West Corporation
WEST CORP (Form: 8-K, Received: 11/06/2009 15:43:14)

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 8-K

 

 

CURRENT REPORT

Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

November 6, 2009

(Date of Earliest Event Reported)

 

 

West Corporation

(Exact name of registrant as specified in its charter)

 

 

Delaware

(State or other jurisdiction of incorporation)

 

000-21771   47-0777362
(Commission File Number)   (I.R.S. Employer Identification No.)

11808 Miracle Hills Drive, Omaha, Nebraska 68154

(Address of principal executive offices)

Registrant’s telephone number, including area code: (402) 963-1200

 

 

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General instruction A.2. below):

 

¨ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

 

¨ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

 

¨ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

 

¨ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

 

 

 


Item 8.01 Other Events

Prior to the third quarter of 2009, the reporting structure for the financial results of West Corporation (the “Company”) consisted of three segments:

 

   

Communication Services, including dedicated agent, shared agent, automated and business-to-business services, emergency communication infrastructure systems and services and notification services;

 

   

Conferencing Services, including reservationless, operator-assisted, web and video conferencing services; and

 

   

Receivables Management, including debt purchasing and collections, contingent/third-party collections, government collections, first-party collections, commercial collections, revenue cycle management, solutions to the insurance, financial services, communications and healthcare industries and overpayment identification and claims subrogation to the insurance industry.

During the third quarter of 2009, the Company implemented certain organizational changes and our Chief Executive Officer began making strategic and operational decisions with respect to assessing performance and allocating resources based on a new segment structure. The Company now operates in two business segments (the “Current Segments”):

 

   

Unified Communications, including reservationless, operator-assisted, web and video conferencing services and alerts and notifications services; and

 

   

Communication Services, including automated call processing, agent-based services and emergency communication infrastructure systems.

Consistent with this approach, the receivables management business (formerly reported as a separate segment) is now part of the Communication Services segment, and the newly named Unified Communications segment is composed of the alerts and notifications business (formerly managed under the Communication Services segment) and the conferencing and collaboration business. The revised organizational structure more closely aligns the resources used by the businesses in each segment.

In addition, on January 1, 2009, the Company adopted Accounting Standards Codification Topic 81 (“ASC 810”). ASC 810 requires that minority interests be renamed noncontrolling interests and be presented as a separate component of total equity in the consolidated balance sheet. In addition, the Company must report a consolidated net income (loss) measure that includes the amount attributable to such noncontrolling interests for all periods presented.

ASC 810 is required to be applied prospectively as of the beginning of the fiscal year in which this statement is initially applied, except for the presentation and disclosure requirements, which are required to be applied retrospectively for all periods presented. The Company reflected the results of its adoption of ASC 810 in the Company’s Quarterly Reports on Form 10-Q for the first three quarters of 2009.

The Company is filing this Current Report on Form 8-K to present its results of operations as of December 31, 2008 and 2007 and for the years ended December 31, 2008, 2007 and 2006 based on the Current Segments and including the effects of the adoption of ASC 810.

The following Items of the Company’s Annual Report on Form 10-K for the year ended December 31, 2008 (the “2008 Form 10-K”) filed with the Securities and Exchange Commission (the “SEC”) on


March 3, 2009, have been recasted to reflect the Company’s adoption of the Current Segments and ASC 810 and are included as Exhibits 99.1, 99.2 and 99.3 to this Current Report on Form 8-K and are incorporated herein by reference: Item 6, Selected Financial Data (Exhibit 99.1); Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations (Exhibit 99.2); and Item 8, Financial Statements and Supplementary Data (Exhibit 99.3).

With respect to the financial statements in the 2008 Form 10-K, the adoption of the Current Segments and ASC 810, as reflected in this Form 8-K, affects only the manner in which certain financial information was previously reported and does not change the financial results reported in the 2008 Form 10-K. All other information in the 2008 Form 10-K has not been otherwise updated for events or developments that occurred subsequent to the filing of the 2008 Form 10-K. The information in this Current Report on Form 8-K should be read in conjunction with the 2008 Form 10-K and any filings made by the Company with the SEC since March 3, 2009.

 

Item 9.01 Financial Statements and Exhibits

(d) Exhibits

 

99.1.   Selected Financial Data (presented based on Current Segments)
99.2   Management’s Discussion and Analysis of Financial Condition and Results of Operations (presented based on Current Segments)
99.3   Financial Statements and Supplementary Data (presented based on Current Segments)

 

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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 hereunto duly authorized.

 

  WEST CORPORATION
Dated: November 6, 2009   By:   / S /    T HOMAS B. B ARKER
   

Thomas B. Barker

   

Chief Executive Officer

 

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Exhibit 99.1

 

ITEM 6. SELECTED FINANCIAL DATA

The following table sets forth a summary of our selected consolidated financial data. We derived the selected consolidated financial data as of December 31, 2008 and December 31, 2007 and for the years ended December 31, 2008, December 31, 2007, and December 31, 2006 from our audited consolidated financial statements included elsewhere in this annual report. The selected consolidated financial data as of December 31, 2006, December 31, 2005, and December 31, 2004, and for the years ended December 31, 2005 and December 31, 2004 have been derived from our financial statements for such years, which are not included in this annual report. On January 1, 2009, we adopted Statement of Financial Accounting Standards No. 160 Noncontrolling Interests in Consolidated Financial Statements—An Amendment of ARB No. 51 , which required retrospective application and accordingly all prior periods have been recast to reflect the retrospective adoption.

The selected consolidated financial data set forth below are not necessarily indicative of the results of future operations and should be read in conjunction with the discussion under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the other financial information included elsewhere in this annual report.

 

     Year Ended December 31,  
     2004     2005     2006     2007     2008  

Statement of Operations Data: (amounts in thousands, except per share amounts)

          

Revenue

   $ 1,217,383      $ 1,523,923      $ 1,856,038      $ 2,099,492      $ 2,247,434   

Cost of services

     541,979        687,381        818,522        912,389        1,015,028   

Selling, general and administrative expenses (“SG&A”) (1)

     487,513        569,865        800,301        840,532        881,586   
                                        

Operating income

     187,891        266,677        237,215        346,571        350,820   

Interest expense

     (9,381     (15,358     (94,804     (332,372     (313,019

Other income (expense)

     3,013        2,177        8,144        13,396        (8,621
                                        

Income before income tax expense and noncontrolling interest

     181,523        253,496        150,555        27,595        29,180   

Income tax expense

     65,762        87,736        65,505        6,814        11,731   
                                        

Net income

     115,761        165,760        85,050        20,781        17,449   

Less net income (loss)—noncontrolling interest

     2,590        15,411        16,287        15,399        (2,058
                                        

Net income—West Corporation

   $ 113,171      $ 150,349      $ 68,763      $ 5,382      $ 19,507   
                                        

Earnings (loss) per share:

          

Basic

   $ 1.67      $ 2.18         

Diluted

   $ 1.63      $ 2.11         

Basic L shares

       $ 2.05      $ 11.08      $ 12.78   

Diluted L shares

       $ 1.98      $ 10.68      $ 12.24   

Basic A shares

       $ 0.66      $ (1.20   $ (1.23

Diluted A shares

       $ 0.64      $ (1.20   $ (1.23

 

     Year Ended December 31,  
     2004     2005     2006     2007     2008  

Selected Other Data: (amounts in thousands)

          

Net cash flows from operating activities

   $ 218,560      $ 290,004      $ 215,739      $ 263,897      $ 287,381   

Net cash flows used in investing activities

   $ (260,743   $ (297,154   $ (812,253   $ (454,946   $ (597,539

Net cash flows from financing activities

   $ 47,083      $ 9,507      $ 780,742      $ 118,106      $ 341,971   

 

1


     Year Ended December 31,  
     2004     2005     2006     2007     2008  

Capital expenditures

   $ 59,886      $ 76,855      $ 113,895      $ 103,647      $ 105,381   

Adjusted EBITDA (2)

   $ 291,003      $ 381,623      $ 501,942      $ 584,123      $ 633,551   

Adjusted EBITDA margin (3)

     23.9     25.0     27.0     27.8     28.2

 

     As of December 31,  
     2004    2005    2006     2007     2008  

Balance Sheet Data: (amounts in thousands)

            

Working capital

   $ 124,766    $ 110,047    $ 128,570      $ 187,795      $ 211,410   

Property and equipment, net

   $ 223,110    $ 234,871    $ 294,707      $ 298,645      $ 320,152   

Total assets

   $ 1,271,206    $ 1,498,662    $ 2,535,856      $ 2,846,490      $ 3,314,789   

Total debt

   $ 258,498    $ 260,520    $ 3,287,246      $ 3,596,691      $ 3,946,127   

Class L common stock

   $ —      $ —      $ 903,656      $ 1,029,782      $ 1,158,159   

Stockholders’ equity (deficit)

   $ 801,595    $ 987,177    $ (2,117,255   $ (2,227,198   $ (2,360,747

 

(1) Includes stock based compensation of $483, $538, $28,738, $1,276 and $1,404 for the years ended December 31, 2004, 2005, 2006, 2007 and 2008, respectively.
(2) The term “EBITDA” refers to earnings before interest expense, taxes, depreciation and amortization, and the term “Adjusted EBITDA” refers to earnings before interest expense, share based compensation, taxes, depreciation and amortization, non-recurring litigation settlement costs, impairments and other non-cash reserves, transaction costs and after-acquisition synergies. We present Adjusted EBITDA because our management team uses it as an important supplemental measure in evaluating our operating performance and preparing internal forecasts and budgets and we believe it is frequently used by securities analysts, investors and other interested parties in the evaluation of companies in our industry. We also use Adjusted EBITDA as a liquidity measure in assessing compliance with our senior credit facilities. For a reconciliation of Adjusted EBITDA to cash flows from operating activities and a description of the material covenants contained in our senior credit facilities, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Debt Covenants.” We believe that the presentation of Adjusted EBITDA is useful because it provides important insight into our profitability trends and allows management and investors to analyze operating results with and without the impact of certain non-cash charges, such as depreciation and amortization, share-based compensation and impairments and other non-cash reserves, as well as certain litigation settlement and transaction costs and after-acquisition synergies. Although we use Adjusted EBITDA as a financial measure to assess the performance of our business and a measure of our liquidity, Adjusted EBITDA is not a measure of financial performance or liquidity under generally accepted accounting principles (“GAAP”) and the use of Adjusted EBITDA is limited because it does not include certain material costs, such as depreciation, amortization and interest, necessary to operate our business and includes adjustments for synergies that have not been realized. In addition, as disclosed below, certain adjustments included in our calculation of Adjusted EBITDA are based on management’s estimates and do not reflect actual results. For example, post-acquisition synergies included in Adjusted EBITDA are determined in accordance with our senior credit facilities, which provide for an adjustment to EBITDA, subject to certain specified limitations, for reasonably identifiable and factually supportable cost savings projected by us in good faith to be realized as a result of actions taken following an acquisition. While we use net income as a measure of performance, we also believe that Adjusted EBITDA, when presented along with net income, provides balanced disclosure which, for the reasons set forth above, is useful to investors and management in evaluating our operating performance and profitability. Adjusted EBITDA included in this annual report should be considered in addition to, and not as a substitute for, net income (loss) as calculated in accordance with GAAP as a measure of performance. Adjusted EBITDA, as presented, may not be comparable to similarly titled measures of other companies. Set forth below is a reconciliation of EBITDA and Adjusted EBITDA to net income.

 

2


     For the year ended December 31,
     2004    2005    2006    2007    2008

(amounts in thousands):

              

Net income

   $ 115,761    $ 165,760    $ 85,050    $ 20,781    $ 17,449

Interest expense

     8,165      14,500      94,803      332,372      313,019

Depreciation and amortization

     100,185      110,339      136,979      182,820      183,487

Income tax expense

     65,762      87,736      65,505      6,814      11,731
                                  

EBITDA

     289,873      378,335      382,337      542,787      525,686
                                  

Provision for share-based compensation (a)

     —        538      28,738      1,276      1,404

Acquisition synergies and transaction costs (b)

     —        1,365      89,562      22,006      20,985

Non-cash portfolio impairments (c)

     —        —        —        1,004      76,405

Site closure and other impairments (d)

     —        —        —        1,309      2,644

Non-cash foreign currency (gain) loss (e)

     —        —        —        —        6,427

Non-recurring litigation settlement costs (f)

     —        —        —        15,741      —  

Synthetic lease interest (g)

     1,130      1,385      1,305      —        —  
                                  

Adjusted EBITDA (h)

   $ 291,003    $ 381,623    $ 501,942    $ 584,123    $ 633,551
                                  

 

(a) Represents total share based compensation expense determined at fair value in accordance with SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123R”).
(b) Represents, for each period presented, unrealized synergies for acquisitions, consisting primarily of headcount reductions and telephony-related savings, direct acquisition expenses, transaction costs incurred with the recapitalization and the exclusion of the negative EBITDA in one acquired entity, which was an unrestricted subsidiary under the indentures governing our outstanding notes. Amounts shown are permitted to be added to “EBITDA” for purposes of calculating our compliance with certain covenants under our credit facility and the indentures governing our outstanding notes.
(c) Represents non-cash portfolio receivable allowances.
(d) Represents site closures and other asset impairments.
(e) Represents the unrealized loss on foreign denominated debt and the loss on transactions with affiliates denominated in foreign currencies.
(f) Class action litigation settlement, net of estimated insurance proceeds, and related legal costs.
(g) Represents interest incurred on a synthetic building lease, which was purchased in September 2006.
(h) Adjusted EBITDA does not include pro forma adjustments for acquired entities of $49.1 million in 2008 and $9.1 million in 2007 as is permitted in the debt covenants.
(3) Represents Adjusted EBITDA as a percentage of revenue.

 

3

Exhibit 99.2

 

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Business Overview

We are a leading provider of technology-driven, voice-oriented solutions. We offer our clients a broad range of communications and infrastructure management solutions that help them manage or support critical communications. The scale and processing capacity of our proprietary technology platforms, combined with our world-class expertise and processes in managing telephony and human capital, enable us to provide our clients with premium outsourced communications solutions. Our automated service and conferencing solutions are designed to improve our clients’ cost structure and provide reliable, high-quality services. Our solutions also help deliver mission-critical services, such as public safety and emergency communications. We serve Fortune 1000 companies and other clients in a variety of industries, including telecommunications, banking, retail, financial services, technology and healthcare, and have sales and operations in the United States, Canada, Europe, the Middle East, Asia Pacific and Latin America.

Since our founding in 1986, we have invested significantly to expand our technology platforms and develop our operational processes to meet the complex communication needs of our clients. We have evolved into a predominantly automated processor of voice-oriented transactions and a provider of network infrastructure solutions for the communications needs of our clients. In 2008, we grew revenue by 7.0% over 2007 to $2,247.4 million and generated $633.6 million in adjusted EBITDA, or 28.2% margins, and $19.5 million in net income. See “Item 6. Selected Financial Data.”

Investing in technology and developing specialized expertise in the industries we serve are critical components to our strategy of enhancing our services and delivering operational excellence. In 2008, we managed over 16.5 billion telephony minutes and over 61 million conference calls, facilitated over 240 million 9-1-1 calls, and delivered over 307 million notification calls and 60 million data messages. With approximately 500,000 telephony ports to handle conference calls, alerts and notifications and customer service, we believe our platforms provide scale and flexibility to handle greater transaction volume than our competitors, offer superior service and develop new offerings. These ports include approximately 150,000 Internet Protocol (“IP”) ports, which we believe provide us with the only large-scale proprietary IP-based global conferencing platform deployed and in use today. Our technology-driven platforms allow us to provide a broad range of complementary automated and agent-based service offerings to our diverse client base.

Financial Operations Overview

Revenue: In our Unified Communications segment, our conferencing and collaboration services are generally billed on a per participant minute basis and our alerts and notifications services are generally billed on a per message or per minute basis. Billing rates for these services vary depending on participant geographic location, type of service (such as audio, video or web conferencing) and type of message (such as voice, text, email or fax). We also charge clients for additional features, such as conference call recording or transcription services. Since we entered the conferencing services business, the average rate per minute that we charge has declined while total minutes sold has increased. This is consistent with industry trends which are expected to continue for the foreseeable future.

In our Communication Services segment, our emergency communications solutions are generally billed per month based on the number of billing telephone numbers and cell towers covered under each client contract. We also bill monthly for our premise-based database solution. In addition, we bill for sales, installation and maintenance of our desktop communications technology solutions. Our automated and agent-based customer service solutions are generally billed on a per minute or per hour basis. We are generally paid on a contingent fee basis for our receivables management and overpayment identification and recovery services as well as for certain other agent-based services.

Cost of Services: The principal component of cost of services for our Unified Communications segment is our variable telephone expense. Significant components of our cost of services in this segment also include labor expense, primarily related to commissions for our sales force. Because the services we provide in this segment are largely automated, labor expense is less significant than the labor expense we experience in our Communication Services segment.

The principal component of cost of services for our Communication Services segment is labor expense. Labor expense included in costs of services primarily reflects compensation for the agents providing our agent-based services, but also includes compensation for personnel dedicated to emergency communications database management, manufacturing and development of our premise-based public safety solution as well as collection expenses, such as costs of letters and postage, incurred in connection with our receivables management. We generally pay commissions to sales professionals on both new sales and incremental revenue generated from existing clients. Significant components of our cost of services in this segment also include variable telephone expense.

 

1


Selling, General and Administrative Expenses:

The principal component of our selling, general and administrative expenses (“SG&A”) is salary and benefits for our sales force, client support staff, technology and development personnel, senior management and other personnel involved in business support functions. SG&A also includes certain fixed telephone costs as well as other expenses that support the ongoing operation of our business, such as facilities costs, certain service contract costs, equipment depreciation and maintenance, and amortization of finite-lived intangible assets.

Key Drivers Affecting Our Results of Operations:

Factors Related to Our Indebtedness . In connection with our recapitalization in 2006, we incurred a significant amount of additional indebtedness. Accordingly, our interest expense has increased significantly over the period since the recapitalization. recent economic conditions have generally resulted in a tightening of credit availability, the maturity extension helps improve our liquidity profile, particularly when combined with the anticipated reduction of our outstanding indebtedness using a portion of the proceeds of this offering, which will also significantly reduce our interest expense.

Evolution to Automated Technologies. As we have continued our evolution into a diversified and automated technology-driven service provider, our revenue from automated services businesses has grown from 37% of total revenue in 2005 to 58% in 2008 and our operating income from automated services businesses has grown from 53% of total operating income to 91% over the same period. This shift in business mix towards higher growth and higher margin automated processing businesses has driven our adjusted EBITDA margin from 25% in 2005 to 28% in 2008.

Acquisition Activities . Identifying and successfully integrating acquisitions of value-added service providers has been a key component of our growth strategy. We will continue to seek opportunities to expand our capabilities across industries and service offerings. We expect this will occur through a combination of organic growth, as well as strategic partnerships, alliances and acquisitions to expand into new services offerings as well as into new industries. Since 2005, we have invested approximately $1.6 billion in strategic acquisitions. We believe there are acquisition candidates that will enable us to expand our capabilities and markets and intend to continue to evaluate acquisitions in a disciplined manner and pursue those that provide attractive opportunities to enhance our growth and profitability.

Factors Affecting Accounts Receivable Management . We have historically purchased portfolios of charged-off accounts receivables as a component of our receivables management services business. In 2008, we recorded reductions in revenue of $76.4 million as an allowance for impairment of purchased accounts receivables. These impairments were due to reduced liquidation rates and reduced future collection estimates on existing portfolios. As a result of the difficulty in identifying new portfolio purchases on attractive terms and the recent deterioration of the U.S. economy, we have significantly reduced our portfolio purchases since the end of 2007.

Overview of 2008 Results

The following overview highlights the areas we believe are important in understanding our results of operations for the year ended December 31, 2008. This summary is not intended as a substitute for the detail provided elsewhere in this annual report, our consolidated financial statements or our condensed consolidated financial statements and notes thereto included elsewhere in this annual report.

 

   

On January 15, 2008 the Universal Service Administrative Company’s (“USAC”) “Administrator’s Decision on Contributor Issue” concluded that InterCall’s audio bridging services are telecommunication services and, consequently, InterCall is required to report its revenues to USAC and pay a universal service charge on end user telecommunications revenue. On June 30, 2008, the FCC ordered that stand-alone providers of audio bridging services have a direct USF contribution obligation. The FCC ordered that conferencing providers begin to submit the appropriate forms to USAC beginning August 1, 2008. The order specifically stated that it would not apply retroactively. We filed our initial report of revenue with USAC on August 1, 2008.

 

   

On April 1, 2008 we completed the acquisition of all the outstanding shares of HBF Communications Inc. (“HBF”), an Austin, Texas based company that provides emergency communication solutions to telecommunication service providers and public safety organizations. The purchase price including transactions costs, net of cash received of $0.2 million, was approximately $19.0 million and was funded by cash on hand.

 

2


   

On May 22, 2008, we closed the acquisition of Genesys SA (“Genesys”), a global conferencing services provider. At June 30, 2008, our ownership in Genesys was approximately 96.6%. In the third quarter of 2008, we acquired the remaining minority issued and outstanding shares and stock options of Genesys. Total acquisition costs, including transaction expenses, are expected to be approximately $321.3 million. We funded the acquisition with proceeds from an incremental term loan under our existing credit facility for $134.0 million ($126.2 million, net of fees), a $75.0 million multicurrency revolving credit facility ($72.6 million, net of fees) entered into by InterCall Conferencing Services Limited, a foreign subsidiary of InterCall, a draw of $45.0 million under our existing revolving credit facility and cash on hand.

 

   

In May 2008, West and InterCall, Inc., one of our subsidiaries, entered into Amendment No. 3 (the “Third Amendment”) to our senior secured credit agreement. The terms of the Third Amendment include an expansion of the term loan credit facility by $134.0 million in incremental term loans.

 

   

In May 2008, InterCall Conferencing Services Limited, a foreign subsidiary of InterCall, entered into a $75.0 million multicurrency revolving credit facility to partially finance the acquisition of Genesys to pay related fees and expenses and for general corporate purposes.

 

   

On May 21, 2008, we entered into a series of agreements with TOGM, LLC (“TOGM”) pursuant to which TOGM agreed to finance up to 80% of the purchase price of selected receivables portfolios.

 

   

On November 21, 2008, we closed the acquisition of IPC Information Systems Holdings, Inc., the holding company for IPC Systems, Inc.’s command systems segment, including Positron Public Safety Systems, Inc. (“Positron”). The purchase price including transaction costs, net of cash received of $2.0 million, was approximately $165.3 million in cash. We funded the acquisition with cash on hand.

 

   

During 2008, the Receivables Management segment recorded impairment charges totaling $76.4 million to establish a valuation allowance against the carrying value of portfolio receivables as a result of reduced liquidation rates on existing portfolios associated with weaker economic conditions.

 

   

Revenues increased $147.9 million, or 7.0%, in 2008, as compared to the prior year. This increase is after the $76.4 million valuation allowance which was recorded as a revenue reduction. $190.3 million of this increase was derived from acquisitions completed in 2007 and 2008 and $34.0 million was attributable to organic growth.

 

   

Operating income increased $4.2 million, or 1.2%, in 2008 compared to the prior year. Operating income was significantly affected by the impairment charge of $76.4 million recorded in the Receivables Management segment.

 

   

Our Adjusted EBITDA increased to $633.6 million in 2008, compared to $584.1 million in 2007- an increase of 8.5%.

In this report, in the disclosure with respect to the results of operations, Adjusted EBITDA is presented as a measure of performance. Under our credit facilities, however, Adjusted EBITDA is used as a measure of liquidity. For further information regarding the computation of Adjusted EBITDA in accordance with the terms of our credit facilities, see “—Liquidity and Capital Resources—Debt Covenants” below.

Outlook

On February 3, 2009, we announced our 2009 financial outlook. In that announcement, we stated that our revenue expectation is $2,400 million to $2,500 million, expected Adjusted EBITDA is $625 million to $675 million, expected cash flow from operations is $230 million to $275 million and expected capital expenditures are $115 million to $130 million.

The following table sets forth our Consolidated Statement of Operations Data as a percentage of revenue for the periods indicated:

 

     Year ended December 31,  
     2008     2007     2006  

Revenue

   100.0   100.0   100.0

Cost of services

   45.2      43.5      44.1   

Selling, general and administrative expenses (“SG&A”):

      

SG&A before recapitalization and share based compensation expense

   39.0      39.4      37.4   

Recapitalization expense

   0.2      0.6      4.2   

Share based compensation

   -        -        1.5   
                  

Total SG&A

   39.2      40.0      43.1   
                  

Operating income

   15.6      16.5      12.8   

Other expense

   14.3      15.2      4.7   
                  

Income before income tax expense and minority interest

   1.3      1.3      8.1   

Income tax expense

   0.5      0.3      3.5   

Noncontrolling interest

   (0.1   0.7      0.9   
                  

Net Income

   0.9   0.3   3.7
                  

 

3


Years Ended December 31, 2008 and 2007

Revenue: Total revenue in 2008 increased $147.9 million, or 7.0%, to $2,247.4 million from $2,099.5 million in 2007. This increase included $190.3 million from the acquisitions of WNG, TeleVox, Omnium, HBF, Genesys and Positron, offset by the $76.4 million impairment to establish a valuation allowance against the carrying value of portfolio receivables. These acquisitions closed on February 1, 2007, March 1, 2007, May 4, 2007, April 1, 2008, May 22, 2008 and November 21, 2008, respectively. In accordance with paragraph 48 of SFAS No. 141 “ Business Combinations ,” an accounting date of May 1, 2007 was used for the Omnium acquisition.

During 2008 and 2007, revenue from our 100 largest clients included $23.0 million and $13.6 million, respectively, of revenue derived from new clients. During the years ended December 31, 2008 and 2007, our largest 100 clients represented approximately 56% and 57% of revenue, respectively. The aggregate revenue provided by our largest client, AT&T, as a percentage of our total revenue in 2008 and 2007 was approximately 13% and 14%, respectively. No other client accounted for more than 10% of our total revenue in 2008 or 2007.

Revenue by business segment:

 

     For the year ended December 31,              
     2008     % of Total
Revenue
    2007     % of Total
Revenue
    Change     % Change  

Revenue in thousands:

            

Unified Communications

   $ 995,161      44.3   $ 764,098      36.4   $ 231,063      30.2

Communication Services

     1,258,182      56.0     1,341,692      63.9     (83,510   -6.2

Intersegment eliminations

     (5,909   -0.3     (6,298   -0.3     389      -6.2
                                          

Total

   $ 2,247,434      100.0   $ 2,099,492      100.0   $ 147,942      7.0
                                          

Unified Communications revenue in 2008 increased $231.1 million, or 30.2%, to $995.2 million from $764.1 million in 2007. The increase in revenue included $150.6 million from the acquisitions of WNG, TeleVox and Genesys. The remaining $80.5 million increase was attributable to organic growth. Since we entered the conferencing services business, the average rate per minute that we charge has declined while total minutes sold has increased. This is consistent with the industry trend which is expected to continue for the foreseeable future.

Communication Services revenue in 2008 decreased $83.5 million, or 6.2%, to $1,258.2 million from $1,341.7 million in 2007. The decrease is primarily attributable to the $76.4 million impairment to establish a valuation allowance against the carrying value of portfolio receivables. The valuation allowance was calculated in accordance with SOP 03-3, which requires that a valuation allowance be taken for decreases in expected cash flows or a change in timing of cash flows which would otherwise require a reduction in the stated yield on a portfolio pool. During 2007, we recorded a similar $2.5 million impairment charge. Partially offsetting the decrease

 

4


in revenue was an increase in revenue from the acquisitions of Omnium, HBF and Positron, which collectively accounted for $39.7 million of revenue. During 2008, our ability to purchase charged-off receivable portfolios on acceptable terms and in sufficient amounts was significantly reduced because of the economic downturn. Purchases of portfolio receivables were $45.4 million during 2008, which was $82.0 million less than during 2007. As a result of this lower purchase activity, our ability to collect and recognize revenue has been adversely affected.

Cost of Services: Cost of services in 2008 increased $102.6 million, or 11.2%, to $1,015.0 million from $912.4 million in 2007. The increase in cost of services included $60.6 million in costs associated with services offered resulting from the acquisitions of WNG, TeleVox, Omnium, HBF, Genesys and Positron. As a percentage of revenue, cost of services increased to 45.2% for 2008, compared to 43.5% in 2007.

 

5


Cost of Services by business segment:

 

     For the year ended December 31,             
     2008     % of
Revenue
    2007     % of
Revenue
    Change    % Change  

Cost of services in thousands:

             

Unified Communications

   $ 351,359      35.3   $ 280,154      36.7   $ 71,205    25.4

Communication Services

     665,571      52.9     637,258      47.5     28,313    4.4

Intersegment eliminations

     (1,902   NM        (5,023   NM        3,121    -62.1
                                         

Total

   $ 1,015,028      45.2   $ 912,389      43.5   $ 102,639    11.2
                                         

 

NM—Not Meaningful

Unified Communications cost of services in 2008 increased $71.2 million, or 25.4%, to $351.4 million from $280.2 million in 2007. The increase in cost of services included $40.6 million in costs associated with services offered resulting from the acquisitions of WNG, TeleVox and Genesys. The remaining increase is primarily driven by increased revenue volume. As a percentage of this segment’s revenue, Unified Communications cost of services decreased to 35.3% in 2008 compared to 36.7% in 2007.

Communication Services cost of services in 2008 increased $28.3 million, or 4.4%, to $665.6 million from $637.3 million in 2007. The increase in cost of services reflected $20.0 million in costs from the acquisitions of Omnium, HBF and Positron. As a percentage of this segment’s revenue, Communication Services cost of services increased to 52.9% in 2008, compared to 47.5% in 2007. The increase in cost of services as a percentage of revenue for 2008 was driven by the $76.4 million portfolio receivable impairment charge recorded as a reduction of revenue. Also, purchases of new receivable portfolios were down significantly from 2007 resulting in a greater proportion of 2008 collection activity from older receivable portfolios which have a higher cost of collection. Rising labor and benefit costs also contributed to the increase in our cost of sales percentage in 2008.

Selling, General and Administrative Expenses: SG&A expenses in 2008 increased $41.1 million, or 4.9%, to $881.6 million from $840.5 million for 2007. The increase included $102.1 million resulting from the acquisitions of WNG, TeleVox, Omnium, HBF, Genesys and Positron. In 2008, in accordance with EITF 97-14 (Accounting for Deferred Compensation Arrangements Where Amounts Earned Are Held in a Rabbi Trust and Invested) (“EITF 97-14”), we recorded a $4.9 million reduction in SG&A with the corresponding increase to other income and expense. EITF 97-14 requires that the deferred compensation obligation be classified as a liability and adjusted with the corresponding charge (or credit) to compensation cost, to reflect changes in the fair value of the amount owed to employees.

During the fourth quarter of 2007, management determined that a final settlement to resolve the Sanford and Ritt class actions was probable. See note 15 of the notes to our consolidated financial statements included elsewhere in this annual report for information regarding these actions. As a result of the settlement negotiations, the Communication Services segment recorded a $20.0 million expense accrual and a $5.0 million receivable for expected insurance proceeds. At December 31, 2008 this expense accrual was $19.3 million. The insurance proceeds were received during 2008. As a percentage of revenue, SG&A expenses decreased to 39.2% in 2008, compared to 40.0% in 2007.

Selling, general and administrative expenses by business segment:

 

     For the year ended December 31,              
     2008     % of
Revenue
    2007     % of
Revenue
    Change     % Change  

SG&A in thousands:

            

Unified Communications

   $ 386,950      38.9   $ 305,022      39.9   $ 81,928      26.9

Communication Services

     498,643      39.6     536,785      40.0     (38,142   -7.1

Intersegment eliminations

     (4,007   NM        (1,275   NM        (2,732   NM   
                                          

Total

   $ 881,586      39.2   $ 840,532      40.0   $ 41,054      4.9
                                          

 

NM—Not Meaningful

 

6


Unified Communications SG&A expenses in 2008 increased $81.9 million, or 26.9%, to $387.0 million from $305.0 million in 2007. SG&A included $82.3 million from the acquisitions of WNG, TeleVox and Genesys, $18.5 million of which was for the amortization of finite-lived intangible assets. As a percentage of this segment’s revenue, Unified Communications SG&A expenses in 2008 was 38.9% compared to 39.9% in 2007.

Communication Services SG&A expenses in 2008 decreased $38.1 million, or 7.1%, to $498.6 million from $536.8 million in 2007. This reduction of SG&A was partially due to $19.4 million in lower depreciation and amortization charges. In 2007 we recorded an $8.8 million impairment charge to fully impair the goodwill associated with a majority-owned unrestricted subsidiary in the communication services segment. The acquisitions of Omnium, HBF and Positron increased SG&A expense by $19.8 million. As a percentage of this segment’s revenue, Communication Services SG&A expenses decreased to 39.6% in 2008 compared to 40.0% in 2007.

Operating Income: Operating income in 2008 increased by $4.3 million, or 1.2%, to $350.8 million from $346.6 million in 2007. As a percentage of revenue, operating income in 2008 decreased to 15.6%, compared to 16.5% in 2007.

Operating income by business segment:

 

     For the year ended December 31,              
     2008    % of
Revenue
    2007    % of
Revenue
    Change     % Change  

Operating income in thousands:

              

Unified Communications

   $ 256,853    25.8   $ 178,923    23.4   $ 77,930      43.6

Communication Services

     93,967    7.5     167,648    12.5     (73,681   -43.9
                                        

Total

   $ 350,820    15.6   $ 346,571    16.5   $ 4,249      1.2
                                        

Unified Communications operating income in 2008 increased $77.9 million, or 43.6%, to $256.9 million from $178.9 million in 2007. The increase in operating income included $27.7 million from the acquisitions of WNG, TeleVox and Genesys. As a percentage of this segment’s revenue, Unified Communications operating income increased to 25.8% in 2008 compared to 23.4% in 2007.

Communication Services operating income in 2008 decreased $73.7 million, or 43.9%, to $94.0 million from $167.6 million in 2007. The decrease in operating income was due primarily to the impairment charge of $76.4 million recorded to establish a valuation allowance against the carrying value of portfolio receivables. As a percentage of this segment’s revenue, Communication Services operating income decreased to 7.5% in 2008 compared to 12.5% in 2007.

Other Income (Expense): Other income (expense) includes interest expense from short-term and long-term borrowings under credit facilities and portfolio notes payable, the aggregate gain (loss) on debt transactions denominated in currencies other than the functional currency, sub-lease rental income and interest income from short-term investments. Other expense in 2008 was $321.6 million compared to $319.0 million in 2007. Interest expense in 2008 was $313.0 million compared to $332.4 million in 2007. The change in interest expense was primarily due to lower effective interest rates partially offset by increased outstanding debt in 2008 than we experienced during 2007. Interest expense in 2008 also included $17.7 million for interest rate swaps which were determined to be ineffective and therefore did not qualify for hedge accounting treatment. In 2008, we recorded a $5.8 million loss on the Euro-denominated multi currency revolver as the Euro strengthened against the British Pound Sterling, the functional currency of InterCall’s United Kingdom subsidiary. In 2008, in accordance with EITF 97-14 we recorded a $4.9 million reduction in the value of the Rabbi Trust assets with the corresponding increase to other expense.

Noncontrolling Interest (Income): We had noncontrolling interest income of ($2.1) million in 2008 compared to noncontrolling interest expense of $15.4 million in 2007. The portfolio receivable impairment recorded in 2008 caused a $13.0 million reduction in noncontrolling interest expense.

Net Income—West Corporation: Our net income in 2008 improved $14.1 million, or 262.4%, to $19.5 million compared to $5.4 million in 2007. The increase in net income was due to the factors discussed above for revenue, cost of services, SG&A expense and other income (expense). Net income includes a provision for income tax expense at an effective rate (income tax expense divided by income before income tax and noncontrolling interest) of approximately 40.2% for 2008, compared to an effective tax rate of approximately 24.7% in 2007. The difference between the effective tax rate during 2007 and the statutory tax rate is primarily due to higher noncontrolling interest pretax income as a percentage of total pretax income and the release of valuation allowances related to losses sustained by an unconsolidated equity investment (for tax purposes) which became deductible for tax purposes upon disposal of the majority owned subsidiary.

 

7


Earnings (Loss) per common share: Earnings per common L share—basic for 2008 improved $1.70 to $12.78 from $11.08 compared to 2007. Earnings per common L share—diluted for 2008 improved $1.56 to $12.24 from $10.68 compared to 2007. The improvement in earnings per share was primarily the result of increased net income attributable to L shareholders. Loss per common A share—basic and diluted for 2008 increased ($0.3) to ($1.23) from ($1.20) for 2007. The increase in (loss) per share was primarily the result of a decrease in net income attributable to the Class A shareholders.

Years Ended December 31, 2007 and 2006

Revenue: Total revenue in 2007 increased $243.5 million, or 13.1%, to $2,099.5 million from $1,856.0 million in 2006. $164.2 million of this increase was derived from the acquisitions of Intrado, Raindance, InPulse, WNG, TeleVox and Omnium which closed for accounting purposes April 1, 2006, April 1, 2006, October 1, 2006, February 1, 2007, March 1, 2007 and May 1, 2007, respectively.

During 2007 and 2006, revenue from our 100 largest clients included $13.6 million and $15.0 million, respectively, of revenue derived from new clients.

During the years ended December 31, 2007 and 2006, our largest 100 clients represented approximately 57% and 61% of revenue, respectively. This reduced concentration was due to our strategic acquisitions in 2007 and 2006 and to organic growth. Late in 2006, AT&T, Cingular, SBC and Bell South were merged. The aggregate revenue provided by these clients as a percentage of our total revenue in 2007 and 2006 were approximately 14% and 17%, respectively. No other client accounted for more than 10% of our total 2007 or 2006 revenue.

Revenue by business segment:

 

     For the year ended December 31,              
     2007     % of Total
Revenue
    2006     % of Total
Revenue
    Change     % Change  

Revenue in thousands:

            

Unified Communications

   $ 764,098      36.4   $ 607,506      32.7   $ 156,592      25.8

Communication Services

     1,341,692      63.9     1,254,540      67.6     87,152      6.9

Intersegment eliminations

     (6,298   -0.3     (6,008   -0.3     (290   4.8
                                          

Total

   $ 2,099,492      100.0   $ 1,856,038      100.0   $ 243,454      13.1
                                          

Unified Communications revenue in 2007 increased $156.6 million, or 25.8%, to $764.1 million from $607.5 million in 2006. The increase in revenue included $55.7 million from the acquisition of WNG, TeleVox and Raindance. The remaining $100.9 million increase was attributable to organic growth. Since we entered the conferencing services business, the average rate per minute that we charge has declined while total minutes sold has increased. This is consistent with the industry trend which is expected to continue for the foreseeable future.

Communication Services revenue in 2007 increased $87.2 million, or 6.9%, to $1,341.7 million from $1,254.5 million in 2006. The increase included $108.5 million due to the acquisitions of Intrado, InPulse, and Omnium. Our inbound dedicated agent business declined $43.7 million during 2007 compared to 2006, due to a reduction in services for AT&T and a reduction in non-recurring programs. Business-to-Business Services increased $24.8 million due to increased volume. During the fourth quarter of 2007, we recorded a $2.5 million allowance for receivable portfolio pools that had recently underperformed expectations. No allowance was taken in 2006. Sales of receivables portfolios in 2007 and 2006 resulted in revenue of $10.8 million and $19.9 million, respectively.

Cost of Services: Cost of services in 2007 increased $93.9 million, or 11.5%, to $912.4 million from $818.5 million in 2006. The increase in cost of services included $51.2 million in costs associated with services offered resulting from the acquisitions of Intrado, Raindance, InPulse, WNG, TeleVox and Omnium. As a percentage of revenue, cost of services decreased to 43.5% for 2007, compared to 44.1% in 2006.

 

8


Cost of Services by business segment:

 

     For the year ended December 31,             
     2007     % of
Revenue
    2006     % of
Revenue
    Change    % Change  

Cost of services in thousands:

             

Unified Communications

   $ 280,154      36.7   $ 210,842      34.7   $ 69,312    32.9

Communication Services

     637,258      47.5     612,731      48.8     24,527    4.0

Intersegment eliminations

     (5,023   NM        (5,051   NM        28    -0.6
                                         

Total

   $ 912,389      43.5   $ 818,522      44.1   $ 93,867    11.5
                                         

 

NM—Not Meaningful

Unified Communications cost of services in 2007 increased $69.3 million, or 32.9%, to $280.2 million from $210.8 million in 2006. The increase in cost of services included $14.1 million in costs associated with services offered resulting from the acquisitions of WNG, TeleVox and Raindance. The remaining increase was primarily driven by increased revenue volume. As a percentage of this segment’s revenue, Unified Communications cost of services increased to 36.7% in 2007, compared to 34.7% in 2006. The increase in cost of services as a percentage of revenue is primarily due to downward pricing pressure on the revenue rate per minute, increased foreign sales which have higher costs of sales and increased video equipment sales which has lower margins than other unified communication services.

Communication Services cost of services in 2007 increased $24.5 million, or 4.0%, to $637.3 million from $612.7 million in 2006. The increase in cost of services included $37.1 million in costs associated with services offered resulting from the acquisitions of Intrado, InPulse, and Omnium. As a percentage of this segment’s revenue, Communication Services cost of services decreased to 47.5% in 2007, compared to 48.8% in 2006. The decrease as a percentage of revenue in 2007 was due to the acquisition of Intrado, which historically had a lower percentage of direct costs to revenue than our Communication Services segment results.

Selling, General and Administrative Expenses: SG&A expenses in 2007 increased $40.2 million, or 5.0%, to $840.5 million from $800.3 million for 2006. The increase included SG&A expenses of $106.8 million from the acquisitions of Intrado, Raindance, InPulse, WNG, TeleVox and Omnium. Total share-based compensation expense (“SBC”) recognized during 2007 was $1.3 million compared to $28.7 million in 2006. This reduction in share based compensation was the result of our recapitalization on October 24, 2006. On that date, the vesting of all outstanding equity and stock options awards was accelerated and the awards were exchanged for a cash payment. The stock compensation expense recognized in 2007 results from grants made after the recapitalization. In 2006, we also recognized $78.8 million in expenses associated with our recapitalization. During the fourth quarter of 2007, management determined that a final settlement which will resolve the Sanford and Ritt class actions is probable. See note 15 of the notes to our consolidated financial statements included elsewhere in this annual report for information regarding this litigation. As a result of the settlement negotiations, the Communication Services segment recorded a $15.0 million accrual, net of $5.0 million of expected insurance proceeds. As a percentage of revenue, SG&A expenses decreased to 40.0% in 2007, compared to 43.1% in 2006.

As set forth below for 2006, base selling, general and administrative expense by business segment excludes recapitalization expense and SBC and is a non-GAAP measure. Management believes these measures provide an alternative presentation of results that more accurately reflects our operations without the non-cash effects of the recapitalization expense and SBC items. The following table includes reconciliations for 2006 SG&A expense by business segment excluding the recapitalization expense and SBC to reported SG&A expense.

 

9


Selling, general and administrative expenses by business segment:

 

     For the year ended December 31,  
     2007     % of
Revenue
           Base
SG&A
    Recap.
Expense
   SBC    Reported
2006
    % of
Revenue
    Change     %
Change
 

SG&A in thousands:

                         

Unified Communications

   $ 305,022      39.9        $ 236,378      $ 34,003    $ 6,847    $ 277,228      45.6   $ 27,794      10.0

Communication Services

     536,785      40.0          457,307        44,832      21,891      524,030      41.8     12,755      2.4

Intersegment eliminations

     (1,275   NM             (957     —        —        (957   NM        (318   NM   
                                                                     

Total

   $ 840,532      40.0        $ 692,728      $ 78,835    $ 28,738    $ 800,301      43.1   $ 40,231      5.0
                                                                     

 

NM—Not Meaningful

Unified Communications SG&A expenses in 2007 increased $27.8 million, or 10.0%, to $305.0 million from $277.2 million in 2006. SG&A included $37.5 million from the acquisitions of WNG, TeleVox and Raindance. Total SBC recognized during 2007 was $0.4 million compared to $6.8 million in 2006. We also recognized $34.0 million in expenses associated with our recapitalization in 2006. As a percentage of this segment’s revenue, Unified Communications SG&A expenses decreased to 39.9% in 2007, compared to 45.6% in 2006. SG&A before recapitalization expense and SBC was $236.4 million or 38.9% of this segment’s revenue in 2006.

Communication Services SG&A expenses in 2007 increased $12.8 million, or 2.4%, to $536.8 million from $524.0 million in 2006. The increase included $69.4 million from the acquisitions of Intrado, InPulse, and Omnium. The increase also includes the net $15.0 million litigation accrual mentioned above. Total SBC recognized during 2007 was $0.9 million, compared to $21.9 million in 2006. We also recognized $44.8 million in expenses associated with our recapitalization in 2006. As a percentage of this segment’s revenue, Communication Services SG&A expenses decreased to 40.0% in 2007, compared to 41.8% in 2006. In 2006, SG&A before recapitalization expense and SBC was $457.3 million or 36.5% of this segment’s revenue.

Operating Income: Operating income in 2007 increased by $109.4 million, or 46.1%, to $346.6 million from $237.2 million in 2006. As a percentage of revenue, operating income increased to 16.5% in 2007 compared to 12.8% in 2006 primarily due to the recapitalization and SBC costs incurred in 2006 and the factors discussed above for revenue, cost of services and SG&A expenses.

As set forth below for 2006, base operating income by business segment excludes recapitalization expense and SBC and is a non-GAAP measure. Management believes these measures provide an alternative presentation of results that more accurately reflects our operations without the non-cash effects of the recapitalization expense and significant SBC expense incurred in connection with our recapitalization. The following table includes reconciliations for 2006 operating income by business segment excluding the recapitalization expense and SBC to reported operating income.

Operating income by business segment:

 

     For the year ended December 31,  
     2007   % of
Revenue
           Base
Operating
Income
   Recap
Expense
   SBC    Reported
2006
   % of
Revenue
    Change    %
Change
 

Operating income in thousands

                            

Unified Communications

   $ 178,923   23.4        $ 160,287    $ 34,003    $ 6,847    $ 119,437    19.7   $ 59,486    49.8

Communication Services

     167,648   12.5          184,501      44,832      21,891      117,778    9.4     49,870    42.3
                                                                

Total

   $ 346,571   16.5        $ 344,788    $ 78,835    $ 28,738    $ 237,215    12.8   $ 109,356    46.1
                                                                

 

10


Unified Communications operating income in 2007 increased by $59.5 million, or 49.8%, to $178.9 million from $119.4 million in 2006. The increase in operating income included $4.2 million from the acquisitions of WNG, TeleVox and Raindance. As a percentage of this segment’s revenue, Unified Communications operating income increased to 23.4% in 2007, compared to 19.7% in 2006. Operating income before recapitalization expense and SBC was $160.3 million, or 26.4%, of this segment’s revenue in 2006.

Communication Services operating income in 2007 increased by $49.9 million, or 42.3%, to $167.6 million from $117.8 million in 2006. The increase in operating income was due primarily to recapitalization expenses and SBC in 2006, as previously discussed. This increase in operating income was partially offset by the previously discussed net $15.0 million litigation accrual. As a percentage of this segment’s revenue, Communication Services operating income increased to 12.5% in 2007, compared to 9.4% in 2006. Operating income before recapitalization expense and SBC was $184.5 million, or 14.7%, of this segment’s revenue in 2006.

Other Income (Expense): Other income (expense) includes sub-lease rental income, interest income from short-term investments and interest expense from short-term and long-term borrowings under our credit facilities and portfolio notes payable. Other expense in 2007 was $319.0 million compared to $86.7 million in 2006. The change in other expense in 2007 was primarily due to interest expense on increased outstanding debt incurred in connection with our recapitalization and higher interest rates in 2007 than we experienced in 2006. Interest expense in 2007 was $332.4 million compared to $94.8 million in 2006.

Noncontrolling Interest : Our portfolio receivable lenders own a noncontrolling interest in several portfolio purchasing subsidiaries. The noncontrolling interest in the earnings of these subsidiaries for 2007 was $15.4 million compared to $16.3 million for 2006.

Net Income—West Corporation: Our net income in 2007 decreased $63.4 million, or 92.2%, to $5.4 million from $68.8 million in 2006. The decrease in net income was due to the factors discussed above for revenue, cost of services, SG&A expense and other income (expense). Net income includes a provision for income tax expense at an effective rate of approximately 24.7% for 2007, compared to 43.5% in 2006. The difference between the effective tax rate during 2007 and the statutory tax rate is primarily due to higher noncontrolling interest pretax income as a percentage of total pretax income and the release of valuation allowances related to losses sustained by an unconsolidated equity investment (for tax purposes) which became deductible for tax purposes upon disposal of the majority owned subsidiary. The 2006 effective income tax rate was impacted by approximately $40.0 million of recapitalization transaction costs which we expect to be non-deductible for income tax purposes.

Earnings (loss) per common share: Earnings per common L share—basic for 2007 improved $9.03 to $11.08 from $2.05 compared to 2006. Earnings per common L share—diluted for 2007 improved $8.70 to $10.68 from $1.98 compared to 2006. The improvement in earnings per share was primarily the result of a full year of net income attributable to L shareholders in 2007 compared to the partial period in 2006, subsequent to the recapitalization. Loss per common A share—basic for 2007 increased ($1.86) to ($1.20) from $0.66 for 2006. Loss per common A share—diluted for 2007 increased ($1.84) to ($1.20) from $0.64 for 2006. The increase in (loss) per share, basic and diluted, was primarily the result of a decrease in net income attributable to the Class A shareholders.

Liquidity and Capital Resources

We have historically financed our operations and capital expenditures primarily through cash flows from operations supplemented by borrowings under our bank credit facilities and specialized credit facilities established for the purchase of receivable portfolios.

Our current and anticipated uses of our cash, cash equivalents and marketable securities are to fund operating expenses, acquisitions, capital expenditures, purchase of portfolio receivables, noncontrolling interest distributions, interest payments, tax payments and the repayment of principal on debt.

We believe that our cash flows from operations, together with existing cash and cash equivalents and available borrowings under our bank credit facility, will be adequate to meet our capital requirements for at least the next twelve months.

 

11


Year Ended December 31, 2008 compared to 2007

The following table summarizes our cash flows by category for the periods presented (in thousands):

 

     For the Years Ended
December 31,
             
     2008     2007     Change     %
Change
 

Net cash provided by operating activities

   $ 287,381      $ 263,897      $ 23,484      8.9

Net cash used in investing activities

   $ (597,539   $ (454,946   $ (142,593   -31.3

Net cash flows from financing activities

   $ 341,971      $ 118,106      $ 223,865      189.5

Net cash flow from operating activities in 2008 increased $23.5 million, or 8.9%, to $287.4 million compared to net cash flows from operating activities of $263.9 million in 2007. The increase in net cash flows from operating activities is primarily due to improved operating income excluding the impact of the $76.4 million non-cash impact of the allowance for impairment of purchased accounts receivable. This increase was partially offset by a reduction in accounts payable and accrued expenses.

DSO, a key performance indicator that we utilize to monitor the accounts receivable average collection period and assess overall collection risks, was 54 days at December 31, 2008 after removing the impact of Positron which was acquired on November 21, 2008. Throughout the year, DSO ranged from 52 to 58 days. At December 31, 2007, the DSO were 50 days and ranged from 50 to 52 days during the year. Due to its higher concentration of international clients, Genesys has traditionally had higher DSO than our other subsidiaries.

Net cash used in investing activities in 2008 increased $142.6 million, or 31.3%, to $597.5 million compared to net cash used in investing activities of $454.9 million in 2007. The increase in cash used in investing activities was due to $493.6 million of acquisition costs incurred in 2008 primarily for the acquisitions of HBF, Genesys and Positron compared to $291.8 million of acquisition costs incurred in 2007 primarily for the acquisitions of WNG, TeleVox and Omnium. We invested $105.4 million in capital expenditures during 2008 compared to $103.6 million invested in 2007. Investing activities in 2008 and 2007 included the purchase of receivable portfolios for $45.4 million and $127.4 million, respectively. Investing activities in 2008 also included cash proceeds applied to amortization of receivable portfolios of $46.4 million compared $66.9 million in 2007.

Net cash flow from financing activities in 2008 increased $223.9 million, or 189.5%, to $342.0 million, compared to net cash flow from financing activities of $118.1 million for 2007. During 2008, net proceeds from the term loan add-on of the senior secured credit facility and the multicurrency revolving credit facility were $198.7 million and were used to finance the Genesys acquisition. During 2008, we drew $224.0 million under our senior secured revolving credit facility and repaid $15.8 million on our multi currency revolving credit facility. In November 2008, we used $167.0 million to purchase Positron. During 2007, proceeds from the expansion of our senior secured term loan facility were $300.0 million and were used to finance the WNG, TeleVox and Omnium acquisitions. In 2007, we settled an appraisal rights claim brought by a former shareholder in connection with our recapitalization for $48.75 per share, the same amount received in the recapitalization by all of our other former public shareholders, for a total settlement amount of $170.6 million plus interest at 8.25% for a total of approximately $13.3 million. During 2008, net cash from financing activities was partially offset by payments on portfolio notes payable of $64.9 million, compared to $75.7 million in 2007. Proceeds from issuance of portfolio notes payable in 2008 were $33.1 million, compared to $108.8 million in 2007.

Year Ended December 31, 2007 compared to 2006

On December 31, 2007, the outstanding balance on the indebtedness incurred in connection with the recapitalization and the amendments to the senior secured term loan facility in February and May 2007 to finance the WNG, TeleVox and Omnium acquisitions was $2,376 million. The senior secured term facility is subject to scheduled annual amortization of 1% with quarterly payments and with variable interest at 2.375% over the selected LIBOR. Our senior secured revolving credit facility providing financing of up to $250.0 million had a $0 balance outstanding on December 31, 2007. On December 31, 2007 our $650.0 million aggregate principal amount of 9.5% senior notes due 2014 and $450.0 million aggregate principal amount of 11% senior subordinated notes due 2016 were outstanding. Interest on the notes is payable semiannually in arrears on April 15 and October 15 of each year. Interest payments commenced on April 15, 2007.

 

12


The following table summarizes our cash flows by category for the periods presented (in thousands):

 

     For the Years Ended
December 31,
             
     2007     2006     Change     %
Change
 

Net cash provided by operating activities

   $ 263,897      $ 215,739      $ 48,158      22.3

Net cash used in investing activities

   $ (454,946   $ (812,253   $ 357,307      44.0

Net cash flows from financing activities

   $ 118,106      $ 780,742      $ (662,636   -84.9

Net cash flow from operating activities in 2007 increased $48.2 million, or 22.3%, to $263.9 million compared to net cash flows from operating activities of $215.7 million in 2006. The increase in net cash flows from operating activities is primarily due to improved collections on accounts receivable and increases in amortization and accounts payable. Decreases in share based compensation, deferred tax expense and accrued expenses partially offset the increase in operating cash flows.

DSO was 50 days at December 31, 2007, and ranged from 50 to 52 days during the year. At December 31, 2006, DSO was 51 days and ranged from 49 to 51 days during the year.

Net cash used in investing activities in 2007 decreased $357.3 million, or 44.0%, to $454.9 million compared to net cash used in investing activities of $812.3 million in 2006. The decrease in cash used in investing activities was due to $291.8 million of acquisition costs incurred in 2007 primarily for the acquisitions of WNG, TeleVox and Omnium compared to $643.7 million of acquisition costs incurred in 2006 primarily for the acquisitions of Intrado, Raindance and InPulse. We invested $103.6 million in capital expenditures during 2007 compared to $113.9 million invested in 2006. The decrease in capital expenditures was primarily due to the purchase in 2006 of a building for $30.5 million, which we previously leased under a synthetic lease arrangement. Investing activities in 2007 also included the purchase of receivable portfolios for $127.4 million and cash proceeds applied to amortization of receivable portfolios of $66.9 million compared to $114.6 million and $59.4 million, respectively, in 2006.

Net cash flow from financing activities in 2007 decreased $662.6 million, or 84.9%, to $118.1 million, compared to net cash flow from financing activities of $780.7 million for 2006. During 2007, proceeds from the expansion of our senior secured term loan facility were $300.0 million and were used to finance the WNG, TeleVox and Omnium acquisitions. On September 21, 2007, we settled an appraisal rights claim brought by a former shareholder in connection with our recapitalization for $48.75 per share, the same amount received in the recapitalization by all of our other former public shareholders for a total settlement amount of $170.6 million plus interest at 8.25% for a total of approximately $13.3 million. Also, during 2007, net cash from financing activities was partially offset by payments on portfolio notes payable of $75.7 million compared to $51.1 million in 2006. Proceeds from issuance of portfolio notes payable in 2007 were $108.8 million compared to $97.9 million in 2006. In 2006, the primary sources of financing were $3.2 billion of proceeds from the new debt and bonds, $725.8 million in equity proceeds from the sponsors and proceeds and related tax benefits of $69.3 million from our stock-based employee benefit programs in connection with our recapitalization. $2,910.5 million of the recapitalization transaction proceeds were used to acquire the common stock and stock options in the recapitalization. The proceeds were also used to pay off the $663.3 million balance of our previous revolving credit facility, including accrued interest. Debt acquisition costs incurred in 2006 were $109.6 million.

Senior Secured Term Loan Facility and Senior Secured Revolving Credit Facility:

The $2,534.0 million senior secured term loan facility and $250 million senior secured revolving credit facility bear interest at variable rates. The senior secured term loan facility requires annual principal payments of approximately $25.3 million, paid quarterly, with a balloon payment at the maturity date of October 24, 2013 of approximately $2,365.3 million. The senior secured term loan facility pricing is based on the Company’s corporate debt rating and the grid ranges from 2.125% to 2.75% for LIBOR rate loans (LIBOR plus 2.375% at December 31, 2008), and from 1.125% to 1.75% for base rate loans (Base Rate plus 1.375% at December 31, 2008), except for the $134.0 million term loan expansion, which is priced at LIBOR plus 5.0%, and Base Rate plus 4.0% for base rate loans. The LIBOR rate has a floor at 3.50%. The rate at December 31, 2008 is Base Rate plus 4.0% or 7.25%.

The senior secured revolving credit facility pricing is based on the Company’s total leverage ratio. The grid ranges from 1.75% to 2.50% for LIBOR rate loans (LIBOR plus 2.0% at December 31, 2008) and the margin ranges from 0.75% to 1.50% for base rate loans (Base Rate plus 1.0% at December 31, 2008). The Company is required to pay each non-defaulting lender a commitment fee of 0.50% in respect of any unused commitments under the senior secured revolving credit facility. The commitment fee in respect of unused commitments under the senior secured revolving credit facility is subject to adjustment based upon our total leverage ratio.

 

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In September 2008, Lehman Brothers, Inc. filed for bankruptcy protection. Our revolving credit facility is administered by Lehman Commercial Paper, Inc. (“LCPI”). In October 2008, LCPI also filed for bankruptcy protection. These events have affected the availability of our revolving credit facility as LCPI has not funded $26.0 million of their commitment. We are working to establish a new administrative agent.

In May 2008, West and InterCall entered into Amendment No. 3 (the “Third Amendment”) to our senior secured credit agreement. The terms of the Third Amendment include an expansion of the term loan credit facility by $134.0 million in incremental term loans. The pricing of this debt is Base Rate (as defined in the senior secured term loan facility) or LIBOR (with a floor of 3.5%) plus margin of 4.0% for Base Rate loans and 5.0% for LIBOR loans. The incremental term loan includes call protection for voluntary or mandatory prepayment or scheduled repayment during the first two years following the borrowing date (5.0% premium during the first year and 2.0% premium during the second year). The effective interest rate for this add-on to the term loan facility is approximately 9.5%. After the expansion of the term loan credit facility, the aggregate facility is $2,534.0 million.

The effective annual interest rates, inclusive of debt amortization costs, on the senior secured term loan facility for 2008 and 2007 were 6.56% and 8.03%, respectively. The average daily outstanding balance of the revolving credit facility during 2008 was $63.0 million. The highest balance outstanding on the revolving credit facility during 2008 was $224.0 million. The senior secured revolving credit facility was not used in 2007.

In October 2006, we entered into three three-year interest rate swap agreements (cash flow hedges) to convert variable long-term debt to fixed rate debt. These swaps were for $800.0 million, $700.0 million and $600.0 million for the three years ending October 23, 2007, 2008 and 2009, respectively, at rates from 5.0% to 5.01%. In August 2007, we entered into two two-year interest rate swap agreements (cash flow hedges) to convert variable long-term debt to fixed rate debt and hedged an additional $120.0 million at rates from 4.81% to 4.815%. In August and September 2008, we entered into three three-year interest rate swap agreements (cash flow hedges) to convert variable long-term debt to fixed rate debt. These swaps were for an additional $200.0 million at 3.532%, $150.0 million at 3.441% and $250.0 million at 3.38%. At December 31, 2008 we had $1,320.0 million of the outstanding $2,485.4 million senior secured term loan facility hedged at rates from 3.38% to 5.01%. See Item 7A. Quantitative and Qualitative Disclosures About Market Risk - Interest Rate Risk – Lehman hedges - for a discussion on the impact of Lehman Brothers bankruptcy on two of these interest rate swaps.

In August 2008 we entered into a one-year interest rate basis swap overlay to reduce interest expense to take advantage of the risk premium between the one-month LIBOR and the three-month LIBOR. We placed the basis overlay swaps on our swaps entered into in October 2006 and August 2007. The basis swap overlay leaves the existing interest rate swaps intact and executes a basis swap whereby our three-month LIBOR payments on the basis swap are offset by the existing swap and we receive one-month LIBOR payments ranging from LIBOR plus 10.5 basis points to 12.75 basis points The termination dates and notional amounts match the interest rate swaps noted above.

We may request additional tranches of term loans or increases to the revolving credit facility in an aggregate amount not to exceed $279.6 million, including the aggregate amount of $48.6 million of principal payments previously made in respect of the term loan facility. The availability of such additional tranches of term loans or increases to the revolving credit facility is subject to the absence of any default and pro forma compliance with financial covenants and, among other things, the receipt of commitments by existing or additional financial institutions. We have not pursued increasing this facility due to the current credit market environment.

Multicurrency revolving credit facility

In May 2008, InterCall Conferencing Services Limited, a foreign subsidiary of InterCall (“ICSL”), entered into a $75.0 million multicurrency revolving credit facility to partially finance the acquisition of Genesys, to pay related fees and expenses and for general corporate purposes. The credit facility is secured by substantially all of the assets of ICSL, and is not guaranteed by West or any of its domestic subsidiaries. The credit facility matures on May 16, 2011 with two one-year additional extensions available upon agreement with the lenders. Interest on the facility is variable based on the leverage ratio of the foreign subsidiary and the margin

 

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ranges from 2.0% to 2.75% over the selected optional currency LIBOR (Sterling or Dollar/EURIBOR (Euro)) (subject to an upward adjustment of up to 0.5% in connection with the syndication of the facility). In September 2008 the agreement was amended to increase the margin by 0.375%, as permitted based on market conditions increasing the margin range to 2.375% to 3.125%. The margin at December 31, 2008 was 2.75%. The effective annual interest rate, inclusive of debt amortization costs, on the revolving credit facility from inception through December 31, 2008 was 8.7%. The credit facility also includes a commitment fee of 0.5% on the unused balance and certain financial covenants which include a maximum leverage ratio, a minimum interest coverage ratio and a minimum revenue test. The average daily outstanding balance of the multicurrency revolving credit facility since its inception was $63.7 million. The highest balance outstanding on the multicurrency revolving credit facility since its inception was $76.5 million.

Senior Notes

The senior notes consist of $650.0 million aggregate principal amount of 9.5% senior notes due 2014. Interest is payable semiannually.

At any time prior to October 15, 2010, the Company may redeem all or a part of the senior notes, at a redemption price equal to 100% of the principal amount of senior notes redeemed plus the applicable premium and accrued and unpaid interest and all additional interest then owing pursuant to the applicable registration rights agreement, if any, to the date of redemption, subject to the rights of holders of senior notes on the relevant record date to receive interest due on the relevant interest payment date.

On and after October 15, 2010, the Company may redeem the senior notes in whole or in part, at the redemption prices (expressed as percentages of principal amount of the senior notes to be redeemed) set forth below plus accrued and unpaid interest thereon to the applicable date of redemption, subject to the right of holders of senior notes of record on the relevant record date to receive interest due on the relevant interest payment date, if redeemed during the twelve-month period beginning on October 15 of each of the years indicated below:

 

Year

   Percentage

2010

   104.750

2011

   102.375

2012 and thereafter

   100.000

Until October 15, 2009, the Company may, at its option, on one or more occasions redeem up to 35% of the aggregate principal amount of senior notes issued by it at a redemption price equal to 109.50% of the aggregate principal amount thereof plus accrued and unpaid interest thereon to the applicable date of redemption, subject to the right of holders of senior notes of record on the relevant record date to receive interest due on the relevant interest payment date, with the net cash proceeds of one or more equity offerings; provided that at least 65% of the sum of the aggregate principal amount of senior notes originally issued under the senior indenture and any additional notes issued under the senior indenture after the issue date remains outstanding immediately after the occurrence of each such redemption; provided further that each such redemption occurs within 90 days of the date of closing of each such equity offering.

From time to time, the Company may repurchase outstanding senior notes in open market or privately negotiated transactions on terms to be determined at the time of such repurchase.

Senior Subordinated Notes:

The senior subordinated notes consist of $450.0 million aggregate principal amount of 11% senior subordinated notes due 2016. Interest is payable semiannually.

At any time prior to October 15, 2011, we may redeem all or a part of the senior subordinated notes at a redemption price equal to 100% of the principal amount of senior subordinated notes redeemed plus the applicable premium and accrued and unpaid interest to the date of redemption, subject to the rights of holders of senior subordinated notes on the relevant record date to receive interest due on the relevant interest payment date.

 

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On and after October 15, 2011, we may redeem the senior subordinated notes in whole or in part at the redemption prices (expressed as percentages of principal amount of the senior subordinated notes to be redeemed) set forth below plus accrued and unpaid interest thereon to the applicable date of redemption, subject to the right of holders of senior subordinated notes of record on the relevant record date to receive interest due on the relevant interest payment date, if redeemed during the twelve-month period beginning on October 15 of each of the years indicated below:

 

Year

   Percentage

2011

   105.500

2012

   103.667

2013

   101.833

2014 and thereafter

   100.000

Until October 15, 2009, we may, at our option, on one or more occasions redeem up to 35% of the aggregate principal amount of senior subordinated notes issued by us at a redemption price equal to 111% of the aggregate principal amount thereof plus accrued and unpaid interest thereon to the applicable date of redemption, subject to the right of holders of senior subordinated notes of record on the relevant record date to receive interest due on the relevant interest payment date, with the net cash proceeds of one or more equity offerings; provided that at least 65% of the sum of the aggregate principal amount of senior subordinated notes originally issued under the senior subordinated indenture and any additional notes issued under the senior subordinated indenture after the issue date remains outstanding immediately after the occurrence of each such redemption; provided further that each such redemption occurs within 90 days of the date of closing of each such equity offering.

From time to time, we may repurchase outstanding senior subordinated notes in open market or privately negotiated transactions on terms to be determined at the time of such repurchase.

Debt Covenants

Senior Secured Term Loan Facility and Senior Secured Revolving Credit Facility. We are required to comply on a quarterly basis with a maximum total leverage ratio covenant and a minimum interest coverage ratio covenant. The total leverage ratio of consolidated total debt Adjusted EBITDA may not exceed 7.0 to 1.0 at December 31, 2008, and the interest coverage ratio of consolidated Adjusted EBITDA to the sum of consolidated interest expense must exceed 1.5 to 1.0. Both ratios are measured on a rolling four-quarter basis. We were in compliance with these financial covenants at December 31, 2008. These financial covenants will become more restrictive over time (adjusted periodically until the maximum leverage ratio reaches 3.75 to 1.0 in 2013 and the interest coverage ratio reaches 2.50 to 1.0 in 2013). We believe that for the foreseeable future we will continue to be in compliance with our financial covenants. The senior secured credit facilities also contain various negative covenants, including limitations on indebtedness, liens, mergers and consolidations, asset sales, dividends and distributions or repurchases of our capital stock, investments, loans and advances, capital expenditures, payment of other debt, including the senior subordinated notes, transactions with affiliates, amendments to material agreements governing our subordinated indebtedness, including the senior subordinated notes and changes in our lines of business.

The senior secured credit facilities include certain customary representations and warranties, affirmative covenants, and events of default, including payment defaults, breach of representations and warranties, covenant defaults, cross-defaults to certain indebtedness, certain events of bankruptcy, certain events under the Employee Retirement Income Security Act of 1974, material judgments, the invalidity of material provisions of the documentation with respect to the senior secured credit facilities, the failure of collateral under the security documents for the senior secured credit facilities, the failure of the senior secured credit facilities to be senior debt under the subordination provisions of certain of our subordinated debt and a change of control of the Company. If an event of default occurs, the lenders under the senior secured credit facilities will be entitled to take certain actions, including the acceleration of all amounts due under the senior secured credit facilities and all actions permitted to be taken by a secured creditor.

Senior Notes. The senior notes indenture contains covenants limiting, among other things, our ability and the ability of our restricted subsidiaries to: incur additional debt or issue certain preferred shares, pay dividends on or make distributions in respect of

 

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our capital stock or make other restricted payments, make certain investments, sell certain assets, create liens on certain assets to secure debt, consolidate, merge, sell, or otherwise dispose of all or substantially all of our assets, enter into certain transactions with our affiliates and designate our subsidiaries as unrestricted subsidiaries.

Senior Subordinated Notes. The senior subordinated indenture contains covenants limiting, among other things, our ability and the ability of our restricted subsidiaries to: incur additional debt or issue certain preferred shares; pay dividends on or make distributions in respect of our capital stock or make other restricted payments, make certain investments, sell certain assets, create liens on certain assets to secure debt, consolidate, merge, sell, or otherwise dispose of all or substantially all of our assets, enter into certain transactions with our affiliates and designate our subsidiaries as unrestricted subsidiaries.

Multicurrency Revolving Credit Facility. InterCall Conferencing Services Limited is required to comply on a quarterly basis with a maximum total leverage ratio covenant, a minimum interest coverage ratio covenant and a minimum revenue covenant. The total leverage ratio of InterCall Conferencing Services Limited and its subsidiaries (“InterCall UK Group”) cannot exceed 2.75 to 1.0 tested as of the last day of each of the first full three quarters ending after the utilization date, 2.50 to 1.0 tested as of the last day of each of the next four fiscal quarters and 2.25 to 1.0 tested as of the last day of each fiscal quarter thereafter. The interest coverage ratio of the InterCall UK Group must be greater than 3.0 to 1.0 as of the end of each quarterly period. The minimum revenue required to be maintained by the InterCall UK Group, as measured on a rolling four-quarter basis, increases over the life of the agreement from £45.0 million in 2008 to £50.0 million in 2010.

Our failure to comply with these debt covenants may result in an event of default which, if not cured or waived, could accelerate the maturity of our indebtedness. If our indebtedness is accelerated, we may not have sufficient cash resources to satisfy our debt obligations and we may not be able to continue our operations as planned. If our cash flows and capital resources are insufficient to fund our debt service obligations and keep us in compliance with the covenants under our senior secured credit facilities or to fund our other liquidity needs, we may be forced to reduce or delay capital expenditures, sell assets or operations, seek additional capital or restructure or refinance our indebtedness, including the notes. We cannot ensure that we would be able to take any of these actions, that these actions would be successful and permit us to meet our scheduled debt service obligations or that these actions would be permitted under the terms of our existing or future debt agreements, including our senior secured credit facilities or the indentures that govern the notes. Our senior secured credit facilities documentation and the indentures that govern the notes restrict our ability to dispose of assets and use the proceeds from the disposition. As a result, we may not be able to consummate those dispositions or use the proceeds to meet our debt service or other obligations, and any proceeds that are available may not be adequate to meet any debt service or other obligations then due.

If we cannot make scheduled payments on our debt, we will be in default, and as a result:

 

   

our debt holders could declare all outstanding principal and interest to be due and payable;

 

   

the lenders under our new senior secured credit facilities could terminate their commitments to lend us money and foreclose against the assets securing our borrowings; and

 

   

we could be forced into bankruptcy or liquidation.

 

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Credit Ratings

At December 31, 2008 our credit ratings and outlook were as follows:

 

     Corporate
Rating/
Outlook
   Senior
Secured
Term
Loans
   Senior
Secured
Revolver
   Senior
Unsecured
Notes
   Senior
Subordinated
Notes

Moody’s (1)

   B2/Stable    B1    B1    Caa1    Caa1

Standard & Poor’s (2)

   B+/Stable    BB-    BB-    B-    B-

 

(1) On October 24, 2008 Moody’s stated that our decision to fully draw on its available revolving credit facility has no immediate impact on our liquidity rating. On November 5, 2008 Moody’s affirmed the current ratings with the acquisition of Positron.
(2) On December 22, 2008, S&P affirmed its current ratings based on the additional debt incurred prior to the acquisition of Positron.

We will monitor and weigh our operating performance with any potential acquisition activities. Additional acquisitions of size would likely require us to secure additional funding sources. We have no reason to believe for the foreseeable future there will be an event to cause downgrades based on the positions of our rating agencies.

Adjusted EBITDA —The common definition of EBITDA is “Earnings Before Interest Expense, Taxes, Depreciation and Amortization.” In evaluating liquidity, we use Adjusted EBITDA, which we define as earnings before interest expense, share-based compensation, taxes, depreciation and amortization, noncontrolling interest, non-recurring litigation settlement costs, impairments and other non-cash reserves, transaction costs and after acquisition synergies and excluding unrestricted subsidiaries, or “Adjusted EBITDA.” EBITDA and Adjusted EBITDA are not measures of financial performance or liquidity under GAAP. Although we use Adjusted EBITDA as a measure of our liquidity, the use of Adjusted EBITDA is limited because it does not include certain material costs, such as depreciation, amortization and interest, necessary to operate our business and includes adjustments for synergies that have not been realized. In addition, as disclosed below, certain adjustments included in our calculation of Adjusted EBITDA are based on management’s estimates and do not reflect actual results. For example, post-acquisition synergies included in Adjusted EBITDA are determined in accordance with our senior credit facilities, which provide for an adjustment to EBITDA, subject to certain specified limitations, for reasonably identifiable and factually supportable cost savings projected by us in good faith to be realized as a result of actions taken following an acquisition. EBITDA and Adjusted EBITDA should not be considered in isolation or as a substitute for net income, cash flow from operations or other income or cash flow data prepared in accordance with GAAP.

 

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Adjusted EBITDA, as presented, may not be comparable to similarly titled measures of other companies. Adjusted EBITDA is presented here as we understand investors use it as one measure of our historical ability to service debt and compliance with covenants in our senior credit facilities. Set forth below is a reconciliation of EBITDA and Adjusted EBITDA to cash flow from operations.

 

     For the year ended December 31,  
(dollars in thousands)    2008     2007     2006     2005     2004  

Cash flows from operating activities

   $ 287,381      $ 263,897      $ 215,739      $ 290,004      $ 218,560   

Income tax expense

     11,731        6,814        65,505        87,736        65,762   

Deferred income tax (expense) benefit

     26,446        8,917        (9,300     2,645        (6,177

Interest expense

     313,019        332,372        94,804        15,358        9,381   

Allowance for impairment of purchased accounts receivable

     (76,405     —          —          —          —     

Non-cash loss on hedge agreements

     (17,679     —          —          —          —     

Unrealized gain (loss) on foreign denominated debt

     (5,558     —          —          —          —     

Provision for share based compensation

     (1,404     (1,276     (28,738     (538     —     

Debt amortization

     (15,802     (14,671     (3,411     (858     (1,216

Other

     (107     195        (876     (699     (48

Excess tax benefit from stock options exercised

     —          —          50,794        —          —     

Changes in operating assets and liabilities, net of business acquisitions

     4,064        (53,461     (2,180     (15,313     3,611   
                                        

EBITDA

     525,686        542,787        382,337        378,335        289,873   
                                        

Provision for share-based compensation (a)

     1,404        1,276        28,738        538        —     

Acquisition synergies and transaction costs (b)

     20,985        22,006        89,562        1,365        —     

Non-cash portfolio impairments (c)

     76,405        1,004        —          —          —     

Site closures and other impairments (d)

     2,644        1,309        —          —          —     

Non-cash foreign currency (gain) losses (e)

     6,427        —          —          —          —     

Non-recurring litigation settlement costs (f)

     —          15,741        —          —          —     

Synthetic lease interest (g)

     —          —          1,305        1,385        1,130   
                                        

Adjusted EBITDA

   $ 633,551      $ 584,123      $ 501,942      $ 381,623      $ 291,003   
                                        

Adjusted EBITDA Margin (h)

     28.2     27.8     27.0     25.0     23.9

Leverage Ratio Covenant and Interest Coverage Ratio Covenant:

          

Total Debt (i)

   $ 3,706,982      $ 3,345,615        NM        NM        NM   

Ratio of Total Debt to Adjusted EBITDA (j)

     5.4 x        5.6 x        NM        NM        NM   

Cash interest expense (k)

   $ 268,041      $ 281,434        NM        NM        NM   

Ratio of Adjusted EBITDA to cash interest expense (l)

     2.4 x        2.1 x        NM        NM        NM   

 

(a) Represents total share based compensation expense determined at fair value in accordance with SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123R”).
(b) Represents, for each period presented, unrealized synergies for acquisitions, consisting primarily of headcount reductions and telephony-related savings, direct acquisition expenses, transaction costs incurred with the recapitalization and the exclusion of the negative EBITDA in one acquired entity, which was an unrestricted subsidiary under the indentures governing our outstanding senior and senior subordinated notes. Amounts shown are permitted to be added to “EBITDA” for purposes of calculating our compliance with certain covenants under our credit facility and the indentures governing our outstanding notes.
(c) Represents non-cash portfolio receivable allowances.
(d) Represents site closures and other asset impairments.
(e) Represents the unrealized loss on foreign denominated debt and the loss on transactions with affiliates denominated in foreign currencies.
(f) Class action litigation settlement, net of estimated insurance proceeds, and related legal costs.
(g) Represents interest incurred on a synthetic building lease, which was purchased in September 2006.
(h) Adjusted EBITDA margin represents Adjusted EBITDA as a percentage of revenue.

 

19


(i) Total debt excludes portfolio notes payable, but includes other indebtedness of capital lease obligations, performance bonds and letters of credit and is reduced by cash and cash equivalents.
(j) Ratio of Total Debt to Adjusted EBITDA is calculated using trailing twelve month. For purposes of calculating our Ratio of Total Debt to Adjusted EBITDA, Adjusted EBITDA includes pro forma adjustments for acquired entities of $49.1 million in 2008 and $9.1 million in 2007 as is permitted in the debt covenants.
(k) Cash Interest Expense represents interest expense paid less amortization of capitalized financing costs and non-cash loss on hedge agreements expensed as interest under the senior secured term loan facility, senior secured revolving credit facility, senior notes and senior subordinated notes.
(l) The ratio of Adjusted EBITDA to cash interest expense is calculated using trailing twelve month cash interest expense.

 

NM—Not meaningful as our current debt covenants became effective October 24, 2006.

Receivables Management Asset Portfolio Notes Payable Facilities.

We historically have maintained, through majority-owned subsidiaries, receivables management asset financing facilities with affiliates of Cargill, Inc. and CarVal Investors, LLC (the “Portfolio Lenders”). Each Portfolio Lender is a noncontrolling interest holder in the applicable majority-owned subsidiary. Pursuant to these agreements, we have borrowed up to 85% of the purchase price of each receivables portfolio purchased from the lender and funded the remaining purchase price. Interest generally accrues on the outstanding debt at a variable rate of 2.75% over prime. The debt is non-recourse and collateralized by all of the assets of the applicable majority-owned subsidiary, including receivable portfolios within a loan series. Each loan series contains a group of portfolio asset pools that had an aggregate original principal amount of approximately $20 million. These notes mature in 24 to 30 months from the date of origination. At December 31, 2008, we had $88.5 million of non-recourse portfolio notes payable outstanding under these facilities, compared to $120.3 million outstanding at December 31, 2007. The Portfolio Lenders have discontinued new financing through the applicable facilities and have served a complaint asserting the occurrence of facility events of default. A facility event of default under the applicable facilities would not constitute an event of default under West’s other credit facilities. West has answered the claims of the Portfolio Lenders and asserted counterclaims alleging misrepresentations and breaches of contract. See Item 3. Legal Proceedings.

On May 21, 2008, we entered into a series of agreements with TOGM, LLC (“TOGM”) pursuant to which TOGM would finance up to 80% of the purchase price of selected receivables portfolios. Interest generally accrues on the outstanding debt at a variable rate of 3.5% over prime. In December 2008, the parties executed a note with a fixed rate of 8.5%). The debt is non-recourse and collateralized by all of the assets of the applicable majority-owned subsidiary, including receivable portfolios within a loan series. Each loan series contains a group of portfolio asset pools that provide for an aggregate original principal amount of approximately $10 million. These notes mature in 24 months from the date of origination. At December 31, 2008, we had $2.8 million of non-recourse portfolio notes payable outstanding under this facility. TOGM’s shareholders are Mary and Gary West who collectively own approximately 22% of West Corporation. The agreements with TOGM provided for a facility termination date of December 31, 2008. West and TOGM are negotiating an extension of the term.

Contractual Obligations. As described in the notes to our consolidated financial statements we have contractual obligations that may affect our financial condition. However, based on management’s assessment of the underlying provisions and circumstances of our material contractual obligations, there is no known trend, demand, commitment, event or uncertainty that is reasonably likely to occur which would have a material effect on our financial condition or results of operations.

 

20


The following table summarizes our contractual obligations at December 31, 2008 (dollars in thousands):

 

     Payment due by period

Contractual Obligations

   Total    Less than
1 year
   1 – 3 years    4 – 5 years    After 5 years

Senior Secured Term Loan Facility, due 2013 (1)

   $ 2,485,432    $ 25,283    $ 50,566    $ 2,409,583    $ —  

Senior Secured Revolving Loan Facility, due 2012

     224,043      —        —        224,043      —  

9.5% Senior Notes, due 2014

     650,000      —        —        —        650,000

11% Senior Subordinated Notes, due 2016

     450,000      —        —        —        450,000

Multicurrency revolving credit facility, due 2011

     48,175      —        48,175      —        —  

Interest payments on fixed rate debt

     748,644      111,250      222,500      222,500      192,394

Estimated interest payments on variable rate debt (2)

     620,213      149,789      253,841      216,583      —  

Operating leases

     151,683      37,207      45,068      21,174      48,234

Capital lease obligations

     550      420      130      —        —  

Contractual minimums under telephony agreements (3)

     185,800      95,100      90,700      —        —  

Purchase obligations (4)

     45,723      40,206      5,517      —        —  

Portfolio notes payable

     88,477      77,308      11,169      —        —  

Commitments under forward flow agreements

     2,200      2,200      —        —        —  
                                  

Total contractual cash obligations

   $ 5,700,940    $ 538,763    $ 727,666    $ 3,093,883    $ 1,340,628
                                  

 

(1) Does not reflect the extension of the maturity for $1.0 billion of our existing term loans from October 24, 2013 to July 15, 2016 (or July 15, 2014 under certain circumstances related to the amount of outstanding senior notes and the senior secured leverage ratio in effect at such time).
(2) Interest rate assumptions based on February 12, 2009 U.S. dollar swap rate curves and LIBOR Euro and GBP swap rate curves for the next five years.
(3) Based on projected telephony minutes through 2011. The contractual minimum is usage based and could vary based on actual usage.
(4) Represents future obligations for capital and expense projects that are in progress or are committed.

The table above excludes amounts to be paid for taxes and long term obligations under our Nonqualified Executive Retirement Savings Plan and Nonqualified Executive Deferred Compensation Plan. The table also excludes amounts to be paid for income tax contingencies because the timing thereof is highly uncertain. At December 31, 2008, we have accrued $15.4 million, including interest and penalties, for uncertain tax positions.

Capital Expenditures: Our operations continue to require significant capital expenditures for technology, capacity expansion and upgrades. Capital expenditures were $105.4 million for the year ended December 31, 2008, and were funded through cash from operations and the use of our various credit facilities. Capital expenditures were $103.6 million for the year ended December 31, 2007. Capital expenditures for the year ended December 31, 2008 consisted primarily of computer and telephone equipment and software purchases.

Our senior secured term loan facility discussed above includes covenants which allow us the flexibility to issue additional indebtedness that is pari passu with, or subordinated to, our debt under our existing credit facilities in an aggregate principal amount not to exceed $292.2 million including the aggregate amount of principal payments made in respect of the senior secured term loan, incur capital lease indebtedness, finance acquisitions, construction, repair, replacement or improvement of fixed or capital assets, incur accounts receivable securitization indebtedness and non-recourse indebtedness; provided we are in pro forma compliance with our total leverage ratio and interest coverage ratio financial covenants. We or any of our affiliates may be required to guarantee any existing or additional credit facilities.

Off – Balance Sheet Arrangements. We utilize standby letters of credit to support primarily workers’ compensation policy requirements and certain operating leases. Performance obligations of Intrado and Positron are supported by performance bonds and letters of credit. These obligations will expire at various dates through April 2013 and are renewed as required. The outstanding commitment on these obligations at December 31, 2008 was $17.1 million. The standby letters of credit and performance bonds are the only off-balance sheet arrangements we participated in at December 31, 2008.

 

21


Inflation

We do not believe that inflation has had a material effect on our results of operations. However, there can be no assurance that our business will not be affected by inflation in the future.

Critical Accounting Policies.

The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires the use of estimates and assumptions on the part of management. The estimates and assumptions used by management are based on our historical experiences combined with management’s understanding of current facts and circumstances. Certain of our accounting policies are considered critical as they are both important to the portrayal of our financial condition and results of operations and require significant or complex judgment on the part of management. We believe the following represent our critical accounting policies as contemplated by the Securities and Exchange Commission Financial Reporting Release No. 60, “Cautionary Advice Regarding Disclosure About Critical Accounting Policies.”

Revenue Recognition: In our Unified Communications segment, our services are generally billed and recognized on a per message or per minute basis. Our Communication Services segment recognizes revenue for automated and agent-based services in the month that services are performed and are generally billed based on call duration, hours of input, number of calls or a contingent basis. Emergency communications services revenue is generated primarily from monthly fees based on the number of billing telephone numbers and cell towers covered under contract. In addition, product sales and installations are generally recognized upon completion of the installation and client acceptance of a fully functional system or, for contracts that are completed in stages and include contract-specified milestones representative of fair value, upon achieving such contract milestones. As it relates to installation sales, clients are generally progress-billed prior to the completion of the installation and these advance payments are deferred until the system installations are completed or specified milestones are attained. Costs incurred on uncompleted contracts are accumulated and recorded as deferred costs until the system installations are completed or specified milestones are attained. Contracts for annual recurring services such as support and maintenance agreements are generally billed in advance and are recorded as revenue ratable (on a monthly basis) over the contractual periods. Nonrefundable up front fees and related costs are recognized ratably over the term of the contract or the expected life of the client relationship, whichever is longer. Revenue for contingent collection services and overpayment identification and recovery services is recognized in the month collection payments are received based upon a percentage of cash collected or other agreed upon contractual parameters. In compliance with SOP 03-3, we account for our investments in receivable portfolios using either the level-yield method or the cost recovery method. During 2008 we began using the cost recovery method for healthcare receivable portfolios and certain newly acquired pools. For all other receivable portfolios, we believe that the amounts and timing of cash collections for our purchased receivables can be reasonably estimated; therefore, we utilize the level-yield method of accounting for our purchased receivables. The level-yield method applies an effective interest rate or internal rate of return (“IRR”) to the cost basis of portfolio pools. SOP 03-3 increases the probability that we will incur impairment allowances in the future, and these allowances could be material. Periodically, we will sell all or a portion of a receivables pool to third parties. The gain or loss on these sales is recognized to the extent the proceeds exceed or, in the case of a loss, are less than the cost basis of the underlying receivables.

Allowance for Doubtful Accounts: Our allowance for doubtful accounts represents reserves for receivables which reduce accounts receivable to amounts expected to be collected. Management uses significant judgment in estimating uncollectible amounts. In estimating uncollectible amounts, management considers factors such as overall economic conditions, industry-specific economic conditions, historical client performance and anticipated client performance. While management believes our processes effectively address our exposure to doubtful accounts, changes in the economy, industry or specific client conditions may require adjustments to the allowance for doubtful accounts.

Goodwill and Intangible Assets: Goodwill and intangible assets, net of accumulated amortization, at December 31, 2008 were $1,642.9 million and $405.0 million, respectively. Management is required to exercise significant judgment in valuing the acquisitions in connection with the initial purchase price allocation and the ongoing evaluation of goodwill and other intangible assets for impairment. The purchase price allocation process requires estimates and judgments as to certain expectations and business strategies. If the actual results differ from the assumptions and judgments made, the amounts recorded in the consolidated financial statements could result in a possible impairment of the intangible assets and goodwill or require acceleration in amortization expense. In accordance with SFAS No. 142, Goodwill and Other Intangible Assets , we test goodwill for impairment at the reporting unit level (operating segment or one level below an operating segment) on an annual basis in the fourth quarter or more frequently if we believe indicators of impairment exist. Goodwill of a reporting unit shall be tested for impairment between annual tests if an event occurs or circumstances change that would more-likely-than-not reduce the fair value of a reporting unit below its carrying amount. At December 31, 2008, our reporting units were our operating segments which consisted of communication services, conferencing services, and receivables management. The performance of the impairment test involves a two-step process. The first step of the goodwill impairment test involves comparing the fair values of the applicable reporting units with their aggregate carrying values, including goodwill. We determine the fair value of our reporting units using the discounted cash flow methodology. The discounted cash flow methodology requires us to make key assumptions such as projected future cash flows, growth rates, terminal value and a weighted average cost of capital. If the carrying amount of a reporting unit exceeds the reporting unit’s fair value, we perform the second step of the goodwill impairment test to determine the amount of impairment loss. The second step of the goodwill impairment test involves comparing the implied fair value of the affected reporting unit’s goodwill with the carrying value of that goodwill. We were not required to perform a second step analysis for the year ended December 31, 2008 as the fair value exceeded the carrying value for each of our reporting units in step one by at least 30%. Due to the excess of the estimated fair value compared to the carrying value for each of our reporting units, we do not believe there is a significant risk of goodwill impairment.

 

22


Our indefinite-lived intangible assets consist of trade names and their values are assessed separately from goodwill in connection with our annual impairment testing. This assessment is made using the relief-from-royalty method, under which the value of a trade name is determined based on a royalty that could be charged to a third party for using the trade name in question. The royalty, which is based on a reasonable rate applied against forecasted sales, is tax-effected and discounted to present value. The most significant assumptions in this evaluation include estimated future sales, the royalty rate and the after-tax discount rate.

Our finite-lived intangible assets are amortized over their estimated useful lives. In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-lived Assets , our finite-lived intangible assets are tested for recoverability whenever events or changes in circumstances such as reductions in demand or significant economic slowdowns are present on intangible assets used in operations that may indicate its carrying amount is not recoverable. Reviews are performed to determine whether the carrying value of an asset is recoverable, based on comparisons to undiscounted expected future cash flows. If this comparison indicates that the carrying value is not recoverable, the impaired asset is written down to fair value.

Income Taxes: We account for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes . Effective January 1, 2007, we adopted Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109 (“FIN 48”), which clarifies the accounting for uncertainty in tax positions. We recognize current tax liabilities and assets based on an estimate of taxes payable or refundable in the current year for each of the jurisdictions in which we transact business. As part of the determination of our current tax liability, we exercise considerable judgment in evaluating positions we have taken in our tax returns. We have established reserves for probable tax exposures. These reserves, included in long-term tax liabilities, represent our estimate of amounts expected to be paid, which we adjust over time as more information becomes available. We also recognize deferred tax assets and liabilities for the estimated future tax effects attributable to temporary differences (e.g., book depreciation versus tax depreciation). The calculation of current and deferred tax assets and liabilities requires management to apply significant judgment relating to the application of complex tax laws, changes in tax laws or related interpretations, uncertainties related to the outcomes of tax audits and changes in our operations or other facts and circumstances. We must continually monitor changes in these factors. Changes in such factors may result in changes to management estimates and could require us to adjust our tax assets and liabilities and record additional income tax expense or benefits.

Recent Accounting Pronouncements:

In December 2007, the FASB issued Statement No. 141 (Revised 2007) Business Combinations (“SFAS 141R”). SFAS 141R will change the accounting for business combinations. Under SFAS 141R, an acquiring entity will be required to recognize all the assets acquired and liabilities assumed in a transaction at fair value on the acquisition date, with limited exceptions. SFAS 141R will also change the accounting treatment and disclosure for certain specific items in a business combination. SFAS 141R applies to us prospectively for business combinations occurring on or after January 1, 2009. Accordingly, any business combinations we engage in will be recorded and disclosed following existing GAAP until January 1, 2009. We expect SFAS 141R will have an impact on accounting for business combinations beginning in 2009, but the effect is dependent upon acquisitions at that time.

In December 2007, the FASB issued Statement No. 160 Noncontrolling Interests in Consolidated Financial Statements—An Amendment of ARB No. 51 (“SFAS 160”). SFAS 160 establishes new accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS 160 applies to us beginning in 2009. We do not expect the adoption of SFAS 160 to have a material impact on our consolidated financial position, results of operations and cash flows.

In March 2008, the FASB issued SFAS 161, Disclosures about Derivative Instruments and Hedging Activities (“SFAS 161”). SFAS 161 is an amendment of FASB Statement No. 133 (“SFAS 133”), Accounting for Derivative Instruments and Hedging Activities. To address concerns that the existing disclosure requirements of SFAS 133 do not provide adequate information, this Statement requires enhanced disclosures about an entity’s derivative and hedging activities and thereby improves the transparency of financial reporting. This statement shall be effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. We do not expect the adoption of SFAS 161 to have a material impact on consolidated financial position, results of operations and cash flows.

 

23

Exhibit 99.3

 

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

To the Board of Directors of

West Corporation

Omaha, Nebraska

We have audited the accompanying consolidated balance sheets of West Corporation and subsidiaries (the “Company”) as of December 31, 2008 and 2007, and the related consolidated statements of operations, stockholders’ equity (deficit), and cash flows for each of the three years in the period ended December 31, 2008. Our audits also included the financial statement schedule listed in the Table of Contents at Item 16. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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 Corporation and its subsidiaries at December 31, 2008 and 2007, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2008, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

As discussed in Note 1 to the consolidated financial statements, the accompanying financial statements have been retrospectively adjusted for the adoption of Statement of Financial Accounting Standard No. 160, Noncontrolling Interests in Consolidated Financial Statements—An Amendment of ARB No. 51 . As discussed in Note 10 to the consolidated financial statements, effective January 1, 2007, the Company adopted Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes—An Interpretation of FASB Statement No. 109 .

/S/ DELOITTE & TOUCHE LLP

Omaha, Nebraska

March 2, 2009 (October 2, 2009 as to Note 14 and to the effects of adoption of SFAS 160 as discussed in Note 1 and October 29, 2009 as to Note 16)

 

F-1


WEST CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(AMOUNTS IN THOUSANDS)

 

     Years Ended December 31,  
     2008     2007     2006  

REVENUE

   $ 2,247,434      $ 2,099,492      $ 1,856,038   

COST OF SERVICES

     1,015,028        912,389        818,522   

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

     881,586        840,532        800,301   
                        

OPERATING INCOME

     350,820        346,571        237,215   

OTHER INCOME (EXPENSE):

      

Interest income

     3,068        11,389        6,081   

Interest expense

     (313,019     (332,372     (94,804

Other, net

     (11,689     2,007        2,063   
                        

Other expense

     (321,640     (318,976     (86,660
                        

INCOME BEFORE INCOME TAX EXPENSE AND NONCONTROLLING INTEREST

     29,180        27,595        150,555   
                        

INCOME TAX EXPENSE

     11,731        6,814        65,505   
                        

NET INCOME

     17,449        20,781        85,050   

LESS NET INCOME (LOSS)—NONCONTROLLING INTEREST

     (2,058     15,399        16,287   
                        

NET INCOME—WEST CORPORATION

   $ 19,507      $ 5,382      $ 68,763   
                        

EARNINGS (LOSS) PER COMMON SHARE:

      

Basic Class L

   $ 12.78      $ 11.08      $ 2.05   
                        

Diluted Class L

   $ 12.24      $ 10.68      $ 1.98   
                        

Basic Class A

   $ (1.23   $ (1.20   $ 0.66   
                        

Diluted Class A

   $ (1.23   $ (1.20   $ 0.64   
                        

WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:

      

Basic Class L

     9,901        9,865        9,777   

Diluted Class L

     10,334        10,236        10,105   

Basic Class A

     87,324        86,724        73,265   

Diluted Class A

     87,324        86,724        76,110   

The accompanying notes are an integral part of these financial statements.

 

F-2


WEST CORPORATION

CONSOLIDATED BALANCE SHEETS

(AMOUNTS IN THOUSANDS)

 

     December 31,  
     2008     2007  

ASSETS

    

CURRENT ASSETS:

    

Cash and cash equivalents

   $ 168,340      $ 141,947   

Trust cash

     9,130        10,358   

Accounts receivable, net

     359,021        289,480   

Portfolio receivables, current portion

     64,204        77,909   

Deferred income taxes receivable

     52,647        33,718   

Other current assets

     85,706        44,463   
                

Total current assets

     739,048        597,875   

PROPERTY AND EQUIPMENT:

    

Property and equipment

     918,388        827,458   

Accumulated depreciation and amortization

     (598,236     (528,813
                

Property and equipment, net

     320,152        298,645   
                

PORTFOLIO RECEIVABLES, NET OF CURRENT PORTION

     68,542        132,233   

GOODWILL

     1,642,857        1,329,978   

INTANGIBLES, net

     405,030        336,407   

OTHER ASSETS

     139,160        151,352   
                

TOTAL ASSETS

   $ 3,314,789      $ 2,846,490   
                

LIABILITIES AND STOCKHOLDERS’ DEFICIT

    

CURRENT LIABILITIES:

    

Accounts payable

   $ 70,028      $ 60,979   

Accrued expenses

     343,922        245,044   

Current maturities of long-term debt

     25,283        23,943   

Current maturities of portfolio notes payable

     77,308        77,219   

Income tax payable

     11,097        2,895   
                

Total current liabilities

     527,638        410,080   

PORTFOLIO NOTES PAYABLE , less current maturities

     11,169        43,092   

LONG-TERM OBLIGATIONS, less current maturities

     3,832,367        3,452,437   

DEFERRED INCOME TAXES PAYABLE

     77,109        90,774   

OTHER LONG-TERM LIABILITIES

     69,094        47,523   
                

TOTAL LIABILITIES

     4,517,377        4,043,906   

COMMITMENTS AND CONTINGENCIES (Notes 5, 7, 9 and 15)

    

CLASS L COMMON STOCK $0.001 PAR VALUE, 100,000 SHARES AUTHORIZED, 9,908 and 9,898 SHARES ISSUED AND OUTSTANDING

     1,158,159        1,029,782   

STOCKHOLDERS’ DEFICIT

    

Class A common stock $0.001 par value, 400,000 shares authorized, 87,334 and 87,223 shares issued and 87,326 and 87,223 shares outstanding

     87        87   

Retained deficit

     (2,334,398     (2,231,302

Accumulated other comprehensive loss

     (30,015     (8,920

Noncontrolling interest

     3,632        12,937   

Treasury stock at cost (8 and 0 shares)

     (53     —     
                

Total stockholders’ deficit

     (2,360,747     (2,227,198
                

TOTAL LIABILITIES AND STOCKHOLDERS’ (DEFICIT)

   $ 3,314,789      $ 2,846,490   
                

The accompanying notes are an integral part of these financial statements.

 

F-3


WEST CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(AMOUNTS IN THOUSANDS)

 

     Years Ended December 31,  
     2008     2007     2006  

CASH FLOWS FROM OPERATING ACTIVITIES:

      

Net income

   $ 17,449      $ 20,781      $ 85,050   

Adjustments to reconcile net income to net cash flows from operating activities:

      

Depreciation

     103,218        102,045        96,218   

Amortization

     80,270        80,775        40,762   

Allowance for impairment of purchased accounts receivable

     76,405        —          —     

Unrealized loss on foreign denominated debt

     5,558        —          —     

Provision for share based compensation

     1,404        1,276        28,738   

Deferred income tax expense (benefit)

     (26,446     (8,917     9,300   

Debt amortization

     15,802        14,671        3,410   

Non cash loss on hedge agreements

     17,679        —          —     

Other

     107        (195     876   

Excess tax benefit from stock options exercised

     —          —          (50,794

Changes in operating assets and liabilities, net of business acquisitions:

      

Accounts receivable

     (3,226     14,713        (41,744

Other assets

     9,113        (9,497     (24,418

Accounts payable

     (8,965     8,753        (7,750

Accrued expenses and other liabilities

     (987     39,492        76,091   
                        

Net cash flows from operating activities

     287,381        263,897        215,739   
                        

CASH FLOWS FROM INVESTING ACTIVITIES:

      

Business acquisitions, net of cash acquired of $9,601, $21,410 and $108,150

     (493,556     (291,760     (643,690

Purchase of portfolio receivables, net of collections applied of $46,395, $66,927 and $59,353

     992        (60,485     (55,207

Purchase of property and equipment

     (105,381     (103,647     (113,895

Other

     406        946        539   
                        

Net cash flows from investing activities

     (597,539     (454,946     (812,253
                        

CASH FLOWS FROM FINANCING ACTIVITIES:

      

Proceeds from issuance of debt and bonds

     134,000        300,000        3,200,000   

Consideration paid to shareholders in exchange for stock

     —          (170,625     (2,790,911

Principal repayments of long-term obligations

     (24,949     (23,618     —     

Consideration paid to stock option holders in exchange for stock options

     —          —          (119,638

Proceeds from private equity sponsors

     —          —          725,750   

Net change in revolving credit facilities

     283,167        —          (220,000

Debt issuance costs

     (10,315     (2,299     (109,591

Proceeds from the sale of stock and stock options exercised

     25        553        18,540   

Excess tax benefits from stock options exercised

     —          —          50,794   

Repayments of portfolio notes payable, net of proceeds from issuance of notes payable of $33,096, $108,812 and $97,871

     (31,834     33,064        46,727   

Noncontrolling interest distributions

     (7,120     (13,165     (19,101

Payments of capital lease obligations

     (949     (1,032     (6,313

Other

     (54     (4,772     4,485   
                        

Net cash flows from financing activities

     341,971        118,106        780,742   
                        

EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS

     (5,420     (42     (131

NET CHANGE IN CASH AND CASH EQUIVALENTS

     26,393        (72,985     184,097   

CASH AND CASH EQUIVALENTS, Beginning of period

     141,947        214,932        30,835   
                        

CASH AND CASH EQUIVALENTS, End of period

   $ 168,340      $ 141,947      $ 214,932   
                        

The accompanying notes are an integral part of these consolidated financial statements.

 

F-4


WEST CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

(AMOUNTS IN THOUSANDS)

 

     Common
Stock
    Class A
Common
Stock
   Additional
Paid-in
Capital
    Retained
Earnings
(Deficit)
    Noncontrolling
Interest
    Treasury
Stock
   Unearned
Restricted
Stock
    Other
Comprehensive
Income (Loss)
Foreign
Currency
Translation
    Other
Comprehensive
Income (Loss)
on Cash Flow
Hedges
    Total
Stockholders’
Equity
(Deficit)
 

BALANCE, January 1, 2006

   $ 697      $ —      $ 272,941      $ 699,765      $ 15,309      $ —      $ (1,130   $ (405   $ —        $ 987,177   

Comprehensive income:

                      

Net income

            68,763        16,287                 85,050   

Foreign currency translation adjustment, net of tax of ($420)

                     715          715   

Unrealized gain on cash flow hedges, net of tax of ($152)

                       264        264   
                            

Total comprehensive income

                         86,029   

Noncontrolling interest distributions

              (19,101              (19,101

Change in ownership of noncontrolling interest

              (2,196              (2,196

Stock options exercised including related tax benefits (6,565 shares) and ESPP shares granted (34 shares)

     71           211,916                     211,987   

Share based compensation

          28,447                     28,447   

Amortization of restricted stock

          (1,130            1,130            —     

Recapitalization

     (768     86      (413,702     (2,975,169                (3,389,553

Accretion of class L common stock priority return preference

          (20,045                  (20,045
                                                                              

BALANCE, December 31, 2006

     —          86      78,427        (2,206,641     10,299        —        —          310        264        (2,117,255

FIN 48 transition liability

            (4,035                (4,035
                                                                              

BALANCE, January 1, 2007

     —          86      78,427        (2,210,676     10,299        —        —          310        264        (2,121,290

Comprehensive income:

                      

Net income

            5,382        15,399                 20,781   

Foreign currency translation adjustment, net of tax of ($408)

                     665          665   

Unrealized loss on cash flow hedges, net of tax of ($5,810)

                       (10,159     (10,159
                            

Total comprehensive loss

                         11,287   

Noncontrolling interest distributions

              (13,165              (13,165

Noncontrolling interest contributions

              404                 404   

Issuance of common stock in a business combination (929,280 shares)

       1      1,161                     1,162   

 

F-5


WEST CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

(AMOUNTS IN THOUSANDS)

 

     Common
Stock
   Class A
Common
Stock
   Additional
Paid-in
Capital
    Retained
Earnings
(Deficit)
    Noncontrolling
Interest
    Treasury
Stock
    Unearned
Restricted
Stock
   Other
Comprehensive
Income (Loss)
Foreign
Currency
Translation
    Other
Comprehensive
Income (Loss)
on Cash Flow
Hedges
    Total
Stockholders’
Equity
(Deficit)
 

Tax benefit of Executive Deferred Compensation Plan distribution

           1,393                     1,393   

Executive Deferred Compensation Plan contributions

           896                     896   

Stock sold (400 shares)

           50                     50   

Stock options exercised including related tax benefits (32 shares)

           91                     91   

Share based compensation

           1,276                     1,276   

Accretion of class L common stock priority return preference

           (83,294     (26,008                (109,302
                                                                             

BALANCE, December 31, 2007

     —        87      —          (2,231,302     12,937        —          —        975        (9,895     (2,227,198

Net income

             19,507        (2,058              17,449   

Foreign currency translation adjustment, net of tax of ($4,276)

               (127          (6,977       (7,104

Reclassification a cash flow hedge into earnings

                        1,234        1,234   

Unrealized loss on cash flow hedges, net of tax of ($8,653)

                        (15,352     (15,352
                             
                       

Total comprehensive loss

                          (3,773

Noncontrolling interest distributions

               (7,120              (7,120

Purchase of stock at cost (8 shares)

                 (53            (53

Executive Deferred Compensation Plan contributions

           1,397                     1,397   

Executive Deferred Compensation Plan valuation change

           1,102                     1,102   

Stock options exercised including related tax benefits (15 shares)

           25                     25   

Share based compensation

           1,404                     1,404   

Accretion of class L common stock priority return preference

           (3,928     (122,603                (126,531
                                                                             

BALANCE, December 31, 2008

   $ —      $ 87    $ —        $ (2,334,398   $ 3,632      $ (53   $ —      $ (6,002   $ (24,013   $ (2,360,747
                                                                             

The accompanying notes are an integral part of these consolidated financial statements.

 

F-6


WEST CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006

 

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Business Description: West Corporation (the “Company” or “West”) is a leading provider of technology-driven, voice-oriented solutions. We offer our clients a broad range of communications and infrastructure management solutions that help them manage or support critical communications. The scale and processing capacity of our proprietary technology platforms, combined with our world-class expertise and processes in managing telephony and human capital, enable us to provide our clients with premium outsourced communications solutions. Our automated service and conferencing solutions are designed to improve our clients’ cost structure and provide reliable, high-quality services. Our solutions also help deliver mission-critical services, such as public safety and emergency communications. We serve Fortune 1000 companies and other clients in a variety of industries, including telecommunications, banking, retail, financial services, technology and healthcare, and have sales and operations in the United States, Canada, Europe, the Middle East, Asia Pacific and Latin America.

Operating Segments: During the third quarter of 2009, we implemented certain organizational changes and our Chief Executive Officer began making strategic and operational decisions with respect to assessing performance and allocating resources based on a new segment structure. We now operate in two business segments:

 

   

Unified Communications, including reservationless, operator-assisted, web and video conferencing services and alerts and notifications services; and

 

   

Communication Services, including automated call processing, agent-based services and emergency communication infrastructure systems and services.

Consistent with this approach, the receivables management business (formerly reported as a separate segment) is now part of the Communication Services segment, and the newly named Unified Communications segment is composed of the alerts and notifications business (formerly managed under the Communications Services segment) and the conferencing and collaboration business. The revised organizational structure more closely aligns the resources used by the businesses in each segment. All prior period comparative information has been reclassified to conform to the new presentation.

Unified Communications:

Conferencing & Collaboration Services. Operating under the InterCall brand, we are the largest conferencing services provider in the world based on conferencing revenue and managed over 61 million conference calls in 2008. We provide our clients with an integrated global suite of meeting replacement services. These include on-demand automated conferencing services, operator-assisted services for complex audio conferences or large events, web conferencing services that allow clients to make presentations and share applications and documents over the Internet, and video conferencing applications that allow clients to experience real-time video presentations and conferences.

Alerts & Notifications Services. Our solutions leverage our proprietary technology platforms to allow clients to manage and deliver automated personalized communications quickly and through multiple delivery channels (voice, text messaging, email and fax). For example, we deliver patient notifications and appointment reminders on behalf of our medical and dental clients, provide travelers with flight arrival and departure updates on behalf of our transportation clients and transmit emergency evacuation notices on behalf of municipalities. Our platform also enables two-way communications that allow the recipients of a message to respond with relevant information to our clients.

 

F-7


WEST CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006

 

Communication Services

Automated Services

Emergency Communications Services. We are the largest provider of emergency communications infrastructure systems and services that support regulatory compliance and public safety mandates based on the number of 9-1-1 calls facilitated. Our solutions are critical in facilitating public safety agencies’ ability to coordinate responses to emergency events. We provide the network database solution that routes emergency calls to the appropriate 9-1-1 centers and allows the appropriate first responders (police, fire, ambulance) to be assigned to those calls. Our clients generally enter into long-term contracts and fund their obligations through monthly charges on users’ local telephone bills. We also provide fully-integrated desktop communications technology solutions to public safety agencies that enable enhanced 9-1-1 call handling.

Automated Customer Service. Over the last 20 years we have developed a best-in-class suite of automated voice-oriented solutions. Our solutions allow our clients to effectively communicate with their customers through inbound and outbound interactive voice response (IVR) applications using natural language speech recognition, automated voice prompts and network-based call routing services. In addition to these front-end customer service applications, we also provide analyses that help our clients improve their automated communications strategy. Our automated services technology platforms serve as the backbone of our telephony management capabilities and our scale and operational flexibility have helped us launch and grow other key services, such as conferencing, alerts and notifications and West at Home.

Agent-Based Services. We provide our clients with large-scale, agent-based services, including inbound customer care, customer acquisition and retention, business-to-business sales and account management, overpayment identification and recovery services, and collection of receivables on behalf of our clients. We have a flexible model with both on-shore and off-shore capabilities to fit our clients’ needs. We believe that we are known in the industry as a premium provider of these services, and we seek opportunities with clients for whom our services can add value while maintaining attractive margins for us. Our West at Home agent service is a remote call handling model that uses employees who work out of their homes. This service has a distinct advantage over traditional facility-based call center solutions by attracting higher quality agents. This model helps enhance our cost structure and significantly reduces our capital requirements.

Recapitalization: On October 24, 2006, we completed a recapitalization (the “recapitalization”) of the Company in a transaction sponsored by an investor group led by Thomas H. Lee Partners, L.P. and Quadrangle Group LLC (the “Sponsors”) pursuant to the Agreement and Plan of Merger, dated as of May 31, 2006, between West Corporation and Omaha Acquisition Corp., a Delaware corporation formed by the Sponsors for the purpose of recapitalizing West Corporation. Omaha Acquisition Corp. was merged with and into West Corporation, with West Corporation continuing as the surviving corporation. Pursuant to such recapitalization, our publicly traded securities were cancelled in exchange for cash. The recapitalization has been accounted for as a leveraged recapitalization, whereby the historical bases of our assets and liabilities have been maintained.

In October 2006, we financed the recapitalization with equity contributions from the Sponsors, and the rollover of a portion of the equity interests in the Company held by Gary and Mary West, the founders of the registrant (“the Founders”), and certain members of management, along with a new $2.1 billion senior secured term loan facility, a new senior secured revolving credit facility providing financing of up to $250.0 million (none of which was drawn at the closing of the recapitalization) and the private placement of $650.0 million aggregate principal amount of 9.5% senior notes due 2014 and $450.0 million aggregate principal amount of 11% senior subordinated notes due 2016.

Basis of Consolidation: The consolidated financial statements include our accounts and the accounts of our wholly owned and majority owned subsidiaries. All intercompany transactions and balances have been eliminated in the consolidated financial statements.

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.

 

F-8


WEST CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006

 

Revenue recognition: In our Unified Communications segment, our services are generally billed and recognized on a per message or per minute basis. Our Communication Services segment recognizes revenue for automated and agent-based services in the month that services are performed and are generally billed based on call duration, hours of input, number of calls or a contingent basis. Emergency communications services revenue is generated primarily from monthly fees based on the number of billing telephone numbers and cell towers covered under contract. In addition, product sales and installations are generally recognized upon completion of the installation and client acceptance of a fully functional system or, for contracts that are completed in stages and include contract-specified milestones representative of fair value, upon achieving such contract milestones. As it relates to installation sales, clients are generally progress-billed prior to the completion of the installation and these advance payments are deferred until the system installations are completed or specified milestones are attained. Costs incurred on uncompleted contracts are accumulated and recorded as deferred costs until the system installations are completed or specified milestones are attained. Contracts for annual recurring services such as support and maintenance agreements are generally billed in advance and are recorded as revenue ratable (on a monthly basis) over the contractual periods. Nonrefundable up front fees and related costs are recognized ratably over the term of the contract or the expected life of the client relationship, whichever is longer. Revenue for contingent collection services and overpayment identification and recovery services is recognized in the month collection payments are received based upon a percentage of cash collected or other agreed upon contractual parameters. In compliance with SOP 03-3, we account for our investments in receivable portfolios using either the level-yield method or the cost recovery method. During 2008, we began using the cost recovery method for healthcare receivable portfolios and certain newly acquired pools. For all other receivable portfolios, we believe that the amounts and timing of cash collections for our purchased receivables can be reasonably estimated; therefore, we utilize the level-yield method of accounting for our purchased receivables. The level-yield method applies an effective interest rate or internal rate of return (“IRR”) to the cost basis of portfolio pools. SOP 03-3 increases the probability that we will incur impairment allowances in the future, and these allowances could be material. Periodically, we will sell all or a portion of a receivables pool to third parties. The gain or loss on these sales is recognized to the extent the proceeds exceed or, in the case of a loss, are less than the cost basis of the underlying receivables.

Cost of Services: Cost of services includes labor, sales commissions, telephone and other expenses directly related to service activities.

Selling, General and Administrative Expenses: Selling, general and administrative expenses consist of expenses that support the ongoing operation of our business. These expenses include costs related to division management, facilities costs, equipment depreciation and maintenance, amortization of finite-lived intangible assets, sales and marketing activities, client support services, bad debt expense and corporate management costs.

Other Income (Expense): Other income (expense) includes interest expense from short-term and long-term borrowings under credit facilities and portfolio notes payable, the aggregate gain (loss) on debt transactions denominated in currencies other than the functional currency, sub-lease rental income and interest income from short-term investments.

Cash and Cash Equivalents: We consider short-term investments with original maturities of three months or less at acquisition to be cash equivalents.

Trust Cash: Trust cash represents cash collected on behalf of our clients that has not yet been remitted to them. A related liability is recorded in accounts payable until settlement with the respective clients.

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.

Accounts Receivable: Accounts receivable from customers is presented net of an allowance for doubtful accounts of approximately $12.4 million and $6.5 million at December 31, 2008 and 2007, respectively.

 

F-9


WEST CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006

 

Property and Equipment: Property and equipment are recorded at cost. Depreciation expense is based on the estimated useful lives of the assets or remaining lease terms, whichever is shorter, and is calculated on the straight-line method. Our owned buildings have estimated useful lives ranging from 20 to 39 years and the majority of the other assets have estimated useful lives of three to five years. We review property, plant and equipment for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. Recoverability of an asset “held-for-use” is determined by comparing the carrying amount of the asset to the undiscounted net cash flows expected to be generated from the use of the asset. If the carrying amount is greater than the undiscounted net cash flows expected to be generated by the asset, the asset’s carrying amount is reduced to its fair value. An asset “held-for-sale” is reported at the lower of the carrying amount or fair value less cost to sell.

Goodwill and Other Intangible Assets: Goodwill and intangible assets with indefinite lives are not amortized, but are tested for impairment on an annual basis. During September 2007 the Company recognized an $8.8 million impairment charge to fully write-off the goodwill associated with a majority-owned unrestricted subsidiary. The majority-owned subsidiary, which had been consolidated in the communication services segment, was disposed of in the fourth quarter of 2007. We have determined that goodwill and intangible assets with indefinite lives are not impaired and therefore no additional write-off is necessary. Finite-lived intangible assets are reviewed for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable.

Other Assets: Other assets primarily include the unamortized balance of debt acquisition costs, assets held in non-qualified deferred compensation plans, and the unamortized balance of internally developed capitalized software and licensing agreements. The assets held in the non-qualified deferred compensation plans represent mutual funds, invested in debt and equity securities, classified as trading securities in accordance with Financial Accounting Standard No. 115, Accounting for Certain Investments in Debt and Equity Securities , considering the employee’s ability to change the investment allocation of their deferred compensation at any time. These investments are reported at fair value with unrealized gains and losses recognized currently within other income. The underlying obligation, recorded in other liabilities, is likewise reported at the investments’ fair value with adjustments recognized currently within compensation expense. Both the investment and the obligation are classified as non-current.

Income Taxes: We file a consolidated United States income tax return. We use an asset and liability 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. Income tax expense has been provided on the portion of foreign source income that we have determined will be repatriated to the United States. On January 1, 2007, we adopted Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109 (“FIN 48”). FIN 48 requires that uncertain tax positions are evaluated in a two-step process, whereby (1) we determine whether it is more likely than not that the tax positions will be sustained based on the technical merits of the position and (2) for those tax positions that meet the more likely than not recognition threshold, we would recognize the largest amount of tax benefit that is greater than fifty percent likely to be realized upon ultimate settlement with the related tax authority.

Other Comprehensive Income (Loss): Comprehensive income (loss) is composed of unrealized gains or losses on foreign currency translation adjustments arising from changes in exchange rates of our foreign subsidiaries. Assets and liabilities are translated at the exchange rates in effect on the balance sheet dates. The translation adjustment is included in comprehensive income, net of related tax expense. Also, the gain or loss on the effective portion of cash flow hedges (i.e., change in fair value) is initially reported as a component of other comprehensive income (loss). The remaining gain or loss is recognized in interest expense in the same period in which the cash flow hedge affects earnings. These are the only components of other comprehensive income (loss).

Stock Based Compensation: On January 1, 2006, we adopted Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123R”). SFAS 123R requires us to recognize expense related to the fair value of employee stock option awards and to measure the cost of employee services received in exchange for an award of equity instruments based on the grant date fair value of the award.

 

F-10


WEST CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006

 

Non-controlling Interest: Our portfolio receivable lenders own a non-controlling interest in several of our portfolio receivable subsidiaries. The Company made a retrospective adoption of Financial Accounting Statement No. 160 Non-controlling Interests in Consolidated Financial Statements – An Amendment of ARB No 51 in this filing to the consolidated balance sheet for the years ended December 31, 2008 and 2007 and in the consolidated statements of operations, cash flows, and stockholders’ equity (deficit) for the years ended December 31, 2008, 2007 and 2006 to reflect the reclassification of the non-controlling interests.

Common Stock: As a result of the recapitalization, our publicly traded securities were cancelled. Our current equity investors (i.e., the Sponsors, the Founders and certain members of management) acquired a combination of Class L and Class A shares (in strips of eight Class A shares and one Class L share) in exchange for cash or in respect of converted shares. Supplemental management incentive equity awards (restricted stock and option programs) have been implemented with Class A shares/options only. General terms of these securities are:

 

   

Class L shares: Each Class L share is entitled to a priority return preference equal to the sum of (x) $90 per share base amount plus (y) an amount sufficient to generate a 12% internal rate of return (“IRR”) on that base amount from the date of the recapitalization until the priority return preference is paid in full. At closing of the recapitalization, the Company issued 9.8 million Class L shares. Each Class L share also participates in any equity appreciation beyond the priority return on the same per share basis as the Class A shares.

 

   

Class A shares: Class A shares participate in the equity appreciation after the Class L priority return is satisfied. At closing of the recapitalization, the Company issued approximately 78.2 million Class A shares.

 

   

Voting: Each share (whether Class A or Class L) is entitled to one vote per share on all matters on which stockholders vote, subject to Delaware law regarding class voting rights.

 

   

Distributions: Dividends and other distributions to stockholders in respect of shares, whether as part of an ordinary distribution of earnings, as a leveraged recapitalization or in the event of an ultimate liquidation and distribution of available corporate assets, are to be paid as follows. First, holders of Class L shares are entitled to receive an amount equal to the Class L base amount of $90 per share plus an amount sufficient to generate a 12% IRR on that base amount, compounded quarterly from the closing date of the recapitalization to the date of payment. Second, after payment of this priority return to Class L holders, the holders of Class A shares and Class L shares participate together, as a single class, in any and all distributions by the Company.

 

   

Conversion of Class L shares: Class L shares automatically convert into Class A shares immediately prior to an Initial Public Offering (“IPO”). Also, the board of directors may elect to cause all Class L shares to be converted into Class A shares in connection with a transfer (by stock sale, merger or otherwise) of a majority of all common stock to a third party (other than to Thomas H. Lee Partners, LP and its affiliates). In the case of any such conversion (whether at an IPO or sale), if any unpaid Class L priority return (base $90/share plus accrued 12% IRR) remains unpaid at the time of conversion it will be “paid” in additional Class A shares valued at the deal price (in case of IPO, at the IPO price net of underwriter’s discount); that is, each Class L share would convert into a number of Class A shares equal to (i) one plus (ii) a fraction, the numerator of which is the unpaid priority return on such Class L share and the denominator of which is the value of a Class A share at the time of conversion.

As the Class L stockholders control a majority of the votes of the board of directors through direct representation on the board of directors and the conversion and redemption features are considered to be outside the control of the Company, all shares of Class L common stock have been presented outside of permanent equity in accordance with EITF Topic D-98, Classification and Measurement of Redeemable Securities. At December 31, 2008 and 2007, the 12% priority return preference has been accreted and included in the Class L share balance.

 

F-11


WEST CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006

 

In accordance with EITF Issue 98-5, Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios (“EITF 98-5”), the Company determined that the conversion feature in the Class L shares is in-the-money at the date of issuance and therefore represents a beneficial conversion feature. Under EITF 98-5, $12.2 million (the intrinsic value of the beneficial conversion feature) of the proceeds received from the issuance of the Class L shares was allocated to additional paid-in capital, consistent with the classification of the Class A shares, creating a discount on the Class L shares. Because the Class L shares have no stated redemption date and the beneficial conversion feature is not considered to be contingent under EITF 98-5, but can be realized immediately, the discount resulting from the allocation of value to the beneficial conversion feature is required to be recognized immediately as a return to the Class L stockholders analogous to a dividend. As no retained earnings are available to pay this dividend at the date of issuance, the dividend is charged against additional paid-in capital resulting in no net impact.

Recent Accounting Pronouncements: In December 2007, the FASB issued Statement No. 141 (Revised 2007) Business Combinations (“SFAS 141R”). SFAS 141R will change the accounting for business combinations. Under SFAS 141R, an acquiring entity will be required to recognize all the assets acquired and liabilities assumed in a transaction at fair value on the acquisition date, with limited exceptions. SFAS 141R will also change the accounting treatment and disclosure for certain specific items in a business combination. SFAS 141R applies to us prospectively for business combinations occurring on or after January 1, 2009. Accordingly, any business combinations we engage in will be recorded and disclosed following existing GAAP until January 1, 2009. We expect SFAS 141R will have an impact on accounting for business combinations once adopted but the effect is dependent upon acquisitions at that time.

In March 2008, the FASB issued SFAS 161, Disclosures about Derivative Instruments and Hedging Activities (“SFAS 161”). SFAS 161 is an amendment of FASB Statement No. 133 (“SFAS 133”), Accounting for Derivative Instruments and Hedging Activities. To address concerns that the existing disclosure requirements of SFAS 133 do not provide adequate information, this Statement requires enhanced disclosures about an entity’s derivative and hedging activities and thereby improves the transparency of financial reporting. This statement shall be effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. We do not expect the adoption of SFAS 161 to have a material impact on our consolidated financial position, results of operations and cash flows.

 

2. MERGERS AND ACQUISITIONS

Positron

On November 21, 2008 we closed the acquisition of IPC Information Systems Holdings, Inc., the holding company for IPC Systems, Inc.’s command systems segment, including Positron Public Safety Systems, Inc. (“Positron”). The purchase price including transaction costs, net of cash received of $2.0 million, was approximately $165.3 million in cash. We funded the acquisition with cash on hand. The results of Positron’s operations have been included in our consolidated financial statements in the Communication Services segment since November 21, 2008.

Positron offers fully-integrated, premise-based public safety solutions that enable Enhanced 9-1-1 call handling, computer-aided dispatching, mapping, automated vehicle location and radio communications capabilities to allow public safety agencies to better coordinate responses to emergency events. Based in Montreal, Quebec, Canada, Positron has been providing public safety solutions for more than 20 years.

The following table summarizes the preliminary estimated fair values of the assets acquired and liabilities assumed at November 21, 2008. The finite-lived intangible assets are comprised of trade names, client relationships and technology. We are in the process of completing the valuation of certain intangible assets and purchase price allocation, therefore, the purchase price allocation is subject to refinement.

 

F-12


WEST CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006

 

     (Amounts in
thousands)
November 21, 2008

Cash

   $ 1,954

Other current assets

     51,619

Property and equipment

     4,512

Other assets

     43

Intangible assets

     29,500

Goodwill

     143,420
      

Total assets acquired

     231,048
      

Current liabilities

     10,283

Other liabilities

     42,317

Non-current deferred taxes

     11,210
      

Total liabilities assumed

     63,810
      

Net assets acquired

   $ 167,238
      

Genesys

On May 22, 2008, we closed the acquisition of Genesys SA (“Genesys”), a global conferencing service provider. At June 30, 2008 our ownership in Genesys was approximately 96.6%. In the third quarter of 2008, we acquired the remaining minority issued and outstanding shares and stock options of Genesys. Total acquisition costs, including transaction expenses, are expected to be approximately $321.3 million. We funded the acquisition with proceeds from an incremental term loan under our existing credit facility for $134.0 million ($126.2 million, net of fees), a $75.0 million multicurrency revolving credit facility ($72.6 million, net of fees) entered into by InterCall Conferencing Services Limited, a foreign subsidiary of InterCall, a draw of $45.0 million under our existing revolving credit facility and cash on hand.

The results of Genesys’ operations have been included in our consolidated financial statements in the Unified Communications segment since May 22, 2008.

The following table summarizes the preliminary estimated fair values of the assets acquired and liabilities assumed at May 22, 2008. The finite-lived intangible assets are comprised of trade names, client relationships and technology. We are in the process of completing the valuation of certain intangible assets and purchase price allocation, therefore, the purchase price allocation is subject to refinement.

 

F-13


WEST CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006

 

     (Amounts in
thousands)
May 22, 2008

Cash

   $ 7,451

Other current assets

     53,347

Property and equipment

     26,661

Deferred tax asset

     19,133

Other assets

     1,890

Intangible assets

     118,171

Goodwill

     169,429
      

Total assets acquired

     396,082
      

Current liabilities

     74,204

Other liabilities

     559

Noncontrolling interest

     2,213
      

Total liabilities assumed

     76,976
      

Net assets acquired

   $ 319,106
      

HBF

On April 1, 2008, West Corporation completed the acquisition of all the outstanding shares of HBF Communications Inc. (“HBF”), an Austin, Texas based company that provides emergency communication solutions to telecommunication providers and public safety organizations. The purchase price including transactions costs, net of cash received of $0.2 million, was approximately $19.0 million and was funded by cash on hand. Finite-lived intangible assets of client relationships, technology and a non-competition agreement totaling $5.9 million were assigned in the purchase price allocation as well as $17.2 million in related goodwill. The purchase allocation was based on the use of the cost, market and income approaches and was completed in 2008.

The results of HBF’s operations have been included in our consolidated financial statements in the Communication Services segment since April 1, 2008.

Omnium

On May 4, 2007, we completed the acquisition of all of the outstanding shares of Omnium Worldwide, Inc. (“Omnium”) pursuant to the Agreement and Plan of Merger, dated as of April 18, 2007, by and among West Corporation, Platte Acquisition Corp., a wholly owned subsidiary of West Corporation, and Omnium. The purchase price including transaction costs and working capital adjustment, net of cash received of $15.2 million, was approximately $127.1 million in cash and $11.6 million in Company equity (116,160 Class L shares and 929,280 Class A shares). We funded the acquisition with proceeds from the amended senior secured term loan facility and cash on hand. The results of Omnium’s operations have been included in our consolidated financial statements in the Communication Services segment since May 1, 2007.

Omnium is a provider of revenue cycle management solutions to the insurance, financial services, communications and healthcare industries and of overpayment identification and claims subrogation to the insurance industry. Omnium utilizes proprietary technology, data models and business processes to improve its clients’ cash flows. Omnium also provides services of identifying and processing probate claims on behalf of credit grantors.

 

F-14


WEST CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006

 

The following table summarizes the fair values of the assets acquired and liabilities assumed at May 1, 2007. The finite-lived intangible assets are comprised of trade names, client relationships and technology. The purchase allocation was based on the use of the cost, market and income approaches and completed in 2008.

 

     (Amounts in
thousands)
May 1, 2007

Cash

   $ 15,230

Other current assets

     23,257

Property and equipment

     10,262

Intangible assets

     67,940

Goodwill

     89,681
      

Total assets acquired

     206,370
      

Current liabilities

     31,855

Capital lease obligations

     933

Non-current deferred taxes

     20,297
      

Total liabilities assumed

     53,085
      

Net assets acquired

   $ 153,285
      

TeleVox

On March 1, 2007, we completed our acquisition of all of the outstanding shares of TeleVox Software, Incorporated (“TeleVox”) pursuant to the Agreement and Plan of Merger, dated as of January 31, 2007, by and among West Corporation, Ringer Acquisition Corp., a wholly owned subsidiary of West Corporation, and TeleVox. The purchase price, net of cash received of $5.2 million and transaction costs, was approximately $128.9 million in cash. We funded the acquisition with cash on hand and the proceeds from the amended senior secured term loan facility. The results of TeleVox’s operations have been included in our consolidated financial statements in the Communication Services segment since March 1, 2007.

TeleVox is a provider of automated messaging services to primarily the healthcare industry. TeleVox offers customer communication products, including message delivery, inbound inquiry, website design and hosting and secure online communication portals.

 

F-15


WEST CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006

 

The following table summarizes the fair values of the assets acquired and liabilities assumed at March 1, 2007. The finite-lived intangible assets are comprised of trade names, client relationships and technology. The purchase allocation was based on the use of the market and income approaches and completed in 2007.

 

     (Amounts in
thousands)
March 1, 2007

Cash

   $ 5,161

Other current assets

     6,041

Property and equipment

     1,012

Other long-term assets

     5,053

Intangible assets

     49,700

Goodwill

     104,521
      

Total assets acquired

     171,488
      

Current liabilities

     14,966

Capital lease obligations

     131

Other long-term liabilities

     119

Non current deferred taxes

     22,184
      

Total liabilities assumed

     37,400
      

Net assets acquired

   $ 134,088
      

CenterPost

On February 1, 2007, we completed our acquisition of all of the outstanding shares of CenterPost Communications, Inc. (“CenterPost”) pursuant to the Agreement and Plan of Merger, dated as of January 31, 2007, by and among West Corporation, Platinum Acquisition Corp., a wholly owned subsidiary of West Corporation, and CenterPost. The purchase price, net of cash received of $1.0 million and transaction costs, was approximately $22.2 million in cash. We funded the acquisition with cash on hand. The results of CenterPost’s operations have been included in our consolidated financial statements in the Unified Communications segment since February 1, 2007. On April 2, 2007 CenterPost changed its name to West Notifications Group, Inc. (“WNG”).

WNG is a provider of enterprise multi-channel solutions for automating communications between companies and their customers via voice, email, fax, wireless text and instant messaging. WNG’s solutions are designed to help companies acquire, care for, grow and retain customers by enabling frequent and relevant customer contact at a price-point that is superior to traditional methods. WNG provides services to some of the nation’s largest companies in industries such as travel & transportation, banking & financial services, health sciences and property & casualty insurance.

 

F-16


WEST CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006

 

The following table summarizes the fair values of the assets acquired and liabilities assumed at February 1, 2007. The purchase allocation was based on the use of the market and income approaches and completed in 2007. The finite-lived intangible assets are comprised of client relationships and technology.

 

     (Amounts in
thousands)
February 1, 2007

Cash

   $ 1,019

Other current assets

     1,001

Property and equipment

     464

Deferred tax asset

     507

Intangible assets

     5,950

Goodwill

     16,436
      

Total assets acquired

     25,377
      

Current liabilities

     2,145
      

Total liabilities assumed

     2,145
      

Net assets acquired

   $ 23,232
      

Assuming the acquisitions of Positron, Genesys, HBF, Omnium, TeleVox and WNG occurred as of the beginning of the periods presented, our unaudited pro forma results of operations for the years ended December 31, 2008 and 2007 would have been, in thousands, as follows:

 

     2008     2007  

Revenue

   $ 2,416,246      $ 2,402,110   

Net Income (Loss)—West Corporation

   $ 12,693      $ (20,248

Earnings per common L share—basic

   $ 12.78      $ 11.08   

Earnings per common L share—diluted

   $ 12.24      $ 10.68   

Earnings per common A share—basic

   $ (1.30   $ (1.49

Earnings per common A share—diluted

   $ (1.30   $ (1.49

The pro forma results above are not necessarily indicative of the operating results that would have actually occurred if the acquisitions had been in effect on the dates indicated, nor are they necessarily indicative of future results of the combined companies.

 

F-17


WEST CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006

 

3. GOODWILL AND OTHER INTANGIBLE ASSETS

The following table presents the activity in goodwill by reporting segment for the years ended December 31, 2008 and 2007, in thousands:

 

     Unified
Communications
    Communication
Services
    Consolidated  

Balance at January 1, 2007

   $ 551,873      $ 634,502      $ 1,186,375   

Acquisitions

     120,013        94,072        214,085   

Impairment of a majority-owned subsidiary

     -          (8,843     (8,843

Purchase accounting adjustments

     (7,754     (53,885     (61,639
                        

Balance at December 31, 2007

     664,132        665,846        1,329,978   

Acquisitions

     169,429        160,637        330,066   

Purchase accounting adjustments

     2,545        (4,392     (1,847

Foreign currency translation adjustment

     (15,340     -          (15,340
                        

Balance at December 31, 2008

   $ 820,766      $ 822,091      $ 1,642,857   
                        

We allocated the excess of the Positron and Genesys purchase costs over the fair value of the assets acquired and other finite-lived intangible assets to goodwill based on preliminary estimates. We are in the process of completing the purchase price allocation and the valuation of certain intangible assets. The process of completing a purchase price allocation and intangible asset valuation involves numerous time consuming steps for information gathering, verification and review. We expect to finalize this process in 2009. Goodwill recognized for Positron and Genesys at December 31, 2008 is approximately $143.4 million and $154.1 million, respectively and not deductible for tax purposes.

During 2008 we completed the purchase price allocation for the Omnium acquisition. The results of the valuation of certain intangible assets required a reduction of $1.6 million to be allocated to finite-lived intangible assets and a corresponding increase to goodwill and a decrease in deferred taxes from what was previously estimated. Also, as a result of completing the valuation, the estimated useful economic lives of the finite-lived intangible assets were increased. The estimated increase (reduction) in amortization expense for the Omnium intangible assets in 2008 through 2012 is approximately ($5.7) million, ($8.5) million, ($2.2) million, $0.8 million and $1.4 million, respectively.

During 2007, we recorded an $8.8 million impairment charge to write-off the goodwill associated with our investment in a majority-owned subsidiary.

Factors Contributing to the Recognition of Goodwill

Factors that contributed to a purchase price resulting in goodwill, non-deductible for tax purposes, for the purchase of Positron included its position in a growing market and vertical expansion in the emergency communication infrastructure.

Factors that contributed to a purchase price resulting in goodwill, non-deductible for tax purposes, for the purchase of Genesys included its system synergies in the Unified Communications segment, the expansion of our global presence and margin expansion opportunities due to additional scale and cost savings opportunities.

Factors that contributed to a purchase price resulting in goodwill, non-deductible for tax purposes, for the purchase of HBF included expansion of our public safety presence within the wireless and Voice-over-Internet Protocol (VoIP) market and margin expansion opportunities due to additional scale and cost savings opportunities.

Factors that contributed to a purchase price resulting in goodwill, non-deductible for tax purposes, for the purchase of Omnium, WNG and TeleVox included their respective positions in large and growing markets and margin expansion opportunities due to additional scale.

 

F-18


WEST CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006

 

Other intangible assets

Below is a summary of the major intangible assets and weighted average amortization periods for each identifiable intangible asset, in thousands:

 

     As of December 31, 2008    Weighted

Intangible assets

   Acquired
Cost
   Accumulated
Amortization
    Net Intangible
Assets
   Average
Amortization
Period (Years)

Client Relationships

   $ 466,884    $ (190,177   $ 276,707    9.0

Technology & Patents

     84,808      (26,695     58,113    10.7

Trade names

     64,285      -          64,285    Indefinite

Trade names (finite lived)

     8,360      (4,369     3,991    5.5

Other intangible assets

     9,924      (7,990     1,934    5.7
                        

Total

   $ 634,261    $ (229,231   $ 405,030   
                        

 

     As of December 31, 2007    Weighted

Intangible assets

   Acquired
Cost
   Accumulated
Amortization
    Net Intangible
Assets
   Average
Amortization
Period (Years)

Client Relationships

   $ 354,668    $ (127,622   $ 227,046    9.0

Technology & Patents

     64,832      (19,214     45,618    9.7

Trade names

     54,285      -          54,285    Indefinite

Trade names (finite lived)

     9,310      (3,157     6,153    4.4

Other intangible assets

     9,865      (6,560     3,305    5.8
                        

Total

   $ 492,960    $ (156,553   $ 336,407   
                        

Amortization expense for finite-lived intangible assets was $73.4 million, $66.9 million and $36.5 million for the years ended December 31, 2008, 2007 and 2006, respectively. Estimated amortization expense for the intangible assets acquired in all acquisitions for the next five years in millions is as follows:

 

2009

   $ 67.8

2010

   $ 57.3

2011

   $ 45.8

2012

   $ 37.9

2013

   $ 32.8

The amount of other indefinite and finite-lived intangible assets recognized in the Positron acquisition is currently estimated to be approximately $29.2 million, net of amortization, and is comprised of client relationships and technology. These finite-lived intangible assets are being amortized over five to fourteen years based on a method that most appropriately reflects our expected cash flows from these assets. Amortization expense for the Positron finite-lived intangible assets was approximately $0.3 million in 2008.

The amount of other finite-lived intangible assets recognized in the Genesys acquisition is currently estimated to be approximately $89.6 million, net of amortization, and is comprised of trade names, client relationships and technology. These finite-lived intangible assets are being amortized over two to nine years based on a method that most appropriately reflects our expected cash flows from these assets. Amortization expense for the Genesys finite-lived intangible assets was approximately $18.5 million in 2008.

The amount of other finite-lived intangible assets recognized in the HBF acquisition is approximately $4.9 million, net of

 

F-19


amortization, and is comprised of a non-compete agreement, client relationships and technology. These finite-lived intangible assets are being amortized over two to seven years based on a method that most appropriately reflects our expected cash flows from these assets. Amortization expense for the HBF finite-lived intangible assets was approximately $1.0 million in 2008.

The amount of other finite-lived intangible assets recognized in the Omnium acquisition is approximately $49.8 million, net of amortization, and is comprised of trade names, customer relationships, a non-compete agreement and technology. These finite-lived intangible assets are being amortized over three to eleven years based on a method that most appropriately reflects our expected cash flows from these assets. Amortization expense for the Omnium finite-lived intangible assets was approximately $8.6 million and $9.5 million in 2008 and 2007, respectively.

The amount of other finite-lived intangible assets recognized in the TeleVox acquisition is approximately $39.3 million, net of amortization, and is comprised of trade names, client relationships, non-compete agreements and technology. These finite-lived intangible assets are being amortized over five to twelve and one half years based on a method that most appropriately reflects our expected cash flows from these assets. Amortization expense for the TeleVox finite-lived intangible assets was approximately $3.5 million and $6.9 million in 2008 and 2007, respectively.

The amount of other finite-lived intangible assets recognized in the WNG acquisition is approximately $2.2 million, net of amortization, and is comprised of client relationships and technology. These finite-lived intangible assets are being amortized over six to ten years based on a method that most appropriately reflects our expected cash flows from these assets. Amortization expense for the WNG finite-lived intangible assets was approximately $0.5 million and $3.3 million in 2008 and 2007, respectively.

The intangible asset trade names for six acquisitions InterCall and ConferenceCall.com in 2003, Intrado and InPulse in 2006, TeleVox in 2007 and Positron in 2008 were determined to have an indefinite life based on management’s current intentions. If factors were to change that would indicate the need to assign a definite life to these assets, we will do so and commence amortization. We periodically assess the trade names value. This assessment is made using the relief-from-royalty method, under which the value of a trade name is determined based on a royalty that could be charged to a third party for using the trade name in question. The royalty, which is based on a reasonable rate applied against forecasted sales, is tax-effected and discounted to present value.

Below is a summary of other intangible assets, at acquired cost, by reporting segment at December 31, 2008 and 2007, in thousands:

 

     Communication
Services
   Unified
Communications
   Corporate    Consolidated

As of December 31, 2008

           

Customer lists

   $ 210,097    $ 256,787    $ -      $ 466,884

Technology & Patents

     53,973      30,454      381      84,808

Trade names

     35,901      36,744      -        72,645

Other intangible assets

     5,725      4,199      -        9,924
                           

Total

   $ 305,696    $ 328,184    $ 381    $ 634,261
                           

As of December 31, 2007

           

Customer lists

   $ 184,935    $ 169,733    $ -      $ 354,668

Technology & Patents

     51,992      12,630      210      64,832

Trade names

     29,391      34,205      -        63,596

Other intangible assets

     5,575      4,289      -        9,864
                           

Total

   $ 271,893    $ 220,857    $ 210    $ 492,960
                           

 

F-20


WEST CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006

 

4 . PORTFOLIO RECEIVABLES

Changes in purchased receivable portfolios for the years ended December 31, 2008 and 2007, respectively, in thousands, were as follows:

 

     2008     2007  

Beginning of period

   $ 210,142      $ 149,657   

Purchases, net of putbacks

     45,403        127,412   

Recoveries, including portfolio sales of $17,881 and $28,848

     (171,612     (212,624

Revenue recognized

     125,218        148,232   

Portfolio allowances

     (76,405     (2,535
                

Balance at end of period

     132,746        210,142   

Less: current portion