West Corporation
WEST CORP (Form: S-1/A, Received: 12/01/2009 17:11:48)
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As filed with the Securities and Exchange Commission on December 1, 2009

Registration No. 333-162292

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

AMENDMENT NO. 2 TO

Form S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

 

West Corporation

(Exact name of Registrant as specified in its charter)

 

 

 

Delaware   7389   47-0777362
(State or other jurisdiction of
incorporation or organization)
  (Primary Standard Industrial
Classification Code Number)
  (IRS Employer
Identification No.)

11808 Miracle Hills Drive

Omaha, Nebraska 68154

(402) 963-1200

(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)

David C. Mussman

Executive Vice President,

Secretary and General Counsel

West Corporation

11808 Miracle Hills Drive

Omaha, Nebraska 68154

(402) 963-1200

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

 

Copies to:

 

Frederick C. Lowinger

Robert L. Verigan

Sidley Austin LLP

One South Dearborn Street

Chicago, Illinois 60603

(312) 853-7000

 

Keith F. Higgins

Andrew J. Terry

Ropes & Gray LLP

One International Place

Boston, Massachusetts 02110

(617) 951-7000

 

 

 

Approximate date of commencement of proposed sale to public: As soon as practicable after this registration statement becomes effective.

 

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.   ¨

 

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.   ¨

 

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.   ¨

 

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.   ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one).

 

Large accelerated Filer   ¨    Accelerated filer   ¨    Non-accelerated filer   x    Smaller reporting company   ¨
      (Do not check if a smaller reporting company)   

 

The Registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until this registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 


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The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities, nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

PROSPECTUS (Subject to completion)

Issued December 1, 2009

 

             Shares

 

LOGO

 

West Corporation

 

 

 

This is an initial public offering of shares of common stock of West Corporation. No public market for our common stock has existed since our recapitalization in 2006.

 

We are offering              of the shares to be sold in the offering. The selling stockholders identified in this prospectus are offering an additional              shares of our common stock. We will not receive any of the proceeds from the sale of the shares being sold by the selling stockholders.

 

We anticipate that the initial public offering price per share will be between $             and $            .

 

 

 

We have applied to list our common stock on the Nasdaq Global Select Market under the symbol “WSTC.”

 

 

 

Investing in our common stock involves risks. See “ Risk Factors ” beginning on page 15.

 

 

 

Price $         Per Share

 

 

 

      

Price to
Public

    

Underwriting
Discounts and
Commission

    

Proceeds to
Us

    

Proceeds to

Selling Stockholders

Per Share

     $              $                      $                  $                          

Total

     $                 $                          $                     $                              

 

We have granted the underwriters a 30-day option to purchase up to an aggregate of              additional shares of common stock on the same terms set forth above. See the section of this prospectus entitled “Underwriting.”

 

The Securities and Exchange Commission and state securities regulators have not approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

The underwriters expect to deliver the shares to purchasers on or about                     , 2009.

 

 

 

Goldman, Sachs & Co.

Morgan Stanley

 

 

 

BofA Merrill Lynch

Citi

 

 

 

Deutsche Bank Securities

Wells Fargo Securities

Barclays Capital

 

 

 

Baird            Sanford C. Bernstein            William Blair & Company           Credit Suisse           UBS Investment Bank

 

 

 

Raymond James                              Signal Hill

 

                    , 2009


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LOGO


Table of Contents

TABLE OF CONTENTS

 

     Page

Prospectus Summary

   1

Summary Consolidated Financial Data

   12

Risk Factors

   15

Special Note Regarding Forward-Looking Statements

   28

Use of Proceeds

   29

Dividend Policy

   29

Capitalization

   30

Dilution

   32

Selected Consolidated Financial Data

   34

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   37

Business

   70

Management

   86
     Page

Executive Compensation

   90

Principal and Selling Stockholders

   110

Certain Relationships and Related Party Transactions

   112

Description of Capital Stock

   115

Shares Available For Future Sale

   118

Material U.S. Federal Tax Considerations For Non-U.S. Stockholders

   120

Underwriting

   123

Legal Matters

   130

Experts

   130

Where You Can Find More Information

   130

Index to Consolidated Financial Statements

   F-1

 

You should rely only on the information contained in this prospectus and any free writing prospectus we provide to you. Neither we nor the underwriters have authorized any other person to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. Neither we nor the underwriters are making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should assume that the information appearing in this prospectus is accurate only as of the date on the front cover of this prospectus or such other date stated in this prospectus.

 

Until                     , 2009 (25 days after the date of this prospectus), all dealers that buy, sell or trade our common stock, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

 

We obtained the industry, market and competitive position data used throughout this prospectus from our own research, internal surveys and studies conducted by third parties, independent industry associations or general publications and other publicly available information.

 

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PROSPECTUS SUMMARY

 

This summary highlights selected information about us and this offering. This summary may not contain all of the information that you should consider before making an investment decision. You should read carefully the more detailed information set forth under “Risk Factors” and the other information included in this prospectus. Except where the context suggests otherwise, the terms “company,” “we,” “us” and “our” refer to West Corporation and its consolidated subsidiaries. Unless indicated otherwise, the information in this prospectus assumes the common stock to be sold in this offering is to be sold at $             per share and no exercise by the underwriters of their option to purchase additional shares.

 

We refer to Adjusted EBITDA in various places in this prospectus. The definitions of EBITDA and Adjusted EBITDA and a reconciliation of EBITDA and Adjusted EBITDA to net income is set forth in note 3 to “Prospectus Summary—Summary Consolidated Financial Data” and a reconciliation of Adjusted EBITDA to cash flows from operating activities is set forth under “Management’s Discussion and Analysis of Financial Results of Operations—Debt Covenants.” References in this prospectus to compound annual growth rate, or CAGR, refer to the growth rate of the item measured over the applicable period as if it had grown at a constant rate on an annually compounded basis. We believe that the presentation of CAGR is useful to investors in assessing growth over time but caution should be taken in reliance on CAGR as a sole measure of growth as it may understate the potential effects of volatility by presenting trends at a steady rate.

 

Our Company

 

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, $19.5 million in net income and $287.4 million in cash flows from operating activities. For the nine months ended September 30, 2009, we grew revenue by 5.8% over the comparable period in 2008 to $1,772.9 million and generated $483.4 million in adjusted EBITDA, or 27.3% margins, $63.7 million in net income and $200.8 million in cash flows from operating activities. See “—Summary Consolidated 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

 

 

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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.

 

Our Services

 

We believe we have built our reputation as a best-in-class service provider over the past 23 years by delivering differentiated, high-quality solutions for our clients. Our portfolio of technology-driven, voice-oriented solutions includes:

 

LOGO

 

Unified Communications

 

   

Conferencing & Collaboration Services. Operating under the InterCall brand, we are the largest conferencing services provider in the world based on conferencing revenue, according to Wainhouse Research, 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.

 

 

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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 believe 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.

 

Market Opportunity

 

Over the past 23 years, we have focused on leveraging our strengths in voice-oriented markets to serve the increasingly complex communications needs of our target client base. The global customer care business process outsourcing (“BPO”) market was estimated to be approximately $59 billion in 2008 with a projected compound annual growth rate (“CAGR”) through 2013 of over 9% according to IDC. In this market, we target opportunities where we can operate with a sustained competitive advantage and drive the highest levels of profitability. We have built on our position in this market by investing in emerging service delivery models with attractive end-market growth characteristics, such as West at Home customer care, that provide a higher quality of service to our clients. We believe we are one of the largest providers of this home-based model, having invested in this market early as client adoption began to accelerate. According to DataMonitor, the global agent base for providing home-based services is expected to grow at a 33% CAGR through 2012.

 

Our investment strategy has evolved over the years as we have targeted new and complementary markets that not only leverage our depth of expertise in voice-oriented solutions but also deliver value through less labor- intensive areas such as conferencing and collaboration, emergency communications and alerts and notifications

 

 

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services. Consistent with this strategy, we entered the conferencing and collaboration services market with our acquisition of InterCall in 2003. Through organic growth and multiple strategic acquisitions, we have built on our initial success with our InterCall brand to become the leading global provider of conferencing services in 2008 based on revenue, according to Wainhouse Research.

 

The global market for unified communications services was $5.6 billion in 2008 and is expected to grow at a CAGR of 18.9% through 2013 according to Wainhouse Research. We believe this growth is being driven by a number of factors, including increased globalization of business activity, focus on lower costs, increased adoption of conferencing and collaboration services and increasing awareness of the need for rapid communication during emergencies. By leveraging our global sales team and diversified client base, we intend to continue targeting higher growth, underserved markets.

 

The emergency communications infrastructure services market represents a complementary opportunity that allows us to diversify into end-markets that are less susceptible to downturns in the economy. According to Compass Intelligence, approximately $3.3 billion of government-sponsored funds are estimated to be available for 9-1-1 software, hardware and systems expenditures in 2009 and such funds are expected to grow at a 7% CAGR through 2013.

 

Business Evolution Since the Recapitalization

 

Over the past several years, we have expanded our capabilities and repositioned our business to meet the growing needs of our clients, addressing attractive new markets with strong demand characteristics and growth profiles. Our evolution during this time frame has resulted in a meaningful shift of our business mix towards a higher growth, higher margin automated processing model. As we continue to increase the level of automated services we provide, we intend to pursue opportunities in markets where we have industry expertise and clients place a premium on the quality of service provided. Since 2005, we have invested approximately $1.6 billion in strategic acquisitions of value-added service providers, including approximately $800 million since our recapitalization in 2006. We have increased our penetration into higher growth international conferencing markets, strengthened our alerts and notifications services business and established a leadership position in emergency communication infrastructure management services. We have also meaningfully reoriented our business to address the emergence of unified communication products, a fast-growing demand trend. The following summaries further highlight the steps we have taken to improve our business:

 

   

Evolved into a Predominantly Automated Solutions Business. We have continued our evolution into a diversified and automated technology-driven service provider. Our revenue from automated services businesses grew from 37% of total revenue in 2005 to 64% for the nine months ended September 30, 2009, and our operating income from automated services businesses grew from 53% of total operating income to 93% 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 27% for the nine months ended September 30, 2009.

 

   

Expanded Emergency Communications Services. In early 2006, we acquired Intrado and, in 2008, we acquired HBF Communications and Positron Public Safety Systems to become the largest provider of 9-1-1 and emergency communications infrastructure services to telecommunications service providers, government agencies and public safety organizations, based on the number of 9-1-1 calls facilitated. To complement these acquisitions, we have steadily increased our presence in this market through substantial investments in proprietary systems to develop IP-based emergency communications services capabilities. This business is characterized by long-term client contracts.

 

   

Expanded Conferencing Presence. Through both organic growth and acquisitions, we have been successful in expanding the reach of our conferencing services both domestically and internationally. Our conferencing services volume has grown from approximately 21 million calls in 2006 to over 61

 

 

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million calls in 2008. In addition, we increased our worldwide presence in this market by acquiring Genesys, a global conferencing services provider, in May 2008 and we are now the largest conferencing services provider in the world based on conferencing revenue, according to Wainhouse Research.

 

   

Strengthened Alerts and Notifications Business. In 2007, we increased our presence in the high growth, high margin alerts and notifications business through the acquisitions of CenterPost Communications and TeleVox. We now provide automated communication solutions across more industries, including financial services, communications, transportation and pharmacy. TeleVox delivers patient notifications to a diverse base of clients in the medical and dental markets as well as certain other commercial clients such as regional utilities and credit unions.

 

   

Revised Our Organizational Structure. During the third quarter of 2009, we began operating in two segments, Unified Communications and Communication Services. We moved our alerts and notifications division from the Communication Services segment into the Unified Communications segment to leverage the sales channel and product distribution expertise developed in the conferencing and collaboration business, including the management of a field sales force and the acquisition of customers over the Internet, to facilitate growth. The receivables management division, which was previously reported as a separate segment, is now part of the Communication Services segment. The activities of the receivables management business have become more focused over the past year on providing agent-based services to the client base it shares with the other Communication Services businesses. Accordingly, the Communication Services segment is expected to continue to facilitate the use of a common sales force and shared contact center infrastructure to better coordinate agent and workstation productivity and more cost-effectively allocate resources. This revised organizational structure is intended to more closely align each business line with the allocation of resources by our management team and more closely reflects how we manage our business.

 

Our Competitive Strengths

 

We have developed operational and market expertise to serve the needs of clients who place a premium on the services we provide. We believe the following strengths have helped us to establish a leading competitive position in the markets we serve.

 

   

Proven Business Model Built Over Decades. We have built a strong and stable business model that has delivered a 33% revenue CAGR since our inception in 1986 and helped our clients by processing billions of minutes of their voice-oriented transactions. As demand for outsourced solutions grows with greater adoption of our technologies and services and the global trend towards business process outsourcing, we believe our long history of delivering results for our clients combined with our scale and the significant investments we have made in our businesses provide us with a significant competitive advantage.

 

   

Broad Portfolio of Product Offerings with Attractive Value Proposition. Our technology-driven platforms combined with our operational expertise and processes allow us to provide a broad range of complementary automated and agent-based service offerings that help establish deep relationships with our clients. Our ability to efficiently and cost-effectively process high volume, complex transactions for our clients facilitates their critical communications and helps improve their cost structure.

 

   

Scalable Operating Model. We have developed integrated proprietary platforms that we believe form one of the largest multi-carrier, multi-protocol secure managed networks. By allowing us to focus our research and development efforts on new services for multiple transaction types, our highly scalable operating model enables us to enhance our value proposition to clients and achieve greater efficiencies and returns from our infrastructure and invested capital. We also benefit from our ability to use our infrastructure and human capital across our business lines providing for the most efficient and opportunistic use of resources.

 

   

Strong, Recurring Client Relationships and Transactions. The nature of our deep strategic and operational partnerships with our clients has allowed us to build long-lasting relationships with clients

 

 

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who operate in a broad range of industries, including telecommunications, banking, retail, financial services, technology and healthcare. Our top ten clients during the nine months ended September 30, 2009 have an average tenure of approximately ten years. During the nine months ended September 30, 2009, our 100 largest clients represented approximately 56% of our revenue and approximately 47% of our revenue came from clients purchasing multiple service offerings.

 

   

Large-Scale, Technology-Driven Platforms. We leverage our strengths in technology, telephony and human capital management to process voice-oriented transactions for our clients. With approximately 500,000 telephony ports to handle conference calls, alerts and notifications and customer service, 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 IP ports, which we believe provide us with the only large-scale proprietary IP-based global conferencing platform deployed and in use today.

 

   

Experienced Management Team. Our senior leadership has an average tenure of 11 years with us and has delivered strong results through various market cycles, both as a public and as a private company. As a group, this team has created a culture of superior client service and has been able to achieve a 17% revenue CAGR over the past ten years. We also have established a long track record of successfully acquiring and integrating companies to drive growth and margin expansion.

 

Our Growth Strategy

 

Our strategy is to identify growing markets where we can deploy our existing assets and expertise to strengthen our competitive position. Our strategy is supported by our commitment to superior client service, operational excellence and technological and market leadership. Key aspects of our strategy include the following:

 

Drive Revenue and Profit Opportunities

 

   

Expand Relationships with Existing Clients . We are focused on deepening and expanding relationships with our existing clients by delivering value in the form of reduced costs, improved customer relationships and enhanced revenue opportunities. Approximately 47% of our revenue for the nine months ended September 30, 2009 came from clients purchasing multiple service offerings from us. As we demonstrate the value that our services provide, often starting with a discrete service, we are frequently able to expand the size and scope of our client relationships.

 

   

Develop New Client Relationships. In addition to expanding and enhancing our existing relationships, we will pursue new client opportunities. We will continue to focus on building long-term client relationships across a wide range of industries and geographies to further diversify our revenue base. We target clients in industries in which we have expertise or other competitive advantages and an ability to deliver a wide range of solutions that have a meaningful impact on their business. For example, our acquisition of Genesys in 2008 combined with our expertise in conferencing and collaboration services has allowed us to penetrate substantial new international markets. By continuing to add long-term client relationships in large and growing markets, we believe we enhance the stability and growth potential of our revenue base.

 

Enhance Utilization of Deployed Assets

 

   

Continue to Enhance Leading Technology Capabilities. We believe our service offerings are enhanced by our superior technology capabilities and track record of innovation. We have approximately 300 pending patent applications for technology and processes that we have developed. Many of our advances in technology and new uses for our platforms have been achieved in close partnership with our clients, and we will continue to target technology-driven solutions that enable our

 

 

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clients to realize significant benefits. In addition to strengthening our client relationships, we believe our focus on technology facilitates our ongoing evolution towards a diversified, predominantly automated and technology-driven operating model.

 

   

Continue to Deliver Operational Excellence. We intend to continue to increase productivity and performance for our clients by leveraging our expertise in technology and telephony to efficiently process voice-oriented transactions. Our ability to provide improvements in processes is an important aspect of our value proposition to clients, and we will continue to leverage our proprietary technology infrastructure and shared services platform to manage higher value transactions and achieve cost savings for our clients and ourselves. In addition, we intend to continue to focus our efforts and expenditures in areas that we believe provide the greatest opportunity for profit enhancement.

 

Pursue Attractive Markets and Services

 

   

Target Growth Opportunities. 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 service 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.

 

Risk Factors

 

Our business is subject to numerous risks and uncertainties, as more fully described under “Risk Factors”, which you should carefully consider prior to deciding whether to invest in our common stock. For example,

 

   

recent global economic trends could adversely affect our business, results of operations and financial condition, primarily through disrupting our clients’ businesses;

 

   

we may not be able to compete successfully in some of our highly competitive markets, which could adversely affect our business, results of operations and financial condition;

 

   

we may not be able to generate sufficient cash to service all of our indebtedness and fund our other liquidity needs;

 

   

the success of our business depends on our ability to keep pace with our clients’ needs for rapid technological change and systems availability;

 

   

a large portion of our revenue is generated from a limited number of clients, and the loss of one or more key clients would result in the loss of revenue;

 

   

increases in the cost of voice and data services or significant interruptions in these services could adversely affect our business, results of operations and financial condition;

 

   

potential future impairments of our substantial goodwill, intangible assets, or other long-lived assets could adversely affect our financial condition and results of operations;

 

   

we had a negative net worth as of September 30, 2009, which may make it more difficult and costly for us to obtain financing in the future and may otherwise negatively impact our business;

 

   

decreases in our collections may have an adverse effect on our receivables management business;

 

   

we may be affected by existing and future litigation and regulatory restrictions;

 

 

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we may be unable to protect the personal data of our clients’ customers or our own proprietary technology;

 

   

our foreign operations subject us to risks inherent in conducting business internationally, including those related to political, economic and other conditions as well as foreign exchange rates; and

 

   

we may not be able to successfully identify or integrate recent and future acquisitions.

 

Corporate Information

 

We are a Delaware corporation that was founded in 1986. 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 us and Omaha Acquisition Corp., a Delaware corporation formed by the Sponsors for the purpose of our recapitalization. Pursuant to such recapitalization, Omaha Acquisition Corp. was merged with and into West Corporation, with West Corporation continuing as the surviving corporation, and our publicly traded securities were cancelled in exchange for cash.

 

We financed the recapitalization with equity contributions from the Sponsors and the rollover of a portion of our equity interests held by Gary and Mary West, the founders of West, 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.

 

Our principal executive offices are located at 11808 Miracle Hills Drive, Omaha, Nebraska 68154 and our telephone number at that address is (402) 963-1200. Our website address is www.west.com. None of the information on our website or any other website identified herein is part of this prospectus. All website addresses in this prospectus are intended to be inactive textual references only.

 

 

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The Offering

 

Common stock offered by us

             shares

 

Common stock offered by selling stockholders

             shares

 

Common stock to be outstanding after this offering

             shares
             shares

 

Use of proceeds

We intend to use the net proceeds from this offering to repay indebtedness, to fund amounts payable to the Sponsors upon the termination of our management agreement and for working capital and other general corporate purposes. See “Use of Proceeds.”

 

  We will not receive any proceeds from the shares sold by the selling stockholders.

 

Principal Stockholders

Upon completion of this offering, investment funds associated with the Sponsors will own a controlling interest in us. As a result, we currently intend to avail ourselves of the controlled company exemption under the Nasdaq Marketplace Rules. For more information, see “Management—Board Structure and Committee Composition.”

 

Risk factors

You should read carefully the “Risk Factors” section of this prospectus for a discussion of factors that you should consider before deciding to invest in shares of our common stock.

 

Proposed Nasdaq Global Select Market symbol

“WSTC”

 

The number of shares of our common stock to be outstanding following this offering is based on              shares of our common stock outstanding as of September 30, 2009, but excludes:

 

   

             shares of common stock issuable upon exercise of options outstanding as of September 30, 2009 at a weighted average exercise price of $             per share;

 

   

             shares of common stock reserved as of                      for future issuance under our 2010 Employee Stock Purchase Plan; and

 

   

             shares of common stock reserved for future issuance under our stock-based compensation plans, including              shares of common stock reserved for issuance under our 2010 Long-Term Incentive Plan, which will become effective on the date of this prospectus, and          shares of common stock reserved for issuance under our Nonqualified Deferred Compensation Plan.

 

Unless otherwise indicated, this prospectus reflects and assumes the following:

 

   

assuming an initial public offering price of $             per share, the mid-point of the range set forth on the cover page of this prospectus, the conversion of all outstanding shares of our Class A common stock and Class L common stock into              shares of our common stock in connection with this offering (the “Common Stock Conversion”); and

 

   

no exercise by the underwriters of their option to purchase up to              additional shares.

 

 

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The following table shows the anticipated holdings and proceeds that each of our Sponsors, directors and executive officers are expected to receive in connection with the offering based on an assumed initial public offering price of $             per share, the mid-point of the range set forth on the cover of this prospectus, and after deducting the underwriting discounts and commissions:

 

Name

   Shares
held
following
Offering
   Cash
Proceeds
from
Offering  (3)

Sponsors

     

Thomas H. Lee Funds (1)

     

Quadrangle Group Funds (2)

     

Directors and Executive Officers

     

Thomas B. Barker

     

Anthony J. DiNovi (4)

     

Soren L. Oberg (4)

     

Joshua L. Steiner (4)

     

Jeff T. Swenson (4)

     

Nancee R. Berger

     

Mark V. Lavin

     

Paul M. Mendlik

     

David C. Mussman

     

Steven M. Stangl

     

Todd Strubbe

     

David J. Treinen

     

 

  (1)   Includes Thomas H. Lee Equity Fund VI, L.P.; Thomas H. Lee Parallel Fund VI, L.P.; THL Equity Fund VI Investors (West), L.P.; Thomas H. Lee Parallel (DT) Fund VI, L.P.; THL Coinvestment Partners, L.P.; and THL Equity Fund VI Investors (West) HL, L.P. (collectively, the “THL Investors”); Putnam Investment Holdings, LLC; and Putnam Investments Employees’ Securities Company III LLC.
  (2)   Includes Quadrangle Capital Partners II LP; Quadrangle Select Partners II LP; and Quadrangle Capital Partners II-A LP (collectively, the “Quadrangle Investors”).
  (3)   Includes a payment of approximately $             million to the THL Investors and $             million to the Quadrangle Investors in connection with the termination of a management agreement. See “Certain Relationships and Related Party Transactions.”
  (4)   Each of Mr. DiNovi, Mr. Oberg, Mr. Steiner and Mr. Swenson is affiliated with a Sponsor. With respect to each such director, the amounts shown include shares of common stock held or cash proceeds received by the Sponsor with which such director is affiliated. Each such director has a pecuniary interest in shares of common stock held by, and cash proceeds received by, the Sponsor with which such director is affiliated.

 

 

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Common Stock Conversion

 

The Common Stock Conversion will occur immediately prior to the closing of this offering. In connection with the Common Stock Conversion, each share of Class L common stock will be entitled to a priority return preference equal to the sum of the $90 per share (“base amount”) plus an amount sufficient to generate a 12% internal rate of return on that base amount compounded quarterly from the date of the recapitalization in which the Class L common stock was originally issued (October 24, 2006) until the effective date of the Common Stock Conversion.

 

The aggregate priority return accrued on the issued and outstanding Class L common stock since the recapitalization in 2006 through the time of the Common Stock Conversion is $            .

 

The Class L priority return through the time of the Common Stock Conversion will be satisfied in the form of additional shares of Class A common stock based on the following conversion ratio: each share of Class L common stock converts into a number of shares of Class A common stock equal to (i) one plus (ii) a fraction, the numerator of which is the unpaid priority return on such share of Class L common stock and the denominator of which is the value of a share of Class A common stock at the time of the Common Stock Conversion. Assuming an initial public offering price of $             per share, the mid-point of the range set forth on the cover page of this prospectus, each share of Class L common stock will convert into      shares of Class A common stock, and after giving effect to such conversion, each share of Class A common stock will be reclassified on a one-for-one basis as a share of our common stock.

 

Related Party Payments

 

The total value of equity awards granted or vested in connection with this offering will be approximately $             million. Upon the completion of this offering, approximately $             will be paid to our Sponsors pursuant to existing agreements with such parties. See “Use of Proceeds” and “Certain Relationships and Related Party Transactions.”

 

 

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SUMMARY CONSOLIDATED FINANCIAL DATA

 

The following tables summarize the consolidated financial data for our business as of the dates and for the periods presented. Our historical results are not necessarily indicative of future operating results. You should read this summary consolidated financial data in conjunction with the sections titled “Selected Consolidated Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes, all included elsewhere in this prospectus.

 

     Year Ended December 31,     Nine Months Ended
September 30,
 
     2006     2007     2008     2008     2009  
     (in millions, except per share amounts)  

Consolidated Statement of Operations Data:

          

Revenue

   $ 1,856.0      $ 2,099.5      $ 2,247.4      $ 1,675.7      $ 1,772.9   

Cost of services

     818.5        912.4        1,015.0        756.2        798.9   

Selling, general and administrative expenses (1)

     800.3        840.5        881.6        657.9        680.8   
                                        

Operating income

     237.2        346.6        350.8        261.6        293.2   

Interest expense

     (94.8     (332.4     (313.0     (217.9     (193.8

Other income (expense)

     8.2        13.4        (8.6     (0.3     1.7   
                                        

Income before income tax expense and noncontrolling interest

     150.6        27.6        29.2        43.4        101.1   

Income tax expense

     65.5        6.8        11.7        17.4        37.4   
                                        

Net income

     85.1        20.8        17.5        26.0        63.7   

Less net income (loss)—noncontrolling interest

     16.3        15.4        (2.0     (2.3     2.7   
                                        

Net income—West Corporation

   $ 68.8      $ 5.4      $ 19.5      $ 28.3      $ 61.0   
                                        

Earnings (loss) per common share

          

Diluted—Class L

   $ 1.98      $ 10.68      $ 12.24      $ 9.33      $ 10.55   

Diluted—Class A

   $ 0.64      $ (1.20   $ (1.23   $ (0.78   $ (0.56

Pro forma earnings per common share (2)

          

 

     Year Ended December 31,     Nine Months Ended
September 30,
 
     2006     2007     2008     2008     2009  
     (dollars in millions)  

Selected Other Data:

          

Net cash flows from operating activities

   $ 215.7      $ 263.9      $ 287.4      $ 160.6      $ 200.8   

Net cash flows used in investing activities

     (812.3     (454.9     (597.5     (395.9     (57.4

Net cash flows from (used in) financing activities

     780.7        118.1        342.0        345.7        (232.2

Capital expenditures

     113.9        103.7        105.4        78.0        95.3   

Adjusted EBITDA (3)

     501.9        584.1        633.6        456.0        483.4   

Adjusted EBITDA margin (4)

     27.0     27.8     28.2     27.2     27.3

 

     As of September 30, 2009
     Actual     Pro Forma As
Adjusted (6)
     (in millions)

Consolidated Balance Sheet Data:

    

Cash and cash equivalents

   $ 82.2     

Working capital

   $ 139.6     

Total assets

   $ 3,146.2     

Long-term debt, net of current portion (5)

   $ 3,640.7     

Class L common stock

   $ 1,272.5     

Total stockholders’ equity (deficit)

   $ (2,387.0  

 

 

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  (1)   Includes stock-based compensation of $28.7 million, $1.3 million and $1.4 million for the years ended December 31, 2006, 2007 and 2008, respectively, and $1.0 million and $1.3 million for the nine months ended September 30, 2008 and 2009, respectively.
  (2)   Represents earnings per common share after giving effect to the Common Stock Conversion.
  (3)   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 as 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 prospectus 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.

 

 

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(continued)

 

    Year ended
December 31,
  Nine months ended
September 30,
 
    2006   2007   2008   2008   2009  
   

(in millions)

 

Net income

  $ 85.1   $ 20.8   $ 17.5   $ 26.0   $ 63.7   

Interest expense

    94.8     332.4     313.0     217.9     193.8   

Depreciation and amortization

    136.9     182.8     183.5     135.2     141.3   

Income tax expense

    65.5     6.8     11.7     17.4     37.4   
                               

EBITDA

    382.3     542.8     525.7     396.5     436.2   
                               

Provision for share-based compensation (a)

    28.7     1.3     1.4     1.0     1.3   

Acquisition synergies and transaction costs (b)

    89.6     22.0     21.0     14.0     14.7   

Non-cash portfolio impairments (c)

        1.0     76.4     44.1     25.5   

Site closure and other impairments (d)

        1.3     2.7     0.4     3.2   

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

            6.4         (0.9

Non-recurring litigation settlement costs (f)

        15.7             3.4   

Synthetic lease interest (g)

    1.3                   
                               

Adjusted EBITDA (h)

  $ 501.9   $ 584.1   $ 633.6   $ 456.0   $ 483.4   
                               

 

  (a)   Represents total share based compensation expense determined at fair value in accordance with Accounting Standards Codification Topic 718, Share-Based Payment (“ASC 718”) (formerly 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. Pro forma adjustments for acquired entities for the trailing twelve months ended September 30, 2009 and 2008 were $2.2 million and $59.0 million, respectively.

 

  (4)   Represents Adjusted EBITDA as a percentage of revenue.
  (5)   Long-term debt, net of current position is equal to total debt less portfolio notes payable and current portion of long-term debt.
  (6)   The pro forma as adjusted column in the consolidated balance sheet data table reflects the pro forma effect of the Common Stock Conversion. The pro forma as adjusted column gives further effect to the sale of             shares of common stock in this offering, at an assumed initial public offering price of $             per share, the mid-point of the range set forth on the cover of this prospectus, and after deducting estimated underwriting discounts and commissions and offering expenses payable by us and the application of our net proceeds from this offering.

 

 

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RISK FACTORS

 

Investing in our common stock involves substantial risks. In addition to the other information in this prospectus, you should carefully consider the following factors before investing in our common stock. Any of the risk factors we describe below could adversely affect our business, financial condition or results of operations. The market price of our common stock could decline if one or more of these risks and uncertainties actually occurs, causing you to lose all or part of the money you paid to buy our shares. Certain statements in “Risk Factors” are forward-looking statements. See “Special Note Regarding Forward-Looking Statements” elsewhere in this prospectus.

 

Risks Related to Our Business

 

Recent global economic trends could adversely affect our business, results of operations and financial condition, primarily through disrupting our clients’ businesses.

 

Recent global economic conditions, including disruption of financial markets, could adversely affect our business, results of operations and financial condition, primarily through disrupting our clients’ businesses. Higher rates of unemployment and lower levels of business generally adversely affect the level of demand for certain of our services. In addition, continuation or worsening of general market conditions in the United States economy or other national economies important to our businesses may adversely affect our clients’ level of spending, ability to obtain financing for purchases and ability to make timely payments to us for our services, which could require us to increase our allowance for doubtful accounts, negatively impact our days sales outstanding and adversely affect our results of operations.

 

We may not be able to compete successfully in our highly competitive industries, which could adversely affect our business, results of operations and financial condition.

 

We face significant competition in many of the markets in which we do business and expect that this competition will intensify. The principal competitive factors in our business are range of service offerings, global capabilities and price and quality of services. In addition, we believe there has been an industry trend to move agent-based operations toward offshore sites. This movement could result in excess capacity in the United States, where most of our current capacity exists. The trend toward international expansion by foreign and domestic competitors and continuous technological changes may erode profits by bringing new competitors into our markets and reducing prices. Our competitors’ products, services and pricing practices, as well as the timing and circumstances of the entry of additional competitors into our markets, could adversely affect our business, results of operations and financial condition.

 

Our Unified Communications segment faces technological advances and consolidation, which have contributed to pricing pressures. Competition in the web and video conferencing services arenas continues to increase as new vendors enter the marketplace and offer a broader range of conferencing solutions through new technologies, including, without limitation, Voice over Internet Protocol, on-premise solutions, private branch exchange (“PBX”) solutions, unified communications solutions and equipment and handset solutions.

 

Our Communication Services segment’s agent-based business and growth depend in large part on the industry trend toward outsourcing. This trend may not continue, or may continue at a slower pace, as organizations may elect to perform these services themselves. In addition, our Communication Services segment faces risks from technological advances that we may not be able to successfully address. We compete with third-party collection agencies, other financial service companies and credit originators. Some of these companies have substantially greater personnel and financial resources than we do. In addition, companies with greater financial resources than we have may elect in the future to enter the consumer debt collection business.

 

There are services in each of our business segments that are experiencing pricing declines. If we are unable to offset pricing declines through increased transaction volume and greater efficiency, our business, results of operations and financial condition could be adversely affected.

 

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Our business depends on our ability to keep pace with our clients’ needs for rapid technological change and systems availability.

 

Technology is a critical component of our business. We have invested in sophisticated and specialized computer and telephone technology and we anticipate that it will be necessary for us to continue to select, invest in and develop new and enhanced technology on a timely basis in the future in order to remain competitive. Our future success depends in part on our ability to continue to develop technology solutions that keep pace with evolving industry standards and changing client demands. Introduction of new methods and technologies brings corresponding risks associated with effecting change to a complex operating environment and, in the case of adding third party services, results in a dependency on an outside technology provider.

 

A large portion of our revenue is generated from a limited number of clients, and the loss of one or more key clients would result in the loss of revenue.

 

Our 100 largest clients represented approximately 56% of our total revenue for the year ended December 31, 2008 with one client, AT&T, accounting for approximately 13% of our total revenue. Subject to advance notice requirements and a specified wind down of purchases, AT&T may terminate certain of its contracts with us with or without cause at any time. If we fail to retain a significant amount of business from AT&T or any of our other significant clients, our business, results of operations and financial condition could be adversely affected.

 

We serve clients and industries that have experienced a significant level of consolidation in recent years. Additional consolidation could occur in which our clients could be acquired by companies that do not use our services. The loss of any significant client would result in a decrease in our revenue and could adversely affect our business, results of operations and financial condition.

 

Our contracts generally are not exclusive and typically do not provide for revenue commitments.

 

Contracts for many of our services generally enable our clients to unilaterally terminate the contract or reduce transaction volumes upon written notice and without penalty, in many cases based on our failure to attain certain service performance levels. The terms of these contracts are often also subject to renegotiation at any time. In addition, most of our contracts are not exclusive and do not ensure that we will generate a minimum level of revenue. Many of our clients also retain multiple service providers with whom we must compete. As a result, the profitability of each client program may fluctuate, sometimes significantly, throughout the various stages of a program.

 

Increases in the cost of voice and data services or significant interruptions in these services could adversely affect our business, results of operations and financial condition.

 

We depend on voice and data services provided by various telecommunications providers. Because of this dependence, any change to the telecommunications market that would disrupt these services or limit our ability to obtain services at favorable rates could adversely affect our business, results of operations and financial condition. While we have entered into long-term contracts with many of our telecommunications providers, there is no obligation for these vendors to renew their contracts with us or to offer the same or lower rates in the future. In addition, these contracts are subject to termination or modification for various reasons outside of our control. An adverse change in the pricing of voice and data services that we are unable to recover through price increases of our services, or any significant interruption in voice or data services, could adversely affect our business, results of operations and financial condition.

 

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Pending and future litigation may divert management’s time and attention and result in substantial costs of defense, damages or settlement, which could adversely affect our business, results of operations and financial condition.

 

We face uncertainties relating to the pending litigation described in “Business—Legal Proceedings” and we may not ultimately prevail or otherwise be able to satisfactorily resolve this litigation. In addition, other material suits by individuals or certified classes, claims, or investigations relating to the same or similar matters as those described in this prospectus or other aspects of our business, including our obligations to market additional products to our clients’ customers may arise in the future. Furthermore, we generally indemnify our clients against third-party claims asserting intellectual property violations, which may result in litigation. Regardless of the outcome of any of these lawsuits or any future actions, claims or investigations relating to the same or any other subject matter, we may incur substantial defense costs and these actions may cause a diversion of management’s time and attention. Also, we may be required to alter our business practices or pay substantial damages or settlement costs as a result of these proceedings, which could adversely affect our business, results of operations and financial condition. Finally, certain of the outcomes of such litigation may directly affect our business model, and thus our profitability.

 

We are subject to extensive regulation, which could limit or restrict our activities and impose financial requirements or limitations on the conduct of our business.

 

The United States Congress, the Federal Communications Commission (“FCC”) and the states and foreign jurisdictions where we provide services have promulgated and enacted rules and laws that govern personal privacy, telephone solicitations, the sale and collection of consumer debt, the provision of emergency communication services and data privacy. As a result, we may be subject to proceedings alleging violation of these rules and laws in the future. Additional rules and laws may require us to modify our operations or service offerings in order to meet our clients’ service requirements effectively, and these regulations may limit our activities or significantly increase the cost of regulatory compliance.

 

There are numerous state statutes and regulations governing telemarketing activities that do or may apply to us. For example, some states place restrictions on the methods and timing of telemarketing calls and require that certain mandatory disclosures be made during the course of a telemarketing call. Some states also require that telemarketers register in the state before conducting telemarketing business in the state. Such registration can be time consuming and costly. We specifically train our marketing representatives to handle calls in an approved manner. While we believe we are in compliance in all material respects with all federal and state telemarketing regulations, compliance with all such requirements is costly and time consuming. In addition, notwithstanding our compliance efforts, any failure on our part to comply with the registration and other legal requirements applicable to companies engaged in telemarketing activities could have an adverse impact on our business. We could become subject to litigation by private parties and governmental bodies alleging a violation of applicable laws or regulations, which could result in damages, regulatory fines, penalties and possible other relief under such laws and regulations and the accompanying costs and uncertainties of such litigation and enforcement actions.

 

Security and privacy breaches of the systems we use to protect personal data could adversely affect our business, results of operations and financial condition.

 

Our databases contain personal data of our clients’ customers, including credit card and healthcare information. Any security or privacy breach of these databases could expose us to liability, increase our expenses relating to the resolution of these breaches and deter our clients from selecting our services. Migration by our emergency communications business to IP-based communication increases this risk. Our data security procedures may not effectively counter evolving security risks, address the security and privacy concerns of existing or potential clients or be compliant with federal, state, and local laws and regulations in all respects. For our international operations, we are obligated to implement processes and procedures to comply with local data

 

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privacy regulations. Any failures in our security and privacy measures could adversely affect our business, financial condition and results of operations.

 

We may not be able to adequately protect our proprietary information or technology.

 

Our success depends in part upon our proprietary information and technology. We rely on a combination of copyright, patent, trademark and trade secret laws, as well as on confidentiality procedures and non-compete agreements, to establish and protect our proprietary rights in each of our segments. Third parties may infringe or misappropriate our patents, trademarks, trade names, trade secrets or other intellectual property rights, which could adversely affect our business, results of operations and financial condition, and litigation may be necessary to enforce our intellectual property rights, protect our trade secrets or determine the validity and scope of the proprietary rights of others. The steps we have taken to deter misappropriation of our proprietary information and technology or client data may be insufficient to protect us, and we may be unable to prevent infringement of our intellectual property rights or misappropriation of our proprietary information. Any infringement or misappropriation could harm any competitive advantage we currently derive or may derive from our proprietary rights. In addition, because we operate in many foreign jurisdictions, we may not be able to protect our intellectual property in the foreign jurisdictions in which we operate.

 

Our technology and services may infringe upon the intellectual property rights of others. Intellectual property infringement claims would be time consuming and expensive to defend and may result in limitations on our ability to use the intellectual property subject to these claims.

 

Third parties have asserted in the past and may assert claims against us in the future alleging that we are violating or infringing upon their intellectual property rights. Any claims and any resulting litigation could subject us to significant liability for damages. An adverse determination in any litigation of this type could require us to design around a third party’s patent, license alternative technology from another party or reduce or modify our product and service offerings. In addition, litigation is time-consuming and expensive to defend and could result in the diversion of our time and resources. Any claims from third parties may also result in limitations on our ability to use the intellectual property subject to these claims.

 

Our data and operation centers are exposed to service interruption, which could adversely affect our business, results of operations and financial condition.

 

Our outsourcing operations depend on our ability to protect our data and operation centers against damage that may be caused by fire, natural disasters, pandemics (including H1N1 flu), power failure, telecommunications failures, computer viruses, trojan horses, other malware, failures of our software, acts of sabotage or terrorism, riots and other emergencies. In addition, for some of our services, we are dependent on outside vendors and suppliers who may be similarly affected. In the past, natural disasters such as hurricanes have caused significant employee dislocation and turnover in the areas impacted. If we experience temporary or permanent employee dislocation or interruption at one or more of our data or operation centers through casualty, operating malfunction, data loss, system failure or other events, we may be unable to provide the services we are contractually obligated to deliver. As a result, we may experience a reduction in revenue or be required to pay contractual damages to some clients or allow some clients to terminate or renegotiate their contracts. Failure of our infrastructure due to the occurrence of a single event may have a disproportionately large impact on our business results. Any interruptions of this type could result in a prolonged interruption in our ability to provide our services to our clients, and our business interruption and property insurance may not adequately compensate us for any losses we may incur. These interruptions could adversely affect our business, results of operations and financial condition.

 

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Our future success depends on our ability to retain key personnel. Our inability to continue to attract and retain a sufficient number of qualified employees could adversely affect our business, results of operations and financial condition.

 

Our future success depends on the experience and continuing efforts and abilities of our management team and on the management teams of our operating subsidiaries. The loss of the services of one or more of these key employees could adversely affect our business, results of operations and financial condition. A large portion of our operations also require specially trained employees. From time to time, we must recruit and train qualified personnel at an accelerated rate in order to keep pace with our clients’ demands and our resulting need for specially trained employees. If we are unable to continue to hire, train and retain a sufficient labor force of qualified employees, our business, results of operations and financial condition could be adversely affected.

 

Increases in labor costs and turnover rates could adversely affect our business, results of operations and financial condition.

 

Portions of our Communication Services segment’s agent-based services are very labor intensive and experience high personnel turnover. Significant increases in the employee turnover rate could increase recruiting and training costs and decrease operating effectiveness and productivity. Moreover, many of our employees are hired on a part-time basis, and a significant portion of our costs consists of wages to hourly workers. In July 2009, the federal minimum wage rate increased to $7.25 per hour. Further increases in the minimum wage or labor regulation could increase our labor costs. The introduction of any federal or state requirements relating to mandatory minimum health insurance coverage for employees could also increase our labor costs. Increases in our labor costs, costs of employee benefits or employment taxes could adversely affect our business, results of operations and financial condition.

 

Because we have operations in countries outside of the United States, we may be subject to political, economic and other conditions affecting these countries that could result in increased operating expenses and regulation.

 

We operate or rely upon businesses in numerous countries outside the United States. We may expand further into additional countries and regions. There are risks inherent in conducting business internationally, including the following:

 

   

difficulties in staffing and managing international operations;

 

   

accounting (including managing internal control over financial reporting in our non-U.S. subsidiaries), tax and legal complexities arising from international operations;

 

   

burdensome regulatory requirements and unexpected changes in these requirements, including data protection requirements;

 

   

data privacy laws that may apply to the transmission of our clients’ and employee’s data to the U.S.;

 

   

localization of our services, including translation into foreign languages and associated expenses;

 

   

longer accounts receivable payment cycles and collection difficulties;

 

   

political and economic instability;

 

   

fluctuations in currency exchange rates;

 

   

potential difficulties in transferring funds generated overseas to the U.S. in a tax efficient manner;

 

   

seasonal reductions in business activity during the summer months in Europe and other parts of the world;

 

   

differences between the rules and procedures associated with handling emergency communications in the United States and those related to IP emergency communications originated outside of the United States; and

 

   

potentially adverse tax consequences.

 

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If we cannot manage our international operations successfully, our business, results of operations and financial condition could be adversely affected.

 

Changes in foreign exchange rates may adversely affect our revenue and net income attributed to foreign subsidiaries.

 

We conduct business in countries outside of the United States. Revenue and expense from our foreign operations are typically denominated in local currencies, thereby creating exposure to changes in exchange rates. Revenue and profit generated by our international operations will increase or decrease compared to prior periods as a result of changes in foreign currency exchange rates. Adverse changes to foreign exchange rates could decrease the value of revenue we receive from our international operations and have a material adverse impact on our business. Generally, we do not attempt to hedge our foreign currency transactions.

 

If we are unable to complete future acquisitions, our business strategy and earnings may be negatively affected.

 

Our ability to identify and take advantage of attractive acquisitions or other business development opportunities is an important component in implementing our overall business strategy. We may be unable to identify, finance or complete acquisitions or to do so at attractive valuations. Given the current illiquid capital markets, we may not be able to borrow sufficient additional funds, which may adversely affect our acquisition strategy.

 

If we are unable to integrate or achieve the objectives of our recent and future acquisitions, our overall business may suffer.

 

Our business strategy depends on successfully integrating the assets, operations and corporate functions of businesses we have acquired and any additional businesses we may acquire in the future. The acquisition of additional businesses involves integration risks, including:

 

   

the diversion of management’s time and attention away from operating our business to acquisition and integration challenges;

 

   

the unanticipated loss of key employees of the acquired businesses;

 

   

the potential need to implement or remediate controls, procedures and policies appropriate for a larger company at businesses that prior to the acquisition lacked these controls, procedures and policies;

 

   

the need to integrate accounting, information management, human resources, contract and intellectual property management and other administrative systems at each business to permit effective management; and

 

   

our entry into markets or geographic areas where we may have limited or no experience.

 

We may be unable to effectively or efficiently integrate businesses we have acquired or may acquire in the future without encountering the difficulties described above. Failure to integrate these businesses effectively could adversely affect our business, results of operations and financial condition.

 

In addition to this integration risk, our business, results of operations and financial condition could be adversely affected if we are unable to achieve the planned objectives of an acquisition. The inability to achieve our planned objectives could result from:

 

   

the financial underperformance of these acquisitions;

 

   

the loss of key clients of the acquired business, which may drive financial underperformance; and

 

   

the occurrence of unanticipated liabilities or contingencies for which we are unable to receive indemnification from the prior owner of the business.

 

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Potential future impairments of our substantial goodwill, intangible assets, or other long-lived assets could adversely affect our business results of operations and financial condition.

 

As of September 30, 2009, we had goodwill and intangible assets, net of accumulated amortization, of approximately $1.6 billion and $356.4 million, respectively. Management is required to exercise significant judgment in identifying and assessing whether impairment indicators exist, or if events or changes in circumstances have occurred, including market conditions, operating results, competition and general economic conditions. Accounting Standards Codification Topic 350, Intangibles—Goodwill and Other (“ASC 350”) requires that goodwill be tested annually using a two-step process. Any changes in key assumptions about the business units and their prospects or changes in market conditions or other externalities could result in an impairment charge, and such a charge could have a material adverse effect on our business, results of operations and financial condition.

 

Our ability to recover charged-off consumer receivables may be limited under federal and state laws, which could limit our ability to recover on our charged-off consumer receivables regardless of any act or omission on our part.

 

Federal and state consumer protection, privacy and related laws and regulations extensively regulate the relationship between debt collectors and debtors. Federal and state laws may limit our ability to recover on our charged-off consumer receivables regardless of any act or omission on our part. Some laws and regulations applicable to credit card issuers may preclude us from collecting on charged-off consumer receivables we purchase if the credit card issuer previously failed to comply with applicable laws in generating or servicing those receivables. Additional consumer protection and privacy protection laws may be enacted that would impose additional or more stringent requirements on the enforcement of and collection on consumer receivables. In addition, federal and state governments are considering, and may consider in the future, other legislative proposals that would further regulate the collection of consumer receivables. Any failure to comply with any current or future laws applicable to us could limit our ability to collect on our charged-off consumer receivable portfolios, which could adversely affect our business, results of operations and financial condition.

 

Decreases in our collections may have an adverse effect on our receivables management business. In addition, changes in expected collection rates on portfolios held by us may cause us to record allowances for impairment against carrying values of these portfolios.

 

In our receivables management business, we have purchased charged-off consumer receivable portfolios for a percentage of their face amount. Revenue in respect of many of the purchased receivable portfolios is recognized based on our estimate of future collections. Although these estimates are based on analytics, the actual amount collected on portfolios and the timing of those collections may differ from our estimates. Further deterioration in economic conditions in the United States may lead to higher rates of unemployment and personal bankruptcy filings and decrease the ability of consumers to pay their debts and result in a decline in our collections. If collections on portfolios are materially less than estimated, we may be required to record an impairment on our purchased receivables portfolios that could materially adversely affect our financial results. For the year ended December 31, 2008, we recorded impairment charges aggregating $76.4 million to establish valuation allowances against the carrying value of portfolio receivables as a result of reduced liquidation rates on existing portfolios associated with weaker economic conditions. During the nine months ended September 30, 2009, $25.5 million of valuation allowance impairments were taken.

 

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Risks Related to Our Level of Indebtedness

 

We may not be able to generate sufficient cash to service all of our indebtedness and fund our other liquidity needs, and we may be forced to take other actions, which may not be successful, to satisfy our obligations under our indebtedness.

 

At September 30, 2009, our aggregate long-term indebtedness, net of current portion, was $3,640.7 million. In 2008, our consolidated interest expense was approximately $313.0 million. Following the completion of this offering, we expect annual interest expense to be reduced by approximately $            , assuming net proceeds to us in this offering of approximately $            , based on an assumed initial public offering price of $             per share, the mid-point of the range on the cover of this prospectus. Our ability to make scheduled payments or to refinance our debt obligations and to fund our other liquidity needs depends on our financial and operating performance, which is subject to prevailing economic and competitive conditions and to certain financial, business and other factors beyond our control. We cannot make assurances that we will maintain a level of cash flows from operating activities sufficient to permit us to pay the principal, premium, if any, and interest on our indebtedness and to fund our other liquidity needs.

 

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. 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 our outstanding 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 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.

 

Our current or future indebtedness could impair our financial condition and reduce the funds available to us for other purposes, and our failure to comply with the covenants contained in our senior secured credit facilities documentation or the indentures that govern our outstanding notes could result in an event of default that could adversely affect our results of operations.

 

Our current or future indebtedness could adversely affect our business, results of operations or financial condition, including the following:

 

   

our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions, product development, general corporate purposes or other purposes may be impaired;

 

   

a significant portion of our cash flow from operations may be dedicated to the payment of interest and principal on our indebtedness, which will reduce the funds available to us for our operations, capital expenditures, future business opportunities or other purposes;

 

   

the debt service requirements of our other indebtedness could make it more difficult for us to satisfy our financial obligations;

 

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because we may be more leveraged than some of our competitors, our debt may place us at a competitive disadvantage;

 

   

our leverage will increase our vulnerability to economic downturns and limit our ability to withstand adverse events in our business by limiting our financial alternatives; and

 

   

our ability to capitalize on significant business opportunities and to plan for, or respond to, competition and changes in our business may be limited.

 

Our debt agreements contain, and any agreements to refinance our debt likely will contain, financial and restrictive covenants that limit our ability to incur additional debt, including to finance future operations or other capital needs, and to engage in other activities that we may believe are in our long-term best interests, including to dispose of or acquire assets. Our failure to comply with these covenants may result in an event of default, which, if not cured or waived, could accelerate the maturity of our indebtedness or result in modifications to our credit terms. 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.

 

We had a negative net worth as of September 30, 2009, which may make it more difficult and costly for us to obtain financing in the future and may otherwise negatively impact our business.

 

As of September 30, 2009, we had a negative net worth of $2,387.0 million. Our negative net worth primarily resulted from the incurrence of indebtedness to finance our recapitalization in 2006. As a result of our negative net worth, we may face greater difficulty and expense in obtaining future financing than we would face if we had a greater net worth, which may limit our ability to meet our needs for liquidity or otherwise compete effectively in the marketplace.

 

Despite our current indebtedness levels and the restrictive covenants set forth in agreements governing our indebtedness, we and our subsidiaries may still incur significant additional indebtedness, including secured indebtedness. Incurring additional indebtedness could increase the risks associated with our substantial indebtedness.

 

Subject to the restrictions in our debt agreements, we and certain of our subsidiaries may incur significant additional indebtedness, including additional secured indebtedness. Although the terms of our debt agreements contain restrictions on the incurrence of additional indebtedness, these restrictions are subject to a number of qualifications and exceptions, and additional indebtedness incurred in compliance with these restrictions could be significant. As of September 30, 2009, under the terms of our debt agreements, we would be permitted to incur up to approximately $300.0 million of additional tranches of term loans or increases to the revolving credit facility. Depending on the application of net proceeds received by us in this offering, our ability to incur additional indebtedness under our senior secured credit facilities could increase substantially and we may reborrow a portion of the debt repaid following this offering. If new debt is added to our and our subsidiaries’ current debt levels, the related risks that we face after this offering could increase.

 

Our lenders may not be willing or able to fulfill their lending commitments, which could have a material adverse impact on our business and financial condition.

 

The reduction in financial institutions’ willingness or ability to lend has increased the cost of capital and reduced the availability of credit. Although we currently believe that the financial institutions (other than Lehman Commercial Paper Inc., which is a defaulting lender under our senior secured credit facilities and has not funded $26 million of its commitment) syndicated under our senior secured credit facilities will be able to fulfill their commitments, there is no assurance that these institutions will be able to continue to do so, which could have a material adverse impact on our business and financial condition.

 

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Risks Related to This Offering and Our Common Stock

 

There has not been a public market for our shares since our recapitalization in 2006 and an active market may not develop or be maintained, which could limit your ability to sell shares of our common stock.

 

Before this offering, there has not been a public market for our shares of common stock since 2006. Although we have applied to list the common stock on the Nasdaq Global Select Market, an active public market for our shares may not develop or be sustained after this offering. The initial public offering price will be determined by negotiations between the underwriters, the selling stockholders and our Board of Directors and may not be representative of the market price at which our shares of common stock will trade after this offering. In particular, we cannot assure you that you will be able to resell our shares at or above the initial public offering price.

 

The price of our common stock could be volatile.

 

The overall market and the price of our common stock may fluctuate greatly. The trading price of our common stock may be significantly affected by various factors, including:

 

   

quarterly fluctuations in our operating results;

 

   

changes in investors’ and analysts’ perception of the business risks and conditions of our business;

 

   

our ability to meet the earnings estimates and other performance expectations of financial analysts or investors;

 

   

unfavorable commentary or downgrades of our stock by equity research analysts;

 

   

termination of lock-up agreements or other restrictions on the ability of our existing stockholders to sell their shares after this offering;

 

   

fluctuations in the stock prices of our peer companies or in stock markets in general; and

 

   

general economic or political conditions.

 

Future sales of our common stock may lower our stock price.

 

If our existing stockholders sell a large number of shares of our common stock following this offering, the market price of our common stock could decline significantly. In addition, the perception in the public market that our existing stockholders might sell shares of common stock could depress the market price of our common stock, regardless of the actual plans of our existing stockholders. Immediately after this offering, approximately              shares of our common stock will be outstanding, or              if the underwriters' option is exercised in full. Of these shares,              shares will be available for immediate resale in the public market, including all of the shares in this offering, and              shares will be available for resale 90 days following completion of this offering, except those held by our “affiliates.” Of the remaining shares outstanding, shares are subject to lock-up agreements restricting the sale of those shares for 180 days from the date of this prospectus. However, the underwriters may waive this restriction and allow the stockholders to sell their shares at any time.

 

In addition, following this offering and the sale by the selling stockholders of the shares offered by them hereby, assuming an initial public offering price of $             per share, which is the mid-point of the range set forth on the cover page of this prospectus, the holders of              shares of common stock will have the right, subject to certain exceptions and conditions, to require us to register their shares of common stock under the Securities Act, and they will have the right to participate in future registrations of securities by us. Registration of any of these outstanding shares of common stock would result in such shares becoming freely tradable without compliance with Rule 144 upon effectiveness of the registration statement. See “Shares Available for Future Sale.”

 

After this offering, we intend to register approximately              shares of common stock that are reserved for issuance upon exercise of options granted under our stock option plans. Once we register these shares, they can

 

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be sold in the public market upon issuance, subject to restrictions under the securities laws applicable to resales by affiliates.

 

Investors in this offering will suffer immediate and substantial dilution.

 

The initial public offering price per share of common stock will be substantially higher than our pro forma net tangible book value per share immediately after this offering. As a result, you will pay a price per share that substantially exceeds the book value of our assets after subtracting our liabilities. At an offering price of $             per share, the mid-point of the range set forth on the cover of this prospectus, you will incur immediate and substantial dilution in an amount of $             per share of common stock. See “Dilution.”

 

Moreover, we issued options in the past to acquire common stock at prices significantly below the assumed initial public offering price. As of                     , 2009,              shares of common stock were issuable upon exercise of outstanding stock options with a weighted average exercise price of $             per share. To the extent that these outstanding options are ultimately exercised, you will incur further dilution.

 

Anti-takeover provisions contained in our certificate of incorporation and bylaws, as well as provisions of Delaware law, could impair a takeover attempt that our stockholders may find beneficial.

 

Our certificate of incorporation, bylaws and Delaware law contain provisions that could have the effect of rendering more difficult or discouraging an acquisition deemed undesirable by our board of directors. Our corporate governance documents include provisions:

 

   

establishing a classified board of directors so that not all members of our board are elected at one time;

 

   

providing that directors may be removed by stockholders only for cause;

 

   

authorizing blank check preferred stock, which could be issued with voting, liquidation, dividend and other rights superior to our common stock;

 

   

limiting the ability of our stockholders to call and bring business before special meetings and to take action by written consent in lieu of a meeting;

 

   

requiring advance notice of stockholder proposals for business to be conducted at meetings of our stockholders and for nominations of candidates for election to our board of directors;

 

   

limiting the determination of the number of directors on our board of directors and the filling of vacancies or newly created seats on the board to our board of directors then in office.

 

These provisions, alone or together, could delay hostile takeovers and changes in control of our company or changes in our management.

 

As a Delaware corporation, we are also subject to provisions of Delaware law, including Section 203 of the Delaware General Corporation law, which prevents some stockholders holding more than 15% of our outstanding common stock from engaging in certain business combinations without approval of the holders of substantially all of our outstanding common stock. Any provision of our amended and restated certificate of incorporation or bylaws or Delaware law that has the effect of delaying or deterring a change in control could limit the opportunity for our stockholders to receive a premium for their shares of our common stock, and could also affect the price that some investors are willing to pay for our common stock.

 

Our existing stockholders will exert significant influence over us after the completion of this offering. Their interests may not coincide with yours and they may make decisions with which you may disagree.

 

After this offering, Gary L. West, Mary E. West and investment funds associated with the Sponsors will own, in the aggregate, approximately     % of our outstanding common stock. As a result, these stockholders, acting individually or together, could control substantially all matters requiring stockholder approval, including

 

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the election of most directors and approval of significant corporate transactions. In addition, this concentration of ownership may delay or prevent a change in control of our company and make some transactions more difficult or impossible without the support of these stockholders. The interests of these stockholders may not always coincide with our interests as a company or the interest of other stockholders. Accordingly, these stockholders could cause us to enter into transactions or agreements that you would not approve or make decisions with which you may disagree.

 

Because investment funds associated with the Sponsors have agreed to act together on certain matters, including with respect to the election of directors, and will own more than         % of our voting power after giving effect to this offering, we will be considered a “controlled company” under the Nasdaq Marketplace Rules. We intend to avail ourselves of the “controlled company” exception under the Nasdaq Marketplace Rules. As such, we will be exempt from certain of the corporate governance requirements under the Nasdaq Marketplace Rules, including the requirements that a majority of our board of directors consist of independent directors, that we have a nominating and corporate governance committee that is composed entirely of independent directors and that we have a compensation committee that is composed entirely of independent directors. As a result, for so long as we are a controlled company, you will not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance requirements under the Nasdaq Marketplace Rules.

 

Our amended and restated certificate of incorporation contains a provision renouncing our interest and expectancy in certain corporate opportunities.

 

Our amended and restated certificate of incorporation provides that we renounce any interest or expectancy in, or in being offered an opportunity to participate in, business opportunities that are from time to time presented to the Sponsors or any of their officers, directors, agents, stockholders, members, partners, affiliates and subsidiaries (other than West and its subsidiaries) and that may be business opportunities for such Sponsor, even if the opportunity is one that we might reasonably be deemed to have pursued or had the ability or desire to pursue if granted the opportunity to do so, and no such person shall be liable to us for breach of any fiduciary or other duty, as a director or officer or otherwise, by reason of the fact that such person, acting in good faith, pursues or acquires such business opportunity, directs such business opportunity to another person or fails to present such business opportunity, or information regarding such business opportunity, to us unless, in the case of any such person who is our director or officer, such business opportunity is expressly offered to such director or officer solely in his or her capacity as our director or officer. None of the Sponsors shall have any duty to refrain from engaging directly or indirectly in the same or similar business activities or lines of business as us or any of our subsidiaries.

 

These provisions apply subject only to certain ownership requirements of the Sponsors and other conditions. Our renouncing our interest and expectancy in such corporate opportunities could have a material adverse effect on our business, financial condition, results of operations or prospects if attractive corporate opportunities are procured by the Sponsors for their own benefit rather than for ours. See “Description of Capital Stock.”

 

If securities or industry analysts do not publish research or reports about our business, if they adversely change their recommendations regarding our common stock or if our operating results do not meet their expectations, our common stock price could decline.

 

The market price of our common stock will be influenced by the research and reports that industry or securities analysts publish about us or our business. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause the market price of our common stock or its trading volume to decline. Moreover, if one or more of the analysts who cover our company downgrade our common stock or if our operating results or prospects do not meet their expectations, the market price of our common stock could decline.

 

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Our management will have broad discretion over the use of the proceeds we receive in this offering and might not apply the proceeds in ways that increase the value of your investment.

 

Our management will have broad discretion to use our net proceeds from this offering, and you will be relying on the judgment of our management regarding the application of these proceeds. Our management might not apply our net proceeds of this offering in ways that increase the value of your investment. We expect to use the net proceeds to repay outstanding borrowings under our revolving credit facilities, to repurchase certain of our notes, to refund the amounts payable as a result of this offering under the management agreement between us and the Sponsors and for working capital and other general corporate purposes. Our management might not be able to yield a significant return, if any, on any investment of these net proceeds. You will not have the opportunity to influence our decisions on how to use our net proceeds from this offering.

 

After the completion of this offering, we do not expect to declare any dividends in the foreseeable future.

 

After the completion of this offering, we do not anticipate declaring any cash dividends to holders of our common stock in the foreseeable future. Consequently, investors may need to rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investment. Investors seeking cash dividends should not purchase our common stock.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This prospectus contains “forward-looking statements” within the meaning of the federal securities laws. All statements other than statements of historical facts contained in this prospectus, including statements regarding our future results of operations and financial position, business strategy and plans and objectives of management for future operations, are forward-looking statements. In many cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “could,” “intend,” “target,” “project,” “contemplate,” “believe,” “estimate,” “predict,” “potential” or “continue” or other similar words.

 

These forward-looking statements are only predictions. These statements relate to future events or our future financial performance and involve known and unknown risks, uncertainties and other important factors that may cause our actual results, levels of activity, performance or achievements to materially differ from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. We have described in the “Risk Factors” section and elsewhere in this prospectus the principal risks and uncertainties that we believe could cause actual results to differ from these forward-looking statements. Because forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified, you should not rely on these forward-looking statements as guarantees of future events.

 

The forward-looking statements in this prospectus represent our views as of the date of this prospectus. We anticipate that subsequent events and developments will cause our views to change. However, while we may elect to update these forward-looking statements at some point in the future, we have no current intention of doing so except to the extent required by applicable law. You should, therefore, not rely on these forward-looking statements as representing our views as of any date subsequent to the date of this prospectus.

 

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USE OF PROCEEDS

 

Based upon an assumed initial public offering price of $             per share, which is the mid-point of the price range set forth on the cover page of this prospectus, we estimate that we will receive net proceeds from this offering of approximately $             million, after deducting estimated underwriting discounts and commissions in connection with this offering and estimated offering expenses payable by us of $             million. See “Underwriting.”

 

We will not receive any of the proceeds from the shares of common stock sold by the selling stockholders in this offering.

 

We expect to use approximately $         million of the net proceeds from this offering received by us to repay or repurchase indebtedness, including amounts outstanding under our senior credit facilities, our senior notes and our senior subordinated notes. We do not currently have a firm expectation as to how we will allocate the reduction of indebtedness among these borrowing arrangements but intend to determine the allocation following the completion of this offering based on a number of factors, including remaining maturity, applicable interest rates, available pricing for repurchases, outstanding balance and ability to reborrow. As of September 30, 2009:

 

   

approximately $1,469.0 million was outstanding under our senior secured term loan facility due 2013 at a blended interest rate of 4.88%;

 

   

approximately $997.4 million was outstanding under our senior secured term loan facility due 2016 at a blended interest rate of 6.14%;

 

   

approximately $80.0 million was outstanding under our senior secured revolving loan facility due 2012 at a blended interest rate of 2.25%;

 

   

$650.0 million of our 9.5% senior notes due 2014 were outstanding; and

 

   

$450.0 million of our 11% senior subordinated notes due 2016 were outstanding.

 

For additional information regarding our liquidity and outstanding indebtedness, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”

 

We also expect to use approximately $         million to fund the amounts payable upon the termination of the management agreement between us and the Sponsors entered into in connection with the consummation of our recapitalization in 2006. We may also use a portion of the net proceeds received by us for working capital and other general corporate purposes.

 

We will have broad discretion in the way that we use the net proceeds of this offering received by us. The amounts that we actually spend for the purposes described above may vary significantly and will depend, in part, on the timing and amount of our future revenue, our future expenses and any potential acquisitions that we may pursue. Pending the uses of the net proceeds of this offering as described above, we intend to invest the net proceeds of this offering received by us in investment-grade, interest-bearing securities including corporate, financial institution, federal agency and U.S. government obligations. See “Risk Factors—Risks Related to This Offering and Our Common Stock—Our management will have broad discretion over the use of the proceeds we receive in this offering and might not apply the proceeds in ways that increase the value of your investment.”

 

DIVIDEND POLICY

 

We currently intend to retain earnings to finance the growth and development of our business and for working capital and general corporate purposes, and do not anticipate paying cash dividends on our common stock in the foreseeable future. Any payment of dividends will be at the discretion of our Board of Directors and will depend upon earnings, financial condition, capital requirements, level of indebtedness, contractual restrictions with respect to payment of dividends, restrictions imposed by applicable law and other factors. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”

 

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CAPITALIZATION

 

The following table shows our capitalization as of September 30, 2009:

 

   

on an actual basis; and

 

   

on a pro forma as adjusted basis to give pro forma effect to: (1) the Common Stock Conversion, and (2) the issuance and sale by us of              shares of our common stock in this offering at an assumed initial public offering price of $             per share, the mid-point of the range set forth on the cover of this prospectus, and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us and the application of the net proceeds to us from this offering as described in “Use of Proceeds.”

 

You should read this table together with the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Use of Proceeds” sections of this prospectus as well as our financial statements and related notes and the other financial information appearing elsewhere in this prospectus.

 

     As of September 30, 2009
     Actual     Pro Forma
As Adjusted (1)
     (unaudited)
(in thousands)

Cash and cash equivalents

   $ 82,154      $  
              

Long-term obligations, including current portion:

    

Senior Secured Term Loan Facility, due 2013

   $ 1,469,027      $  

Senior Secured Revolving Credit Facility, due 2012

     80,000     

Multi Currency Revolving Credit Facility, due 2011

     19,365     

9.5% Senior Notes, due 2014

     650,000     

Senior Secured Term Loan Facility, due 2016

     997,442     

11% Senior Subordinated Notes, due 2016

     450,000     

8.5% Mortgage Note, due 2011

     187     

Portfolio notes payable

     52,486     

Class L common stock, $0.001 par value, 100,000 shares authorized, 9,948 shares issued and outstanding, actual; no shares authorized, and no shares issued and outstanding, pro forma

     1,272,509       

Stockholders’ deficit:

    

Class A common stock, $0.001 par value, 400,000 shares authorized, 87,348 shares issued and 87,340 shares outstanding, actual; no shares authorized, and no shares issued and outstanding, pro forma

     87       

Preferred stock, $0.001 par value, no shares authorized and no shares issued and outstanding, actual;              shares authorized, and no shares issued and outstanding, pro forma

           

Common stock, $0.001 par value, no shares authorized and no shares issued and outstanding, actual;              shares authorized, and              shares issued and outstanding, pro forma

         

Retained deficit

     (2,377,699  

Accumulated other comprehensive loss

     (11,629  

Noncontrolling interest

     2,246     

Treasury stock at cost (8 shares)

     (53  
          

Total Stockholders’ deficit

     (2,387,048  
              

Total capitalization

   $ 2,603,968      $             
              

 

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  (1)   A $1.00 increase or decrease in the assumed initial public offering price per share would decrease or increase long-term obligations, including current portion, by $             million, would increase or decrease additional paid-in capital by $             million and would decrease or increase total stockholders’ deficit and would increase or decrease total capitalization each by $             million, after deducting the underwriting discounts and commissions and the estimated offering expenses payable by us. An increase or decrease of 1.0 million shares in the number of shares offered by us would decrease or increase long-term obligations, including current portion, by $             million, would increase or decrease additional paid-in capital by $             million, and would decrease or increase total stockholders’ deficit and would increase or decrease total capitalization each by approximately $             million, assuming the assumed initial public offering price of $             per share, the mid-point of the range set forth on the front cover of this prospectus, remains the same and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. The pro forma as adjusted information discussed above is illustrative only and will change based on the actual initial public offering price and other terms of this offering.

 

The share information as of September 30, 2009 shown in the table above excludes:

 

   

             shares of common stock issuable upon exercise of options outstanding as of September 30, 2009 at a weighted average exercise price of $             per share;

 

   

             shares of common stock reserved as of                                          for future issuance under our 2010 Employee Stock Purchase Plan; and

 

   

             shares of common stock reserved for future issuance under our stock-based compensation plans, including              shares of common stock reserved for issuance under our 2010 Long-Term Incentive Plan, which will become effective on the date of this prospectus, and              shares of common stock reserved for issuance under our Nonqualified Deferred Compensation Plan.

 

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DILUTION

 

If you invest in our common stock, your ownership interest will be immediately diluted to the extent of the difference between the initial public offering price per share of our common stock and the net tangible book value per share of our common stock after this offering. Dilution results from the fact that the per share offering price of the common stock is substantially in excess of the book value per share attributable to the existing stockholders for the presently outstanding stock.

 

Our net tangible book value at September 30, 2009 was $(3.1) billion, and our pro forma net tangible book value per share was $            . Pro forma net tangible book value per share before the offering has been determined by dividing net tangible book value (total book value of tangible assets less total liabilities) by the number of shares of common stock outstanding at September 30, 2009 (after giving effect to the Common Stock Conversion).

 

After giving effect to the sale of our common stock in this offering at an assumed initial public offering price of $             per share, the mid-point of the price range set forth on the cover page of this prospectus, and after deducting the underwriting discount and estimated offering expenses payable by us, our pro forma net tangible book value at September 30, 2009 would have been $             million, or $             per share. This represents an immediate increase in net tangible book value per share of $             to the existing stockholders and dilution in net tangible book value per share of $             to new investors who purchase shares in the offering. The following table illustrates this per share dilution to new investors:

 

Assumed initial public offering price per share

   $             

Pro forma net tangible book value per share as of September 30, 2009

   $  

Increase per share attributable to new investors in this offering

  

Pro forma net tangible book value per share after this offering

  

Dilution of net tangible book value per share to new investors

   $  
      

 

A $1.00 increase or decrease in the assumed initial public offering price of $             per share, the mid-point of the price range set forth on the front cover of this prospectus, would increase or decrease pro forma net tangible book value by approximately $             million, or approximately $             per share, and the dilution per share to investors in this offering by approximately $             per share, assuming that the number of shares offered by us set forth on the front cover of this prospectus remains the same and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. We may also increase or decrease the number of shares we are offering. An increase of 1.0 million shares in the number of shares offered by us would result in a pro forma net tangible book value of approximately $             million, or approximately $             per share, and the dilution per share to investors in this offering would be approximately $             per share, assuming the assumed initial public offering price of $             per share, the mid-point of the price range set forth on the front cover of this prospectus, remains the same and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, a decrease of 1.0 million shares in the number of shares offered by us would result in a pro forma net tangible book value of approximately $             million, or approximately $             per share, and the dilution per share to investors in this offering would be approximately $             per share, assuming the assumed initial public offering price of $             per share, the mid-point of the price range set forth on the front cover of this prospectus, remains the same and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. The dilution information discussed above is illustrative only and will change based on the actual initial public offering price and other terms of this offering.

 

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The following table summarizes, on the same pro forma basis as of September 30, 2009, the total number of shares of common stock purchased from us, the total consideration paid to us and the average price per share paid by the existing stockholders and by new investors purchasing shares in this offering (amounts in thousands, except percentages and per share data):

 

     Shares Purchased     Total Consideration     Average Price
Per Share
     Number    Percent     Amount    Percent    

Existing stockholders

             $                        $             

New investors

            
                              

Total

      100   $      100   $  
                              

 

A $1.00 increase or decrease in the assumed initial public offering price of $             per share, the mid-point of the price range set forth on the front cover of this prospectus, would increase or decrease total consideration paid by new investors and total consideration paid by all stockholders by $             million, assuming that the number of shares offered by us set forth on the front cover of this prospectus remains the same, and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. An increase or decrease of 1.0 million shares in the number of shares offered by us would increase or decrease the total consideration paid to us by new investors and total consideration paid to us by all stockholders by $             million, assuming the assumed initial public offering price of $             per share, the mid-point of the price range set forth on the front cover of this prospectus, remains the same and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

 

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SELECTED CONSOLIDATED 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 prospectus. 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 prospectus. In January 2009, we adopted Accounting Standards Codification Topic 810, Consolidation (“ASC 810”) (formerly Statement of Financial Accounting Standard 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.

 

We derived the selected consolidated financial data for the nine months ended September 30, 2009 and September 30, 2008 from our unaudited condensed consolidated financial statements included elsewhere in this prospectus, which, in the opinion of our management, have been prepared on the same basis as the audited financial statements and reflect all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of our results of operations and financial position for such periods. Results for the nine months ended September 30, 2009 and September 30, 2008 are not necessarily indicative of the results that may be expected for the entire year.

 

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 prospectus.

 

    Year Ended December 31,     Nine Months Ended
September 30,
 
    2004     2005     2006     2007     2008     2008     2009  
    (amounts in thousands, except per share amounts)  

Statement of Operations Data:

             

Revenue

  $ 1,217,383      $ 1,523,923      $ 1,856,038      $ 2,099,492      $ 2,247,434      $ 1,675,716      $ 1,772,878   

Cost of services

    541,979        687,381        818,522        912,389        1,015,028        756,189        798,888   

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

    487,513        569,865        800,301        840,532        881,586        657,954        680,775   
                                                       

Operating income

    187,891        266,677        237,215        346,571        350,820        261,573        293,215   

Interest expense

    (9,381     (15,358     (94,804     (332,372     (313,019     (217,924     (193,842

Other income (expense)

    3,013        2,177        8,144        13,396        (8,621     (298     1,687   
                                                       

Income before income tax expense and noncontrolling interest

    181,523        253,496        150,555        27,595        29,180        43,351        101,060   

Income tax expense

    65,762        87,736        65,505        6,814        11,731        17,341        37,360   
                                                       

Net income

    115,761        165,760        85,050        20,781        17,449        26,010        63,700   

Less net income (loss)—noncontrolling interest

    2,590        15,411        16,287        15,399        (2,058     (2,255     2,745   
                                                       

Net income—West Corporation

  $ 113,171      $ 150,349      $ 68,763      $ 5,382      $ 19,507      $ 28,265      $ 60,955   
                                                       

Earnings (loss) per share:

             

Basic

  $ 1.67      $ 2.18             

Diluted

  $ 1.63      $ 2.11             

Basic L shares

      $ 2.05      $ 11.08      $ 12.78      $ 9.73      $ 11.01   

Diluted L shares

      $ 1.98      $ 10.68      $ 12.24      $ 9.33      $ 10.55   

Basic A shares

      $ 0.66      $ (1.20   $ (1.23   $ (0.78   $ (0.56

Diluted A shares

      $ 0.64      $ (1.20   $ (1.23   $ (0.78   $ (0.56

Pro forma earnings per common share (2)

             

 

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    Year Ended December 31,     Nine Months Ended
September 30,
 
    2004     2005     2006     2007     2008     2008     2009  
    (dollars in thousands)  

Selected Other Data:

             

Net cash flows from operating activities

  $ 218,560      $ 290,004      $ 215,739      $ 263,897      $ 287,381      $ 160,621      $ 200,792   

Net cash flows used in investing activities

  $ (260,743   $ (297,154   $ (812,253   $ (454,946   $ (597,539   $ (395,916   $ (57,373

Net cash flows from financing activities

  $ 47,083      $ 9,507      $ 780,742      $ 118,106      $ 341,971      $ 345,707      $ (232,199

Capital expenditures

  $ 59,886      $ 76,855      $ 113,895      $ 103,647      $ 105,381      $ 78,010      $ 95,322   

Adjusted EBITDA (3)

  $ 291,003      $ 381,623      $ 501,942      $ 584,123      $ 633,551      $ 455,988      $ 483,352   

Adjusted EBITDA margin (4)

    23.9     25.0     27.0     27.8     28.2     27.2     27.3
    As of December 31,     As of September 30,  
    2004     2005     2006     2007     2008     2008     2009  
    (dollars in thousands)  

Balance Sheet Data:

             

Working capital

  $ 124,766      $ 110,047      $ 128,570      $ 187,795      $ 211,410      $ 283,799      $ 139,604   

Property and equipment, net

  $ 223,110      $ 234,871      $ 294,707      $ 298,645      $ 320,152      $ 315,382      $ 333,542   

Total assets

  $ 1,271,206      $ 1,498,662      $ 2,535,856      $ 2,846,490      $ 3,314,789      $ 3,270,771      $ 3,146,213   

Total debt

  $ 258,498      $ 260,520      $ 3,287,246      $ 3,596,691      $ 3,946,127      $ 3,954,085      $ 3,718,507   

Class L common stock

  $      $      $ 903,656      $ 1,029,782      $ 1,158,159      $ 1,125,908      $ 1,272,509   

Stockholders’ equity (deficit)

  $ 801,595      $ 987,177      $ (2,117,255   $ (2,227,198   $ (2,360,747   $ (2,313,041   $ (2,387,048

 

  (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, and $1,026 and $1,274 for the nine months ended September 30, 2008 and 2009, respectively.
  (2)   Represents earnings per common share after giving effect to the Common Stock Conversion.

 

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  (3)   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 as 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 prospectus 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.

 

    For the year ended December 31,   For the nine months
ended September 30,
 
    2004   2005   2006   2007   2008   2008   2009  
    (dollars in thousands)  

Net income

  $ 115,761   $ 165,760   $ 85,050   $ 20,781   $ 17,449   $ 26,010   $ 63,700   

Interest expense

    8,165     14,500     94,803     332,372     313,019     217,924     193,842   

Depreciation and amortization

    100,185     110,339     136,979     182,820     183,487     135,202     141,268   

Income tax expense

    65,762     87,736     65,505     6,814     11,731     17,341     37,360   
                                           

EDITDA

    289,873     378,335     382,337     542,787     525,686     396,477     436,170   
                                           

Provision for share-based compensation (a)

        538     28,738     1,276     1,404     1,026     1,274   

Acquisition synergies and transaction costs (b)

        1,365     89,562     22,006     20,985     13,984     14,743   

Non-cash portfolio impairments (c)

                1,004     76,405     44,076     25,464   

Site closure and other impairments (d)

                1,309     2,644     426     3,207   

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

                    6,427         (883

Non-recurring litigation settlement costs (f)

                15,741             3,376   

Synthetic lease interest (g)

    1,130     1,385     1,305                   
                                           

Adjusted EBITDA (h)

  $ 291,003   $ 381,623   $ 501,942   $ 584,123   $ 633,551   $ 455,989   $ 483,351   
                                           

 

  (a)   Represents total share based compensation expense determined at fair value in accordance with ASC 718 (formerly SFAS No. 123).
  (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. Pro forma adjustments for acquired entities for the trailing twelve months ended September 30, 2009 and 2008 were $2.2 million and $59.0 million, respectively.

 

  (4)   Represents Adjusted EBITDA as a percentage of revenue.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion should be read in conjunction with our consolidated financial statements and related notes and other financial information appearing elsewhere in this prospectus. In addition to historical information, the following discussion and other parts of this prospectus contain forward-looking information that involves risks and uncertainties. Our actual results could differ materially from those anticipated by such forward-looking information due to the factors discussed under “Risk Factors,” “Special Note Regarding Forward-Looking Statements” and elsewhere in this prospectus.

 

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. For the nine months ended September 30, 2009, we grew revenue by 5.8% over the comparable period in 2008 to $1,772.9 million and generated $483.4 million in adjusted EBITDA, or 27.3% margins, and $63.7 million in net income. See “Selected Consolidated 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

 

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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 is 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.

 

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. We recently extended 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). While 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 64% for the nine months ended September 30, 2009 and our operating income from automated services businesses has grown from 53% of total operating income to 93% over the same period. This

 

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shift in business mix towards higher growth and higher margin automated processing businesses has driven our adjusted EBITDA margin from 25% in 2005 to 27% for the nine months ended September 30, 2009.

 

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.

 

Revised Organizational Structure. During the third quarter of 2009, we began operating in two segments, Unified Communications and Communication Services. We moved our alerts and notifications division from the Communication Services segment into the Unified Communications segment to leverage the sales channel and product distribution expertise developed in the conferencing and collaboration business, including the management of a field sales force and the acquisition of customers over the Internet, to facilitate growth. The receivables management division, which was previously reported as a separate segment, is now part of the communication services segment. The activities of the receivables management business have become more focused over the past year on providing agent-based services to the client base it shares with the other Communication Services businesses. Accordingly, the Communications Services segment is expected to continue to facilitate the use of a common sales force and shared contact center infrastructure to better coordinate agent and workstation productivity and more cost-effectively allocate resources. This revised organizational structure is intended to more closely align each business line with the allocation of resources by our management team and more closely reflects how we manage our business.

 

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 the nine months ended September 30, 2009 and twelve months ended December 31, 2008, we recorded reductions in revenue of $25.5 million and $76.4 million, respectively, 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 and we expect the scope of our portfolio purchases to be significantly reduced for the foreseeable future.

 

Valuation for Stock-Based Compensation

 

During the 12 months prior to September 30, 2009, we granted options to purchase an aggregate of 292,500 shares of our Class A common stock and 25,000 restricted shares of our Class A common stock, in each case as of January 2, 2009. The fair value of the shares of our Class A common stock was determined based on an independent third party appraisal performed as of October 31, 2008 by Corporate Valuation Advisors, Inc. and delivered to us in December 2008. We believe that such appraisal was substantially contemporaneous with our determination of fair value for purposes of such awards and that there were no significant intervening events between the date of the appraisal and the grant date for the awards.

 

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

 

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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 (“SEC”) 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 Accounting Standards Codification Topic 310, Receivable s , (“ASC 310”) (formerly SOP 03-3), we account for our investments in receivable portfolios using either the level-yield method or the cost recovery method. During 2008 and 2009, 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. ASC 310 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 Accounting Standards Codification Topic 350, Intangibles—Goodwill and Other (“ASC 350”) (formerly 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

 

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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.

 

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 Accounting Standards Codification Topic 360, Property, Plant and Equipment (“ASC 360”) (formerly 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 Accounting Standards Codification Topic 740, Income Taxes , (“ASC 740”) (formerly SFAS No. 109, Accounting for Income Taxes ). Effective January 1, 2007, we adopted ASC 740 (formerly Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes—An Interpretation of FASB Statement No. 109 ), 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.

 

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Results of Operations

 

The following table shows consolidated results of operations for the periods indicated:

 

    Year Ended December 31,     Nine Months Ended
September 30,
 
    2006     2007     2008     2008     2009  
    (in millions)  

Consolidated Statement of Operations Data:

         

Revenue

  $ 1,856.0      $ 2,099.5      $ 2,247.4      $ 1,675.7      $ 1,772.9   

Cost of services

    818.5        912.4        1,015.0        756.2        798.9   

Selling, general and administrative (1)

    800.3        840.5        881.6        657.9        680.8   
                                       

Operating income

    237.2        346.6        350.8        261.6        293.2   

Interest expense

    (94.8     (332.4     (313.0     (217.9     (193.8

Other income (expense)

    8.2        13.4        (8.6     (0.3     1.7   
                                       

Income before income tax expense and noncontrolling interest

    150.6        27.6        29.2        43.4        101.1   

Income tax expense

    65.5        6.8        11.7        17.4        37.4   
                                       

Net income

    85.1        20.8        17.5        26.0        63.7   

Less net income (loss)—noncontrolling interest

    16.3        15.4        (2.0     (2.3     2.7   
                                       

Net income—West Corporation

  $ 68.8      $ 5.4      $ 19.5      $ 28.3      $ 61.0   
                                       

Earning (loss) per share:

         

Basic L

  $ 2.05      $ 11.08      $ 12.78      $ 9.73      $ 11.01   

Diluted L

  $ 1.98      $ 10.68      $ 12.24      $ 9.33      $ 10.55   

Basic A

  $ 0.66      $ (1.20   $ (1.23   $ (0.78   $ (0.56

Diluted A

  $ 0.64      $ (1.20   $ (1.23   $ (0.78   $ (0.56

 

  (1)   Includes stock based compensation of $28.7, $1.3 and $1.4 for the years ended December 31, 2006, 2007 and 2008, respectively, and $1.0 million and $1.3 million for the nine months ended September 30, 2008 and 2009, respectively.

 

Nine Months Ended September 30, 2009 and 2008

 

Revenue: Total revenue for the nine months ended September 30, 2009 improved $97.2 million, or 5.8%, to $1,772.9 million from $1,675.7 million for the nine months ended September 30, 2008. The increase in revenue for the nine months ended September 30, 2009 included $156.4 million of revenue from the acquisitions of HBF, Genesys and Positron. These acquisitions closed on April 1, 2008, May 22, 2008 and November 21, 2008, respectively. During the nine months ended September 30, 2009, decreased call volumes in our agent-based services, which we attribute to the sluggish economy, resulted in reduced revenue of $98.6 million. During the nine months ended September 30, 2009, the Communication Services segment recorded impairment charges of $25.5 million to establish a valuation allowance against the carrying value of portfolio receivables. During the nine months ended September 30, 2008, the Communication Services segment recorded impairment charges of $44.1 million.

 

For the nine months ended September 30, 2009 and 2008, our largest 100 clients represented 56% of our total revenue in each period. The aggregate revenue from our largest client, AT&T, as a percentage of our total revenue during the nine months ended September 30, 2009 and 2008, was approximately 12% and 14%, respectively.

 

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Revenue by business segment:

 

     For the nine months ended September 30,        
     2009     2008     Change     % Change  

Revenue in thousands:

        

Unified Communications

   $ 845,388      $ 728,328      $ 117,060      16.1

Communication Services

     931,610        951,697        (20,087   -2.1

Intersegment eliminations

     (4,120     (4,309     189      4.4
                              

Total

   $ 1,772,878      $ 1,675,716      $ 97,162      5.8
                              

 

For the nine months ended September 30, 2009, Unified Communications revenue improved $117.1 million, or 16.1%, to $845.4 million from $728.3 million for the nine months ended September 30, 2008. The increase in revenue was a result of $95.1 million from the acquisition of Genesys for the nine months ended September 30, 2009 and $22.0 million from organic growth as a result of increased volume, which was partially offset by reduced pricing.

 

Communication Services revenue for the nine months ended September 30, 2009 decreased $20.1 million, or 2.1%, to $931.6 million from $951.7 million for the nine months ended September 30, 2008. The decrease in revenue for the nine months ended September 30, 2009 is primarily the result of decreased call volumes in our agent-based services which reduced revenue by $98.6 million. During the nine months ended September 30, 2009, the Communication Services segment recorded impairment charges of $25.5 million to establish a valuation allowance against the carrying value of portfolio receivables. During the nine months ended September 30, 2008, the Communication Services segment recorded impairment charges of $44.1 million. Revenue from acquired entities of $61.2 million partially offset this decrease in revenue.

 

Cost of services: Cost of services consists of direct labor, telephone expense and other costs directly related to providing services to clients. Cost of services increased $42.7 million, or 5.6%, in the nine months ended September 30, 2009 to $798.9 million from $756.2 million for each of the nine months ended September 30, 2008. As a percentage of revenue, cost of services was 45.1% for each of the nine months ended September 30, 2009 and 2008. The impact of the valuation allowance on cost of services as a percentage of revenue was 70 basis points for the nine months ended September 30, 2009 and 110 basis points for the nine months ended September 30, 2008.

 

Cost of services by business segment:

 

     For the nine months ended September 30,              
     2009     % of
Revenue
    2008     % of
Revenue
    Change     %
Change
 

In thousands:

            

Unified Communications

   $ 313,378      37.1   $ 262,597      36.1   $ 50,781      19.3

Communication Services

     488,233      52.4     495,077      52.0     (6,844   -1.4

Intersegment eliminations

     (2,723   NM        (1,485   NM        (1,238   NM   
                                          

Total

   $ 798,888      45.1   $ 756,189      45.1   $ 42,699      5.6
                                          

 

NM—Not Meaningful

 

Unified Communications cost of services for the nine months ended September 30, 2009 increased $50.8 million, or 19.3%, to $313.4 million from $262.6 million for the nine months ended September 30, 2008. The increase in cost of services for the nine months ended September 30, 2009 included $25.0 million from the acquisition of Genesys. As a percentage of revenue, Unified Communications cost of services increased to 37.1% for the nine months ended September 30, 2009 from 36.1% for the nine months ended September 30, 2008.

 

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Communication Services costs of services decreased $6.8 million, or 1.4%, in the nine months ended September 30, 2009 to $488.2 million from $495.1 million for the nine months ended September 30, 2008. The decrease in cost of services for the nine months ended September 30, 2009 included $47.7 million from the acquisitions of HBF and Positron. As a percentage of revenue, Communication Services cost of services increased to 52.4% for the nine months ended September 30, 2009 from 52.0% for the nine months ended September 30, 2008. The impact of the valuation allowance on Communication Services cost of services as a percentage of revenue for the nine months ended September 30, 2009 and 2008 was 140 basis points and 230 basis points, respectively.

 

Selling, general and administrative expenses (“ SG&A”) : SG&A expenses for the nine months ended September 30, 2009 increased by $22.8 million, or 3.5%, to $680.8 million from $658.0 million for the nine months ended September 30, 2008. This increase included $46.6 million from acquisitions. As a percentage of revenue, SG&A expenses improved to 38.4% for the nine months ended September 30, 2009, from 39.3% for the nine months ended September 30, 2008. The improvement in SG&A as a percentage of revenue was driven primarily by cost control initiatives and acquisition synergies.

 

SG&A expenses by business segment:

 

     For the nine months ended September 30,             
     2009     % of
Revenue
    2008     % of
Revenue
    Change    %
Change
 

In thousands:

             

Unified Communications

   $ 303,885      35.9   $ 286,861      39.4   $ 17,024    5.9

Communication Services

     378,287      40.6     373,916      39.3     4,371    1.2

Intersegment eliminations

     (1,397   NM        (2,823   NM        1,426    NM   
                                         

Total

   $ 680,775      38.4   $ 657,954      39.3   $ 22,821    3.5
                                         

 

NM—Not Meaningful

 

Unified Communications SG&A for the nine months ended September 30, 2009 increased $17.0 million, or 5.9%, to $303.9 million from $286.9 million for the nine months ended September 30, 2008. The increase in SG&A for the nine months ended September 30, 2009 included $30.8 million from the acquisition of Genesys. As a percentage of revenue, Unified Communications SG&A expenses improved to 35.9% for the nine months ended September 30, 2009, from 39.4% for the nine months ended September 30, 2008. The Unified Communications segment has effectively reduced SG&A expenses through realized synergies from acquisitions.

 

Communication Services SG&A expenses increased $4.4 million, or 1.2%, to $378.3 million for the nine months ended September 30, 2009 from $373.9 million for the nine months ended September 30, 2008. The increase in SG&A expenses for the nine months ended September 30, 2009 included $15.9 million from the acquisitions of Positron and HBF and $3.4 million in additional litigation settlement expenses. As a percentage of revenue, Communication Services SG&A expenses increased to 40.6% for the nine months ended September 30, 2009 from 39.3% for the nine months ended September 30, 2008. The impact of the valuation allowance on SG&A as percentage of revenue for the nine months ended September 30, 2009 and 2008 was 110 basis points and 170 basis points, respectively.

 

Operating income: Operating income for the nine months ended September 30, 2009 improved by $31.6 million, or 12.1%, to $293.2 million from $261.6 million for the nine months ended September 30, 2008. As a percentage of revenue, operating income improved to 16.5% for the nine months ended September 30, 2009, up from 15.6% for the nine months ended September 30, 2008. The increase in operating income for the nine months ended September 30, 2009 was primarily the result of the $44.1 million of impairment charges recorded to establish a valuation allowance against the carrying value of portfolio receivables in the Communication

 

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Services segment during the nine months ended September 30, 2008, increased net operating income from acquisitions and related synergies achieved in 2009. The impairment charge taken in the nine months ended September 30, 2009 was $25.5 million.

 

Operating income by business segment:

 

     For the nine months ended September 30,              
     2009    % of
Revenue
    2008    % of
Revenue
    Change     %
Change
 

In thousands:

              

Unified Communications

   $ 228,125    27.0   $ 178,870    24.6   $ 49,255      27.5

Communication Services

     65,090    7.0     82,703    8.7     (17,613   -21.3
                                        

Total

   $ 293,215    16.5   $ 261,573    15.6   $ 31,642      12.1
                                        

 

Unified Communications operating income for the nine months ended September 30, 2009 improved $49.3 million, or 27.5%, to $228.1 million from $178.9 million for the nine months ended September 30, 2008. The increase in operating income for the nine months ended September 30, 2009 included operating income of $39.3 million from the acquisition of Genesys. As a percentage of revenue, Unified Communications operating income improved to 27.0% for the nine months ended September 30, 2009 from 24.6% for the nine months ended September 30, 2008.

 

Communication Services operating income for the nine months ended September 30, 2009 decreased $17.6 million, or 21.3%, to $65.1 million from $82.7 million for the nine months ended September 30, 2008. The decrease in operating income for the nine months ended September 30, 2009 was driven primarily by reduction in agent-based services of $36.6 million, partially offset by lower impairment charges taken in the nine months ended September 30, 2009 compared to the nine months ended September 30, 2008. As a percentage of revenue, Communication Services operating income declined to 7.0% for the nine months ended September 30, 2009 from 8.7% for the nine months ended September 30, 2008. The impact of the valuation allowance on operating income as a percentage of revenue for the nine months ended September 30, 2009 and 2008 was 250 basis points and 400 basis points, respectively.

 

Other income (expense): Other income (expense) includes interest expense from short-term and long-term borrowings under credit facilities and portfolio notes payable, interest income from short-term investments and sub-lease rental income. Other income (expense) for the nine months ended September 30, 2009 was ($192.2) million, compared to ($218.2) million for the nine months ended September 30, 2008. The changes in other expense for the nine months ended September 30, 2009 compared to the nine months ended September 30, 2008, respectively, were primarily due to interest expense on increased outstanding debt offset by lower interest rates in 2009 than we experienced during the nine months ended September 30, 2008. Interest expense during the nine months ended September 30, 2009 also included a reduction of $3.1 million for the decline in the fair value liability of the interest rate swap hedges which were determined to be ineffective and therefore did not qualify for hedge accounting treatment. Interest expense was further reduced during the nine months ended September 30, 2009 by $4.8 million for hedges that did not qualify for hedge accounting treatment compared to $0.2 million for the nine months ended September 30, 2008.

 

Noncontrolling interest : Certain of the subsidiaries comprising our receivable management business are not wholly owned by us. These majority-owned subsidiaries are not parties to or guarantors of our senior secured term loan facility, our senior secured revolving credit facility, our senior notes or our senior subordinated notes. Accordingly, interest expense associated with the foregoing debt instruments is not attributed to these subsidiaries. The only interest expense attributed to these majority-owned subsidiaries is the portion of the interest that accrued on our portfolio notes payable facilities that corresponds with our ownership percentage of such subsidiaries.

 

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During the nine months ended September 30, 2009, loss attributable to noncontrolling interest was $2.7 million compared to income attributable to noncontrolling interest of $2.3 million during the nine months ended September 30, 2008. The portfolio receivable impairment recorded in the first nine months of 2008 primarily caused the reduction in the loss attributable to the non-controlling interest. The reduction resulting from impairment in the nine months ended September 30, 2009 had less impact on the loss attributable to noncontrolling interest than that in the nine months ended September 30, 2008 as the noncontrolling interest carrying value had been significantly reduced as a result of the impairments in 2008.

 

Net income-West Corporation: Our net income improved $32.7 million, or 115.7%, for the nine months ended September 30, 2009 to $61.0 million from $28.3 million for the nine months ended September 30, 2008.

 

Net income includes a provision for income tax expense at an effective rate of approximately 38.0% for the nine months ended September 30, 2009, compared to an effective tax rate of approximately 40.0% for the nine months ended September 30, 2008.

 

Earnings (loss) per common share: Earnings per common L share-basic for the nine months ended September 30, 2009 improved to $11.01 from $9.73 for the nine months ended September 30, 2008. Earnings per common L share-basic for the nine months ended September 30, 2009 improved to $10.55 from $9.33 for the nine months ended September 30, 2008. Loss per common A share-basic and diluted for the nine months ended September 30, 2009 improved to ($0.56) from ($0.78) for the nine months ended September 30, 2008. See “Selected Consolidated Financial Data” elsewhere in this prospectus.

 

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.

 

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.

 

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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 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.

 

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

 

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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 prospectus 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

 

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
                                        

 

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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): Certain of the subsidiaries comprising our receivable management business are not wholly owned by us. These majority-owned subsidiaries are not parties to or guarantors of our senior secured term loan facility, our senior secured revolving credit facility, our senior notes or our senior subordinated notes. Accordingly, interest expense associated with the foregoing debt instruments is not attributed to these subsidiaries. The only interest expense (income) attributed to these majority-owned subsidiaries is the portion of the interest that accrued on our portfolio notes payable facilities that corresponds with our ownership percentage of such subsidiaries. We had income attributable to noncontrolling interest of ($2.1) million in 2008 compared to loss attributable to noncontrolling interest of $15.4 million in 2007. The portfolio receivable impairment recorded in the year ended December 31, 2008 primarily caused the reduction in the loss attributable to the non-controlling interest.

 

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.

 

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.

 

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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.

 

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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 is 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 prospectus 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.

 

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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.

 

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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
                                                     

 

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 : Certain of the subsidiaries comprising our receivable management business are not wholly owned by us. These majority-owned subsidiaries are not parties to or guarantors of our senior secured term loan facility, our senior secured revolving credit facility, our senior notes or our senior subordinated notes. Accordingly, interest expense associated with the foregoing debt instruments is not attributed to these subsidiaries. The only interest expense attributed to these majority-owned subsidiaries is the portion of the interest that accrued on our portfolio notes payable facilities that corresponds with our ownership percentage of such 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

 

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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.

 

Quarterly Results of Operations

 

Revenue in our segments is not significantly seasonal.

 

The following table presents a summary of our unaudited quarterly results of operations for our last ten completed fiscal quarters (in thousands):

 

    Three Months Ended     Three Months Ended     Three Months Ended  
    June 30,
2007
    September 30,
2007 (1)
    December 31,
2007 (2)
    March 31,
2008 (3)
    June 30,
2008 (3)
    September 30,
2008
    December 31,
2008 (3)
    March 31,
2009
    June 30,
2009
    September 30,
2009 (3)
 

Revenue

  $ 520,186      $ 531,098      $ 539,575     $ 525,755     $ 551,433      $ 598,528      $ 571,718     $ 606,959      $ 606,907      $ 559,012   

Cost of services

    224,306        228,309        240,789       250,560       251,143        254,486        258,839       269,050        269,268        260,570   

SG&A

    206,305        217,213        223,951       206,128       219,090        232,736        223,632       229,454        229,893        221,428   
                                                                               

Operating income

    89,575        85,576        74,835       69,067       81,200        111,306        89,247       108,455        107,746        77,014   
                                                                               

Net income (loss)—West Corporation

  $ 2,512      $ 1,921      $ (8,070   $ (1,204   $ 7,729      $ 21,740      $ (8,758   $ 30,624      $ 26,435      $ 3,896   
                                                                               

Earnings (loss) per common share

                   

Basic Class L

  $ 2.42      $ 2.84      $ 3.04      $ 3.46      $ 3.07      $ 3.20      $ 3.05      $ 3.84      $ 3.54      $ 3.63   

Diluted Class L

  $ 2.33      $ 2.74      $ 2.93      $ 3.32      $ 2.94      $ 3.07      $ 2.92      $ 3.69      $ 3.39      $ 3.47   

Basic Class A

  $ (0.25   $ (0.30   $ (0.44   $ (0.41   $ (0.26   $ (0.11   $ (0.45   $ (0.09   $ (0.10   $ (0.37

Diluted Class A

  $ (0.25   $ (0.30   $ (0.44   $ (0.41   $ (0.26   $ (0.11   $ (0.45   $ (0.09   $ (0.10   $ (0.37

 

  (1)   Results of operations in the third quarter 2007 were affected by an $8.8 million impairment charge taken by the Communication Services segment to fully write-off the goodwill associated with a majority-owned subsidiary.
  (2)   Results of operations in the fourth quarter 2007 were affected by $18.5 million of settlements in litigation and an impairment charge to establish a valuation allowance against the carrying value of portfolio receivables and site closures.
  (3)   Results of operations in the first quarter 2008, second quarter 2008, fourth quarter 2008 and third quarter 2009 were affected by the Communication Services segment recording impairment charges in the amounts of $24.2 million, $19.8 million, $32.3 million and $25.5 million, respectively, to establish a valuation allowance against the carrying value of portfolio receivables.

 

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.

 

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Nine Months Ended September 30, 2009 compared to 2008

 

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

 

     For the Nine Months Ended September 30,     % Change  
     2009     2008     Change    

Cash flows from operating activities

   $ 200,792      $ 160,621      $ 40,171      25.0

Cash flows from (used in) investing activities

   $ (57,373   $ (395,916   $ 338,543      85.5

Cash flows from (used ) in financing activities

   $ (232,199   $ 345,707      $ (577,906   -167.2

 

Net cash flows from operating activities improved $40.2 million, or 25.0%, to $200.8 million for the nine months ended September 30, 2009, compared to net cash flows provided by operating activities of $160.6 million for the nine months ended September 30, 2008. The increase in net cash flows provided by operating activities is primarily due to improved operations and working capital.

 

Days sales outstanding (“DSO”), a key performance indicator we utilize to monitor the accounts receivable average collection period and assess overall collection risk, was 59 days, excluding the impact of portfolio impairments, at September 30, 2009. At September 30, 2008, DSO was 54 days.

 

Net cash flows used in investing activities decreased $338.5 million, or 85.5%, to $57.4 million for the nine months ended September 30, 2009, compared to net cash flows used in investing activities of $395.9 million for the nine months ended September 30, 2008. We invested $318.2 million for the acquisitions and related transaction costs of HBF and Genesys during the nine months ended September 30, 2008 compared to $1.6 million in acquisition activity for the nine months ended September 30, 2009. We invested $90.7 million in capital expenditures during the nine months ended September 30, 2009 compared to $78.0 million for the nine months ended September 30, 2008. The capital expenditures in 2009 were mainly related to telephone switching equipment, computer hardware and software additions and upgrades. Investing activities during the nine months ended September 30, 2009 included the purchase of receivable portfolios for $1.7 million and cash proceeds applied to amortization of receivable portfolios of $36.4 million, compared to $40.0 million for the purchase of receivable portfolios and $39.9 million of cash proceeds applied to the amortization of receivable portfolios during the nine months ended September 30, 2008.

 

Net cash flows (used in) from financing activities decreased $577.9 million, or 167.2%, to ($232.2) million for the nine months ended September 30, 2009, compared to net cash flows from financing activities of $345.7 million for the nine months ended September 30, 2008. Principal repayments on the senior secured term loan facility were $19.0 million for the nine months ended September 30, 2009, compared to $18.6 million during the nine months ended September 30, 2008. During the nine months ended September 30, 2009, $174.9 million was paid on the senior secured revolving credit facility and the multicurrency revolving credit facility. During the nine months ended September 30, 2008, the net increase in our revolving credit facilities was $194.6 million. During the nine months ended September 30, 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 the nine months ended September 30, 2009, payments on portfolio notes payable were $28.5 million compared to $53.5 million during the nine months ended September 30, 2008. No proceeds from the issuance of portfolio notes payable were received during the nine months ended September 30, 2009 compared to $31.0 million for the nine months ended September 30, 2008. Given our current levels of cash on hand, anticipated cash flow from operations and available borrowing capacity, we believe we have sufficient liquidity to conduct our normal operations and pursue our business strategy in the ordinary course.

 

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Year Ended December 31, 2008 compared to 2007

 

The following table summarizes our cash flows by category for the periods presented:

 

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

Net cash provided by operating activities in thousands:

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

Net cash used in investing activities in thousands:

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

Net cash flows from financing activities in thousands:

   $ 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

 

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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.

 

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

 

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

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 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

 

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approximately $25.3 million, paid quarterly, with a balloon payment at the maturity date of October 24, 2013 and 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 as of such date) of approximately $1,408.8 million and $928.4 million, respectively. The senior secured term loan facility pricing is based on our corporate debt rating and the grid ranges from 2.125% to 2.75% for LIBOR rate loans (LIBOR plus 2.375% at September 30, 2009), and from 1.125% to 1.75% for base rate loans (Base Rate plus 1.375% at September 30, 2009). The interest rate margins for the extended term loans are based on our corporate debt rating based on a grid, which ranges from 3.625% to 4.25% for LIBOR rate loans (as of September 30, 2009, LIBOR plus 3.875%), and from 2.625% to 3.25% for base rate loans (as of September 30, 2009, Base Rate plus 2.875%), except for the $134.0 million term loan expansion, which is priced at LIBOR (subject to a 3.5% floor) plus 5.0%, and Base Rate plus 4.0% for base rate loans. The rate at September 30, 2009 is Base Rate plus 4.0%, or 7.25%.

 

The senior secured revolving credit facility pricing is based on our total leverage ratio and the grid ranges from 1.75% to 2.50% for LIBOR rate loans (LIBOR plus 2.0% at September 30, 2009) and the margin ranges from 0.75% to 1.50% for base rate loans (Base Rate plus 1.0% at September 30, 2009). We are 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.

 

The effective annual interest rates, inclusive of debt amortization costs, on the senior secured term loan facility and revolving credit facility during the nine months ended September 30, 2009 was 5.35%, compared to 6.59% during the nine months ended September 30, 2008. The average daily outstanding balance of the revolving credit facility during the nine months ended September 30, 2009 was $198.1 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 the nine months ended September 30, 2009 and the twelve months ended December 31, 2008 was $224.0 million. The senior secured revolving credit facility was not used in 2007.

 

In August 2009, we and the lenders amended the senior secured term loan facility to permit us to, among other things, (i) agree with individual lenders to extend the maturity of their term loans or extend or refinance their revolving credit commitments, and pay a different interest rate or otherwise modify certain terms of their loans or revolving commitments in connection with such an extension, and (ii) issue new secured notes, which may include indebtedness secured on a pari passu basis with the obligations under the senior secured facility, so long as, among other things, the net cash proceeds from any such issuance are used to prepay loans under such facility at par. In connection with the amendment, we extended the maturity date for $1 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 as of such date) and the interest rate margins of such extended term loans have been increased.

 

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 September 30, 2009, we had $1,200.0 million of the outstanding $2,466.5 million senior secured term loan facility hedged at rates from 3.38% to 5.01%. See “—Quantitative and Qualitative Disclosures About Market Risk—Interest Rate Risk—Lehman Hedges” elsewhere in this prospectus for a discussion on the impact of Lehman Brothers bankruptcy on two of these interest rate swaps.

 

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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. 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. The termination dates and notional amounts match the interest rate swaps noted above.

 

During the three months ended March 31, 2009, we entered into three eighteen-month forward starting interest rate swaps for a total notional value of $500.0 million. The effective date of these forward starting interest rate swaps is July 26, 2010. The fixed interest rate on the forward starting interest rate swaps ranges from 2.56% to 2.60%.

 

We may request additional tranches of term loans or increases to the revolving credit facility in an aggregate amount not to exceed $298.5 million, including the aggregate amount of $67.5 million of principal payments previously made in respect of the term loan facility. 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.

 

Multicurrency revolving credit facility

 

InterCall Conferencing Services Limited, a foreign subsidiary of InterCall (“ICSL”), maintains a $75.0 million multicurrency revolving credit facility. The credit facility is secured by substantially all of the assets of ICSL, and is not guaranteed by us or any of our 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 ranges from 2.375% to 3.125% over the selected optional currency LIBOR (Sterling or Dollar/EURIBOR (Euro)). The margin at September 30, 2009 was 2.375%. The effective annual interest rate, inclusive of debt amortization costs, on the revolving credit facility during the nine months ended September 30, 2009 was 6.02%, compared to 8.6% from inception, May 16, 2008, through September 30, 2008. 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 outstanding balance of the multicurrency revolving credit facility at September 30, 2009 was $19.4 million. The average daily outstanding balance of the multicurrency revolving credit facility during the nine months ended September 30, 2009 was $38.8 million. The highest balance outstanding on the multicurrency revolving credit facility during the nine months ended September 30, 2009 was $48.2 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, we 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 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.

 

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On and after October 15, 2010, we 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, we may, at our option, on one or more occasions redeem up to 35% of the aggregate principal amount of senior notes issued by us 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, we 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.

 

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

 

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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 to Adjusted EBITDA ratio may not exceed 7.0 to 1.0 at December 31, 2008 and 6.50 to 1.0 at September 30, 2009, and the interest coverage ratio of consolidated Adjusted EBITDA to the sum of consolidated interest expense must exceed 1.50 to 1.0 at December 31, 2008 and 1.75 to 1.0 at September 30, 2009. Both ratios are measured on a rolling four-quarter basis. We were in compliance with these financial covenants at September 30, 2009. 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 2012). 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 us. 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 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

 

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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 (beginning with the fiscal quarter ended June 30, 2009) 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 and £47.5 million in 2009 to £50.0 million in 2010 and thereafter.

 

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.

 

Credit Ratings

 

At September 30, 2009, 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)   Rating confirmed on May 12, 2009.
  (2)   Rating confirmed on June 30, 2009.

 

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,

 

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