<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to ____________
Commission File Number 000-21771
WEST TELESERVICES CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 47-0777362
(State or other jurisdiction (IRS Employer
of incorporation of organization) Identification No.)
9910 Maple Street, Omaha, Nebraska 68134
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (402) 571-7700
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
-- --
At August 12, 1998, 63,330,000 shares of Common Stock, par value $.01 per share,
of the registrant were outstanding.
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INDEX
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Page
No.
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PART I. FINANCIAL INFORMATION .................................................... 3
Item 1. Financial Statements
Consolidated Balance Sheets - June 30, 1998 and December 31, 1997 3
Consolidated Statements of Operations -
Three and Six Months Ended June 30, 1998 and 1997 .................. 4
Consolidated Statements of Cash Flows - Six Months Ended
June 30, 1998 and 1997 .............................................. 5
Notes to Consolidated Financial Statements ............................ 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ........................................... 8
Item 3. Quantitative and Qualitative Disclosure About Market Risk ............. 11
PART II. OTHER INFORMATION ........................................................ 12
Item 1. Legal Proceedings ..................................................... 12
Item 4. Submission of Matters to a Vote of Securities Holders ................. 13
Item 5. Other Information ..................................................... 13
Item 6. Exhibits and Reports on Form 8-K ...................................... 14
SIGNATURES .......................................................................... 15
</TABLE>
2
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
WEST TELESERVICES CORPORATION
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSAND EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
----------- -----------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 19,663 $ 39,820
Accounts receivable, net of allowance
for doubtful accounts of $555 and $447 96,132 64,325
Vendor receivable 6,676 183
Notes receivable 11,097 7,486
Accounts receivable - financing 10,521 4,971
Other 8,714 4,834
--------- ---------
Total current assets 152,803 121,619
PROPERTY AND EQUIPMENT:
Land and improvements 4,939 4,888
Buildings 24,316 23,059
Telephone and computer equipment 111,030 97,021
Office furniture and equipment 21,897 18,730
Leasehold improvements 28,653 24,119
Construction in process 4,888 1,182
--------- ---------
195,723 168,999
Accumulated depreciation and amortization (68,970) (57,289)
--------- ---------
126,753 111,710
GOODWILL, NET OF ACCUMULATED AMORTIZATION
OF $2,695 AND $1,853 47,838 48,680
OTHER ASSETS 158 141
--------- ---------
$ 327,552 $ 282,150
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable - financing $ 4,912 $ -
Accounts payable 41,274 18,948
Customer deposits and holdbacks 17,496 22,475
Accrued wages and benefits 10,487 8,809
Accrued phone expense 5,721 7,228
Other current liabilities 4,711 3,103
Current maturities of long-term obligations 4,793 5,736
Income tax payable 606 -
--------- ---------
Total current liabilities 90,000 66,299
LONG TERM OBLIGATIONS, LESS CURRENT MATURITIES 13,876 15,950
DEFERRED INCOME TAXES 3,874 3,684
OTHER LONG-TERM LIABILITIES 157 -
COMMITMENTS AND CONTINGENCIES (NOTE 2) - -
STOCKHOLDERS' EQUITY
Preferred stock $0.01 par value, 10,000
shares authorized, no shares issued
and outstanding - -
Common stock $0.01 par value, 200,000 shares
authorized, 63,330 shares issued and
outstanding 633 633
Additional paid-in capital 157,647 157,647
Retained earnings 61,365 37,937
--------- ---------
Total stockholders' equity 219,645 196,217
--------- ---------
$ 327,552 $ 282,150
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements
3
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WEST TELESERVICES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- -------------------
1998 1997 1998 1997
------ ------ ------- ------
<S> <C> <C> <C> <C>
REVENUE $ 118,004 $ 98,380 $ 234,079 $ 194,026
COST OF SERVICES 64,250 55,153 126,984 106,501
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 36,184 29,384 69,540 55,529
--------- -------- --------- ---------
NET OPERATING INCOME 17,570 13,843 37,555 31,996
OTHER INCOME (EXPENSE):
Interest income 150 312 341 701
Interest income - financing net of interest expense of $240, $85,
$394 and $178 496 390 921 770
Interest expense (116) (178) (240) (409)
Other (expense), net (184) (145) (438) (314)
--------- -------- --------- ---------
Net other income 346 379 584 748
--------- -------- --------- ---------
NET INCOME BEFORE INCOME TAX EXPENSE 17,916 14,222 38,139 32,744
INCOME TAX EXPENSE:
Current income tax expense 6,847 5,458 14,569 12,596
Deferred income tax expense 53 85 142 157
--------- -------- --------- ---------
Total income tax expense 6,900 5,543 14,711 12,753
--------- -------- --------- ---------
NET INCOME $ 11,016 $ 8,679 $ 23,428 $ 19,991
========= ======== ========= =========
EARNINGS PER COMMON SHARE:
Basic $ 0.17 $ 0.14 $ 0.37 $ 0.32
========= ======== ========= =========
Diluted $ 0.17 $ 0.14 $ 0.37 $ 0.32
========= ======== ========= =========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING
Basic common shares 63,330 63,330 63,330 63,330
Dilutive impact of potential common shares from stock options - - - 33
--------- -------- --------- ---------
Diluted common shares 63,330 63,330 63,330 63,363
========= ======== ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
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WEST TELESERVICES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-----------------------------
1998 1997
----------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 23,428 $ 19,991
Adjustments to reconcile net income cash flows
from operating activities:
Depreciation and amortization 12,817 9,372
(Gain) loss on sale of equipment 23 113
Deferred income tax expense 142 157
Changes in operating assets and liabilities:
Accounts receivable (34,531) (34,005)
Other assets and vendor receivables (11,118) (1,389)
Accounts payable 22,326 8,596
Other liabilities and accrued expenses 1,936 3,675
Income tax payable 1,382 (2,188)
----------- ------------
Net cash flows from operating activities 16,405 4,322
----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (28,272) (23,294)
Proceeds from disposal of property and equipment 1,231 346
Issuance of notes receivable (4,961) (287)
Proceeds from payments of notes receivable 4,074 601
----------- ------------
Net cash flows from investing activities (27,928) (22,634)
----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt - 2,499
Payments of long-term obligations (3,017) (15,345)
Net change in accounts receivable financing and notes payable financing (638) 270
Payments for stock registration costs - (38)
Net change in customer deposits and holdbacks (4,979) (6,257)
----------- ------------
Net cash flows from financing activities (8,634) (18,871)
----------- ------------
NET CHANGE IN CASH AND CASH EQUIVALENTS (20,157) (37,183)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 39,820 55,065
----------- ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 19,663 $ 17,882
=========== ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 634 659
=========== ============
Cash paid during the period for income taxes $ 13,067 $ 14,446
=========== ============
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES:
Reduction of accounts receivable through issuance of notes receivable $ 2,724 $ 1,114
=========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
WEST TELESERVCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF CONSOLIDATION AND PRESENTATION
West TeleServices Corporation and its direct and indirect subsidiaries (West
Telemarketing Corporation, West Interactive Corporation, West Telemarketing
Corporation Outbound, Interactive Billing Services, Inc. and West Interactive
Canada, Inc.) (collectively, 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 consist of live operator call-processing applications such as order
capture, customer service and product support. The Company's 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. The Company's outbound direct
teleservices consist of live operator direct marketing applications such as
product sales and customer acquisition and retention campaigns. All significant
intercompany balances and transactions have been eliminated.
The accompanying unaudited consolidated financial statements reflect all
normal and recurring adjustments which are, in the opinion of management,
necessary for a fair presentation of the financial position, operating results,
and cash flows for the interim periods. The consolidated financial statements
should be read in conjunction with the consolidated financial statements and
notes thereto, together with management's discussion and analysis of financial
condition and results of operations, contained in the Company's Form 10-K for
the year ended December 31, 1997.
Certain amounts in prior fiscal periods have been reclassified for
comparative purposes.
2. COMMITMENTS AND CONTINGENCIES
From time to time, the Company is subject to lawsuits and claims which arise
out of its operations in the normal course of its business. The Company and
certain of its subsidiaries are defendants in various litigation matters in the
ordinary course of business, some of which involve claims for damages that are
substantial in amount. The Company believes, except for the items discussed
below and in its Form 10-K for the year ended December 31, 1997, for which the
Company is currently unable to predict the outcome, the disposition of claims
currently pending will not have a material adverse effect on the Company's
financial position or results of operations.
On May 26, 1998, a Fourth Amended Complaint in the case of Chris Bone, et
al., individually and as class representatives, vs. Horry Telephone Cooperative,
Inc.; AT&T Corp.; AT&T Communications, Inc.; AT&T Communications of Southern
States, Inc; and West Telemarketing Outbound Corporation (Civil Action No. 4:96-
3527-22) was filed in United States District Court for the District of South
Carolina. The plaintiffs assert numerous causes of action under the Federal
Communications Act, the 1986 Telecommunications Act, and the Federal
Telemarketing Sales Rule. The complaint also seeks to reserve various state
claims which pertain to intrastate long distance calls which were asserted in
the Third Amended Complaint. West Telemarketing Outbound was joined as a party
with the Fourth Amended Complaint only. The plaintiffs allege that the class
members suffered damage as a result of AT&T's marketing of long distance calling
plans which were not available in their area due to tariff restrictions and as a
result of AT&T's alleged failure to switch them to certain long distance calling
plans that were available. The plaintiffs seek monetary damages, punitive
damages, attorney's fees, cost and injunctive relief. The defendants have made
a joint motion to dismiss the Fourth Amended Complaint based upon the filed
tariff doctrine. The plaintiffs have made motion to refer issues to the Federal
Communication Commission under the doctrine of primary jurisdiction.
6
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WEST TELESERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
On July 28, 1997, Schurman, Bowers, et al, individually and on behalf of a
class of all other persons similarly situated v. Horry Telephone Cooperative,
Inc.; AT&T Corp.; AT&T Communications, Inc.; AT&T Communications of the Southern
States, Inc.; and West Telemarketing Outbound Corporation (Civil Action No.
4:97-2635-12) was filed in the Court of Common Pleas in Horry, South Carolina
and then removed by the defendants to the United States District Court for the
District of South Carolina. Plaintiffs allege, among other things, claims of
negligent misrepresentation, fraud, breach of contract and statutory violations
in connection with offers of rate programs and long distance services to the
plaintiffs. Plaintiffs seek monetary damages, punitive damages, attorney's
fees, costs and injunctive relief. At a hearing held on February 23, 1998, the
federal judge ruled that all but two of the plaintiff's federal law causes of
action were barred by the filed tariff doctrine. The court noted that the two
remaining causes of action appeared to state claims under the Federal
Communications Act, but that it was unclear whether they did so. Accordingly,
the court gave the plaintiffs 60 days to replead those causes of action with
specificity. By agreement of counsel, the date for filing the amended petition
was continued until May 22, 1998. No amended petition has yet been filed. The
court stayed all discovery and all action on the state law claims while the
federal claims are pending. The two remaining federal claims, as currently
plead, state claims only against AT&T Corp., AT&T Communications, Inc. and AT&T
Communications of the Southern States, Inc. The Company will still be involved
in the state law claims, which are stayed at this time.
3. SUBSEQUENT EVENT
On July 16, 1998, the majority owners, Gary and Mary West ("Wests"), who
along with the Company's Chief Executive Officer, Troy Eaden ("Eaden") proposed
to acquire all the Common Stock not owned by the Wests or Eaden for a cash
purchase price of $13.50 per share. The Wests collectively beneficially own
approximately 71.8% of the Company's outstanding Common Stock, and Eaden
beneficially owns approximately 13.4% of the Company's outstanding Common Stock.
In the event that the Wests and Eaden acquire less than 100% of the Company's
Common Stock pursuant to a tender offer, the Wests and Eaden intend to acquire
the remainder of the Company's Common Stock through a merger transaction.
The proposal is subject to a number of conditions, including the approval of
the Board of Directors and stockholders of the Company and other conditions
customary in this type of transaction, including without limitation, the receipt
of all necessary consents and government approvals.
The Wests and Eaden anticipate that, upon consummation of the acquisition,
the new entity will seek to cause the Common Stock to be delisted from trading
on the Nasdaq National Market and to cause the deregistration of the Common
Stock with the Securities and Exchange Commission.
A special committee of independent directors has retained independent
financial and legal advisors to assist the committee in its consideration of a
proposal the committee had received on July 16 from the Wests and Eaden, to
acquire the approximately 15% equity interest in the Company they did not
already own.
The committee, which consists of the two directors who are not the founders
or officers of the Company, has retained BT Wolfensohn as its financial advisers
and Debevoise & Plimpton as its counsel. BT Wolfensohn is a division of BT Alex
Brown Inc.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of the Company's financial condition and
results of operations should be read in conjunction with the Consolidated
Financial Statements and the Notes thereto. Certain statements under this
caption constitute forward-looking statements which involve risks and
uncertainties. The Company's actual results in the future could differ
significantly from the results discussed or implied in such forward-looking
statements. Factors that could cause or contribute to such differences include,
but are not limited to, the effect on financial performance of increased
competition in the teleservices industry, potential future competition,
competitive pricing for services, potential future competing technologies and
trends, dependence on technology and phone service, dependence on the Company's
labor force, reliance on major clients, the success of new product innovations,
legal proceedings and government regulation.
RESULTS OF OPERATIONS
COMPARISON OF THE THREE AND SIX MONTHS ENDED JUNE 30, 1998 AND 1997
REVENUE: For the three months ended June 30, 1998, revenues increased
$19.6 million, or 20.0%, to $118.0 million up from $98.4 million for the three
months ended June 30, 1997. For the six months ended June 30, 1998, revenues
increased $40.1 million, or 20.6%, to $234.1 million up from $194.0 million for
the six months ended June 30, 1997. For the three months ending June 30, 1998,
inbound operator teleservices accounted for $43.4 million of revenue,
interactive teleservices accounted for $32.2 million, and outbound direct
teleservices accounted for $42.4 million. For the six months ended June 30,
1998, revenue from inbound operator teleservices increased approximately $28.1
million to $89.4 million. Revenue from interactive teleservices decreased
approximately $4.3 million to $64.1 million. Revenue from outbound direct
teleservices increased approximately $16.3 million to $80.6 million. During 1997
and 1998, interactive teleservices transferred calls to a live agent at inbound
operator teleservices to complete a service that began on interactive
teleservices voice response units. Inbound operator teleservices billed
interactive teleservices for the live operator portion of the call and
interactive teleservices billed the entire service provided by both divisions.
Consequently, a portion of interactive teleservices revenue reported on the
Company's reports on Form 10-Q in 1997 represented services delivered by inbound
operator teleservices. Since management feels that it is more appropriate to
include the revenue in the division that provided the services rather than where
the revenue is invoiced to the client, the Company reclassified revenue for 1997
as described in its Form 10-K for the year ended December 31, 1997. All of the
revenue information contained herein reflects such reclassification. The
increases in inbound operator teleservices and outbound direct teleservices are
primarily the result of servicing the growing needs of the Company's clients.
The decrease in interactive teleservices is a result of the reduction in 900 pay
per call volume in the six months ended June 30, 1998 compared to the comparable
period of 1997.
COST OF SERVICES: Cost of services represents direct labor, telephone
expense and other costs directly related to teleservices activities. Costs of
services increased $9.1 million, or 16.5%, in the second quarter of 1998 to
$64.3 million up from $55.2 million for the comparable period of 1997. Cost of
services increased $20.5 million, or 19.2%, to $127.0 million for the six months
ended June 30, 1998 up from $106.5 million for the comparable period of 1997.
As a percentage of revenue, cost of services decreased to 54.5% for the second
quarter of 1998 and 54.3% for the six months ended June 30, 1998 compared to
56.1% and 54.9%, respectively, for the comparable periods in 1997. The decreases
in cost of services as a percentage of revenue can be attributed to the
Company's ability to continue to hire cost effective quality labor as it enters
new markets through the addition of call centers and the change in operating
activity from interactive teleservices to direct and operator teleservices.
Direct and operator teleservices traditionally have lower direct costs as a
percentage of revenue.
8
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE ("SG&A") EXPENSES: SG&A expenses
increased by $6.8 million, or 23.1%, to $36.2 million for the second quarter of
1998 up from $29.4 million for the comparable period of 1997. For the six months
ended June 30, 1998, SG&A expenses increased by $14.0 million, or 25.2%, to
$69.5 million, up from $55.5 million for the comparable period of 1997. As a
percentage of revenue, SG&A expenses increased to 30.7% for the second quarter
of 1998 and 29.7% for the six months ended June 30, 1998 compared to
approximately 29.9% and 28.6%, respectively, for the comparable periods of 1997.
The increase is primarily due to increased depreciation expense and other costs
associated with call center expansion.
NET OPERATING INCOME: Net operating income increased by $3.8 million, or
26.9%, to $17.6 million in the second quarter of 1998 up from $13.8 million in
the second quarter of 1997. For the six months ended June 30, 1998, net
operating income increased by $5.6 million, or 17.4%, to $37.6 million up from
$32.0 million for the comparable period of 1997. As a percentage of revenue,
net operating income increased to approximately 14.9% for the second quarter of
1998 and decreased to 16.0% for the six months ended June 30, 1998, compared to
14.1% and 16.5%, respectively, for the corresponding periods of 1997 due to the
factors discussed above for Revenue, Cost of Services and SG&A expenses.
NET OTHER INCOME (EXPENSE): Net other income (expense) includes interest
income from short-term investments, interest income from an accounts receivable
financing program (net of the related interest expense to fund the program) and
interest expense from short-term and long-term borrowings under credit
facilities, a mortgage note and capital leases. Other income (expense) for the
second quarter of 1998 totaled $346,000 compared to $379,000 for the second
quarter of 1997. Other income (expense) for the six months ended June 30, 1998,
totaled $584,000 compared to $748,000 for the comparable period of 1997. The
reduction in net other income is primarily due to reduced interest income as a
result of lower cash balances during the first and second quarter of 1998
compared to the comparable periods of 1997.
NET INCOME: Net income increased by $2.3 million, or 26.9%, for the second
quarter of 1998, to $11.0 million from net income of $8.7 million for the second
quarter of 1997. Net income increased by $3.4 million, or 17.2%, for the six
months ended June 30, 1998, to $23.4 million up from net income of $20.0 million
for the comparable period of 1997. Net income includes a provision for income
tax expense at an effective rate of approximately 38.5% and 38.6% for the three
and six months ended June 30, 1998, respectively, and approximately 39.0% and
38.9% for the comparable periods of 1997.
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 has a $10.0 million unsecured revolving credit facility. Advances
under the revolving credit facility bear interest at the prime rate less 1.0%.
The revolving credit facility expires on July 31, 1999. There were no
outstanding borrowings under this facility at June 30, 1998. The Company's
credit facility contains certain financial covenants and restrictions, which
were met at June 30, 1998. This credit facility was renewed on June 30, 1998
for $20.0 million under substantially the same terms and conditions. The
renewed credit facility expires on June 29, 1999.
9
<PAGE>
The Company also has a $20.0 million revolving bank line used to fund an
accounts receivable financing program offered to certain customers in the pay
per call industry. Borrowings under the facility are limited to a borrowing base
of pledged accounts receivable from certain of the Company's qualified customers
which were assigned by the Company to the bank. There was $4.9 million
outstanding under this facility at June 30, 1998. The credit facility expired on
June 30, 1998. This credit facility was renewed on June 30, 1998 for $15.0
million under substantially the same terms and conditions. The renewed credit
facility expires on June 29, 1999.
Net cash flow from operating activities increased $12.1 million, or 279.6%, to
$16.4 million for the six months ended June 30, 1998, compared to a net cash
flow from operating activities of $4.3 million for the six months ended June 30,
1997. The increase was due principally to cash from higher net income, higher
accounts payable balances and higher depreciation and amortization; partially
offset by increases in accounts receivable and other assets resulting from
growth in revenue.
Net cash flow used in investing activities was $27.9 million for the six
months ended June 30, 1998 compared to $22.6 million for the comparable period
of 1997. The increase was primarily due to investments in call center expansion
to support the growth of the Company's businesses.
Net cash flow used in financing activities was $8.6 million for the six months
ended June 30, 1998 compared to $18.9 million for the comparable period of
1997. In the six months ended June 30, 1998 and 1997, net cash flow used in
financing activities was primarily a result of refunds in customer holdbacks and
deposits and payments of debt and capital lease obligations. The decrease in
net cash flow used in financing activities is primarily due to additional
payments on debt and capital lease obligations in January 1997 with the
remaining proceeds from the November 1996 Initial Public Offering.
CAPITAL EXPENDITURES
The Company's operations will continue to require significant capital
expenditures for capacity expansion and upgrades. Capital expenditures were
$28.3 million for the six months ended June 30, 1998. Capital expenditures for
the six months ended June 30, 1998 consisted primarily of equipment purchases.
The Company projects its capital expenditures for the remainder of 1998 to be
approximately $12 million to $17 million, primarily for capacity expansion and
upgrades at existing facilities and the addition of three new call centers.
The Company believes cash flow from operations, together with existing cash
and cash equivalents, financing through capital or operating leases, and
available borrowings under its credit facilities will be adequate to meet its
capital requirements for the foreseeable future. The Company may pledge
additional property or assets of the Company or any of its subsidiaries, which
are not already pledged as collateral securing existing credit facilities. The
Company or any of its affiliates may be required to guarantee any existing or
additional credit facilities.
10
<PAGE>
IMPACT OF THE YEAR 2000 ISSUE
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
computer programs that have date-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
Based on a recent assessment, the Company determined that it will be required
to modify or replace portions of its software so that its computer systems will
properly utilize dates beyond December 31, 1999. The Company presently believes
that modifications to existing software and conversions to new hardware and
software can mitigate the impact of the Year 2000 Issue. However, if such
modifications and conversions are not completed on a timely basis, the Year 2000
Issue could have a material adverse impact on the operations of the Company.
The Company is in the process of initiating formal communications with all of
its significant suppliers and large customers to determine the extent to which
the Company is vulnerable to those third parties' failure to remediate their own
Year 2000 Issue, and the Company's current assessments are based on presently
available information. However, there can be no guarantee that the systems of
other companies on which the Company's systems rely will be timely converted, or
that a failure to convert by another company, or a conversion that is
incompatible with the Company's systems, would not have material adverse effect
on the Company.
The Company will utilize both internal and external resources to reprogram,
or replace, and test the software for Year 2000 modifications. The Company
plans to complete the Year 2000 project in the next 15 months, if not sooner.
The total remaining cost of the Year 2000 project is estimated at $5.6 million
and is being funded through operating cash flows. Of the total projected cost,
approximately $1.9 million is attributable to the purchase of new software and
hardware which will be capitalized. The remaining $3.7 million, which will be
expensed as incurred over the next 15 months, is not expected to have a material
effect on the results of operations.
The costs of the project and the date on which the Company plans to complete
the Year 2000 modifications and conversions are based on management's best
estimates, which were derived utilizing numerous assumptions of future events
including the continued availability of certain resources, third party
modification plans and other factors. However, there can be no guarantee that
these estimates will be achieved and actual results could differ materially from
those plans. Specific factors that might cause such material differences
include, but are not limited to, the availability and cost of personnel trained
in this area, the ability to locate and correct all relevant computer codes,
failure of third parties on which the Company relies and similar uncertainties.
INFLATION
The Company does not believe that inflation has had a material effect on its
results of operations. However, there can be no assurance that the Company's
business will not be affected by inflation in the future.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
11
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, the Company is subject to lawsuits and claims which arise
out of its operations in the normal course of its business. The Company and
certain of its subsidiaries are defendants in various litigation matters in the
ordinary course of business, some of which involve claims for damages that are
substantial in amount. The Company believes, except for the items discussed
below and in its Form 10-K for the year ended December 31, 1997, for which the
Company is currently unable to predict the outcome, the disposition of claims
currently pending will not have a material adverse effect on the Company's
financial position or results of operations.
On May 26, 1998, a Fourth Amended Complaint in the case of Chris Bone, et
al., individually and as class representatives, vs. Horry Telephone Cooperative,
Inc.; AT&T Corp.; AT&T Communications, Inc.; AT&T Communications of Southern
States, Inc; and West Telemarketing Outbound Corporation (Civil Action No. 4:96-
3527-22) was filed in United States District Court for the District of South
Carolina. The plaintiffs assert numerous causes of action under the Federal
Communications Act, the 1986 Telecommunications Act, and the Federal
Telemarketing Sales Rule. The complaint also seeks to reserve various state
claims which pertain to intrastate long distance calls which were asserted in
the Third Amended Complaint. West Telemarketing Outbound was joined as a party
with the Fourth Amended Complaint only. The plaintiffs allege that the class
members suffered damage as a result of AT&T's marketing of long distance calling
plans which were not available in their area due to tariff restrictions and as a
result of AT&T's alleged failure to switch them to certain long distance calling
plans that were available. The plaintiffs seek monetary damages, punitive
damages, attorney's fees, cost and injunctive relief. The defendants have made
a joint motion to dismiss the Fourth Amended Complaint based upon the filed
tariff doctrine. The plaintiffs have made motion to refer issues to the Federal
Communication Commission under the doctrine of primary jurisdiction.
On July 28, 1997, Schurman, Bowers, et al, individually and on behalf of a
class of all other persons similarly situated v. Horry Telephone Cooperative,
Inc.; AT&T Corp.; AT&T Communications, Inc.; AT&T Communications of the Southern
States, Inc.; and West Telemarketing Outbound Corporation (Civil Action No.
4:97-2635-12) was filed in the Court of Common Pleas in Horry, South Carolina
and then removed by the defendants to the United States District Court for the
District of South Carolina. Plaintiffs allege, among other things, claims of
negligent misrepresentation, fraud, breach of contract and statutory violations
in connection with offers of rate programs and long distance services to the
plaintiffs. Plaintiffs seek monetary damages, punitive damages, attorney's
fees, costs and injunctive relief. At a hearing held on February 23, 1998, the
federal judge ruled that all but two of the plaintiff's federal law causes of
action were barred by the filed tariff doctrine. The court noted that the two
remaining causes of action appeared to state claims under the Federal
Communications Act, but that it was unclear whether they did so. Accordingly,
the court gave the plaintiffs 60 days to replead those causes of action with
specificity. By agreement of counsel, the date for filing the amended petition
was continued until May 22, 1998. No amended petition has yet been filed. The
court stayed all discovery and all action on the state law claims while the
federal claims are pending. The two remaining federal claims, as currently
plead, state claims only against AT&T Corp., AT&T Communications, Inc. and AT&T
Communications of the Southern States, Inc. The Company will still be involved
in the state law claims, which are stayed at this time.
12
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
The annual meeting of the stockholders of the Company was held on May 13,
1998 (the "Annual Meeting"). The matters submitted to the stockholders for a
vote included (a) the election of two directors with terms expiring at the 2001
annual meeting of stockholders and (b) the ratification and approval of Deloitte
& Touche LLP as the Company's independent auditors. The following table sets
forth the results of the voting on these matters:
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF
NUMBER OF VOTES AGAINST ABSTENTIONS AND
MATTER VOTES FOR OR WITHHELD BROKER NON-VOTES
------ --------- ------------- ----------------
<S> <C> <C> <C>
Election of Directors
Mary E. West ................................ 60,974,857 14,053 0
Troy L. Eaden ............................... 60,975,586 13,324 0
Approval of Deloitte & Touche LLP as
Independent Auditors ................................ 60,983,090 5,235 585
</TABLE>
Members of the Board of Directors whose term of office as a director
continued after the Annual Meeting other than those elected are Gary L. West,
Thomas B. Barker, Greg T. Sloma, and William E. Fisher.
ITEM 5. OTHER INFORMATION
On July 16, 1998, the majority owners, Gary and Mary West ("Wests"), who
along with the Company's Chief Executive Officer, Troy Eaden ("Eaden") proposed
to acquire all the Common Stock not owned by the Wests or Eaden for a cash
purchase price of $13.50 per share. The Wests collectively beneficially own
approximately 71.8% of the Company's outstanding Common Stock, and Eaden
beneficially owns approximately 13.4% of the Company's outstanding Common Stock.
In the event that the Wests and Eaden acquire less than 100% of the Company's
Common Stock pursuant to a tender offer, the Wests and Eaden intend to acquire
the remainder of the Company's Common Stock through a merger transaction.
The proposal is subject to a number of conditions, including the approval of
the Board of Directors and stockholders of the Company and other conditions
customary in this type of transaction, including without limitation, the receipt
of all necessary consents and government approvals.
The Wests and Eaden anticipate that, upon consummation of the acquisition,
the new entity will seek to cause the Common Stock to be delisted from trading
on the Nasdaq National Market and to cause the deregistration of the Common
Stock with the Securities and Exchange Commission.
A special committee of independent directors has retained independent
financial and legal advisors to assist the committee in its consideration of a
proposal the committee had received on July 16 from the Wests and Eaden, to
acquire the approximately 15% equity interest in the Company they did not
already own.
The committee, which consists of the two directors who are not the founders
or officers of the Company, has retained BT Wolfensohn as its financial advisers
and Debevoise & Plimpton as its counsel. BT Wolfensohn is a division of BT Alex
Brown Inc.
13
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.01 Financial Data Schedule.
99.01 Press Release dated July 20, 1998
99.02 Press Release dated July 16, 1998
(b) Reports on Form 8-K
None.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 12, 1998
WEST TELESERVICES CORPORATION
By: /s/ Troy L. Eaden
------------------
Troy L. Eaden
Chief Executive Officer
By: /s/ Michael A. Micek
---------------------
Michael A. Micek
Chief Financial Officer,
Executive Vice President-Finance and
Treasurer
15
<PAGE>
INDEX TO EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
------- ----------- ----------
<S> <C> <C>
27.01 Financial Data Schedule
99.01 Press Release Dated July 20, 1998
99.02 Press Release Dated July 16, 1998
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE SECOND
QUARTER 1998 FORM 10-Q OF WEST TELESERVICES CORPORATION, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO THE FINANCIAL STATEMENTS CONTAINED THEREIN.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 19,663
<SECURITIES> 0
<RECEIVABLES> 96,687
<ALLOWANCES> 555
<INVENTORY> 0
<CURRENT-ASSETS> 152,803
<PP&E> 195,723
<DEPRECIATION> 68,970
<TOTAL-ASSETS> 327,552
<CURRENT-LIABILITIES> 90,000
<BONDS> 0
0
0
<COMMON> 633
<OTHER-SE> 219,012
<TOTAL-LIABILITY-AND-EQUITY> 327,552
<SALES> 118,004
<TOTAL-REVENUES> 118,004
<CGS> 64,250
<TOTAL-COSTS> 100,434
<OTHER-EXPENSES> 184
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 356
<INCOME-PRETAX> 17,916
<INCOME-TAX> 6,900
<INCOME-CONTINUING> 11,016
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,016
<EPS-PRIMARY> 0.17
<EPS-DILUTED> 0.17
</TABLE>
<PAGE>
EXHIBIT 99.01
MONDAY JULY 20, 12:21 PM EASTERN TIME
WEST TELESERVICES COMMITTEE TO STUDY ACQUISITION PROPOSAL
WEST TELESERVICES CORP. INDEPENDENT COMMITTEE TO CONSIDER ACQUISITION PROPOSAL
July 17, 1998, West TeleServices Corp. said a special committee of independent
directors has retained independent financial and legal advisors to assist the
committee in its consideration of a proposal the committee had received on July
16 from WTSC's founders, to acquire the approximately 15% equity interest in the
company they did not already own.
WTSC said the committee, which consists of the two directors who are not the
founders or officers of the company, has retained BT Wolfensohn as its financial
advisers and Debevoise & Plimpton as its counsel. BT Wolfensohn is a division of
BT Alex Brown Inc.
As reported, Gary L. West, Mary E. West, and Troy L. Eaden have proposed
acquiring all WTSC's common shares they do not already own at $13.50 per share.
<PAGE>
EXHIBIT 99.02
THURSDAY JULY 16, 8:58 PM EASTERN TIME
COMPANY PRESS RELEASE
SOURCE: WEST TELESERVICES CORPORATION
MAJOR SHAREHOLDERS PROPOSE TO ACQUIRE REMAINING SHARES OF WEST TELESERVICES
CORPORATION
OMAHA, Neb., July 16 /PRNewswire/ -- West TeleServices Corporation announced
today that Gary L. West, Mary E. West, and Troy L. Eaden, Chairman of the Board
of Directors of the Company, Vice Chairman of the Board of Directors of the
Company and Chief Executive Officer and Director of the Company, respectively,
proposed to acquire all the shares of the Company's Common Stock not owned by
Mr. West, Ms. West or Mr. Eaden for a cash purchase price of $13.50 per share.
The proposed acquisition price represents a 11.34% premium over the closing
market price on June 30, 1998 (the date before Mr. West, Ms. West and Mr. Eaden
informed the Board of their intention) of $12.125.
Mr. West and Ms. West collectively beneficially own approximately 71.8% of the
Company's outstanding Common Stock, and Mr. Eaden beneficially owns
approximately 13.4% of the Company's outstanding Common Stock.
On July 1, 1998, the Company's Board appointed a special committee to determine
the advisability and fairness of the proposal to the Company's other
stockholders. The members of the special committee are William E. Fisher and
Greg T. Sloma.
The proposal is subject to a number of conditions, including the approval of the
Board of Directors and stockholders of the Company and other conditions
customary in this type of transaction.
