UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF | |
| THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2003
OR
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF | |
| THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 000-21771
West Corporation
| DELAWARE | 47-0777362 | |
| (State or other jurisdiction of incorporation or | (IRS Employer Identification No.) | |
| organization) | ||
| 11808 Miracle Hills Drive, Omaha, Nebraska | 68154 | |
| (Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code: (402) 963-1200
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 þ No o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes þ No o
At November 3, 2003, 67,198,611 shares of Common Stock, par value $.01 per share, of the registrant (“Common Stock”) were outstanding.
INDEX
| Page No. | ||||||
Independent Accountants’ Report |
3 | |||||
PART I. FINANCIAL INFORMATION |
||||||
Item 1. Financial Statements |
||||||
Consolidated Statements of Operations -
Three and Nine Months Ended September 30, 2003 and 2002 |
4 | |||||
Consolidated Balance Sheets - September 30, 2003 and December 31, 2002 |
5 | |||||
Consolidated Statements of Cash Flows - Nine Months Ended September 30,
2003 and 2002 |
6 | |||||
Notes to Consolidated Financial Statements |
7 | |||||
Item 2. Management’s Discussion and Analysis of Financial Condition
and Results of Operations |
19 | |||||
Item 3. Quantitative and Qualitative Disclosures About Market Risk |
25 | |||||
Item 4. Controls and Procedures |
26 | |||||
PART II. OTHER INFORMATION |
||||||
Item 1. Legal Proceedings |
27 | |||||
Item 6. Exhibits and Reports on Form 8-K |
28 | |||||
SIGNATURES |
29 | |||||
CERTIFICATIONS |
30 | |||||
2
INDEPENDENT ACCOUNTANTS’ REPORT
Board of Directors and Stockholders
West Corporation
Omaha, Nebraska
We have reviewed the accompanying consolidated balance sheet of West Corporation and subsidiaries (the “Company”) as of September 30, 2003, and the related consolidated statements of operations for the three-month and nine-month periods ended September 30, 2003 and 2002 and of cash flows for the nine-month periods ended September 30, 2003 and 2002. These interim financial statements are the responsibility of the Company’s management.
We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States of America, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should be made to such consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.
We have previously audited, in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet of West Corporation and subsidiaries as of December 31, 2002, and the related consolidated statements of operations, stockholders’ equity, and cash flows for the year then ended (not presented herein); and in our report dated February 4, 2003, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2002 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Omaha, Nebraska
October 22, 2003
3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
WEST CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
| Three Months Ended | Nine Months Ended | |||||||||||||||||
| September 30, | September 30, | |||||||||||||||||
| 2003 | 2002 | 2003 | 2002 | |||||||||||||||
REVENUE |
$ | 263,551 | $ | 199,354 | $ | 717,296 | $ | 604,978 | ||||||||||
COST OF SERVICES |
112,804 | 98,103 | 322,290 | 293,210 | ||||||||||||||
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES |
110,309 | 80,320 | 289,171 | 224,851 | ||||||||||||||
OPERATING INCOME |
40,438 | 20,931 | 105,835 | 86,917 | ||||||||||||||
OTHER INCOME (EXPENSE): |
||||||||||||||||||
Interest income |
25 | 478 | 652 | 2,148 | ||||||||||||||
Interest expense |
(1,972 | ) | (811 | ) | (3,645 | ) | (2,108 | ) | ||||||||||
Other, net |
538 | 739 | 1,378 | 1,508 | ||||||||||||||
Other income (expense) |
(1,409 | ) | 406 | (1,615 | ) | 1,548 | ||||||||||||
INCOME BEFORE INCOME TAX EXPENSE AND MINORITY INTEREST |
39,029 | 21,337 | 104,220 | 88,465 | ||||||||||||||
INCOME TAX EXPENSE: |
||||||||||||||||||
Current income tax expense |
14,523 | 4,257 | 40,561 | 32,261 | ||||||||||||||
Deferred income tax expense (benefit) |
138 | 3,425 | (1,831 | ) | (483 | ) | ||||||||||||
Income tax expense |
14,661 | 7,682 | 38,730 | 31,778 | ||||||||||||||
INCOME BEFORE MINORITY INTEREST |
24,368 | 13,655 | 65,490 | 56,687 | ||||||||||||||
MINORITY INTEREST IN NET INCOME OF A CONSOLIDATED SUBSIDIARY |
— | 48 | 165 | 203 | ||||||||||||||
NET INCOME |
$ | 24,368 | $ | 13,607 | $ | 65,325 | $ | 56,484 | ||||||||||
EARNINGS PER COMMON SHARE: |
||||||||||||||||||
Basic |
$ | 0.37 | $ | 0.21 | $ | 0.98 | $ | 0.86 | ||||||||||
Diluted |
$ | 0.35 | $ | 0.20 | $ | 0.95 | $ | 0.83 | ||||||||||
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING: |
||||||||||||||||||
Basic common shares |
66,617 | 65,725 | 66,411 | 65,685 | ||||||||||||||
Dilutive impact of potential common shares from stock options |
2,409 | 1,836 | 2,110 | 2,628 | ||||||||||||||
Diluted common shares |
69,026 | 67,561 | 68,521 | 68,313 | ||||||||||||||
The accompanying notes are an integral part of these financial statements.
4
WEST CORPORATION
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(Unaudited)
| September 30, | December 31, | |||||||||
| 2003 | 2002 | |||||||||
ASSETS
|
||||||||||
CURRENT ASSETS: |
||||||||||
Cash and cash equivalents |
$ | 40,568 | $ | 137,927 | ||||||
Accounts and notes receivable, net of allowance of $9,423 and $6,139 |
147,485 | 121,868 | ||||||||
Other |
24,611 | 29,790 | ||||||||
Total current assets |
212,664 | 289,585 | ||||||||
PROPERTY AND EQUIPMENT: |
||||||||||
Property and equipment |
510,082 | 427,625 | ||||||||
Accumulated depreciation and amortization |
(267,265 | ) | (213,984 | ) | ||||||
Property and equipment, net |
242,817 | 213,641 | ||||||||
GOODWILL |
418,727 | 114,146 | ||||||||
INTANGIBLE ASSETS, net of accumulated amortization of $11,280 and $4,862 |
85,259 | 35,310 | ||||||||
NOTES RECEIVABLE AND OTHER ASSETS |
22,059 | 18,140 | ||||||||
TOTAL ASSETS |
$ | 981,526 | $ | 670,822 | ||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
||||||||||
CURRENT LIABILITIES: |
||||||||||
Accounts payable |
$ | 20,444 | $ | 16,742 | ||||||
Accrued expenses |
76,507 | 37,088 | ||||||||
Current maturities of long-term obligations |
41,250 | 12,492 | ||||||||
Total current liabilities |
138,201 | 66,322 | ||||||||
LONG TERM OBLIGATIONS, less current maturities |
156,750 | 17,155 | ||||||||
DEFERRED INCOME TAXES |
30,702 | 11,691 | ||||||||
OTHER LONG TERM OBLIGATIONS |
23,950 | 25,131 | ||||||||
MINORITY INTEREST |
— | 931 | ||||||||
COMMITMENTS
AND CONTINGENCIES (Note 11)
|
||||||||||
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, 67,247 shares issued, 67,175 outstanding and
66,228 shares issued and 66,156 outstanding |
673 | 662 | ||||||||
Additional paid-in capital |
222,712 | 204,335 | ||||||||
Retained earnings |
413,694 | 348,369 | ||||||||
Accumulated other comprehensive income |
584 | — | ||||||||
Treasury stock at cost (72 shares) |
(2,697 | ) | (2,697 | ) | ||||||
Unearned restricted stock (188 and 80 shares) |
(3,043 | ) | (1,077 | ) | ||||||
Total stockholders’ equity |
631,923 | 549,592 | ||||||||
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY |
$ | 981,526 | $ | 670,822 | ||||||
The accompanying notes are an integral part of these financial statements.
5
WEST CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
| Nine Months Ended | |||||||||||
| September 30, | |||||||||||
| 2003 | 2002 | ||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
|||||||||||
Net income |
$ | 65,325 | $ | 56,484 | |||||||
Adjustments to reconcile net income to net cash flows from operating
activities: |
|||||||||||
Depreciation |
54,575 | 43,061 | |||||||||
Amortization |
7,725 | 1,828 | |||||||||
Deferred income tax benefit |
(1,831 | ) | (483 | ) | |||||||
Other |
188 | 318 | |||||||||
Changes in operating assets and liabilities before effects from acquisitions: |
|||||||||||
Accounts receivable |
11,316 | 26,754 | |||||||||
Other assets |
(3,830 | ) | (14,853 | ) | |||||||
Accounts payable |
(4,741 | ) | (10,925 | ) | |||||||
Other liabilities and accrued expenses |
39,912 | (6,979 | ) | ||||||||
Customer deposits and holdbacks |
930 | (4,564 | ) | ||||||||
Income tax payable |
(21,733 | ) | — | ||||||||
Net cash flows from operating activities |
147,836 | 90,641 | |||||||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
|||||||||||
Acquisition costs, net of cash received of $13,922 and $5,010 |
(393,286 | ) | (80,278 | ) | |||||||
Purchases of property and equipment |
(34,013 | ) | (33,105 | ) | |||||||
Proceeds from disposal of property and equipment |
183 | 576 | |||||||||
Proceeds from payments of notes receivable |
2,123 | 396 | |||||||||
Net cash flows from investing activities |
(424,993 | ) | (112,411 | ) | |||||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
|||||||||||
Proceeds from issuance of debt - term loan |
200,000 | — | |||||||||
Net proceeds revolving line of credit |
8,000 | — | |||||||||
Payments of long-term obligations |
(39,649 | ) | (9,327 | ) | |||||||
Proceeds from stock option exercises including related tax benefits |
11,308 | 8,816 | |||||||||
Net change in accounts receivable financing and accounts payable financing |
— | (13,693 | ) | ||||||||
Net cash flows from financing activities |
179,659 | (14,204 | ) | ||||||||
EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS |
139 | — | |||||||||
NET CHANGE IN CASH AND CASH EQUIVALENTS |
(97,359 | ) | (35,974 | ) | |||||||
CASH AND CASH EQUIVALENTS, Beginning of period |
137,927 | 151,520 | |||||||||
CASH AND CASH EQUIVALENTS, End of period |
$ | 40,568 | $ | 115,546 | |||||||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: |
|||||||||||
Cash paid during the period for interest |
$ | 2,628 | $ | 1,875 | |||||||
Cash paid during the period for income taxes |
$ | 27,296 | $ | 30,286 | |||||||
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES: |
|||||||||||
Acquisition of property with debt obligation financing |
$ | — | $ | 14,955 | |||||||
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES: |
|||||||||||
Issuance of common stock from employee stock purchase plan |
$ | 624 | $ | — | |||||||
The accompanying notes are an integral part of these financial statements.
6
WEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF CONSOLIDATION AND PRESENTATION
West Corporation (the “Company”) is one of the largest independent providers of outsourced communication services and worldwide conferencing services. The Company enables its clients to outsource a full range of communication services as well as providing audio, video and web conferencing services. The Company provides services to its clients through two segments, communication services and conferencing services. The Company was founded in 1986 and is headquartered in Omaha, Nebraska.
The Company’s communication services segment is composed of agent and automated services. Agent services provide clients with a comprehensive portfolio of agent-based services driven by both customer–initiated and Company-initiated transactions. The Company offers its clients large volume transaction-processing capabilities, including order processing, customer acquisition, customer retention, customer care, and accounts receivable management. Agent services are primarily directed towards consumer applications and has a presence in business-to-business applications. Automated services utilize over 140,000 Interactive Voice Response (“IVR”) ports, which provide large volume automated voice response services to clients. Examples of IVR services include secured automated credit card activation, prepaid calling card services, automated product information requests, answers to frequently asked questions, utility power outage reporting and call routing and call transfer services.
The Company’s conferencing services include a integrated suite of audio, video and web conferencing services. Audio conferencing services include a full spectrum of audio conferencing solutions – from the most basic automated solutions to highly complex, operator-assisted, event driven solutions. Video conferencing services provide basic video conferencing services with the additional ability to visually share documents and presentations. Web conferencing services provide web conferencing and interactive web casting services.
The communication services segment operates a network of state-of-the-art customer contact centers and automated voice and data processing centers throughout the United States and in Jamaica, India and Canada. The conferencing services segment operates facilities in the United States, the United Kingdom, Canada, Singapore, Australia and New Zealand.
The unaudited consolidated financial statements include the accounts of the Company and its wholly-owned and majority-owned subsidiaries and reflect all adjustments (all of which are normal recurring accruals) 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 Annual Report on Form 10-K for the year ended December 31, 2002, as amended. All intercompany balances and transactions have been eliminated. Certain amounts in prior fiscal periods have been reclassified for comparative purposes.
Use of Estimates – The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America, 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 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 – The Company’s communication services segment recognizes revenue for customer-initiated, agent based services, including order processing, customer acquisition, customer retention and customer care in the month that calls are answered by an agent based on the number of calls and/or minutes received and processed on behalf of clients. For agent based services that are initiated by the Company including
7
WEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
order processing, customer acquisition, customer retention and customer care, revenue is recognized on an hourly basis or on a success rate basis in the month that the Company places calls to consumers on behalf of clients. Revenue for accounts receivable management services is recognized in the month collection payments are received based upon a percentage of cash collected or other agreed upon contractual parameters. Automated services revenue is recognized in the month that the calls are received or sent by automated voice response units and is billed based on call duration.
The Company’s conferencing services segment recognizes revenue when services are provided and generally consists of per-minute charges. Revenues are reported net of any volume or special discounts.
Stock-based compensation – The Company accounts for its stock-based compensation plans 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 for the nine months ended September 30, 2003 and 2002.
For purposes of pro forma disclosures, the estimated fair value of the options is amortized over the options’ vesting period. Had the Company’s stock option and stock purchase plan been accounted for under Statement of Financial Accounting Standard (“SFAS”) No. 123, Accounting for Stock-Based Compensation; net income and earnings per share for the three and nine months ended September 30, 2003 and 2002 would have been reduced to the following pro forma amounts:
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||
| 2003 | 2002 | 2003 | 2002 | ||||||||||||||
Net Income: |
|||||||||||||||||
As reported |
$ | 24,368 | $ | 13,607 | $ | 65,325 | $ | 56,484 | |||||||||
Pro forma |
$ | 20,362 | $ | 12,453 | $ | 55,923 | $ | 52,818 | |||||||||
Earnings per common share: |
|||||||||||||||||
Basic as reported |
$ | 0.37 | $ | 0.21 | $ | 0.98 | $ | 0.86 | |||||||||
Diluted as reported |
$ | 0.35 | $ | 0.20 | $ | 0.95 | $ | 0.83 | |||||||||
Pro forma basic |
$ | 0.31 | $ | 0.19 | $ | 0.84 | $ | 0.80 | |||||||||
Pro forma diluted |
$ | 0.29 | $ | 0.18 | $ | 0.82 | $ | 0.77 | |||||||||
The weighted average fair value per share of options granted during the three months ended September 30, 2003 and 2002 was $23.53 and $17.40, respectively. The weighted average fair value per share of options granted during the nine months ended September 30, 2003 and 2002 was $18.97 and $20.49, respectively. The fair value for options granted under the above described plans was estimated at the date of grant using the Black Scholes pricing model with the following assumptions: