UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to ____________
Commission File Number 000-21771
West TeleServices Corporation
(Exact name of registrant as specified in its charter)
DELAWARE 47-0777362
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or 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
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 __
---
At November 6, 2000, 64,354,041 shares of Common Stock, par value $.01 per
share, of the registrant ("Common Stock") were outstanding.
INDEX
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - September 30, 2000 and December 31, 1999................................... 3
Consolidated Statements of Operations -
Three and Nine Months Ended September 30, 2000 and 1999.................................................. 4
Consolidated Statements of Cash Flows - Nine Months Ended September 30, 2000 and 1999.................... 5
Notes to Consolidated Financial Statements......... ..................................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................................................................ 7
Item 3. Quantitative and Qualitative Disclosure About Market Risk................................................ 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................................................................ 11
Item 6. Exhibits and Reports on Form 8-K......................................................................... 11
SIGNATURES............................................................................................................ 13
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
WEST TELESERVICES CORPORATION
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
(Unaudited)
September 30, December 31,
2000 1999
--------------- ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 96,243 $ 61,865
Accounts receivable, net of allowance for doubtful accounts of $5,355 and $4,717 125,633 88,056
Notes receivable 4,460 18,604
Accounts receivable - financing 165 267
Other 24,913 16,348
--------------- ------------
Total current assets 251,414 185,140
PROPERTY AND EQUIPMENT:
Land and improvements 5,392 5,355
Buildings 30,195 29,908
Telephone and computer equipment 190,872 164,691
Office furniture and equipment 37,548 30,748
Leasehold improvements 57,304 41,372
Construction in process 4,415 6,731
--------------- ------------
Total property and equipment 325,726 278,805
Accumulated depreciation and amortization (138,697) (110,871)
--------------- ------------
Total property and equipment, net 187,029 167,934
GOODWILL, net of accumulated amortization of $6,485 and $5,222 44,048 45,311
NOTES RECEIVABLE AND OTHER ASSETS 26,114 10,604
--------------- ------------
TOTAL ASSETS $ 508,605 $ 408,989
=============== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 26,190 $ 33,745
Customer deposits and holdbacks 11,993 9,273
Accrued wages and benefits 16,159 7,411
Accrued phone expense 7,817 5,245
Other current liabilities 22,342 10,157
Current maturities of long-term obligations 19,961 14,882
Income tax payable 1,897 -
--------------- ------------
Total current liabilities 106,359 80,713
LONG TERM OBLIGATIONS, less current maturities 26,334 30,314
DEFERRED INCOME TAXES 5,438 6,000
MINORITY INTEREST 14,731 -
COMMITMENTS AND CONTINGENCIES (Note 2)
STOCKHOLDERS' EQUITY
Preferred stock $0.01 par value, 10,000 shares authorized,
no shares issued and outstanding - -
Common stock $0.01 par value, 200,000 shares authorized, 64,406 shares issued, 64,304
outstanding and 63,330 shares issued and outstanding 644 633
Additional paid-in capital 172,974 157,647
Treasury stock at cost (102 shares) (2,661) -
Retained earnings 184,786 133,682
--------------- ------------
Total stockholders' equity 355,743 291,962
--------------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 508,605 $ 408,989
=============== ============
The accompanying notes are an integral part of these financial statements.
3
WEST TELESERVICES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- ---------------------------
2000 1999 2000 1999
----------- ---------- ------------- ----------
REVENUE $189,513 $143,071 $531,109 $419,149
COST OF SERVICES 98,593 73,176 274,014 216,356
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 62,243 50,287 177,278 143,871
----------- ---------- ------------- -----------
NET OPERATING INCOME 28,677 19,608 79,817 58,922
OTHER INCOME (EXPENSE):
Interest income 1,114 312 2,690 1,476
Interest expense - including interest expense - financing of $52,
$127, $116 and $441. (1,047) (476) (2,433) (1,320)
Other income, net 316 334 828 817
----------- ---------- ------------- -----------
Net other income 383 170 1,085 973
----------- ---------- ------------- -----------
NET INCOME BEFORE INCOME TAX EXPENSE 29,060 19,778 80,902 59,895
INCOME TAX EXPENSE:
Current income tax expense 6,916 8,190 27,949 22,972
Deferred income tax expense 3,788 (572) 1,849 (212)
----------- ---------- ------------- -----------
Total income tax expense 10,704 7,618 29,798 22,760
----------- ---------- ------------- -----------
NET INCOME $ 18,356 $ 12,160 $ 51,104 $ 37,135
=========== ========== ============= ===========
EARNINGS PER COMMON SHARE:
Basic $ 0.29 $ 0.19 $ 0.80 $ 0.59
=========== ========== ============= ===========
Diluted $ 0.27 $ 0.19 $ 0.75 $ 0.58
=========== ========== ============= ===========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:
Basic common shares 64,304 63,330 63,943 63,330
Dilutive impact of potential common shares from stock options 3,557 614 3,761 357
----------- ---------- ------------- -----------
Diluted common shares 67,861 63,944 67,704 63,687
=========== ========== ============= ===========
The accompanying notes are an integral part of these financial statements.
4
WEST TELESERVICES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
Nine Months Ended
September 30,
-------------------------------------------
2000 1999
------------------- ------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 51,104 $ 37,135
Adjustments to reconcile net income to net cash flows
from operating activities:
Depreciation and amortization 32,159 27,266
Loss on sale of equipment 382 110
Deferred income tax expense 1,849 (212)
Minority interest in earnings 65 -
Changes in operating assets and liabilities:
Accounts receivable (37,577) (10,342)
Other assets and vendor receivables 351 (419)
Accounts payable (7,555) 2,986
Other liabilities and accrued expenses 21,266 8,785
Customer deposits and holdbacks 2,720 (1,116)
Income tax payable 1,897 1,426
------------------- ------------------
Net cash flows from operating activities 66,661 65,619
------------------- ------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (47,371) (31,699)
Proceeds from disposal of property and equipment 1,224 1,091
Issuance of notes receivable (202) (6,404)
Proceeds from payments of notes receivable 4,050 1,225
Net cash flows from investing activities ------------------- ------------------
(42,299) (35,787)
------------------- ------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of long-term obligations (12,762) (10,084)
Proceeds from issuance of debt 10,000 6,000
Net change in line of credit agreement - 1,000
Secondary offering costs (872) -
Proceeds from stock option exercises 7,789 -
Stock option income tax benefits 5,759 -
Net change in accounts receivable financing and notes
payable financing 102 2,115
------------------- -------------------
Net cash flows from financing activities 10,016 (969)
------------------- ------------------
NET CHANGE IN CASH AND CASH EQUIVALENTS 34,378 28,863
CASH AND CASH EQUIVALENTS, Beginning of period 61,865 6,928
------------------ ------------------
CASH AND CASH EQUIVALENTS, End of period $ 96,243 $ 35,791
=================== ==================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 2,439 $ 2,250
=================== ==================
Cash paid during the period for income taxes $ 22,998 $ 21,461
=================== ==================
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES:
Acquistion of property with debt obligation financing $ 3,860 $ 17,505
=================== ==================
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES:
Acquistion of a patent with a debt obligation and
stock options $ 14,666 $ -
=================== ==================
Treasury stock acquired in exchange for stock options
exercised $ 2,661 $ -
=================== ==================
Reduction of accounts receivable through issuance of
notes receivable $ 3,717 $ -
=================== ==================
The accompanying notes are an integral part of these financial statements.
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF CONSOLIDATION AND PRESENTATION
West TeleServices Corporation and its direct and indirect subsidiaries (the
"Company") is one of the largest independent providers of 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 provides its CRM solutions to Fortune 500
companies, leading Internet oriented companies and e-commerce companies. These
services help the Company's clients acquire customers, provide customer support
and generate repeat sales. The Company provides these integrated CRM services
through three operating divisions - Operator Teleservices, Interactive
Teleservices and Direct Teleservices.
The Company's Operator Teleservices division provides agent processing of
customer initiated transactions such as order capture, product support and
general customer service. The Company's 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. The Company's Direct
Teleservices division provides our clients with a premium service that includes
agent direct marketing applications, including product sales, customer
acquisition and retention campaigns. As part of the Company's complete customer
care solution, the Company offers West iCare, a full suite of Internet services,
including "chat", e-mail, Voice over the Internet, call back requests, form
sharing, electronic faxing and co-browsing. West iCare is integrated with other
services or can be provided on a stand-alone basis.
The accompanying unaudited consolidated financial statements reflect all
normal and recurring adjustments which are, in the opinion of management,
necessary for a fair presentation of the financial position, operating results,
and cash flows for the interim periods. The consolidated financial statements
should be read in conjunction with the consolidated financial statements and
notes thereto, together with management's discussion and analysis of financial
condition and results of operations, contained in the Company's Form 10-K for
the year ended December 31, 1999. All significant intercompany balances and
transactions have been eliminated. Certain amounts in prior fiscal periods have
been reclassified for comparative purposes.
2. 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 the disposition of claims
currently pending will not have a material adverse effect on the Company's
financial position or results of operations.
6
Item 2. 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. Certain statements under this
caption constitute forward-looking statements, which involve risks and
uncertainties. The Company's actual results in the future could differ
significantly from the results discussed or implied in such forward-looking
statements. Factors that could cause or contribute to such differences include,
but are not limited to, the effect on financial performance of increased
competition in the customer relationship management industry, potential future
competition, competitive pricing for services, potential future competing
technologies and trends, dependence on technology and phone service, dependence
on the Company's labor force, reliance on major clients, the success of new
product innovations, legal proceedings and government regulation.
Results of Operations
Comparison of the Three Months and Nine Months Ended September 30, 2000 and 1999
Revenue: For the three months ended September 30, 2000, revenue increased
$46.4 million, or 32.4%, to $189.5 million up from $143.1 million for the three
months ended September 30, 1999. For the nine months ended September 30, 2000,
revenues increased $112.0 million, or 26.7%, to $531.1 million up from $419.1
million for the nine months ended September 30, 1999. For the three months
ended September 30, 2000, revenue from Operator Teleservices increased
approximately $32.0 million to $95.9 million from the three months ended
September 30, 1999. Revenue from Interactive Teleservices decreased
approximately $0.6 million to $35.6 million from the three months ended
September 30, 1999. Revenue from Direct Teleservices increased approximately
$15.0 million to $58.0 million from the three months ended September 30, 1999.
Cost of services: Cost of services represents direct labor, telephone
expense and other costs directly related to customer relationship management
activities. Costs of services increased $25.4 million, or 34.7%, in the third
quarter of 2000 to $98.6 million, up from $73.2 million for the comparable
period of 1999. Cost of services increased $57.6 million, or 26.6%, to $274.0
million for the nine months ended September 30, 2000, up from $216.4 million for
the comparable period of 1999. As a percentage of revenue, cost of services
increased to 52.0% for the third quarter of 2000 but remained unchanged at 51.6%
for the nine months ended September 30, 2000, compared to 51.2% and 51.6%,
respectively, for the comparable periods in 1999. The slight increase in cost of
services in the third quarter was due to increased wages paid for direct labor.
Selling, general and administrative ("SG&A") expenses: SG&A expenses
increased by $11.9 million, or 23.8%, to $62.2 million for the third quarter of
2000 up from $50.3 million for the comparable period of 1999. For the nine
months ended September 30, 2000, SG&A expenses increased by $33.4 million, or
23.2%, to $177.3 million, up from $143.9 million for the comparable period of
1999. As a percentage of revenue, SG&A expenses declined to 32.8% for the third
quarter of 2000 and 33.4% for the nine months ended September 30, 2000 compared
to 35.1% and 34.3%, respectively, for the comparable periods of 1999. The
improvement in SG&A is due to better use of capacity this year over the same
periods in 1999. Revenue per workstation improved in the third quarter 2000 in
our Operator TeleServices and Direct Teleservices divisions to $15,824 from
$13,203 earned per workstation during the third quarter of 1999.
Net operating income: Net operating income for the three months ended
September 30, 2000, increased $9.1 million, or 46.3%, to $28.7 million up from
$19.6 million for the three months ended September 30, 1999. For the nine
months ended September 30, 2000, net operating income increased by $20.9
million, or 35.5%, to $79.8 million up from $58.9 million for the comparable
period of 1999. As a percentage of revenue, net operating income increased to
15.1% for the third quarter of 2000 and 15.0% for the nine months ended
September 30, 2000 compared to 13.7% and 14.1%, respectively, for the
corresponding periods of 1999 due to the factors discussed above for Revenue,
Cost of services and SG&A expenses.
7
Net other income: Net other income 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. Other income for the third quarter of 2000 totaled $383,000
compared to $170,000 for the third quarter of 1999. Other income for the nine
months ended September 30, 2000 totaled $1.1 million compared to $973,000 for
the comparable period of 1999.
Net income: Net income increased by $6.2 million, or 51.0%, to $18.4
million for the third quarter of 2000 compared to $12.2 million for the third
quarter of 1999. For the nine months ended September 30, 2000, net income
increased $14.0 million, or 37.6%, to $51.1 million compared to $37.1 million
for the comparable period of 1999. Net income includes a provision for income
tax expense at an effective rate of approximately 36.7% for the three and nine
months ended September 30, 2000, and approximately 38.5% and 38.0%,
respectively, for each of the comparable periods of 1999. The reduction in the
effective tax 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 historically 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 September
30, 2000. The Company's credit facility contains certain financial covenants
and restrictions, which were met at September 30, 2000. The credit facility
expires on June 29, 2001. The Company believes it could increase the amount of
the facility, if needed.
The Company also has a $1.0 million revolving bank line used to fund an
accounts receivable financing program offered to certain customers in the pay-
per-call industry. Borrowings under the bank line are limited to a borrowing
base of pledged accounts receivable from certain of the Company's qualified
customers which are assigned by the Company to the bank. Borrowings bear
interest at 1.0% below the prime rate. There were no borrowings under this
credit facility at September 30, 2000. The bank line expires on June 29, 2001.
The Company believes it could increase the amount of the facility, if needed.
Net cash flows from operating activities increased $1.1 million to $66.7
million for the nine months ended September 30, 2000, compared to net cash flows
from operating activities of $65.6 million for the nine months ended September
30, 1999. The increase was due principally to increased accrued expenses and
other liabilities, higher net income and higher depreciation and amortization.
This increase was nearly totally offset by an increase in trade accounts
receivable and a decrease in accounts payable.
Net cash flows used in investing activities increased $6.5 million to $42.3
million for the nine months ended September 30, 2000, compared to $35.8 million
for the comparable period of 1999. During the first nine months of 2000, the
Company invested $51.2 million in contact center expansion to support the growth
of the Company's business. The Company financed $3.9 million of equipment with
capital leases, further, a $10.0 promissory note was issued to a bank. The
remaining $37.3 million of property and equipment purchases were financed
through cash flow from operations. This net cash flow used for investing
activities was partially offset by a $4.1 million collection of proceeds from
payments on notes receivable and $1.2 million of proceeds from the disposal of
property and equipment.
Net cash flows from financing activities were $10.0 million for the nine
months ended September 30, 2000, compared to net cash flows used for financing
activities of $969,000 for the comparable period of 1999. In the nine months
ended September 30, 2000, net cash flows used in financing activities was
primarily for payments of debt and capital lease obligations. The cash used was
offset by $7.8 million of proceeds from the
8
exercise of stock options to purchase Common Stock, the recognition of a $5.8
million tax benefit associated with the optionee's gain on the exercise of stock
options and $10.0 million of proceeds from the promissory note issued to a bank
referenced above.
Capital Expenditures
The Company's operations continue to require significant capital
expenditures for capacity expansion and upgrades. Capital expenditures were
$51.2 million for the nine months ended September 30, 2000 compared to $49.2
million for the nine months ended September 30, 1999. Capital expenditures for
the nine months ended September 30, 2000 consisted primarily of equipment
purchases.
The Company believes 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 its subsidiaries, which are not
already pledged as collateral securing existing credit facilities. The Company
or any of its affiliates may be required to guarantee any existing or additional
credit facilities.
Inflation
The Company does not believe that inflation has had a material effect on
its results of operations. However, there can be no assurance that the Company's
business will not be affected by inflation in the future.
9
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Certain statements under this caption constitute forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995 which
involve known and unknown risks and uncertainties. The Company's actual results
in the future could differ significantly from the results discussed or implied
in such forward-looking statements. Factors that could cause or contribute to
such differences include, but are not limited to, the effect on financial
performance of increased competition in the customer relationship management
industry, potential future competition, competitive pricing for services,
potential future competing technologies and trends, dependence on technology and
phone service, dependence on the Company's labor force, reliance on major
clients, the success of new product innovations, legal proceedings and
government regulation.
The Company does not use derivative financial and commodity instruments.
The Company's other financial instruments include cash and cash equivalents,
accounts and notes receivable, accounts and notes payable and long-term
obligations. The Company's cash and cash equivalents, accounts and notes
receivable and accounts and notes payable balances are generally short-term in
nature and do not expose the Company to material market risk. At September 30,
2000, the Company had $26.3 million of long-term obligations. (See Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources.) Management does not believe that
changes in future interest rates on these fixed rate long-term obligations would
have a material effect on the Company's results of operations given the
Company's currently existing obligations under such long-term obligations and
credit facilities.
10
PART II. OTHER INFORMATION
Item 1. 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 noted in
its Form 10-K for the year ended December 31, 1999, and its quarterly report on
Form 10-Q for the first and second quarters of 2000, 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.
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 sued under theories of breach of contract, quantum meriut, 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. The certification order entered by the District Court was
reversed by the appellate court and the case has been remanded back to the
District Court for further proceedings. No claims remain in the lawsuit that
allow for an award of punitive damages under Texas law.
No other material events or material developments occurred during the three
months ended September 30, 2000. A current detailed discussion of significant
legal proceedings is contained in the Company's Form 10-Q for the three months
ended June 30, 2000.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
Exhibit
Number Description
------- -----------
10.01 Employment Agreement between the West Telemarketing
Corporation Outbound and Michael E. Mazour dated
July 1, 2000
27.01 Financial Data Schedule
(b) Reports on Form 8-K.
None.
11
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WEST TELESERVICES CORPORATION
By: /s/ Thomas B. Barker
-------------------------------------
Thomas B. Barker
President and Chief Executive Officer
By: /s/ Michael A. Micek
-------------------------------------
Michael A. Micek
Chief Financial Officer,
Executive Vice President-Finance and Treasurer
Date: November 13, 2000
12
INDEX TO EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
Sequential
Exhibit Page
Number Description Number
- ------- ----------- ----------
10.01 Employment Agreement between the West
Telemarketing Corporation Outbound and
Michael E. Mazour dated July 1, 2000
27.01 Financial Data Schedule
13