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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 000-21771
WEST TELESERVICES CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 47-0777362
(STATE OF INCORPORATION) (IRS EMPLOYER IDENTIFICATION NO.)
9910 MAPLE STREET, OMAHA, NEBRASKA 68134
(ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE)
OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (402) 571-7700
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE.
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK (PAR VALUE $0.01 PER SHARE)
(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K.
At March 17, 1997, 63,330,000 shares of common stock of the registrant were
outstanding. The aggregate market value (based upon the closing price of these
shares on the Nasdaq National Market at March 17, 1997) of the voting stock
held by nonaffiliates was approximately $112.24 million.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held on May 14, 1997, are incorporated into Part III.
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TABLE OF CONTENTS
PART I
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ITEM 1. BUSINESS....................................................... 3
ITEM 2. PROPERTIES..................................................... 14
ITEM 3. LEGAL PROCEEDINGS.............................................. 15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............ 15
EXECUTIVE OFFICERS OF THE REGISTRANT.................................... 16
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS........................................................ 17
ITEM 6. SELECTED FINANCIAL DATA........................................ 17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS......................................... 19
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................... 23
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.......................................... 23
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............. 24
ITEM 11. EXECUTIVE COMPENSATION......................................... 24
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. 24
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................. 24
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K...................................................... 24
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PART I
ITEM 1. BUSINESS
GENERAL
West TeleServices Corporation (the "Company") is one of the largest
independent teleservices companies in the United States, and provides a full
range of customized telecommunications-based services to business clients on
an outsourced basis. The Company is a leading provider in each of inbound
operator services, automated voice response services and outbound direct
teleservices. Inbound operator services consist of live operator call-
processing applications such as order capture, customer service and product
support. Inbound was established in 1986 with the goal of becoming the leading
inbound teleservices operation in the United States and represented
approximately 29.3% of the Company's revenue in 1996. Automated voice response
services consist of computerized call-processing applications such as
automated product information requests, computerized surveys and polling, and
secure automated credit card activation. Interactive began operations in 1989
with the goal of establishing the leadership position in automated voice
response services and represented approximately 42.2% of the Company's
revenues in 1996. Outbound direct teleservices consist of live operator direct
marketing applications such as product sales and customer acquisition and
retention campaigns. Outbound began operations in 1990 with the goal of
becoming one of the leading teleservices organizations in the United States
and represented approximately 28.5% of the Company's revenue in 1996. The
Company has developed proprietary technology platforms designed to provide a
high degree of automation and reliability in all three of its businesses. This
technology also enables the Company to efficiently integrate a range of its
services. The Company believes that its ability to offer integrated services
for its clients distinguishes it from most of its competitors.
The Company targets businesses in highly competitive, consumer-based
industries, including telecommunications, insurance, banking, pharmaceuticals,
public utilities, consumer goods and computer software services, that require
large volume applications. Representative clients include: AT&T Corp.
("AT&T"), America Online Inc., Commonwealth Edison Company, MBNA Corporation,
Merck & Co., Inc., Sun Microsystems Inc., Time-Life, Inc. and Turner
Broadcasting System, Inc. The Company's revenue and pro forma net income for
the year ended December 31, 1995 were $256.9 million and $22.4 million,
respectively. The Company's revenue and pro forma net income for the year
ended December 31, 1996 were $317.2 million and $28.7 million, respectively.
The Company operated approximately 4,400 telephone workstations as of
December 31, 1996 in eight state-of-the-art call centers located in Nebraska,
Texas and Virginia which it uses for inbound and outbound services, and
maintained approximately 5,800 proprietary interactive voice response ports as
of December 31, 1996 for its automated voice response services. The Company
has deployed multiple automatic call distributors, predictive dialers, a
proprietary interactive voice response platform and multiple mainframe
computer systems, in combination with an intelligent workstation environment,
in order to fully automate and manage the Company's information-processing
requirements. The Company believes it has designed and implemented a
sophisticated technology platform, permitting it to provide flexible, high-
quality and cost-effective service solutions for its clients.
The Company conducts its business principally through three wholly-owned
subsidiaries: West Telemarketing Corporation ("Inbound"); West Telemarketing
Corporation Outbound ("Outbound"); and, West Interactive Corporation
("Interactive"). The Company, Inbound, Outbound, Interactive and all other
direct or indirect subsidiaries of the Company are collectively referred to
herein as the "West Affiliates."
INDUSTRY OVERVIEW
The teleservices industry facilitates direct communication between companies
and their current and prospective customers through telecommunications-based
systems. Industry sources estimate
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that total media advertising expenditures (including teleservices
expenditures) in the United States were approximately $263 billion in 1995.
Industry sources also estimate that teleservices expenditures in the United
States were approximately $80 billion in 1995.
ADVANTAGES OF TELESERVICES
Many industries, including telecommunications, pharmaceuticals, consumer
goods, banking and insurance, are experiencing increased competition to
attract and retain customers, and accordingly many businesses are seeking to
expand their direct contact with current and prospective customers. Many of
these businesses are allocating more of their advertising and customer service
expenditures to teleservices which effectively complement other marketing
media such as television, radio and print advertising and enables businesses
to quantify and evaluate the effectiveness of specific marketing expenditures.
Teleservices is estimated to be the leading direct marketing medium by which
approximately 81.0 million consumers purchased goods or services over the
telephone in 1995.
EVOLUTION OF THE TELESERVICES INDUSTRY
The teleservices industry has evolved during the past ten years from
primarily single-facility, low technology environments to large, full service
organizations with multi-location, large volume call-processing centers
utilizing advanced systems. Certain independent teleservices providers have
invested an increasing amount of capital in large volume state-of-the-art call
centers and advanced network technology. Larger service providers, which can
achieve greater economies of scale, can more easily justify ongoing investment
in sophisticated call management software, predictive dialers and automatic
call distributors, to better provide premium quality and cost-effective
services. Businesses are seeking to provide greater information for consumers
to make informed purchase decisions as product and service offerings become
more complex and varied. As an example, it is estimated that in the mid-1980's
only 5% of United States companies offered toll-free lines as compared to
approximately 75% today. These toll-free lines are estimated to handle an
average of 60 million calls per day. Finally, businesses are increasingly
recognizing the economic benefits of expanding relationships with existing
customers through teleservices such as customer retention campaigns.
ROLE OF OUTSOURCING
Businesses historically have relied on in-house personnel to provide most
telephone-based services. Industry sources estimate that expenditures for the
"non-captive" portion of the industry, which is serviced on an outsourced
basis by independent teleservices companies, were approximately $6 billion in
1995 (or 8% of the estimated total industry). Based on discussions with its
clients and prospective clients, the Company believes that businesses are
increasingly outsourcing their teleservices activities in order to focus their
internal resources on their core competencies, to increase the productivity of
their marketing services and to reduce overall teleservices expenditures.
Providers of outsourced teleservices can offer clients lower overall
teleservices costs due to economies of scale in sharing the cost of new
technology among a larger base of users and higher capacity utilization rates.
The overall teleservices market is estimated to grow at approximately 8% per
year for the next five years.
COMPANY STRATEGY
The Company believes that it is one of the leading providers in the
teleservices industry and is well positioned to benefit from the continued
growth in outsourced teleservices. The Company's objective is to enhance its
leading position in each of inbound, automated voice response and outbound
services. The principal elements of the Company's strategy are:
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I. LEVERAGE ABILITY TO PROVIDE INTEGRATED SERVICE SOLUTIONS
The Company seeks to apply its operating expertise in inbound, automated
voice response and outbound services to develop customized service solutions
which utilize the resources of each division on an integrated basis. The
Company is able to integrate its service offerings by utilizing its voice and
data networking technology and its proprietary software systems and hardware
platforms. The Company is able to design and implement highly flexible
applications which combine the large volume call capacity of automated voice
response with the specialized customer service capabilities of inbound
services. As an additional component of integration, customer follow-up can be
scheduled and initiated through the Company's outbound services. This
integrated offering provides a cost effective solution for the client and
increases the productivity of the Company's live operators. Furthermore, the
Company leverages its ability to provide integrated services by cross-selling
its services to its clients to capture an increasing share of their outsourced
business. The Company believes that its integrated service capabilities are a
significant competitive advantage.
II. PURSUE RECURRING AND LARGE VOLUME APPLICATIONS
The Company has developed its facilities and operations specifically to
provide effective service to clients which generate large and recurring call
volumes. The Company has established a strong track record in successfully
managing client programs which produce such volumes. The consistent revenue
streams derived from these large volume and recurring applications help the
Company manage its long-term growth.
III. CAPITALIZE ON STATE-OF-THE-ART TECHNOLOGY
The Company seeks to capitalize on its state-of-the-art technology, which
enables the Company to offer premium quality, flexible and cost-effective
service solutions to its clients. The Company believes that its significant
and continuing investment in sophisticated call center technology, including
proprietary interactive voice response technology, proprietary scheduling
systems, computer telephony integration systems, advanced call management
software systems and high speed, fault-tolerant computer systems, is a
competitive advantage. In addition, the Company's proprietary software
systems, hardware platforms and extensive networking technology allow it to
provide customized client applications and integrate two or more of its
inbound, automated voice response and outbound services. The Company
continually seeks to improve its technological capabilities.
IV. PROVIDE PREMIUM QUALITY SERVICES
The Company believes that service quality is a critical factor in a
potential client's decision to outsource its teleservices. The Company
differentiates the quality of its services through its ability to quickly
respond to new applications and short-term volume fluctuations, efficiently
address staffing needs, and effectively employ operating systems that can
process client campaign data and provide sophisticated reports. The Company
also seeks to provide premium quality services through an extensive training
program and an experienced management team. The Company believes that it
provides premium quality service to its clients and that the quality of its
service is one of its competitive advantages.
V. DEVELOP LONG-TERM CLIENT RELATIONSHIPS
The Company focuses on developing long-term client relationships. Since the
Company manages programs that interface with its clients' current or
prospective customers, the Company seeks to develop a detailed understanding
of each of its clients' specialized businesses. This process enables the
Company to create customized solutions which meet clients' needs and minimize
client turnover. As a result, the Company is better positioned to cross-sell
its services and proactively offer new applications.
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VI. LEVERAGE STRONG MANAGEMENT EXPERIENCE
The Company's management team possesses extensive industry experience in
inbound, automated voice response and outbound services. The Company's
management team has proven experience managing the rapid growth of the
business. The founders of the Company are among the pioneers of key areas of
the teleservices industry and the members of the management team have
continued to contribute to the development of the teleservices industry. The
Company believes that it has distinguished itself through its ability to
attract and retain some of the most talented managers in the industry.
DESCRIPTION OF SERVICES
The Company's organizational structure is outlined below:
[A CHART DEPICTING THE COMPANY'S ORGANIZATIONAL STRUCTURE APPEARS HERE.]
I. OPERATOR TELESERVICES ("INBOUND")
Inbound provides live operator call-processing services, including order
capture and customer service applications. Inbound was established in 1986
with the goal of becoming the leading inbound teleservices operation in the
United States. It was one of the first service providers to fully automate its
operations and to develop proprietary software systems to service the
customized needs of its clients. In 1996, Inbound represented approximately
29.3% of the Company's revenue. The two divisions of Inbound are Direct
Response Services and Custom Operator Services.
DIRECT RESPONSE SERVICES. This division provides large volume inbound call-
processing services. Inbound custom designs applications to meet client
specifications for order capture, lead generation, customer service, dealer
referral and other information processing campaigns. Direct Response Services
receives incoming calls 24 hours per day, 365 days per year. Clients measure
this division's service quality by its ability to (i) process a large volume
of simultaneous incoming calls and (ii) to minimize the number of calls which
receive a busy signal. Although this division processes call volume from other
media such as radio, print and direct mail advertisements, most of its call
volume is generated via toll-free numbers appearing in television
advertisements. This type of inbound campaign requires the capability to
handle increases in call volumes over short periods of time.
The Company utilizes automatic call distributors and digital switches to
identify the toll-free number dialed by each caller. The toll-free number
specifies the particular client campaign and designates customer, product, and
service information to the operator and provides a highly structured script
designed to aid in processing the transaction. Each individual operator may
receive a call for one of hundreds of different client campaigns at any given
time. Furthermore, the Company can immediately report information captured
during the call to its client, the client's advertising agency and the
client's designated fulfillment company. Caller information and campaign call
volume summary
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reports are customized and may be transmitted to the client via magnetic tape,
electronic transfer or facsimile per the client's instructions. Clients also
have the ability to access real-time on-line program results by media source.
Immediate access to call volume data allows the Company's clients to quickly
determine the cost-effectiveness of various campaigns and to adjust their
media expenditures accordingly.
CUSTOM OPERATOR SERVICES. This division provides customized teleservices
solutions on a dedicated basis to large business clients. The Company believes
that many businesses are finding it increasingly difficult to provide high
quality customer service and product support without diverting resources from
their core businesses. In addition, it is expensive for these businesses to
own, operate and maintain state-of-the-art call-processing facilities. The
Company believes there are significant growth opportunities in outsourced
teleservices for companies that can provide customized solutions on a
dedicated basis. The Company's objective for this division is to provide a
wide range of inbound telephone-based services including: (i) programs
designed to enhance or maximize customer acquisition and retention; (ii)
customer service and support; (iii) product support; (iv) collection services;
(v) customer complaint resolution; and (vi) client satisfaction information.
II. INTERACTIVE TELESERVICES ("INTERACTIVE")
Interactive provides large volume automated voice response services which
allow a caller to access information by means of a touch-tone telephone or
voice prompt. Interactive began operations in 1989 with the goal of
establishing the leadership position in automated voice response services. The
Company believes that Interactive is currently the largest, fully automated
call-processing operation in the United States. In 1996, Interactive
represented approximately 42.2% of the Company's revenues. Interactive has
developed proprietary software systems and hardware platforms to service the
diverse needs of its clients and complements the Company's live operator
service offerings.
Interactive provides automated voice response services for a broad range of
applications, which include secure automated credit card activation,
information and entertainment services, polling and surveying, cellular fraud
prevention service, automated product information requests, database
management and enhancement, multiple caller conferencing, customer service and
third-party caller transfers. Interactive is measured by its ability to
process a large volume of simultaneous transactions. Additionally, Interactive
designs customized applications to meet stated client specifications and
offers a variety of voice recording services to aid in the design of an
interactive voice application.
Interactive specializes in processing large volumes of telephone
transactions generated by print, direct mail, radio and television broadcast
advertisements. Interactive's clients typically advertise a toll-free or pay
per call number designed to generate a prompt response. Interactive's
automated voice-processing platforms may be accessed 24 hours per day, 365
days per year. Interactive's proprietary software systems and hardware
platforms integrate the use of automated call distributors, digital switches
and decentralized computers for database management with remote host computer
interfaces and other peripheral processing activities. Interactive's
proprietary technology systems along with inbound and outbound services,
permit a caller to connect to a live operator to process data already captured
through automated Voice Response Units ("VRUs"). Interactive utilizes VRU's or
digital switches to identify the specific toll-free number dialed by the
caller. The toll-free number will identify the specific client campaign and
direct the call to the appropriate VRU's, switches, database machines, and
other required hardware and software needed to fulfill the requirements of the
client's application. Interactive was the first large scale platform to
incorporate advanced services such as voice recognition for callers with
rotary phones, and near real time transcription for quick data dissemination.
Interactive's clients have remote access capability to modify their scripts
and obtain instantaneous call count and program information. Interactive
reports all information captured or disseminated during a transaction to its
clients. Campaign information, summary reports and statistics are customized
to meet a client's specifications.
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In connection with the provision of interactive teleservices, the Company
offers an accounts receivable financing program for certain qualified clients
designed to advance a portion of revenue created by the client's program prior
to receipt of these funds through the normal collection cycle. These advances
are collateralized by the client's billed receivables. The purpose of the
program is to provide clients with working capital on a weekly basis instead
of having them rely on the normal monthly collection cycle.
III. DIRECT TELESERVICES ("OUTBOUND")
Outbound provides live operator direct marketing services. Outbound began
operations in 1990 with the goal of becoming one of the leading teleservices
organizations in the United States. In 1996, Outbound represented
approximately 28.5% of the Company's revenue. Since Outbound operates in a
more mature and competitive environment than Inbound and Interactive, Outbound
focuses exclusively on high volume projects. The two divisions of Outbound are
Consumer Direct Services and Business Direct Services.
CONSUMER DIRECT SERVICES. This division provides business-to-consumer
marketing services. While client applications may include product
registration, customer acquisition and retention campaigns, lead generation,
database enhancement and management, customer service and verification
activities, the division's primary service is product sales. Outbound is
typically measured by its ability to generate the highest net revenue per
billable hour for its clients.
The Company typically initiates contact with consumers that have been
identified by a client as existing or potential customers. Integrated call
management systems utilizing large-scale predictive dialers systematically
call consumers and transfer successful connections to a designated marketing
representative. As a call is presented to a marketing representative who has
been trained for specific client applications, the consumer's name, address
and other available information are simultaneously presented along with the
client's customized script. The Company's proprietary software systems permit
clients to immediately access on-line program results and shadow monitor the
performance of all designated marketing representatives. The Company can
report information captured, summary results and more detailed statistical
analyses in a customized format for each of its clients.
BUSINESS DIRECT SERVICES. This division provides business-to-business
marketing services for clients whose target markets include thousands of small
to medium sized businesses. These applications are designed to enhance and
grow their database of information about their prospects and clients, schedule
appointments for their regional and national sales forces, and sell services
to accounts that may not warrant a face-to-face sales presentation.
FACILITIES AND SERVICE FORTIFICATION
The Company recognizes the importance of providing uninterrupted service for
its clients. The Company has invested significant resources to develop,
install and maintain facilities and systems designed to be highly reliable.
All of the Company's service facilities and systems are designed to maximize
system in-service time and minimize the possibility of telecommunications
outage, commercial power loss or equipment failure. The Company believes that
this level of reliability provides an important competitive advantage.
The Company utilizes redundant network architecture which substantially
reduces the possibility of a system failure and the interruption of
telecommunications service. As depicted in the diagram below, Inbound's and
Interactive's call centers are served by redundant long distance and local
access facilities. Each call center is serviced by dual central office
switches, providing split access flexible egress routing capabilities, as well
as backup access into each facility, using dual fiber ring SONET-based self-
healing network architectures. All inbound numbers directed to a Company
facility are
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appended with dual routing instructions in the event of an error on the
primary network path. These capabilities allow incoming calls to be redirected
via an alternate long distance switch and/or through a backup access line in
the unlikely event of a long distance or local network failure.
[A FLOW CHART DEPICTING THE COMPANY'S REDUNDANT LONG DISTANCE
AND LOCAL ACCESS FACILITIES APPEARS HERE.]
The Company's systems also feature operational redundancy. The Company uses
automatic call distributors with dual processors and online automatic backup
and fault-tolerant mainframe computers with spontaneous dual backup for all
processors, disk management and mechanical functions. Copies of all
proprietary Company software systems and client application software reside in
a secure off-site storage facility. The Company actively monitors all critical
components of its call-processing facilities 24 hours per day, 365 days per
year. Each facility also has a stand-alone primary power system and both
battery backup and diesel generator backup power systems.
PERSONNEL AND TRAINING
The Company believes that a key component of its success is the quality of
its employees. As a large-scale service provider, the Company is continually
refining its approach to recruiting, training and managing its employees. The
Company has established procedures for the efficient weekly hiring and
training of hundreds of qualified employees. These procedures, coupled with
the Company's proprietary scheduling system, enable the Company to provide
flexible scheduling and staffing solutions to meet a client's needs for
additional resources.
The Company offers extensive classroom and on-the-job training programs for
personnel, including instruction regarding call-processing procedures, direct
sales techniques, customer service guidelines, telephone etiquette and proper
use of voice inflections. Telephone representatives receive professional
training lasting from four to 21 days, depending upon the client's program and
the nature of the services being provided. In addition to training designed to
enhance job performance, employees are also given a detailed description of
the Company's organizational structure, standard operating procedures, and
business philosophies.
In 1996, the Company employed an average of approximately 7,400 telephone
representatives per day for its inbound services and outbound services with
peak employment of approximately 8,600 operators per day. In addition, the
Company employed as of December 31, 1996 approximately 1,800 management, staff
and administrative employees. The Company considers its relations with its
employees to be good.
CALL MANAGEMENT SYSTEMS
The Company specializes in processing large and recurring call volumes. In
each of Inbound, Interactive and Outbound, the Company works closely with its
clients to accurately project future call volumes. The Company uses the
following practices to efficiently manage its call volumes:
HISTORICAL TRENDS ANALYSES. The Company tracks weekly, daily and hourly
calling trends for individual client programs for Inbound, Interactive and
Outbound. The Company believes that the key to a cost efficient teleservices
program begins with the effective planning of future call volumes to determine
the optimal number of employees, workstations and calling ports that need to
be deployed
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each hour. Based upon the Company's experience in processing large call
volumes during the past ten years, it has accumulated the data necessary to
differentiate the calling patterns of different applications such as order
capture, lead generation and customer service.
FORECASTING CALL VOLUMES/ESTABLISHING PRODUCTION PLANS. Call volumes are
forecasted for each one-half hour increment for each day. Detailed assumptions
are made regarding average length of call, average wait time between calls,
average speed of answer, and service level targets to determine the actual
number of calls that may be processed by a workstation or voice response port
during a specific one-half hour increment. This process enables the Company to
effectively determine the number of workstations and voice response ports
needed for a given campaign.
STAFFING AND SCHEDULING PLANS. Based upon the total number of workstations
required to be staffed, a detailed schedule is created. These schedules are
typically forecasted six to eight weeks in advance to assist the Company's
personnel and training departments in hiring and training the desired number
of personnel. Operators and marketing representatives are given regular work
schedules that are designed to coincide with anticipated calling patterns and
trends.
The Company has developed a proprietary scheduling system that efficiently
identifies variances between staff scheduled and staff needed. The system
accommodates real-time adjustments to be made for personnel schedules as call
volume projections fluctuate. Telephone agent personnel directly interact with
the system to schedule additional hours or time off. The system is integrated
into all attendance and payroll processing systems.
FACILITY CALLING PLAN. Once staffing and scheduling plans have been
developed, each division determines how to efficiently allocate the projected
call volumes among its call centers. Each call center receives a detailed plan
outlining the projected call volumes for each day of the week and each one-
half hour increment of each day. Personnel schedules are produced to optimally
match the projected calling volumes.
NETWORK CONTROL. The Company interfaces directly with AT&T's nationwide long
distance network and has the ability to allocate call volumes among its
various call centers on command. Traffic control specialists within the
Company are responsible for comparing actual call volumes and trends to stated
staffing and scheduling plans. When necessary, adjustments can be made to fine
tune minor variances between actual call volumes and personnel that have been
scheduled by facility. As a result, calls are optimally directed to available
personnel. Network control monitors the status of all call-processing
activities on a minute-by-minute basis. Minor real time variances between
projected and actual calling trends are promptly input into the Company's
database and the call management cycle repeats.
TECHNOLOGY/SYSTEMS DEVELOPMENT
All proprietary software systems and hardware platforms for Inbound,
Interactive and Outbound permit the design and execution of highly integrated
service offerings which share consumer database files, source files, calling
records and calling lists. All systems provide clients with the ability to
directly interface and communicate with the Company's systems. The Company
currently employs approximately 380 systems analysts, programmers and
technicians to modify and enhance the Company's operating systems and to
design client applications.
QUALITY ASSURANCE
By the nature of its services, the Company establishes direct contact with
the customer base of its clients. Given the importance of this role, the
Company believes that its reputation for providing premium quality service is
critical. Both the Company and its clients shadow monitor and evaluate the
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performance of telephone representatives to confirm that clients' programs are
properly implemented using clients' approved scripts and that the telephone
representatives meet clients' customer service standards. The Company
regularly measures the quality of its services by reviewing such variables as
average length of call, calls per hour, average speed of answer, sales per
hour, rate of call abandonment and order conversion percentages. The Company's
information systems enable the Company to provide clients with regular reports
on a real-time basis as to the status of an ongoing campaign and to transmit
summary data and captured information electronically to clients.
The Company maintains a quality assurance department for each of Inbound,
Interactive and Outbound that is responsible for the overall quality of the
services being provided. A comprehensive performance appraisal is typically
given to every telephone representative every six to eight weeks. The Company
uses statistical summaries of the performance appraisal information for its
training and operations departments to provide feedback and to identify
telephone representatives who may need additional training.
SALES AND MARKETING
The Company's sales and marketing strategy focuses on leveraging the
Company's teleservices expertise, integrated service capabilities and
reputation for premium quality service in order to cross-sell its services to
existing clients and to develop new long-term client relationships. The
Company also identifies industries that face increased competition, such as
telecommunications, insurance, banking, pharmaceuticals, consumer goods and
computer software, in which the Company can offer clients large-scale cost-
effective solutions on an outsourced basis.
The Company formulates detailed annual marketing plans. These plans contain
objectives and milestones which are tracked regularly throughout the year. The
sales organization consists of a vice president of sales for each division
that manages a group of national account managers. A national account
manager's primary responsibility is to solicit business from new prospects and
to enhance existing client relationships. Commissions are paid on both new
sales and incremental revenues generated from existing clients to provide the
appropriate incentives for national account managers. Once a client campaign
is initiated, a client services account manager is responsible for the daily
management of the campaign.
COMPETITION
The teleservices industry is highly fragmented and competitive. The
Company's competitors in the teleservices industry range from very small firms
catering to specialized applications and short-term projects to large
independent firms and the in-house operations of many clients and potential
clients. In addition, some of the Company's services compete with other forms
of marketing such as mail, television and radio. While the Company has various
competitors for each of its divisions, the Company believes that only a few
competitors currently have the capability to provide each of inbound,
automated voice-processing and outbound services. The Company believes that
the principal competitive factors in the teleservices industry are capacity,
flexibility of implementing customized solutions to clients' teleservices
needs, technological expertise and price.
PROPRIETARY RIGHTS AND LICENSES
The Company has made significant investments in the development of its
proprietary software systems and hardware platforms. The Company relies on a
combination of the protections provided by applicable copyright, trademark and
trade secret laws, as well as on confidentiality procedures, to establish and
protect its proprietary rights. The Company does not license any of its
software or hardware designs for use by others. Despite these precautions,
there can be no assurance that misappropriation of the Company's proprietary
software and hardware designs will not occur. Although
11
<PAGE>
the Company believes that its intellectual property rights do not infringe
upon the proprietary rights of third-parties, there can be no assurance that
third-parties will not assert infringement claims against the Company.
Further, there can be no assurance that intellectual property protection will
be available in certain foreign countries should the Company commence
operations outside North America.
GOVERNMENT REGULATION
Teleservices sales practices are regulated at both the federal and state
level. The significant growth of the telemarketing industry in the 1980's
produced concern over the proliferation of unsolicited teleservices calls made
to private residences. In response, Congress passed the Telephone Consumer
Protection Act of 1991 (the "TCPA") as the first attempt at regulating the
telemarketing industry. The Federal Communications Commission ("FCC") enacted
rules pursuant to the TCPA in December 1992 which prohibit the initiation of
telephone solicitations to residential telephone subscribers before 8:00 a.m.
and after 9:00 p.m. and prohibit the use of automated telephone dialing
equipment to call certain telephone numbers. The FCC rules also require the
maintenance of a list of residential consumers that have stated that they do
not want to receive telephone solicitations to ensure that companies avoid
making calls to consumers on this list.
In a further effort to combat telemarketing fraud, Congress also passed the
Federal Telemarketing Consumer Fraud and Abuse Act of 1994 ("TCFAA") which
authorized the Federal Trade Commission (the "FTC") to issue regulations
designed to prevent deceptive and abusive telemarketing acts and practices. In
1995, the FTC issued its new Telemarketing Sales Rule, which went into effect
in January 1996. The Telemarketing Sales Rule broadly defines telemarketing as
a plan, program or campaign conducted to induce the sale of goods, or services
through the use of one or more telephones and which involve more than one
interstate telephone call. The Telemarketing Sales Rule covers most outbound
telemarketing calls and certain inbound telemarketing calls. The Telemarketing
Sales Rule excludes from its coverage, among other things, (i) certain calls
initiated by customers in response to catalog offerings, (ii) calls initiated
by customers in response to mass media advertisements, except advertising
relating to investment opportunities, credit repair services, offers to
recover money lost in previous telemarketing transactions or solicitations
that represent a high likelihood of success in obtaining credit if a payment
in advance of obtaining credit is required, (iii) certain calls initiated by
customers in response to a direct mail solicitation, (iv) pay per call
services which are subject to the FTC's 900 Number Rule, and (v) business-to-
business calls except those involving the sale of nondurable office or
cleaning supplies. The Telemarketing Sales Rule sets forth certain mandatory
disclosures which must be made in connection with telephone sales, and
requires that records be kept for a period of two years. The Telemarketing
Sales Rule proscribes the making of outbound calls to consumers who have
previously requested not to be called. Telemarketers who inadvertently call
such persons can avoid liability only if they have implemented a set of "do-
not-call" procedures and have trained their personnel to abide by these
procedures. The Telemarketing Sales Rule prohibits telemarketers from making
any false or misleading statements to induce any person to pay for goods or
services, from using threats, intimidation and profane or obscene language
during calls, from causing any telephone to ring repeatedly or continuously
with intent to annoy, abuse or harass any person and from engaging in other
certain conduct. The Telemarketing Sales Rule also prohibits telemarketers
from debiting a consumer's checking, charge or similar account without the
consumer's express written authorization. Alternatively, a consumer may give
an oral authorization if the oral authorization is recorded and certain
disclosures are made. The Telemarketing Sales Rule also imposes potential
liability on companies providing substantial assistance to those engaged in
violations of the Telemarketing Sales Rule.
In addition to the FTC's new Telemarketing Sales Rule, there are numerous
state statutes and regulations governing telemarketing activities to which the
Company is subject. These statutes impose restrictions on auto-dialed recorded
message players, on solicitations initiated by or on behalf of the
12
<PAGE>
seller of goods or services and on the monitoring of telephone calls of
telemarketer employees. Some states also require registration of any
telemarketing campaign prior to any solicitation or attempted solicitation in
connection therewith and impose certain mandatory disclosures which must be
made during the course of the telephone calls. A number of states also provide
that a sale cannot be final unless a written contract is delivered to and
signed by the buyer and may be canceled within three business days. At least
one state also prohibits telemarketers from requiring credit card payment.
From time to time, bills are introduced in Congress which, if enacted, would
regulate the use of credit information. The Company cannot predict whether
this legislation will be enacted and what effect, if any, it would have on the
Company or its industry.
The FTC has also adopted regulations governing pay per call services (the
"900 Number Rule") pursuant to the Telephone Disclosure and Dispute Resolution
Act passed by Congress in 1992 ("TDDRA"). The 900 Number Rule prescribes the
content of advertising for such services, requires that certain introductory
disclosures be made (at no charge to the caller) and provides for the manner
and content of billing and collection for such services. The FCC supplements
this regulation by requiring that common carriers assign a telephone number to
a provider of interstate pay per call services and offer billing and
collection services to such a provider to assure compliance with the 900
Number Rule. In March 1997, the FTC initiated a 900 Number rulemaking review
proceeding to evaluate the operation of the 900 Number Rule and to determine
whether the scope of the 900 Number Rule should be expanded to information
services provided through dialing patterns other than 900 numbers. The Company
cannot predict whether any modifications will be made to the 900 Number Rule,
and, if so, what impact they would have on the Company or its industry.
The Telecommunications Act of 1996 also contains certain provisions which
may impact upon the Company. Because of abuses that arose from pay per call
services offering toll free numbers, the 1996 Act eliminated the tariffed
service exception from the pay per call rules and required the FCC to adopt
new and more stringent rules for the use of toll free numbers for pay per call
services. The FCC has proposed rules for the use of toll free numbers for pay
per call services. The FCC has proposed rules designed to restrict the use of
toll free numbers in connection with pay per call information programming.
Among the most significant changes to the toll free number rules are that
presubscription agreements now must be executed in writing, require the use of
a PIN or other identifier unique to the subscriber and provide subscribers
with a choice of billing method direct remit, debit prepaid account phone bill
or credit or calling card. As an alternative, information providers may charge
information services provided via toll free numbers with a prepaid account or
debit, credit, charge or calling card if there is a preamble disclosing the
costs, the point when the charges begin and billing methods. There are also
corresponding disclosure requirements for soliciting presubscription
agreements and for consumers' billing statements.
The industries served by the Company are also subject to varying degrees of
government regulation. Generally, the Company relies on its clients and their
advisors to develop the scripts to be used by the Company in making consumer
solicitations. The Company generally requires its clients to indemnify the
Company against claims and expenses arising with respect to the Company's
services performed on its clients' behalf. The Company employees who complete
sales for insurance companies are required to be licensed by various state
insurance commissions and participate in regular continuing education
programs, which are currently provided in-house by the Company. A state
insurance department is reviewing certain practices and procedures used by the
Company. The Company is working with the insurance department to comply with
all regulations. The Company has never been held financially responsible, or
been assessed any penalty, in any material respect for regulatory
noncompliance. The Company may be subject to the payment of penalties in this
matter, but based on its experience in other states, its understanding of the
resolutions of similar reviews of other companies and the advice of legal
counsel, the Company believes that this matter is not likely to have a
material adverse effect on the Company.
13
<PAGE>
The Company believes it is in compliance in all material respects with all
federal and state regulations. The Company specifically trains its marketing
representatives to handle calls in an approved manner, and maintains "do not
call" lists.
There can be no assurance, however, that the Company would not be subject to
regulatory challenge for a violation of federal or state law by any of its
clients.
ITEM 2. PROPERTIES
The Company operated four automated voice response facilities with
approximately 4,400 telephone workstations as of December 31, 1996 and
approximately 5,800 ports as of December 31, 1996 and eight state-of-the-art
call centers. Certain of the Company's call centers can be used
interchangeably by both Inbound and Outbound.
Inbound operates three large volume, automated call-processing facilities
located in Omaha, Nebraska, San Antonio, Texas and Hampton, Virginia. These
facilities consist of approximately 1,800 computer-assisted workstations. In
1996, Inbound employed an average of approximately 3,970 operators per day
with peak employment of approximately 4,200 operators per day.
Interactive operates four large volume, automated voice response platforms
located in Omaha, Nebraska (two platforms), San Antonio, Texas and Calgary,
Alberta (Canada). Interactive has a total capacity of approximately 5,600
voice response ports. Interactive is not a labor intensive business and
currently employs approximately 195 managerial, staff and administrative
personnel.
Outbound operates five large volume, automated facilities located in San
Antonio, Texas, Universal City, Texas, El Paso, Texas, Killeen, Texas and
Waco, Texas. Outbound currently maintains approximately 2,600 computer-
assisted workstations and in 1996 employed an average of 3,500 marketing
representatives per day with peak employment of approximately 4,600 marketing
representatives per day.
The following table summarizes the location of, and the number of telephone
workstations at each of the Company's call centers for each of Inbound,
Interactive and Outbound.
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF
CALL CENTERS TELEPHONE WORKSTATIONS VOICE RESPONSE PORTS
------------ ---------------------- --------------------
<S> <C> <C>
Inbound
Omaha, Nebraska............. 725 --
San Antonio, Texas.......... 539 --
Hampton, Virginia........... 577 --
Inbound Total............. 1,841 --
Interactive
Omaha, Nebraska............. -- 3,887
San Antonio, Texas.......... -- 1,687
Calgary, Alberta............ -- 230
Interactive Total......... -- 5,804
Outbound
San Antonio, Texas.......... 1,021 --
Universal City, Texas....... 480 --
El Paso, Texas.............. 594 --
Killeen, Texas.............. 252 --
Waco, Texas................. 252
Outbound Total............ 2,599 --
Total................... 4,440 5,804
</TABLE>
14
<PAGE>
The Company occupies approximately 597,000 square feet of office space. All
facilities described above other than the facilities located in San Antonio,
Texas are leased.
The Company believes that its facilities are adequate for its foreseeable
needs and that additional space will be available as required. See Note E to
Combined Financial Statements for information regarding the Company's
obligations under its facilities leases.
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company is involved in litigation relating to claims
arising out of its operations in the normal course of business. Interactive is
a defendant in a case brought in the United States District Court for the
Southern District of Georgia, Augusta Division, on September 12, 1991,
captioned Lamar Andrews, individually and as Representative of a Class of All
Other Persons Similarly Situated, Plaintiff v. American Telephone & Telegraph
Company, et al., Defendants, No. CV 191-175. The District Court certified a
master class of all persons who paid for one or more 900 number calls
pertaining to programs offering sweepstakes, games of chance, awards, cash or
other prizes, gifts or information on unclaimed funds. These calls were billed
and collected by AT&T Corp. ("AT&T") and U.S. Sprint Communications Company
Limited Partnership ("Sprint"). The District Court also certified a sub-class
of those persons who paid, in the State of Georgia, for one or more such calls
billed and collected by AT&T or Sprint. The complaint alleges that the
programs at issue involved, among other things, acts of unlawful gambling,
mail fraud and wire fraud in violation of the Racketeer Influenced and Corrupt
Organizations Act ("RICO"), the Communications Act of 1934, the federal common
law of communications and other state and federal laws. Interactive provided
interactive voice processing and billing services to a customer which
conducted some of the programs at issue in the litigation. The billing
services were provided through AT&T. The action seeks recovery of treble
damages (which amount has not been specified), punitive damages, costs and
attorneys' fees. The Company's potential liability and expenses in this matter
are not covered by insurance. On September 19, 1996, the United States Court
of Appeals for the Eleventh Circuit reversed the District Court's order
certifying the classes on the ground that the class action would be
unmanageable and, on December 4, 1996, it denied the plaintiffs' subsequent
petition for rehearing. On February 19, 1997, a Motion to Amend Class
Definition and a Renewed Motion for Class Certification was filed by the
plaintiffs in the District Court. The Company cannot predict the ultimate
outcome of this case or the magnitude of any potential damages or costs
payable by the Company. The Company believes that the decision by the United
States Court of Appeals is a favorable development and intends to vigorously
contest the claims made in this case.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders in the fourth quarter
of the fiscal year covered by this report.
15
<PAGE>
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<C> <C> <S>
Gary L. West........................ 51 Chairman of the Board and Director
Mary E. West........................ 51 Vice Chair of the Board, Secretary
and Director
Troy L. Eaden....................... 34 Chief Executive Officer and Director
Thomas B. Barker.................... 42 President, Chief Operating Officer
and Director
Michael A. Micek.................... 47 Chief Financial Officer, Vice
President--
Finance and Treasurer
Nancee R. Berger.................... 36 President--Interactive Teleservices
John W. Erwin....................... 34 President--Direct Teleservices
Lee O. Waters....................... 38 Executive Vice President--Operator
Teleservices
Mark V. Lavin....................... 38 Executive Vice President--Direct
Teleservices
Michael M. Sturgeon................. 35 Executive Vice President--Sales and
Marketing
Joseph L. Bradley................... 42 Executive Vice President--Systems and
Technology
Diane K. Ferris..................... 49 Chief Administrative Officer
</TABLE>
GARY L. WEST co-founded WATS Marketing of America ("WATS") in 1978 and
remained with that company until 1985. Mr. West joined the Company in July
1987 after the expiration of a noncompetition agreement with WATS. Mr. West
has served as Chairman of the Board since joining the Company. Mr. West and
Mary E. West are husband and wife.
MARY E. WEST co-founded WATS and remained until December 1985. In January
1986, she and Mr. Eaden founded the Company. Mrs. West has served as Vice
Chair of the Company since 1987. Mrs. West and Mr. West are wife and husband.
TROY L. EADEN co-founded the Company with Mrs. West in January 1986. He has
served as the principal executive of the Company since 1989 and has formally
held the title of Chief Executive Officer since March 1995. Mr. Eaden was
employed by WATS from May 1980 to December 1985.
THOMAS B. BARKER joined the Company in 1991 as Executive Vice President of
Interactive. Mr. Barker was promoted to President and Chief Operating Officer
of the Company in March 1995. Prior to joining the Company, he served as
President and Chief Operating Officer of Cue Network Corp., a provider of
nationwide paging and satellite data distribution services.
MICHAEL A. MICEK joined the Company in 1988 and was appointed to his current
position in 1990. Prior to joining the Company, Mr. Micek was a partner in the
accounting firm of Blackman and Micek, P.C. from 1983 to 1988 and was employed
by the accounting firm of Touche Ross from 1981 to 1983.
NANCEE R. BERGER joined Interactive in 1989 as Manager of Client Services.
Ms. Berger was promoted to Vice President of Interactive in May 1994. She was
promoted to Executive Vice President of Interactive in March 1995, and to
President of Interactive Teleservices in October 1996. Before joining
Interactive, she was Senior Project Manager at Applied Communications, Inc.
JOHN W. ERWIN joined the Company in 1988 as Executive Vice President of
Outbound. In March of 1995, Mr. Erwin became President--Direct Teleservices.
Prior to joining the Company, Mr. Erwin held a management position with Dial
America Marketing and a management and ownership position with Telcom
Communications Marketing, Inc., both of which provide outbound telemarketing
services.
16
<PAGE>
LEE O. WATERS joined the Company in 1994 as a Vice President of Sales and
Marketing for Inbound and was promoted to Executive Vice President--Operator
Teleservices in 1996. Prior to joining the Company, he was employed by Federal
Express. From 1989 until 1992 at Federal Express, he was a District Sales
Manager of the Commonwealth District and in 1992 he became the Regional
Manager of the Catalog and Remail Services Division.
MARK V. LAVIN joined the Company in 1996 as Executive Vice President--Direct
Response TeleServices. From 1991 until 1996, he held various management
positions in reservation services for Radisson Hospitality Worldwide.
MICHAEL M. STURGEON joined the Company in 1991 a National Account Manager--
Interactive. In September 1994, Mr. Sturgeon was promoted to Vice President of
Sales and Marketing--Interactive. In March of 1997, Mr. Sturgeon was promoted
to Executive Vice President--Sales and Marketing for the Company. Prior to
joining the Company, Mr. Sturgeon was a management consultant for Anderson
Consulting and Laventhol & Hartworth.
JOSEPH L. BRADLEY has been at the Company since its inception in 1986. Mr.
Bradley is Executive Vice President--Systems and Technology. Prior to joining
the Company, Mr. Bradley worked in information systems from 1982 to 1986 with
First Data Resources.
DIANE K. FERRIS joined the Company in 1988 as Vice President of Operations--
Inbound. In February 1991, Ms. Ferris was promoted to Chief Administrative
Officer. Prior to joining the Company, Ms. Ferris was Vice President of
Administration and Corporate Planning for Mutual of Omaha Fund Management
Company.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
On December 2, 1996, the Company completed the initial public offering (the
"Initial Public Offering") of its shares of common stock, par value $0.01 per
share (the "Common Shares" or "Shares").The Common Shares are listed on the
Nasdaq National Market under the symbol "WTSC." The high and low closing sales
prices for Common Shares in the fourth quarter of 1996, as reported on the
Nasdaq National Market since December 2, 1996, were $25.50 and $21.00,
respectively.
As of March 17, 1997, there were 94 holders of record of Common Shares. As
of the same date, there were a total of 63,330,000 Common Shares issued and
outstanding. No dividends have been declared with respect to the Common Shares
since the Initial Public Offering. The Company currently intends to retain
earnings to finance the growth and development of its business and for working
capital and general corporate purposes, and does not anticipate paying cash
dividends on the Common Shares in the foreseeable future. Any payment of
dividends will be at the discretion of the Company's Board of Directors and
will depend upon earnings, financial condition, capital requirements, level of
indebtedness, contractual restrictions with respect to payment of dividends
and other factors.
The Company entered into an Agreement and Plan of Reorganization, dated as
of November 20, 1996, with all of the stockholders of three companies
affiliated with the Company, Inbound, Outbound and Interactive. Pursuant to
this agreement, the stockholders received in the aggregate 56,775,000 Common
Shares in exchange for all of their respective holdings of capital stock in
each of the affiliates. All of the foregoing were effected in reliance upon
Section 4(2) of the Securities Act of 1933.
17
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth, for the periods and at the dates indicated,
selected historical consolidated financial data of the Company. The selected
consolidated historical financial data has been derived from the audited
historical consolidated financial statements of the Company. The Company's
consolidated financial statements as of December 31, 1996 and 1995, and for the
years ended December 31, 1996, 1995 and 1994 and Deloitte & Touche LLP's audit
report with respect thereto have been included in this Annual Report on Form
10-K. The information is qualified in its entirety by the detailed information
included elsewhere herein and should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Business" and the "Consolidated Financial Statements" and notes thereto
included elsewhere in this Annual Report on Form 10-K.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------
1992 1993 1994 1995 1996
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AND SELECTED
OPERATING DATA)
------------------------------------------------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenue.................... $101,208 $142,508 $186,512 $256,894 $317,210
Cost of services........... 56,181 77,785 102,707 146,531 180,380
Selling, general and
administrative expenses... 32,789 45,041 51,904 70,575 87,499
Litigation settlement...... -- 4,400 -- -- --
-------- -------- -------- -------- --------
Net operating income....... 12,238 15,282 31,901 39,788 49,331
Net other expense.......... (1,147) (1,419) (1,905) (3,389) (3,420)
-------- -------- -------- -------- --------
Net income before income
tax expense............... 11,091 13,863 29,996 36,399 45,911
Actual income tax expense.. -- 48 269 828 4,213
Pro Forma Information(1):
Income tax expense....... 2,832 5,234 10,900 13,130 12,950
-------- -------- -------- -------- --------
Net income............... $ 8,259 $ 8,581 $ 18,827 $ 22,441 $ 28,748
======== ======== ======== ======== ========
Primary and fully diluted
earnings per common and
common equivalent share. $ 0.16 $ 0.16 $ 0.35 $ 0.42 $ 0.52
======== ======== ======== ======== ========
Weighted average number
of common shares
outstanding............. 53,251 53,968 53,968 53,968 54,891
======== ======== ======== ======== ========
SELECTED OPERATING DATA:
Operating margin........... 12.1% 10.7% 17.1% 15.5% 15.6%
Number of workstations (at
end of period)............ 1,693 2,095 2,228 3,158 4,440
Number of ports (at end of
period).................... 2,070 2,530 3,496 3,870 5,804
<CAPTION>
DECEMBER 31,
------------------------------------------------
1992 1993 1994 1995 1996
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital............ $ (4,905) $ (4,742) $ 5,408 $ 6,550 $ 46,169
Property and equipment,
net....................... 21,587 26,396 30,820 45,889 69,025
Total assets............... 49,546 60,225 88,880 123,452 238,285
Total debt................. 26,195 23,913 32,608 41,743 22,523
Stockholders' equity....... 9,423 13,165 27,179 38,229 158,879
</TABLE>
(1) Reflects a pro forma provision for income taxes as if the Company had
been subject to federal and state corporate income taxes for all periods. The
pro forma provision for income taxes represents a combined federal and state
tax rate.
18
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis of the Company's financial condition
and results of operations should be read in conjunction with "Selected
Financial Data" and the Consolidated Financial Statements and Notes thereto
appearing elsewhere in this Form 10-K.
Certain statements under this caption constitute forward-looking statements
which involve risks and uncertainties. The Company's actual results in the
future could differ significantly from the results discussed or implied in
such forward-looking statements. Factors that could cause or contribute to
such differences include, but are not limited to, those discussed under the
heading "Item 1. Business."
OVERVIEW
Inbound was formed in 1986 and, together with its affiliates, is one of the
largest independent teleservices companies in the United States. During the
first nine months of operations, the Company focused its resources on
designing and building an automated call-processing platform to effectively
manage large volumes of inbound calls. In January 1989, the Company began
offering automated voice response services utilizing its own proprietary
technology platform. In May 1990, the Company began offering outbound
teleservices utilizing state-of-the-art workstations staffed by highly trained
teleservices representatives. The Company is a leading provider of each of
these services to businesses on an outsourced basis. The Company also believes
it has established a distinct competitive advantage in its ability to offer a
range of services through its three operating divisions (Inbound, Interactive
and Outbound) on a fully integrated basis.
REVENUE: Inbound services represented approximately 29.3% of total revenue
for the year ended December 31, 1996. Revenue for inbound services is
primarily generated on the basis of the number of calls received and processed
on behalf of clients. The Company also generates revenue by providing
assistance to clients in the design and implementation of new applications.
Interactive services represented approximately 42.2% of total revenue for
the year ended December 31, 1996. Revenue for interactive services is
primarily generated on the basis of total billable minutes as measured between
a caller and the Company's automated voice response units. The Company also
generates revenue by providing billing and collection services for pay per
call programs.
Outbound services represented approximately 28.5% of total revenue for the
year ended December 31, 1996. Revenue for outbound services is generated on an
hourly basis as calls are placed by the Company's marketing representatives on
behalf of its clients. The Company also generates revenue by providing
assistance to its clients in the design and programming of customized
applications.
EXPENSES: Costs of telecommunications services incurred by the Company are
primarily comprised of long distance transmission charges. The Company
effectively manages its telecommunications costs through a long-term services
contract with AT&T which includes an established rate schedule subject to
certain call volume commitments. As one of the largest clients of AT&T, the
Company believes it has negotiated a favorable contract at an attractive
service rate. The Company has also entered into a number of equipment
maintenance and network management contracts with AT&T in order to facilitate
reliable and efficient network operations. Rates for telecommunications
services are primarily determined by total call volume and level of network
management and technical support under contract.
The Company manages its direct labor costs through its flexible staffing and
scheduling initiatives. In particular, the Company has developed its own
proprietary scheduling systems which are designed
19
<PAGE>
to optimize staffing and pay levels in anticipation of fluctuating call
volumes as clients' campaigns are scheduled. The Company seeks to control its
direct labor costs by decentralizing its operations and by seeking new
geographic markets which offer attractive labor market characteristics for its
Inbound and Outbound services. Direct labor rates fluctuate based upon local
market factors such as the size and availability of a part-time workforce in
addition to local economic growth. Labor rates are adjusted, as necessary, to
attract the required number of service representatives during seasonal
fluctuations.
Selling, general and administrative expenses consist of all expenses that
support the ongoing operation of the Company. These expenses include costs
related to division management, facilities costs, equipment depreciation and
maintenance, amortization of goodwill, allowance for doubtful accounts, sales
and marketing activities, client support services, and corporate management
costs. Changes in selling, general and administrative expenses primarily
reflect the addition of new facilities over certain periods or expanded
marketing activities.
Through November 25, 1996 each of the West Affiliates were treated for
federal income tax purposes as an S Corporation under the Internal Revenue
Code. As a result, the stockholders of each of the West Affiliates, rather
than the West Affiliates, have paid all federal income tax on the West
Affiliates' income. Each of the West Affiliates has made periodic
distributions to its stockholders in amounts approximately equal to its
stockholders' corresponding tax liabilities associated with such companies'
earnings plus amounts representing a portion of retained earnings.
Additionally, the Company has earned state income tax credits in Nebraska
under a job creation and investment incentive program. As a result, the West
Affiliates' stockholders have paid little, if any, state income tax in
Nebraska. As of November 26, 1996, the Company has been considered a C
Corporation for federal and state income tax purposes. The Company still is
eligible for similar tax credits in Nebraska, at least through 1998, so long
as the Company continues to create additional employment positions within that
state. As the Company opens new facilities in states without job or investment
tax credits, or in states with corporate income taxes, its effective tax rate
may increase.
RESULTS OF OPERATIONS
The following table sets forth the Consolidated Statement of Operations Data
as a percentage of revenue for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------
1994 1995 1996
----- ----- -----
<S> <C> <C> <C>
Revenue................................................. 100.0% 100.0% 100.0%
Cost of services........................................ 55.1 57.0 56.8
Selling, general and administrative expenses............ 27.8 27.5 27.6
Net operating income.................................... 17.1 15.5 15.6
Net other expense....................................... (1.0) (1.3) (1.1)
Net income before income tax expense.................... 16.1 14.2 14.5
Actual income tax expense............................... 0.1 0.3 1.3
Pro forma provision for income taxes.................... 5.9 5.1 4.1
----- ----- -----
Pro forma net income.................................... 10.1% 8.8% 9.1%
===== ===== =====
</TABLE>
YEARS ENDED DECEMBER 31, 1996 AND 1995
REVENUE: Revenue increased $60.3 million or 23.5% to $317.2 million in 1996
from $256.9 million in 1995. The increase in revenue included $18.5 million
derived from new clients and $41.8 million derived from existing clients. The
overall revenue increase is attributable to higher call volumes. Approximately
$7 million of the increase in revenue was attributable to the introduction of
the custom
20
<PAGE>
operator services offering. This new division specializes in dedicated inbound
live operator applications.
COST OF SERVICES: Cost of services represents direct labor, telephone
expense and other costs directly related to teleservices activities. Costs of
services increased $33.9 million or 23.1% in 1996 to $180.4 million from
$146.5 million for the comparable period of 1995. As a percentage of revenue,
cost of services remained relatively unchanged at 56.8% for the year ended
December 31, 1996 compared to 57.0% in 1995. The key component of direct labor
was held in check partly through the entering of new labor markets by adding
new facilities in Hampton, Virginia, Killeen, Texas, and Waco, Texas.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SG&A"): SG&A expenses
increased by $16.9 million or 24.0% to $87.5 million for the year ended
December 31, 1996 from $70.6 million in 1995. As a percentage of revenue, SG&A
expenses increased to 27.6% for the year ended December 31, 1996 compared to
27.5% in 1995.
NET OPERATING INCOME: Net operating income increased by $9.5 million or
24.0% to $49.3 million in 1996 from $39.8 million in 1995. As a percentage of
revenue, net operating income remained relatively unchanged at 15.6% for the
year ended December 31, 1996 compared to 15.5% in the 1995 period due to the
factors discussed above.
NET OTHER EXPENSE: Net other expense includes interest income from short-
term investments, interest income from an accounts receivable financing
program (net of the related interest expense to fund the program), interest
expense from short-term and long-term borrowings under credit facilities and
capital leases, minority interest in net income and other expense. Other
expense remained virtually unchanged at $3.4 million for the year ended
December 31, 1996.
PRO FORMA NET INCOME: Pro forma net income increased by $6.3 million or
28.1% for the year ended December 31, 1996, to $28.7 million from $22.4
million in 1995. Pro forma net income includes a provision for actual income
tax expense and pro forma income tax expense at a combined effective rate of
36.3% for 1996 and 37.2% for 1995. These rates reflect the combined federal
and state income tax rate of the Company as if it had been treated as a C
Corporation. The decrease in the effective tax rate is attributable to
increased tax credits available under a Nebraska incentive program.
YEARS ENDED DECEMBER 31, 1995 AND 1994
REVENUE: Revenue increased $70.4 million or 37.7% to $256.9 million in 1995
from $186.5 million in 1994. The increase in revenue included $24.2 million
derived from new clients and $46.2 million derived from existing clients. The
overall revenue increase is attributable principally to higher call volumes.
COST OF SERVICES: Cost of services increased $43.8 million or 42.6% to
$146.5 million in 1995 from $102.7 million in 1994. As a percentage of
revenue, cost of services increased to 57.0% in 1995 from 55.1% in 1994. The
increase was primarily attributable to increased labor rates experienced in
the Company's Inbound division, offset partially by lower telephone costs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: SG&A expenses increased by
$18.7 million or 36.0% to $70.6 million for 1995 from $51.9 million for 1994.
As a percentage of revenue, SG&A expenses decreased to 27.5% in 1995 from
27.8% in 1994. The decrease as a percentage of revenue primarily reflects
greater efficiencies achieved through higher call volumes.
NET OPERATING INCOME: Net operating income increased $7.9 million or 24.8%
to $39.8 million in 1995 from $31.9 million in 1994. As a percentage of
revenue, net operating income decreased to 15.5% in 1995 from 17.1% in 1994
due to the factors discussed above.
21
<PAGE>
NET OTHER EXPENSE: Net other expense increased $1.5 million or 77.9% to $3.4
million in 1995 from $1.9 million in 1994. This increase was primarily due to
increased interest expense from higher average borrowings outstanding.
PRO FORMA NET INCOME: Pro forma net income increased by $3.6 million or
19.2% to $22.4 million in 1995 from $18.8 million in 1994. Pro forma net
income includes a provision for actual federal and state income tax expense
and pro forma income tax expense at a combined effective rate of 37.2% for
1995 and 36.1% 1994. These rates reflect the combined federal and state income
tax rate as if the Company had been treated as a C Corporation, less
applicable credits. The increase in the effective tax rate in fiscal 1995 is
attributable to higher state income taxes due to a larger proportion of total
revenues generated outside of Nebraska.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary source of liquidity has been cash flow from
operations, supplemented by borrowings under its revolving bank lines of
credit.
The Company's credit facilities consist of $8.0 million and $4.5 million
revolving credit facilities, with no outstanding balances at December 31,
1996. Advances under the revolving credit facilities bear interest at the
prime rate less 0.25% and 0.50%, respectively. The revolving credit facilities
terminate on June 30, 1997, and July 1, 1997, respectively. Aggregate
borrowings under the revolving credit facilities are limited to 80% of
eligible accounts receivable. At December 31, 1996, the Company had term loans
with banks that totaled $5.9 million, which were used to fund capital
expenditures and real estate investments. Repayment of all bank debt is
secured by the Company's accounts receivable, equipment, real estate, and
other assets. In addition, the Company's loan agreements contain certain
financial covenants and restrictions.
The Company also has a $30 million revolving bank line used to fund an
accounts receivable financing program offered to certain customers in the pay
per call industry. Borrowings under the facility are limited to a borrowing
base of pledged accounts receivable from certain of the Company's qualified
customers which are assigned by the Company to the bank. There were no
outstanding borrowings under this facility at December 31, 1996. This credit
facility expires on June 30, 1997.
Net cash flow from operating activities increased $6.5 million or 13.7% to
$54.1 million for the year ended December 31, 1996, compared to an increase of
$14.2 million in 1995, and was $47.6 million, and $33.4 million for the years
ended 1995, and 1994, respectively. The increase in each period was due
principally to higher net income and depreciation and amortization each year,
partially offset by increased cash used for accounts receivable resulting from
growth in revenue.
Net cash flow used in investing activities was $20.6 million for the year
ended December 31, 1996 compared to $14.5 million in 1995, and was $7.9
million for the year ended December 31, 1994. The increase in each period was
primarily due to investments in call centers to support the growth of the
business, in addition to the purchase of real estate in 1995 for $3.2 million.
Net cash flow used in financing activities was $0.3 million for the year
ended December 31, 1996 compared to $25.2 million in 1995, and was $20.6
million for 1994. The net cash flow used in financing activities for all
periods reflect distributions made to the existing stockholders to cover their
tax liabilities as S Corporation stockholders and to provide a return of
capital, offsetting borrowings under the Company's credit facilities, net of
repayments. Also, the Company realized net proceeds of $107.7 million from the
Initial Public Offering on November 26, 1996.
The Company used the net proceeds of the Initial Public Offering as follows:
(i) to repay total outstanding debt of $42.8 million comprised of (a) an
aggregate of $24.7 million outstanding under its
22
<PAGE>
revolving credit facilities, (b) $10.9 million in term loans and (c) $7.2
million in outstanding capital leases; (ii) approximately $44.1 million to
repay the remaining balance of promissory notes payable to certain
stockholders of the Company including interest created in connection with the
declaration of a dividend to existing stockholders as part of the conversion
of the Company to a C Corporation; and (iii) $4.8 million for capital
expenditures. The balance of the net proceeds totaling $16.0 million will be
used for working capital and general corporate purposes. The Company expects
to renew its revolving lines of credit when they expire and believes it could
increase the amount of credit facilities, if needed.
Capital leasing has been used to fund the majority of computer and telephone
equipment, furniture and other equipment placed into service. All capital
leases are for a three-year term with a bargain purchase option. The Company
expects to exercise its right to purchase all equipment financed by leasing
activity at maturity.
Interactive is a defendant in a case brought in the United States District
Court for the Southern District of Georgia, Augusta Division, captioned Lamar
Andrews, individually and as Representative of a Class of All Other Persons
Similarly Situated, Plaintiff v. American Telephone & Telegraph Company, et
al., Defendants, No. CV 191-175. The Company cannot predict the ultimate
outcome of this case or the magnitude of any potential damages or costs
payable by the Company. The Company, therefore, cannot predict the affect of
this matter on the future operations and financial position of the Company.
CAPITAL EXPENDITURES
The Company's operations will continue to require significant capital
expenditures for capacity expansion and upgrades. Capital expenditures, which
includes the acquisition of equipment through the assumption of capital
leases, $37.9 million in 1996, $26.4 million in 1995, and $11.5 million in
1994. The Company projects its capital expenditures for 1997 to be
approximately $44.0 million, primarily for the capacity expansion and upgrades
at existing facilities and the addition of four new call centers.
The Company believes that the cash flow from operations, together with the
net proceeds of the Initial Public Offering and available borrowings under its
credit facilities will be adequate to meet its capital requirements for the
foreseeable future. The Company may pledge additional property or assets of
the Company or any of its subsidiaries, which are not already pledged as
collateral securing the new and existing credit facilities the Company or any
of their affiliates may be required to guarantee any 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 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information called for by this item is incorporated from the Company's
Consolidated Financial Statements and Notes thereto set forth on pages F-1
through F-15.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
23
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 10 is incorporated by reference from the
Company's definitive proxy statement for the 1997 annual meeting of
stockholders to be held on May 14, 1997. The definitive proxy statement will
be filed with the Securities and Exchange Commission not later than 120 days
after the end of the fiscal year covered by this Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated by reference from the
Company's definitive proxy statement for the 1997 annual meeting of
stockholders to be held on May 14, 1997. The definitive proxy statement will
be filed with the Securities and Exchange Commission not later than 120 days
after the end of the fiscal year covered by this Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is incorporated by reference from the
Company's definitive proxy statement for the 1997 annual meeting of
stockholders to be held on May 14, 1997. The definitive proxy statement will
be filed with the Securities and Exchange Commission not later than 120 days
after the end of the fiscal year covered by this Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated by reference from the
Company's definitive proxy statement for the 1997 annual meeting of
stockholders to be held on May 14, 1997. The definitive proxy statement will
be filed with the Securities and Exchange Commission not later than 120 days
after the end of the fiscal year covered by this Form 10-K.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed as a part of the report:
(1) Financial Statements:
<TABLE>
<S> <C>
Report of Independent Auditors....................................... F-1
Consolidated balance sheets for the years ended December 31, 1996 and
1995................................................................ F-2
Consolidated statement of operations for the years ended December 31,
1996, 1995, and 1994................................................ F-3
Combined statements of stockholders' equity for the years ended
December 31, 1996, 1995 and 1994.................................... F-4
Consolidated statements of cash flows for the years ended December
31, 1996, 1995 and 1994............................................. F-5
Notes to Consolidated Financial Statements........................... F-6
(2) Financial Statement Schedules:
Report of Independent Auditors....................................... S-1
Schedule II (Consolidated valuation accounts three years ended
December 31, 1996).................................................. S-2
</TABLE>
24
<PAGE>
(3) Exhibits:
Exhibits identified in parentheses below, on file with the United States
Securities and Exchange Commission, are incorporated herein by reference as
exhibits hereto.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
3.01 Restated Certificate of Incorporation of the Company (Exhibit 3.01 to Registration Statement under
Form S-1 (Amendment No. 2) dated November 21, 1996, File No. 333-13991)
3.02 Restated Bylaws of the Company (Exhibit 3.02 to Registration Statement under Form S-1 (Amendment No.
2) dated November 21, 1996, File No. 333-13991)
10.01 Form of Registration Rights Agreement (Exhibit 10.01 to Registration Statement under Form S-1
(Amendment No. 1) dated November 12, 1996, File No. 333-13991)
10.02 Bill of Sale & Assignment, dated October 30, 1996, from West Telemarketing Corp. to Troy L. Eaden
(Exhibit 10.02 to Registration Statement under Form S-1 (Amendment No. 1)
dated November 12, 1996, File No. 333-13991)
10.03 Purchase Agreement, dated March 14, 1996, between West Telemarketing Corporation and Executive Jet
Sales, Inc. (Exhibit 10.03 to Registration Statement under Form S-1 (Amendment No. 1) dated November
12, 1996, File No. 333-13991)
10.04 1996 Stock Incentive Plan (Exhibit 10.04 to Registration Statement under Form S-1 (Amendment No. 1)
dated November 12, 1996, File No. 333-13991)
10.05 Agreement and Plan of Reorganization (Exhibit 10.05 to Registration Statement under Form S-1
(Amendment No. 2) dated November 21, 1996, File No. 333-13991)
10.06 Employment Agreement with Thomas B. Barker (Exhibit 10.06 to Registration Statement under Form S-1
(Amendment No. 1) dated November 12, 1996, File No. 333-13991)
10.07 Employment Agreement with Michael A. Micek (Exhibit 10.07 to Registration Statement under Form S-1
(Amendment No. 1) dated November 12, 1996, File No. 333-13991)
10.08 Employment Agreement with Troy L. Eaden (Exhibit 10.08 to Registration Statement under Form S-1
(Amendment No. 1) dated November 12, 1996, File No. 333-13991)
10.09 Employment Agreement with Lee Waters (Exhibit 10.09 to Registration Statement under Form S-1
(Amendment No. 1) dated November 12, 1996, File No. 333-13991)
10.10 Employment Agreement with Wayne Harper (Exhibit 10.10 to Registration Statement under Form S-1
(Amendment No. 1) dated November 12, 1996, File No. 333-13991)
10.11 Stock Redemption Agreement, dated April 9, 1996, by and among John W. Erwin, Gary L. West, Mary E.
West and Troy L. Eaden (Exhibit 10.11 to Registration Statement under Form S-1 (Amendment No. 1)
dated November 12, 1996, File No. 333-13991)
10.12 Assignment and Assumption Agreement, dated as of November 12, 1996, by and among Gary L. West, Mary
E. West, Troy L. Eaden and the Company (Exhibit 10.12 to Registration Statement under Form S-1
(Amendment No. 2) dated November 21, 1996, File No. 333-13991)
10.13 Personnel Company Subscription Service Agreement, dated as of November 12, 1996, between West
Telemarketing Insurance Agency, Inc. and West Telemarketing Corporation Outbound (Exhibit 10.13 to
Registration Statement under Form S-1 (Amendment No. 2) dated November 21, 1996, File No. 333-13991)
10.14 Lease, dated September 1, 1994, by and between West Telemarketing Corporation and 99-Maple
Partnership (Exhibit 10.14 to Registration Statement under Form S-1 (Amendment No. 1) dated November
12, 1996, File No. 333-13991)
21.01 Subsidiaries of the Company (Exhibit 21.01 to Registration Statement under Form S-1 (Amendment No.
2) dated November 21,1996, File No. 333-13991)
24.01 Powers of Attorney executed by officers and directors who signed this report.
</TABLE>
25
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
West TeleServices Corporation
/s/ Troy L. Eaden
By:_________________________________
TROY L. EADEN, CHIEF EXECUTIVE
OFFICER (PRINCIPAL EXECUTIVE
OFFICER)
March 31, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
SIGNATURES TITLE DATE
/s/ Gary L. West Chairman of the March 31, 1997
- ------------------------------------- Board and Director
GARY L. WEST
/s/ Mary E. West Vice Chair of the March 31, 1997
- ------------------------------------- Board and Director
MARY E. WEST
/s/ Troy L. Eaden Chief Executive March 31, 1997
- ------------------------------------- Officer and
TROY L. EADEN Director (Principal
Executive Officer)
/s/ Thomas B. Barker President and Chief March 31, 1997
- ------------------------------------- Operating Officer
THOMAS B. BARKER and Director
/s/ Michael A. Micek Chief Financial March 31, 1997
- ------------------------------------- Officer (Principal
MICHAEL A. MICEK Financial and
Accounting Officer)
/s/ William E. Fisher Director March 31, 1997
- -------------------------------------
WILLIAM E. FISHER
/s/ Greg T. Sloma Director March 31, 1997
- -------------------------------------
GREG T. SLOMA
26
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
West TeleServices Corporation
Omaha, Nebraska
We have audited the accompanying consolidated balance sheets of West
TeleServices Corporation and subsidiaries (the "Company") as of December 31,
1996 and 1995 and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of West TeleServices Corporation and
subsidiaries as of December 31, 1996 and 1995 and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1996 in conformity with generally accepted accounting
principles.
Deloitte & Touche LLP
Omaha, Nebraska
February 5, 1997
F-1
<PAGE>
WEST TELESERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1996 1995
ASSETS (Notes B and D) -------- --------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................ $ 55,065 $ 21,861
Accounts receivable, net of allowance for doubtful
accounts of $244 and $1,557............................. 45,982 35,955
Notes receivable......................................... 360 522
Accounts receivable--financing (Note B).................. 11,805 13,980
Deferred income tax--current (Note G).................... 88 --
Other.................................................... 3,961 3,079
-------- --------
Total current assets................................... 117,261 75,397
PROPERTY AND EQUIPMENT (Note E):
Land and Improvements.................................... 1,132 1,148
Buildings................................................ 8,043 7,257
Telephone and computer equipment......................... 62,521 43,722
Office furniture and equipment........................... 20,295 12,882
Leasehold improvements................................... 18,180 7,171
Construction in process.................................. 749 2,843
-------- --------
110,920 75,023
Accumulated depreciation and amortization................ (41,895) (29,134)
-------- --------
69,025 45,889
GOODWILL, NET OF AMORTIZATION OF $168 AND $-0-(Note C)..... 50,365 --
LAND HELD FOR DEVELOPMENT.................................. 1,583 1,583
OTHER ASSETS............................................... 51 583
-------- --------
$238,285 $123,452
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable--bank (Note D)............................. $ -- $ 6,500
Notes payable--financing (Note B)........................ -- 13,456
Accounts payable......................................... 23,271 21,511
Customer deposits and holdbacks.......................... 12,662 5,340
Accrued wages and benefits............................... 5,748 4,649
Accrued phone expense.................................... 8,404 7,192
Other current liabilities................................ 2,501 2,103
Current obligations under capital leases (Note E)........ 10,915 5,192
Current maturities of long-term debt (Note D)............ 5,894 2,208
Income tax payable--current (Note G)..................... 1,697 696
-------- --------
Total current liabilities.............................. 71,092 68,847
OBLIGATIONS UNDER CAPITAL LEASES, less current obligations
(Note E).................................................. 5,714 6,151
LONG-TERM DEBT, less current maturities (Note D)........... -- 8,236
DEFERRED INCOME TAXES, less current portion (Note G)....... 2,600 --
COMMITMENTS AND CONTINGENCIES (Notes A, E, F and H)
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES............. -- 1.989
STOCKHOLDERS' EQUITY (Notes K, L, M and N)
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, 63,330 and 56,775 shares issued and
outstanding)........................................... 633 568
Additional paid-in capital.............................. 157,719 4,743
Retained earnings....................................... 527 32,918
-------- --------
Total stockholders' equity............................. 158,879 38,229
-------- --------
$238,285 $123,452
======== ========
</TABLE>
See notes to consolidated financial statements.
F-2
<PAGE>
WEST TELESERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
REVENUE.......................................... $317,210 $256,894 $186,512
COST OF SERVICES................................. 180,380 146,531 102,707
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES..... 87,499 70,575 51,904
-------- -------- --------
NET OPERATING INCOME............................. 49,331 39,788 31,901
OTHER INCOME (EXPENSE):
Interest income................................ 577 142 144
Interest income--financing, net of interest ex-
pense of $1,244, $1,784 and $1,223............ 669 449 234
Interest expense............................... (2,880) (2,403) (1,606)
Minority interest in net income of consolidated
subsidiaries.................................. (1,359) (1,167) (979)
Other income (expense)......................... (427) (410) 302
-------- -------- --------
Net other expense.............................. (3,420) (3,389) (1,905)
-------- -------- --------
NET INCOME BEFORE INCOME TAX EXPENSE: 45,911 36,399 29,996
ACTUAL INCOME TAX EXPENSE (Note G):
Current income tax expense..................... 1,701 828 269
Deferred income tax expense.................... 2,512 -- --
-------- -------- --------
Actual income tax expense...................... 4,213 828 269
-------- -------- --------
NET INCOME AND NET INCOME BEFORE PROFORMA
INCOME TAX EXPENSE.............................. 41,698 35,571 29,727
PROFORMA INFORMATION:
Income tax expense (Note G).................... 12,950 13,130 10,900
-------- -------- --------
Net income..................................... $ 28,748 $ 22,441 $ 18,827
======== ======== ========
Primary and fully diluted earnings per common and
common
equivalent share................................ $ 0.52 $ 0.42 $ 0.35
======== ======== ========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING.... 54,891 53,968 53,968
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
WEST TELESERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
TOTAL
COMMON PAID-IN RETAINED STOCKHOLDERS'
STOCK CAPITAL EARNINGS EQUITY
------ -------- -------- -------------
<S> <C> <C> <C> <C>
BALANCE, January 1, 1994............... $568 $ 4,743 $ 7,854 $ 13,165
Distributions to stockholders, net of
$200 paid to minority shareholders.. -- -- (15,783) (15,783)
Net income........................... -- -- 29,727 29,727
---- -------- ------- --------
BALANCE, December 31, 1994............. 568 4,743 21,798 27,109
Distributions to stockholders, net of
$662 paid to minority shareholders.. -- -- (24,451) (24,451)
Net income........................... -- -- 35,571 35,571
---- -------- ------- --------
BALANCE, December 31, 1995............. 568 4,743 32,918 38,229
Issuance of 6,555 shares of common
stock, net of expense (Note L)...... 65 107,658 -- 107,723
Effects of purchase accounting for
minority interest (Note C).......... -- 50,533 -- 50,533
Distributions to stockholders, net of
$2,139 paid to minority
shareholders........................ -- (5,215) (74,089) (79,304)
Net income........................... -- -- 41,698 41,698
---- -------- ------- --------
BALANCE, December 31, 1996............. $633 $157,719 $ 527 $158,879
==== ======== ======= ========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
WEST TELESERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
-------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.......................................... $41,698 $35,571 $29,727
Adjustments to reconcile net income to net cash
flows from operating activities:
Depreciation and amortization....................... 13,551 10,127 7,086
(Gain) loss on sale of equipment.................... (131) 148 (1)
Deferred income tax expense......................... 2,512 -- --
Minority interest................................... 1,359 1,167 979
Changes in operating assets and liabilities:
Accounts receivable................................. (10,027) (10,954) (9,553)
Other assets and vendor receivables................. (350) (1,540) (518)
Accounts payable.................................... 1,760 9,423 4,848
Other current liabilities and accrued expenses...... 2,709 3,615 848
Income tax payable.................................. 1,001 -- --
------- ------- -------
Net cash flows from operating activities.......... 54,082 47,557 33,416
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment................. (21,631) (16,824) (7,655)
Proceeds from disposal of property and equipment.... 1,540 1,165 2
Issuance of notes receivable........................ (1,550) -- (985)
Proceeds from payments of notes receivable.......... 1,027 1,173 760
------- ------- -------
Net cash flows from investing activities.......... (20,614) (14,486) (7,878)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt...................... 10,320 7,123 2,733
Payments of debt.................................... (14,870) (3,644) (1,895)
Payments of capital lease obligations............... (11,535) (5,193) (4,176)
Payments of notes to stockholder.................... -- (975) (313)
Net change in line of credit agreement.............. (6,500) (340) 2,240
Distribution to stockholders........................ (81,443) (25,113) (15,983)
Net change in accounts receivable financing and
notes payable--financing............................ (11,281) 2,187 (2,712)
Proceeds from issuance of common stock, net of
expense............................................. 107,723 -- 20
Increase (decrease) in customer deposits and
holdbacks........................................... 7,322 774 (529)
------- ------- -------
Net cash flows from financing activities.......... (264) (25,181) (20,615)
------- ------- -------
NET CHANGE IN CASH AND CASH EQUIVALENTS............... 33,204 7,890 4,923
<CAPTION>
21,861 13,971 9,048
CASH AND CASH EQUIVALENTS, Beginning of Period........ ------- ------- -------
<S> <C> <C> <C>
CASH AND CASH EQUIVALENTS, End of Period.............. $55,065 $21,861 $13,971
======= ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest.............. $ 4,696 $ 4,048 $ 2,726
======= ======= =======
Cash paid during the year for income taxes.......... $ 702 $ 459 $ 27
======= ======= =======
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES:
Acquisition of equipment through assumption of
capital lease obligations........................... $16,297 $ 9,592 $ 3,854
======= ======= =======
Reduction of accounts receivable through issuance of
notes receivable.................................... $ 61 $ 367 $ 1,005
======= ======= =======
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
WEST TELESERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1966, 1995 AND 1994
(DOLLARS IN THOUSANDS)
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS DESCRIPTION--West TeleServices Corporation (WTSC) and its direct
and indirect subsidiaries (West Telemarketing Corporation (WTC), West
Interactive Corporation (WIC), West Telemarketing Corporation Outbound (WTCO),
Interactive Billing Services, Inc. (IBS) and West Interactive Canada, Inc.
(WICI)) (the "Company") provide a full range of customized telecommunications-
based services to business clients on an outsourced basis. The Company is a
leading provider in each of inbound operator services, automated voice
response services and outbound direct teleservices through its call centers
throughout the United States. The Company's inbound operator services
("Inbound") consist of live operator call-processing applications such as
order capture, customer service and product support. The Company's automated
voice response services ("Interactive") consist of computerized call-
processing applications such as automated product information requests,
computerized surveys and polling and secure automated credit card activation.
The Company's outbound direct teleservices ("Outbound") consist of live
operator direct marketing applications such as product sales and customer
acquisition and retention campaigns. The Company has developed proprietary
technology platforms designed to provide a high degree of automation and
reliability in all three of its businesses.
The Company targets businesses in highly competitive, consumer-based
industries, including telecommunications, insurance, banking, pharmaceuticals,
public utilities, consumer goods and computer software services, that require
large volume applications.
REORGANIZATION--Through the corporate reorganization completed on November
25, 1996, West TeleServices Corporation became the parent company for WTC,
WTCO and WIC and indirectly for IBS and WICI. These five corporations were
previously under common control and management. Prior to November 25, 1996,
each of the five corporations had 10,000 shares of common stock authorized
with the exception of WTC which had 100,000 shares authorized. The shares of
WICI and IBS were issued during 1994. Each of the five corporations had 10,000
shares issued and outstanding. The corporations entered into a reorganization
with the Company whereby each of the stockholders of WTC, WTCO and WIC
exchanged their respective capital stock for 56,775,000 shares of common stock
of the Company and each of the stockholders of IBS and WICI transferred their
respective capital stock to WIC for nominal consideration.
MINORITY INTEREST--The Company accounted for the minority interest portion
of the reorganization under the purchase method of accounting. The
consolidated financial statements for all periods presented give effect to the
reorganization referred to in the previous paragraph. Under such, the Company
recorded the 4.945% minority interest for the period through November 25, 1996
and for 1995 and 1994.
BASIS OF CONSOLIDATION--The consolidated financial statements include the
accounts of the Company's wholly-owned subsidiaries and other insignificant
subsidiaries whose operations are interrelated. All material intercompany
transactions and balances have been eliminated in the consolidated financial
statements.
USE OF ESTIMATES--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date
F-6
<PAGE>
WEST TELESERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1966, 1995 AND 1994
(DOLLARS IN THOUSANDS)
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
REVENUE RECOGNITION--Inbound revenue is recognized at the time calls are
answered by a telemarketing representative based on the number of calls
received and processed on behalf of clients. Interactive revenue is recognized
at the time calls are received or sent by automated voice response units and
is billed based on call duration. Outbound revenue is recognized on an hourly
rate basis at the time the telemarketing representatives place calls to
consumers on behalf of its clients. The customer is obligated to pay for these
services when these activities have been performed.
COST OF SERVICES--Cost of services includes labor, telephone and other
expense directly related to teleservices activities.
CASH AND CASH EQUIVALENTS--For purposes of the statement of cash flows, the
Company considers short-term investments with maturities of three months or
less at acquisition to be cash equivalents.
FINANCIAL INSTRUMENTS--Cash and cash equivalents, accounts receivable and
accounts payable are short-term in nature and the net values at which they are
recorded are considered to be reasonable estimates of their fair values. The
carrying values of notes payable are deemed to be reasonable estimates of
their fair values. Interest rates that are currently available to the Company
for the reissuance of debt with similar terms and remaining maturities are
used to estimate fair values of the notes payable.
PROPERTY AND EQUIPMENT--Property and equipment are recorded at cost.
Depreciation expense is based on the estimated useful lives of the assets and
is calculated on straight-line methods. The Company's buildings have estimated
useful lives of 31.5 years and the majority of the other assets have estimated
useful lives of five years.
GOODWILL AND INTANGIBLES--Goodwill represents the excess of the value of
Company stock received by minority shareholders upon their exchange of stock
in WTC and WTCO over the book value of this stock. The goodwill is being
amortized over 30 years. Included in other assets are the costs of billing
agreements with various telephone companies. Amortization expense is
calculated on the straight line method over the five year estimated useful
lives of the billing agreements. Recoverability of these assets is evaluated
periodically based on management's estimate of future undiscounted operating
income for each respective component of goodwill.
CUSTOMER DEPOSITS AND HOLDBACKS--The Company obtains directly from the
billing and collection agent, revenue generated from its Interactive
customers' programs. The Company retains a specified amount of the revenue and
remits the remainder to its customers. The retained amount is based upon the
collection history of the customer's program success and is necessary to allow
for potential caller adjustments which may be filed within one year of the
actual phone calls.
The Company obtains security deposits from certain Inbound and Interactive
customers, which are refunded to the customers when the Company discontinues
service to the customers' programs.
INCOME TAXES--For periods subsequent to November 25, 1996, the Company and
its wholly-owned subsidiaries will file a consolidated income tax return. The
Company uses an asset and liability
F-7
<PAGE>
WEST TELESERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1966, 1995 AND 1994
(DOLLARS IN THOUSANDS)
approach for the financial reporting of income taxes in accordance with SFAS
No. 109, Accounting for Income Taxes. Deferred income taxes arise from
temporary differences between financial and tax reporting.
Prior to the reorganization in November 1996, the affiliated companies elected
to be treated as "Small Business Corporations" for income tax purposes. Under
this election, all income and expense flowed through to the stockholders on a
pro rata basis for income tax purposes. Accordingly, no provision for actual
income taxes has been made except for certain state taxes which are applicable
to "Small Business Corporations."
Prior to the closing of the Company's Initial Public Offering and
simultaneous to the reorganization, the five subsidiary companies terminated
their Small Business Corporation status and became subject to Federal and
state income taxes. The pro forma tax provisions were calculated using the
asset and liability approach for financial accounting and reporting of income
taxes.
EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE--Earnings per common and
common equivalent share have been computed by using the weighted average
number of shares outstanding during the year. Outstanding dilutive stock
options are included in the computation of weighted average number of shares.
RECLASSIFICATIONS--Certain reclassifications have been made to prior years
financial statements to conform to the current year presentation.
B. ACCOUNTS RECEIVABLE FINANCING PROGRAM
The Company maintains a line of credit with four participating banks in the
amount of $30,000, outstanding amounts payable totaled $-0- and $13,456 at
December 31, 1996 and 1995, respectively, bearing interest at .5% below the
prime rate (actual rate 7.75% at December 31, 1996) to fund customer advances.
The paydown of outstanding debt under the line of credit as of December 31,
1996 was made possible through the proceeds of the initial public offering.
Substantially all assets of WIC are pledged as collateral on the line of
credit which expires June 30, 1997. The Company had advances to Interactive
customers through their accounts receivable financing programs aggregating
$11,805 and $13,980 at December 31, 1996 and 1995, respectively. Under terms
of the programs, advances are collateralized by the customer's accounts
receivable from unrelated national billing services. The Company charges
interest at the prime rate plus 3.0% actual rate (11.25% at December 31,
1996).
C. GOODWILL
Goodwill of $50,533 was recorded and is being amortized over 30 years.
Amortization expense totaled $168 for the year ended December 31, 1996.
The goodwill recorded was calculated based upon the number of shares of
Company stock received by the minority shareholders upon their exchange of
stock in WTC and WTCO multiplied by the initial public offering price. This
incremental value over cost was allocated entirely to goodwill since the
recorded value of the Company's assets and liabilities, other than goodwill,
was approximately equal to their fair value at the date of the transaction.
F-8
<PAGE>
WEST TELESERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1966, 1995 AND 1994
(DOLLARS IN THOUSANDS)
D. LONG-TERM DEBT AND CREDIT ARRANGEMENTS
WTC has revolving lines of credit aggregating $4,500 at two banks which
expire in July 1997. The note requires interest at .5% below prime (actual
rate 7.75% at December 31, 1996). WTCO had revolving lines of credit
aggregating $8,000 at two banks which expire in June 1997 and bear interest at
.25% below the prime rate (actual rate 8.0% at December 31, 1996). At December
31, 1996, outstanding borrowings under these lines of credit were $-0-.
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1996 1995
------ -------
<S> <C> <C>
Notes payable to bank (modified on June 11, 1996, due in monthly
installments of $54 including interest, payable until maturity
on June 11, 1999. The note bears interest at the prime rate
(8.25% at December 31, 1996). Paid in January 1997............. $1,436 $ 1,278
Note payable to bank, due in monthly installments of $63
including interest, payable until maturity on June 11, 1999.
The note bears interest at the prime rate (8.25% at December
31, 1996). Paid in January 1997................................ 1,693 --
Mortgage note payable to bank, due in monthly installments of
$25 including interest at the prime rate(8.25% at December 31,
1996), maturing April 25, 1999. Paid in January 1997........... 651 883
Note payable to bank, due in monthly installments of $79
including interest, payable until maturity on June 28, 1999.
The note bears interest at the prime rate (8.25% at December
31, 1996). Paid in January 1997................................ 2,114 --
Notes payable to bank. Paid in 1996............................. -- 8,283
------ -------
5,894 10,444
Less current maturities......................................... 5,894 2,208
------ -------
$ -- $ 8,236
====== =======
</TABLE>
Substantially all assets of the Companies are pledged as collateral on their
debt. The agreements contain restrictive covenants which, among other things,
require the maintenance of certain ratios and minimum tangible net worth, as
defined in the agreements.
As of January 31, 1997, the Company paid all outstanding long-term debt
obligations plus accrued interest as of December 31, 1996. Based on these
payments, all amounts have been classified as currently payable in the
accompanying balance sheet.
F-9
<PAGE>
WEST TELESERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1966, 1995 AND 1994
(DOLLARS IN THOUSANDS)
E. LEASES
The Company leases certain land, buildings and equipment under operating and
capital leases which expire at varying dates through September 2006. Rent
expense was $2,158, $1,807 and $1,360 for the years ended December 31, 1996,
1995 and 1994, respectively. On all real estate leases, the Company pays real
estate taxes, insurance and maintenance associated with the leased sites.
Certain of the leases offer extension options ranging from month to month to
two five-year options. All of the capital leases call for transfer of
ownership or contain bargain purchase options at the end of the lease term.
Amortization of assets purchased through capital lease agreements is included
in depreciation expense. The following information applies to those leases
exclusive of related party leases as discussed in Note F:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1996 1995
------- -------
<S> <C> <C>
Assets under capital leases consist of:
Telephone and computer equipment....................... $22,107 $15,278
Office furniture and equipment......................... 3,327 1,874
Lease/building improvement............................. 343 --
------- -------
Total Cost........................................... 25,777 17,152
Accumulated depreciation................................. 5,355 4,099
------- -------
Net book value........................................... $20,422 $13,053
======= =======
</TABLE>
During 1997, the Company paid approximately $7,226 in capital lease
obligations existing as of December 31, 1996 prior to their scheduled
maturity. These prepayments have been classified as currently payable in the
accompanying balance sheet. Future minimum payments under non-cancellable
operating and capital leases with initial or remaining terms of one year or
more and minimum future lease payments and present value of the net minimum
lease payments are as follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASES
--------- -------
<S> <C> <C>
Year Ending December 31
1997................................................... $ 3,686 $12,271
1998................................................... 3,271 4,160
1999................................................... 2,762 1,741
2000................................................... 2,434 --
2001 and thereafter.................................... 4,626 --
------- -------
Total minimum obligations................................ $16,779 18,172
=======
Less interest at 4.6% to 9.9%............................ $ 1,543
-------
Present value of net minimum lease payments.............. 16,629
Less current portion..................................... 10,915
-------
$ 5,714
=======
</TABLE>
F-10
<PAGE>
WEST TELESERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1966, 1995 AND 1994
(DOLLARS IN THOUSANDS)
F. RELATED PARTY TRANSACTIONS
The Company leases office space owned by a partnership whose partners are
majority stockholders of the Company. The lease expires August 31, 2004, and
is accounted for as an operating lease. Required lease payments are as
follows:
<TABLE>
<S> <C>
Year Ending December 31,
1997.......................................................... $ 730
1998.......................................................... 773
1999.......................................................... 820
2000.......................................................... 869
2001 and thereafter........................................... 3,649
</TABLE>
Lease expense was $691, $649 and $546 for the years ended December 31, 1996,
1995 and 1994, respectively.
Total interest expense paid to related parties in connection with notes
payable was $269, $59 and $76 for the years ended December 31, 1996, 1995 and
1994, respectively.
G. INCOME TAXES
Prior to the reorganization in November 1996, the predecessor companies
maintained their Small Business Corporation status. Accordingly, no provision
for actual income tax has been made as it relates to periods prior to the
reorganization except for certain state taxes which are applicable to Small
Business Corporations. However, pro forma income tax expense has been
recognized as if the reorganized company had been subject to federal and state
corporate income taxes for all periods. The pro forma provision for income tax
expense represents a combined federal and state tax rate.
Components of the actual income tax expense are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1996
------------
<S> <C>
Current income tax expense
Federal................................................. $1,079
State................................................... 622
------
1,701
------
Deferred income tax expense
Federal................................................. 2,446
State................................................... 66
------
2,512
------
$4,213
======
</TABLE>
F-11
<PAGE>
WEST TELESERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1966, 1995 AND 1994
(DOLLARS IN THOUSANDS)
The difference between the U.S. Federal statutory tax rate and the Company's
effective tax rate are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1996
------------
<S> <C>
Statutory rate............................................ 35.00%
State income tax effect................................... 1.05
Other..................................................... 0.26
-----
36.31%
=====
</TABLE>
Significant temporary differences between reported financial and taxable
earnings that give rise to deferred tax assets and liabilities were as
follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1996
------------
<S> <C>
Net current deferred tax asset:
Allowance for doubtful accounts......................... $ 88
------
Net long-term deferred tax liabilities:
Depreciation............................................ 2,566
Other................................................... 34
------
Net long-term deferred tax liabilities.................... 2,600
------
Net total deferred tax liabilities........................ $2,512
======
</TABLE>
H. EMPLOYEE BENEFIT PLAN
The Company has a 401(k) plan which covers substantially all of their
employees. Under the plan, the Company will match employee contributions up to
7% of their gross salary. The Company matching contributions are 100% vested
after the employee has attained five years of service. Total contributions
under the plan were $589, $564 and $406 for the years ended December 31, 1996,
1995 and 1994, respectively.
I. COMMITMENTS AND CONTINGENCIES
The Company is a defendant in a number of lawsuits and claims for various
amounts, which arise out of the normal course of business. WIC is a defendant
in a case brought in the United States District Court for the Southern
District of Georgia, Augusta Division, captioned Lamar Andrews Individually
and as Representative of a Class of All Other Persons Similarly Situated,
Plaintiff v. American Telephone & Telegraph Company, et al., Defendants, No.
CV 191-175. The District Court certified a master class of all persons who
paid for one or more 900 number calls pertaining to programs offering
sweepstakes, games of chance, awards, cash or other prizes, gifts or
information on unclaimed funds. These calls were billed and collected by AT&T
Corp. ("AT&T") and U.S. Sprint Communications Company Limited Partnership
("Sprint"). The District Court also certified a sub-class of those persons who
paid, in the State of Georgia, for one or more such calls billed and collected
by AT&T or Sprint. The complaint alleges that the programs at issue involved,
among other things, acts of unlawful gambling, mail fraud
F-12
<PAGE>
WEST TELESERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1966, 1995 AND 1994
(DOLLARS IN THOUSANDS)
or wire fraud in violation of the Racketeer Influenced and Corrupt
Organizations Act ("RICO"), the Communications Act of 1934, the federal common
law of communications and other state and federal laws. The action seeks
recovery of treble damages (which amount has not been specified), punitive
damages, costs and attorneys' fees. On September 19, 1996, the United States
Court of Appeals for the Eleventh Circuit reversed the District Court's order
certifying the classes on the ground that the class action would be
unmanageable. The Appellees filed with the Eleventh Circuit a Petition for
Rehearing and Suggestion for Rehearing En Banc which was denied on December 4,
1996. In the opinion of management and the Companies' legal counsel, the
Company is unable to form an opinion as to the likelihood of an unfavorable
outcome or an estimate of the amount or range of any potential loss related to
this case.
J. SIGNIFICANT CUSTOMERS
For the years ended December 31, 1996 through December 31, 1994, the Company
had 20 to 24 major customers who accounted for approximately 44% to 67% of
total revenues. The Company had one significant customer in each year, as
follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31
------------
<S> <C>
1996 18%
1995 15%
1994 13%
</TABLE>
K. INITIAL PUBLIC OFFERING
In November 1996, the Company completed an initial public offering of 6,555
shares of common stock of the Company at an offering price of $18.00 per
share. The net proceeds of the offering were used to redeem approximately
$35,549 Company notes payable, $7,253 of capital lease obligations and $43,879
of notes payable to shareholders.
If the Company had consummated the offering as of January 1, 1996, pro forma
net income would have been $30,944 and pro forma earnings per common and
common equivalent share would have been $.50 for the year ended December 31,
1996.
L. STOCK INCENTIVE PLAN
During September 1996, the Company and its stockholders adopted the 1996
Stock Incentive Plan. The Plan authorized granting to officers and directors
options to purchase common shares at the fair market value on the date of
grant. Options to a maximum of 9,499.5 common shares may be granted under the
1996 Plan. There were options for 3,601 shares issued during November, 1996
and outstanding at December 31, 1996. These options vest over ten years and
carry an exercise price of $18 per share. No options were exercisable at
December 31, 1996.
The Company accounts for its stock-based compensation under the provisions
of accounting Principles Board Opinion 25, Accounting for Stock Issued to
Employees, which utilizes the intrinsic value method. As a result of the
exercise price being equal to the market price at the date of grant, the
Company recognized no compensation expense as of December 31, 1996.
F-13
<PAGE>
WEST TELESERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1966, 1995 AND 1994
(DOLLARS IN THOUSANDS)
The pro forma effect on 1996 net income and earnings per share of accounting
for stock-based compensation using the fair value method required by Statement
of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation is $304 and $.01, respectively. Since the options issued during
the current year were outstanding for less than two months, and because the
options vest over several years and additional awards may be issued in future
years, the pro forma disclosures for 1996 are not likely to be representative
of the effects on reported net income for future years.
The fair value for options granted under the 1996 Plan was estimated at the
date of grant using the Black-Scholes pricing model with the following
assumptions:
<TABLE>
<CAPTION>
1996
----- ---
<S> <C> <C>
Risk-free interest rate.................... 6.50%
Dividend yield............................. --
Expected volatility........................ 40.00%
Expected life (years)...................... 5.5
</TABLE>
M. PREFERRED STOCK
The Board of Directors of the Company has the authority, without any further
vote or action by the stockholders, to provide for the issuance of up to ten
million shares of preferred stock from time to time in one or more series with
such designations, rights, preferences and limitations as the Board of
Directors may determine, including the consideration received therefor. The
Board also has the authority to determine the number of shares comprising each
series, dividend rates, redemption provisions, liquidation preferences,
sinking fund provisions, conversion rights and voting rights without approval
by the holders of common stock.
F-14
<PAGE>
WEST TELESERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1966, 1995 AND 1994
(DOLLARS IN THOUSANDS)
N. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is the summary of the quarterly results of operations for the
two years ended December 31:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, YEAR ENDED
1996 1996 1996 1996 1996
--------- -------- ------------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Revenue................. $79,488 $74,980 $80,720 $82,022 $317,210
Net Operating income.... 15,258 11,571 11,240 11,262 49,331
Net income before income
taxes................... 14,331 10,724 10,406 10,450 45,911
Net income and net
income before pro forma
income tax expense..... 14,118 10,558 10,155 6,867 41,698
Pro forma information:
Net income............. 8,954 6,696 6,441 6,657 28,748
Primary and fully
diluted earnings per
common and common
equivalent share....... $ 0.17 $ 0.12 $ 0.12 $ 0.12 $ 0.52
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, YEAR ENDED
1995 1995 1995 1995 1995
--------- -------- ------------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Revenue................. $64,012 $60,416 $62,904 $69,562 $256,894
Net Operating income.... 12,936 9,418 8,610 8,824 39,788
Net income before income
taxes................... 12,084 8,623 7,731 7,961 36,399
Net income and net
income before pro forma
income tax expense..... 11,898 8,419 7,500 7,754 35,571
Pro forma information:
Net income............. 7,398 5,280 4,735 5,028 22,441
Primary and fully
diluted earnings per
common and common
equivalent share....... $ 0.14 $ 0.10 $ 0.09 $ 0.09 0.42
</TABLE>
F-15
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Stockholders and Board of Directors
West TeleServices Corporation
We have audited the consolidated financial statements of West TeleServices
Corporation as of December 31, 1996 and 1995, and for each of the three years
in the period ended December 31, 1996, and have issued our report thereon dated
February 5, 1997; such report is included elsewhere in this Form 10-K. Our
audits also included the consolidated financial statement schedule of West
TeleServices Corporation and subsidiaries, listed in Item 14. This consolidated
financial statement schedule is the responsibility of the Company's management.
Our responsibility is to express an opinion based on our audits. In our
opinion, such consolidated financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.
Deloitte & Touche LLP
Omaha, Nebraska
February 5, 1997
S-1
<PAGE>
SCHEDULE II
WEST TELESERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED VALUATION ACCOUNTS
THREE YEARS ENDED DECEMBER 31, 1996
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS-
BALANCE, CHARGED TO DEDUCTIONS-
BEGINNING COST AND ACCOUNTS BALANCE,
DESCRIPTION OF YEAR EXPENSES CHARGED-OFF END OF YEAR
----------- --------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
December 31, 1996--Allowance for
doubtful accounts................ $1,557 $1,279 $2,592 $ 244
------ ------ ------ ------
December 31, 1995--Allowance for
doubtful accounts................ $1,509 $2,361 $2,313 $1,557
------ ------ ------ ------
December 31, 1994--Allowance for
doubtful accounts................ $2,156 $1,636 $2,283 $1,509
------ ------ ------ ------
</TABLE>
S-2
<PAGE>
EXHIBIT INDEX
Exhibits identified in parentheses below, on file with the United States
Securities and Exchange Commission, are incorporated herein by reference as
exhibits hereto.
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
------- ----------- ----------
<C> <S> <C>
3.01 Restated Certificate of Incorporation of the Company *
(Exhibit 3.01 to Registration Statement under Form S-1
(Amendment No. 2) dated November 21, 1996, File No. 333-
13991)
3.02 Restated Bylaws of the Company (Exhibit 3.02 to *
Registration Statement under Form S-1 (Amendment No. 2)
dated November 21, 1996, File No. 333-13991)
10.01 Form of Registration Rights Agreement (Exhibit 10.01 to *
Registration Statement under Form S-1 (Amendment No. 1)
dated November 12, 1996, File No. 333-13991)
10.02 Bill of Sale & Assignment, dated October 30, 1996, from *
West Telemarketing Corp. to Troy L. Eaden (Exhibit 10.02
to Registration Statement under Form S-1 (Amendment No.
1) dated November 12, 1996, File No. 333-13991)
10.03 Purchase Agreement, dated March 14, 1996, between West *
Telemarketing Corporation and Executive Jet Sales, Inc.
(Exhibit 10.03 to Registration Statement under Form S-1
(Amendment No. 1) dated November 12, 1996, File No. 333-
13991)
10.04 1996 Stock Incentive Plan (Exhibit 10.04 to Registration *
Statement under Form S-1 (Amendment No. 1) dated
November 12, 1996, File No. 333-13991)
10.05 Agreement and Plan of Reorganization (Exhibit 10.05 to *
Registration Statement under Form S-1 (Amendment No. 2)
dated November 21, 1996, File No. 333-13991)
10.06 Employment Agreement with Thomas B. Barker (Exhibit 10.06 *
to Registration Statement under Form S-1 (Amendment No.
1) dated November 12, 1996, File No. 333-13991)
10.07 Employment Agreement with Michael A. Micek (Exhibit 10.07 *
to Registration Statement under Form S-1 (Amendment No.
1) dated November 12, 1996, File No. 333-13991)
10.08 Employment Agreement with Troy L. Eaden (Exhibit 10.08 to *
Registration Statement under Form S-1 (Amendment No. 1)
dated November 12, 1996, File No. 333-13991)
10.09 Employment Agreement with Lee Waters (Exhibit 10.09 to *
Registration Statement under Form S-1 (Amendment No. 1)
dated November 12, 1996, File No. 333-13991)
10.10 Employment Agreement with Wayne Harper (Exhibit 10.10 to *
Registration Statement under Form S-1 (Amendment No. 1)
dated November 12, 1996, File No. 333-13991)
10.11 Stock Redemption Agreement, dated April 9, 1996, by and *
among John W. Erwin, Gary L. West, Mary E. West and Troy
L. Eaden (Exhibit 10.11 to Registration Statement under
Form S-1 (Amendment No. 1) dated November 12, 1996, File
No. 333-13991)
10.12 Assignment and Assumption Agreement, dated as of November *
12, 1996, by and among Gary L. West, Mary E. West, Troy
L. Eaden and the Company (Exhibit 10.12 to Registration
Statement under Form S-1 (Amendment No. 2) dated
November 21, 1996, File No. 333-13991)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
------- ----------- ----------
<C> <S> <C>
10.13 Personnel Company Subscription Service Agreement, dated *
as of November 12, 1996, between West Telemarketing
Insurance Agency, Inc. and West Telemarketing
Corporation Outbound (Exhibit 10.13 to Registration
Statement under Form S-1 (Amendment No. 2) dated
November 21, 1996, File No. 333-13991)
10.14 Lease, dated September 1, 1994, by and between West *
Telemarketing Corporation and 99-Maple Partnership
(Exhibit 10.14 to Registration Statement under Form S-1
(Amendment No. 1) dated November 12, 1996, File No.
333-13991)
21.01 Subsidiaries of the Company (Exhibit 21.01 to *
Registration Statement under Form S-1 (Amendment No. 2)
dated November 21,1996, File No. 333-13991)
24.01 Powers of attorney executed by officers and directors who
signed this report
</TABLE>
- --------
* Indicates that the page number for such item is not applicable.
<PAGE>
POWER OF ATTORNEY
We, the undersigned directors and officers of WEST TELESERVICES CORPORATION,
a Delaware corporation (the "Company"), do hereby constitute and appoint Troy
L. Eaden, Thomas B. Barker and Michael A. Micek, or any of them, our true and
lawful attorneys and agents with full power of substitution to sign the
Company's Annual Report under Form 10-K for the year ended December 31, 1996
(the "Form 10-K") to be filed with the Securities and Exchange Commission, and
to do any and all acts and things and to execute any and all instruments for
us and in our names in the capacities indicated below, which said attorneys
and agents, or any one of them, may deem necessary or advisable to enable the
Company to comply with the Securities Exchange Act of 1934, as amended, and
any rules, regulations, and requirements of the Securities and Exchange
Commission, in connection with such Form 10-K, including specifically, but
without limitation, power and authority to sign for us or any of us in our
names and in the capacities indicated below, any and all amendments thereto;
and we do hereby ratify and confirm all that the said attorneys and agents, or
any of them, shall do or cause to be done by virtue of this power of attorney.
This Power of Attorney may be executed in one or more counterparts, each of
which shall be deemed an original, but all of which shall constitute a single
instrument.
Executed below by the following persons in the capacities and on the dates
indicated:
NAME TITLE DATE
/s/ Gary L. West Chairman of the March 31, 1997
- ------------------------------------- Board and Director
GARY L. WEST
/s/ Mary E. West Vice Chair of the March 31, 1997
- ------------------------------------- Board and Director
MARY E. WEST
/s/ Troy L. Eaden Chief Executive March 31, 1997
- ------------------------------------- Officer and
TROY L. EADEN Director (Principal
Executive Officer)
/s/ Thomas B. Barker President and Chief March 31, 1997
- ------------------------------------- Operating Officer
THOMAS B. BARKER and Director
/s/ Michael A. Micek Chief Financial March 31, 1997
- ------------------------------------- Officer (Principal
MICHAEL A. MICEK Financial and
Accounting Officer)
/s/ William E. Fisher Director March 31, 1997
- -------------------------------------
WILLIAM E. FISHER
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
FINANCIAL DATA SCHEDULE AS OF AND FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1996
(Columnar Dallars in Thousands Except Per Share Data)
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 55,065
<SECURITIES> 0
<RECEIVABLES> 58,391
<ALLOWANCES> 244
<INVENTORY> 0
<CURRENT-ASSETS> 117,261
<PP&E> 110,920
<DEPRECIATION> 41,895
<TOTAL-ASSETS> 238,285
<CURRENT-LIABILITIES> 71,092
<BONDS> 5,714
0
0
<COMMON> 633
<OTHER-SE> 158,246
<TOTAL-LIABILITY-AND-EQUITY> 238,285
<SALES> 0
<TOTAL-REVENUES> 317,210
<CGS> 0
<TOTAL-COSTS> 180,380
<OTHER-EXPENSES> 86,220
<LOSS-PROVISION> 1,279
<INTEREST-EXPENSE> 4,124
<INCOME-PRETAX> 45,911
<INCOME-TAX> 17,163
<INCOME-CONTINUING> 28,748
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 28,748
<EPS-PRIMARY> .52
<EPS-DILUTED> .52
</TABLE>
