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 June 30, 2002
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 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 July 26, 2002, 65,713,333 shares of Common Stock, par value $.01 per share,
of the registrant ("Common Stock") were outstanding.
INDEX
Page No.
Independent Accountants' Report......................................... 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - June 30, 2002 and
December 31, 2001....................................... 4
Consolidated Statements of Operations - Three and
Six Months Ended June 30, 2002 and 2001................. 5
Consolidated Statements of Cash Flows - Six Months Ended
June 30, 2002 and 2001.................................. 6
Notes to Consolidated Financial Statements................ 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............... 11
Item 3. Quantitative and Qualitative Disclosure About
Market Risk....................................... 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................... 17
Item 4. Submission of Matters to a Vote of
Security Holders.................................. 17
Item 6. Exhibits and Reports on Form 8-K.................... 18
SIGNATURES.............................................................. 19
2
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 June 30, 2002, and the related
consolidated statements of operations for the three-month and six-month periods
ended June 30, 2002 and 2001 and the related consolidated statements of cash
flows for the six-month periods ended June 30, 2002 and 2001. 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, 2001, 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,
2002, 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, 2001 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
July 17, 2002
3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
WEST CORPORATION
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
(Unaudited)
June 30, December 31,
2002 2001
----------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 139,301 $ 151,520
Accounts receivable, net of allowance for doubtful accounts of
$14,615 and $6,993 118,045 131,316
Notes receivable 5,019 4,315
Accounts receivable - financing 13,657 18,926
Other 36,962 22,695
--------- ---------
Total current assets 312,984 328,772
PROPERTY AND EQUIPMENT:
Land and improvements 6,728 6,710
Buildings 43,184 42,314
Telephone and computer equipment 263,313 220,387
Office furniture and equipment 40,142 37,484
Leasehold improvements 61,685 59,005
construction in process 9,875 10,172
--------- ---------
Total property and equipment 424,927 376,072
Accumulated depreciation and amortization (208,160) (173,401)
--------- ---------
Total property and equipment, net 216,767 202,671
GOODWILL, net of accumulated amortization of $8,591 68,069 41,942
INTANGIBLE ASSETS, net of accumulated amortization of $2,566 and $1,481 20,801 13,377
NOTES RECEIVABLE AND OTHER ASSETS 5,004 4,673
--------- ---------
TOTAL ASSETS $ 623,625 $ 591,435
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 24,517 $ 47,426
Customer deposits and holdbacks 4,478 8,131
Accrued wages and benefits 11,827 11,412
Accrued phone expense 2,772 5,520
Other current liabilities 11,028 11,725
Current maturities of long-term obligations 17,258 9,378
--------- ---------
Total current liabilities 71,880 93,592
LONG TERM OBLIGATIONS, less current maturities 23,928 20,893
DEFERRED INCOME TAXES 5,091 6,629
OTHER LONG TERM OBLIGATIONS 2,553 1,531
MINORITY INTEREST 656 631
COMMITMENTS AND CONTINGENCIES (Note 5)
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, 65,865 shares
issued, 65,713 outstanding and 65,352 shares issued and 65,200 outstanding 659 654
Additional paid-in capital 200,297 191,821
Retained earnings 322,604 279,727
Treasury stock at cost (152 shares) (4,043) (4,043)
--------- ---------
Total stockholders' equity 519,517 468,159
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 623,625 $ 591,435
========= =========
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 Six Months Ended
June 30, June 30,
------------------ ------------------
2002 2001 2002 2001
------------------ ------------------
REVENUE $195,076 $193,006 $405,624 $396,048
COST OF SERVICES 92,787 98,431 195,106 201,465
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 71,166 64,171 144,532 130,262
-------- -------- -------- --------
OPERATING INCOME 31,123 30,404 65,986 64,321
OTHER INCOME (EXPENSE):
Interest income 691 1,491 1,670 2,673
Interest expense - including interest expense -
financing of $0, $34, $0 and $182 (674) (949) (1,296) (1,593)
Other, net 414 452 768 568
-------- -------- -------- --------
Other income (expense) 431 994 1,142 1,648
-------- -------- -------- --------
INCOME BEFORE INCOME TAX EXPENSE AND MINORITY INTEREST 31,554 31,398 67,128 65,969
INCOME TAX EXPENSE:
Current income tax expense 13,004 12,325 28,004 26,235
Deferred income tax expense (benefit) (1,784) (621) (3,908) (1,870)
-------- -------- -------- --------
Total income tax expense 11,220 11,704 24,096 24,365
-------- -------- -------- --------
INCOME BEFORE MINORITY INTEREST 20,334 19,694 43,032 41,604
MINORITY INTEREST IN NET INCOME OF A CONSOLIDATED SUBSIDIARY 49 209 155 282
-------- -------- -------- --------
NET INCOME $ 20,285 $ 19,485 $ 42,877 $ 41,322
======== ======== ======== ========
EARNINGS PER COMMON SHARE:
Basic $ 0.31 $ 0.30 $ 0.65 $ 0.64
======== ======== ======== ========
Diluted $ 0.30 $ 0.28 $ 0.63 $ 0.60
======== ======== ======== ========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:
Basic common shares 65,659 64,804 65,506 64,692
Dilutive impact of potential common shares from stock options 2,832 3,681 3,024 3,765
-------- -------- -------- --------
Diluted common shares 68,491 68,485 68,530 68,457
======== ======== ======== ========
The accompanying notes are an integral part of these financial statements.
5
WEST CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
Six Months Ended
June 30,
--------------------------
2002 2001
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 42,877 $ 41,322
Adjustments to reconcile net income to net cash flows
from operating activities:
Depreciation and amortization 29,130 24,499
(Gain) Loss on sale of equipment 101 (23)
Deferred income tax (benefit) (3,908) (1,870)
Minority interest 155 282
Changes in operating assets and liabilities before
effects from acquisitions:
Accounts receivable 21,944 29,261
Other assets (11,472) 534
Accounts payable (5,551) (5,605)
Other liabilities and accrued expenses (8,463) (17,324)
Customer deposits and holdbacks (3,653) (3,911)
Income tax payable - 1,353
---------- ----------
Net cash flows from operating activities 61,160 68,518
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition costs, net of cash received (41,905) -
Purchases of property and equipment (20,772) (27,945)
Proceeds from disposal of property and equipment 14 49
Proceeds from payments of notes receivable 396 3,562
---------- ----------
Net cash flows from investing activities (62,267) (24,334)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of long-term obligations (5,936) (10,509)
Proceeds from stock option exercises including
related tax benefits 8,481 5,313
Net change in accounts receivable financing and accounts
payable financing (13,657) 107
---------- ----------
Net cash flows from financing activities (11,112) (5,089)
---------- ----------
NET CHANGE IN CASH AND CASH EQUIVALENTS (12,219) 39,095
CASH AND CASH EQUIVALENTS, Beginning of period 151,520 108,113
---------- ----------
CASH AND CASH EQUIVALENTS, End of period $ 139,301 $ 147,208
========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 1,325 $ 1,286
========== ==========
Cash paid during the period for income taxes $ 24,503 $ 22,896
========== ==========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES:
Acquistion of property with debt obligation financing $ 13,114 $ -
---------- ----------
Application of accounts receivable to accounts payable $ 18,926 $ 19,025
========== ==========
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES:
Treasury stock acquired in exchange for stock options exercised $ - $ 1,382
========== ==========
Debt assumed with the acquisition of subsidiary $ 3,739 $ -
========== ==========
The accompanying notes are an integral part of these financial statements.
6
WEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF CONSOLIDATION AND PRESENTATION
West Corporation and its direct and indirect subsidiaries (the "Company")
is one of the largest independent providers of outsourced customer relationship
management, or CRM, solutions in the United States. The Company is a leading
provider of integrated customer contact solutions focused on helping Fortune
1000 companies acquire, retain and grow their customer relationships. The
Company's customized solutions include large volume agent based transaction
processing, interactive voice response and Web-enabled customer contact
solutions. The Company's operational strength and proprietary technology helps
its clients gain greater value from each customer interaction and drive improved
results.
Founded in 1986 and headquartered in Omaha, Nebraska, the Company operates
a national network of 35 state-of-the-art customer contact centers and eight
automated voice and data processing centers throughout North America and in
India.
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, 2001. All significant intercompany balances and
transactions have been eliminated. Certain amounts in prior fiscal periods have
been reclassified for comparative purposes.
2. GOODWILL AND OTHER INTANGIBLE ASSETS - ADOPTION OF SFAS NO. 142
In June 2001, the Financial Accounting Standards Board 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 that all business combinations
entered into subsequent to June 30, 2001 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 was effective for the Company
beginning on January 1, 2002. The Company has determined that presently goodwill
is not impaired and therefore no write-off is necessary. The historical impact
of not amortizing goodwill would have resulted in an increase in net income for
the six months ended June 30, 2001 by $842,000. The following table presents the
effect of not amortizing goodwill on reported net income, basic earnings per
share and diluted earnings per share.
WEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Amounts in thousands
except for per share amounts)
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------------------- ---------------------------------------
2002 2001 2002 2001
----------------- ----------------- ----------------- -----------------
Reported net income $ 20,285 $ 19,485 $ 42,877 $ 41,322
Add back: Goodwill amorization - 421 - 842
----------------- ----------------- ----------------- -----------------
Adjusted net income $ 20,285 $ 19,906 $ 42,877 $ 42,164
================= ================= ================= =================
Basic earnings per share:
Reported net income $ 0.31 $ 0.30 $ 0.65 $ 0.64
Goodwill amortization - - - 0.01
----------------- ----------------- ----------------- -----------------
Adjusted net income $ 0.31 $ 0.30 $ 0.65 $ 0.65
================= ================= ================= =================
Diluted earnings per share:
Reported net income $ 0.30 $ 0.28 $ 0.63 $ 0.60
Goodwill amortization - - - 0.01
----------------- ----------------- ----------------- -----------------
Adjusted net income $ 0.30 $ 0.28 $ 0.63 0.61
================= ================= ================= =================
The Company also has a patent, which is classified as a finite life
intangible asset. This patent was valued at $14.7 million when it was acquired
on May 4, 2000. The patent is being amortized over the life of the patent, 17
years, using a straight-line method. Goodwill and other intangible assets
acquired in 2002 through acquisitions are discussed in note 3 below.
3. ACQUISITIONS
During the six months ended June 30, 2002, the Company acquired the
following two entities for a cost of $41.9 million, net of cash received, plus
an additional $4.6 million in assumed liabilities.
.. Tel Mark Sales, Inc., based in Appleton, Wisconsin, is a provider of
outsourced business to business customer care and telemarketing services.
The stock of Tel Mark Sales, Inc. was acquired on January 1, 2002.
.. Dakotah Direct II, LLC, based in Spokane, Washington, is a customer
relationship services company that focuses on providing marketing and
customer solutions through inbound, outbound and Internet services. The
membership interests of Dakotah Direct II, LLC, were acquired on March 1,
2002.
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. Goodwill recognized in those transactions amounted to $26.1 million.
Other intangible assets in those transactions amounted to $8.5 million. These
intangible assets, including customer lists, a favorable lease, non-competition
agreements, trade names and software, are being amortized over one to twenty
years depending on the estimated remaining useful lives of the various
intangible assets. The estimated 2002 amortization expense for these finite
lived intangible assets is $1.4 million. The $19.6 million recorded as goodwill
and the $14.1 million recorded for intangible assets at March 31, 2002 were
based on preliminary estimates prepared by a third-party appraisal company.
Those estimates were finalized during the three months ended June 30, 2002.
WEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The Company's unaudited pro forma results of operations for the six months
ended June 30, 2002 and 2001, assuming the acquisitions referred to above
occurred as of the beginning of the periods presented (in thousands, except per
share data) are as follows:
2002 2001
Revenue $413,448 $426,212
Net Income $ 43,404 $ 42,442
Earnings per common share- basic $ 0.66 $ 0.66
Earnings per common share- diluted $ 0.63 $ 0.62
The pro forma results above are not necessarily indicative of the operating
results that would have actually occurred if the acquisitions had been in effect
on the dates indicated, nor are they necessarily indicative of future results of
the combined companies. The Company believes synergies and cost savings will
result from the acquisitions and would affect the pro forma results noted above.
4. SUBSEQUENT EVENTS
On July 23, 2002, the Company entered into an agreement to purchase all of
the membership interests of Attention LLC ("Attention"), a privately-held
limited liability company based in Atlanta, Georgia. Attention provides accounts
receivable management, outsourcing and other services, including debt collection
to clients in various industries. The purchase price to be paid by the Company
at the closing of the transaction consists of $35.7 million in cash and $4.3
million in assumed debt. Additional consideration, payable over the four year
period between 2004 and 2008, will range from a minimum of $21.5 to a maximum of
$50.0 million, based on Attention's satisfaction of certain earnings objectives
during such period. The closing of the transaction is subject to customary
closing conditions, including expiration or termination of any applicable
waiting period under the Hart-Scott-Rodino Antitrust Improvement Act of 1976, as
amended. The closing of this transaction occurred on August 1, 2002.
5. COMMITMENTS AND CONTINGENCIES
From time to time, the Company is subject to lawsuits and claims which
arise out of its operations in the normal course of its business. The Company
and certain of its subsidiaries are defendants in various litigation matters in
the ordinary course of business, some of which involve claims for damages that
are substantial in amount. The Company believes, except for the items discussed
below, in its Form 10-K for the year ended December 31, 2001 and in its
quarterly report on Form 10-Q for the first quarter of 2002, for which the
Company is currently unable to predict the outcome, the disposition of claims
currently pending will not have a material adverse effect on the Company's
financial position, results of operations, or cash flows.
Patricia Sanford v. Memberworks Incorporated, et al., pending in the United
States District Court, Southern District of California, Case No. 02CV0601H was
filed on March 28, 2002. West Corporation and West Telemarketing Corporation,
are named as defendants in the plaintiff's class action complaint. The other
defendants include Memberworks Incorporated, MWI Essentials, MWI Leisure
Advantage, MWI Home & Garden, MWI Connections and MWI Valuemax. The complaint
alleges that class members were sold club memberships by misleading means or
billed for club memberships they did not purchase as a part of an upsell offer
after ordering another product. The plaintiff asserts four separate claims. The
plaintiff claims the defendants mailed unordered merchandise to the plaintiff
and the similarly situated class members in violation of 39 USC ss. 3009. The
plaintiff also seeks declaratory relief granting the plaintiff the right to keep
any unordered merchandise as a gift. The plaintiff has also asserted claims for
conversion, unjust enrichment and fraud. The purported class is composed of
WEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
all persons in the United States who, after calling a telephone number to
inquire about or purchase another product, (1) were sent a membership kit in the
mail;(2) were charged for a Memberworks membership program; and (3) were
customers of a joint venture between Memberworks and the Company or were
wholesale customers of the Company. The Company filed a motion to dismiss for
lack of personal jurisdiction, which was denied. The Company joined with
Memberworks on a motion to dismiss on various other grounds. On July 12, 2002
the Company's motion to dismiss was granted.
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, 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. 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.
CRITICAL ACCOUNTING POLICIES
In December, 2001, the Securities and Exchange Commission issued Financial
Reporting Release No. 60, "Cautionary Advice Regarding Disclosure About Critical
Accounting Policies" ("FRR 60"), suggesting companies provide additional
disclosure and commentary on those accounting policies considered most critical.
FRR 60 considers an accounting policy to be critical if it is important to the
Company's financial condition and results, and requires significant judgment and
estimates on the part of management in its application. The Company believes the
following represent the critical accounting policies of the Company as
contemplated by FRR 60.
Revenue Recognition - Operator Teleservices, Direct Teleservices and
Interactive Teleservices are the Company's three operating divisions. West
Direct, Inc., is a majority owned performance based marketing and technology
subsidiary of the Company. 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.
West Direct, Inc. revenues
are recognized during the period services are provided. The Company defers
revenues during the period in which customer refund obligations exist.
Selling, General and Administrative ("SG&A") Expenses - SG&A 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 intangibles, allowance
for doubtful accounts, sales and marketing activities, client support services
and corporate management costs. These costs require estimates to be made by
management who periodically re-evaluate these estimates which include estimated
useful lives of fixed assets, impairment of goodwill and ultimate collection of
monies owed by clients. These estimates are reviewed on a continuous basis and
adjusted based upon the most current information available and the judgment of
management.
Goodwill & Other Intangible Assets - As a result of the two acquisitions
made during 2002, the Company's recorded goodwill has increased significantly by
$26.1 million and the recorded value of other intangible assets has increased
significantly by $8.5 million as of June 30, 2002. Two matters arise with
respect to these assets that require significant management estimates and
judgment: a) the valuation in connection with the initial purchase price
allocation and b) the ongoing evaluation for impairment. In connection with
these acquisitions, a third-party valuation was completed to determine the
purchase price allocation between goodwill and other intangible assets. Upon
completion of this process, approximately 25% was assigned to various identified
finite lived intangible assets and the remainder to goodwill. The purchase price
allocation process requires estimates and judgment as to certain expectations
and business strategies. If the actual results differ from the assumptions and
judgments made, the amounts recorded in the consolidated financial statements
could result in a possible impairment of the intangible assets and goodwill or
require acceleration in amortization expense. In addition, Financial Accounting
Standard 142 requires that goodwill be tested annually using a two-step process.
The first step is to identify a potential impairment. The second step measures
the amount of the impairment loss, if any. Because of the significance of the
goodwill and identified intangible assets to the Company's consolidated balance
sheet, the annual impairment analysis will be critical. Any changes in key
assumptions about the business and its prospects, or changes in market
conditions or other externalities, could result in an impairment charge and such
a charge could have a material effect on the Company's financial condition and
results of operations.
Results of Operations
Comparison of the Three Months and Six Months Ended June 30, 2002 and 2001
Revenue: For the second quarter of 2002, revenue increased $2.1 million, or
1.1%, to $195.1 million up from $193.0 million for the three months ended June
30, 2001. For the six months ended June 30, 2002, revenue increased $9.6
million, or 2.4%, to $405.6 million up from $396.0 million for the six months
ended June 30, 2001. The increase in revenue for the three months ended June 30,
2002, included $13.7 million derived from new clients and $15.9 million derived
from the acquisitions of Tel Mark Sales, Inc. and Dakotah Direct II, LLC. The
increase in revenue for the six months ended June 30, 2002, included $44.7
million derived from new clients and $25.3 million derived from such
acquisitions. The overall revenue increase is attributable to the acquisitions
of Tel Mark Sales, Inc. and Dakotah Direct II, LLC. Lower call volumes, in 2002
relative to 2001 for Company-initiated transactions and direct response volumes
as well as a significant reduction in 900 service call volumes partially offset
the growth noted above in the three and six months ended June 30, 2002.
For the three months ended June 30, 2002, 80% of the Company's total
revenue was generated by 30 clients. This compares to 87 clients during the
comparable period in 2001. For the six months ended June 30, 2002, 80% of the
Company's total revenue was generated by 56 clients. This compares to 70 clients
during the comparable period in 2001. During the three months ended June 30,
2002, AT&T remained the Company's largest client and accounted for 26% of total
revenue, an increase from 22% during the comparable period in 2001. For the six
months ended June 30, 2002, AT&T accounted for 24% of total revenue, the same
percentage as during the comparable period in 2001.
Cost of services: Cost of services represents direct labor, telephone
expense and other costs directly related to teleservices activities. Costs of
services decreased $5.6 million, or 5.7%, in the second quarter of 2002 to $92.8
million, down from $98.4 million for the comparable period of 2001. Cost of
services decreased $6.4 million, or 3.2%, to $195.1 million for the six months
ended June 30, 2002, down from $201.5 million for the comparable period of 2001.
As a percentage of revenue, cost of services decreased to 47.6% for the second
quarter of 2002 and to 48.1% for the six months ended June 30, 2002, compared to
51.0% and 50.9%, respectively, for the comparable periods in 2001. The decrease
in cost of services as a percentage of revenue for the three months and six
months ended June 30, 2002 can be attributed primarily to lower
telecommunication costs due to lower service rates negotiated with the Company's
telecommunications vendor, continued control of variable labor costs, a
greater percentage of Interactive Teleservices and Operator Teleservices call
volumes which traditionally have a lower direct cost as a percent of revenue and
the significant reduction in 900 service call volumes which have relatively
higher direct costs as a percentage of revenue.
Selling, general and administrative expenses: SG&A expenses increased by
$7.0 million, or 10.9%, to $71.2 million for the second quarter of 2002 up from
$64.2 million for the comparable period of 2001. For the six months ended June
30, 2002, SG&A expenses increased by $14.3 million, or 11.0%, to $144.5 million,
up from $130.3 million for the comparable period of 2001. As a percentage of
revenue, SG&A expenses increased to 36.5% for the second quarter of 2002 and
35.6% for the six months ended June 30, 2002 compared to 33.2% and 32.9%,
respectively, for the comparable periods of 2001. The percentage increase can be
attributed primarily to an increase in the allowance for doubtful accounts, an
increase in depreciation, amortization of finite life intangible assets acquired
in two acquisitions during the period and costs associated with the operation of
these two companies. The increase in the allowance for doubtful accounts is
based on management's judgment as to the potential effect of the continued weak
economy on the ultimate collection of monies owed by clients. The increase in
depreciation is due to the overall increase in property and equipment.
Operating income: Operating income increased by $0.7 million, or 2.4%, to
$31.1 million for the second quarter of 2002 up from $30.4 million, for the
comparable period of 2001. For the six months ended June 30, 2002, operating
income increased by $1.7 million, or 2.6%, to $66.0 million up from $64.3
million for the comparable period of 2001. As a percentage of revenue, operating
income increased to 16.0% for the second quarter of 2002 and 16.3% for the six
months ended June 30, 2002 compared to 15.8% and 16.2%, respectively, for the
corresponding periods of 2001 due to the factors discussed above for revenue,
cost of services and SG&A expenses.
Other income: Other income includes interest income from short-term
investments, interest income from an accounts receivable financing program,
interest income from customer notes receivable and interest expense from
short-term and long-term obligations. Other income for the second quarter of
2002 totaled $431,000 compared to $994,000 for the second quarter of 2001. Other
income for the six months ended June 30, 2002 totaled $1,142,000 compared to
$1,648,000 for the comparable period of 2001. Lower average cash balances and
lower interest rates accounted for the decline.
Net income: Net income increased by $0.8 million, or 4.1%, to $20.3 million
for the second quarter of 2002 compared to $19.5 million for the second quarter
of 2001. For the six months ended June 30, 2002, net income increased $1.6
million, or 3.8%, to $42.9 million up from $41.3 million for the comparable
period of 2001. Net income included a provision for income tax expense at an
effective rate of approximately 35.6% and 35.9% for the three months and six
months ended June 30, 2002, respectively, and approximately 37.3% and 36.9% for
the comparable periods of 2001.
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 had a $25.0 million revolving credit facility, which expired on
June 29, 2002. Advances under this revolving credit facility bore interest at
the prime rate less 1.0%. This credit facility was renewed on June 30, 2002 for
$25.0 million under substantially the same terms and conditions. There were no
borrowings outstanding under this facility at June 30, 2002. The Company's
credit facility contains certain financial covenants and restrictions, which
were met at June 30, 2002. The renewed credit facility expires on June 28, 2003.
The Company believes it could increase the amount of the facility, if needed.
Net cash flow from operating activities decreased $7.4 million, or 10.7%,
to $61.2 million for the six months ended June 30, 2002, compared to net cash
flow from operating activities of $68.5 million for the six months ended June
30, 2001. The decrease was due principally to the increase in other assets,
primarily prepaid expenses of the monthly membership programs, and a decrease in
accounts payable and other liabilities and accrued expenses. The decrease in
cash flows from operating activities was partially offset by an increase in
depreciation and amortization and the increase in net income.
Net cash flow used in investing activities was $62.3 million for the six
months ended June 30, 2002, compared to $24.3 million for the comparable period
of 2001 an increase of 158%. The increase in cash flow used in investing
activities was primarily due to two acquisitions completed by the Company during
the first quarter of 2002 as described above requiring approximately $41.9
million of cash flow in the aggregate, including aggregate cash purchase price
of approximately $42.8 million and acquisition costs of $0.8 million, less
approximately $1.7 million in cash retained by the acquired companies. The
increase in cash flow used in investing activities was partially reduced by a
reduction in the cash purchase of property and equipment. The Company invested
$33.9 million in additional voice response ports and contact center expansion
and upgrades to support the growth of the Company's business in the six months
ended June 30, 2002, comparable to the $27.9 million invested during the same
period in 2001. However, the 2002 purchases were financed by $13.1 million of
capital lease obligations and the remaining $20.8 million were funded through
cash flow from operations. In the comparable period for 2001, all of the
property and equipment purchases were financed through cash flow from
operations.
Net cash flow used in financing activities was $11.1 million for the six
months ended June 30, 2002, compared to net cash flow used in financing
activities of $5.1 million for the comparable period of 2001 a increase of 118%.
During the six months ended June 30, 2002, net cash flow used in financing
activities was primarily for payments of debt and capital lease obligations.
These payments were $5.9 million during the six months ended June 30, 2002
compared to $10.5 million for the comparable period of 2001. Proceeds from stock
options exercised, including related tax benefits, were $8.5 million during the
six months ended June 30, 2002 compared to $5.3 million for the comparable
period of 2001.
During the first quarter of 2001, the Company executed synthetic lease
agreements for two buildings. A special purpose trust owns both buildings
and leases these to the Company. The leases are 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 later in 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 of 87.5 basis points over a selected LIBOR, which was 1.84%, at June 30,
2002. The estimated aggregate lease expense on these leases for 2002 is
estimated to be $0.7 million. 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 July 23, 2002, the Company entered into an agreement to purchase all of
the membership interests of Attention LLC ("Attention"), a privately-held
limited liability company based in Atlanta, Georgia. Attention provides accounts
receivable management, outsourcing and other services, including debt collection
to clients in various industries. The purchase price to be paid by the Company
at the closing of the transaction consists of $35.7 million in cash and $4.3
million in assumed debt. Additional consideration, payable over the four year
period between 2004 and 2008, will range from a minimum of $21.5 to a maximum of
$50.0 million, based on Attention's satisfaction of certain earnings objectives
during such period. The closing of the transaction is subject
to customary closing conditions, including expiration or termination of any
applicable waiting period under the Hart-Scott-Rodino Antitrust Improvement Act
of 1976, as amended. The closing of this transaction occurred on August 1, 2002.
Capital Expenditures
The Company's operations continue to require significant capital
expenditures for capacity expansion and upgrades. Capital expenditures were
$33.9 million for the six months ended June 30, 2002 compared to $27.9 million
for the six months ended June 30, 2001. Capital expenditures for the six months
ended June 30, 2002 consisted primarily of additional voice response ports and
equipment purchases for contact center expansion and upgrades. The Company
projects its capital expenditures for the remainder of 2002 to be approximately
$30.0 million primarily for additional voice response ports and contact center
expansion and upgrades at existing facilities.
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, which involve risks and uncertainties. The Company's actual results
in the future could differ significantly from the results discussed or implied
in such forward-looking statements. Factors that could cause or contribute to
such differences include, but are not limited to, the effect on financial
performance of increased competition in the outsourced CRM solutions industry,
potential future competition, competitive pricing for services, potential future
competing technologies and trends, dependence on technology and phone service,
dependence on the Company's labor force, reliance on major clients, the success
of new product innovations, legal proceedings and government regulation.
The Company does not use derivative financial and commodity instruments.
The Company's financial instruments include cash and cash equivalents, accounts
and notes receivable, accounts and notes payable and long-term obligations. The
Company's cash and cash equivalents, accounts and notes receivable and accounts
and notes payable balances are generally short-term in nature and do not expose
the Company to material market risk. As of June 30, 2002, the Company had $41.2
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 June 30, 2002. 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.
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, 2001, and in its
quarterly report on Form 10-Q for the first quarter of 2002, 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.
Patricia Sanford v. Memberworks Incorporated, et al., pending in the United
States District Court, Southern District of California, Case No. 02CV0601H was
filed on March 28, 2002. West Corporation and West Telemarketing Corporation,
are named as defendants in the plaintiff's class action complaint. The other
defendants include Memberworks Incorporated, MWI Essentials, MWI Leisure
Advantage, MWI Home & Garden, MWI Connections and MWI Valuemax. The complaint
alleges that class members were sold club memberships by misleading means or
billed for club memberships they did not purchase as a part of an upsell offer
after ordering another product. The plaintiff asserts four separate claims. The
plaintiff claims the defendants mailed unordered merchandise to the plaintiff
and the similarly situated class members in violation of 39 USC (S) 3009. The
plaintiff also seeks declaratory relief granting the plaintiff the right to keep
any unordered merchandise as a gift. The plaintiff has also asserted claims for
conversion, unjust enrichment and fraud. The purported class is composed of all
persons in the United States who, after calling a telephone number to inquire
about or purchase another product, (1) were sent a membership kit in the mail;
(2) were charged for a Memberworks membership program; and (3) were customers of
a joint venture between Memberworks and the Company or were wholesale customers
of the Company. The Company filed a motion to dismiss for lack of personal
jurisdiction, which was denied. The Company has joined Memberworks on a motion
to dismiss on various other grounds. On July 12, 2002 the Company's motion to
dismiss was granted.
Item 4. Submission of Matters to a Vote of Security Holders
The annual meeting of the stockholders of the Company was held on May 15,
2002 (the "Annual Meeting"). The matters submitted to the stockholders for a
vote included (a) the election of two directors with terms expiring at the 2005
annual meeting of stockholders and (b) the ratification of appointment of
Deloitte & Touche LLP as the Company's independent auditors. The following table
sets forth the results of the voting on these matters:
Number of
Number of Votes Against
Matter Votes For or Withheld Abstain
Election of Directors
Gary L. West 59,501,565 3,619,284 -
Greg T. Sloma 62,735,626 385,223 -
Ratification of Appointment of Deloitte & Touche LLP as
Independent Auditors 62,578,321 542,113 415
Members of the Board of Directors whose term of office as a director continued
after the Annual Meeting other than the directors elected are Mary E. West,
Thomas B. Barker, William E. Fisher and George H. Krauss.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
99.01 Certification
(b) Reports on Form 8-K.
The Company filed a Report on Form 8-K, dated July 23, 2002, with the
Securities and Exchange Commission to disclose the execution of an
agreement to purchase all of the membership interests of Attention LLC.
The Company filed a Report on Form 8-K, dated August 2, 2002, with the
Securities and Exchange Commission to disclose the execution of an
agreement to purchase all of the membership interests of Attention LLC.
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: August 7, 2002