Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For The Fiscal Year Ended December 31, 2001
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.)
incorporation of 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 1, 2002, 65,516,134 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 1, 2002) of the voting stock held
by non-affiliates was approximately $569.1 million.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's proxy statement for the annual meeting of
stockholders to be held on May 15, 2002 are incorporated into Part III.
TABLE OF CONTENTS
PART I
Page
----
ITEM 1. BUSINESS ................................................... 3
ITEM 2. PROPERTIES ................................................. 12
ITEM 3. LEGAL PROCEEDINGS .......................................... 14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ........ 15
EXECUTIVE OFFICERS OF THE REGISTRANT ....................... 15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS ........................................ 17
ITEM 6. SELECTED FINANCIAL DATA .................................... 17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS ........................ 19
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK . 24
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ................ 24
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE ........................ 24
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT ......... 25
ITEM 11. EXECUTIVE COMPENSATION ..................................... 25
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT ..................................................25
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ..............25
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K ....................................................25
SIGNATURES ...........................................................28
2
ITEM I. Business
General
West Corporation (the "Company") 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 its CRM solutions to Fortune 500
companies, and leading Internet oriented companies. These services help its
clients acquire customers, provide customer support and generate repeat sales.
Founded in 1986 and headquartered in Omaha, Nebraska, the Company operates
a national network of 31 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 . Internet . financial services
. pharmaceuticals . public utilities . consumer packaged goods
. direct marketing . insurance
The Company's management team is among the most experienced in the
industry. Each of the Company's nine executive officers who are responsible for
the day-to-day management of the Company has proven experience profitably
managing the rapid growth of its business and has been with the Company, on
average, for more than ten years. Over the last decade, the Company has
consistently delivered increasing revenue and profits each year. Revenue has
grown from approximately $399 million in 1997 to approximately $780 million in
2001, and net income has grown from approximately $37 million to approximately
$76 million over the same period, representing a compound annual growth rate of
approximately 20% and 21%, respectively. Through 2001, all the Company's growth
in revenue and earnings have been generated internally.
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 2001 study by
Gartner Dataquest estimated that the business process-outsourcing marketplace
was approximately $245 billion in 2000 and expected to increase to $600 billion
by 2005. The sales, marketing and customer care portion of that marketplace is
estimated to increase at a compound annual growth rate of 29.9% from $13.8
billion in 2000 to $46.1 billion by 2005.
According to forecasts prepared in 2001 by International Data Corporation
(IDC), the U.S. market for third-party customer care services is estimated to
grow at a 15.9% compound annual growth rate from $14.6 billion in 2001 to $26.4
billion in 2005. Customer care represents the largest component of the CRM
solutions market, with IDC estimating the current worldwide, outsourced market
at $27.1 billion, growing to approximately $51.7 billion through 2005.
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
outsource CRM solutions which effectively complement other marketing media, such
3
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 solutions 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, 2001, the
Company provided its offerings through its four integrated divisions--Operator
Teleservices, Interactive Teleservices, Direct Teleservices, and West Direct,
Inc.
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, computerized surveys and polling and
secure automated credit card activation. Also, the Interactive Teleservices
division provides agent-assisted interactive voice response interfaces. The
Direct Teleservices division furnishes clients with agents who provide a premium
service that includes agent direct marketing applications, product sales, and
customer acquisition and retention campaigns. Also, the Direct Teleservices
division provides specialized integrated customer initiated customer support.
West Direct, Inc. is focused on helping the Company's clients maximize the value
of every customer interaction. The Company has developed proprietary technology
platforms designed to provide a high degree of automation and reliability in all
of its service categories.
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, surveyed the top 50 CRM
providers and the Operator Teleservices division ranked as the third largest
outsourced provider for 1999 and 2000 and fourth in 2001, based upon number of
minutes connected. The Company focuses on two service offerings, Custom Operator
Services and Direct Response 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:
4
. 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 clients. 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
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 five 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;
. answers to frequently asked questions;
. and call 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. As of December 31, 2001, the Company maintained 78,287 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 six 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.
5
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.
West Direct, Inc.
West Direct, Inc. ("West Direct") is a performance based marketing and
technology company that was developed internally over the past two years. West
Direct, Inc. is focused on helping the Company's clients maximize the value of
every customer interaction. At West Direct's core is a patent protected process
(U.S. Patent number 6,055,513, awarded in April 2000) that drives a real-time
decision on how to optimize an offer to a customer. Rather than starting with a
product or service and finding a customer to offer it to, West Direct's
sophisticated marketing decision platform helps match customers with the offer
that is best suited for them. This non-traditional marketing approach addresses
the needs of many companies to personalize their marketing efforts and develop
closer relationships with customers. West Direct's ability to match the best
product or service with the needs of individual customers delivers quantifiable
results and drives incremental revenue to the Company, its clients and its
marketing partners.
West Direct is currently focused on serving the needs of five key vertical
markets, direct response, financial services, telecommunications, retail and
utilities. West Direct has the ability to work directly with companies who
manage their own transactions in contact centers or on the Internet. These
companies can benefit from West Direct's decision support system and performance
based marketing process to maximize the value of their customer interactions.
Company Strategy
The Company aims to remain a leading full-service provider of integrated
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
2001, 53% 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 nearly eight
years.
6
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 65% 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 11.0 billion minutes in 2001, 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 generally seeks
growth-oriented clients who need customized applications, which often leads to
long-term relationships.
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 790 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
. propietary 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 nine executive officers who are responsible for the day-to-day
management of the Company has proven experience profitably managing the rapid
growth of its business and has been with the Company, on average, for more than
ten 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 quality assurance testing includes monitoring of the
7
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 is 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
across 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.
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 Direct Response 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 contact centers 24 hours per day, 365 days per year. The Operator
Teleservices and Interactive Teleservices divisions' facilities also have
stand-alone primary power systems which include 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 35 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 2001, the Company employed an average of approximately 22,900 agents per
day for its agent contact services with peak employment of approximately 23,600
agents per day. In addition, the Company employed, as of December 31, 2001,
approximately 3,100 management, staff and administrative employees. The Company
considers its relations with its employees to be good.
8
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 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 voice response ports that need to be deployed each hour. Based upon the
Company's experience in processing large volumes 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 and Interactive Teleservices contact 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;
9
. development of a proprietary, highly responsive scripting system;
. development of a proprietary, state-of-the-art workforce management
and scheduling system.
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.
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. 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
large-scale, 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 outsourced CRM solutions. The principal competitive factors in this
industry are: 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.
10
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 25% of the Company's revenue in 2001,
and the Company's 62 largest clients in the aggregate accounted for
approximately 80% of the Company's revenue in 2001. The revenue generated by
AT&T results from over 40 different programs which utilize platforms with three
of the Company's divisions. 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 revise the
TSR. On January 22, 2002 the FTC published a Notice of Proposed Rulemaking and
proposed changes to the TSR. The FTC has requested public comment on the
proposed changes and intends to hold a public forum to discuss the proposed
changes on June 5, 6, and 7, 2002. The proposed changes, if adopted by the FTC,
could materially adversely affect the Company, the Company's clients and or the
Company's industry include: (1) subjecting a portion of the Company's inbound
calls to additional disclosure requirements from which such calls were
previously exempt; (2) prohibiting the receiving of billing information from
anyone other than the consumer or donor for use in telemarketing; (3)
prohibiting the disclosure of billing information to any person for use in
telemarketing; (4) the application of the TSR to charitable solicitations; (5)
additional disclosure statements relating to certain products and services; (6)
additional disclosure statements for payment methods that do not have consumer
protections comparable to those available under the Fair Credit Billing Act and
the Truth in Lending Act; (7) instituting a national "do-not-call" registry; (8)
limitations on the use of predictive dialers for outbound calls; and (9)
eliminating the business-to-business exemption of the TSR in the sale of
Internet services and Web services. The Company cannot predict which
modifications will be made to the TSR, and, if adopted, 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
11
through dialing patterns other than 900 numbers. As part of this rulemaking
review proceeding, the FTC has issued proposed revisions to the 900 Number Rule
which, among other things, would expand the scope of the 900 Number Rule to
information services provided through other dialing patterns, impose more
stringent requirements on the establishment of pre-subscription arrangements
governing the use of toll free numbers for pay per call services and require
express verifiable authorization from a telephone subscriber in order for
purchases to be billed to the telephone subscriber's telephone bill. The
industry filed written comments to the FTC's proposed revisions in March 1999.
The FTC 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, 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.
Some of the proposed modifications, if adopted, would severely restrict and
potentially prohibit the Company and its clients from conducting upsell
telemarketing campaigns. Such campaigns represent a significant portion of the
Company's and its clients' businesses, the loss of which could have a material
adverse effect on the Company.
ITEM 2. PROPERTIES
As of December 31, 2001, the Company operated 31 large volume, automated
customer contact facilities located in Alabama, Arkansas, Florida, Georgia,
Illinois, Louisiana, Nebraska, Nevada, Oklahoma, Pennsylvania, Texas, Virginia,
and Mumbai, India. These facilities consisted of 11,675 computer-assisted
workstations.
12
As of December 31, 2001, 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,
2001, Interactive Teleservices had a total capacity of 78,287 voice response
ports.
The following table summarizes the location of and the number of
computer-assisted telephone workstations or voice response ports at each of the
Company's contact centers as of December 31, 2001.
Number of Number of
Contact Centers Computer- Assisted Workstations Voice Response Ports
- --------------- ------------------------------- --------------------
Huntsville, Alabama 489 -
Mobile, Alabama 371 -
Dothan, Alabama 210 -
Texarkana, Arkansas 159 -
Fayetteville, Arkansas 150 -
Ft. Smith, Arkansas 163 -
Pensacola, Florida 605 -
Tallahassee, Florida 164 -
Hinesville, Georgia 132 -
Rockford, Illinois 318 -
Carbondale, Illinois 117 -
Baton Rouge, Louisiana 564 -
Lafayette, Louisiana 159 -
Omaha, Nebraska 1,037 -
Reno, Nevada 322 -
Oklahoma City, Oklahoma 316 -
Tulsa, Oklahoma 568 -
Erie, Pennsylvania 448 -
San Antonio, Texas 600 -
Beaumont, Texas 449 -
Harlingen, Texas 154 -
San Antonio, Texas 796 -
Universal City, Texas 682 -
El Paso, Texas 624 -
Killeen, Texas 258 -
Waco, Texas 252 -
Lubbock, Texas 284 -
Odessa, Texas 117 -
McAllen, Texas 209 -
Hampton, Virginia 708 -
Mumbai, India 250 -
--- -
Total workstations 11,675
Denver, Colorado - 47,426
Baton Rouge, Louisiana - 480
Omaha, Nebraska - 25,574
Tulsa, Oklahoma - 940
San Antonio, Texas - 2,732
Hampton, Virginia - 744
Calgary, Alberta , Canada - 391
---
Total voice response ports - 78,287
The Company occupied approximately 1,391,000 square feet of office space at
December 31, 2001. 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
13
facilities located in San Antonio, Texas; Pensacola, Florida; 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 has executed a lease agreement for a 158,000 square foot office building
in Omaha, Nebraska that is currently under construction and scheduled for
completion in mid-2002.
The Company believes that its facilities are adequate for its current
requirements and that additional space will be available as required. See Item
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations and Item 8. Financial Statements and Supplementary Data 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, West Telemarketing Corporation, West Telemarketing Corporation
Outbound, and West Telemarketing Insurance Agency, Inc. Plaintiffs allege that
they were not paid for all compensable work performed by them during their
employment. Plaintiffs seek recovery under the theories of quantum meruit,
common law fraud, common law debt, conversion and civil theft. 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
quantum meruit 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. On November 7, 2001,
the San Antonio Court of Appeals found that the trial court abused its
discretion in certifying the class and reversed and remanded the matter back to
the trial court for any further proceedings consistent with the San Antonio
Court of Appeals decision. On November 20, 2001, the plaintiffs filed a Motion
for Rehearing and a Motion for Rehearing en banc. On January 29, 2002, the San
Antonio Court of Appeals denied the motions for rehearing. The Plaintiffs have
45 days in which to request review from the Texas Supreme Court.
Brandy L. Ritt, et al. v. Billy Blanks Enterprises, et al. was filed in
January 2001 in the Court of Common Pleas in Cuyahoga County, Ohio, against two
of the Company's clients. The suit, a purported class action, was amended for
the third time in July 2001 and the Company was added as a defendant at that
time. The suit, which seeks statutory, compensatory, and punitive damages as
well as injunctive and other relief, alleges violation of various provisions of
Ohio's consumer protection laws, negligent misrepresentation, fraud, breach of
contract, unjust enrichment and civil conspiracy in connection with the
marketing of certain membership programs offered by the Company's clients. On
February 6, 2002 the court denied the plaintiffs' motion for class
certification.
14
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 ..............56 Chairman of the Board and Director
Mary E. West ..............56 Vice Chair of the Board, Secretary and Director
Thomas B. Barker ..........47 President, Chief Executive Officer and Director
Nancee Shannon Berger .....41 Chief Operating Officer
Michael A. Micek ..........52 Chief Financial Officer and Treasurer, Executive Vice
President - Finance
Michael E. Mazour .........41 Executive Vice President - Direct Teleservices
Mark V. Lavin .............43 President - Operator Teleservices
Steven M. Stangl ..........43 President - Interactive Teleservices
Todd B. Strubbe ...........38 President, Chief Executive Officer - West Direct
Michael M. Sturgeon .......40 Executive Vice President - Sales and Marketing
Jon R. Hanson .............35 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.
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.
15
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 - Interactive Teleservices in September 1998. Mr.
Stangl was promoted to President - Interactive Teleservices in September 2000.
Todd B. Strubbe joined West Direct, Inc. in July 2001 as President and
Chief Executive Officer. He most recently was President and Chief Operating
Officer of CompuBank, N.A., prior to its sale of customers and deposits to
NetBank. He was with First Data Corporation from 1995 to 2000, where he was
Managing Director, Systems Architecture and Product Development for its $1.4
billion division, First Data Resources. At First Data Resources, Mr. Strubbe was
responsible for strategic planning and marketing, product development and
management, and systems architecture. Prior to this, Mr. Strubbe was President
of First Data's Electronic Payments Group and Vice President of Corporate
Planning and Development.
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.
16
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.
2000 High Low
----
First Quarter $26.3125 $18.25
Second Quarter $27.75 $21.0625
Third Quarter $25.25 $22.00
Fourth Quarter $30.00 $18.125
2001
----
First Quarter $31.375 $18.50
Second Quarter $29.18 $19.875
Third Quarter $27.40 $16.59
Fourth Quarter $27.00 $18.70
As of March 1, 2002, there were 65 holders of record of Common Shares and
approximately 3,100 beneficial shareholders. As of the same date, there were a
total of 65,668,378 Common Shares issued and 65,516,134 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 income statement and balance sheet data has
been derived from the audited historical consolidated financial statements of
the Company. The Company's consolidated financial statements as of December 31,
2001 and 2000, and for the years ended December 31, 2001, 2000 and 1999 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.
17
Year ended December 31,
-----------------------------------------------------------------------------
2001 2000 1999 1998 1997
--------------- -------------- --------------- -------------- ---------------
(in thousands, except for per share and selected operating data)
Income Statement Data:
Revenue $ 780,159 $ 724,505 $ 562,444 $ 482,823 $ 398,832
Cost of services 398,892 371,549 288,503 256,494 220,858
Selling, general and administrative expenses 260,426 243,573 194,610 152,838 118,878
--------------- -------------- --------------- -------------- ---------------
Operating income 120,841 109,383 79,331 73,491 59,096
Other income 81 1,539 1,027 1,269 1,716
--------------- -------------- --------------- -------------- ---------------
Income before income tax expense and
minority interest 120,922 110,922 80,358 74,760 60,812
Income tax expense 44,633 40,663 30,604 28,769 23,402
--------------- -------------- --------------- -------------- ---------------
Income before minority interest 76,289 70,259 49,754 45,991 37,410
Minority interest in net income of a
consolidated subsidiary 503 - - - -
--------------- -------------- --------------- -------------- ---------------
Net income $ 75,786 $ 70,259 $ 49,754 $ 45,991 $ 37,410
=============== ============== =============== ============== ===============
Earnings per share:
Basic $ 1.17 $ 1.10 $ 0.79 $ 0.73 $ 0.59
Diluted $ 1.11 $ 1.03 $ 0.77 $ 0.73 $ 0.59
Weighted average number of common shares
outstanding:
Basic 64,895 64,043 63,330 63,330 63,330
Diluted 68,130 67,950 64,380 63,353 63,346
Selected Operating Data:
EBITDA (1) $ 169,596 $ 154,756 $ 117,019 $ 99,909 $ 79,256
EBITDA margin (2) 21.7% 21.4% 20.8% 20.7% 19.9%
Operating margin (3) 15.5% 15.1% 14.1% 15.2% 14.8%
Net income margin (4) 9.7% 9.7% 8.9% 9.5% 9.4%
Net cash flows from operating activities 101,784 111,050 114,221 11,903 45,132
Number of workstations (at end of period) 11,675 10,147 8,364 7,624 5,931
Number of ports (at end of period) 78,287 50,573 33,476 11,160 8,056
As of December 31,
-----------------------------------------------------------------------------
2001 2000 1999 1998 1997
--------------- -------------- --------------- -------------- ---------------
Balance Sheet Data:
Working capital $ 235,180 $ 151,006 $ 104,427 $ 70,699 $ 55,320
Property and equipement, net 202,671 197,178 167,934 144,139 111,710
Total assets 591,435 553,907 408,989 326,139 282,150
Total debt 30,271 41,355 45,196 30,952 21,686
Stockholders' equity 468,159 378,125 291,962 242,208 196,217
_____________
(1) "EBITDA" is defined as income before income tax expense and minority
interest, 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.
(2) Represents EBITDA as a percentage of revenue.
(3) Represents operating income as a percentage of revenue.
(4) Represents net income as a percentage of revenue.
18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of the Company's financial condition
and results of operations should be read in conjunction with the Consolidated
Financial Statements and the Notes thereto appearing elsewhere in this Annual
Report on Form 10-K.
Certain statements under this caption constitute "forward-looking
statements" as defined under the Private Securities Litigation Reform Act of
1995, which involve risks and uncertainties that could cause actual results to
differ materially from the Company's historical experience and the Company's
present expectations or projections. The Company's actual results in the future
could differ significantly from the results discussed or implied in such
forward-looking statements. Generally, the words "believe," "expect," "intend,"
"estimate," "anticipate," "project," "will" and similar expressions identify
forward-looking statements, which generally are not historical in nature.
Forward-looking statements are subject to certain risks and uncertainties that
could cause actual results to differ materially from the Company's historical
experience and present expectations or projections. As and when made, management
believes that these forward-looking statements are reasonable. However, caution
should be taken not to place undue reliance on any such forward-looking
statements since such statements speak only as of the date when made. The
Company undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise. Some of the 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, trend in the general economy and
government regulation.
In addition, recent terrorist attacks in the United States, as well as
future events occurring in response thereto or in connection therewith,
including, without limitation, future terrorist attacks against the United
States, rumors or threats of such attacks or war, armed hostilities or
international conflicts directly or indirectly involving the United States or
its allies or military or trade disruptions may impact the Company's operations.
Subsequent to the September 11, 2001 attacks on the World Trade Center and the
Pentagon, many Direct Teleservices division projects were temporarily halted and
the Company also experienced a reduction in Operator Teleservices division
projects as well. More generally, any of these events could cause consumer
confidence and spending to decrease or result in increased volatility in the
United States and worldwide financial markets and economy. They also could
result in prolonging the economic recession in the United States or abroad. Any
of these occurrences could have a significant impact on the Company's operating
results, revenues and costs and may result in the volatility of the market price
for the Company's common stock and on the future price of the Company's common
stock.
Overview
The Company is a leading provider of outsourced CRM solutions to businesses
on an outsourced basis. The Company believes it has established a distinct
competitive advantage in its ability to offer a range of integrated services on
a fully integrated basis.
Revenue: 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 the duration of the call and processed on behalf
of clients. Operator Teleservices services also generates revenue from calls
transferred to telemarketing representatives from interactive voice response
units and by providing assistance to clients in the design and implementation of
new applications. 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. Revenue for Direct Teleservices
services is generated generally on an hourly and success based rate basis at the
time the marketing representatives place calls to consumers on behalf of
clients. 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 is included in other current liabilities.
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.
19
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 markets which offer attractive
labor market characteristics. 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 agents 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,
-------------------------------------------
2001 2000 1999
------------ ------------- --------------
Revenue 100.0% 100.0% 100.0%
Cost of services 51.1 51.3 51.3
Selling, general and administrative expenses 33.4 33.6 34.6
Operating income 15.5 15.1 14.1
Other income 0.0 0.2 0.2
Income before income tax expense and minority interest 15.5 15.3 14.3
Income tax expense 5.7 5.6 5.4
Minority interest 0.1 - -
------------ ------------- --------------
Net Income 9.7% 9.7% 8.9%
============ ============= ==============
Years Ended December 31, 2001 and 2000
Revenue: Revenue increased $55.7 million or 7.7% to $780.2 million in 2001
from $724.5 million in 2000. The increase in revenue included $26.2 million
derived from new clients and $29.5 million derived from existing clients. The
overall revenue increase is attributable to higher call volumes.
During the year ended December 31, 2001, the Company provided service to
nearly 800 clients. Eighty percent of the Company's total revenue was generated
by 62 clients. During 2001, AT&T remained the Company's largest client and
accounted for 25% of total revenue, down from 28% in 2000.
Cost of Services: Cost of services represents direct labor, telephone
expense and other costs directly related to services activities. Costs of
services increased $27.4 million or 7.4% for the year ended December 31, 2001 to
$398.9 million from $371.5 million for the comparable period of 2000. As a
percentage of revenue, cost of services decreased to 51.1% for 2001 from 51.3%
for 2000.
Selling, General and Administrative Expenses: SG&A expenses increased by
$16.8 million or 6.9% to $260.4 million for the year ended December 31, 2001,
from $243.6 million in 2000. As a percentage of revenue, SG&A expenses decreased
to 33.4% for the year ended December 31, 2001, compared to 33.6% in 2000. The
decrease is attributable to management's focus on reducing these costs.
20
Operating Income: Operating income increased by $11.4 million or 10.5% to
$120.8 million in 2001 from $109.4 million in 2000. For the year ended December
31, 2001, operating income as a percentage of revenue increased 0.4% to 15.5%
from 15.1% for 2000.
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, 2001, totaled $0.1
million compared to $1.5 million for 2000. The reduction of $1.4 million for the
year ended December 31, 2001 is primarily the result of a $3.0 million write
down of an investment in Synchrony Communications, Inc. In May, 2000, the
Company acquired a minority interest in Synchrony Communications, Inc. The
intent of the investment was to enter into a strategic relationship with
Synchrony Communications, Inc. to offer additional tools for integrating
customer interactions across multiple communication channels (phone, fax, e-mail
and Web chat) to deliver consistent and dynamic customer support. During the
third quarter of 2001, the board of directors of Synchrony Communications, Inc.
decided it would be in the best interests of Synchrony to be acquired by divine,
inc. The acquisition was announced by divine, inc. on October 23, 2001 and later
consumated in the fourth quarter of 2001. Based on the acquisition terms, the
Company determined that this investment was permanently impaired, and as a
result, the entire investment of $3.0 million was written off.
Net Income: Net income increased by $5.5 million or 7.9% for the year ended
December 31, 2001 to $75.8 million from net income of $70.3 million in 2000. Net
income includes a provision for income tax expense at a combined effective rate
of 37.1% and 36.7% for 2001 and 2000, respectively.
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 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.
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
21
rate is due to maximizing state credits and incentive programs in various state
and local tax jurisdictions.
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, 2001. The Company's credit facility contains certain financial covenants and
restrictions, which were met at December 31, 2001. The credit facility expires
on June 29, 2002. The Company believes it could increase the amount of the
facility, if needed.
Throughout 2001, the Company purchased $53.7 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 4.5% to 5.4%.
Net cash flow from operating activities was $101.8 million for the year
ended December 31, 2001, compared to net cash flow from operating activities of
$111.1 and $114.2 million for the years ended December 31, 2000 and 1999,
respectively. The decrease from 2000 was due principally to an increase in
accounts receivable, decreases in other liabilities and accrued expenses and
customer deposits and holdbacks. The decrease was partially offset by increases
in net income and depreciation. The decrease from 1999 to 2000 was due primarily
to increases in accounts receivable and other assets offset by increased
earnings.
Net cash flow used in investing activities was $39.5 million for the year
ended December 31, 2001, compared to $68.5 million and $51.6 million, for the
comparable periods of 2000 and 1999, respectively. The decrease from 2000 was
due primarily to a reduction in purchases of property and equipment. The
increase from 1999 to 2000 was primarily due to investments in contact centers.
Net cash flow used in financing activities decreased $22.6 million to $18.9
million for the year ended December 31, 2001, compared to net cash flows from
financing activities of $3.7 million and $7.7 million used, for the comparable
periods of 2000 and 1999, respectively. In the year ended December 31, 2001, net
cash flows used in financing activities were primarily for payments of debt and
capital lease obligations. Further, preferred stock in a consolidated subsidiary
was acquired for $12.0 million from a former minority stockholder of that
subsidiary. The cash used was offset by $11.6 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. The net
cash flow provided and used in financing activities for the years ended December
31, 2000 and 1999 were due primarily to the proceeds from the exercise of stock
options and payments on debt and capital lease obligations.
During the first quarter of 2001, the Company executed lease agreements for
a 34,000 square foot office building in San Antonio, Texas and a 158,000 square
foot office building in Omaha, Nebraska that is currently under construction and
scheduled for completion in mid-2002. The leases have five-year terms with
renewal options. The lease payments are based on a variable interest rate at
87.5 basis points over a selected LIBOR, 3.23%, at December 31, 2001. The
aggregate lease expense in 2001 for the San Antonio building was $0.5 million.
The lessor is capitalizing the interest paid on the Omaha building during
construction. The Company may, at any time, elect to exercise a purchase option
of approximately $10.0 million for the San Antonio building and approximately
$34.0 million for the Omaha building.
On May 4, 2000, the Company consummated the purchase of an equity interest
in excess of 80% in West Direct. In connection therewith, the Company's venture
partner was extended an option during the first 18 months to surrender its 5%
equity interest in West Direct in exchange for $12.0 million in cash plus an
option to acquire 325,000 shares of the Company's common stock, exercisable at
$26.03 per share. The venture partner elected to exercise this option on October
2, 2001. As a result, the Company owned 87.75% of West Direct at December 31,
2001.
22
Subsequent to December 31, 2001, the Company purchased two companies, Tel
Mark Sales, Inc. and Dakotah Direct II, LLC. Tel Mark Sales, Inc., based in
Appleton, Wisconsin is a provider of outsourced business to business customer
care and telemarketing services. Dakotah Direct II, LLC, based in Spokane,
Washington, provides customer relationship services focused on providing
marketing and customer solutions through a variety of channels. The combined
consideration for the two acquisitions was $42.8 million paid entirely in cash.
There is a provision for a three-year contingent earn-out with a maximum
earn-out of $5.0 million per year relating to one of the acquisitions. The
earn-out is based on the acquired entity achieving certain revenue growth
objectives.
Contractual Obligations
As described in the Item 8. Financial Statements and Supplementary Data,
the Company has contractual obligations that may affect the financial condition
of the Company. However, based on management's assessment of the underlying
provisions and circumstances of the material contractual obligations of the
Company, there is no known trend, demand, commitment, event or uncertainty that
is reasonably likely to occur which would have a material effect on the
Company's financial condition or results of operations.
Below is a summary disclosure of the Company's contractual obligations at
December 31, 2001 (dollars in thousands):
Contractual Less than After 5
Obligations Total 1 year 1 - 3 years 4 - 5 years years
- ------------------------------------ --------------------------------------------------------------------------
Long - Term Debt $ 22,817 $ 6,525 $ 16,292 $ - $ -
Capital Lease Obligations 7,454 2,853 4,601 - -
Operating Leases 33,653 9,077 21,260 3,316 -
Acquisition Commitments 42,750 42,750 - - -
--------------------------------------------------------------------------
Total Contractual Cash Obligations $ 106,674 $ 61,205 $ 42,153 $ 3,316 $ -
==========================================================================
The Company is subject to lawsuits and claims, which arise out of the
normal course of its business. The Company and certain of its subsidiaries are
defendants in various litigation matters in the ordinary course of business,
some of which involve claims for damages that are substantial in amount.
Management believes, except for the items listed in 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 $53.7 million for the year ended December 31, 2001, in which
$39.2 million of these expenditures were financed from operations, $7.0 million
from notes payable to a bank and the remaining $7.5 million was financed using
capital leases. Capital expenditures for 2001 consisted primarily of furniture,
telephone and computer equipment purchases associated with the addition of three
new contact centers and upgrades to existing contact centers. The Company
currently projects its capital expenditures for 2002 to be approximately $55.0
to $65.0 million, primarily for capacity expansion and upgrades at existing
facilities and the addition of two contact centers late in the fourth quarter.
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.
23
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" as defined under the Private Securities Litigation Reform Act of
1995, which involve risks and uncertainties that could cause actual results to
differ materially from the Company's historical experience and present
expectations or projections. The Company's actual results in the future could
differ significantly from the results discussed or implied in such
forward-looking statements. Generally, the words "believe," "expect," "intend,"
"estimate," "anticipate," "project," "will" and similar expressions identify
forward-looking statements, which generally are not historical in nature.
Forward-looking statements are subject to certain risks and uncertainties that
could cause actual results to differ materially from the Company's historical
experience and present expectations or projections. As and when made, management
believes that these forward-looking statements are reasonable. However, caution
should be taken not to place undue reliance on any such forward-looking
statements since such statements speak only as of the date when made. The
Company undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise. Some of the 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, trend in the general economy and
government regulation.
In addition, recent terrorist attacks in the United States, as well as
future events occurring in response thereto or in connection therewith,
including, without limitation, future terrorist attacks against the United
States, rumors or threats of such attacks or war, armed hostilities or
international calamity directly or indirectly involving the United States or its
allies or military or trade disruptions may impact the Company's operations.
Subsequent to the September 11, 2001 attacks on the World Trade Center and the
Pentagon, many Direct Teleservices division projects were temporarily halted and
the Company also experienced a reduction in Operator Teleservices division
projects as well. More generally, any of these events could cause consumer
confidence and spending to decrease or result in increased volatility in the
United States and worldwide financial markets and economy. They also could
result in economic recession in the United States or abroad. Any of these
occurrences could have a significant impact on the Company's operating results,
revenues and costs and may result in the volatility of the market price for the
Company's common stock and on the future price of the Company's common stock.
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 $30.3 million of long-term
obligations and $25.0 million of credit facilities with variable interest rates.
There were no borrowings outstanding under these credit facilities at December
31, 2001. 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.
24
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, 2002. 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, 2002. 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, 2002. 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, 2002. 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, 2001 and 2000 ....................... F-2
Consolidated statements of operations for the years ended December 31, 2001,
2000 and 1999 ..................................................................... F-3
Consolidated statements of stockholders' equity for the years ended December 31,
2001, 2000 and 1999 ............................................................... F-4
Consolidated statements of cash flows for the years ended December 31, 2001,
2000 and 1999 ..................................................................... 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, 2001) ................................................................ 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.
25
(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 December
21, 2001
10.07 Employment Agreement between the Company and Michael A. Micek dated January 1, 1999, as amended December
21, 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 December
21, 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, 1999, as amended December 21,
2001
10.15 Employment Agreement between the Company and Steven M. Stangl dated January 1, 1999, as amended December
21, 2001
10.16 Employment Agreement between the Company and Michael M. Sturgeon, dated January 1, 1999, as amended
December 21, 2001
10.17 Employment Agreement between the Company and Jon R. (Skip) Hanson, dated October 4, 1999, as amended
December 21, 2001
10.18 Employment Agreement between the Company and Michael E. Mazour, dated July 1, 2000, as amended December
21, 2001
10.19 Employment Agreement between West Direct, Inc. and Todd B. Strubbe, dated July 30, 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
26
(b) Reports on Form 8-K.
None.
27
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
(Principal Executive Officer)
March 15, 2002
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
Signatures Title Date
---------- ----- ----
/S/ GARY L. WEST Chairman of the Board and Director March 15, 2002
- ---------------------------------------
Gary L. West
/S/ MARY E. WEST Vice Chair of the Board and Director March 15, 2002
- ---------------------------------------
Mary E. West
/S/ THOMAS B. BARKER President and Chief Executive Officer and Director March 15, 2002
- --------------------------------------- (Principal Executive Officer)
Thomas B. Barker
/S/ MICHAEL A. MICEK Chief Financial Officer, Executive Vice President - March 15, 2002
- --------------------------------------- Finance and Treasurer (Principal Financial and
Michael A. Micek Accounting Officer)
/S/ WILLIAM E. FISHER Director March 15, 2002
- ---------------------------------------
William E. Fisher
/S/ GEORGE H. KRAUSS Director March 15, 2002
- ---------------------------------------
George H. Krauss
/S/ GREG T. SLOMA Director March 15, 2002
- ---------------------------------------
Greg T. Sloma
28
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, 2001 and 2000, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 2001. 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, 2001
and 2000, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 2001 in conformity with
accounting principles generally accepted in the United States of America.
/s/ DELOITTE & TOUCHE LLP
Deloitte & Touche LLP
Omaha, Nebraska
February 6, 2002
F-1
WEST CORPORATION
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
December 31,
----------------------------------
2001 2000
---------------- ---------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 151,520 $ 108,113
Accounts receivable, net of allowance for doubtful accounts of $6,993 and $6,611 131,316 129,695
Notes receivable 4,315 2,153
Accounts receivable - financing 18,926 19,154
Other 22,695 24,550
---------------- ---------------
Total current assets 328,772 283,665
PROPERTY AND EQUIPMENT:
Land and improvements 6,710 5,392
Buildings 42,314 30,678
Telephone and computer equipment 220,387 188,775
Office furniture and equipment 37,484 35,100
Leasehold improvements 59,005 56,724
Construction in process 10,172 17,243
---------------- ---------------
Total property and equipment 376,072 333,912
Accumulated depreciation and amortization (173,401) (136,734)
---------------- ---------------
Total property and equipment, net 202,671 197,178
GOODWILL, net of accumulated amortization of $8,591 and $6,906 41,942 43,627
NOTES RECEIVABLE AND OTHER ASSETS 18,050 29,437
---------------- ---------------
TOTAL ASSETS $ 591,435 $ 553,907
================ ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 47,426 $ 46,132
Customer deposits and holdbacks 8,131 22,007
Accrued wages and benefits 11,412 13,353
Accrued phone expense 5,520 8,767
Other current liabilities 11,725 22,820
Current maturities of long-term obligations 9,378 19,580
---------------- ---------------
Total current liabilities 93,592 132,659
LONG - TERM OBLIGATIONS, less current maturities 20,893 21,775
DEFERRED INCOME TAXES 6,629 5,884
OTHER LONG TERM LIABILITIES 1,531 663
MINORITY INTEREST 631 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, 65,352 shares issued
and 65,200 outstanding and 64,547 shares issued and 64,445 outstanding 654 645
Additional paid-in capital 191,821 176,200
Retained earnings 279,727 203,941
Treasury stock at cost (152 and 102 shares) (4,043) (2,661)
---------------- ---------------
Total stockholders' equity 468,159 378,125
---------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 591,435 $ 553,907
================ ===============
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,
-----------------------------------
2001 2000 1999
--------- --------- ---------
REVENUE $ 780,159 $ 724,505 $ 562,444
COST OF SERVICES 398,892 371,549 288,503
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 260,426 243,573 194,610
--------- --------- ---------
OPERATING INCOME 120,841 109,383 79,331
OTHER INCOME (EXPENSE):
Interest income 4,694 4,440 3,231
Interest expense - including interest expense - financing of $365, $184
and $490 (3,015) (3,107) (2,549)
Other, net (1,598) 206 345
--------- --------- ---------
Other income (expense) 81 1,539 1,027
--------- --------- ---------
INCOME BEFORE INCOME TAX EXPENSE AND MINORITY INTEREST 120,922 110,922 80,358
INCOME TAX EXPENSE:
Current income tax expense 45,119 41,466 31,476
Deferred income tax (benefit) (486) (803) (872)
--------- --------- ---------
Income tax expense 44,633 40,663 30,604
--------- --------- ---------
INCOME BEFORE MINORITY INTEREST 76,289 70,259 49,754
MINORITY INTEREST IN NET INCOME OF A CONSOLIDATED SUBSIDIARY 503 -- --
--------- --------- ---------
NET INCOME $ 75,786 $ 70,259 $ 49,754
========= ========= =========
EARNINGS PER COMMON SHARE:
Basic $ 1.17 $ 1.10 $ 0.79
========= ========= =========
Diluted $ 1.11 $ 1.03 $ 0.77
========= ========= =========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:
Basic common shares 64,895 64,043 63,330
Dilutive impact of potential common shares from stock options 3,235 3,907 1,050
--------- --------- ---------
Diluted common shares 68,130 67,950 64,380
========= ========= =========
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, 1999 $ 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
Net income - - 75,786 - 75,786
Stock options issued and exercised
including related tax benefits (805 shares) 9 15,621 - - 15,630
Treasury stock (50 shares) - - - (1,382) (1,382)
------------- --------------- --------------- ------------ -----------------
BALANCE, December 31, 2001 $ 654 $ 191,821 $ 279,727 $ (4,043) $ 468,159
============= =============== =============== ============ =================
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,
-----------------------------------
2001 2000 1999
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 75,786 $ 70,259 $ 49,754
Adjustments to reconcile net income to net cash flows
from operating activities:
Depreciation and amortization 50,353 45,167 37,343
Loss on sale of equipment 305 723 170
Deferred income tax (benefit) (486) (803) (872)
Minority interest 503 -- --
Write-off of investment 3,000 -- --
Changes in operating assets and liabilities:
Accounts receivable (2,002) (42,062) 8,244
Other assets 3,784 (10,145) (1,610)
Accounts payable 1,393 12,387 20,888
Other liabilities and accrued expenses (16,976) 22,790 4,507
Customer deposits and holdbacks (13,876) 12,734 (4,203)
--------- --------- ---------
Net cash flows from operating activities 101,784 111,050 114,221
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (46,205) (70,436) (38,953)
Proceeds from disposal of property and equipment 141 1,425 1,285
Issuance of notes receivable -- -- (15,401)
Proceeds from payments of notes receivable 6,603 497 1,471
--------- --------- ---------
Net cash flows from investing activities (39,461) (68,514) (51,598)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt 7,000 10,000 6,000
Payments of long-term obligations (25,619) (17,701) (13,712)
Redemption of preferred stock of subsidiary (12,000) -- --
Net change in line of credit agreement -- -- (2,000)
Proceeds from accounts receivable financing 129 (4,491) 2,026
Proceeds from stock options exercised including related tax benefits 11,574 15,904 --
--------- --------- ---------
Net cash flows from financing activities (18,916) 3,712 (7,686)
--------- --------- ---------
NET CHANGE IN CASH AND CASH EQUIVALENTS 43,407 46,248 54,937
CASH AND CASH EQUIVALENTS, Beginning of period 108,113 61,865 6,928
--------- --------- ---------
CASH AND CASH EQUIVALENTS, End of period $ 151,520 $ 108,113 $ 61,865
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 2,599 $ 3,580 $ 3,092
========= ========= =========
Cash paid during the period for income taxes $ 43,280 $ 32,961 $ 29,842
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES:
Acquisition of property through assumption of long-term obligations $ 7,536 $ 3,860 $ 21,956
========= --------- =========
Application of accounts receivable financing to accounts payable $ 99 $ -- $ --
========= ========= =========
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 $ 1,382 $ 2,661 $ --
========= ========= =========
Issuance of stock options in consideration for minority interest $ 2,674 $ -- $ --
========= ========= =========
Transfer of accounts receivable to notes receivable $ 381 $ 423 $ 2,000
========= ========= =========
The accompanying notes are an integral part of these financial statements.
F-5
WEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business Description - West Corporation (the "Company") 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 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.
Founded in 1986 and headquartered in Omaha, Nebraska, the Company operates
a national network of 31 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, which is included in other current
liabilities, was $4,411 and $8,257, at December 31, 2001 and 2000 respectively.
Cost of Services - Cost of services includes labor, telephone and other
expense 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.
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 obligations. In May, 2000, the Company acquired a
minority interest in Synchrony Communications, Inc. The intent of the investment
was to enter a strategic relationship with Synchrony Communications, Inc. to
offer additional tools for integrating customer interactions across multiple
communication channels (phone, fax, e-mail and Web chat) to deliver consistent
and dynamic customer support. During the three months ended September 30, 2001,
the board of directors of Synchrony Communications, Inc. decided it would be in
F-6
WEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
the best interests of Synchrony to be acquired by divine, inc. The Company
determined that this investment was permanently impaired, and as a result, the
entire investment of $3.0 million was written off.
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 28 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. Upon adoption of Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets, beginning on January 1, 2002, the Company
will cease periodic amortization of this asset, however, the asset will be
tested for impairment on an annual basis.
Notes Receivable - Notes receivable and other assets are presented net of
an allowance for doubtful accounts of $2,900 in 2001 and $2,768 in 2000.
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 claimed 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. At December 31, 2001, there were 244,000 stock
options outstanding with an exercise price exceeding the average market value of
common stock that were therefore excluded from the computation of shares
contingently issuable upon exercise of the options. At December 31, 2000 and
1999 the average market value of the common stock exceeded the exercise price of
all of the outstanding stock options and therefore all options were included in
the computation of shares contingently issuable upon exercise of the options.
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
F-7
WEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
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.
Minority Interest - On May 4, 2000, the Company consummated the purchase of
an equity interest in excess of 80% in a new venture that was formed to 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 CRM industry and a wide range of other
industries. In connection therewith, the Company's venture partner was extended
an option during the first 18 months of the venture to surrender its 5% equity
interest in the venture in exchange for $12,000 in cash plus an option to
acquire 325,000 shares of the Company's common stock, exercisable at $26.03 per
share. The venture partner elected to exercise this option on October 2, 2001.
As a result, the Company owned 87.75% of the venture at December 31, 2001. The
remaining ownership interest is held by certain of the Company's executive
officers who were granted the equity interest in order to incentivize the
development and pursue this opportunity.
The Company utilized the Black-Scholes pricing model to value the 325,000
options. The sum of that calculation and the $12,000 in cash resulted in the
valuation of the patent at $14,700, which is being amortized over the life of
the patent, 17 years.
Recent Accounting Pronouncements - In June 2001, the Financial Accounting
Standards Board ("FASB") approved the issuance of Statement of Financial
Accounting Standards ("SFAS") No. 141, Business Combinations, and SFAS No. 142,
Goodwill and Other Intangible Assets. These standards, issued in July 2001,
establish accounting and reporting for business combinations. SFAS No. 141
requires all business combinations entered into subsequent to June 30, 2001 to
be accounted for using the purchase method of accounting. SFAS No. 142 provides
that goodwill and other intangible assets with indefinite lives will not be
amortized, but will be tested for impairment on an annual basis. SFAS No. 142 is
effective for the Company beginning on January 1, 2002. The historical impact of
not amortizing goodwill would have been to increase net income for the years
ended December 31, 2001, 2000 and 1999 by $1,685 annually. The Company has not
yet determined the effect of goodwill impairment, if any, that this statement
may have on its financial statements. The Company does not believe the other
provisions of these standards will have a material effect on these financial
statements.
In July 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations. This standard is effective for fiscal years beginning after June
15, 2002, and provides accounting requirements for asset retirements obligations
associated with tangible long-lived assets. The Company does not believe that
adoption of this standard will have a material effect on its financial
statements.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets, which supersedes SFAS No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of.
SFAS No. 144 develops one accounting model for long-lived assets that are to be
disposed of by sale. SFAS No. 144 requires that long-lived assets that are to be
disposed of by sale be measured at the lower of book value or fair value less
cost to sell. This statement also supersedes certain aspects of Accounting
Principles Board Opinion No. 30 ("APB 30"), Reporting the Results of
Operations-Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions, with
regard to reporting the effects of a disposal of a segment of a business and
will require expected future operating losses from discontinued operations to be
reported in discontinued operations in the period incurred (rather than as of
the measurement date as presently required by APB 30). This standard is
effective for fiscal years beginning after December 15, 2001. The Company does
not believe that adoption of this standard will have a material effect on its
financial statements.
Reclassifications - Certain reclassifications have been made to prior
years' financial statements to conform to the current year presentation.
F-8
WEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
B. ACCOUNTS RECEIVABLE FINANCING PROGRAM
The Company had advances to customers through its accounts receivable
financing programs aggregating $18,926 and $19,154 at December 31, 2001 and
2000, 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 7.75% at
December 31, 2001).
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 3.75% at December 31, 2001). The revolving credit facility expires
on June 29, 2002. Outstanding borrowings under the revolving credit facility
totaled $-0- at December 31, 2001 and 2000, respectively. The Company's credit
facility contains certain financial and other covenants which contain current
ratio and tangible net worth requirements and limitations on indebtedness, among
others. The financial covenants were met at December 31, 2001.
Long-term obligations consisted of the following:
December 31,
------------------------------
2001 2000
--------------- -------------
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 $ 10,717 $ 11,633
Notes payable to bank, due in monthly installments of $221, including interest
at 1% less than the prime rate maturing October 16, 2004 6,611 -
Note payable to bank, due in monthly installments of $278, including interest
at 1% less than the prime rate maturing June 30, 2003 5,000 8,333
Note payable to bank, due in monthly installments of $92, including interest
at 6.75% maturing April 1, 2002 400 2,885
Note payable to vendor, due in monthly installments of $30, including interest
at 5.40% maturing March 31, 2002 89 1,272
Notes payable to bank, paid in October 2001 - 1,875
Capital lease obligations (See Note D) 7,454 15,357
--------------- -------------
30,271 41,355
Less current maturities:
Debt 6,525 8,792
Capital lease obligations (See Note D) 2,853 10,788
--------------- -------------
Current maturities of long-term obligations 9,378 19,580
--------------- -------------
Long-term obligations $ 20,893 $ 21,775
=============== =============
Several of 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, 2001.
F-9
WEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Scheduled maturities on long-term debt excluding capital lease obligations
described in Note D, are as follows:
Year Ending December 31,
2002 $ 6,525
2003 14,347
2004 1,945
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 $8,188, $6,730 and $4,595 for the years ended
December 31, 2001, 2000 and 1999, 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.
December 31,
------------------------------
2001 2000
--------------- --------------
Assets under capital leases consisted of:
Telephone and computer equipment $ 23,176 $ 26,403
Office furniture and equipment 676 3,328
Lease/building improvements 101 336
--------------- --------------
Total cost 23,953 30,067
Accumulated depreciation (8,284) (10,428)
--------------- --------------
Net book value $ 15,669 $ 19,639
=============== ==============
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:
F-10
WEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Operating Capital
Leases Leases
-------------- --------------
Year Ending December 31,
2002 $ 9,077 $ 3,167
2003 9,380 2,725
2004 6,576 2,117
2005 5,304 -
2006 2,870 -
2007 and thereafter 446 -
-------------- --------------
Total minimum obligations $ 33,653 8,009
==============
Less interest at 4.50% to 7.31% 555
--------------
Present value of net minimum lease payments 7,454
Less current portion 2,853
--------------
$ 4,601
==============
During the first quarter of 2001, the Company executed lease agreements for
a 34,000 square foot office building in San Antonio, Texas and a 158,000 square
foot office building in Omaha, Nebraska that is currently under construction and
scheduled for completion in mid-2002. The leases have five-year terms with three
renewal options of five years each. The lease payments are based on a variable
interest rate at 87.5 basis points over a selected LIBOR, 3.23%, at December 31,
2001. The estimated aggregate lease expense on these leases for 2002 through
2006 is included in the minimum lease payments schedule above. The Company may,
at any time, elect to exercise a purchase option of approximately $10,000 for
the San Antonio building and approximately $34,000 for the Omaha building.
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,
2002 $ 976
2003 1,035
2004 717
Lease expense was $921, $869 and $820 for the years ended December 31, 2001,
2000 and 1999, respectively.
F. INCOME TAXES
Components of the actual income tax expense were as follows:
F-11
WEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Year Ended December 31,
-----------------------------------------------
2001 2000 1999
-------------- --------------- --------------
Current income tax expense:
Federal $ 44,006 $ 39,134 $ 29,582
State 1,113 2,332 1,894
-------------- --------------- --------------
45,119 41,466 31,476
-------------- --------------- --------------
Deferred income tax expense (benefit):
Federal (418) (707) (687)
State (68) (96) (185)
-------------- --------------- --------------
(486) (803) (872)
-------------- --------------- --------------
$ 44,633 $ 40,663 $ 30,604
============== =============== ==============
A reconciliation of income tax expense computed at statutory tax rates
compared to effective income tax rates was as follows:
2001 2000 1999
-------------- -------------- --------------
Statutory rate 35.0% 35.0% 35.0%
State income tax effect 0.6% 1.4% 2.5%
Other 1.5% 0.3% 0.6%
-------------- -------------- --------------
37.1% 36.7% 38.1%
============== ============== ==============
Significant temporary differences between reported financial and taxable
earnings that give rise to deferred tax assets and liabilities were as follows:
December 31,
--------------------------
2001 2000
------------ -----------
Deferred tax assets:
Allowance for doubtful accounts $ 3,710 $ 2,479
Deferred tax liabilities:
Depreciation 6,629 5,884
------------ -----------
Net deferred tax liability $ 2,919 $ 3,405
============ ===========
The deferred tax asset at December 31, 2001 and 2000 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 employees contributions up to 14%
of their gross salary. The Company's matching contributions are 100% vested
after the employee has attained five years of service. Total employer
contributions under the plan were $1,233, $1,614 and $1,390 for the years ended
December 31, 2001, 2000 and 1999, respectively.
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
F-12
WEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
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 $318 and $221 for the years ended December 31, 2001 and
2000.
The Company's 1996 Stock Incentive Plan (the "Plan") authorized granting to
employees of the Company 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.
The following table presents the activity of the stock options for each of
the fiscal years ended December 31, 2001, 2000 and 1999 and the stock options
outstanding at the end of the respective fiscal years:
Stock Option Weighted Average
Shares Exercise Price
--------------- ----------------
Outstanding at January 1, 1999 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
--------------- ----------------
Granted 474,000 23.9668
Canceled (383,865) 9.7027
Exercised (804,520) 9.7979
--------------- ----------------
Outstanding at December 31, 2001 5,198,240 $ 11.4626
=============== ================
Shares available for future grants at
December 31, 2001 2,313,745
===============
The following table summarizes information about the Company's stock
options outstanding at December 31, 2001:
Average Weighted
Range of Stock Option Remaining Average
Exercise Shares Contractual Exercise Stock Option
Prices Outstanding Life in Years Price Shares Exercisable
- -------------------- ----------------- ---------------- ---------------- ---------------------
$ 8.00 - $ 8.00 8,000 7.36 $ 8.0000 5,000
$ 9.69 - $ 9.69 4,221,110 6.96 $ 9.6875 1,296,670
$10.81 - $21.94 530,130 8.24 $14.2141 121,130
$23.13 - $23.38 127,500 9.02 $23.2450 16,878
$24.48 - $24.48 67,500 9.33 $24.4800 -
$25.32 - $25.32 67,500 8.84 $25.3125 16,878
$25.45 - $25.45 14,000 9.54 $25.4500 -
$26.01 - $26.01 10,000 9.37 $26.0100 -
$26.78 - $26.78 67,500 9.09 $26.7813 -
$27.56 - $27.56 85,000 9.01 $27.5625 -
----------------- --------------- -------------- ---------------------
$ 8.00 - $27.56 5,198,240 7.27 $11.4626 1,456,556
================= =============== ============== =====================
F-13
WEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
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,
2001, 2000 and 1999.
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; 2001,
2000 and 1999 net income and earnings per share would have been reduced to the
following pro forma amounts:
Year ended December 31,
--------------------------------------
2001 2000 1999
----------- ------------ -----------
Net Income:
As reported $ 75,786 $ 70,259 $ 49,754
Pro forma $ 72,680 $ 64,840 $ 41,782
Earnings per common share:
Basic as reported $ 1.17 $ 1.10 $ 0.79
Diluted as reported $ 1.11 $ 1.03 $ 0.77
Pro forma basic $ 1.12 $ 1.01 $ 0.66
Pro forma diluted $ 1.07 $ 0.95 $ 0.65
The weighted average fair value per share of options granted in 2001, 2000,
and 1999 was $15.44, $14.18 and $6.80, 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:
2001 2000 1999
----------- ------------ -----------
Risk-free interest rate 3.9% 6.2% 5.3%
Dividend yield 0.0% 0.0% 0.0%
Expected volatility 85.0% 75.0% 60.0%
Expected life (years) 4.3 4.0 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 Common Shares through annual
offerings to be made during the five-year period commencing July 1, 1997. The
Company currently expects to extend the expiration date of this plan beyond June
30, 2002. 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
($24.23 at July 2, 2001). 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 Common Shares.
F-14
WEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
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 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, West Telemarketing Corporation, West Telemarketing Corporation
Outbound, and West Telemarketing Insurance Agency, Inc. Plaintiffs allege that
they were not paid for all compensable work performed by them during their
employment. Plaintiffs seek recovery under the theories of quantum meruit,
common law fraud, common law debt, conversion and civil theft. 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
quantum meruit 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. On November 7, 2001,
the San Antonio Court of Appeals found that the trial court abused its
discretion in certifying the class and reversed and remanded the matter back to
the trial court for any further proceedings consistent with the San Antonio
Court of Appeals decision. On November 20, 2001, the plaintiffs filed a Motion
for Rehearing and a Motion for Rehearing en banc. On January 29, 2002, the San
Antonio Court of Appeals denied the motions for rehearing. The plaintiffs have
45 days in which to request review from the Texas Supreme Court.
Brandy L. Ritt, et al. v. Billy Blanks Enterprises, et al. was filed in
January 2001 in the Court of Common Pleas in Cuyahoga County, Ohio, against two
of the Company's clients. The suit, a purported class action, was amended for
the third time in July 2001 and the Company was added as a defendant at that
time. The suit, which seeks statutory, compensatory, and punitive damages as
well as injunctive and other relief, alleges violation of various provisions of
Ohio's consumer protection laws, negligent misrepresentation, fraud, breach of
contract, unjust enrichment and civil conspiracy in connection with the
marketing of certain membership programs offered by the Company's clients. On
February 6, 2002 the court denied the plaintiffs' motion for class
certification.
I. SIGNIFICANT CUSTOMERS AND CREDIT RISK CONCENTRATION
For the years ended December 31, 2001, 2000 and 1999, the Company had 62,
34 and 46 major customers, respectively, who accounted for approximately 80% of
total revenues. The Company had one customer, AT&T, who accounted for 25% of
total revenue for the year ended December 31, 2001 and 28% and 32% of total
revenue for the years ended December 31, 2000 and 1999, respectively. On
December 31, 2001 the Company had no material revenue or assets outside the
United States.
The accounts receivable, notes receivable and accounts receivable financing
subject the Company to the potential for credit risk with their customers. At
December 31, 2001, five customers accounted for $79,600 or 47.6% of the gross
receivables, compared to $74,500, or 44.7% of gross receivables, at December 31,
2000. The Company performs ongoing credit evaluations of its customers'
financial condition. The Company maintains an allowance for doubtful accounts
for potential credit losses based upon historical trends, specific collection
problems, historical write-offs, account aging and other analysis of all
accounts and notes receivable.
F-15
WEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(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, 2001 and 2000.
Three Months Ended
-----------------------------------------------------------------------
March 31, June 30, September 30, December 31,
2001 2001 2001 2001
------------- ------------- ------------- -------------
Revenue $ 203,042 $ 193,006 $ 180,968 $ 203,143
Cost of services 103,034 98,431 93,713 103,714
Selling, general and administrative expenses 66,091 64,171 61,736 68,428
------------- ------------- ------------- -------------
Operating income 33,917 30,404 25,519 31,001
Other income (expense) 654 994 (2,063) 496
------------- ------------- ------------- -------------
Income before income tax expense 34,571 31,398 23,456 31,497
Income tax expense 12,661 11,704 8,691 11,577
Minority Interest 73 209 24 197
------------- ------------- ------------- -------------
Net income $ 21,837 $ 19,485 $ 14,741 $ 19,723
============= ============= ============= ============
Earnings per common share:
Basic $ 0.34 $ 0.30 $ 0.23 $ 0.30
Diluted $ 0.32 $ 0.28 $ 0.22 $ 0.29
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
------------- ------------- ------------- -------------
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
K. SUBSEQUENT EVENTS
Subsequent to December 31, 2001, the Company purchased two companies, Tel
Mark Sales, Inc. and Dakotah Direct II, LLC. Tel Mark Sales, Inc., based in
Appleton, Wisconsin is a provider of outsourced business to business customer
care and telemarketing services. Dakotah Direct II, LLC, based in Spokane,
Washington, provides customer relationship services focused on providing
marketing and customer solutions through a variety of channels. The combined
consideration for the two acquisitions was $42,750 paid entirely in cash. There
is a provision for a three-year contingent earn-out with a maximum earn-out of
$5,000 per year relating to one of the acquisitions. The earn-out is based on
the acquired entity achieving certain revenue growth objectives.
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, 2001 and 2000, and for each
of the three years in the period ended December 31, 2001, and have issued our
report thereon dated February 6, 2002; 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.
/s/ DELOITTE & TOUCHE LLP
Deloitte & Touche LLP
Omaha, Nebraska
February 6, 2002
S-1
Schedule II
WEST CORPORATION AND SUBSIDIARIES
CONSOLIDATED VALUATION ACCOUNTS
THREE YEARS ENDED DECEMBER 31, 2001
(AMOUNTS IN THOUSANDS)
Additions -
Balance Charged to Deductions -
Beginning Cost and Amounts Balance
Description of Year Expenses Charged-Off End of Year
----------- --------------- ---------------- --------------- ----------------
December 31, 2001 - Allowance for doubtful
accounts - Accounts receivable $ 6,611 1,725 1,343 $ 6,993
--------------- ---------------- --------------- ----------------
December 31, 2000 - Allowance for doubtful
accounts - Accounts receivable $ 4,717 6,955 5,061 $ 6,611
--------------- ---------------- --------------- ----------------
December 31, 1999 - Allowance for doubtful
accounts - Accounts receivable $ 1,870 8,381 5,534 $ 4,717
--------------- ---------------- --------------- ----------------
December 31, 2001 - Allowance for doubtful
accounts - Long-term notes receivable $ 2,768 132 - $ 2,900
--------------- ---------------- --------------- ----------------
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 December 21, 2001
10.07 Employment Agreement between the Company and Michael A. Micek dated January 1, 1999, as **
amended December 21, 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 December 21, 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, 1999, as amended **
December 21, 2001
10.15 Employment Agreement between the Company and Steven M. Stangl dated January 1, 1999, as **
amended December 21, 2001
10.16 Employment Agreement between the Company and Michael M. Sturgeon, dated January 1, 1999, **
as amended December 21, 2001
10.17 Employment Agreement between the Company and Jon R. (Skip) Hanson, dated October 4, 1999, **
as amended December 21, 2001
10.18 Employment Agreement between the Company and Michael E. Mazour, dated July 1, 2000, as **
amended December 21, 2001
10.19 Employment Agreement between West Direct, Inc. and Todd B. Strubbe, dated July 30, 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