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, 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 or (IRS Employer Identification No.)
incorporation 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, 2001, 65,099,059 shares of Common Stock, par value $.01 per
share, of the registrant ("Common Stock") were outstanding.
1
INDEX
Page No.
PART I. FINANCIAL INFORMATION
Independent Accountants' Report ............................................................ 3
Item 1. Financial Statements
Consolidated Balance Sheets - September 30, 2001 and December 31, 2000 ........ 4
Consolidated Statements of Operations -
Three and Nine Months Ended September 30, 2001 and 2000 ....................... 5
Consolidated Statements of Cash Flows - Nine Months Ended September 30,
2001 and 2000 ................................................................. 6
Notes to Consolidated Financial Statements .................................... 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ..................................................... 9
Item 3. Quantitative and Qualitative Disclosure About Market Risk ..................... 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ............................................................. 14
Item 6. Exhibits and Reports on Form 8-K .............................................. 15
SIGNATURES ................................................................................. 16
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Independent Accountants' Report
Board of Directors and Stockholders
West Corporation
Omaha, Nebraska
We have reviewed the accompanying consolidated balance sheet of West Corporation
and subsidiaries (the "Company") as of September 30, 2001, and the related
consolidated statements of operations for the three-month and nine-month periods
ended September 30, 2001 and 2000 and cash flows. These financial statements are
the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and of making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with auditing standards generally accepted in the United States of America, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to such consolidated financial statements for them to be in conformity
with accounting principles generally accepted in the United States of America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of West
Corporation and subsidiaries as of December 31, 2000, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the year then ended (not presented herein); and in our report dated February 6,
2001, we expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the accompanying
consolidated balance sheet as of December 31, 2000 is fairly stated, in all
material respects, in relation to the consolidated balance sheet from which it
has been derived.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Omaha, Nebraska
October 23, 2001
3
WEST CORPORATION
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
(Unaudited)
September 30, December 31,
2001 2000
------------- ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 163,158 $ 108,113
Accounts receivable, net of allowance for doubtful accounts of $7,083 and $6,611 107,826 129,695
Notes receivable 1,881 2,153
Accounts receivable - financing 17,663 19,154
Other 22,670 24,550
------------- ------------
Total current assets 313,198 283,665
PROPERTY AND EQUIPMENT:
Land and improvements 6,710 5,392
Buildings 39,404 30,678
Telephone and computer equipment 210,649 188,775
Office furniture and equipment 36,968 35,100
Leasehold improvements 61,147 56,724
Construction in process 8,667 17,243
------------- ------------
Total property and equipment 363,545 333,912
Accumulated depreciation and amortization (161,178) (136,734)
------------- ------------
Total property and equipment, net 202,367 197,178
GOODWILL, net of accumulated amortization of $8,170 and $6,906 42,363 43,627
NOTES RECEIVABLE AND OTHER ASSETS 20,426 29,437
------------- ------------
TOTAL ASSETS $ 578,354 $ 553,907
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 41,101 $ 46,132
Customer deposits and holdbacks 8,060 22,007
Accrued wages and benefits 14,586 13,353
Accrued phone expense 4,763 8,767
Other current liabilities 7,876 20,447
Current maturities of long-term obligations 12,735 19,580
Income tax payable 9,863 2,373
------------- ------------
Total current liabilities 98,984 132,659
LONG TERM OBLIGATIONS, less current maturities 15,580 21,775
DEFERRED INCOME TAXES 5,063 5,884
OTHER LONG TERM OBLIGATIONS 1,474 663
MINORITY INTEREST 15,108 14,801
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, 65,172 shares issued, 65,020
outstanding and 64,547 shares issued and 64,445 outstanding 652 645
Additional paid-in capital 185,532 176,200
Retained earnings 260,004 203,941
Treasury stock at cost 152 and 102 shares (4,043) (2,661)
------------- ------------
Total stockholders' equity 442,145 378,125
------------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 578,354 $ 553,907
============= ============
The accompanying notes are an integral part of these financial statements.
4
WEST CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
2001 2000 2001 2000
--------- --------- --------- ---------
REVENUE $ 180,968 $ 189,513 $ 577,015 $ 531,109
COST OF SERVICES 93,713 98,593 295,178 274,014
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 61,736 62,320 191,998 177,986
--------- --------- --------- ---------
OPERATING INCOME 25,519 28,600 89,839 79,109
OTHER INCOME (EXPENSE):
Interest income 1,114 1,114 3,787 2,690
Interest expense - including interest expense - financing of $181, $363,
$52 and $127 (723) (765) (2,316) (2,433)
Write-down of investment (3,000) -- (3,000) --
Other income, net 546 111 1,114 1,536
--------- --------- --------- ---------
Other income (expense) (2,063) 460 (415) 1,793
--------- --------- --------- ---------
INCOME BEFORE INCOME TAX EXPENSE AND MINORITY INTEREST 23,456 29,060 89,424 80,902
INCOME TAX EXPENSE:
Current income tax expense 8,306 6,916 34,541 27,949
Deferred income tax expense (benefit) 385 3,788 (1,486) 1,849
--------- --------- --------- ---------
Total income tax expense 8,691 10,704 33,055 29,798
--------- --------- --------- ---------
INCOME BEFORE MINORITY INTEREST 14,765 18,356 56,369 51,104
MINORITY INTEREST IN NET INCOME OF A CONSOLIDATED SUBSIDIARY 24 -- 306 --
--------- --------- --------- ---------
NET INCOME $ 14,741 $ 18,356 $ 56,063 $ 51,104
========= ========= ========= =========
EARNINGS PER COMMON SHARE:
Basic $ 0.23 $ 0.29 $ 0.86 $ 0.80
========= ========= ========= =========
Diluted $ 0.22 $ 0.27 $ 0.82 $ 0.75
========= ========= ========= =========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:
Basic common shares 64,956 64,304 64,876 63,943
Dilutive impact of potential common shares from stock options 2,888 3,557 3,263 3,761
--------- --------- --------- ---------
Diluted common shares 67,844 67,861 68,139 67,704
========= ========= ========= =========
The accompanying notes are an integral part of these financial statements.
5
WEST CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
Nine Months Ended
September 30,
-----------------------
2001 2000
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 56,063 $ 51,104
Adjustments to reconcile net income to net cash flows from operating activites:
Depreciation and amortization 37,219 32,159
Loss on sale of equipment 11 382
Deferred income tax expense (benefit) (1,486) 1,849
Minority interest 306 --
Write-off of investment 3,000 --
Changes in operating assets and liabilities:
Accounts receivable 21,869 (37,577)
Other assets 3,306 416
Accounts payable (3,647) (7,555)
Other liabilities and accrued expenses (14,531) 20,394
Customer deposits and holdbacks (13,947) 2,720
Income tax payable 7,490 1,897
---------- ----------
Net cash flows from operating activities 95,653 65,789
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (37,317) (47,371)
Proceeds from disposal of property and equipment 112 1,224
Issuance of notes receivable (1,028) (202)
Proceeds from payments of notes receivable 5,903 4,050
---------- ----------
Net cash flows from investing activities (32,330) (42,299)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of long-term obligations (16,341) (12,762)
Proceeds from issuance of debt -- 10,000
Proceeds from stock option exercises including related tax benefits 7,957 13,548
Net change in accounts receivable financing and notes payable financing 106 102
---------- ----------
Net cash flows from financing activities (8,278) 10,888
---------- ----------
NET CHANGE IN CASH AND CASH EQUIVALENTS 55,045 34,378
CASH AND CASH EQUIVALENTS, Beginning of period 108,113 61,865
---------- ----------
CASH AND CASH EQUIVALENTS, End of period $ 163,158 $ 96,243
========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 1,825 $ 2,439
========== ==========
Cash paid during the period for income taxes $ 23,339 $ 22,998
========== ==========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES:
Acquistion of property with debt obligation financing $ 3,300 $ 3,860
========== ==========
Application of accounts receivable to accounts payable $ 1,384 $ --
========== ==========
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 $ 1,382 $ 2,661
---------- ----------
Reduction of accounts receivable through issuance of notes receivable $ 428 $ 3,717
========== ==========
The accompanying notes are an integral part of these financial statements.
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
West Corporation and its affiliates (the "Company") is one of the
largest independent providers of full-service customer relationship management,
or CRM, solutions in the United States. The Company helps companies, including
many Fortune 500 companies, acquire, retain and grow profitable customer
relationships. The Company enables its clients to completely outsource a full
range of services, including processing customer initiated contacts, automated
voice response services and direct marketing services. Utilizing the latest in
voice and Internet technology, the Company's services minimize its clients' cost
of managing their customer relationship services, improve their customers'
overall experience, and provide an opportunity to leverage customer data.
The Company has the technology, experience and leadership position
needed to create customized solutions that work for both traditional business
ventures and new economy companies. The Company operates a national network of
31 state-of-the-art customer contact centers and seven interactive automated
voice and data processing centers throughout North America and in India.
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. These standards are 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 nine months ended September 30,
2001 and 2000 by $1,263,000. The Company has not quantified the impact resulting
from the adoption of the other provisions of these standards.
In July 2001, the FASB approved the issuance of 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 approved issuance of 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). In addition, more dispositions may qualify for discontinued operations
treatment. This standard is effective for fiscal years beginning after December
15, 2001, and interim periods within those fiscal years. The Company has not yet
determined what effect, if any, this statement will have on its financial
statements.
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
7
and Analysis of Financial Condition and Results of Operations, contained in the
Company's Annual Report on Form 10-K for the year ended December 31, 2000. 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, except for the items below, in
its Annual Report on Form 10-K for the year ended December 31, 2000, and its
Quarterly Reports on Form 10-Q for the first and second calendar quarters of
2001, 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.
Glenn K. Jackson and Elsie Jackson v. West Telemarketing Corporation
Outbound and Does 1 through 100, inclusive, was filed in the United States
District Court for the Central District of California (No. CV-97-8281 TJH
(AIJx)), on August 12, 1997, and transferred to the United States District Court
for the Northern District of Texas, Dallas Division (Civil Action No.
3:98-CV-0960-H). The complaint contains several causes of action, all of which
deal with the purchase by the Company's subsidiary, West Telemarketing
Corporation Outbound ("Outbound"), of two pieces of property from the Resolution
Trust Corporation during 1993 and 1994. The plaintiffs contend that they also
bid on the property, that Outbound learned the amount of their bids, used that
information to out-bid them and, ultimately, purchased the property. The
complaint seeks general damages, special damages, equitable injunctive and
restitutionary relief, including restitution of the property involved, punitive
damages, attorneys' fees, and litigation costs. On November 19, 1999, the
Company's motion for summary judgment was granted in full. On December 9, 1999,
the plaintiffs appealed this summary judgment order to the U.S. Fifth Circuit
Court of Appeals for the Fifth Circuit. On April 4, 2001 the Fifth Circuit
affirmed summary judgment for the Company. Plaintiffs filed a petition for writ
of certiorari with the U.S. Supreme Court. On October 19, 2001, the U.S. Supreme
Court denied the petition. With that denial, plaintiffs have exhausted their
appeals and the case is closed.
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 Court of
Appeals' decision.
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. The suit,
which seeks unspecified monetary damages, 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
8
the marketing of certain membership programs offered by the Company's clients.
The class has not been certified to date. The Company believes that the claims
asserted against it are unfounded.
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" 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 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.
Results of Operations
Comparison of the Three Months and Nine Months Ended September 30, 2001 and 2000
Revenue: For the three months ended September 30, 2001, revenue
decreased $8.5 million, or 4.5%, to $181.0 million down from $189.5 million for
the three months ended September 30, 2000. The decrease in revenue was due to a
combination of factors, most importantly a softening of the overall United
States economy and consumer spending as well as the impact of the terrorist
attacks on September 11, 2001. For the nine months ended September 30, 2001,
revenues increased $45.9 million, or 8.6%, to $577.0 million up from $531.1
million for the nine months ended September 30, 2000. The increase in revenue
included $18.9 million derived from new clients and $27.0 million derived from
existing clients. The overall revenue increase is attributable to higher call
volumes.
For the third quarter of 2001, 80% of the Company's total revenue was
generated by 93 clients. This compares to 63 clients during the comparable
period in 2000. For the nine months ended September 30, 2001, 80% of the
Company's total revenue was generated by 55 clients. This compares to 33 clients
during the
9
comparable period in 2000. During the three months ended September 30, 2001,
AT&T Corp. remained the Company's largest client and accounted for 27% of total
revenue, down from 28% during the comparable period in 2000. For the nine months
ended September 30, 2001, AT&T Corp. accounted for 25% of total revenue, down
from 28% during the comparable period in 2000.
Cost of services: Cost of services represents direct labor, telephone
expense and other costs directly related to customer management relationship
management activities. Costs of services decreased $4.9 million, or 4.9%, in
4.9%, in the third quarter of 2001 to $93.7 million, down from $98.6 million for
the comparable period of 2000. Cost of services $21.2 million, or 7.7%, to
$295.2 million for the nine months ended September 30, 2001, up from $274.0
million for the comparable period of 2000. As a percentage of revenue, cost of
services decreased to 51.8%, for the three months ended September 30, 2001, down
from 52.0% during the comparable period in 2000. For the ths ended September 30,
2001, cost of services as a percentage of revenue decreased to 51.2%, compared
to 51.6%, for the comparable period in 2000. As a percentage of revenue, the
Company was able to hold cost of services relatively flat for the three and nine
months ended September 30, 2001 due to the Company's ability to control direct
labor costs.
Selling, general and administrative ("SG&A") expenses: SG&A expenses
decreased by $0.6 million, or 0.9%, to $61.7 million for the third quarter of
2001 down from $62.3 million for the comparable period of 2000. For the nine
months ended September 30, 2001, SG&A expenses increased by $14.0 million, or
7.9%, to $192.0 million, up from $178.0 million for the comparable period of
2000. As a percentage of revenue, SG&A expenses increased to 34.1% for the third
quarter of 2001 and decreased to 33.3% for the nine months ended September 30,
2001 compared to 32.9% and 33.5%, respectively, for the comparable periods of
2000. As a percentage of revenue, SG&A expenses for the three months ended
September 30, 2001, increased due to the softening of the overall United States
economy and the impact of the terrorist attacks on September 11, 2001. As a
percentage of revenue, SG&A expenses for the nine months ended September 30,
2001, declined due to efficiencies achieved in the first six months of the year
and the Company's continued focus on cost reduction opportunities.
Operating income: Operating income for the three months ended September
30, 2001, decreased $3.1 million, or 10.8%, to $25.5 million down from $28.6
million for the three months ended September 30, 2000. For the nine months ended
September 30, 2001, operating income increased by $10.7 million, or 13.6%, to
$89.8 million up from 79.1 million for the comparable period of 2000. As a
percentage of revenue, operating income decreased to 14.1% for the third quarter
of 2001 and increased to 15.6% for the nine months ended September 30, 2001
compared to 15.1% and 14.9%, respectively, for the corresponding periods of 2000
due to the factors discussed above for Revenue, Cost of services and SG&A
expenses.
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. Other income (expense) for the third
quarter of 2001 totaled $(2.1) million compared to $0.5 million for the third
quarter of 2000. Other income (expense) for the nine months ended September 30,
2001 totaled $(0.4) million compared to $1.8 million for the comparable period
of 2000. The reduction of $2.6 million and $2.2 million for the three and nine
months ended September 30, 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 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 the best interests of Synchrony to
be acquired by divine, inc. The acquisition was announced by divine, inc. on
October 23, 2001. In return for its original investment, the Company expects it
will likely receive restricted stock of the acquirer at a nominal value. The
Company believes that this investment is permanently impaired. As a result, the
entire investment of $3.0 million was written off.
10
Net income: Net income decreased by $3.7 million, or 19.7%, to $14.7
million for the third quarter of 2001 compared to $18.4 million for the third
quarter of 2000. For the nine months ended September 30, 2001, net income
increased $5.0 million, or 9.7%, to $56.1 million compared to $51.1 million for
the comparable period of 2000. The $3.0 million write-off of the investment in
Synchrony Communications, Inc. had a significant impact on net income for the
three and nine months ended September 30, 2001. Excluding this one-time
write-off, net income would have decreased $0.7 million or 3.8%, to $17.7
million for the third quarter of 2001. For the nine months ended September 30,
2001, net income would have increased $8.0 million, or 15.7%, to $59.1 million.
The net impact of the terrorist attacks on September 11, 2001 on net
income was somewhat mitigated by the Company's ability to control variable costs
such as labor costs. Net income includes a provision for income tax expense at
an effective rate of approximately 37.1% for the three and nine months ended
September 30, 2001, respectively, and approximately 36.8% for each of the
comparable periods of 2000.
Liquidity and Capital Resources
The Company's primary source of liquidity has historically been cash
flows 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, 2001. The Company's credit facility contains certain financial covenants and
restrictions, which were met at September 30, 2001. The credit facility expires
on June 29, 2002. The Company believes it could increase the amount of the
facility, if needed.
Net cash flows from operating activities increased $29.9 million to
$95.7 million for the nine months ended September 30, 2001, compared to net cash
flows from operating activities of $65.8 million for the nine months ended
September 30, 2000. The increase was due principally to the decrease in accounts
receivable, as well as an increase in net income and income tax payable. The
increase in net cash flows from operating activities was partially offset by a
reduction in customer deposits and holdbacks and other liabilities and accrued
expenses.
Net cash flows used in investing activities decreased $10.0 million to
$32.3 million for the nine months ended September 30, 2001, compared to $42.3
million for the comparable period of 2000. During the first nine months of 2001,
the Company invested $40.6 million in contact center expansion to support the
growth of the Company's business. The Company financed $3.3 million of equipment
with capital leases. The remaining $37.3 million of property and equipment
purchases were financed through cash flows from operations. The primary reason
for the overall decline in net cash flows used in investing activities is $10.6
million in reduced spending on purchases of property and equipment compared to
the same period a year ago.
Net cash flows used in financing activities were $8.3 million for the
nine months ended September 30, 2001, compared to net cash flows from financing
activities of $10.9 million for the comparable period of 2000. The reduction was
due primarily to $10.0 million in proceeds from the issuance of debt that was
incurred during the nine months ended September 30, 2000. During the nine months
ended September 30, 2001, net cash flows used in financing activities were
primarily for payments of debt and capital lease obligations. These payments
were $16.3 million during the nine months ended September 30, 2001 compared to
$12.8 million for the comparable period of 2000. Proceeds from stock options
exercised, including related tax benefits, were $7.9 million during the nine
months ended September 30, 2001 compared to $13.5 million for the comparable
period of 2000.
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Capital Expenditures
The Company's operations continue to require significant capital
expenditures for capacity expansion and upgrades. Capital expenditures were
$40.6 million for the nine months ended September 30, 2001 compared to $51.2
million for the nine months ended September 30, 2000. Capital expenditures for
the nine months ended September 30, 2001 consisted primarily of equipment
purchases for contact center expansion and upgrades. The Company projects its
capital expenditures for the remainder of 2001 to be approximately $13.0 million
primarily for contact center expansion and upgrades.
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.
Item 3. 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.
12
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 $28.3 million of long-term obligations and $25.0 million of credit
facilities with both fixed and variable interest rates. There were no borrowings
outstanding under these credit facilities at September 30, 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 facility.
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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 below, in
its Annual Report on Form 10-K for the year ended December 31, 2000, and its
Quarterly Reports on Form 10-Q for the first and second calendar quarters of
2001, 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.
Glenn K. Jackson and Elsie Jackson v. West Telemarketing Corporation
Outbound and Does 1 through 100, inclusive, was filed in the United States
District Court for the Central District of California (No. CV-97-8281 TJH
(AIJx)), on August 12, 1997, and transferred to the United States District Court
for the Northern District of Texas, Dallas Division (Civil Action No.
3:98-CV-0960-H). The complaint contains several causes of action, all of which
deal with the purchase by the Company's subsidiary, West Telemarketing
Corporation Outbound ("Outbound"), of two pieces of property from the Resolution
Trust Corporation during 1993 and 1994. The plaintiffs contend that they also
bid on the property, that Outbound learned the amount of their bids, used that
information to out-bid them and, ultimately, purchased the property. The
complaint seeks general damages, special damages, equitable injunctive and
restitutionary relief, including restitution of the property involved, punitive
damages, attorneys' fees, and litigation costs. On November 19, 1999, the
Company's motion for summary judgment was granted in full. On December 9, 1999,
the plaintiffs appealed this summary judgment order to the U.S. Fifth Circuit
Court of Appeals for the Fifth Circuit. On April 4, 2001 the Fifth Circuit
affirmed summary judgment for the Company. Plaintiffs filed a petition for writ
of certiorari with the U.S. Supreme Court. On October 19, 2001, the U.S. Supreme
Court denied the petition. With that denial, plaintiffs have exhausted their
appeals and the case is closed.
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 Court of
Appeals' decision.
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. The suit,
which seeks unspecified monetary damages, 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. The class has not been certified to date. The Company believes that the
claims asserted against it are unfounded.
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
None.
(b) Reports on Form 8-K.
None.
15
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 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 9, 2001
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