about the operating
segments, products and services, geographic areas and major customers of the
entity. As the requirements of SFAS No. 131 are only of a disclosure nature,
the adoption of SFAS No. 131 did not have a material impact on the Company's
financial position or results of operations. The Company operates as an
independent teleservices provider offering a full range of customized
telecommunications-based services to business clients on an outsourced basis.
The Company believes it has established a distinct competitive advantage in
its ability to offer a full range of teleservices through its operating
divisions (Inbound, Interactive and Outbound) on a fully-
F-8
WEST TELESERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
(Dollars in Thousands Except Per Share Amounts)
integrated basis. Accordingly, the Company primarily evaluates performance and
determines the allocation of resources on an entity-wide basis.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities (SFAS No. 133) which established accounting and
reporting standards for derivative instruments, including derivative
instruments that are embedded in other contracts, and for hedging activities.
SFAS No. 133 is applicable for fiscal years and quarters beginning after June
15, 1999. The Company does not believe the adoption of SFAS No. 133 will have
a material effect on the Company.
B. ACCOUNTS RECEIVABLE FINANCING PROGRAM
The Company maintains a line of credit with three participating banks in the
amount of $15,000. Outstanding borrowings totaled $344 and $-0- at December
31, 1998 and 1997, respectively. Borrowings bear interest at 1.0% below the
prime rate (actual rate 6.75% at December 31, 1998) to fund customer advances.
Substantially all current assets of WIC are pledged as collateral on the line
of credit which expires June 29, 1999. The Company had advances to Interactive
customers through their accounts receivable financing programs aggregating
$2,637 and $4,971 at December 31, 1998 and 1997, respectively. Under terms of
the programs, advances are collateralized by the customer's accounts
receivable from unrelated national billing services. The Company charges
interest at the prime rate plus 3.0% (actual rate 10.75% at December 31,
1998).
C. LONG-TERM OBLIGATIONS AND CREDIT ARRANGEMENTS
The Company has a $20,000 unsecured revolving credit facility. Advances
under the revolving credit facility bear interest at the prime rate less 1.0%
(actual rate 6.75% at December 31, 1998). The revolving credit facility
expires on June 29, 1999. Outstanding borrowings under the revolving credit
facility totaled $2,000 and $-0- at December 31, 1998 and 1997, respectively.
The Company's credit facility contains certain financial and other covenants
which contain current ratio and tangible net worth requirements and
limitations on indebtedness, among others. The financial covenants were met at
December 31, 1998.
F-9
WEST TELESERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
(Dollars in Thousands Except Per Share Amounts)
Long-term obligations consist of the following:
December 31,
---------------
1998 1997
------- -------
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................... $12,271 $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..................................... 2,000 3,151
Notes payable to bank, due in monthly installments of $176
including interest at 6.2% maturing October 28, 2001...... 5,758 --
Notes payable to vendor, due in monthly installments of $75
including interest at 5.4% maturing from November 1, 2001
to January 1, 2002........................................ 2,412 --
Capital lease obligations (See Note D)..................... 8,511 5,535
------- -------
30,952 21,686
Less current maturities:
Debt..................................................... 4,305 1,880
Capital lease obligations (See Note D)................... 3,941 3,856
------- -------
Current maturities of long-term obligations................ 8,246 5,736
------- -------
Long-term obligations...................................... $22,706 $15,950
======= =======
Substantially all assets of the Company and its direct and indirect
subsidiaries 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 excluding capital lease obligations
described in Note D, are as follows:
1999...................................... $ 4,305
2000...................................... 3,740
2001...................................... 3,079
2002...................................... 370
2003...................................... 10,947
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 on operating leases was $4,190, $2,666 and $2,158 for the years ended
December 31, 1998, 1997 and 1996, respectively, exclusive of related party
lease expense as discussed in Note E. 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.
F-10
WEST TELESERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
(Dollars in Thousands Except Per Share Amounts)
Amortization of assets purchased through capital lease agreements is included
in depreciation expense.
December 31,
----------------
1998 1997
------- -------
Assets under capital leases consist of:
Telephone and computer equipment......................... $17,012 $ 9,452
Office furniture and equipment........................... 4,097 990
Lease/building improvements.............................. 633 --
------- -------
Total cost............................................. 21,742 10,442
Accumulated depreciation................................... (5,463) (3,454)
------- -------
Net book value............................................. $16,279 $ 6,988
======= =======
Future minimum payments under non-cancellable operating and capital leases
with initial or remaining terms of one year or more, 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,
1999..................................................... $ 5,839 $4,357
2000..................................................... 5,241 2,559
2001..................................................... 4,310 2,304
2002..................................................... 3,682 --
2003..................................................... 2,822 --
2004 and thereafter...................................... 5,018 --
------- ------
Total minimum obligations.................................. $26,912 9,220
=======
Less interest at 4.6% to 9.3%.............................. 709
------
Present value of net minimum lease payments................ 8,511
Less current portion....................................... 3,941
------
$4,570
======
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,
1999................................................................ $ 820
2000................................................................ 869
2001................................................................ 921
2002................................................................ 976
2003................................................................ 1,035
2004................................................................ 717
F-11
WEST TELESERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
(Dollars in Thousands Except Per Share Amounts)
Lease expense was $773, $730 and $691 for the years ended December 31, 1998,
1997 and 1996, respectively.
Total interest expense paid to related parties in connection with notes
payable was $-0-, $-0- and $269 for the years ended December 31, 1998, 1997
and 1996, 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,
----------------------
1998 1997 1996
------- ------- ------
Current income tax expense:
Federal............................................ $24,450 $20,417 $1,079
State.............................................. 2,890 1,975 622
------- ------- ------
27,340 22,392 1,701
------- ------- ------
Deferred income tax expense:
Federal............................................ 1,088 966 2,446
State.............................................. 341 44 66
------- ------- ------
1,429 1,010 2,512
------- ------- ------
$28,769 $23,402 $4,213
======= ======= ======
A reconciliation of income tax computed at statutory tax rates compared to
actual and proforma income tax rates is as follows:
Year Ended
December 31,
-------------------
1998 1997 1996
----- ----- -----
Statutory rate.......................................... 35.00% 35.00% 35.00%
State income tax effect................................. 2.33 1.56 1.05
Other................................................... 1.15 1.92 0.26
----- ----- -----
38.48% 38.48% 36.31%
===== ===== =====
F-12
WEST TELESERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
(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 are as follows:
December 31,
-------------
1998 1997
------ ------
Deferred tax assets:
Allowance for doubtful accounts............................. $ 720 $ 162
Deferred tax liabilities:
Depreciation................................................ 5,799 3,684
------ ------
Net deferred tax liability.................................... $5,079 $3,522
====== ======
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 $1,208, $816 and $589 for the years ended December 31,
1998, 1997 and 1996, 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 generally vest over a
three to seven year period and expire ten years after grant date. 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 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 to purchase
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. All options expire ten years after the
date of the grant.
During December 1998, the Company amended all outstanding options granted.
The options to purchase the Common Shares at $15.625 were surrendered by
option holders in December of 1998 and replacement options of 5,185,700 Common
Shares with an exercise price of $9.6875 were issued including replacement
options of 44,000 Common Shares held by non-employee directors. All
replacement options retain their original vesting schedules but are subject to
a 382 day period in which exercises are prohibited. During December 1998,
additional options to purchase 1,810,000 Common Shares at $9.6875 were issued.
Twenty-five percent of the additional options vest on the first, second, third
and fourth anniversaries of January 1, 1999. All options expire ten years
after the date of the grant. No options were exercisable at December 31, 1998,
1997 and 1996.
F-13
WEST TELESERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
(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, 1998, 1997 and 1996 and the stock options
outstanding at the end of the respective fiscal years.
Stock Option Weighted Average Aggregate
Shares Exercise Price Amount
------------ ---------------- ---------
Outstanding at January 1, 1996...... -- $ -- $ --
---------- -------- --------
Granted........................... 3,601,000 18.0000 64,818
---------- -------- --------
Outstanding at December 31, 1996.... 3,601,000 18.0000 64,818
---------- -------- --------
Surrendered and replaced by plan
amendment........................ (3,601,000) 18.0000 (64,818)
Granted........................... 4,735,400 15.6375 74,050
Canceled.......................... (177,100) 15.6250 (2,767)
---------- -------- --------
Outstanding at December 31, 1997.... 4,558,300 15.6381 71,283
---------- -------- --------
Granted........................... 7,760,800 10.2726 79,724
Surrendered and replaced by plan
amendment........................ (5,185,700) 15.6361 (81,084)
Canceled.......................... (137,700) 15.6250 (2,152)
---------- -------- --------
Outstanding at December 31, 1998.... 6,995,700 $ 9.6875 $ 67,771
========== ======== ========
Shares available for future grants
at December 31, 1998............... 2,503,800
==========
The following table summarizes information about the Company's stock options
outstanding at December 31, 1998:
Weighted
Average Weighted
Stock Option Remaining Average
Exercise Shares Contractual Exercise
Price Outstanding Life in Years Price
-------- ------------ ------------- --------
$9.6875 6,995,700 9.95 $9.6875
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 National Market quoted
market price ($12 5/32 at July 1, 1998). 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
F-14
WEST TELESERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
(Dollars in Thousands Except Per Share Amounts)
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, 1998 and 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 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,
1998, 1997 and 1996.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized over the options' vesting period. Had the Company's stock
option and stock purchase plan been accounted for under Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation; 1998,
1997 and 1996 net income and earnings per share would have been reduced to the
following pro forma amounts:
Year ended December 31,
-----------------------
1998 1997 1996
------- ------- -------
Net Income:
As reported....................................... $45,991 $37,410 $28,748
Pro forma......................................... $39,885 $31,751 $28,444
Earnings per common share:
Basic as reported................................. $ 0.73 $ 0.59 $ 0.52
Diluted as reported............................... $ 0.73 $ 0.59 $ 0.52
Pro forma basic................................... $ 0.63 $ 0.50 $ 0.52
Pro forma diluted................................. $ 0.63 $ 0.50 $ 0.52
The weighted average fair value per share of options granted in 1998, 1997,
and 1996 was $3.45, $7.65 and $5.99, respectively. 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:
1998 1997 1996
---- ---- ----
Risk-free interest rate.................................... 4.7% 6.5% 6.5%
Dividend yield............................................. 0.0% 0.0% 0.0%
Expected volatility........................................ 55.0% 45.0% 40.0%
Expected life (years)...................................... 4.1 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.
F-15
WEST TELESERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
(Dollars in Thousands Except Per Share Amounts)
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. This case is currently captioned Lamar Andrews, et al.,
Plaintiff v. American Telephone & Telegraph Company, et al., Defendants, No.
CV 191-175. The seven named plaintiffs allege that they 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.
West Interactive Corporation provided interactive voice processing and other
services to one or more customers which conducted some of the programs at
issue in the litigation. The billing and collection services were provided
through AT&T and US Sprint Communication Company Limited Partnership. The
plaintiffs' second amended complaint alleges that the programs at issue
involved, among other things, acts of unlawful gambling and the collection of
illegal gambling debts, 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, the
Georgia RICO statute, and other state and federal laws. AT&T has asserted a
cross-claim against West Interactive Corporation seeking contractual and
common law indemnity and contribution. The action seeks recovery of treble
damages, punitive damages, costs and attorneys' fees. On October 2, 1998, the
court heard argument on cross-motions for summary judgment by all parties.
Those motions remain pending.
West Interactive Corporation, and Troy Eaden and Gary West, Co-Chairmen of
the Board and directors of the Company, are named as defendants in a case
filed on August 19, 1997, which is pending in the United States District Court
for the Southern District of Georgia. The case is captioned Janie 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, File
No. CV197-233. 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.
West Interactive Corporation provided interactive voice processing and other
services with regard to some of the programs. Plaintiff seeks to recover
treble damages and punitive damages, together with expenses, attorney's fees
and injunctive relief. The plaintiff filed a motion for class certification on
November 17, 1997. The court has not ruled on that motion, and no class has
been certified.
West Telemarketing Corporation Outbound is a defendant in a case filed on
July 28, 1997, entitled 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,
pending in the United States District Court for the District of South Carolina
at Civil Action No. 4:97-2635-12. West Telemarketing Corporation Outbound is
also named as a defendant in a Fourth Amended Complaint filed on October 26,
1998, in the case of Chris Bone, et al., individually and as class
representatives, vs. Horry Telephone Cooperative, Inc.; AT&T Corp.; AT&T
Communications, Inc.; AT&T Communications of Southern States, Inc.; and West
Telemarketing Outbound Corporation, which is also pending in United States
District Court for the District of South Carolina, at Civil Action No. 4:96-
3527-22. Plaintiffs in both cases allege claims of negligent
misrepresentation, fraud, breach of contract and statutory violations in
connection with offers by AT&T of rate programs and long distance services
which were allegedly either unavailable or not provided to plaintiffs. West
Telemarketing Corporation Outbound provided telemarketing services to AT&T in
connection with AT&T's marketing of its programs and services. Plaintiffs seek
monetary damages, punitive damages, attorney's fees, costs
F-16
WEST TELESERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
(Dollars in Thousands Except Per Share Amounts)
and injunctive relief. No class has been certified in either case. The federal
judge to whom both cases are assigned has consolidated the cases and referred
all issues in both cases to the Federal Communications Commission (FCC). The
judge also stayed both cases pending the outcome of the FCC referral.
Richard Carney, et al. v. West TeleServices, Inc., 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 AND SERVICE LINES
For the years ended December 31, 1998, through December 31, 1996, the
Company had 41 to 50 major customers who accounted for approximately 80% of
total revenues. The Company had one customer who accounted for 33% of total
revenue for the year ended December 31, 1998, 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.
The following is revenue by service lines for years ending December 31,
1998, 1997 and 1996:
For the Year Ending
December 31,
--------------------------
1998 1997 1996
-------- -------- --------
Inbound........................................... $186,454 $130,469 $ 92,875
Interactive....................................... 122,601 138,874 134,017
Outbound.......................................... 173,768 129,489 90,318
-------- -------- --------
Total revenue................................... $482,823 $398,832 $317,210
======== ======== ========
F-17
WEST TELESERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
(Dollars in Thousands Except Per Share Amounts)
J. 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,
1998 1998 1998 1998
-------- -------- -------- --------
Revenue................... $116,075 $118,004 $123,294 $125,450
Net operating income...... 19,985 17,570 18,013 17,923
Net income before income
taxes.................... 20,223 17,916 18,438 18,183
Net income................ 12,412 11,016 11,355 11,208
Earnings per common share:
Basic................... $ 0.20 $ 0.17 $ 0.18 $ 0.18
Diluted................. $ 0.20 $ 0.17 $ 0.18 $ 0.18
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 common share:
Basic................... $ 0.18 $ 0.14 $ 0.14 $ 0.13
Diluted................. $ 0.18 $ 0.14 $ 0.14 $ 0.13
F-18
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, 1998 and 1997,
and for each of the three years in the period ended December 31, 1998, and
have issued our report thereon dated February 5, 1999; 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.
Deloitte & Touche LLP
/S/ DELOITTE & TOUCHE LLP
Omaha, Nebraska
February 5, 1999
S-1
SCHEDULE II
WEST TELESERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED VALUATION ACCOUNTS
Three Years Ended December 31, 1998
(Amounts in Thousands)
Additions-
Balance Charged to Deductions-
Beginning Cost and Amounts Balance
Description of Year Expenses Charged-Off End of Year
----------- --------- ---------- ----------- -----------
December 31, 1998--Allowance for
doubtful accounts................ $ 447 $3,484 $2,061 $1,870
------ ------ ------ ------
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
------ ------ ------ ------
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 September 1,
1998 (Exhibit 10.01 to Form 10-Q dated November 12, 1998,
File No. 000-21771) *
10.07 Employment Agreement between the Company and Michael A.
Micek dated January 1, 1996, as amended September 1, 1998
(Exhibit 10.02 to Form 10-Q dated November 12, 1998, File
No. 000-21771) *
10.08 Employment Agreement with Troy L. Eaden dated June 30,
1991, as amended October 1, 1998 **
10.09 Employment Agreement between the Company and John W.
Erwin dated January 1, 1996, as amended September 1, 1998
(Exhibit 10.03 to Form 10-Q dated November 12, 1998, File
No. 000-21771) *
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 Nancee R.
Berger, dated January 1, 1996 amended September 1, 1998
(Exhibit 10.05 to Form 10-Q dated November 12, 1998, File
No. 000-21771) *
10.15 Employee Stock Purchase Plan dated July 1, 1997 (Exhibit
10.01 to Form 10-Q 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 September 1, 1998
(Exhibit 10.04 to Form 10-Q dated November 12, 1998, File
No. 000-21771) *
1
Sequential
Exhibit Page
Number Description Number
------- ----------- ----------
10.17 Employment Agreement between the Company and Steven M.
Stangl dated January 1, 1996, as amended September 1,
1998 (Exhibit 10.06 to Form 10Q dated November 12, 1998,
File No. 000-21771) *
10.18 Employment Agreement between the Company and Michael M.
Sturgeon, dated March 17, 1997, as amended February 22,
1999 **
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) *
23.01 Consent of Deloitte & Touche LLP **
27.01 Financial Data Schedule for the year ended December 31,
1998 **
- -------
*Indicates that the page number for such item is not applicable.
**Filed herewith
2