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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, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 000-21771
West Corporation
(Exact name of registrant as specified in its charter)
Delaware 47-0777362
(State or other jurisdiction of (IRS Employer Identification No.)
organization)
11808 Miracle Hills Drive, Omaha, Nebraska 68154
(Address of principal executive offices) (Zip Code)
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 6, 2001, 64,705,406 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 6, 2001) of the voting stock held
by non-affiliates was approximately $469.6 million.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held on May 15, 2001 are incorporated into Part III.
TABLE OF CONTENTS
PART I
Page
----
ITEM 1. BUSINESS...................................................... 3
ITEM 2. PROPERTIES.................................................... 13
ITEM 3. LEGAL PROCEEDINGS............................................. 16
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....................................... 19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.................................... 21
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.... 25
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................... 25
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE..................................... 25
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............ 26
ITEM 11. EXECUTIVE COMPENSATION........................................ 26
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT................................................... 26
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................ 26
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K..................................................... 26
SIGNATURES.............................................................. 29
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ITEM I. Business
General
West Corporation (the "Company"), formerly known as West TeleServices
Corporation, is one of the largest independent providers of outsourced
customer relationship management, or CRM, solutions in the United States. The
Company enables its clients to completely outsource a full range of services,
including processing of customer initiated contacts, automated voice response
services and direct marketing services. The Company offers its services over
the telephone and the Internet. The Company's services minimize its clients'
cost of managing their customer relationships, improve their customers'
overall experience and provide its clients an opportunity to leverage customer
data.
The Company provides CRM solutions to Fortune 500 companies, leading
Internet oriented companies and e-commerce companies. These services help its
clients acquire customers, provide customer support and generate repeat sales.
The Company operates a national network of 28 state-of-the-art customer
contact centers and seven automated voice and data processing centers
throughout North America and in India.
The Company targets clients in highly competitive industries that require
sophisticated services, including:
. communications . public utilities . consumer packaged goods
. pharmaceuticals . direct marketing . insurance
. Internet/e-commerce . financial services
The Company's management team is among the most experienced in the
industry. Each of the Company's eight executive officers has proven experience
managing the rapid growth of its business and has been with the Company on
average for more than 9 years. Over the last decade, the Company has
consistently delivered increasing revenue and profits each year. Revenue has
grown from approximately $317 million in 1996 to approximately $725 million in
2000, and net income has grown from approximately $29 million to approximately
$70 million over the same period, representing a compound annual growth rate
of approximately 23% and 25%, respectively. All the Company's growth in
revenue and earnings have been generated internally.
On December 29, 2000 the Company changed its name from West Teleservices
Corporation to West Corporation by a merger with its wholly owned subsidiary
with that name.
Industry Overview
The Company believes that growth in the outsourced CRM solutions industry
will be driven by two factors:
. the trend toward outsourcing of CRM operations to third parties which
are able to provide cost-effective, higher levels of service; and
. the increasing use of telephone and on-line media to acquire and service
customers whose expectations of immediate service and access to
extensive information have been driven by the explosive growth of the
Internet.
The Company's market is large and growing aggressively. A 2000, study by
Gartner Dataquest estimates that the business process outsourcing marketplace
is currently approximately $175 billion and expected to increase to $500
billion in 2003. The sales, marketing and customer care portion of that
marketplace is estimated to increase 27.98% from $11.3 billion in 1999 to
$38.8 billion by 2004.
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According to the January, 2001, Winterberry Group research study titled
Teleservices Industry--Multi-Channel Marketing Drives Universal Call Centers,
expenditures on teleservices were $147.7 billion in 2000--a 19% increase from
1999--and are expected to grow an average of 13% annually through 2004,
reaching $240.5 billion.
Advantages of Outsourcing CRM Solutions
Many industries, including communications, pharmaceuticals, consumer goods,
financial services and insurance, are experiencing increased competition to
attract and retain customers. 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 outsourcing CRM solutions which effectively complement other
marketing media, such as television, radio and print advertising, and enable
businesses to quantify and evaluate the effectiveness of specific marketing
expenditures.
Evolution of the Outsourced CRM Solutions Industry
The outsourced CRM solutions industry has evolved during the past 15 years
from primarily single-facility, low technology environments to large, full
service organizations with multi-location, large-volume contact centers
utilizing advanced systems. Certain independent CRM solution providers have
invested an increasing amount of capital in large-volume state-of-the-art
contact centers and advanced network technology. Larger service providers, who
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. As product and service offerings become more complex and
varied, businesses are seeking to provide greater information for consumers to
make informed purchase decisions. Moreover, businesses are increasingly
recognizing the economic benefits of expanding relationships with existing
customers through outsourcing CRM solutions, such as customer retention
campaigns.
Role of Outsourcing
Historically, businesses, have relied on in-house personnel to provide
customer sales and service. Based on discussions with its clients and
prospective clients, the Company believes that businesses are increasingly
outsourcing these activities in order to focus their internal resources on
their core competencies, to increase the productivity of their marketing
services and to reduce overall expenditures. For example, providers of
outsourced CRM solutions 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.
Description of Services
The Company is among the few CRM solution providers offering a complete
portfolio of services with an emphasis on the complex, higher margin categories
that respond to customer initiated interactions. Through December 31, 2000, the
Company provided its offerings through its three integrated divisions--Operator
Teleservices, Interactive Teleservices and Direct Teleservices.
The Operator Teleservices division provides agents who process customer
initiated transactions, such as order capture, product support and general
customer service. The Interactive Teleservices division provides technology
oriented automated voice response services for customer initiated transactions,
consisting of computerized transaction-processing programs, such as automated
product information requests,
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computerized surveys and polling and secure automated credit card activation.
The Direct Teleservices division furnishes clients with agents who provide a
premium service that includes direct marketing applications, 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 service categories.
As illustrated in the table below, over two-thirds of the Company's 2000
revenue was derived from customer initiated interactions.
Percentage
of 2000
Division Revenue
-------- ----------
Operator Teleservices......... 49%
Interactive Teleservices...... 19%
----
Customer initiated
transactions................. 68%
Direct Teleservices........... 32%
----
Total....................... 100%
Operator Teleservices
The Company offers its clients large volume transaction-processing
capabilities, including order processing, customer acquisition and customer
service applications. Customer Inter@ction Solutions, formerly Call Center CRM
Solutions Magazine, surveyed the top 50 CRM providers and the Operator
Teleservices division ranked as the third largest outsourced provider for 1999
and 2000, based upon number of minutes connected. The Company focuses on two
service offerings, Direct Response Services and Custom Operator Services.
Custom Operator Services. Many companies find it increasingly difficult to
provide high quality customer service without diverting resources from their
core businesses. The Company addresses these concerns by providing customized
solutions with dedicated agents who have extensive knowledge of a single client
and its products. The Company works closely with each client to understand its
customer contact needs and jointly develops solutions that enhance its
customers' satisfaction. Examples of such solutions include:
. customer acquisition;
. customer service;
. product support; and
. technical support.
Customers of clients initiate their interaction with Custom Operator
Services using their telephone or the Internet. Depending upon the nature of
the interaction, the customers of clients may be directed to an agent or an
automated voice response system.
The Company's performance is measured based on the critical success factors
identified by its client. These success factors are program specific, such as
response time, average length of customer interaction, average speed of
answering the customer initiated contact, quality and successful resolution of
the customer's concerns in a single transaction.
Direct Response Services. Direct Response Services focuses on maximizing the
Company's clients' sales potential and, at the same time, lowering their cost
per order. The Company's agents typically process telephone or web-based order
capture, sales lead generation, dealer referral and other information gathering
campaigns. The Company's agents are trained on a sophisticated proprietary
system that enables each of them to process transactions for all of the
Company's clients. Agents receive transactions for one of hundreds of
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different products at any given time. The Company handles transactions 24 hours
per day, 365 days per year. The Company's clients measure service quality by
the Company's ability to process a large volume of simultaneous incoming calls
and to minimize the number of calls that receive a busy signal. The transaction
volume is primarily generated from television advertisements and the Company,
therefore, handles extreme fluctuations in transaction volumes over short
periods of time.
Interactive Teleservices
The Company provides large volume automated voice response services that the
Company customizes for its clients. The Company has developed state-of-the-art
proprietary software systems and hardware platforms to service its clients. The
Company often provides these services with its other service offerings. The
Interactive Teleservices division was ranked as the number one interactive
teleservices company in each of the last four years, based on number of minutes
connected, by Customer Inter@ction Solutions.
The use of this automated system enhances the Company's other service
offerings by processing routine customer transactions while routing the more
complicated customer interaction to an appropriate agent. This results in a
cost-effective solution for the client.
Examples of such applications include:
. secure automated credit card activation;
. prepaid calling card services;
. automated product information requests;
. frequently asked questions, or FAQs; and
. routing and call transfer services.
The Interactive Teleservices division strives to remain on the leading edge
of technology by incorporating new functions such as common language speech
recognition. The Company currently maintains approximately 50,500 voice
response ports for simultaneous transaction processing.
Direct Teleservices
The Company offers direct marketing services, including product sales,
customer acquisition and retention campaigns. In each of the last five years,
the Direct Teleservices division has been named the top outbound direct
marketing company, based on number of minutes connected, by Customer
Inter@ction Solutions. Direct Teleservices focuses exclusively on providing
direct marketing services for leading brand products. The Company focuses on
two service offerings, Consumer Direct Services and Business Direct Services.
Consumer Direct Services. Consumer Direct Services provides business-to-
consumer marketing services. Client applications include: product sales,
product registration, customer acquisition and retention campaigns, sales lead
generation and database enhancement.
The Company contacts consumers identified by its client as existing or
potential customers. Integrated call processing systems using large-scale
predictive dialers systematically call these consumers and transfer successful
connections to a designated agent. As a call is presented to the agent, the
consumer's name, address and other available information are simultaneously
presented along with the client's customized script.
Business Direct Services. Business Direct Services 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 increase the Company's clients' databases of information about their
current and prospective 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.
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Company Strategy
The Company aims to remain a leading full-service provider of voice and
Internet solutions. The Company's strategy is to offer a fully integrated
portfolio of services that is customized to address each client's unique needs
and that continues to improve the quality and cost-effectiveness of its
clients' customer service and marketing operations. The Company strives to
implement this strategy through the following:
I. Build Long-Term Client Relationships by Providing Quality Services
The Company believes that service quality is a critical factor in a
potential client's decision to outsource its customer service and sales
functions. The Company differentiates the quality of its services through its
ability to:
. quickly respond to new client programs;
. efficiently address staffing needs;
. effectively employ operating systems that can process client campaign
data; and
. provide meaningful reports.
The Company provides premium quality services through an extensive training
program and an experienced management team. The Company believes that the
quality of its service is one of its competitive advantages.
The Company's focus is on developing long-term client relationships. In
2000, 85% of the Company's revenue growth was derived from existing clients.
The Company develops a detailed understanding of each of its clients'
specialized business requirements to more effectively manage interaction with
its clients' current and prospective customers. This process enables the
Company to create customized solutions that consistently meet and exceed the
Company's clients' needs, minimizing client turnover. As a result, the Company
is better positioned to cross-sell its services and proactively offer new
applications. The Company's top 10 clients have been using its services for an
average of seven years.
II. Provide Fully Integrated Service Solutions
The Company develops customized and integrated service solutions that
incorporate all of its resources. The Company integrates its service offerings
by using its voice and data networking technology and its software systems and
hardware platforms. The Company also designs and implements highly flexible
applications, combining the large volume capacity of automated voice response
with its specialized agent services. Customer follow-up can also be coordinated
through Direct Teleservices. This integration of its services provides a cost-
effective, comprehensive solution for the client and increases the
effectiveness of its agents.
The Company believes that its integrated services give it a significant
competitive advantage. By cross-selling integrated services, the Company has
been able to capture an increasing share of its clients' outsourced business.
The Company currently generates over 60% of its revenue from clients that use
two or more of its service offerings.
III. Manage Profitable Growth through Recurring and Large Volume Programs
The Company has established a strong track record of successfully managing
large volume client programs. The Company manages its growth by targeting
clients with large volume programs where it has both technological and
personnel expertise. For example, the Company's prepaid calling card platform
processed over six billion minutes in 2000, up from approximately 95 million
minutes in 1997. As a result, the Company's business is more predictable and
the Company can maintain consistent revenue streams. The Company selects
growth-oriented clients who need customized applications, which often leads to
long-term relationships.
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IV. Capitalize on State-of-the-Art Technology
The Company's state-of-the-art technology enables it to offer premium
quality, flexible and cost-effective service solutions tailored to each
client's needs. The Company believes its significant and continuing investment
in sophisticated contact center technology provides a competitive advantage.
The Company currently employs approximately 780 information technology
professionals to modify and enhance its operating systems and to design client
programs. Examples of the Company's technology include:
. computer/telephone and Internet protocol (IP) systems integration;
. proprietary contact management software systems;
. proprietary interactive voice response technology including Advanced
Speech Recognition;
. high speed, fault-tolerant computer systems; and
. proprietary staffing and scheduling.
The Company continually strives to improve its technological capabilities.
V. Leverage Strong Management Experience
The Company believes it has distinguished itself through its ability to
attract and retain some of the most talented managers in the outsourced CRM
industry. The Company's management team possesses extensive experience. Each of
the Company's eight executive officers has proven experience profitably
managing the rapid growth of its business and has been with the Company, on
average, for more than nine years. The members of the management team have
continued to contribute to the development of the industry. The Company's
management team has delivered consistently increasing revenue and profits since
inception in 1986.
Contact Management Systems
The Company specializes in processing large and recurring volumes on behalf
of its clients. The Company's ability to consistently staff and manage its
agents, across geographically dispersed contact centers, is critical to
providing premium quality service. The Company applies standardized practices
in all contact centers to ensure uniform quality of service. The Company
maintains strong centralized control to assure rigorous adherence to the
Company's management practices, including quality assurance, and to provide
daily staffing plans for each individual site.
The Company continuously evaluates the performance of its agents to ensure
that the Company achieves its internal and its clients' quality standards. The
Company's testing includes monitoring of the agent/consumer contacts. In
addition, the Company measures its performance against objective standards such
as average handle time, average response time, sales per hour and conversion
percentages. The Company encourages its clients to participate in all aspects
of the quality assessment.
The Company's multiple remote sites present unique challenges in delivering
consistent premium quality service. The Company's Network Control Center, based
in Omaha, Nebraska which operated 24 hours a day, 365 days a year, uses both
internal and external systems to effectively create and operate this remote
site environment. The Company allocates transactions based upon agent
availability for all contact centers servicing customer-initiated transactions,
and can remotely adjust staffing requirements based upon projected volume. The
Network Control Center is in constant communication with the site operations
personnel to ensure efficient use of the available personnel and to maximize
utilization of assets. During times of unexpected events, such as weather-
related situations, the Company can immediately react and, whenever possible,
redirect transactions to an unaffected site to satisfy the Company's clients'
business needs.
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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.
The Operator Teleservices division utilizes redundant network architecture,
which substantially reduces the possibility of a system failure and the
interruption of telecommunications service. Most contact 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 telephone numbers
directed to a Company contact 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.
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. The Operator Teleservices and Interactive Teleservices divisions'
facilities also have stand-alone primary power systems which includes 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. Operators receive professional training lasting from
four to 21 days, depending upon the client's program and the nature of the
services being provided. In addition to training designed to enhance job
performance, employees are also given a detailed description of the Company's
organizational structure, standard operating procedures and business
philosophies.
In 2000, the Company employed an average of approximately 21,200 agents per
day for its agent contact services with peak employment of approximately 24,500
agents per day. In addition, the Company employed, as of December 31, 2000,
approximately 3,000 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 transaction
volumes. The Company works closely with its clients to accurately project
future transaction volumes. The Company uses the following practices to
efficiently manage its transaction volumes:
Historical Trends Analyses. The Company tracks weekly, daily and hourly
trends for individual client programs for Operator Teleservices, Interactive
Teleservices and Direct Teleservices. The Company believes
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that the key to a cost efficient CRM solutions program begins with the
effective planning of future 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 volumes during the past
ten years, it has accumulated the data necessary to differentiate the
transaction patterns of different applications such as order capture, lead
generation and customer service.
Forecasting Call Volumes/Establishing Production Plans. Volumes in Operator
Teleservices are forecasted for each one-half hour increment for each day.
Detailed assumptions are made regarding average handle time, average wait time,
average speed of answer and service level targets to determine the actual
number of transactions 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. Agents are given regular work schedules that are designed to
coincide with anticipated transaction 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 volume
projections fluctuate. 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
volumes among its contact centers. Each contact center receives a detailed plan
outlining the projected volumes for each day of the week and each 30 minute
increment of each day. Personnel schedules are produced to optimally match the
projected volumes.
Network Control. The Company interfaces directly with the nationwide long
distance network of AT&T Corp. ("AT&T") and has the ability to allocate volumes
among its various Operator Teleservices call centers on command with the
assistance of sophisticated third party routing products. Traffic control
specialists within the Company are responsible for comparing actual volumes and
trends to stated staffing and scheduling plans. When necessary, adjustments can
be made to fine tune minor variances between actual volumes and personnel that
have been scheduled by facility. As a result, Operator Teleservices
transactions are optimally directed to available personnel which maximizes the
utilization of personnel and improves efficiency. Network control monitors the
status of all Operator Teleservices processing activities on a minute-by-minute
basis. Minor real time variances between projected and actual trends are
promptly entered into the Company's database and the transaction management
cycle repeats.
Technology/Systems Development
The Company's software and hardware systems, as well as its network
infrastructure, are designed to offer high-quality and integrated solutions.
The Company has made significant investments in reliable hardware systems. The
Company also integrates commercially available software when appropriate.
Because its technology is client focused, the Company also relies on
proprietary software systems to customize its services.
The Company's significant achievements include:
. development of sophisticated data collection tools and data warehousing
systems to analyze and measure the success of clients' programs;
. design of a proprietary system that web-enables its workstations,
enhancing its agents' effectiveness in interacting with its clients'
customers; and
. development of a proprietary, state-of-the-art workforce management and
scheduling system.
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The Company's network facilities and systems are designed to maximize system
in-service time and minimize the possibility of failure. The Company's
infrastructure is designed to reduce the possibility of system or site downtime
or interruption of the telecommunications service.
All software systems and hardware platforms for Operator Teleservices,
Interactive Teleservices and Direct Teleservices 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 currently employs approximately 780 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 shadow-monitor and evaluate the
performance of agents to confirm that clients' programs are properly
implemented using clients' approved scripts and that the agents meet clients'
customer service standards. The Company regularly measures the quality of its
services by reviewing such variables as average handle time, volume, average
speed of answer, sales per hour, rate of 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 agent-
based divisions that are responsible for the overall quality of the services
being provided. A comprehensive performance appraisal is typically given to
every agent 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 agents who may need additional
training.
Sales and Marketing
The Company's sales and marketing strategy focuses on leveraging the
Company's 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
potential new clients with aggressive growth objectives and premium brands in
industries that face increased competition. The company can offer clients cost
effective solutions on an outsourced basis to help companies acquire, retain
and grow their customer relationships.
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
division who are trained to focus on specific industries and overall client
needs. The objective is to sell integrated 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.
Competition
The outsourced CRM solution provider industry is highly fragmented and
competitive. Some competitors in this industry are starting to provide
integrated Internet services with their current service offerings. The
Company's competitors range from very small firms, catering to specialized
programs and short-term projects, to large independent firms. The Company also
competes with the in-house operations of many existing clients and potential
clients. The Company believes that only a few competitors have the capability
to provide fully integrated outsourced CRM solutions. The principal competitive
factors in this industry are:
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quality of service, range of service offerings, flexibility and speed of
implementing customized solutions to meet clients' needs, capacity, industry-
specific experience, 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, patent,
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.
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, accounted for approximately 28% of the Company's revenue in 2000,
and the Company's 34 largest clients in the aggregate accounted for
approximately 80% of the Company's revenue in 2000. The Company generally
operates under contracts with these clients which may be terminated on 30 days'
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 direct teleservices telemarketing calls
and certain operator teleservices telemarketing calls and generally prohibits a
variety of deceptive, unfair or abusive practices in telemarketing sales. The
FTC has initiated administrative rulemaking proceedings to review and possibly
revise the TSR. The Company cannot predict whether any modifications will be
made to the TSR, and, if so, what impact such revisions would have on the
Company or its industry.
The FTC has also adopted regulations governing pay per call services (the
"900 Number Rule") pursuant to the Telephone Disclosure and Dispute Resolution
Act passed by Congress in 1992. In general, the 900 Number Rule prescribes the
content of advertising for such services, requires that certain introductory
disclosures be made (at no charge to the caller) and provides for the manner
and content of billing and collection for such services. The FCC supplements
this regulation by requiring that common carriers assign a telephone number to
a provider of interstate pay per call services and offer billing and collection
services to such a provider to assure compliance with the 900 Number Rule. In
March 1997, the FTC initiated a 900 Number 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
12
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 held a
workshop in 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. Some
states also require that telemarketers register in the state before conducting
telemarketing business in the state.
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 in these instances, the Company relies on its
clients and their advisors to develop the scripts to be used by the Company in
making consumer solicitations on behalf of its clients. 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 telemarketing 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.
ITEM 2. PROPERTIES
The Company operated seven automated voice response facilities with 50,573
ports as of December 31, 2000 and 28 state-of-the-art customer contact centers
with 10,147 workstations as of December 31, 2000.
As of December 31, 2000, Operator Teleservices operated 12 large volume,
automated customer contact facilities located in Nebraska, Texas, Virginia,
Oklahoma, Nevada, Louisiana, Alabama, Illinois, Pennsylvania
13
and Mumbai, India. These facilities consisted of 5,636 computer-assisted
workstations. During 2000, Operator Teleservices employed an average of
approximately 11,500 agents per day with peak employment of approximately
12,900 agents per day.
As of December 31, 2000, Interactive Teleservices operated seven large
volume, automated voice and data processing centers located in Nebraska, Texas,
Oklahoma, Louisiana, Colorado, Virginia, and Alberta, Canada. As of December
31, 2000, Interactive Teleservices had a total capacity of 50,573 voice
response ports. Interactive teleservices is not a labor-intensive business and
employed approximately 280 managerial, staff and administrative personnel as of
December 31, 2000.
As of December 31, 2000, Direct Teleservices operated 16 large volume,
automated facilities located in Texas, Alabama, Arkansas, Louisiana, Georgia,
Florida and Illinois. Direct Teleservices maintained 4,511 computer-assisted
workstations and in 2000 employed an average of 9,700 agents per day with peak
employment of approximately 11,600 agents per day.
14
The following table summarizes the location of and the number of telephone
workstations at each of the Company's call centers for each of Operator
Teleservices, Interactive Teleservices and Direct Teleservices as of December
31, 2000.
Number of
Computer- Number of
Call Centers Assisted Workstations Voice Response Ports
- ------------ --------------------- --------------------
Operator Teleservices
Omaha, Nebraska.................... 1,158 --
San Antonio, Texas................. 600 --
Hampton, Virginia.................. 708 --
Tulsa, Oklahoma.................... 568 --
Reno, Nevada....................... 322 --
Baton Rouge, Louisiana............. 564 --
Rockford, Illinois................. 272 --
Dothan, Alabama.................... 224 --
Oklahoma City, Oklahoma............ 243 --
Erie, Pennsylvania................. 448 --
Huntsville, Alabama................ 429 --
Mumbai, India...................... 100 --
------
Operator Teleservices Total...... 5,636 --
------
Interactive Teleservices
Omaha, Nebraska.................... -- 22,580
San Antonio, Texas................. -- 2,712
Calgary, Alberta, Canada........... -- 391
Tulsa, Oklahoma.................... -- 940
Baton Rouge, Louisiana............. -- 480
Denver, Colorado................... -- 22,726
Hampton, Virginia.................. -- 744
------
Interactive Teleservices Total... -- 50,573
------
Direct Teleservices
San Antonio, Texas................. 796 --
Universal City, Texas.............. 682 --
El Paso, Texas..................... 582 --
Killeen, Texas..................... 258 --
Waco, Texas........................ 252 --
Lubbock, Texas..................... 284 --
Odessa, Texas...................... 117 --
McAllen, Texas..................... 209 --
Mobile, Alabama.................... 371 --
Texarkana, Arkansas................ 159 --
Ft. Smith, Arkansas................ 119 --
Fayetteville, Arkansas............. 150 --
Lafayette, Louisiana............... 159 --
Carbondale, Illinois............... 117 --
Tallahassee, Florida............... 124 --
Hinesville, Georgia................ 132 --
------
Direct Teleservices Total........ 4,511 --
------
Total.......................... 10,147 50,573
====== ======
15
The Company occupied approximately 1,338,000 square feet of office space at
December 31, 2000. The Mumbai, India location is operated under a three year
contract. Upon expiration of the contract the Company has an option to buy the
contact center and related assets. All of the other facilities described above
other than the facilities located in San Antonio, Texas and Carbondale,
Illinois (which are owned) are leased. The Company also owns 125,000 square
feet of office space in a corporate headquarters building in Omaha, Nebraska.
The Company believes that its facilities are adequate for its current
requirements and that additional space will be available as required. See the
Notes to the Company's Consolidated Financial Statements included elsewhere in
this Annual Report on Form 10-K 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 or cash flows.
Richard Carney, et al. v. West TeleServices, Inc., et al. 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
the Company, Inbound, 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.
A partial summary judgment was granted to the defendants on March 8, 2000 on
breach of express contract and civil theft and on all claims against the
individual defendants. On May 12, 2000, the court certified a class of
plaintiffs and other similarly situated hourly employees of the Company and
several of its subsidiaries that allege they had not been paid for all
compensable work performed during their employment. On July 7, 2000, defendants
filed a brief for an interlocutory appeal of the certification order. On
November 1, 2000, the San Antonio Court of Appeals reversed and remanded the
certification order back to the district court for further proceedings. The
plaintiffs also amended their petition to allege on quantum meriut as a theory
of recovery. On November 21, 2000, the district court entered an order
modifying its May 12, 2000 order granting class certification. The Company
filed a notice of appeal of the amended order, which remains pending. No claims
remain in the lawsuit that allow for an award of punitive damages under Texas
law.
Glenn K. Jackson and Elsie Jackson v. West Telemarketing Corporation
Outbound and Does 1 through 100, inclusive, was filed in the United States
District Court for the Central District of California (No. CV-97-8281 TJH
(AIJx)), on August 12, 1997, and transferred to the United States District
Court for the Northern District of Texas, Dallas Division, where it is pending
(Civil Action No. 3:98-CV-0960-H). The complaint contains several causes of
action, all of which deal with the purchase by the Company's subsidiary, West
Telemarketing Corporation Outbound ("Outbound"), of two pieces of property from
the Resolution Trust Corporation ("RTC") during 1993 and 1994. The plaintiffs
contend that they also bid on the property, that Outbound learned the amount of
their bids, used that information to out-bid them and, ultimately, purchased
the property. The complaint seeks general damages, special damages, equitable
injunctive and restitutionary relief, including restitution of the property
involved, punitive damages, attorneys' fees, and litigation costs. On November
19, 1999, the Company's motion for summary judgment was granted in full. On
December 9, 1999, the plaintiffs appealed this summary judgment order to the
U.S. Fifth Circuit Court of Appeals for the Fifth Circuit. Plaintiffs filed
their brief on April 12, 2000 and the defendants filed their brief on June 16,
2000. The Court heard oral argument on December 6, 2000, but has not yet ruled.
A ruling is expected in the first half of 2001.
16
Outbound is a defendant in three cases which have been consolidated into one
proceeding entitled Bone, Zarella, et al. individually and on behalf of a class
of all other persons similarly situated vs. 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. The plaintiffs
in these cases alleged they were marketed AT&T long distance calling plans, and
did not receive the full benefits of the marketed plans. Outbound provided
telemarketing services to AT&T in connection with AT&T's marketing of these
plans. The Federal judge referred the consolidated case to the FCC, and on
March 10, 2000, the plaintiffs filed a Motion Seeking Conditional Certification
of the Settlement Class, Preliminary Approval of a Settlement, and Approval and
Order for Class Notice to be Given. Outbound and the co-defendants concurred in
the motion. On March 23, 2000, the Federal judge approved the plaintiffs'
motion and conditionally certified a class settlement and preliminarily
approved the settlement. Under the proposed settlement AT&T will pay the entire
settlement amount and neither Outbound nor the Company will be responsible for
any such costs. On November 9, 2000, the court held that the settlement was
fair and reasonable and the settlement was approved. Outbound has been released
from all class action claims.
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..................... 55 Chairman of the Board and Director
Mary E. West..................... 55 Vice Chair of the Board, Secretary and
Director
Thomas B. Barker................. 46 President, Chief Executive Officer and
Director
Nancee Shannon Berger............ 40 Chief Operating Officer
Michael A. Micek................. 51 Chief Financial Officer and Treasurer,
Executive Vice President--Finance
Michael E. Mazour................ 40 Executive Vice President--Direct
Teleservices
Mark V. Lavin.................... 42 President--Operator Teleservices
Steven M. Stangl................. 42 President--Interactive Teleservices
Michael M. Sturgeon.............. 39 Executive Vice President--Sales and
Marketing
Jon R. Hanson.................... 34 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 with that company until December
1985. In January 1986, she founded the Company. Mrs. West has served as Vice
Chair of the Company since 1987. Mrs. West and Mr. West are wife and husband.
Thomas B. Barker joined the Company in 1991 as Executive Vice President of
Interactive Teleservices. 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.
Nancee Shannon Berger joined Interactive Teleservices in 1989 as Manager of
Client Services. Ms. Berger was promoted to Vice President of Interactive
Teleservices in May 1994. She was promoted to Executive Vice President of
Interactive Teleservices 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.
17
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.
Michael E. Mazour joined the Operator TeleServices division in 1987 as
Director--Data Processing Operations. In 1990, Mr. Mazour was promoted to Vice
President--Information Services of the Company's Direct TeleServices division
and again to Senior Vice President--Client Operations in 1995. In 1997,
Mr. Mazour was promoted to Executive Vice President--Direct TeleServices and in
July 2000, Mr. Mazour assumed full operations responsibility for this division.
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 Teleservices in 1993 as Controller. Mr.
Stangl was promoted to Vice President of Accounting in 1996. He was promoted to
Executive Vice President of Interactive Teleservices in September 1998. Mr.
Stangl was promoted to President in September 2000.
Michael M. Sturgeon joined the Company in 1991 as a National Account
Manager--Interactive Teleservices. In September 1994, Mr. Sturgeon was promoted
to Vice President of Sales and Marketing--Interactive Teleservices. In March of
1997, Mr. Sturgeon was promoted to Executive Vice President--Sales and
Marketing for the Company.
Jon R. (Skip) Hanson joined the Company in 1991 as a Business Analyst. Mr.
Hanson was promoted to Vice President, Corporate Administrative Services in
June 1996. In October 1999, he was promoted to Chief Administrative Officer and
Executive Vice President--Administrative Services.
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 "WSTC." 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.
1999 High Low
---- -------- --------
First Quarter.............................................. $12.25 $ 8.50
Second Quarter............................................. $10.625 $ 7.375
Third Quarter.............................................. $12.625 $ 8.375
Fourth Quarter............................................. $25.00 $11.625
2000
----
First Quarter.............................................. $26.3125 $18.25
Second Quarter............................................. $27.75 $21.0625
Third Quarter.............................................. $25.25 $22.00
Fourth Quarter............................................. $30.00 $18.125
As of March 6, 2001, there were 66 holders of record of Common Shares and
approximately 2,000 beneficial shareholders. As of the same date, there were a
total of 64,807,743 Common Shares issued and 64,705,406 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.
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 the Company. The
selected consolidated historical financial data has been derived from the
audited historical consolidated financial statements of the Company. The
Company's consolidated financial statements as of December 31, 2000 and 1999,
and for the years ended December 31, 2000, 1999 and 1998 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.
19
Year ended December 31,
------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(in thousands, except for per share and
selected operating data)
Income Statement Data:
Revenue..................... $724,505 $562,444 $482,823 $398,832 $317,210
Cost of services............ 371,549 288,503 256,494 220,858 180,380
Selling, general and
administrative expenses.... 243,573 194,610 152,838 118,878 87,499
-------- -------- -------- -------- --------
Net operating income........ 109,383 79,331 73,491 59,096 49,331
Other income (expense)...... 1,539 1,027 1,269 1,716 (3,420)
-------- -------- -------- -------- --------
Income before income tax
expense.................... 110,922 80,358 74,760 60,812 45,911
Actual income tax expense... 40,663 30,604 28,769 23,402 4,213
Pro Forma Information (1):
Income tax expense......... -- -- -- -- 12,950
-------- -------- -------- -------- --------
Net income.................. $ 70,259 $ 49,754 $ 45,991 $ 37,410 $ 28,748
======== ======== ======== ======== ========
Earnings per share:
Basic...................... $ 1.10 $ 0.79 $ 0.73 $ 0.59 $ 0.52
Diluted.................... $ 1.03 $ 0.77 $ 0.73 $ 0.59 $ 0.52
Weighted average number of
common shares outstanding:
Basic...................... 64,043 63,330 63,330 63,330 54,891
Diluted.................... 67,950 64,380 63,353 63,346 54,966
Selected Operating Data:
EBITDA (2).................. $154,756 $117,019 $ 99,909 $ 79,256 $ 61,096
EBITDA margin (3)........... 21.4% 20.8% 20.7% 19.9% 19.3%
Operating margin (4)........ 15.1% 14.1% 15.2% 14.8% 15.6%
Net income margin (5)....... 9.7% 8.9% 9.5% 9.4% 9.1%
Net cash flows from
operating activities....... 111,050 114,221 11,903 45,132 61,404
Number of workstations (at
end of period)............. 10,147 8,364 7,624 5,931 4,440
Number of ports (at end of
period).................... 50,573 33,476 11,160 8,056 5,804
As of December 31,
------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
Balance Sheet Data:
Working capital............. $151,006 $104,427 $ 70,699 $ 55,320 $ 46,169
Property and equipement,
net........................ 197,178 167,934 144,139 111,710 70,608
Total assets................ 553,907 408,989 326,139 282,150 238,285
Total debt.................. 41,355 45,196 30,952 21,686 22,523
Stockholders' equity........ 378,125 291,962 242,208 196,217 158,879
- --------
(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.
(2) "EBITDA" is defined as income before income taxes, depreciation, interest
expense and amortization. EBITDA is not intended to represent cash flow
from operations as defined by generally accepted accounting principles and
should not be considered as an alternative to net income as an indicator
of operating performance or to cash flows as a measure of liquidity.
EBITDA is presented as the Company understands that certain investors use
it as one measure of a borrower's historical ability to service its debt.
(3) Represents EBITDA as a percentage of revenue.
(4) Represents net operating income as a percentage of revenue.
(5) Represents net income as a percentage of revenue.
20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Company conducts its business principally through three integrated
divisions: Operator Teleservices, Interactive Teleservices and Direct
Teleservices. 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 outsourced CRM solutions 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 outsourced CRM solutions to businesses.
The Company believes it has established a distinct competitive advantage in its
ability to offer a range of integrated services through its three operating
divisions (Operator Teleservices, Interactive Teleservices and Direct
Teleservices) on a fully integrated basis.
Revenue: Operator Teleservices services represented approximately 49.0% of
total revenue for the year ended December 31, 2000. Revenue for Operator
Teleservices 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. Operator Teleservices services
also generates revenue from calls transferred to agents from interactive voice
response units and by providing assistance to clients in the design and
implementation of new applications.
Interactive Teleservices services represented approximately 19.2% of total
revenue for the year ended December 31, 2000. Revenue for Interactive
Teleservices services is primarily generated at the time calls are received or
sent by automated voice response units and is billed based on call duration.
Direct Teleservices services represented approximately 31.8% of total
revenue for the year ended December 31, 2000. Revenue for Direct Teleservices
services is generated generally on an hourly and success based rate basis at
the time the agents place calls to consumers on behalf of clients. Direct
Teleservices services also generate revenue by providing assistance to 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 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
21
markets which offer attractive labor market characteristics for its Operator
Teleservices and Direct Teleservices 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.
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.
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,
-------------------------
2000 1999 1998
------- ------- -------
Revenue.............................................. 100.0% 100.0% 100.0%
Cost of services..................................... 51.3 51.3 53.1
Selling, general and administrative expenses......... 33.6 34.6 31.7
Net operating income................................. 15.1 14.1 15.2
Other income (expense)............................... 0.2 0.2 0.3
Income before income tax expense..................... 15.3 14.3 15.5
Income tax expense................................... 5.6 5.4 6.0
------- ------- -------
Net income........................................... 9.7% 8.9% 9.5%
======= ======= =======
Years Ended December 31, 2000 and 1999
Revenue: Revenue increased $162.1 million or 28.8% to $724.5 million in 2000
from $562.4 million in 1999. The increase in revenue included $23.8 million
derived from new clients and $138.3 million derived from existing clients. The
overall revenue increase is attributable to higher call volumes.
During the year ended December 31, 2000, the Company provided service to
more than 900 clients. Eighty percent of the Company's total revenue was
generated by 34 clients. During 2000, AT&T remained the Company's largest
client and accounted for 28% of total revenue, down from 32% in 1999.
Cost of Services: Cost of services represents direct labor, telephone
expense and other costs directly related to services activities. Costs of
services increased $83.0 million or 28.8% for the year ended December 31, 2000
to $371.5 million from $288.5 million for the comparable period of 1999. As a
percentage of revenue, cost of services was 51.3% for 2000 and 1999.
Selling, General and Administrative Expenses ("SG&A"): SG&A expenses
increased by $49.0 million or 25.2% to $243.6 million for the year ended
December 31, 2000, from $194.6 million in 1999. As a percentage of revenue,
SG&A expenses decreased to 33.6% for the year ended December 31, 2000, compared
to 34.6% in 1999. The decrease can be attributed to higher than expected sales
and management's focus on reducing these costs.
Net Operating Income: Net operating income increased by $30.1 million or
38.0% to $109.4 million in 2000 from $79.3 million in 1999. For the year ended
December 31, 2000, net operating income as a percentage of revenue increased
1.0% to 15.1% from 14.1% for 1999.
22
Other Income (Expense): 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, 2000, totaled $1.5 million compared
to $1.0 million for 1999. This increase was due primarily to an increase in
interest income related to increased balances in cash and cash equivalents.
Net Income: Net income increased by $20.5 million or 41.2% for the year
ended December 31, 2000, to $70.3 million from net income of $49.8 million in
1999. Net income includes a provision for income tax expense at a combined
effective rate of 36.7% and 38.1% for 2000 and 1999, respectively. The
reduction in the effective tax rate is due to maximizing state credits and
incentive programs in various state and local tax jurisdictions.
Years Ended December 31, 1999 and 1998
Revenue: Revenue increased $79.6 million or 16.5% to $562.4 million in 1999
from $482.8 million in 1998. The increase in revenue included $32.6 million
derived from new clients and $47.0 million derived from existing clients. The
overall revenue increase was attributable to higher call volumes.
During the year ended December 31, 1999, the Company provided service to
more than 900 clients. Eighty percent of the Company's total revenue was
generated by 46 clients. During 1999, AT&T remained the Company's largest
client and accounted for 32% 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 $32.0 million or 12.5% for the year ended December 31, 1999,
to $288.5 million from $256.5 million for the comparable period of 1998. As a
percentage of revenue, cost of services decreased to 51.3% for 1999 compared to
53.1% for 1998. The decreases in direct costs as a percentage of revenues can
be attributed to continued favorable labor costs due to the deployment of new
facilities earlier in 1999 and the shift in operating activity from interactive
teleservices to direct and operator teleservices divisions. Historically,
Interactive teleservices has higher cost of services to generate revenue.
Selling, General and Administrative Expenses: SG&A expenses increased by
$41.8 million or 27.3% to $194.6 million for the year ended December 31, 1999,
from $152.8 million in 1998. As a percentage of revenue, SG&A expenses
increased to 34.6% for the year ended December 31, 1999, compared to 31.7% in
1998. The increase can be attributed to increased depreciation expense taken on
new call centers, SG&A expenses related to 1999 facility site development and
the shift in operating activity to Operator Teleservices. Depreciation for the
twelve months ended December 31, 1999 was $35.7 million compared to $25.6
million in 1998. The change in revenue mix accounted for 1.8% of the shift from
direct costs of services to SG&A. The remaining 1.1% increase can be explained
by 0.7% in increased depreciation and the remaining 0.4% is due to the under
utilization of assets in Direct Teleservices.
Net Operating Income: Net operating income increased by $5.8 million or 7.9%
to $79.3 million in 1999 from $73.5 million in 1998. For the twelve months
ended December 31, 1999, net operating income as a percentage of revenue
decreased 1.1% to 14.1% from 15.2% for 1998. Operating margins were lower than
expected in the second quarter at 12.8% due to a reduction in minutes by Direct
Teleservices's largest customer, AT&T, but increased to 14.3% in the fourth
quarter.
Other Income (Expense): 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. Other income (expense) for the year ended December 31, 1999,
totaled $1.0 million compared to $1.3 million for 1998. The decrease was due
primarily to an increase in interest expense related to new capital leases.
23
Net Income: Net income increased by $3.8 million or 8.2% for the year ended
December 31, 1999, to $49.8 million from $46.0 million in 1998. Net income
includes a provision for actual income tax expense at a combined effective rate
of 38.1% and 38.5% for 1999 and 1998, respectively.
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 $25.0 million unsecured revolving credit facility.
Advances under the revolving credit facility bear interest at the prime rate
less 1.0%. There were no borrowings outstanding under this facility at December
31, 2000. The Company's credit facility contains certain financial covenants
and restrictions, which were met at December 31, 2000. The credit facility
expires on June 29, 2001. The Company believes it could increase the amount of
the facility, if needed.
The Company also has a $1.0 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 bank line are limited to a borrowing
base of pledged accounts receivable from certain of the Company's qualified
customers which are assigned by the Company to the bank. Borrowings bear
interest at 1.0% below the prime rate. There were no borrowings under this
credit facility at December 31, 2000. The bank line expires on June 29, 2001.
The Company believes it could increase the amount of the facility, if needed.
During the second quarter of 2000, the Company issued a promissory note to a
bank for $10.0 million to finance its growth in operations. The note will be
paid in 36 monthly installments of approximately $278,000 plus interest. The
note bears interest at 1% less than the prime rate.
Throughout 2000, the Company purchased $74.3 million of furniture and
telephone and computer equipment financed through working capital and notes
payable to vendors and banks and capital leases over three years which bear
interest from 6.11% to 10.65%.
Net cash flow from operating activities was $111.1 million for the year
ended December 31, 2000, compared to net cash flow from operating activities of
$114.2 and $11.9 million for the years ended December 31, 1999 and 1998,
respectively. The decrease from 1999 was due principally to increases in
accounts receivable and other assets offset by increased earnings.
Net cash flow used in investing activities was $68.5 million for the year
ended December 31, 2000, compared to $51.6 million and $43.5 million, for the
comparable periods of 1999 and 1998, 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 flows from financing activities were $3.7 million for the year
ended December 31, 2000, compared to net cash flows used for financing
activities of $7.7 million and $1.3 million, for the comparable periods of 1999
and 1998, respectively. In the year ended December 31, 2000, net cash flows
used in financing activities were primarily for payments of debt and capital
lease obligations. The cash used was offset by $15.9 million of proceeds from
the exercise of stock options to purchase Common Shares, including the tax
benefit associated with the optionee's gain on the exercise of stock options
and $10.0 million of proceeds from the promissory note issued to the bank
referenced above. The net cash flow used in financing activities for the year
ended December 31, 1999 was due primarily to payments on capital lease
obligations. Net cash flow used in financing activities for the year ended
December 31, 1998 was due primarily to the repayment of $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 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
24
business, some of which involve claims for damages that are substantial in
amount. Management believes, except for the items listed in the Notes to the
Consolidated Financial Statements included elsewhere in this Annual Report on
Form 10-K, 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, results of operations, or cash flows.
Capital Expenditures
The Company's operations will continue to require significant capital
expenditures for real estate and capacity/expansion upgrades. Capital
expenditures were $74.3 million for the year ended December 31, 2000. Capital
expenditures for 2000 consisted primarily of furniture, telephone and computer
equipment purchases associated with the addition of four new call centers. The
Company currently projects its capital expenditures for 2001 to be
approximately $50 to $60 million, primarily for capacity expansion and upgrades
at existing facilities and the addition of two call centers.
The Company believes that the cash flow from operations, together with
existing cash and cash equivalents, financing through capital or operating
leases, and available borrowings under its credit facilities will be adequate
to meet its capital requirements for the foreseeable future. The Company may
pledge additional property or assets of the Company or any of its subsidiaries,
which are not already pledged as collateral securing existing credit facilities
of the Company or any of its affiliates. The Company or any of its affiliates
may be required to guarantee any existing or additional credit facilities.
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 outsourced CRM solutions 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 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 $41.4 million of long-term
obligations and $26.0 million of credit facilities with variable interest
rates. There were no borrowings outstanding under these credit facilities at
December 31, 2000. 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 financial position,
results of operations, or cash flows 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-16.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
25
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 2001 annual meeting of
stockholders to be held on May 15, 2001. 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 2001 annual meeting of
stockholders to be held on May 15, 2001. 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 2001 annual meeting of
stockholders to be held on May 15, 2001. 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 2001 annual meeting of
stockholders to be held on May 15, 2001. 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
(a) Documents filed as a part of the report:
(1) Financial Statements:
Independent Auditors' Report.................................. F-1
Consolidated balance sheets as of December 31, 2000 and 1999.. F-2
Consolidated statement of operations for the years ended
December 31, 2000, 1999 and 1998............................ F-3
Consolidated statements of stockholders' equity for the years
ended December 31, 2000, 1999 and 1998...................... F-4
Consolidated statements of cash flows for the years ended
December 31, 2000, 1999 and 1998............................ F-5
Notes to the Consolidated Financial Statements................ F-6
(2) Financial Statement Schedules:
Independent Auditors' Report.................................. S-1
Schedule II (Consolidated valuation accounts for the three
years ended December 31, 2000).............................. S-2
(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.
26
(a) Exhibits.
Exhibit
Number Description
------- -----------
3.01 Restated Certificate of Incorporation of the Company (Exhibit 99.02 to
Form 8-K dated December 29, 2001, File No. 000-21771)
3.02 Restated Bylaws of the Company (Exhibit 99.03 to Form 8-K dated
December 29, 2001, File No. 000-21771)
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, 1999, as amended January 1, 2001
10.07 Employment Agreement between the Company and Michael A. Micek dated
January 1, 1999, as amended January 1, 2001
10.08 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)
10.09 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)
10.10 Personnel Company Subscription Service Agreement, dated as of November
12, 1996, between West Telemarketing Insurance Agency, Inc. and West
Telemarketing Corporation Direct Teleservices (Exhibit 10.13 to
Registration Statement under Form S-1 (Amendment No. 2) dated November
21, 1996, File No. 333-13991)
10.11 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)
10.12 Employment Agreement between the Company and Nancee S. Berger, dated
January 1, 1999, as amended January 1, 2001
10.13 Employee Stock Purchase Plan dated July 1, 1997 (Exhibit 10.01 to Form
10-Q dated August 14, 1997, File No. 000-21771)
10.14 Employment Agreement between the Company and Mark V. Lavin dated July
1, 1996, as amended January 1, 2001
10.15 Employment Agreement between the Company and Steven M. Stangl dated
January 1, 1999, as amended January 1, 2001
27
Exhibit
Number Description
------- -----------
10.16 Employment Agreement between the Company and Michael M. Sturgeon,
dated January 1, 1999, as amended January 1, 2001
10.17 Employment Agreement between the Company and Jon R. (Skip) Hanson,
dated October 4, 1999, as amended January 1, 2001
10.18 Employment Agreement between the Company and Michael E. Mazour, dated
July 1, 2000, as amended January 1, 2001
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
(b) Reports on Form 8-K.
On December 29, 2000, the Company filed a Report on Form 8-K reporting that
(1) West Corporation, a wholly owned subsidiary of the Company and a Delaware
corporation, was merged into the Company, with the Company being the surviving
corporation and (2) the name of the Company was changed from West TeleServices
Corporation to West Corporation.
28
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 CORPORATION
By: /s/ Thomas B. Barker
-----------------------------------
Thomas B. Barker
President and Chief Executive
Officer
March 16, 2001 (Principal Executive Officer)
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 and March 16, 2001
____________________________________ Director
Gary L. West
/s/ Mary E. West Vice Chair of the Board and March 16, 2001
____________________________________ Director
Mary E. West
/s/ Thomas B. Barker President and Chief March 16, 2001
____________________________________ Executive Officer and
Thomas B. Barker Director
(Principal Executive
Officer)
/s/ Michael A. Micek Chief Financial Officer, March 16, 2001
____________________________________ Executive Vice President--
Michael A. Micek Financial and
Treasurer (Principal
Financial and
Accounting Officer)
/s/ William E. Fisher Director March 16, 2001
____________________________________
William E. Fisher
/s/ Greg T. Sloma Director March 16, 2001
____________________________________
Greg T. Sloma
29
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
West Corporation
Omaha, Nebraska
We have audited the accompanying consolidated balance sheets of West
Corporation and subsidiaries (the "Company") as of December 31, 2000 and 1999,
and the related consolidated statements of operations, stockholders' equity,
and cash flows for each of the three years in the period ended December 31,
2000. 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 auditing standards generally
accepted in the United States of America. 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 the Company as of December 31,
2000 and 1999 and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 2000 in conformity with
accounting principles generally accepted in the United States of America.
Deloitte & Touche LLP
/s/ DELOITTE & TOUCHE LLP
Omaha, Nebraska
February 6, 2001
F-1
WEST CORPORATION
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
December 31,
--------------------
2000 1999
--------- ---------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.............................. $ 108,113 $ 61,865
Accounts receivable, net of allowance for doubtful
accounts of $6,611 and $4,717......................... 129,695 88,056
Notes receivable....................................... 2,153 4,208
Accounts receivable--financing......................... 19,154 14,663
Other.................................................. 24,550 16,348
--------- ---------
Total current assets................................. 283,665 185,140
PROPERTY AND EQUIPMENT:
Land and improvements.................................. 5,392 5,355
Buildings.............................................. 30,678 29,908
Telephone and computer equipment....................... 188,775 164,691
Office furniture and equipment......................... 35,100 30,748
Leasehold improvements................................. 56,724 41,372
Construction in process................................ 17,243 6,731
--------- ---------
Total property and equipment......................... 333,912 278,805
Accumulated depreciation and amortization.............. (136,734) (110,871)
--------- ---------
Total property and equipment, net.................... 197,178 167,934
GOODWILL, net of accumulated amortization of $6,906 and
$5,222.................................................. 43,627 45,311
NOTES RECEIVABLE AND OTHER ASSETS........................ 29,437 10,604
--------- ---------
TOTAL ASSETS............................................. $ 553,907 $ 408,989
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable....................................... $ 46,132 $ 33,745
Customer deposits and holdbacks........................ 22,007 9,273
Accrued wages and benefits............................. 13,353 7,411
Accrued phone expense.................................. 8,767 5,245
Other current liabilities.............................. 22,820 10,157
Current maturities of long-term obligations............ 19,580 14,882
--------- ---------
Total current liabilities............................ 132,659 80,713
LONG-TERM OBLIGATIONS, less current maturities........... 21,775 30,314
DEFERRED INCOME TAXES.................................... 5,884 6,000
OTHER LONG TERM LIABILITIES.............................. 663 --
MINORITY INTEREST........................................ 14,801 --
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, 64,547 shares issued and 64,445
outstanding and 63,330 shares issued and outstanding.. 645 633
Additional paid-in capital............................. 176,200 157,647
Retained earnings...................................... 203,941 133,682
Treasury stock at cost (102 shares).................... (2,661) --
--------- ---------
Total stockholders' equity........................... 378,125 291,962
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............... $ 553,907 $ 408,989
========= =========
The accompanying notes are an integral part of these financial statements.
F-2
WEST CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Years Ended December 31,
----------------------------
2000 1999 1998
-------- -------- --------
REVENUE.......................................... $724,505 $562,444 $482,823
COST OF SERVICES................................. 371,549 288,503 256,494
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES..... 243,573 194,610 152,838
-------- -------- --------
NET OPERATING INCOME............................. 109,383 79,331 73,491
OTHER INCOME (EXPENSE):
Interest income................................ 4,440 3,231 3,762
Interest expense--including interest expense--
financing of $184, $490 and $772.............. (3,107) (2,549) (1,627)
Other, net..................................... 206 345 (866)
-------- -------- --------
Other income (expense)....................... 1,539 1,027 1,269
-------- -------- --------
INCOME BEFORE INCOME TAX EXPENSE................. 110,922 80,358 74,760
INCOME TAX EXPENSE:
Current income tax expense..................... 41,466 31,476 27,340
Deferred income tax expense (benefit).......... (803) (872) 1,429
-------- -------- --------
Income tax expense........................... 40,663 30,604 28,769
-------- -------- --------
NET INCOME....................................... $ 70,259 $ 49,754 $ 45,991
======== ======== ========
EARNINGS PER COMMON SHARE:
Basic.......................................... $ 1.10 $ 0.79 $ 0.73
======== ======== ========
Diluted........................................ $ 1.03 $ 0.77 $ 0.73
======== ======== ========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:
Basic common shares............................ 64,043 63,330 63,330
Dilutive impact of potential common shares from
stock options................................. 3,907 1,050 23
-------- -------- --------
Diluted common shares.......................... 67,950 64,380 63,353
======== ======== ========
The accompanying notes are an integral part of these financial statements.
F-3
WEST CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Total
Common Paid-in Retained Treasury Stockholders'
Stock Capital Earnings Stock Equity
------ -------- -------- -------- -------------
BALANCE, January 1, 1998....... $633 $157,647 $ 37,937 $ -- $196,217
Net income................... -- -- 45,991 -- 45,991
---- -------- -------- ------- --------
BALANCE, December 31, 1998..... 633 157,647 83,928 -- 242,208
Net income................... -- -- 49,754 -- 49,754
---- -------- -------- ------- --------
BALANCE, December 31, 1999..... 633 157,647 133,682 -- 291,962
Net income................... -- -- 70,259 -- 70,259
Stock options exercised
including related tax
benefits (1,217 shares)..... 12 18,553 -- -- 18,565
Treasury stock (102 shares).. -- -- -- (2,661) (2,661)
---- -------- -------- ------- --------
BALANCE, December 31, 2000..... $645 $176,200 $203,941 $(2,661) $378,125
==== ======== ======== ======= ========
The accompanying notes are an integral part of these financial statements.
F-4
WEST CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
Years Ended December 31,
----------------------------
2000 1999 1998
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income..................................... $ 70,259 $ 49,754 $ 45,991
Adjustments to reconcile net income to net cash
flows from operating activities:
Depreciation and amortization................ 45,167 37,343 27,284
Loss on sale of equipment.................... 723 170 58
Deferred income tax expense (benefit)........ (803) (872) 1,429
Changes in operating assets and liabilities:
Accounts receivable.......................... (42,062) 8,244 (36,699)
Other assets................................. (10,145) (1,610) (11,139)
Accounts payable............................. 12,387 20,888 (6,091)
Other liabilities and accrued expenses....... 21,527 3,200 (637)
Income tax payable........................... 1,263 1,307 706
Customer deposits and holdbacks.............. 12,734 (4,203) (8,999)
-------- -------- --------
Net cash flows from operating activities... 111,050 114,221 11,903
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment............. (70,436) (38,953) (44,551)
Proceeds from disposal of property and
equipment..................................... 1,425 1,285 1,684
Issuance of notes receivable................... -- (15,401) (6,990)
Proceeds from payments of notes receivable..... 497 1,471 6,338
-------- -------- --------
Net cash flows from investing activities... (68,514) (51,598) (43,519)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt................. 10,000 6,000 --
Payments of long-term obligations.............. (17,701) (13,712) (5,954)
Net change in line of credit agreement......... -- (2,000) 2,000
Net change in accounts receivable financing and
notes payable financing....................... (4,491) 2,026 2,678
Proceeds from stock options exercised including
related tax benefits.......................... 15,904 -- --
-------- -------- --------
Net cash flows from financing activities... 3,712 (7,686) (1,276)
-------- -------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS.......... 46,248 54,937 (32,892)
CASH AND CASH EQUIVALENTS, Beginning of period... 61,865 6,928 39,820
-------- -------- --------
CASH AND CASH EQUIVALENTS, End of period......... $108,113 $ 61,865 $ 6,928
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest....... $ 3,580 $ 3,092 $ 1,627
======== ======== ========
Cash paid during the period for income taxes... $ 32,961 $ 29,842 $ 26,366
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING
ACTIVITIES:
Acquisition of property through assumption of
long-term obligations......................... $ 3,860 $ 21,956 $ 15,220
======== ======== ========
Transfer of accounts receivable to notes
receivable.................................... $ 423 $ 2,000 $ 2,724
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING
ACTIVITIES:
Acquisition of patent through issuance of
preferred stock of subsidiary................. $ 14,666 $-- $ --
======== ======== ========
Treasury stock acquired in exchange for stock
options exercised............................. $ 2,661 $-- $ --
======== ======== ========
The accompanying notes are an integral part of these financial statements.
F-5
WEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business Description--West Corporation (the "Company"), formerly known as
West TeleServices Corporation, is one of the largest independent providers of
outsourced customer relationship management, or CRM, solutions in the United
States. The Company enables its clients to completely outsource a full range of
services, including processing of customer initiated contacts, automated voice
response services and direct marketing services. The Company offers its
services over the telephone and the Internet. The Company's services minimize
its clients' cost of managing their customer relationships, improve their
customers' overall experience and provide its clients an opportunity to
leverage its customer data.
The Company provides its CRM solutions to Fortune 500 companies, leading
Internet oriented companies and e-commerce companies. These services help its
clients acquire customers, provide customer support and generate repeat sales.
The Company operates a national network of 28 state-of-the-art customer contact
centers and seven automated voice and data processing centers throughout North
America and in India.
Basis of Consolidation--The consolidated financial statements include the
accounts of the Company and its subsidiaries. All intercompany transactions and
balances have been eliminated in the consolidated financial statements.
Use of Estimates--The preparation of financial statements in conformity with
accounting principles, generally accepted in the United States of America,
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--Operator Teleservices revenue is recognized at the time
calls are answered by an agent based on the number of calls and/or minutes
received and processed on behalf of clients. Interactive Teleservices revenue
is recognized at the time calls are received or sent by automated voice
response units and is billed based on call duration. Direct Teleservices
revenue is generally recognized on an hourly and success based rate basis at
the time the agents place calls to consumers on behalf of clients. The customer
is obligated to pay for these services when these activities have been
performed. Both Operator Teleservices and Direct Teleservices also generate
revenue by providing assistance to their clients in the design and programming
of customized applications which are generally recognized on an hourly basis at
the time the services are provided. Other revenues are recognized during the
period services are provided. The Company defers revenues during the period in
which customer refund obligations exist. Deferred revenue at December 31, 2000
and 1999 was $8,257 and $-0- respectively.
Cost of Services--Cost of services includes labor, telephone and other
expenses directly related to service 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.
F-6
WEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Cash and Cash Equivalents--For purposes of the statement of cash flows, the
Company considers short-term investments with original 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 receivable, 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 notes with similar
terms and remaining maturities are used to estimate fair values of the notes
receivable, 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 30.5 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 stockholders upon their exchange of stock in certain
subsidiaries 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.
Notes Receivable--Notes receivable and other assets are presented net of an
allowance for doubtful accounts of $2,768 in 2000 and $-0- in 1999.
Customer Deposits and Holdbacks--The Company obtains directly from the
billing and collection agent, revenue generated from its 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.
Income Taxes--The Company and its 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.
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.
F-7
WEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Minority Interest--The Company exercised an option to acquire, develop and
commercialize an innovative new technology that is the subject of a patent
issued on April 25, 2000. The technology relates to a process that the Company
believes could have applications in the teleservices industry and a wide range
of other industries. In order to incentivize certain of the Company's executive
officers to develop and pursue this opportunity an equity interest was granted
to those executives in the new company. The Company's venture partner and
patent developer was granted 500 shares of convertible preferred stock in the
new company. The venture partner has the option during the first 18 months of
the venture to surrender those shares of convertible preferred stock in the new
company in exchange for $12 million in cash plus an option to acquire 325,000
shares of the Company's common stock, exercisable at the average market price
on the 15 days prior to the date of the agreement ($26.03 per share).
Alternatively, the venture partner has the option to convert the 500 shares of
convertible preferred stock into 5% of the common stock of the new company. The
Company utilized the Black-Scholes pricing model to value the 325,000 options.
The sum of that calculation and the $12 million in cash resulted in the
valuation of the patent at $14.7 million, which is being amortized over the
life of the patent, 17 years.
Recent Accounting Pronouncements--In June 1998, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 133,
Accounting for Derivative Financial Instruments and Hedging Activities, (SFAS
No. 133). This statement, which is effective for the Company beginning on
January 1, 2001, requires recognition of all derivative financial instruments
as either assets or liabilities in the balance sheet and measurement of those
instruments at fair value. Management has determined that the adoption of SFAS
No. 133 will not have a material effect on the Company's financial statements.
Reclassifications--Certain reclassifications have been made to prior years'
financial statements to conform to the current year presentation.
B. ACCOUNTS RECEIVABLE FINANCING PROGRAM
The Company maintains a line of credit with three participating banks in the
amount of $1,000. Outstanding borrowings were $-0- at December 31, 2000 and
1999. Borrowings bear interest at 1.0% below the prime rate (actual rate 8.5%
at December 31, 2000) to fund customer advances. Substantially all current
assets of a subsidiary are pledged as collateral on the line of credit, which
expires June 28, 2001. The Company had advances to customers through its
accounts receivable financing programs aggregating $19,154 and $14,663 at
December 31, 2000 and 1999, 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 12.5% at December 31, 2000).
C. LONG-TERM OBLIGATIONS AND CREDIT ARRANGEMENTS
The Company has a $25,000 unsecured revolving credit facility. Advances
under the revolving credit facility bear interest at the prime rate less 1.0%
(actual rate 8.5% at December 31, 2000). The revolving credit facility expires
on June 29, 2001. Outstanding borrowings under the revolving credit facility
totaled $-0- at December 31, 2000 and 1999. 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, 2000.
F-8
WEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Long-term obligations consisted of the following:
December 31,
---------------
2000 1999
------- -------
Mortgage note payable to bank, due in monthly installments of
$102 including interest at 7.63% with a balloon payment at
maturity at February 1, 2003................................. $11,633 $11,977
Notes payable to bank, due in monthly installments of $278,
interest is variable at 1% less than the prime rate maturing
June 30, 2003................................................ 8,333 --
Notes payable to bank, due in monthly installments of $185,
including interest at 6.75% maturing April 1, 2002........... 2,885 4,780
Notes payable to bank, due in monthly installments of $176,
including interest at 6.20% maturing October 28, 2001........ 1,875 3,802
Notes payable to vendor, due in monthly installments of $141,
including interest from 3.54% to 5.40% maturing from March 1,
2001 to January 1, 2002...................................... 1,272 3,098
Capital lease obligations (See Note D)........................ 15,357 21,539
------- -------
41,355 45,196
Less current maturities:
Debt........................................................ 8,792 5,771
Capital lease obligations (See Note D)...................... 10,788 9,111
------- -------
Current maturities of long-term obligations................... 19,580 14,882
------- -------
Long-term obligations......................................... $21,775 $30,314
======= =======
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. The financial covenants were met at December 31,
2000.
Scheduled maturities on long-term debt excluding capital lease obligations
described in Note D, are as follows:
Year Ending December 31,
2001............................................................... $ 8,792
2002............................................................... 4,625
2003............................................................... 12,581
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 $6,730, $4,595 and $4,190 for the years ended
December 31, 2000, 1999 and 1998, 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. Amortization
of assets purchased through capital lease agreements is included in
depreciation expense.
F-9
WEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
December 31,
-----------------
2000 1999
-------- -------
Assets under capital leases consisted of:
Telephone and computer equipment........................ $ 26,403 $24,490
Office furniture and equipment.......................... 3,328 2,361
Lease/building improvements............................. 336 633
-------- -------
Total cost............................................ 30,067 27,484
Accumulated depreciation.................................. (10,428) (6,621)
-------- -------
Net book value............................................ $ 19,639 $20,863
======== =======
Future minimum payments under non-cancelable operating and capital leases
with initial or remaining terms of one year or more 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,
2001.................................................... $ 8,214 $11,557
2002.................................................... 7,497 4,545
2003.................................................... 6,511 257
2004.................................................... 3,824 --
2005.................................................... 3,242 --
2006 and thereafter..................................... 1,977 --
------- -------
Total minimum obligations................................. $31,265 16,359
=======
Less interest at 6.11% to 10.65%.......................... 1,002
-------
Present value of net minimum lease payments............... 15,357
Less current portion...................................... 10,788
-------
$ 4,569
=======
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,
2001................................................................ $ 921
2002................................................................ 976
2003................................................................ 1,035
2004................................................................ 717
Lease expense was $869, $820 and $773 for the years ended December 31, 2000,
1999 and 1998, respectively.
F-10
WEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
F. INCOME TAXES
Components of the actual income tax expense were as follows:
Year Ended December 31,
-------------------------
2000 1999 1998
------- ------- -------
Current income tax expense:
Federal......................................... $39,134 $29,582 $24,450
State........................................... 2,332 1,894 2,890
------- ------- -------
41,466 31,476 27,340
------- ------- -------
Deferred income tax expense (benefit):
Federal......................................... (707) (687) 1,088
State........................................... (96) (185) 341
------- ------- -------
(803) (872) 1,429
------- ------- -------
$40,663 $30,604 $28,769
======= ======= =======
A reconciliation of income tax expense computed at statutory tax rates
compared to effective income tax rates was as follows:
2000 1999 1998
----- ----- -----
Statutory rate............................................. 35.0% 35.0% 35.0%
State income tax effect.................................... 1.4% 2.5% 2.3%
Other...................................................... 0.3% 0.6% 1.2%
----- ----- -----
36.7% 38.1% 38.5%
===== ===== =====
Significant temporary differences between reported financial and taxable
earnings that give rise to deferred tax assets and liabilities were as follows:
December 31,
-------------
2000 1999
------ ------
Deferred tax assets:
Allowance for doubtful accounts.............................. $2,479 $1,792
Deferred tax liabilities:
Depreciation................................................. 5,884 6,000
------ ------
Net deferred tax liability..................................... $3,405 $4,208
====== ======
The deferred tax asset at December 31, 2000 and 1999 was included in other
current assets.
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 14%
of their gross salary. The Company matching contributions are 100% vested after
the employee has attained five years of service. Total employer contributions
under the plan were $1,614, $1,390 and $1,076 for the years ended December 31,
2000, 1999 and 1998, respectively.
F-11
WEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
During 2000, the Company established a grantor trust under the West
Corporation Executive Retirement Savings Plan ("Trust"). The principal of the
Trust, and any earnings thereon shall be held separate and apart from other
funds of the Company and shall be used exclusively for the uses and purposes of
plan participants and general creditors. Participation in the Trust is
voluntary and is restricted to highly compensated individuals as defined by the
Internal Revenue Service. The Company will match 50% of employee contributions,
limited to the same maximums as those of the 401(k) plan. Total employer
contributions under the plan were $221 for the year ended December 31, 2000.
The Company's 1996 Stock Incentive 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 four 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.
During December 1998, the Company amended all outstanding options granted.
The options to purchase the Common Shares at prices ranging from $15.625 to
$17.75 were surrendered by option holders in December of 1998 and replacement
options of 5,185,700 Common Shares with an exercise price, equal to the current
market price, of $9.6875 were issued including replacement options of 44,000
Common Shares held by non-employee directors.
The following table presents the activity of the stock options for each of
the fiscal years ended December 31, 2000, 1999 and 1998 and the stock options
outstanding at the end of the respective fiscal years.
Stock Option Weighted Average
Shares Exercise Price
------------ ----------------
Outstanding at January 1, 1998.................. 4,558,300 $15.6381
---------- --------
Granted....................................... 7,760,800 10.2726
Surrendered and replaced by plan amendment.... (5,185,700) 15.6361
Canceled...................................... (137,700) 15.6250
---------- --------
Outstanding at December 31, 1998................ 6,995,700 9.6875
---------- --------
Granted....................................... 515,000 10.7693
Canceled...................................... (499,300) 9.7443
---------- --------
Outstanding at December 31, 1999................ 7,011,400 9.7634
---------- --------
Granted....................................... 145,000 24.0054
Canceled...................................... (60,780) 9.8268
Exercised..................................... (1,182,995) 9.7268
---------- --------
Outstanding at December 31, 2000................ 5,912,625 $10.1194
========== ========
Shares available for future grants at December
31, 2000....................................... 2,403,880
==========
F-12
WEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
The following table summarizes information about the Company's stock options
outstanding at December 31, 2000:
Weighted
Average Weighted
Stock Option Remaining Average
Exercise Shares Contractual Exercise Stock Option
Price Outstanding Life in Years Price Shares Exercisable
--------- ------------ ------------- -------- ------------------
$ 8.0000............. 8,000 8.36 $ 8.0000 2,000
$ 9.6875............. 5,325,895 7.95 $ 9.6875 899,270
$10.8130............. 433,730 8.58 $10.8130 79,730
$21.1250............. 10,000 9.36 $21.1250 --
$23.1250............. 67,500 9.58 $23.1250 --
$25.3125............. 67,500 9.84 $25.3125 --
--------- ---- -------- -------
5,912,625 8.04 $10.1194 981,000
========= ==== ======== =======
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,
2000, 1999 and 1998.
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; 2000,
1999 and 1998 net income and earnings per share would have been reduced to the
following pro forma amounts:
Year Ended December 31,
-----------------------
2000 1999 1998
------- ------- -------
Net Income:
As reported....................................... $70,259 $49,754 $45,991
Pro forma......................................... $64,840 $41,782 $39,885
Earnings per common share:
Basic as reported................................. $ 1.10 $ 0.79 $ 0.73
Diluted as reported............................... $ 1.03 $ 0.77 $ 0.73
Pro forma basic................................... $ 1.01 $ 0.66 $ 0.63
Pro forma diluted................................. $ 0.95 $ 0.65 $ 0.63
The weighted average fair value per share of options granted in 2000, 1999,
and 1998 was $14.18, $6.80 and $3.45, 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:
2000 1999 1998
---- ---- ----
Risk-free interest rate.................................... 6.2% 5.3% 4.7%
Dividend yield............................................. 0.0% 0.0% 0.0%
Expected volatility........................................ 75.0% 60.0% 55.0%
Expected life (years)...................................... 4.0 4.1 4.1
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
F-13
WEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
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 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 ($25.3125 at July 3, 2000). On the last day of the offering
period, the option to purchase Common Shares becomes exercisable. If at the end
of the offering, the fair market value of the Common Shares is less than 100%
of the fair market value at the date of grant, then the options will not be
deemed exercised and the payroll deductions made with respect to the options
will be applied to the next offering unless the employee elects to have the
payroll deductions withdrawn from the Stock Purchase Plan. The maximum number
of Common Shares available for sale under the Stock Purchase Plan is 1,965,532
shares.
H. COMMITMENTS AND CONTINGENCIES
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, results of operations or cash flows.
Richard Carney, et al. v. West TeleServices, Inc., et al. 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
the Company, Inbound, 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.
A partial summary judgment was granted to the defendants on March 8, 2000 on
breach of express contract and civil theft and on all claims against the
individual defendants. On May 12, 2000, the court certified a class of
plaintiffs and other similarly situated hourly employees of the Company and
several of its subsidiaries that allege they had not been paid for all
compensable work performed during their employment. On July 7, 2000, defendants
filed a brief for an interlocutory appeal of the certification order. On
November 1, 2000, the San Antonio Court of Appeals reversed and remanded the
certification order back to the district court for further proceedings. The
plaintiffs also amended their petition to allege on quantum meriut as a theory
of recovery. On November 21, 2000, the district court entered an order
modifying its May 12, 2000 order granting class certification. The Company
filed a notice of appeal of the amended order, which remains pending. No claims
remain in the lawsuit that allow for an award of punitive damages under Texas
law.
Glenn K. Jackson and Elsie Jackson v. West Telemarketing Corporation
Outbound and Does 1 through 100, inclusive, was filed in the United States
District Court for the Central District of California (No. CV-97-8281 TJH
(AIJx)), on August 12, 1997, and transferred to the United States District
Court for the Northern District of Texas, Dallas Division, where it is pending
(Civil Action No. 3:98-CV-0960-H). The complaint contains several causes of
action, all of which deal with the purchase by the Company's subsidiary, West
Telemarketing Corporation Outbound ("Outbound"), of two pieces of property from
the Resolution Trust Corporation ("RTC") during 1993 and 1994. The plaintiffs
contend that they also bid on the property, that Outbound learned the amount of
their bids, used that information to out-bid them and, ultimately, purchased
the
F-14
WEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
property. The complaint seeks general damages, special damages, equitable
injunctive and restitutionary relief, including restitution of the property
involved, punitive damages, attorneys' fees, and litigation costs. On November
19, 1999, the Company's motion for summary judgment was granted in full. On
December 9, 1999, the plaintiffs appealed this summary judgment order to the
U.S. Fifth Circuit Court of Appeals for the Fifth Circuit. Plaintiffs filed
their brief on April 12, 2000 and the defendants filed their brief on June 16,
2000. The Court heard oral argument on December 6, 2000, but has not yet ruled.
A ruling is expected in the first half of 2001.
Outbound is a defendant in three cases which have been consolidated into one
proceeding entitled Bone, Zarella, et al. individually and on behalf of a class
of all other persons similarly situated vs. 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. The plaintiffs
in these cases alleged they were marketed AT&T long distance calling plans, and
did not receive the full benefits of the marketed plans. Outbound provided
telemarketing services to AT&T in connection with AT&T's marketing of these
plans. The Federal judge referred the consolidated case to the FCC, and on
March 10, 2000, the plaintiffs filed a Motion Seeking Conditional Certification
of the Settlement Class, Preliminary Approval of a Settlement, and Approval and
Order for Class Notice to be Given. Outbound and the co-defendants concurred in
the motion. On March 23, 2000, the Federal judge approved the plaintiffs'
motion and conditionally certified a class settlement and preliminarily
approved the settlement. Under the proposed settlement AT&T will pay the entire
settlement amount and neither Outbound nor the Company will be responsible for
any such costs. On November 9, 2000, the court held that the settlement was
fair and reasonable and the settlement was approved. Outbound has been released
from all class action claims.
I. SIGNIFICANT CUSTOMERS AND SERVICE LINES
For the years ended December 31, 2000, through December 31, 1998, the
Company had 34 to 46 major customers who accounted for approximately 80% of
total revenues. The Company had one customer who accounted for 28% of total
revenue for the year ended December 31, 2000 and 32% and 33% of total revenue
for the years ended December 31, 1999 and 1998, respectively. On December 31,
2000 the Company had no material revenue or assets outside the United States.
The following is revenue by service lines for years ending December 31,
2000, 1999 and 1998:
For the Year Ended
December 31,
--------------------------
2000 1999 1998
-------- -------- --------
Operator Teleservices............................ $354,861 $251,663 $186,454
Interactive Teleservices......................... 138,903 131,720 122,601
Direct Teleservices.............................. 230,741 179,061 173,768
-------- -------- --------
Total revenue.................................... $724,505 $562,444 $482,823
======== ======== ========
F-15
WEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(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, 2000 and 1999. Certain reclassifications between
other income (expense) and selling, general and administrative expenses have
been made to the companies quarterly financial statements to conform to the
current year presentation primarily for the classification of sales and use
taxes and the gain or loss on sale of equipment:
Three Months Ended
--------------------------------------------
March
31, June 30, September 30, December 31,
2000 2000 2000 2000
-------- -------- ------------- ------------
Revenue.......................... $170,059 $171,537 $189,513 $193,396
Cost of services................. 86,198 89,223 98,593 97,535
Selling, general and
administrative expenses......... 57,427 58,239 62,320 65,587
-------- -------- -------- --------
Net operating income............. 26,434 24,075 28,600 30,274
Other income (expense)........... 466 867 460 (254)
-------- -------- -------- --------
Income before income tax
expense......................... 26,900 24,942 29,060 30,020
Income tax expense............... 9,872 9,222 10,704 10,865
-------- -------- -------- --------
Net income....................... $ 17,028 $ 15,720 $ 18,356 $ 19,155
======== ======== ======== ========
Earnings per common share:
Basic.......................... $ 0.27 $ 0.24 $ 0.29 $ 0.30
Diluted........................ $ 0.25 $ 0.23 $ 0.27 $ 0.28
Three Months Ended
--------------------------------------------
March
31, June 30, September 30, December 31,
1999 1999 1999 1999
-------- -------- ------------- ------------
Revenue.......................... $137,992 $138,086 $143,071 $143,295
Cost of services................. 71,729 71,452 73,176 72,146
Selling, general and
administrative expenses......... 45,340 49,195 50,472 49,603
-------- -------- -------- --------
Net operating income............. 20,923 17,439 19,423 21,546
Other income (expense)........... 1,257 497 355 (1,082)
-------- -------- -------- --------
Income before income tax
expense......................... 22,180 17,936 19,778 20,464
Income tax expense............... 8,271 6,870 7,618 7,845
-------- -------- -------- --------
Net income....................... $ 13,909 $ 11,066 $ 12,160 $ 12,619
======== ======== ======== ========
Earnings per common share:
Basic.......................... $ 0.22 $ 0.17 $ 0.19 $ 0.20
Diluted........................ $ 0.22 $ 0.17 $ 0.19 $ 0.19
F-16
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
West Corporation
We have audited the consolidated financial statements of West Corporation
and subsidiaries (the "Company") as of December 31, 2000 and 1999, and for each
of the three years in the period ended December 31, 2000, and have issued our
report thereon dated February 6, 2001; such report is included elsewhere in
this Form 10-K. Our audits also included the consolidated financial statement
schedule of the Company, 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 consolidated 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 6, 2001
S-1
Schedule II
WEST CORPORATION AND SUBSIDIARIES
CONSOLIDATED VALUATION ACCOUNTS
THREE YEARS ENDED DECEMBER 31, 2000
(AMOUNTS IN THOUSANDS)
Transfers/
Additions- Transfers/
Balance Charged to Deductions- Balance
Beginning Cost and Amounts End of
Description of Year Expenses Charged-Off Year
- ----------- --------- ---------- ----------- -------
December 31, 2000--Allowance for
doubtful accounts--
Accounts receivable................ $4,717 $9,723 $7,829 $6,611
------ ------ ------ ------
December 31, 1999--Allowance for
doubtful accounts-- Accounts
receivable......................... $1,870 $8,381 $5,534 $4,717
------ ------ ------ ------
December 31, 1998--Allowance for
doubtful accounts-- Accounts
receivable......................... $ 447 $3,484 $2,061 $1,870
------ ------ ------ ------
December 31, 2000--Allowance for
doubtful accounts-- Long-term notes
receivable......................... $ -- $2,768 $ -- $2,768
------ ------ ------ ------
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 99.02 to Form 8-K dated December 29, 2001, File
No. 000-21771)
3.02 Restated Bylaws of the Company (Exhibit 99.03 to Form 8-K *
dated December 29, 2001, File No. 000-21771)
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, 1999, as amended January 1, 2001
10.07 Employment Agreement between the Company and Michael A. **
Micek dated January 1, 1999, as amended January 1, 2001
10.08 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)
10.09 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)
10.10 Personnel Company Subscription Service Agreement, dated *
as of November 12, 1996, between West Telemarketing
Insurance Agency, Inc. and West Telemarketing Corporation
Direct Teleservices (Exhibit 10.13 to Registration
Statement under Form S-1 (Amendment No. 2) dated November
21, 1996, File No. 333-13991)
10.11 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)
10.12 Employment Agreement between the Company and Nancee S. **
Berger, dated January 1, 1999, as amended January 1, 2001
10.13 Employee Stock Purchase Plan dated July 1, 1997 (Exhibit *
10.01 to Form 10-Q dated August 14, 1997, File No. 000-
21771)
Sequential
Exhibit Page
Number Description Number
------- ----------- ----------
10.14 Employment Agreement between the Company and Mark V. **
Lavin dated July 1, 1996, as amended January 1, 2001
10.15 Employment Agreement between the Company and Steven M. **
Stangl dated January 1, 1999, as amended January 1, 2001
10.16 Employment Agreement between the Company and Michael M. **
Sturgeon, dated January 1, 1999, as amended January 1,
2001
10.17 Employment Agreement between the Company and Jon R. **
(Skip) Hanson, dated October 4, 1999, as amended January
1, 2001
10.18 Employment Agreement between the Company and Michael E. **
Mazour, dated July 1, 2000, as amended January 1, 2001
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 **
- --------
*Indicates that the page number for such item is not applicable.
** Filed herewith