S-1/A 1 d477270ds1a.htm AMENDMENT NUMBER 13 TO FORM S-1 Amendment Number 13 to Form S-1
Table of Contents

As filed with the Securities and Exchange Commission on March 15, 2013

Registration No. 333-162292

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

AMENDMENT NO. 13 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

Prudential Tower

800 Boylston Street

Boston, Massachusetts 02199-3600

(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.

 

 


Table of Contents

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 March 15, 2013

 

21,275,000 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.

 

West Corporation is offering 21,275,000 shares of common stock to be sold in the offering.

 

We anticipate that the initial public offering price per share will be between $22.00 and $25.00.

 

 

 

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

Per Share

     $              $                      $            

Total

     $                 $                          $               

 

We have granted the underwriters a 30-day option to purchase up to an aggregate of 3,191,250 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                     , 2013.

 

 

 

Goldman, Sachs & Co.

Morgan Stanley

 

BofA Merrill Lynch

   Barclays    Citigroup   Deutsche Bank Securities    Wells Fargo Securities
          

Baird

           William Blair
          

Evercore Partners

           Sanford C. Bernstein

 

                    , 2013


Table of Contents

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

     30   

Use of Proceeds

     31   

Dividend Policy

     31   

Capitalization

     32   

Dilution

     34   

Selected Consolidated Financial Data

     36   

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

     39   

Business

     64   

Management

     81   
 

 

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                     , 2013 (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.

 

i


Table of Contents

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 $ 23.50 per share, the mid-point of the range set forth on the cover of this prospectus, and no exercise by the underwriters of their option to purchase additional shares.

 

We refer to EBITDA and 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 2 to “Prospectus Summary—Summary Consolidated Financial Data” and a reconciliation of EBITDA and Adjusted EBITDA to net 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, communication services. We offer a broad portfolio of services, including conferencing and collaboration, unified communications, alerts and notifications, emergency communications, business process outsourcing and telephony / interconnect services. The scale and processing capacity of our proprietary technology platforms, combined with our expertise in managing voice and data transactions, enable us to provide reliable, high-quality, mission-critical communications designed to maximize return on investment for our clients. Our clients include Fortune 1000 companies, along with small and medium enterprises in a variety of industries, including telecommunications, retail, financial services, public safety, technology and healthcare. We have sales and operations in the United States, Canada, Europe, the Middle East, Asia Pacific, Latin America and South America.

 

Our focus on large addressable markets with attractive growth characteristics has allowed us to deliver steady, profitable growth. Over the past ten years, we have grown our revenue at a compound annual growth rate (“CAGR”), of 12%, and improved our Adjusted EBITDA margin from 21.1% to 27.0%. For the fiscal year ended December 31, 2012, we grew revenue by 5.9% over the comparable period in 2011 to $2,638.0 million and generated $713.1 million in Adjusted EBITDA, or 27.0% Adjusted EBITDA margins, $125.5 million in net income and $318.9 million in net cash flows from operating activities. See note 2 to the ‘‘Prospectus Summary—Summary Consolidated Financial Data’’ table for a reconciliation of Adjusted EBITDA to net income.

 

Evolution into a Predominately Platform-Based Solutions Business

 

Since our founding in 1986, we have invested significantly to expand our technology platforms and develop our operational processes to meet the complex and changing communications needs of our clients. We have evolved our business mix from labor-intensive communication services to predominantly diversified and platform-based, technology-driven voice and data services. As a result, our revenue from platform-based services grew from 37% of total revenue in 2005 to 72% in 2012, and our operating income from platform-based services grew from 53% of total operating income to 90% over the same period.

 

Since 2005, we have invested approximately $2.0 billion in strategic acquisitions. We have increased our penetration into higher growth international conferencing markets, strengthened our alerts and notifications

 

 

1


Table of Contents

services business and established a leadership position in emergency communication services. We have reoriented our business to address the emergence of fast-growing trends such as unified communications (“UC”) products and mobility.

 

Today, our platform-based service lines include conferencing and collaboration, event services, Internet Protocol (“IP”)-based UC solutions, alerts and notifications, emergency communications services and our automated customer service platforms such as interactive voice response (“IVR”), natural language speech recognition and network-based call routing services. As we continue to increase the variety of platform-based services we provide, we intend to pursue opportunities in markets where we have strong client relationships and where clients place a premium on the quality of service provided.

 

The following summaries further highlight the steps we have taken to improve our business model:

 

   

Developed and Enhanced Large Scale Technology Platforms. 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. Our approximately 672,000 telephony ports, including approximately 384,000 Internet Protocol (“IP”) ports, provide us with what we believe is the only large-scale proprietary IP-based global conferencing platform deployed and in use today. Our acquisitions of TuVox Incorporated (“TuVox”) and Holly Australia Pty Ltd (“Holly”) significantly advanced the development capabilities of our existing platform. The resulting open standards-based platform allows for the flexibility to add new capabilities as our clients demand. In addition, we have integrated mobile, social media and cloud computing capabilities into our platforms and offer those services to our clients.

 

   

Expanded Emergency Communications Services Platform. We have invested significant resources into our emergency communications services. Since 2006, we have made several strategic acquisitions, including Intrado, Inc. (“Intrado”) and Positron Public Safety Systems, which provided us with the leading platform in communication services for public safety. Today, we believe we are one of the largest providers of emergency communications services to telecommunications service providers, government agencies and public safety organizations, based on the number of 9-1-1 calls that we and other participants in the industry facilitate. We have steadily increased our presence in this market through substantial investments in proprietary systems to develop programs designed to upgrade the capabilities of 9-1-1 centers by delivering a broader set of features.

 

   

Expanded Our Unified Communications Business Segment. Through both organic growth and acquisitions, we have been successful in strengthening our unified communications service offering. We have grown our sales force to expand the reach of our Unified Communications services both domestically and internationally. We have developed and integrated proprietary global and large enterprise-based services into our platform which allow for streamlined, cost-effective conferencing capabilities. With the acquisitions of Corvent LLC (“Corvent”), Stream57 LLC (“Stream57”) and Unisfair, Inc. (“Unisfair”), we have enhanced our event services offerings. We have increased our capabilities in IP-based Unified Communications solutions through the acquisitions of Preferred One Stop Technologies Limited (“POSTcti”), SKT Business Communications Solutions division of the Southern Kansas Telephone Company, Inc. (“SKT”) and Smoothstone IP Communciations Corporation (“Smoothstone”). We are able to offer system design, project management and implementation to clients with our sales engineering and integration services.

 

We have also increased our presence in the high growth alerts and notifications market. We now provide platform-based communication services across several industries, including financial services, communications, transportation, government and public safety. Additionally, through our acquisitions of TeleVox Software, Inc. (“TeleVox”) and Twenty First Century Communications, Inc. (“TFCC”), we have a strong presence in the healthcare market and the utilities industry.

 

 

2


Table of Contents

Market Opportunity

 

We are focused on voice and data markets. Consistent with our investment strategy, we have and will continue to target new and complementary markets that leverage our depth of expertise in voice and data services. We believe these markets, including unified communications, emergency communications and alerts and notifications services, are large, have relatively predictable and steady growth, and are characterized by recurring, valuable transactions and strong margin profiles.

 

Unified Communications

 

We entered the conferencing and collaboration services market with our acquisition of InterCall in 2003. Through organic growth and multiple strategic acquisitions, we have become the leading global provider of conferencing services since 2008 based on revenue, according to Wainhouse Research. The market for worldwide unified communications services, which includes hosted and managed unified communications services, audio, web and operator-assisted conferencing was $7.5 billion in 2012 and is expected to grow at a CAGR of 15% through 2016 according to Wainhouse Research. By leveraging our global sales team and diversified client base, we intend to continue targeting higher growth markets.

 

According to Tern Systems, the market for automated message delivery in the U.S. was approximately $793 million in 2012, and is expected to grow at an annual growth rate of 20% through 2017. 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 unified communications services, and increasing awareness of the need for rapid communication during emergencies.

 

Communication Services

 

The market for emergency communications services represents a highly attractive opportunity, allowing us to diversify into an end-market that we believe is less volatile with respect to downturns in the economy. According to Compass Intelligence, approximately $4.1 billion of government-sponsored funds were estimated to be available for 9-1-1 and Enhanced 9-1-1 (“E9-1-1”) applications, hardware and systems expenditures in 2012 and such funds are expected to grow at a 6.8% CAGR through 2016. Given the critical nature of these systems and services, government agencies and other public safety organizations prioritize funding for such services to ensure dependable delivery. Further, as communities across the U.S. upgrade outdated 9-1-1 systems to next generation 9-1-1 platforms, we believe our suite of services is best suited to capture the demand.

 

We deliver critical agent-based and automated services for our enterprise clients. Today, the market for these services remains attractive given its size and steady growth characteristics. We target select opportunities within the global customer care business process outsourcing market which was estimated to be approximately $56 billion in 2012 with a projected CAGR through 2015 of approximately 6% according to International Data Corporation (“IDC”). We focus on high-value transactions that utilize our specialized knowledge and scale to drive enhanced profitability. We have built on our leading position in this market by investing in emerging service delivery models that provide a higher quality of service to our clients.

 

 

3


Table of Contents

Our Services

 

We believe we have built our reputation as a best-in-class service provider by delivering differentiated, high-quality services for our clients. Our portfolio of technology-driven communication services 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. We managed approximately 134 million conference calls in 2012, an 11% increase over 2011. We provide our clients with an integrated global suite of meeting services. Conferencing and Collaboration Services include on-demand audio conferencing, web conferencing and collaboration tools and video managed services and video bridging hosted in our data centers.

 

   

Event Services. InterCall offers multimedia platforms designed to give our clients the ability to create, manage, distribute and reuse content internally and externally. Through a combination of proprietary products and strategic partnerships, our clients have the tools to support diverse internal and external multimedia requirements. Event Services Solutions include audio and video webcasting services, virtual event design and hosting, operator-assisted audio conferencing services.

 

   

IP-Based Unified Communications Solutions. We provide our clients with enterprise class IP-based communications solutions enabled by our technology. We offer hosted IP-private branch exchange

 

 

4


Table of Contents
 

(“PBX”) and enterprise call management, hosted and managed multi-protocol label switching (“MPLS”) network solutions, unified communications partner solution portfolio services, cloud-based security services, and professional services and systems integration.

 

   

Alerts & Notifications Services. Our technology platforms allow clients to manage and deliver automated, proactive and personalized communications. We use multiple delivery channels (voice, text messaging, email, social media and fax) based on the preference of the recipient. For example, we deliver patient notifications, confirm appointments and send prescription reminders on behalf of our healthcare clients, send and receive automated outage notifications on behalf of our utility clients and transmit emergency evacuation notices on behalf of municipalities. Our scalable platform enables a high volume of messages to be sent in a short amount of time. It also enables two-way communication which allows the recipients of a message to respond to our clients.

 

Communication Services

 

   

Emergency Communications Services. We believe we are one of the largest providers of emergency communications services, based on the number of 9-1-1 calls that we and other participants in the industry facilitate. Our services are critical in facilitating public safety agencies’ ability to receive emergency calls from citizens. Our clients generally enter into long-term contracts and fund their obligations through monthly charges on users’ telephone bills.

 

   

Automated Call Processing. We believe we have developed a best-in-class automated customer service platform. Our services allow our clients to effectively communicate with their customers through inbound and outbound 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 open standards-based platform allows the flexibility to integrate new capabilities such as mobility, social media and cloud-based services.

 

   

Telephony / Interconnect Services. Our telephony / interconnect services support the merging of traditional telecom, mobile and IP technologies to service providers and enterprises. We are a leading provider of local and national tandem switching services to carriers throughout the United States. We leverage our proprietary customer traffic information system, sophisticated call routing and control facility to provide tandem interconnection services to the competitive marketplace, including wireless, wire-line, cable telephony and Voice over Internet Protocol (“VoIP”) companies. We entered this market through the acquisition of HyperCube LLC (“HyperCube”) in March 2012.

 

   

Agent-Based Services. We provide our clients with large-scale, agent-based services. We target opportunities that allow our agent-based services to be a part of larger strategic client engagements and with clients for whom these services can add value. We believe that we are known in the industry as a premium provider of these services. We offer a flexible model that includes on-shore, off-shore and virtual home-based agent capabilities to fit our clients’ needs.

 

Our Competitive Strengths

 

We have developed 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 and enable us to deliver operational excellence to clients.

 

   

Broad Portfolio of Product Offerings with Attractive Value Proposition. Our technology platforms combined with our operational expertise and processes allow us to provide a broad range of service

 

 

5


Table of Contents
 

offerings for our clients. Our ability to provide our clients with a reliable, efficient and cost-effective alternative to process high volume, complex voice and data transactions, helps them meet their critical communications needs and improve their cost structure.

 

   

Robust Technology Capabilities Enable Scalable Operating Model. Our strengths across technology and multiple channels allow us to efficiently process data and voice transactions for our clients. We cross-utilize our assets and shared service platforms across our businesses, providing scale and flexibility to handle greater transaction volume, offer superior service and develop new offerings more effectively and efficiently. We foster a culture of innovation and have been issued approximately 213 patents and have approximately 328 pending patent applications for technology and processes that we have developed. We continue to invest in new platform technologies, including IP-based cloud computing environments and to enhance our portfolio with patented technologies, which allow us to deliver premium services to our clients.

 

   

Strong Client Relationships. We have built long-lasting relationships with our clients who operate in a broad range of industries, including telecommunications, retail, financial services, public safety, technology and healthcare. Our top ten clients in 2012 had an average tenure with us of over 11 years. In 2012, our 100 largest clients represented approximately 57% of our revenue and approximately 44% of our revenue came from clients purchasing multiple service offerings.

 

   

Operational Excellence. We achieve the results our clients are seeking through productivity, reliability and scale. Our ability to improve upon our client’s communications processes is an important aspect of our value proposition. We leverage our proprietary technology infrastructure and shared services platforms to manage higher value transactions and achieve cost savings for our clients and ourselves.

 

   

Experienced Management Team with Track Record of Growth. Our senior leadership has an average tenure of approximately 15 years with us and has delivered strong results through various market cycles, both as a public and a private company. As a group, this team has created a culture of superior client service and, through acquisitions and organic growth, has been able to achieve 12% revenue CAGR over the past ten years. Our team has established a long track record of successfully acquiring and integrating companies to drive growth.

 

As demand for outsourced services grows with greater adoption of our technologies and services and the global trend toward business process outsourcing, we believe our long history of delivering results for our clients combined with our scale and the investments we have made in our businesses provide us with a significant competitive advantage.

 

Our Business 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 market leadership. Key aspects of our strategy include the following:

 

   

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 44% of our revenue in 2012 came from clients purchasing multiple service offerings from us. We seek out clients with plans for growth and expect to participate in that growth along with our clients. As we demonstrate the value that our services provide, often starting with a single service, we are frequently able to expand the size and scope of our client relationships.

 

   

Develop New Client Relationships. We will continue to focus on building long-term client relationships across a wide range of industries to further diversify our revenue base. We target clients

 

 

6


Table of Contents
 

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. By continuing to add new long-term client relationships in large and growing markets, we believe we enhance the stability and growth potential of our revenue base.

 

   

Capitalize on Select Global Opportunities. In addition to expanding and enhancing our existing relationships domestically, we will selectively pursue new client opportunities globally. Our expertise in conferencing and collaboration services has allowed us to penetrate substantial new international markets. In 2012, 19% of our consolidated revenue was generated outside of the U.S. Given the attractive growth dynamics within Europe, Asia-Pacific, South America and Latin America, we intend to further grow our unified communications business in these regions. Our distribution capabilities, including approximately 375 dedicated international Unified Communications sales personnel, provide us with the platform to drive incremental revenue opportunities.

 

   

Continue to Enhance Leading Technology Capabilities. We believe our service offerings are enhanced by our superior technology capabilities and track record of innovation, and we will continue to target services where our reliability, scale and efficiencies enable us to solve our clients’ communications issues or enhance the results of their communications. In addition to strengthening our client relationships, we believe our focus on technology facilitates our ongoing evolution toward a diversified, predominantly platform-based and technology-driven operating model.

 

   

Continue to Enhance Our Value Proposition Through Selective Acquisitions. Since our founding in 1986, we have completed 30 acquisitions of businesses and technologies with a total value of approximately $2.7 billion. We will continue to expand our suite of communication services across industries, geographies and end-markets. While we expect this will occur primarily through organic growth, we have and expect to continue to acquire assets and businesses that strengthen our value proposition to clients and drive value to us. We have developed an internal capability to source, evaluate and integrate acquisitions that we believe has created value for shareholders.

 

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,

 

   

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 depend on third parties for certain services we provide and 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;

 

   

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

 

   

growth in our IP-Based UC Solutions and Emergency Communications businesses depends in large part on continued deployment and adoption of emerging technologies;

 

   

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;

 

   

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

 

   

growth in our IP-Based UC solutions and other new services may provide alternatives to our services which could adversely affect our business, results of operations and financial condition;

 

 

 

7


Table of Contents
   

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

 

   

our contracts generally are not exclusive and typically do not provide for revenue commitments;

 

   

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;

 

   

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;

 

   

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;

 

   

we may not be able to adequately protect our proprietary information or technology;

 

   

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;

 

   

our current or future indebtedness could impair our financial condition and reduce the funds available to us for other purposes, including dividend payments, 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;

 

   

we had a negative net worth as of December 31, 2012, which may make it more difficult and costly for us to obtain financing in the future and may otherwise negatively impact our business;

 

   

our failure to repatriate cash from our foreign subsidiaries, or the costs incurred to do so, could harm our liquidity;

 

   

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;

 

   

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

 

   

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.

 

Corporate Information

 

Our business was founded in 1986 through a predecessor company, and West Corporation was incorporated in Delaware. 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 the 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 senior secured term loan facility, a senior secured revolving credit facility and the private placement of senior notes and senior subordinated notes.

 

 

8


Table of Contents

On December 30, 2011, we completed the conversion of our outstanding Class L Common Stock into shares of Class A Common Stock (the “Conversion”) and thereafter the reclassification (the “Reclassification”) of all of our Class A Common Stock as a single class of Common Stock by filing amendments to our amended and restated certificate of incorporation (the “Charter Amendments”) with the Delaware Secretary of State. Upon the effectiveness of the filing of the Charter Amendments, each share of our outstanding Class L Common Stock was converted into 5.03625 shares of Class A Common Stock pursuant to the Conversion, and all of the outstanding shares of Class A Common Stock were reclassified as shares of Common Stock pursuant to the Reclassification. Following the Conversion and Reclassification, all shares of Common Stock share proportionately in dividends. On March 8, 2013, we effected a 1-for-8 reverse stock split and amended our Amended and Restated Certificate of Incorporation by filing an amendment with the Delaware Secretary of State. We also adjusted the share amounts under our executive incentive plan and nonqualified deferred compensation plan as a result of the 1-for-8 reverse stock split.

 

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 where our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports are available without charge, as soon as reasonably practicable following the time they are filed with or furnished to the SEC. 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.

 

 

9


Table of Contents

The Offering

 

Common stock offered by us

21,275,000 shares

 

Common stock to be outstanding after this offering

83,422,374 shares

 

Use of proceeds

We intend to use the net proceeds from this offering to repay the $450.0 million of our 11% senior subordinated notes due 2016 outstanding and any remaining proceeds and cash on hand to fund amounts payable to the Sponsors pursuant to the management agreement and the management letter agreement between us and the Sponsors, dated October 24, 2006 and March 8, 2013, respectively, to pay transaction-based IPO bonuses under our Executive Incentive Compensation Plan or for working capital and other general corporate purposes. See “Use of Proceeds.”

 

Dividend policy

Following this offering and subject to legally available funds, we intend to pay a quarterly cash dividend at a rate initially equal to $18.75 million per quarter (or an annual rate of $75.0 million). Based on the approximately 83.4 million shares of common stock to be outstanding after this offering, this dividend policy implies a quarterly dividend of approximately $0.225 per share (or an annual dividend of approximately $0.90 per share). The declaration and payment of future dividends to holders of our common stock will be at the sole discretion of our board of directors and will depend on many factors. See “Risk Factors—Risks Related to This Offering and Our Common Stock—We may not generate sufficient net cash flows or have sufficient restricted payment capacity under our senior secured credit facilities or the indentures governing our outstanding notes to pay our intended dividends on the common stock,” “Dividend Policy,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Debt Covenants.”

 

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.”

 

Conflicts of Interest

Because Goldman, Sachs & Co. is an underwriter and its affiliates collectively indirectly own approximately 10% of the issuer’s common stock through investments in investment funds affiliated with Thomas H. Lee Partners, L.P., Goldman, Sachs & Co. is deemed to have a “conflict of interest” under Rule 5121 of the Financial Industry Regulatory Authority. Rule 5121 requires that a “qualified independent underwriter” meeting certain standards participate in the preparation of the registration statement and prospectus and exercise the usual standards of due diligence in respect thereto, subject to certain exceptions which are not applicable here. Morgan Stanley & Co. LLC will serve as a qualified independent underwriter within the

 

 

10


Table of Contents
 

meaning of Rule 5121 in connection with this offering. For more information see “Conflicts of Interest.”

 

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 62,147,374 shares of our common stock outstanding as of March 7, 2013, but excludes:

 

   

3,224,240 shares of common stock issuable upon exercise of options outstanding as of March 7, 2013, at a weighted average exercise price of $25.47 per share;

 

   

1,159,358 shares underlying notional shares outstanding under our Nonqualified Deferred Compensation Plan at March 7, 2013;

 

   

1,000,000 shares of common stock reserved for future issuance under our 2013 Employee Stock Purchase Plan;

 

   

8,500,000 shares of common stock reserved for issuance under our 2013 Long-Term Incentive Plan, which will become effective prior to the closing of this offering; and

 

   

3,300,000 shares of common stock reserved for issuance under our Nonqualified Deferred Compensation Plan.

 

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

 

   

the effectiveness of a one-for-eight reverse split of our common stock that was effected on March 8, 2013; and

 

   

no exercise by the underwriters of their option to purchase up to 3,191,250 additional shares.

 

Related Party Payments

 

Upon completion of this offering, pursuant to the terms of that certain management agreement we entered into with affiliates of the Sponsors, dated October 24, 2006 and that certain management letter agreement we entered into with affiliates of the Sponsors, dated March 8, 2013, we expect to pay to the Sponsors $24.0 million. See “Use of Proceeds” and “Certain Relationships and Related Party Transactions—Transactions Since the Recapitalization—Management Agreement.” In connection with this offering, our compensation committee intends to grant transaction-based IPO bonuses of $2.9 million under our Executive Incentive Compensation Plan, of which $750,000 will be granted to Mr. Thomas B. Barker and $250,000 will be granted to each of Ms. Berger and Messrs. Mendlik, Stangl and Strubbe. See “Executive Compensation—Executive Incentive Compensation Plan.” Also in connection with this offering, our compensation committee intends to accelerate vesting of all remaining unvested shares subject to the Restricted Stock Award and Special Bonus Agreements and Restricted Stock Award Agreements entered into pursuant to the 2006 Executive Incentive Plan. The acceleration would result in the vesting of an aggregate of 42,562 shares of common stock, including the acceleration of 40,001 shares of common stock previously granted to Todd B. Strubbe. See “Executive Compensation—West Corporation 2006 Executive Incentive Plan.”

 

 

11


Table of Contents

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,  
          2010               2011          2012  
     (in millions, except per share amounts)  

Consolidated Statement of Operations Data:

      

Revenue

   $ 2,388.2      $
2,491.3
  
  $ 2,638.0   

Cost of services

     1,057.0       
1,113.3
  
    1,224.4   

Selling, general and administrative expenses

     911.0        909.9        935.4   
  

 

 

   

 

 

   

 

 

 

Operating income

     420.2        468.1        478.2   

Interest expense

     (252.7    
(269.9

    (272.0

Refinancing expense

     (52.8     —          —     

Other income

     6.1       
6.3
  
    1.4   
  

 

 

   

 

 

   

 

 

 

Income before income tax expense

     120.8       
204.5
  
    207.6   

Income tax expense

     60.5       
77.0
  
    82.1   
  

 

 

   

 

 

   

 

 

 

Net income

   $ 60.3      $
127.5
  
  $ 125.5   
  

 

 

   

 

 

   

 

 

 

Earnings (loss) per common share:

      

Basic Class L shares(1)

   $ 17.07      $ 17.18     

Diluted Class L shares(1)

   $ 16.37      $ 16.48     

Basic Common

   $ (10.00   $ (4.01   $ 2.04   

Diluted Common

   $ (10.00   $ (4.01   $ 1.98   

 

     Year Ended December 31,  
     2010     2011     2012  
     (dollars in millions)  

Selected Other Data:

      

Net cash flows from operating activities

   $ 312.8      $
348.2
  
  $ 318.9   

Net cash flows used in investing activities

     (137.9    
(329.4

    (201.6

Net cash flows used in financing activities

     (133.7    
(23.2

    (33.1

Capital expenditures

     122.0        120.1        128.4   

EBITDA(2)

     596.6        648.8        663.1   

EBITDA Margin(3)

     25.0     26.0     25.1

Adjusted EBITDA(2)

     654.7       
681.4
  
    713.1   

Adjusted EBITDA margin(4)

     27.4    
27.3

    27.0

Cash dividends declared, $8.00 per common share

     —          —        $ 511.0   

 

     As of December 31, 2012  
     Actual     As
Adjusted(5)
 
     (in millions)  

Consolidated Balance Sheet Data:

    

Cash and cash equivalents

   $ 179.1      $ 153.9   

Working capital

   $ 303.4      $ 294.8   

Total assets

   $ 3,448.2      $ 3,421.8   

Long-term debt, net of current portion

   $ 3,992.5      $ 3,542.5   

Total stockholders’ deficit(6)

   $ (1,249.7   $ (809.5

 

 

12


Table of Contents

 

  (1)   On December 30, 2011, each outstanding share of Class L Common Stock was converted into 5.03625 shares of Class A Common Stock and our Class A Common Stock was then reclassified as a single class of Common Stock.
  (2)   The term “EBITDA” refers to earnings before interest expense, taxes, depreciation and amortization, and the term “Adjusted EBITDA” refers to earnings before interest expense, share based compensation, taxes, depreciation and amortization, certain litigation settlement costs, impairments and other non-cash reserves, transaction costs and post-acquisition synergies. We present EBITDA Adjusted EBITDA because our management team uses them as important supplemental measures in evaluating our operating performance and preparing internal forecasts and budgets, and we believe they are 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 net 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 presentations of EBITDA and Adjusted EBITDA are useful because they provide important insight into our profitability trends and allow 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 post-acquisition synergies. Although we use EBITDA and Adjusted EBITDA as financial measures to assess the performance of our business and we use Adjusted EBITDA as a measure of our liquidity, neither EBITDA nor Adjusted EBITDA is a measure of financial performance or liquidity under generally accepted accounting principles (“GAAP”) and the use of EBITDA and Adjusted EBITDA is limited because they do not include certain material costs, such as depreciation, amortization and interest, necessary to operate our business and include adjustments for synergies that have not been realized. In addition, as disclosed below, certain adjustments included in our calculation of EBITDA and 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 EBITDA and Adjusted EBITDA, when presented along with net income, provide balanced disclosure which, for the reasons set forth above, are useful to investors and management in evaluating our operating performance and profitability. EBITDA and 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. EBITDA and 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.

 

 

13


Table of Contents

(continued)

 

    Year Ended December 31,  
    2010     2011     2012  
   

(in millions)

 

Net income

  $ 60.3      $ 127.5      $ 125.5   

Interest expense and other financing charges

    305.5        272.4        273.1   

Depreciation and amortization

    170.3        171.9        182.4   

Income tax expense

    60.5        77.0        82.1   
 

 

 

   

 

 

   

 

 

 

EBITDA

  $ 596.6      $ 648.8      $ 663.1   
 

 

 

   

 

 

   

 

 

 

Provision for share-based compensation

    4.2        23.3        25.8   

Acquisition synergies and transaction costs(a)

   
5.1
  
   
14.3
  
    15.5   

Site closure and other impairments(b)

    44.1        2.2        4.4   

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

    1.2        (6.4     1.6   

Litigation settlement costs(d)

    3.5        (0.8     2.7   
 

 

 

   

 

 

   

 

 

 

Adjusted EBITDA(e)

  $ 654.7      $ 681.4      $ 713.1   
 

 

 

   

 

 

   

 

 

 

 

  (a)   Represents, for each period presented, unrealized synergies for acquisitions, consisting primarily of headcount reductions and telephony-related savings, direct acquisition expenses and transaction costs incurred with the recapitalization. Amounts shown are permitted to be added to “EBITDA” for purposes of calculating our compliance with certain covenants under our credit facilities and the indentures governing our outstanding notes.
  (b)   Represents site closures, severance, goodwill and other asset impairments, and in 2012, was net of the reversal of a contingent earn-out liability of $7.9 million.
  (c)   Represents the unrealized loss (gain) on foreign denominated debt and the loss on transactions with affiliates denominated in foreign currencies.
  (d)   Represents litigation settlements, net of estimated insurance proceeds, and related legal costs.
  (e)   Adjusted EBITDA does not include pro forma adjustments for acquired entities of $5.5 million in 2012, $3.9 million in 2011 and $(0.1) million in 2010 as is permitted in our debt covenants.

 

  (3)   Represents EBITDA as a percentage of revenue.
  (4)   Represents Adjusted EBITDA as a percentage of revenue.
  (5)   The as adjusted column gives effect to the sale of 21,275,000 shares of common stock in this offering, at an assumed initial public offering price of $23.50 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 and cash on hand described under “Use of Proceeds.”
  (6)   On October 24, 2006, we completed the Recapitalization of our Company. The Recapitalization was accounted for as a leveraged recapitalization, whereby the historical bases of our assets and liabilities were maintained. The net recapitalization amount was first applied against additional paid-in capital in excess of par value until that was exhausted and the remainder was applied against accumulated deficit.

 

 

14


Table of Contents

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

 

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, which have contributed to pricing pressures and could result in the loss of customer relationships. 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, VoIP, on-premise solutions, 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 United States businesses automating and outsourcing call handling activities. Such automation and outsourcing 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 both 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.

 

We depend on third parties for certain services we provide, and 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.

 

15


Table of Contents

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.

 

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. With respect to third party technology we use to support our services, some of which is provided by our competitors, the failure of such technology or the third party becoming unable or unwilling to continue to provide the technology could interfere with our ability to satisfy customer demands and may require us to make investments in a replacement technology, which could adversely affect our business, financial condition and results of operations.

 

Growth in our IP-Based UC Solutions and Emergency Communications businesses depends in large part on continued deployment and adoption of emerging technologies.

 

Growth in our IP-based UC Solutions business and our next generation 9-1-1 solution offering is largely dependent on customer acceptance of communications services over IP-based networks, which is still in its early stages. Continued growth depends on a number of factors outside of our control. Customers may delay adoption and deployment of IP-based UC Solutions for several reasons, including available capacity on legacy networks, internal commitment to in-house solutions and customer attitudes regarding security, reliability and portability of IP-based solutions. In the Emergency Communications business, adoption may be hindered by, among other factors, continued reliance by customers on legacy systems, the complexity of implementing new systems and budgetary constraints. If customers do not deploy and adopt IP-based network solutions at the rates we expect, for these or other reasons, our business results of operations and financial condition could be adversely affected.

 

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 by revenue represented approximately 57% of our total revenue for the year ended December 31, 2012. If we fail to retain a significant amount of business from any of our 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.

 

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, whether from human error or fraud or malice on the part of employees or third parties or accidental technical failure, could expose us to liability, increase our expenses relating to the resolution of these breaches and deter our clients from selecting our services. Certain of our client contracts do not contractually limit our liability for the loss of confidential information. Migration of our emergency communications business to IP-based communication increases this risk. Our data security

 

16


Table of Contents

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

 

Growth in our IP-Based UC Solutions and other new services may provide alternatives to our services which could adversely affect our business, results of operations and financial condition.

 

Our IP-Based UC Solutions and other new services and enhancements to existing services may compete with our current conferencing and collaboration services. Continued growth in such emerging technologies may result in the availability of feature rich alternatives to our existing services with a more attractive pricing model. These developments could reduce the attractiveness to customers of our existing product offerings and reduce the price which we can receive from customers with respect to such services, which could adversely affect our business, results of operations and financial condition.

 

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

 

Uncertain and changing global economic conditions, including disruption of financial markets, could adversely affect our business, results of operations and financial condition, primarily through disruptions of 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, Europe or other markets 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.

 

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.

 

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 related to pending and potential litigation. 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 our business may arise in the future. Furthermore, we generally indemnify our clients against third-party claims asserting intellectual property violations and data security breaches, 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.

 

17


Table of Contents

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.

 

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, the provision of telecommunication services, telephone solicitations, the 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 regulate the pricing for our offerings or 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. Compliance with all federal and state telemarketing regulations 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.

 

In addition, the FCC recently adopted rules revising the manner in which regulated service providers compensate each other for the termination of interstate, intrastate, and local traffic, as well as intercarrier compensation between wireline carriers and wireless providers. The rules adopted by the FCC provide for a multi-year transition to a national uniform terminating charge of zero, which is known as “bill-and-keep.” Carriers were required to cap all current rate elements as of December 29, 2011 and to begin reducing their termination and transport rates in annual steps, culminating with a bill-and-keep system by July 2018. In a Further Notice, the FCC is considering changes to rates charged for origination of toll-free traffic, which is a major type of traffic carried by West’s subsidiary, HyperCube. These rules are currently being challenged by several states, industry groups and telecommunications carriers, and there are other initiatives by state regulators to address intrastate access rates. We are unable to predict the outcome of these rulemaking efforts, and any resulting regulations could limit our ability to determine how we charge for our services and have an adverse effect on our profitability.

 

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

 

18


Table of Contents

agreements, to establish and protect our proprietary rights in each of our businesses. 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 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, 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.

 

While we maintain insurance coverage that may, subject to policy terms and conditions including significant self-insured deductibles, cover certain aspects of cyber risks, such insurance coverage may be insufficient to cover all losses.

 

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 as a result of state and federal laws and regulations, market conditions or 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. In addition, increases in our labor costs, costs of employee benefits or employment taxes could adversely affect our business, results of operations and financial

 

19


Table of Contents

condition. In particular, the implementation of the Patient Protection and Affordable Care Act and the amendments thereto contain provisions relating to mandatory minimum health insurance coverage for employees which could materially impact our future healthcare costs for our predominantly United States-based workforce. While the legislation’s ultimate impact is not yet known, it is possible that these changes could significantly increase our compensation costs. In addition, many of our employees are hired on a part-time basis, and a significant portion of our costs consists of wages to hourly workers. From time to time, federal and state governments consider legislation to increase the minimum wage rate in their respective jurisdictions. Increases in the minimum wage or labor regulation could increase our labor costs.

 

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 employees’ data to the United States;

 

   

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 United States 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.

 

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.

 

20


Table of Contents

Our failure to repatriate cash from our foreign subsidiaries, or the costs incurred to do so, could harm our liquidity.

 

As of December 31, 2012, the amount of cash and cash equivalents held by our foreign subsidiaries was $58.6 million. From time to time we may seek to repatriate funds held by these subsidiaries, and our ability to withdraw cash from foreign subsidiaries will depend upon the results of operations of these subsidiaries and may be subject to legal, contractual or other restrictions and other business considerations. Our foreign subsidiaries may enter into financing arrangements that limit their ability to make loans or other payments to fund payments of our debt. In addition, dividend and interest payments to us from our foreign subsidiaries may be subject to foreign withholding taxes, which could reduce the amount of funds we receive from our foreign subsidiaries. Dividends and other distributions from our foreign subsidiaries may also be subject to fluctuations in currency exchange rates and legal and other restrictions on repatriation, which could further reduce the amount of funds we receive from our foreign subsidiaries.

 

In general, when an entity in a foreign jurisdiction repatriates cash to the United States, the amount of such cash is treated as a dividend taxable at current U.S. tax rates. Accordingly, upon the distribution of cash to us from our foreign subsidiaries, we will be subject to U.S. income taxes. Although foreign tax credits may be available to reduce the amount of the additional tax liability, these credits may be limited based on our tax attributes. Therefore, to the extent that we use cash generated in foreign jurisdictions, there may be a cost associated with repatriating cash to the United States or other limitations that could adversely affect our liquidity.

 

If we are unable to complete future acquisitions or if we incur unanticipated acquisition liabilities, 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.

 

In addition, we incur significant transaction costs associated with our acquisitions, including substantial fees for attorneys, accountants and other advisors. Any acquisition could result in our assumption of unknown and/or unexpected, and perhaps material, liabilities. Additionally, in any acquisition agreement, the negotiated representations, warranties and agreements of the selling parties may not entirely protect us, and liabilities resulting from any breaches could exceed negotiated indemnity limitations. These factors could impair our growth and ability to compete; divert resources from other potentially more profitable areas; or otherwise cause a material adverse effect on our business, financial position and results of operations.

 

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.

 

21


Table of Contents

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 including cost savings and synergies. 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;

 

   

the loss of key personnel at the acquired company; and

 

   

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

 

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 December 31, 2012, we had goodwill of approximately $1.8 billion and intangible assets, net of accumulated amortization, of $285.7 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. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies—Goodwill and Intangible Assets.” 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 an adverse effect on our business, results of operations and financial condition.

 

Our ability to recover consumer receivables on behalf of our clients may be limited under federal and state laws, which could limit our ability to recover on 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 clients’ consumer receivables regardless of any act or omission on our part. In addition, in March 2011, we entered into a Stipulated Order as part of a settlement agreement with the Federal Trade Commission (“FTC”) that imposes duties upon us beyond those of current federal and state laws. For example, for a period of five years from the date of entry of the Order, we must include a special disclosure on all written communications sent to consumers in connection with the collection of debts. The disclosure advises the consumer of certain rights they have under the Federal Fair Debt Collection Practices Act (“FDCPA”), provides a phone number and address at West to which the consumer can direct a complaint, and also provides contact information for the FTC if the consumer wishes to file a complaint with the Commission. In addition, for a period of five years, we must provide a special notice to all employees that advises them of certain requirements under the FDCPA including notice that individual collectors can be liable for violations of the FDCPA. Each employee must sign an acknowledgement that he or she has received and read the notice and we must maintain copies of the acknowledgements to verify our compliance. 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. The recently created Consumer Financial Protection Bureau (“CFPB”) has broad regulatory authority over consumer protection issues pertaining to financial products and services in the United States. The primary focus of the CFPB is on banks, but it also has authority over non-bank servicing agencies such as debt collection

 

22


Table of Contents

companies. The CFPB has the authority to conduct compliance examinations of any company within its jurisdiction and may bring enforcement actions when necessary to enforce consumer protection statutes. The CFPB is also authorized to promulgate regulations under consumer protection statutes that may impact the Company. Any failure to comply with any current or future laws applicable to us could limit our ability to collect on our clients’ charged-off consumer receivable portfolios, which could adversely affect our business, results of operations and financial condition.

 

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 December 31, 2012, our aggregate long-term indebtedness, including the current portion, was $4,017.7 million. In 2012, our consolidated interest expense was approximately $272.0 million. 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 to fund our other liquidity needs, we may be forced to reduce or delay capital expenditures or declared dividends, sell assets or operations, seek additional capital or restructure or refinance our indebtedness. We cannot make assurances 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 of such debt and, as a result:

 

   

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

 

   

our debt holders under other debt subject to cross default provisions could declare all outstanding principal and interest on such other debt 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, including dividend payments, 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, refinancing of our existing obligations or other purposes may be impaired;

 

23


Table of Contents
   

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;

 

   

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;

 

   

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

 

   

limit our ability to declare or pay dividends.

 

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 December 31, 2012, 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 December 31, 2012, we had a negative net worth of $1,249.7 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. At December 2012, under the terms of our debt agreements, we would be permitted to incur up to approximately $347.3 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.

 

24


Table of Contents

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 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 83,422,374 shares of our common stock will be outstanding, or 86,613,624 if the underwriters’ option is exercised in full. Of these shares, all of the shares in this offering will be available for immediate resale in the public market, 1,620,286 shares will be available for resale 90 days following completion of this offering, except those held by our “affiliates”, and the remaining 60,527,088 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, the holders of 58,899,908 shares of common stock will have the right, subject to certain exceptions and conditions and to the lock-up agreements described above, 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 16,024,240 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 be sold in the public market upon issuance, subject to restrictions under the securities laws applicable to resales by affiliates and to lock-up agreements described above.

 

25


Table of Contents

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 $23.50 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 $58.43 per share of common stock. See “Dilution.”

 

Moreover, we issued options in the past to acquire common stock at prices some of which are significantly below the assumed initial public offering price. As of March 7, 2013, 3,224,240 shares of common stock were issuable upon exercise of outstanding stock options with a weighted average exercise price of $25.47 per share. To the extent that outstanding options with an exercise price below $23.50, the mid-point of the range set forth on the cover of this prospectus, are ultimately exercised, you will incur further dilution.

 

We may not generate sufficient cash flows or have sufficient restricted payment capacity under our senior secured credit facilities or the indentures governing our outstanding notes to pay our intended dividends on the common stock.

 

Following this offering, and subject to legally available funds, we intend to pay quarterly cash dividends. We will only be able to pay dividends from our available cash on hand and funds generated by us and our subsidiaries. Our ability to pay dividends to our stockholders will be subject to the terms of our senior secured credit facilities and the indentures governing the outstanding notes. Our operating cash flow and ability to comply with restricted payments covenants in our debt instruments will depend on our future performance, which will be subject to prevailing economic conditions and to financial, business and other factors beyond our control. In addition, dividend payments are not mandatory or guaranteed, and our board of directors may never declare a dividend, decrease the level of dividends or entirely discontinue the payment of dividends. Your decision whether to purchase shares of our common stock should allow for the possibility that no dividends will be paid. You may not receive any dividends as a result of the following additional factors, among others:

 

   

we are not legally or contractually required to pay dividends;

 

   

while we currently intend to pay a regular quarterly dividend, the actual amount of dividends distributed and the decision to make any distribution is entirely at the discretion of our board of directors and future dividends with respect to shares of our capital stock, if any, will depend on, among other things, our results of operations, cash requirements, financial condition, business opportunities, provisions of applicable law and other factors that our board of directors may deem relevant;

 

   

the amount of dividends distributed is and will be subject to contractual restrictions under the restricted payments covenants contained in:

 

   

the indentures governing our outstanding notes,

 

   

the terms of our senior secured credit facilities, and

 

   

the terms of any other outstanding indebtedness incurred by us or any of our subsidiaries after the completion of this offering; and

 

   

the amount of dividends distributed is subject to state law restrictions.

 

As a result of the foregoing limitations on our ability to make distributions, we cannot assure you that we will be able to make all of our intended quarterly dividend payments.

 

26


Table of Contents

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 amended and restated certificate of incorporation, second amended and restated 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;

 

   

limiting our ability to engage in certain business combinations with any “interested stockholder” (other than the Sponsors, Gary and Mary West, their affiliates and certain transferees) for a three-year period following the time that the stockholder became an interested stockholder;

 

   

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; and

 

   

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. Any provision of our amended and restated certificate of incorporation or second amended and restated 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, entities controlled by Gary L. West and Mary E. West, the Gary and Mary West Health Institute and investment funds associated with the Sponsors will own, in the aggregate, approximately 70.6% of our outstanding common stock. Under our amended and restated stockholder agreement with our Sponsors and entities controlled with our Founders, our Sponsors can designate up to 5 directors, in the aggregate, to our board of directors, subject to ownership of our common stock above certain thresholds. Because our Chief Executive Officer will be appointed, and may be terminated, by our board of directors, our Sponsors will effectively have the ability to select our Chief Executive Officer through the designation of directors, subject to ownership of our common stock above a certain threshold. See “Certain Relationships and Related Party Transactions—Transactions Since the Recapitalization—Stockholder Agreement.” As a result, these stockholders, acting individually or together, could control substantially all matters requiring stockholder approval, including 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.

 

27


Table of Contents

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 52% 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, which could adversely affect our business or prospects.

 

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, any business opportunity that may be 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 a business opportunity for such Sponsor, even if the opportunity is one that we might reasonably 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 any such business opportunity, directs any such business opportunity to another person or fails to present any such business opportunity, or information regarding any such business opportunity, to us unless, in the case of any such person who is our director or officer, any 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. For example, our Sponsors may become aware, from time to time, of certain business opportunities, such as acquisition opportunities or ideas for product line expansions, and may direct such opportunities to other businesses in which they have invested, in which case we may not become aware of or otherwise have the ability to pursue such opportunity. Further, such businesses may choose to compete with us for these opportunities. As a result, our renouncing our interest and expectancy in any business opportunity that may be from time to time presented to the Sponsors could adversely impact our business or prospects if attractive business 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.

 

28


Table of Contents

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 redeem our 11% senior subordinated notes due 2016. We expect to use any remaining proceeds to repay additional indebtedness under our other credit facilities, to fund the amounts payable as a result of this offering under the management agreement between us and the Sponsors or 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.

 

29


Table of Contents

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.

 

30


Table of Contents

USE OF PROCEEDS

 

Based upon an assumed initial public offering price of $23.50 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 $468.3 million, after deducting estimated underwriting discounts and commissions in connection with this offering and estimated offering expenses payable by us of approximately $31.7 million. See “Underwriting.”

 

We expect to use the net proceeds from this offering to redeem our 11% senior subordinated notes due 2016, which have an outstanding principal amount of $450.0 million and are redeemable through October 14, 2013 at a redemption price equal to 103.667% of the principal amount. We expect to use any remaining proceeds and cash on hand, to the extent necessary, to fund $24.0 million payable as a result of this offering pursuant to the management agreement and the management letter agreement between us and the Sponsors, dated October 24, 2006 and March 8, 2013, respectively, to pay $2.9 million of anticipated transaction-based IPO bonuses under our Executive Incentive Compensation Plan or for working capital and other general corporate purposes. To the extent there is a reduction in the offering price or the number of shares sold in this offering, we expect to use cash on hand or borrowings under our credit facilities to redeem our 11% senior subordinated notes due 2016.

 

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

 

DIVIDEND POLICY

 

Following this offering and subject to legally available funds, we intend to pay a quarterly cash dividend at a rate initially equal to $18.75 million per quarter (or an annual rate of $75.0 million). Based on the approximately 83.4 million shares of common stock to be outstanding after the offering, this dividend policy implies a quarterly dividend of approximately $0.225 per share (or an annual dividend of approximately $0.90 per share). We anticipate funding our dividend with cash generated by our operations. In 2012, our net cash flows from operating activities were $318.9 million, our net cash flows used in investing activities were $201.6 million and our net cash flows used in financing activities were $33.1 million. We anticipate an improvement in our cash flows from operations for 2013, including the partial-year beneficial impact of reduced interest expense of approximately $49.5 million (less approximately $16.5 million of cost associated with the redemption) from the redemption of our 11% senior subordinated notes due 2016 with the net proceeds from this offering and the termination of the $4.0 million annual fee paid under the management agreement with our Sponsors. Any fluctuations in cash flows used in investing and financing activities for 2013 will be dependent on various factors, including potential acquisition opportunities, but we anticipate capital expenditures in 2013 of approximately $130.0 million to $140.0 million. We cannot assure you that any dividends will be paid in the anticipated amounts and frequency set forth in this prospectus, if at all.

 

The declaration and payment of all future dividends, if any, will be at the sole discretion of our Board of Directors. In determining the amount of any future dividends, our Board of Directors will take into account: (i) our financial condition and results of operations, (ii) our available cash and net cash flows from operating activities, as well as anticipated cash requirements (including debt servicing), (iii) our capital requirements and the capital requirements of our subsidiaries, (iv) contractual, legal, tax and regulatory restrictions, including restrictions imposed by the terms of our outstanding indebtedness, (v) general economic and business conditions, (vi) priority of preferred stock dividends, if any, and (vii) any other factors that our Board of Directors may deem relevant. In particular, the restricted payments covenants under our senior secured credit facilities and the indentures governing our outstanding notes effectively limit our ability to pay dividends. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Debt Covenants” Based on the approximately 83.4 million shares of common stock expected to be outstanding after the offering, this dividend policy would require approximately $75.0 million in cash per year.

 

On August 15, 2012, our Board of Directors declared a special cash dividend of $8.00 per share paid to stockholders of record on that date.

 

31


Table of Contents

CAPITALIZATION

 

The following table shows our capitalization as of December 31, 2012:

 

   

on an actual basis; and

 

   

on an as adjusted basis to give effect to the issuance and sale by us of 21,275,000 shares of our common stock in this offering at an assumed initial public offering price of $23.50 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 from such issuance and cash on hand to redeem our 11% senior subordinated notes due 2016 at a redemption premium of 103.667% and to pay the $24.0 million fee related to the management agreement with the Sponsors and $2.9 million of anticipated transaction-based IPO bonuses under our Executive Incentive Compensation Plan.

 

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 December 31, 2012  
     Actual     As  Adjusted(1)  
     (unaudited)
(in thousands)
 

Cash and cash equivalents(2)

   $ 179,111      $ 153,941   
  

 

 

   

 

 

 

Long-term obligations, including current portion:

    

Senior Secured Term Loan Facility, due 2016(3)

   $ 1,452,506      $ 1,452,506   

Senior Secured Term Loan Facility, due 2018(3)

     965,150        965,150   

11% Senior Subordinated Notes, due 2016

     450,000        —     

8 5/8% Senior Notes, due 2018

     500,000        500,000   

7 7/8% Senior Notes, due 2019

     650,000        650,000   

Stockholders’ deficit

    

Common Stock $0.001 par value, 475,000 shares authorized, 62,178 shares issued and 62,086 shares outstanding on an actual basis; 83,453 shares issued and 83,361 shares outstanding on an as adjusted basis

     62        83   

Additional paid-in capital

     1,720,639        2,187,715   

Retained deficit(4)

     (2,941,948     (2,968,872

Accumulated other comprehensive loss

     (23,131     (23,131

Treasury stock, at cost (92 shares)

     (5,308     (5,308
  

 

 

   

 

 

 

Total stockholders’ deficit(4)

     (1,249,686     (809,513
  

 

 

   

 

 

 

Total capitalization

   $ 2,767,970      $ 2,758,143   
  

 

 

   

 

 

 

 

  (1)  

The 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. To the extent there is a reduction in the offering price or the number of shares sold in this offering, we expect to use cash on hand or borrowings under our credit facilities to redeem our 11% senior subordinated notes due 2016. See “Use of Proceeds.” A $1.00 increase or decrease in the assumed initial public offering price per share would increase or decrease additional paid-in capital by $20.0 million and would decrease or increase total stockholders’ deficit and would increase or decrease total capitalization each by $20.0 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 increase or decrease additional paid-in capital by $22.1 million, would decrease or increase total stockholders’ deficit and would increase or decrease total capitalization each by approximately $22.1 million, assuming the assumed initial public offering price of $23.50

 

32


Table of Contents
  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.
  (2)   Other than the underwriting discounts and commissions, we expect the estimated offering costs payable by us to be approximately $3.5 million, which includes legal, accounting and printing costs and various other fees associated with registration and listing of our common stock, $1.8 million of these expenses were paid prior to December 31, 2012, and $0.6 million of such $1.8 million was previously recognized as expense.
  (3)   On February 20, 2013, we amended our senior secured term loan facilities, which amendment extended the maturity of a portion of the term loans due July 2016 to June 2018. As of the effective date of the amendment, we had outstanding term loans in an aggregate principal amount of $2.1 billion due June 2018 and term loans in an aggregate principal amount of approximately $317.7 million due July 2016.
  (4)   On October 24, 2006, we completed the Recapitalization of our Company. The Recapitalization was accounted for as a leveraged recapitalization, whereby the historical bases of our assets and liabilities were maintained. The net recapitalization amount was first applied against additional paid-in capital in excess of par value until that was exhausted and the remainder was applied against accumulated deficit.

 

33


Table of Contents

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 December 31, 2012 was $(3.4) billion, and our net tangible book value per share was $(53.99). Adjusted 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 December 31, 2012.

 

After giving effect to the sale of our common stock in this offering at an assumed initial public offering price of $23.50 per share, the mid-point of the price range set forth on the cover page of this prospectus, and after deducting the underwriting discount, estimated offering expenses payable by us, and the application of net proceeds from this offering as described in “Use of Proceeds”, our net tangible book value at December 31, 2012 would have been $(2.9) billion, or $(34.93) per share. This represents an immediate increase in net tangible book value per share of $19.06 to the existing stockholders and dilution in net tangible book value per share of $(58.43) 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

  

  $ 23.50   

Net tangible book value per share as of December 31, 2012

   $ (53.99  

Increase per share attributable to new investors in this offering

     19.06     

Pro forma net tangible book value per share after this offering

  

    (34.93

Dilution of net tangible book value per share to new investors

  

  $ (58.43
    

 

 

 

 

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. For example, a $1.00 increase or decrease in the initial public offering price from that assumed in this prospectus of $23.50 per share, the mid-point of the price range set forth on the front cover of this prospectus, would increase or decrease net tangible book value from the amounts shown above by approximately $20.0 million, or approximately $0.24 per share, and the dilution per share to investors in this offering by approximately $0.76 per share, assuming that the number of shares offered by us set forth on the front cover of this prospectus remains the same. 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 net tangible book value of approximately $(2.9) billion, or approximately $(34.26) per share, and the dilution per share to investors in this offering would be approximately $(57.76) per share, assuming the assumed initial public offering price of $23.50 per share, the mid-point of the price range set forth on the front cover of this prospectus, remains the same. Similarly, a decrease of 1.0 million shares in the number of shares offered by us would result in a net tangible book value of approximately $(2.9) billion, or approximately $(35.63) per share, and the dilution per share to investors in this offering would be approximately $(59.13) per share, assuming the assumed initial public offering price of $23.50 per share, the mid-point of the price range set forth on the front cover of this prospectus, remains the same.

 

34


Table of Contents

The following table summarizes, on the same basis as of December 31, 2012, 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

     62,085,570         74.5   $ 1,000,071,993         66.7   $ 16.11   

New investors

     21,275,000         25.5     499,962,500         33.3     23.50   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total

     83,360,570         100   $ 1,500,034,493         100   $ 17.99   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

 

A $1.00 increase or decrease in the assumed initial public offering price of $23.50 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 $20.0 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 $22.1 million, assuming the assumed initial public offering price of $23.50 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.

 

35


Table of Contents

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, 2012 and December 31, 2011 and for the years ended December 31, 2012, December 31, 2011, and December 31, 2010 from our consolidated financial statements included elsewhere in this prospectus. The selected consolidated financial data as of December 31, 2010, December 31, 2009, and December 31, 2008, and for the years ended December 31, 2009 and December 31, 2008 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.

 

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,  
     2008     2009     2010     2011     2012  
    

(amounts in thousands except per share amounts)

 

Statement of Operations Data:

          

Revenue

   $ 2,247,434      $ 2,375,748      $ 2,388,211      $ 2,491,325      $ 2,638,024   

Cost of services

     1,015,028        1,067,777        1,057,008        1,113,289        1,224,459   

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

     881,586        907,358        911,022        909,908        935,390   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     350,820        400,613        420,181        468,128        478,175   

Interest expense

     (313,019     (254,103     (252,724     (269,863     (271,951

Refinancing expense

     —         —         (52,804     —         —     

Other income (expense)

     (8,621     1,326        6,127        6,262        1,385   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income tax expense

     29,180        147,836        120,780        204,527        207,609   

Income tax expense

     11,731        56,862        60,476        77,034        82,068   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     17,449        90,974        60,304        127,493        125,541   

Less net income (loss)—noncontrolling interest

     (2,058     2,745        —         —         —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income—West Corporation

   $ 19,507      $ 88,229      $ 60,304      $ 127,493      $ 125,541   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Basic Class L shares(1)

   $ 12.78      $ 17.45      $ 17.07      $ 17.18     

Diluted Class L shares(1)

   $ 12.24      $ 16.67      $ 16.37      $ 16.48     

Basic Common

   $ (9.84   $ (7.84   $ (10.00   $ (4.01   $ 2.04   

Diluted Common

   $ (9.84   $ (7.84   $ (10.00   $ (4.01   $ 1.98   

 

36


Table of Contents
    Year Ended December 31,  
    2008     2009     2010     2011     2012  
    (dollars in thousands)  

Selected Other Data:

         

Net cash flows from operating activities

  $ 287,381      $ 272,857      $ 312,829      $ 348,187      $ 318,916   

Net cash flows used in investing activities

  $ (597,539   $ (112,615   $ (137,896   $ (329,441   $ (201,622

Net cash flows from (used in) financing activities

  $ 341,971      $ (271,844   $ (133,651   $ (23,180   $ (33,130

Cash dividends declared, $8.00 per common share

    —          —          —          —        $ 511,041   

Capital expenditures

  $ 108,765      $ 122,668      $ 122,049      $ 120,122      $ 128,429   

EBITDA(2)

  $ 525,686      $ 590,286      $ 596,639      $ 648,818      $ 663,148   

EBITDA Margin(3)

    23.3     24.8     25.0     26.0     25.1

Adjusted EBITDA(2)

  $ 633,551      $ 647,941      $ 654,650      $ 681,357      $ 713,075   

Adjusted EBITDA margin(4)

    28.2     27.3     27.4     27.3     27.0

 

    As of December 31,  
    2008     2009     2010     2011     2012  
    (dollars in thousands)  

Balance Sheet Data:

         

Working capital

  $ 211,410      $ 175,007      $ 213,465      $ 203,486      $ 303,424   

Property and equipment, net

  $ 320,152      $ 333,267      $ 341,366      $ 350,855      $ 364,896   

Total assets

  $ 3,314,789      $ 3,045,262      $ 3,005,250      $ 3,227,518      $ 3,448,153   

Total debt

  $ 3,946,127      $ 3,633,928      $ 3,533,566      $ 3,516,365      $ 4,017,656   

Class L common stock(1)

  $ 1,158,159      $ 1,332,721      $ 1,504,445       

Total Stockholders’ deficit(5)

  $ (2,360,747   $ (2,425,465   $ (2,543,500   $ (896,413   $ (1,249,686

 

  (1)   On December 30, 2011, each outstanding share of Class L Common Stock was converted into 5.03625 shares of Class A Common Stock and our Class A Common Stock was then reclassified as a single class of Common Stock.
  (2)   The term “EBITDA” refers to earnings before interest expense, taxes, depreciation and amortization, and the term “Adjusted EBITDA” refers to earnings before interest expense, share based compensation, taxes, depreciation and amortization, certain litigation settlement costs, impairments and other non-cash reserves, transaction costs and post-acquisition synergies. We present EBITDA and Adjusted EBITDA because our management team uses them as important supplemental measures in evaluating our operating performance and preparing internal forecasts and budgets and we believe they are 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 net 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 presentations of EBITDA and Adjusted EBITDA are useful because they provide important insight into our profitability trends and allow 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 post-acquisition synergies. Although we use EBITDA and Adjusted EBITDA as financial measures to assess the performance of our business and we use Adjusted EBITDA as a measure of our liquidity, neither EBITDA nor Adjusted EBITDA is a measure of financial performance or liquidity under generally accepted accounting principles (“GAAP”) and the use of EBITDA and Adjusted EBITDA is limited because they do not include certain material costs, such as depreciation, amortization and interest, necessary to operate our business and include adjustments for synergies that have not been realized. In addition, as disclosed below, certain adjustments included in our calculation of EBITDA and 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 EBITDA and Adjusted EBITDA, when presented along with net income, provides balanced disclosure which, for the reasons set forth above, are useful to investors and management in evaluating our operating performance and profitability. EBITDA and 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. EBITDA and 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 net income.

 

37


Table of Contents
    For the year ended December 31,  
    2008     2009     2010     2011     2012  
    (dollars in thousands)  

Net income

  $ 17,449      $ 90,974      $ 60,304      $ 127,493      $ 125,541   

Interest expense and other financing charges

    313,019        254,103        305,528        272,383        273,117   

Depreciation and amortization

    183,487        188,347        170,331        171,908        182,422   

Income tax expense

    11,731        56,862        60,476        77,034        82,068   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

    525,686        590,286        596,639        648,818        663,148   

Provision for share-based compensation(a)

    1,404        3,840        4,233        23,341        25,849   

Acquisition synergies and transaction costs(b)

    20,985        18,003        5,035        14,314        15,476   

Non-cash portfolio impairments(c)

    76,405        25,464                        

Site closure and other impairments(d)

    2,644        6,976        44,040        2,233        4,358   

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

    6,427        (229     1,199        (6,454     1,581   

Litigation settlement costs(f)

           3,601        3,504        (895     2,663   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA(g)

  $ 633,551      $ 647,941      $ 654,650      $ 681,357      $ 713,075   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  (a)   Represents total share-based compensation expense determined at fair value, excluding share based compensation expense related to deferred compensation-notional shares of $1.0 million in 2008 as amounts were determined to be not significant.
  (b)   Represents, for each period presented, unrealized synergies for acquisitions, consisting primarily of headcount reductions and telephony-related savings, direct acquisition expenses and transaction costs incurred with the recapitalization. Amounts shown are permitted to be added to “EBITDA” for purposes of calculating our compliance with certain covenants under our credit facilities and the indentures governing our outstanding notes.
  (c)   Represents non-cash portfolio receivable allowances.
  (d)   Represents site closures, severance, goodwill and other asset impairments, and in 2012, was net of the reversal of a contingent earn-out liability of $7.9 million.
  (e)   Represents the unrealized loss (gain) on foreign denominated debt and the loss on transactions with affiliates denominated in foreign currencies.
  (f)   Represents litigation settlements, net of estimated insurance proceeds, and related legal costs.
  (g)   Adjusted EBITDA does not include pro forma adjustments for acquired entities of $5.5 million in 2012, $3.9 million in 2011, $(0.1) million in 2010, $2.0 million in 2009 and $49.1 million in 2008 as is permitted in our debt covenants.
  (3)   Represents EBITDA as a percentage of revenue.
  (4)   Represents Adjusted EBITDA as a percentage of revenue.
  (5)   On October 24, 2006, we completed the Recapitalization of our Company. The Recapitalization was accounted for as a leveraged recapitalization, whereby the historical bases of our assets and liabilities were maintained. The net recapitalization amount was first applied against additional paid-in capital in excess of par value until that was exhausted and the remainder was applied against accumulated deficit.

 

38


Table of Contents

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, communication services. We offer a broad portfolio of services, including conferencing and collaboration, unified communications, alerts and notifications, emergency communications, business process outsourcing and telephony / interconnect services. The scale and processing capacity of our proprietary technology platforms, combined with our expertise in managing voice and data transactions, enable us to provide reliable, high-quality, mission-critical communications designed to maximize return on investment for our clients. Our clients include Fortune 1000 companies, along with small and medium enterprises in a variety of industries, including telecommunications, retail, financial services, public safety, technology and healthcare. We have sales and operations in the United States, Canada, Europe, the Middle East, Asia Pacific, Latin America and South America.

 

Since our founding in 1986, we have invested significantly to expand our technology platforms and develop our operational processes to meet the complex and changing communication needs of our clients. We have evolved our business mix from labor-intensive communication services to predominantly diversified and platform-based, technology-driven voice and data services.

 

Investing in technology and developing specialized expertise in the industries we serve are critical components to our strategy of enhancing our services and our value proposition. In 2012, we managed approximately 28 billion telephony minutes and approximately 134 million conference calls, facilitated over 260 million 9-1-1 calls, and delivered over 1.2 billion notification calls and data messages. With approximately 672,000 telephony ports to handle conference calls, 9-1-1 public safety calls, alerts and notifications and customer service at December 31, 2012, 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 384,000 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, event services and IP-based unified communication solutions are generally billed on a per participant minute or per seat 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, transcription services or professional services. Since we entered the conferencing services business, the average rate per minute that we charge has declined while total minutes sold has increased. This is consistent with industry trends. We expect this trend 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 or cell towers covered under each client contract. We

 

39


Table of Contents

also bill monthly for our premise-based database solution. In addition, we bill for sales, installation and maintenance of our communication equipment technology solutions. Our platform-based 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. Our telephony / interconnect services are generally billed based on usage of toll-free origination 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 platform-based, 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 in costs of services primarily reflects compensation and benefits 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 commissions for our sales professionals. 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, impairment charges and amortization of finite-lived intangible assets.

 

Key Drivers Affecting Our Results of Operations

 

Factors Related to Our Indebtedness. During the third quarter of 2012, we amended our senior secured term loans by entering into an amendment to our amended and restated credit agreement (as so amended, the “Amended Credit Agreement”). The Amended Credit Agreement provided for senior secured term loans of $970.0 million, due June 30, 2018 (the “New Term Loans”). The proceeds were used to repay the $448.4 million term loans due October 24, 2013. The remaining net proceeds were used to fund a special cash dividend to West’s stockholders and make other dividend equivalent payments and to pay fees and expenses related to the execution of the amendment. The interest rate margins for the New Term Loans are 4.50%, for LIBOR rate loans, and 3.50%, for base rate loans. The Amended Credit Agreement also provides for interest rate floors applicable to the New Term Loans and the remaining term loans under our senior secured credit facilities. The interest rate floors are 1.25%, for the LIBOR component of the LIBOR rate loans, and 2.25%, for the base rate component of the base rate loans. The Amended Credit Agreement also provides for a soft call option applicable to the New Term Loans and the remaining term loans under the senior secured credit facilities. The soft call option provides for a premium equal to 1.0% of the amount of the repricing payment, in the event that, on or prior to the first anniversary of the effective date of the amendment, we or our subsidiary borrowers enter into certain repricing transactions. The Amended Credit Agreement also modified the financial covenants and certain covenant baskets.

 

Evolution into a Predominately Platform-based Solutions Business. We have evolved into a diversified and platform-based technology-driven service provider. Since 2005, our revenue from platform-based services has grown from 37% of total revenue to 72% for 2012, and our operating income from platform-based services has grown from 53% of total operating income to 90% over the same period. As in the past, we will continue to seek

 

40


Table of Contents

and invest in higher margin businesses, irrespective of whether the associated services are delivered to our customers through an agent-based or a platform-based environment. We expect our platform-based service lines to grow at a faster pace than agent-based services and as a result will continue to increase as a percentage of our total revenue. However, many of our customers require an integrated service offering that incorporates both agent-based and platform-based services—for example, an automated voice response system with the option for the client’s customer to speak to an agent and accordingly, we expect agent-based services will continue to represent a meaningful portion of our service offerings for the foreseeable future.

 

Acquisition Activities. Identifying and successfully integrating acquisitions of value-added service providers has been a key component of our business strategy. We will continue to seek opportunities to expand our suite of communication services across industries, geographies and end-markets. While we expect this will occur primarily through organic growth, we have and will continue to acquire assets and businesses that strengthen our value proposition to clients and drive value to us. We have developed an internal capability to source, evaluate and integrate acquisitions that we believe has created value for shareholders. Since 2005, we have invested approximately $2.0 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.

 

Critical Accounting Policies

 

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

 

Revenue Recognition. In our Unified Communications segment, conferencing and event services are generally billed and revenue recognized on a per participant minute basis. Web services are generally billed and revenue recognized on a per participant minute basis or, in the case of operating license arrangements, generally billed in advance and revenue recognized ratably over the service life period, IP-based services are generally billed and revenue recognized on a per seat basis and alerts and notifications services are generally billed, and revenue recognized, on a per message or per minute basis. We also charge clients for additional features, such as conference call recording, transcription services or professional services. Our Communication Services segment recognizes revenue for platform-based and agent-based services in the month that services are performed and services are generally billed based on call duration, hours of input, number of calls or a contingent basis. Emergency communications services revenue within the Communication Services segment 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, recognized upon completion of such stages. Contracts for annual recurring services such as support and maintenance agreements are generally billed in advance and are recognized as revenue ratably (on a monthly basis) over the contractual periods.

 

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.

 

Revenue for telephony / interconnect services is recognized in the period the service is provided and when collection is reasonably assured. These telephony / interconnect services are primarily comprised of switched access charges for toll-free origination services, which are paid primarily by interexchange carriers.

 

41


Table of Contents

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, 2012 were $1,816.9 million and $285.7 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. 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 is 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, 2012, our reporting units were one level below our operating segments. 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, 2012 as the fair value substantially exceeded the carrying-value for each of our reporting units in step one. If events and circumstances change resulting in significant changes in operations which result in lower actual operating income compared to projected operating income, we will test our reporting unit for impairment prior to our annual impairment test.

 

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. 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 the 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 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

 

42


Table of Contents

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. Our repatriation policy is to look at our foreign earnings on a jurisdictional basis. We have historically determined that the undistributed earnings of our foreign subsidiaries will be repatriated to the United States and, accordingly, we have provided a deferred tax liability on such foreign source income. In 2012, we reorganized certain foreign subsidiaries to simplify our business structure, and evaluated our liquidity requirements in the United States and the capital requirements of our foreign subsidiaries. We have determined at December 31, 2012 that a portion of our foreign earnings are indefinitely reinvested, and therefore deferred income taxes have not been provided on such foreign subsidiary earnings.

 

Results of Operations

 

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

 

    Year Ended December 31,  
    2012     2011     2010  
    (in millions)  

Consolidated Statement of Operations Data:

     

Revenue

  $ 2,638.0      $ 2,491.3      $ 2,388.2   

Cost of services

    1,224.4        1,113.3        1,057.0   

Selling, general and administrative

    935.4        909.9        911.0   
 

 

 

   

 

 

   

 

 

 

Operating income

    478.2        468.1        420.2   

Interest expense

    (272.0     (269.9     (252.7

Refinancing expense

    —          —          (52.8

Other income

    1.4        6.3        6.1   
 

 

 

   

 

 

   

 

 

 

Income before income tax expense

    207.6        204.5        120.8   

Income tax expense

    82.1        77.0        60.5   
 

 

 

   

 

 

   

 

 

 

Net income

  $ 125.5      $ 127.5      $ 60.3   
 

 

 

   

 

 

   

 

 

 

Earning (loss) per common share:

     

Basic Class L shares

    $ 17.18      $ 17.07   

Diluted Class L shares

    $ 16.48      $ 16.37   

Basic Common

  $ 2.04      $ (4.01   $ (10.00

Diluted Common

  $ 1.98      $ (4.01   $ (10.00

 

Years Ended December 31, 2012 and 2011

 

Revenue: Total revenue in 2012 increased $146.7 million, or 5.9%, to $2,638.0 million from $2,491.3 million in 2011. This increase included revenue of $96.2 million from acquired entities. The acquisitions which comprise this increase were TFCC, POSTcti, Unisfair, WIPC, Contact One, Inc. (“Contact One”), PivotPoint Solutions, LLC (“PivotPoint”) and HyperCube. These acquisitions closed on February 1, 2011, February 1, 2011, March 1, 2011, June 3, 2011, June 7, 2011, August 10, 2011 and March 23, 2012, respectively. Results from PivotPoint, Contact One and HyperCube have been included in the Communication Services segment since their respective acquisition dates. All of the other acquisitions, noted above, have been included in the Unified Communications segment since their respective acquisition dates.

 

During the years ended December 31, 2012 and 2011, our largest 100 clients represented approximately 57% and 55% of total revenue, respectively. In 2012, no client accounted for 10% or more of our aggregate revenue. In 2011, the aggregate revenue from our largest client, AT&T, as a percentage of our total revenue was approximately 10%.

 

43


Table of Contents

Revenue by business segment:

 

     For the year ended December 31,  
     2012     % of Total
Revenue
    2011     % of Total
Revenue
    Change     % Change  

Revenue in thousands:

            

Unified Communications

   $ 1,451,301        55.0   $ 1,364,032        54.8   $ 87,269        6.4

Communication Services

     1,198,320        45.4     1,137,900        45.7     60,420        5.3

Intersegment eliminations

     (11,597     -0.4     (10,607     -0.5     (990     9.3
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 2,638,024        100.0   $ 2,491,325        100.0   $ 146,699        5.9
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Unified Communications revenue in 2012 increased $87.3 million, or 6.4%, to $1,451.3 million from $1,364.0 million in 2011. The increase in revenue included $27.4 million from acquisitions. The remaining $59.9 million increase was primarily attributable to the addition of new customers as well as an increase in usage primarily of our web and audio-based services by our existing customers. Revenue attributable to increased usage and new customer usage was partially offset by a decline in the rates charged to existing customers for those services. The volume of minutes used for our reservationless services, which accounts for the majority of our Unified Communications revenue, grew approximately 9.0% in 2012 over 2011, while the average rate per minute for reservationless services declined by approximately 6.7%.

 

During 2012, revenue in the Asia-Pacific (“APAC”) and Europe, Middle East and Africa (“EMEA”) regions grew to $458.5 million, an increase of 4.0% over 2011 primarily related to volume growth in APAC. Using the same foreign currency rates in effect during 2011, revenue in APAC and EMEA increased 6.4% in 2012.

 

Communication Services revenue in 2012 increased $60.4 million, or 5.3%, to $1,198.3 million from $1,137.9 million in 2011. The increase in revenue in 2012 included $68.8 million from acquisitions. Revenue from agent-based services for 2012 increased $20.6 million compared with revenue for 2011, partially offset by a decline of $12.8 million in direct response agent revenue. Revenue from equipment sales in public safety declined by $16.5 million due to reduced government spending for public safety equipment and due to the transition to a software as a services (“SAAS”) model. The SAAS model provides recurring monthly revenue over a multi-year period as opposed to an upfront one-time sale, with monthly maintenance fees.

 

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 in 2012 increased $111.2 million, or 10.0%, to $1,224.5 million from $1,113.3 million in 2011. Cost of services from acquired entities was $56.0 million. As a percentage of revenue, cost of services increased to 46.4% in 2012 from 44.7% in 2011.

 

Cost of Services by business segment:

 

     For the year ended December 31,  
     2012     % of Revenue     2011     % of Revenue     Change     % Change  

Cost of services in thousands:

            

Unified Communications

   $ 616,899        42.5   $ 558,267        40.9   $ 58,632        10.5

Communication Services

     616,894        51.5     563,831        49.6     53,063        9.4

Intersegment eliminations

     (9,334     NM        (8,809     NM        (525     6.0
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 1,224,459        46.4   $ 1,113,289        44.7   $ 111,170        10.0
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

NM—Not Meaningful

 

44


Table of Contents

Unified Communications cost of services in 2012 increased $58.6 million, or 10.5%, to $616.9 million from $558.3 million in 2011. Cost of services from acquired entities increased cost of services by $16.6 million. The remaining increase is primarily driven by increased service volume. As a percentage of this segment’s revenue, Unified Communications cost of services increased to 42.5% in 2012 from 40.9% in 2011. The increase in cost of services as a percentage of revenue for 2012 is due primarily to changes in the product mix, geographic mix, the impact of acquired entities and declines in the average rate per minute for reservationless services.

 

Communication Services cost of services in 2012 increased $53.1 million, or 9.4%, to $616.9 million from $563.8 million in 2011. The increase in cost of services included $39.4 million of additional costs from acquired entities. The remaining $13.7 million increase was primarily driven by increased service volume. As a percentage of revenue, Communication Services cost of services increased to 51.5% in 2012 from 49.6% in 2011. The increase in cost of services as a percentage of revenue in 2012 was the result of additional costs from acquired entities and a higher mix of agent-based services.

 

Selling, General and Administrative Expenses: SG&A expenses in 2012 increased $25.5 million, or 2.8%, to $935.4 million from $909.9 million for 2011. The increase in SG&A expenses in 2012 reflected an improvement in our SG&A expense margin that was offset by $30.4 million of additional SG&A expenses from acquired entities and a fair value adjustment in the valuation of an acquisition earn-out accrual. As a percentage of revenue, SG&A expenses improved to 35.5% in 2012 from 36.5% in 2011. In 2012, SG&A included $18.3 million of share based compensation expense for the modification of vesting criteria of certain stock options and dividend equivalents paid on notional shares in our deferred compensation plan in connection with the special cash dividend declared by our Board of Directors on August 15, 2012. In 2011, SG&A included $18.5 million of share based compensation expense for the modification of vesting criteria of restricted stock grants.

 

Selling, general and administrative expenses by business segment:

 

     For the year ended December 31,  
     2012     % of Revenue     2011     % of Revenue     Change     % Change  

SG&A in thousands:

            

Unified Communications

   $ 449,836        31.0   $ 442,539        32.4   $ 7,297        1.6

Communication Services

     487,818        40.7     469,167        41.2     18,651        4.0

Intersegment eliminations

     (2,264     NM        (1,798     NM        (466     NM   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 935,390        35.5   $ 909,908        36.5   $ 25,482        2.8
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

NM—Not meaningful

 

Unified Communications SG&A expenses in 2012 increased $7.3 million, or 1.6%, to $449.8 million from $442.5 million in 2011. The $9.4 million increase in SG&A expenses in 2012 reflected an improvement in our SG&A expense margin, which included a contingent earn-out liability reversal of $7.9 million, that was partially offset by $5.8 million of additional SG&A expenses from acquired entities. As a result of these changes, our Unified Communications SG&A expenses as a percentage of this segments’ revenue in 2012 improved to 31.0% from 32.4% in 2011.

 

Communication Services SG&A expenses in 2012 increased $18.7 million, or 4.0%, to $487.8 million from $469.2 million in 2011. This increase in SG&A expense reflects an improvement in SG&A of $16.8 million that was offset by $6.8 million for site closure and severance expense and $4.1 million in asset impairments. During 2012, SG&A expenses from acquired entities were $24.6 million. As a percentage of this segment’s revenue, Communication Services SG&A expenses improved to 40.7% in 2012 from 41.2% in 2011.

 

Operating Income: Operating income in 2012 increased $10.0 million, or 2.1%, to $478.2 million from $468.1 million in 2011. As a percentage of revenue, operating income decreased to 18.1% in 2012 from 18.8% in 2011.

 

45


Table of Contents

Operating income by business segment:

 

     For the year ended December 31,  
     2012      % of Revenue     2011      % of Revenue     Change     % Change  

Operating income in thousands:

              

Unified Communications

   $ 384,565         26.5   $ 363,226         26.6   $ 21,339        5.9

Communication Services

     93,610         7.8     104,902         9.2     (11,292     -10.8
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total

   $ 478,175         18.1   $ 468,128         18.8   $ 10,047        2.1
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

Unified Communications operating income in 2012 increased $21.3 million, or 5.9%, to $384.6 million from $363.2 million in 2011. The $21.3 million increase is primarily due to organic growth and a contingent earn-out liability reversal of $7.9 million. As a percentage of this segment’s revenue, Unified Communications operating income declined to 26.5% in 2012 from 26.6% in 2011 due to the factors discussed above for revenue, cost of services and SG&A expenses.

 

Communication Services operating income in 2012 decreased $11.3 million, or 10.8%, to $93.6 million from $104.9 million in 2011. This $11.3 million reduction is primarily attributable to the $10.9 million SG&A expense for site closure, related severance charges and asset impairments. As a percentage of revenue, Communication Services operating income decreased to 7.8% in 2012 from 9.2% in 2011 due to the factors discussed above for revenue, cost of services and SG&A expenses.

 

Other Income (Expense): Other income (expense) includes interest expense from borrowings under credit facilities and outstanding notes, the aggregate foreign exchange gain (loss) on affiliate transactions denominated in currencies other than the functional currency and interest income. Other expense in 2012 was $270.6 million compared to $263.6 million in 2011. Interest expense in 2012 was $272.0 million compared to $269.9 million in 2011. In 2012, the change in interest expense was primarily due to higher outstanding debt obligations as a result of the Amended Credit Agreement. A portion of the net proceeds from the New Term Loans under the Amended Credit Agreement were used to repay approximately $448.4 million in term loans under our senior secured credit facilities due in October 2013. As a result of the repayment, the associated unamortized deferred debt issuance costs of $2.7 million were fully amortized and recorded as interest expense. During 2012, we recognized a $1.6 million loss on foreign currency transactions denominated in currencies other than the functional currency compared to a $6.5 million gain on foreign currencies in 2011. During 2012 and 2011 we recognized a $3.3 million gain and $1.3 million loss in marking the investments in our non-qualified retirement plans to market, respectively.

 

Net Income: Our net income in 2012 decreased $2.0 million, or 1.5%, to $125.5 million from $127.5 million in 2011. 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 39.5% for 2012, compared to an effective tax rate of approximately 37.7% in 2011. The increase in the effective tax rate is primarily due to the expiration of federal credits and an increase in the accrual for uncertain tax positions.

 

Earnings (Loss) per common share: Earnings (loss) per common share-basic for 2012 and 2011 were $2.04 and $(4.01), respectively. Earnings per common share-diluted for 2012 and 2011 were $1.98 and $(4.01), respectively.

 

Diluted earnings per share is computed using the weighted-average number of common shares and dilutive potential common shares outstanding during the period. Dilutive potential common shares result from the assumed exercise of outstanding stock options, by application of the treasury stock method that have a dilutive effect on earnings per share. At December 31, 2012, 2,681,313 stock options were outstanding with an exercise price at or exceeding the market value of our common stock, which market value was determined based on the results of an independent appraisal performed as of August 1, 2012 by Corporate Valuation Advisors, Inc., and approved by management and the Board of Directors. These options were therefore excluded from the computation of shares contingently issuable upon exercise of the options.

 

46


Table of Contents

Years Ended December 31, 2011 and 2010

 

Revenue: Total revenue in 2011 increased $103.1 million, or 4.3%, to $2,491.3 million from $2,388.2 million in 2010. This increase included revenue of $76.5 million from entities acquired since January 1, 2011. Acquisitions made in 2011 were TFCC, POSTcti, Unisfair, Smoothstone, Contact One, WIPC and Pivot Point. These acquisitions closed on February 1, February 1, March 1, June 3, June 7 and August 10, respectively. Pivot Point’s and Contact One’s results have been included in the Communication Services segment since their respective acquisition dates. All of the other acquisitions made in 2011 have been included in the Unified Communications segment since their respective acquisition dates.

 

During the years ended December 31, 2011 and 2010, our largest 100 clients represented approximately 55% and 57% of total revenue, respectively. The aggregate revenue from our largest client, AT&T, as a percentage of our total revenue in 2011 and 2010 was approximately 10% and 11%, respectively. No other client accounted for more than 10% of our total revenue in 2011 or 2010.

 

Revenue by business segment:

 

     For the year ended December 31,  
     2011     % of Total
Revenue
    2010     % of Total
Revenue
    Change     % Change  

Revenue in thousands:

            

Unified Communications

   $ 1,364,032        54.8   $ 1,220,216        51.1   $ 143,816        11.8

Communication Services

     1,137,900        45.7     1,173,945        49.2     (36,045     -3.1

Intersegment eliminations

     (10,607     -0.5     (5,950     -0.3     (4,657     78.3
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 2,491,325        100.0   $ 2,388,211        100.0   $ 103,114        4.3
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Unified Communications revenue in 2011 increased $143.8 million, or 11.8%, to $1,364.0 million from $1,220.2 million in 2010. The increase in revenue included $66.1 million from acquisitions. The remaining $77.7 million increase was primarily attributable to the addition of new customers as well as an increase in usage primarily of our web and audio-based services by our existing customers. Revenue attributable to increased usage and new customer usage was partially offset by a decline in the rates charged to existing customers for those services. The volume of minutes used for our reservationless services, which accounts for the majority of our Unified Communications revenue, grew approximately 11.1% in 2011 over 2010, while the average rate per minute for reservationless services declined by approximately 4.2%.

 

Our Unified Communications revenue is also experiencing organic growth at a faster pace internationally than in North America. During 2011, revenue in the Asia Pacific (“APAC”) and Europe, Middle East and Africa (“EMEA”) regions grew to $441.0 million, an increase of 15.0% over 2010.

 

Communication Services revenue in 2011 decreased $36.0 million, or 3.1%, to $1,137.9 million from $1,173.9 million in 2010. Revenue from agent-based services for 2011 decreased $26.8 million compared with revenue for 2010. We exited the purchase paper receivables management business in 2010, which represents $14.4 million of this decrease. The direct response agent revenue declined $12.1 million. We expect the decrease in direct response agent service volume to continue for the foreseeable future, but at a lower rate. Partially offsetting the reduction in revenue in 2011 was revenue from acquired entities of $10.3 million.

 

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 in 2011 increased $56.3 million, or 5.3%, to $1,113.3 million from $1,057.0 million in 2010. Cost of services from acquired entities was $34.3 million. As a percentage of revenue, cost of services increased to 44.7% in 2011 from 44.3% in 2010.

 

47


Table of Contents

Cost of Services by business segment:

 

     For the year ended December 31,  
     2011     % of Revenue     2010     % of Revenue     Change     % Change  

Cost of services in thousands:

            

Unified Communications

   $ 558,267        40.9   $ 492,263        40.3   $ 66,004        13.4

Communication Services

     563,831        49.6     569,110        48.5     (5,279     -0.9

Intersegment eliminations

     (8,809     NM        (4,365     NM        (4,444     101.8
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 1,113,289        44.7   $ 1,057,008        44.3   $ 56,281        5.3
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

NM—Not Meaningful

 

Unified Communications cost of services in 2011 increased $66.0 million, or 13.4%, to $558.3 million from $492.3 million in 2010. Cost of services from acquired entities increased cost of services by $32.1 million. The remaining increase is primarily driven by increased service volume. As a percentage of this segment’s revenue, Unified Communications cost of services increased to 40.9% in 2011 from 40.3% in 2010. The increase in cost of services as a percentage of revenue for 2011 is due primarily to changes in the product mix, geographic mix and the impact of acquired entities.

 

Communication Services cost of services in 2011 decreased $5.3 million, or 0.9%, to $563.8 million from $569.1 million in 2010. The decrease in cost of services was the result of lower revenue in the segment, partially offset by $2.2 million of additional costs from acquired entities. As a percentage of revenue, Communication Services cost of services increased to 49.6% in 2011 from 48.5% in 2010. The increase in cost of services as a percentage of revenue in 2011 is due to declines in revenue rates for agent-based services.

 

Selling, General and Administrative Expenses: SG&A expenses in 2011 decreased $1.1 million, or 0.1%, to $909.9 million from $911.0 million for 2010. The decrease in SG&A expenses in 2011 reflected an improvement in our SG&A expense margin that was partially offset by $47.0 million of additional SG&A expenses from acquired entities and $18.5 million of share based compensation recorded as a result of modifying the vesting of restricted stock awards. During 2010, the Company identified impairment indicators in one of our reporting units, our traditional direct response business (marketed as “West Direct”). As a result of these impairment indicators and the results of impairment tests performed using the discounted cash flows model, goodwill with a carrying value of $37.7 million was written down to its fair value of zero. As a percentage of revenue, SG&A expenses decreased to 36.5% in 2011 from 38.1% in 2010. Without the impairment, SG&A expense was 36.5% of revenue in 2010.

 

Selling, general and administrative expenses by business segment:

 

     For the year ended December 31,  
     2011     % of Revenue     2010     % of Revenue     Change     % Change  

SG&A in thousands:

            

Unified Communications

   $ 442,539        32.4   $ 407,543        33.4   $ 34,996        8.6

Communication Services

     469,167        41.2     505,064        43.0     (35,897     -7.1

Intersegment eliminations

     (1,798     NM        (1,585     NM        (213     NM   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 909,908        36.5   $ 911,022        38.1   $ (1,114     -0.1
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

NM—Not meaningful

 

Unified Communications SG&A expenses in 2011 increased $35.0 million, or 8.6%, to $442.5 million from $407.5 million in 2010. The increase in SG&A expenses in 2011 reflected an improvement in our SG&A expense margin that was offset by $37.5 million of additional SG&A expenses from acquired entities. As a percentage of this segment’s revenue, Unified Communications SG&A expenses in 2011 improved to 32.4% from 33.4% in 2010.

 

48


Table of Contents

Communication Services SG&A expenses in 2011 decreased $35.9 million, or 7.1%, to $469.2 million from $505.1 million in 2010. The decrease in SG&A expenses in 2011 reflected an improvement in our SG&A expense margin that was partially offset by $9.5 million of additional SG&A expenses from acquired entities. SG&A expenses for this segment in 2010 included the $37.7 million goodwill impairment charge described above. As a percentage of this segment’s revenue, Communication Services SG&A expenses improved to 41.2% in 2011 from 43.0% in 2010. The impact of the impairment charge on Communication Services SG&A as a percentage of revenue was 320 basis points in 2010.

 

Operating Income: Operating income in 2011 increased by $47.9 million, or 11.4%, to $468.1 million from $420.2 million in 2010. As a percentage of revenue, operating income increased to 18.8% in 2011 from 17.6% in 2010.

 

Operating income by business segment:

 

     For the year ended December 31,  
     2011      % of
Revenue
    2010      % of
Revenue
    Change      %
Change
 

Operating income in thousands:

               

Unified Communications

   $ 363,226         26.6   $ 320,411         26.3   $ 42,815         13.4

Communication Services

     104,902         9.2     99,770         8.5     5,132         5.1
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 468,128         18.8   $ 420,181         17.6   $ 47,947         11.4
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

Unified Communications operating income in 2011 increased $42.8 million, or 13.4%, to $363.2 million from $320.4 million in 2010. As a percentage of this segment’s revenue, Unified Communications operating income improved to 26.6% in 2011 from 26.3% in 2010 due to the factors discussed above for revenue, cost of services and SG&A expenses.

 

Communication Services operating income in 2011 increased $5.1 million, or 5.1%, to $104.9 million from $99.8 million in 2010. As a percentage of revenue, Communication Services operating income improved to 9.2% in 2011 from 8.5% in 2010 due to the factors discussed above for revenue, cost of services and SG&A expenses.

 

The impact of the 2010 impairment charge on Communication Services operating income as a percentage of revenue was 320 basis points.

 

Other Income (Expense): Other income (expense) includes interest expense from borrowings under credit facilities and outstanding notes, the aggregate foreign exchange gain (loss) on affiliate transactions denominated in currencies other than the functional currency, interest income and, in 2010, refinancing expenses. Other expense in 2011 was $263.6 million compared to $299.4 million in 2010. Interest expense in 2011 was $269.9 million compared to $252.7 million in 2010. In 2010, refinancing expense of $52.8 million included $33.4 million for the redemption call premium and related costs of redeeming the 9.5% Senior Notes due 2014 (the “2014 Senior Notes”) and $19.4 million for accelerated debt amortization costs on the amended and extended Senior Secured Term Loan Facility. Proceeds from the issuance of $500.0 million aggregate principal amount of 8 5/8% Senior Notes due 2018 (the “2018 Senior Notes”) were utilized to partially pay the Senior Secured Term Loan Facility due 2013. Proceeds from the issuance of $650.0 million aggregate principal amount of 7 7/8% Senior Notes due 2019 (the “2019 Senior Notes”) were utilized to finance the repurchase of the Company’s outstanding $650 million aggregate principal amount of 2014 Senior Notes.

 

Net Income: Our net income in 2011 increased $67.2 million, or 111.4%, to $127.5 million from $60.3 million in 2010. 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 of approximately 37.7% for 2011, compared to an effective tax rate of approximately 50.1% in 2010. The effective tax rate was higher in 2010 when compared to 2011 due primarily to the goodwill impairment charge taken in 2010, which was not deductible for income tax purposes.

 

49


Table of Contents

Earnings (Loss) per common share: Earnings per Common L share—basic for 2011 increased $0.11, to $17.18, from $17.07 in 2010. Earnings per Common L share—diluted for 2011 increased $0.11, to $16.48, from $16.37 in 2010. Loss per Common share—basic and diluted for 2011 decreased $(5.99), to $(4.01), from $(10.00) in 2010. The decrease in (loss) per share was primarily the result of an increase in net income attributable to the common shares due to our increased earnings in 2011.

 

On December 30, 2011, we completed the conversion of our outstanding Class L Common Stock into shares of Class A Common Stock and thereafter the reclassification of all of our Class A Common Stock as a single class of Common Stock. As a result earnings per share calculations in future periods will be presented as a single class of Common Stock and references to Class A common stock have been changed to common stock for all periods.

 

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 eight completed fiscal quarters (in thousands):

 

     Three Months Ended  
     March 31,
2011
    June 30,
2011
    September 30,
2011
    December  31,
2011(1)
    March 31,
2012
     June 30,
2012
     September  30,
2012(2)
     December 31,
2012
 

Revenue

   $ 610,818      $ 622,820      $ 632,803      $ 624,884      $ 639,062       $ 661,895       $ 656,896       $ 680,171   

Cost of services

     271,603        276,220        284,406        281,060        291,702         307,286         307,699         317,772   

SG&A

     220,408        223,849        216,450        249,201        233,118        
233,110
  
    
231,905
  
    
237,257
  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Operating income

     118,807        122,751        131,947        94,623        114,242         121,499         117,292         125,142   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Net income (loss)

   $
34,580
  
  $ 34,378      $ 37,347      $ 21,188      $ 34,044       $ 36,694       $ 22,096       $ 32,707   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Earnings (loss) per common share

                   

Basic Class L(3)

   $ 4.39      $ 4.58      $ 4.81      $ 3.40              

Diluted Class L(3)

   $ 4.21      $ 4.39      $ 4.62      $ 3.26              

Basic Common

   $ (0.84   $
(1.03

  $ (0.97   $ (1.17   $ 0.55       $ 0.60       $ 0.36       $ 0.53   

Diluted Common

   $ (0.84   $ (1.03   $ (0.97   $ (1.17   $ 0.54       $ 0.58       $ 0.35       $ 0.51   

 

  (1)   Results of operations in the fourth quarter of 2011 were affected by a pre-tax $18.5 million share based compensation expense for the modification of vesting criteria of restricted stock grants. $12.1 million was not deductible for tax purposes.
  (2)   Results of operations in the third quarter of 2012 were affected by a pre-tax $10.0 million expense associated with the dividend equivalent attributed to participants in our Deferred Compensation Plan, $8.3 million of additional share-based compensation associated with the dividend and $10.3 million of additional interest expense incurred with the refinancing for the additional borrowings of approximately $521.6 million due to the dividends declared and dividend equivalents paid in August 2012.
  (3)   On December 30, 2011, each outstanding share of Class L Common Stock was converted into 5.03625 shares of Class A Common Stock and our Class A Common Stock was then reclassified as a single class of Common Stock.

 

Liquidity and Capital Resources

 

We have historically financed our operations and capital expenditures primarily through net cash flows from operations supplemented by borrowings under our senior secured credit and asset securitization facilities.

 

On October 5, 2010, we issued $500.0 million aggregate principal amount of senior unsecured notes due 2018. Proceeds of the notes were used to pay off a portion of our senior secured term loan facility.

 

On October 5, 2010, we amended and restated our credit agreement, which modified our senior secured credit facilities in several respects, including providing for the following:

 

   

Extending the maturity of approximately $158 million of our $250 million senior secured revolving credit facility (and securing approximately $43 million of additional senior secured revolving credit facility commitments for the extended term) from October 2012 to January 2016 with the interest rate margins of such extended maturity revolving credit loans increasing by 1.00 percent;

 

50


Table of Contents
   

Extending the maturity of $500 million of our senior secured term loan facility from October 2013 to July 2016 with the interest rate margins of such extended senior secured term loan facility increasing by 1.875 percent;

 

   

Increasing the interest rate margins of approximately $985 million of our senior secured term loans due July 2016 by 0.375 percent to match interest rate margins for the newly extended senior secured term loans; and

 

   

Modifying the step-down schedule in the current financial covenants and certain covenant baskets.

 

On November 24, 2010, we issued $650.0 million aggregate principal amount of 7  7/8% senior notes due 2019, and used the gross proceeds to repurchase our $650 million aggregate principal amount of 9  1/2% senior notes due 2014.

 

On February 20, 2013, we amended our senior secured credit facilities, which amendment provided for a reduction in the applicable margins and interest rate floors of all term loans, extended the maturity of a portion of the term loans due July 2016 to June 2018 and added a further step down to the applicable margins of all term loans upon satisfaction of certain conditions. As of the effective date of the amendment, we had outstanding the following senior secured term loans:

 

   

Term loans in an aggregate principal amount of approximately $2.1 billion (the “2018 Maturity Term Loans”). The 2018 Maturity Term Loans will mature on June 30, 2018, and the interest rate margins applicable to the 2018 Maturity Term Loans are 3.25%, for LIBOR rate loans, and 2.25%, for base rate loans; and

 

   

Term loans in an aggregate principal amount of approximately $317.7 million (the “2016 Maturity Term Loans”; and, together with the 2018 Maturity Term Loans, the “Term Loans”). The 2016 Maturity Term Loans will mature on July 15, 2016, and the interest rate margins applicable to the 2016 Maturity Term Loans are 2.75%, for LIBOR rate loans, and 1.75%, for base rate loans.

 

The Third Amendment also provides for interest rate floors applicable to the Term Loans. The interest rate floors are 1.00%, for LIBOR rate loans, and 2.00%, for base rate loans. The Term Loans are subject to an additional step down to the applicable margins by 0.50% conditioned upon completion by the Company of an initial public offering and the Company attaining and maintaining a total leverage ratio less than or equal to 4.75:1.00. See “—Senior Secured Term Loan Facility.”

 

On September 12, 2011, our revolving trade accounts receivable financing facility was amended and extended. The amended and extended facility provides an additional $25.0 million of available financing for a total of $150.0 million and is extended to September 12, 2014, reduces the unused commitment fee by 25 basis points to 50 basis points and lowers the LIBOR spread on borrowings by 150 basis points to 175 basis points.

 

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

 

Year Ended December 31, 2012 compared to 2011

 

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

 

     For the Years Ended December 31,  
     2012     2011     Change     %
Change
 

Net cash flows from operating activities

   $ 318,916      $ 348,187      $ (29,271     -8.4

Net cash flows used in investing activities

   $ (201,622   $ (329,441   $ 127,819        -38.8

Net cash flows used in financing activities

   $ (33,130   $ (23,180   $ (9,950     42.9

 

51


Table of Contents

Net cash flows from operating activities in 2012 decreased $29.3 million, or 8.4%, to $318.9 million compared to net cash flows from operating activities of $348.2 million in 2011. The decrease in net cash flows from operating activities is primarily due to an $18.4 million increase in cash interest payments and $53.5 million increase in cash tax payments, including foreign income tax payments due to higher utilization of net operating loss carry forwards in prior years compared to 2012 and higher domestic cash taxes associated with repatriation of foreign earnings.

 

Days sales outstanding (“DSO”), a key performance indicator that we utilize to monitor the accounts receivable average collection period and assess overall collection risk, was 60 days at December 31, 2012. Throughout 2012, DSO ranged from 60 to 65 days. At December 31, 2011, DSO was 61 days and ranged from 58 to 62 days during 2011.

 

Net cash flows used in investing activities in 2012 decreased $127.8 million, or 38.8%, to $201.6 million compared to net cash flows used in investing activities of $329.4 million in 2011. In 2012, business acquisition investing was $134.4 million less than in 2011 due to fewer acquisitions. During the year ended December 31, 2012, cash used for capital expenditures was $125.5 million compared to $117.9 million during 2011, an increase of $7.6 million.

 

Net cash flows used in financing activities in 2012 increased $9.9 million or 42.9%, to $33.1 million compared to net cash flows used in financing activities of $23.2 million for 2011. During 2012, we entered into the Amended Credit Agreement, which provided for $970.0 million of New Term Loans, due June 30, 2018. We repaid the $448.4 million term loans due October 24, 2013 with a portion of the net proceeds from the New Term Loans. In connection with the New Term Loans we paid $27.5 million in related debt issuance costs that will be amortized into interest expense over the life of the New Term Loans. Also, on August 15, 2012, we announced that our Board of Directors declared a special cash dividend of $8.00 per share to be paid to stockholders of record as of August 15, 2012. In addition, we made equivalent cash payments and/or adjustments to holders of outstanding stock options to reflect the payment of such dividend and, in connection with such payment, accelerated the vesting of certain stock options that were scheduled to vest in 2013. We used a portion of the net proceeds from the New Term Loans and cash on hand to fund approximately $492.0 million cash dividends to stockholders (including holders of restricted stock, either currently or upon a future vesting date) and approximately $18.3 million dividend equivalent cash payments with respect to stock options (either currently or upon a future vesting date).

 

As of December 31, 2012, the amount of cash and cash equivalents held by our foreign subsidiaries was $58.6 million. We have also accrued U.S. taxes on $167.8 million of unremitted foreign earnings and profits. Our intent is to permanently reinvest a portion of these funds outside the U.S. for acquisitions and capital expansion, and to repatriate a portion of these funds. Based on our current projected capital needs and the current amount of cash and cash equivalents held by our foreign subsidiaries, we do not anticipate incurring any material tax costs beyond our accrued tax position in connection with such repatriation, but we may be required to accrue for unanticipated additional tax costs in the future if our expectations or the amount of cash held by our foreign subsidiaries change.

 

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.

 

52


Table of Contents

Year Ended December 31, 2011 compared to 2010

 

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

 

     For the Years Ended December 31,  
     2011     2010     Change     %
Change
 

Net cash flows from operating activities

   $ 348,187      $ 312,829      $ 35,358        11.3

Net cash flows used in investing activities

   $ (329,441   $ (137,896   $ (191,545     138.9

Net cash flows used in financing activities

   $ (23,180   $ (133,651   $ 110,471        -82.7

 

Net cash flows from operating activities in 2011 increased $35.4 million, or 11.3%, to $348.2 million compared to net cash flows from operating activities of $312.8 million in 2010. The increase in net cash flows from operating activities is primarily due to improvement in operating income.

 

DSO, a key performance indicator that we utilize to monitor the accounts receivable average collection period and assess overall collection risk, was 61 days at December 31, 2011. Throughout 2011, DSO ranged from 58 to 62 days. At December 31, 2010, DSO was 56 days and ranged from 56 to 62 days during 2010.

 

Net cash flows used in investing activities in 2011 increased $191.5 million, or 138.9%, to $329.4 million compared to net cash flows used in investing activities of $137.9 million in 2010. In 2011, business acquisition investing was $178.1 million greater than in 2010, due primarily to the acquisitions of TFCC and Smoothstone. We invested $117.9 million in capital expenditures during 2011 compared to $118.2 million invested in 2010.

 

Net cash flows used in financing activities in 2011 decreased $110.5 million or 82.7%, to $23.2 million compared to net cash flows used in financing activities of $133.7 million for 2010. During 2010, net cash flows used in financing activities primarily included payments on our revolving credit facility of $72.9 million, which paid off the outstanding balance on our revolving credit facilities. At December 31, 2011, there was no outstanding balance on the senior secured revolving credit facility. Also, in 2010 we incurred $31.1 million in debt issuance costs relating to our refinancing activities.

 

Senior Secured Term Loan Facility

 

On August 15, 2012, we, certain of our domestic subsidiaries, as subsidiary borrowers, Wells Fargo Bank, National Association (“Wells Fargo”), as administrative agent, and the various lenders party thereto modified our senior secured credit facilities by entering into a Amendment No. 1 to Amended and Restated Credit Agreement (“Amendment No. 1”), amending the Company’s amended and restated credit agreement, dated as of October 5, 2010, by and among us, Wells Fargo, as administrative agent, and the various lenders party thereto, as lenders (as so amended, the “Amended Credit Agreement”). Amendment No. 1 provided for new incremental term loans in an aggregate principal amount of $970.0 million (the “New Term Loans”). The New Term Loans will mature on June 30, 2018.

 

The net proceeds of the New Term Loans were used to repay approximately $448.4 million in term loans under the senior secured credit facilities with a maturity date of October 24, 2013, to fund a special cash dividend to West’s stockholders and make other dividend equivalent payments and to pay fees and expenses related to the execution of Amendment No. 1 and related transactions.

 

On February 20, 2013, we modified our senior secured credit facilities by entering into Amendment No. 3 thereto (the “Third Amendment”). The senior secured credit facilities, as modified by the Third Amendment, provide for a reduction in the applicable margins and interest rate floors of all term loans, extend the maturity of a portion of the term loans due July 2016 to June 2018 and add a further step down to the applicable margins of all term loans upon satisfaction of certain conditions. As of the effective date of the Third Amendment, the Company had outstanding the following senior secured term loans:

 

   

Term loans due June 2018 in an aggregate principal amount of approximately $2.1 billion; and

 

53


Table of Contents
   

Term loans due July 2016 in an aggregate principal amount of approximately $317.7 million.

 

In connection with the Third Amendment, we incurred refinancing expenses of approximately $24.2 million for the soft-call premium paid to holders of term loans outstanding prior to the effectiveness of the Third Amendment and $5.8 million for other fees and expenses.

 

Following effectiveness of the Third Amendment, the interest rate margins for the term loans due 2016 will range from 2.25% to 2.75% for LIBOR rate loans, and from 1.25% to 1.75% for base rate loans, the interest rate margins for the term loans due 2018 will range from 2.75% to 3.25% for LIBOR rate loans, and 1.75% to 2.25% for base rate loans and the interest rate floor will be 1.00% for the LIBOR component of the LIBOR rate loans and 2.00% for the base rate component of the base rate loans. The applicable margins for each of the term loan tranches will initially be set at the high end of the range and will be subject to step down to the low end of the range (a 0.50% reduction) conditioned upon completion by the Company of an initial public offering and the Company attaining and maintaining a total leverage ratio less than or equal to 4.75:1.00. The Third Amendment also provides for a soft call option applicable to all of the outstanding term loans. The soft call option provides for a premium equal to 1.0% of the amount of the repricing payment, in the event that, on or prior to the six month anniversary of the effective date of the amendment, we or our subsidiary borrowers enter into certain repricing transactions.

 

Our senior secured term loan facility and senior secured revolving credit facility bear interest at variable rates. The amended and restated senior secured term loan facility, after giving effect to the Third Amendment, requires annual principal payments of approximately $24.1 million, paid quarterly with balloon payments at maturity dates of July 15, 2016 and June 30, 2018 of approximately $306.5 million and $1,989.8 million respectively.

 

Senior Secured Revolving Credit Facility

 

Prior to October 24, 2012, our senior secured revolving credit facilities provided senior secured financing of up to $250 million, with $92 million maturing on October 24, 2012 (original maturity), and $158 million maturing on January 15, 2016 (extended maturity). We had previously received commitments for $43 million of additional extended maturity senior secured revolving credit facility commitments. Pursuant to Amendment No. 2 to the Amended Credit Agreement, dated as of October 24, 2012, the additional commitments replaced a portion of the original maturity senior secured revolving credit facility. At December 31, 2012, our senior secured revolving credit facility provides senior secured financing up to approximately $201 million.

 

The original maturity senior secured revolving credit facility pricing was based on our total leverage ratio and the grid ranged from 1.75% to 2.50% for LIBOR rate loans (LIBOR plus 1.75% at October 24, 2012), and from 0.75% to 1.50% for base rate loans (Base Rate plus 0.75% at October 24, 2012). We were required to pay each non-defaulting lender a commitment fee of 0.50% in respect of any unused commitments under the original maturity senior secured revolving credit facility. The commitment fee in respect of unused commitments under the original maturity senior secured revolving credit facility was subject to adjustment based upon our total leverage ratio. During 2012 and 2011, the original maturity senior secured revolving credit facility was undrawn.

 

The extended maturity senior secured revolving credit facility pricing is based on our total leverage ratio and the grid ranges from 2.75% to 3.50% for LIBOR rate loans (LIBOR plus 3.0% at December 31, 2012), and the margin ranges from 1.75% to 2.50% for base rate loans (Base Rate plus 2.0% at December 31, 2012). We are required to pay each non-defaulting lender a commitment fee of 0.50% in respect of any unused commitments under the extended maturity senior secured revolving credit facility. The commitment fee in respect of unused commitments under the extended maturity senior secured revolving credit facility is subject to adjustment based upon our total leverage ratio.

 

The average daily outstanding balance of the original and extended maturity senior secured revolving credit facility during 2012 and 2011 was $1.3 million and $4.8 million, respectively. The highest balance outstanding

 

54


Table of Contents

on the original and extended maturity senior secured revolving credit facility during 2012 and 2011 was $19.9 million and $50.5 million, respectively.

 

Subsequent to December 31, 2012, we may request additional tranches of term loans or increases to the revolving credit facility in an aggregate amount not to exceed $347.3 million, including the aggregate amount of $116.3 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.

 

2016 Senior Subordinated Notes

 

Our $450.0 million aggregate principal amount of 11% senior subordinated notes due 2016 (the “2016 Senior Subordinated Notes”) bear interest that is payable semiannually.

 

We may redeem the 2016 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 2016 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  

2012

     103.667   

2013

     101.833   

2014 and thereafter

     100.000   

 

2018 Senior Notes

 

On October 5, 2010, we issued $500 million aggregate principal amount of 8 5/8% senior notes that mature on October 1, 2018 (the “2018 Senior Notes”).

 

At any time prior to October 1, 2014, we may redeem all or a part of the 2018 Senior Notes at a redemption price equal to 100% of the principal amount of 2018 Senior Notes redeemed plus the Applicable Premium (as defined in the indenture governing the 2018 Senior Notes) as of, and accrued and unpaid interest to the date of redemption, subject to the rights of holders of 2018 Senior Notes on the relevant record date to receive interest due on the relevant interest payment date.

 

On and after October 1, 2014, we may redeem the 2018 Senior Notes in whole or in part at the redemption prices (expressed as percentages of principal amount of the 2018 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 2018 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 1 of each of the years indicated below:

 

Year

     Percentage   

2014

     104.313   

2015

     102.156   

2016 and thereafter

     100.000   

 

At any time (which may be more than once) before October 1, 2013, we can choose to redeem up to 35% of the outstanding 2018 Senior Notes with money that we raise in one or more equity offerings, as long as: we pay 108.625% of the face amount of such notes, plus accrued and unpaid interest; we redeem the notes within 90 days after completing the equity offering; and at least 65% of the aggregate principal amount of the applicable series of notes issued remains outstanding afterwards.

 

55


Table of Contents

2019 Senior Notes

 

On November 24, 2010, we issued $650.0 million aggregate principal amount of 7 7/8% senior notes that mature January 15, 2019 (the “2019 Senior Notes”).

 

At any time prior to November 15, 2014, we may redeem all or a part of the 2019 Senior Notes at a redemption price equal to 100% of the principal amount of 2019 Senior Notes redeemed plus the Applicable Premium (as defined in the indenture governing the 2019 Senior Notes) as of, and accrued and unpaid interest to the date of redemption, subject to the rights of holders of 2019 Senior Notes on the relevant record date to receive interest due on the relevant interest payment date.

 

On and after November 15, 2014, we may redeem the 2019 Senior Notes in whole or in part at the redemption prices (expressed as percentages of principal amount of the 2019 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 2019 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 November 15 of each of the years indicated below:

 

Year

     Percentage   

2014

     103.938   

2015

     101.969   

2016 and thereafter

     100.000   

 

At any time (which may be more than once) before November 15, 2013, we can choose to redeem up to 35% of the outstanding 2019 Senior Notes with money that we raise in one or more equity offerings, as long as: we pay 107.875% of the face amount of such notes, plus accrued and unpaid interest; we redeem the notes within 90 days after completing the equity offering; and at least 65% of the aggregate principal amount of the applicable series of notes issued remains outstanding afterwards.

 

We and our subsidiaries, affiliates or significant shareholders may from time to time, in our sole discretion, purchase, repay, redeem or retire any of our outstanding debt or equity securities (including any publicly issued debt or equity securities), in privately negotiated or open market transactions, by tender offer or otherwise.

 

Amended and Extended Asset Securitization

 

On September 12, 2011, the revolving trade accounts receivable financing facility between West Receivables LLC, a wholly-owned, bankruptcy-remote direct subsidiary of West Receivables Holdings LLC and Wells Fargo Bank, National Association, was amended and extended. The amended and extended facility provides for $150.0 million in available financing and was extended to September 12, 2014, reduced the unused commitment fee to 0.50% and lowered the LIBOR spread grid on borrowings, based on our total leverage ratio to 1.50% to 2.0% (LIBOR plus 1.75% at December 31, 2012). Under the amended and extended facility, West Receivables Holdings LLC sells or contributes trade accounts receivables to West Receivables LLC, which sells undivided interests in the purchased or contributed accounts receivables for cash to one or more financial institutions. The availability of the funding is subject to the level of eligible receivables after deducting certain concentration limits and reserves. The proceeds of the facility are available for general corporate purposes. West Receivables LLC and West Receivables Holdings LLC are consolidated in our condensed consolidated financial statements included elsewhere in this prospectus. At December 31, 2012 and 2011, this facility was undrawn. The highest balance outstanding during 2012 and 2011 was $39.0 million and $84.5 million, respectively.

 

Debt Covenants

 

Senior Secured Term Loan Facility and Senior Secured Revolving Credit Facility—The Amended Credit Agreement modified the financial covenants and certain covenant baskets. In particular, the Company is required to comply on a quarterly basis with a maximum total leverage ratio covenant and a minimum interest coverage ratio covenant. Pursuant to the Amended Credit Agreement, the total leverage ratio of consolidated total debt to Adjusted EBITDA may not exceed 6.75 to 1.0 at December 31, 2012, and the interest coverage ratio of Adjusted EBITDA to

 

56


Table of Contents

the sum of consolidated interest expense must be not less than 1.85 to 1.0. The total leverage ratio will become more restrictive over time (adjusted periodically until the maximum leverage ratio reaches 6.00 to 1.0 in 2015). Both ratios are measured on a rolling four-quarter basis. We were in compliance with these financial covenants at December 31, 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, breaches of representations and warranties, covenant defaults, cross-defaults to certain indebtedness, certain events of bankruptcy, certain events under ERISA, 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 the Company’s subordinated debt and a change of control of the Company. If an event of default occurs, the lenders under the senior secured credit facilities will be entitled to take certain actions, including the acceleration of all amounts due under the senior secured credit facilities and all actions permitted to be taken by a secured creditor. We believe that for the foreseeable future, our existing senior secured credit facilities offer us sufficient capacity for our indebtedness financing requirements and we do not anticipate that the limitations on incurring additional indebtedness included in the senior secured credit facilities will materially impair our financial condition and operating performance.

 

2016 Senior Subordinated Notes, 2018 Senior Notes and 2019 Senior Notes—The indentures governing the 2016 Senior Subordinated Notes, the 2018 Senior Notes and the 2019 Senior Notes contain 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.

 

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 would 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 and 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 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.

 

57


Table of Contents

Amended and Extended Asset Securitization—The amended and extended asset securitization facility contains various customary affirmative and negative covenants and also contains customary default and termination provisions, which provide for acceleration of amounts owed under the program upon the occurrence of certain specified events, including, but not limited to, failure to pay yield and other amounts due, defaults on certain indebtedness, certain judgments, changes in control, certain events negatively affecting the overall credit quality of collateralized accounts receivable, bankruptcy and insolvency events and failure to meet financial tests requiring maintenance of certain leverage and coverage ratios, similar to those under our senior secured credit facility.

 

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, certain litigation settlement costs, impairments and other non-cash reserves, transaction costs and post-acquisition synergies and excluding unrestricted subsidiaries. EBITDA and Adjusted EBITDA are not measures of financial performance or liquidity under GAAP. Although we use Adjusted EBITDA as a measure of our liquidity, the use of EBITDA and Adjusted EBITDA is limited because they do 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 EBITDA and 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 and indentures governing our outstanding notes which provide for an adjustment to EBITDA, subject to certain specified limitations, for reasonably identifiable and factually supportable cost savings projected by us in good faith to be realized as a result of actions taken following an acquisition. EBITDA and Adjusted EBITDA should not be considered in isolation or as a substitute for net income, cash flow from operations or other income or cash flow data prepared in accordance with GAAP. EBITDA and Adjusted EBITDA, as presented, may not be comparable to similarly titled measures of other companies. EBITDA and Adjusted EBITDA is presented here as we understand investors use it as one measure of our historical ability to service debt and compliance with covenants in our senior credit facilities. Set forth below is a reconciliation of EBITDA and Adjusted EBITDA to cash flow from operations.

 

    For the year ended December 31,  
(amounts in thousands)   2008     2009     2010     2011     2012  

Net cash flows from operating activities

  $ 287,381      $ 272,857      $ 312,829      $ 348,187      $ 318,916   

Income tax expense

    11,731        56,862        60,476        77,034        82,068   

Deferred income tax (expense) benefit

    26,446        (28,274     (20,837     (23,716     (1,318

Interest expense

    313,019        254,103        305,528        269,863        271,951   

Allowance for impairment of purchased accounts receivable

    (76,405     (25,464     —          —          —     

Impairments

    —          —          (37,675     —          (3,715

Provision for share-based compensation

    (1,404     (3,840     (4,233     (23,341     (25,849

Amortization of debt issuance costs

    (15,802     (16,416     (35,263     (13,449     (17,321

Other

    (107     (375     (652     2,288        1,598   

Excess tax benefit from stock options exercised

    —          1,709        897        1,417        8,656   

Changes in operating assets and liabilities, net of business acquisitions

    (19,173     79,124        15,569        10,535        28,162   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

    525,686        590,286        596,639        648,818        663,148   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Provision for share-based compensation(a)

    1,404        3,840        4,233        23,341        25,849   

Acquisition synergies and transaction costs(b)

    20,985        18,003        5,035        14,314        15,476   

Non-cash portfolio impairments(c)

    76,405        25,464        —          —          —     

Site closures and other impairments(d)

    2,644        6,976        44,040        2,233        4,358   

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

    6,427        (229     1,199        (6,454     1,581   

Litigation settlement costs(f)

    —          3,601        3,504        (895     2,663   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA(g)

  $ 633,551      $ 647,941      $ 654,650      $ 681,357      $ 713,075   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA Margin(h)

    28.2     27.3     27.4     27.3     27.0

 

58


Table of Contents
    For the year ended December 31,  
(amounts in thousands)   2008     2009     2010     2011     2012  

Leverage Ratio Covenant and Interest Coverage Ratio Covenant:

         

Total debt(i)

  $ 3,706,982      $ 3,577,291      $ 3,436,761      $ 3,422,583      $ 3,838,545   

Ratio of total debt to Adjusted EBITDA(j)

    5.4x        5.5x        5.3x        5.0x        5.3x   

Cash interest expense(k)

  $ 280,702      $ 243,401      $ 237,965      $ 258,064      $ 252,783   

Ratio of Adjusted EBITDA to cash interest expense(l)

    2.4x        2.7x        2.8x        2.7x        2.9x   

 

  (a)   Represents total share-based compensation expense determined at fair value, excluding share based compensation expense related to deferred compensation-notional shares of $1.0 million in 2008 as amounts were determined to be not significant.
  (b)   Represents, for each period presented, unrealized synergies for acquisitions, consisting primarily of headcount reductions and telephony-related savings, direct acquisition expenses and transaction costs incurred with the recapitalization. Amounts shown are permitted to be added to “EBITDA” for purposes of calculating our compliance with certain covenants under our credit facilities and the indentures governing our outstanding notes.
  (c)   Represents non-cash portfolio receivable allowances.
  (d)   Represents site closures, severance, goodwill and other asset impairments, and in 2012, was net of the reversal of a contingent earn-out liability of $7.9 million.
  (e)   Represents the unrealized loss (gain) on foreign denominated debt and the loss on transactions with affiliates denominated in foreign currencies.
  (f)   Represents litigation settlements, net of estimated insurance proceeds, and related legal costs.
  (g)   Adjusted EBITDA does not include pro forma adjustments for acquired entities of $5.5 million in 2012, $3.9 million in 2011, $(0.1) million in 2010, $2.0 million in 2009 and $49.1 million in 2008 as is permitted in our debt covenants.
  (h)   Adjusted EBITDA margin represents Adjusted EBITDA as a percentage of revenue.
  (i)   Total debt excludes portfolio notes payable, but includes other indebtedness of capital lease obligations, performance bonds and letters of credit and is reduced by cash and cash equivalents.
  (j)   Total debt excludes portfolio notes payable, but includes other indebtedness of capital lease obligations, performance bonds and letters of credit and is reduced by cash and cash equivalents. For purposes of calculating our Ratio of Total Debt to Adjusted EBITDA, Adjusted EBITDA includes pro forma adjustments for acquired entities of $5.5 million in 2012, $3.9 million in 2011, $(0.1) million in 2010, $2.0 million in 2009 and $49.1 million in 2008 as is permitted in our debt covenants.
  (k)   Cash interest expense, as defined in our credit facility covenants, represents interest expense less amortization of capitalized financing costs and non-cash loss on hedge agreements expensed as interest under the senior secured term loan facility, senior secured revolving credit facility, senior notes and senior subordinated notes.
  (l)   The ratio of Adjusted EBITDA to cash interest expense is calculated using trailing twelve-month cash interest expense. Adjusted EBITDA includes pro forma adjustments for acquired entities of $5.5 million in 2012, $3.9 million in 2011, $(0.1) million in 2010, $2.0 million in 2009 and $49.1 million in 2008 as is permitted in the debt covenants.

 

Set forth below are our cash flow from operations, cash flow used in investing activities and cash flow from financing activities for the periods indicated.

 

    For the year ended December 31,  
(dollars in thousands)   2012     2011     2010     2009     2008  

Net cash flows from operating activities

  $ 318,916      $ 348,187      $ 312,829      $ 272,857      $ 287,381   

Net cash flows used in investing activities

  $ (201,622   $ (329,441   $ (137,896   $ (112,615   $ (597,539

Net cash flows from (used in) financing activities

  $ (33,130   $ (23,180   $ (133,651   $ (271,844   $ 341,971   

 

59


Table of Contents

Contractual Obligations

 

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

 

The following table summarizes our contractual obligations at December 31, 2012 (amounts in thousands):

 

    Payment due by period  

Contractual Obligations

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

Senior Secured Term Loan Facility, due 2016 (1)

  $ 1,452,506      $ 15,425      $ 30,850      $ 1,406,231      $ —    

11% Senior Subordinated Notes, due 2016

    450,000        —         —         450,000        —    

Senior Secured Term Loan Facility, due 2018 (1)

    965,150        9,700        19,400        19,400        916,650   

8 5/8% Senior Notes, due 2018

    500,000        —         —         —         500,000   

7 7/8% Senior Notes, due 2019

    650,000        —         —         —         650,000   

Interest payments on fixed rate debt

    781,513        143,813        287,626        238,126        111,948   

Estimated interest payments on variable rate debt (2)

    587,801        139,904        270,884        150,513        26,500   

Operating leases

    130,245        36,331        48,953        21,582        23,379   

Contractual minimums under telephony agreements (3)

    93,000        66,200        26,800        —         —    

Purchase obligations (4)

    43,398        30,126        12,808        464        —    

Interest rate swaps

    2,346        2,346        —         —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total contractual cash obligations

  $ 5,655,959      $ 443,845      $ 697,321      $ 2,286,316      $ 2,228,477   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

  (1)   On February 20, 2013, we amended our senior secured term loan facilities, which amendment extended the maturity of a portion of the term loans due July 2016 to June 2018. As of the effective date of the amendment, we had outstanding term loans in an aggregate principal amount of $2.1 billion due June 2018 and term loans in an aggregate principal amount of approximately $317.7 million due July 2016.
  (2)   Interest rate assumptions based on January 7, 2013 LIBOR U.S. dollar swap rate curves for the next five years.
  (3)   Based on projected telephony minutes through 2014. The contractual minimum is usage based and could vary based on actual usage.
  (4)   Represents future obligations for capital and expense projects that are in progress or are committed.

 

The table above excludes amounts to be paid for taxes and long-term obligations under our Nonqualified Executive Retirement Savings Plan and Nonqualified Executive Deferred Compensation Plan. The table also excludes amounts to be paid for income tax contingencies because the timing thereof is highly uncertain. At December 31, 2012, we had accrued $20 million, including interest and penalties, for uncertain tax positions.

 

Upon completion of this offering, pursuant to the terms of that certain management agreement we entered into with affiliates of Thomas H. Lee Partners, L.P. and Quadrangle Group LLC, dated October 24, 2006 and that certain management letter agreement we entered into with affiliates of Thomas H. Lee Partners, L.P. and Quadrangle Group LLC, dated March 8, 2013, we expect to pay to those affiliates of Thomas H. Lee Partners, L.P. and Quadrangle Group LLC an aggregate amount of $24.0 million and the management agreement will, in accordance with its terms, terminate.

 

60


Table of Contents

Capital Expenditures

 

Our operations continue to require significant capital expenditures for technology, capacity expansion and upgrades. Capital expenditures were $128.4 million for the year ended December 31, 2012, and were funded through cash from operations and the use of our various credit facilities. Capital expenditures were $120.1 million for the year ended December 31, 2011. Capital expenditures for the year ended December 31, 2012 consisted primarily of computer and telephone equipment and software purchases. We currently estimate our capital expenditures for 2013 to be approximately $130.0 million to $140.0 million primarily for capacity expansion and upgrades at existing facilities.

 

Our senior secured term loan facility discussed above includes covenants which allow us the flexibility to issue additional indebtedness that is pari passu with or subordinated to our debt under our existing credit facilities in an aggregate principal amount not to exceed $347.3 million including the aggregate amount of principal payments made in respect of the senior secured term loan, incur capital lease indebtedness, finance acquisitions, construction, repair, replacement or improvement of fixed or capital assets, incur accounts receivable securitization indebtedness and non-recourse indebtedness; provided we are in pro forma compliance with our total leverage ratio and interest coverage ratio financial covenants. We or any of our affiliates may be required to guarantee any existing or additional credit facilities.

 

Off-Balance Sheet Arrangements

 

We utilize standby letters of credit to support primarily workers’ compensation policy requirements and certain operating leases. Performance obligations of certain of our subsidiaries are supported by performance bonds and letters of credit. These obligations will expire at various dates through August 2013 and are renewed as required. The outstanding commitment on these obligations at December 31, 2012 was $18.6 million.

 

Inflation

 

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

 

Quantitative and Qualitative Disclosures about Market Risk

 

Market Risk Management

 

Market risk is the potential loss arising from adverse changes in market rates and prices, such as interest rates, foreign currency exchange rates and changes in the market value of investments. The effects of inflation on our variable interest rate debt is discussed below in “Interest Rate Risk.”

 

Interest Rate Risk

 

As of December 31, 2012, we had $2,417.7 million outstanding under our senior secured term loan facility, $450.0 million outstanding under our 2016 Senior Subordinated Notes, $500.0 million outstanding under our 2018 Senior Notes and $650.0 million outstanding under our 2019 Senior Notes.

 

Due to the interest rate floors, our long-term obligations at variable interest rates would be subject to interest rate risk only if current LIBOR rates exceed the interest rate floors. A 50 basis point change in the variable interest rate at December 31, 2012, would have no impact on our variable interest rate. At December 31, 2012, the 30 and 90 day LIBOR rates are approximately 0.193% and 0.306%, respectively. As a result of the interest rate floors and prevailing LIBOR rates, rate increases on our variable debt in the immediate and near term is unlikely.

 

61


Table of Contents

Foreign Currency Risk

 

Our Unified Communications segment conducts business in countries outside of the United States. Revenue and expenses from these foreign operations are typically denominated in local currency, thereby creating exposure to changes in exchange rates. Generally, we do not hedge the foreign currency transactions. Changes in exchange rates may positively or negatively affect our revenue and net income attributed to these subsidiaries. Based on our level of operating activities in foreign operations during 2012, a five percent change in the value of the U.S. dollar relative to the Euro and British Pound Sterling would have positively or negatively affected our net operating income by less than one percent.

 

During 2012 and 2011, the Communication Services segment had no material revenue outside the United States. Our facilities in Canada, Jamaica, Mexico and the Philippines operate under revenue contracts denominated in U.S. dollars. These contact centers receive calls only from customers in North America under contracts denominated in U.S. dollars and therefore our foreign currency exposure is primarily for expenses incurred in the respective country.

 

For the years ended December 31, 2012, 2011 and 2010, revenue from non-U.S. countries was approximately 19%, 19% and 16%, respectively, of consolidated revenue. During these periods, no individual foreign country accounted for greater than 10% of revenue. At December 31, 2012 and 2011, long-lived assets from non-U.S. countries were approximately 9% of consolidated long-lived assets each year. We have generally not entered into forward exchange or option contracts for transactions denominated in foreign currency to hedge against foreign currency risk. We are exposed to translation risk because our foreign operations are in local currency and must be translated into U.S. dollars. As currency exchange rates fluctuate, translation of our Statements of Operations of non-U.S. businesses into U.S. dollars affects the comparability of revenue, expenses, and operating income between periods.

 

Investment Risk

 

During 2009, we entered into three eighteen month forward starting interest rate swaps for a total notional value of $500.0 million. These forward starting interest rate swaps commenced during the third quarter of 2010. The fixed interest rate on these interest rate swaps ranged from 2.56% to 2.60% and expired in January 2012. In 2010, 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 aggregate notional value of $500.0 million with interest rates ranging from 1.685% to 1.6975% and expire in June 2013. At December 31, 2012, the notional amount of debt outstanding under these interest rate swap agreements was $500.0 million of the outstanding $2,417.7 million senior secured term loan facility.

 

Recently Issued Accounting Pronouncements

 

In May 2011, the FASB issued ASU No. 2011-04, Amendments to Achieve Common Fair Value Measurements and Disclosure Requirements in U. S. GAAP and IFRS. The amendments in ASU 2011-04 change the wording used to describe many of the requirements in U. S. Generally Accepted Accounting Principles (“GAAP”) for measuring fair value and disclosing information about fair value measurements. Some of the amendments clarify FASB’s intent about the application of existing fair value measurement and disclosure requirements. Other amendments change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. This guidance became effective for the Company January 1, 2012, and the adoption had no immediate effect on our financial position, results of operations or cash flows.

 

In September 2011, the FASB issued ASU No. 2011-08, Intangibles-Goodwill and Other (Topic 350), permitting entities the option to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. ASU No. 2011-08 became effective for the Company January 1, 2012 and the adoption had no effect on our financial position, results of operations or cash flows.

 

62


Table of Contents

In July 2012, the FASB issued ASU No. 2012-02, Intangibles-Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment (ASU 2012-02), allowing entities the option to first assess qualitative factors to determine whether it is necessary to perform the quantitative impairment test. If the qualitative assessment indicates it is more-likely-than-not that the fair value of an indefinite-lived intangible asset is less than its carrying amount, the quantitative impairment test is required. Otherwise, no testing is required. ASU 2012-02 is effective for the Company in the period beginning January 1, 2013. The Company does not expect the adoption of this update to have a material effect on our financial position, results of operations or cash flows.

 

63


Table of Contents

BUSINESS

 

Overview

 

Our Company

 

We are a leading provider of technology-driven, communication services. We offer a broad portfolio of services, including conferencing and collaboration, unified communications, alerts and notifications, emergency communications, business process outsourcing and telephony / interconnect services. The scale and processing capacity of our proprietary technology platforms, combined with our expertise in managing voice and data transactions, enable us to provide reliable, high-quality, mission-critical communications designed to maximize return on investment for our clients. Our clients include Fortune 1000 companies, along with small and medium enterprises in a variety of industries, including telecommunications, retail, financial services, public safety, technology and healthcare. We have sales and operations in the United States, Canada, Europe, the Middle East, Asia Pacific, Latin America and South America.

 

Our focus on large addressable markets with attractive growth characteristics has allowed us to deliver steady, profitable growth. Over the past ten years, we have grown our revenue at a compound annual growth rate (“CAGR”), of 12%, and improved our Adjusted EBITDA margin from 21.1% to 27.0%. For the fiscal year ended December 31, 2012, we grew revenue by 5.9% over 2011 to $2,638.0 million and generated $713.1 million in Adjusted EBITDA, or 27.0% Adjusted EBITDA margin, $125.5 million in net income and $318.9 million in net cash flows from operating activities. See note 2 to the “Selected Consolidated Financial Data” table for a reconciliation of Adjusted EBITDA to net income.

 

Evolution into a Predominately Platform-Based Solutions Business

 

Since our founding in 1986, we have invested significantly to expand our technology platforms and develop our operational processes to meet the complex and changing communications needs of our clients. We have evolved our business mix from labor-intensive communication services to predominantly diversified and platform-based, technology-driven voice and data services. As a result, our revenue from platform-based services grew from 37% of total revenue in 2005 to 72% in 2012, and our operating income from platform-based services grew from 53% of total operating income to 90% over the same period.

 

Since 2005, we have invested approximately $2.0 billion in strategic acquisitions. 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 services. We have reoriented our business to address the emergence of fast-growing trends such as unified communications (“UC”) products and mobility.

 

Today, our platform-based service lines include conferencing and collaboration, event services, Internet Protocol (“IP”) - based UC solutions, alerts and notifications, emergency communications services and our automated customer service platforms such as interactive voice response (“IVR”), natural language speech recognition and network-based call routing services. As we continue to increase the variety of platform-based services we provide, we intend to pursue opportunities in markets where we have strong client relationships and where clients place a premium on the quality of service provided.

 

The following summaries further highlight the steps we have taken to improve our business model:

 

   

Developed and Enhanced Large Scale Technology Platforms. 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. Our approximately 672,000 telephony ports, including approximately 384,000 IP ports, provide us with what we believe is the only large-scale proprietary IP-based global conferencing platform deployed and in use today. Our acquisitions of TuVox Incorporated and Holly Australia Pty Ltd significantly advanced the development capabilities

 

64


Table of Contents
 

of our existing platform. The resulting open standards-based platform allows for the flexibility to add new capabilities as our clients demand. In addition, we have integrated mobile, social media and cloud computing capabilities into our platforms and offer those services to our clients.

 

   

Expanded Emergency Communications Services Platform. We have invested significant resources into our emergency communications services. Since 2006, we have made several strategic acquisitions, including Intrado, Inc. (“Intrado”) and Positron Public Safety Systems, which provided us with the leading platform in communication services for public safety. Today, we believe we are one of the largest providers of emergency communications services to telecommunications service providers, government agencies and public safety organizations, based on the number of 9-1-1 calls that we and other participants in the industry facilitate. We have steadily increased our presence in this market through substantial investments in proprietary systems to develop programs designed to upgrade the capabilities of 9-1-1 centers by delivering a broader set of features.

 

   

Expanded Our Unified Communications Business Segment. Through both organic growth and acquisitions, we have been successful in strengthening our unified communications service offering. We have grown our sales force to expand the reach of our Unified Communications services both domestically and internationally. We have developed and integrated proprietary global and large enterprise-based services into our platform which allow for streamlined, cost-effective conferencing capabilities. With the acquisitions of Corvent, Stream57 and Unisfair, we have enhanced our event services offerings. We have increased our capabilities in IP-based Unified Communications solutions through the acquisitions of POSTcti, SKT and Smoothstone. We are able to offer system design, project management and implementation to clients with our sales engineering and integration services.

 

We have also increased our presence in the high growth alerts and notifications market. We now provide platform-based communication services across several industries, including financial services, communications, transportation, government and public safety. Additionally, through our acquisitions of TeleVox Software, Inc. and Twenty First Century Communications, Inc. (“TFCC”) we have a strong presence in the medical and dental markets and the electric utilities industry.

 

Market Opportunity

 

We are focused on voice and data markets. Consistent with our investment strategy, we have and will continue to target new and complementary markets that leverage our depth of expertise in voice and data services. We believe these markets, including unified communications, emergency communications and alerts and notifications services, are large, have relatively predictable and steady growth, and are characterized by recurring, valuable transactions and strong margin profiles.

 

Unified Communications

 

We entered the conferencing and collaboration services market with our acquisition of InterCall® in 2003. Through organic growth and multiple strategic acquisitions, we have become the leading global provider of conferencing services since 2008 based on revenue, according to Wainhouse Research. The market for worldwide unified communications services, which includes hosted and managed unified communications services, audio, web, video and operator-assisted conferencing was $7.5 billion in 2012 and is expected to grow at a CAGR of 15% through 2016 according to Wainhouse Research. By leveraging our global sales team and diversified client base, we intend to continue targeting higher growth markets.

 

According to Tern Systems, the market for automated message delivery in the U.S. was approximately $793 million in 2012, and is expected to grow at an annual growth rate of 20% through 2017. 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 unified communications services, and increasing awareness of the need for rapid communication during emergencies.

 

65


Table of Contents

Communication Services

 

The market for emergency communications services represents a highly attractive opportunity, allowing us to diversify into an end-market that we believe is less volatile with respect to downturns in the economy. According to Compass Intelligence, approximately $4.1 billion of government-sponsored funds were estimated to be available for 9-1-1 and E9-1-1 applications, hardware and systems expenditures in 2012 and such funds are expected to grow at a 6.8% CAGR through 2016. Given the critical nature of these systems and services, government agencies and other public safety organizations prioritize funding for such services to ensure dependable delivery. Further, as communities across the U.S. upgrade outdated 9-1-1 systems to next generation 9-1-1 platforms, we believe our suite of services is best suited to capture the demand.

 

We deliver critical agent-based and automated services for our enterprise clients. Today, the market for these services remains attractive given its size and steady growth characteristics. We target select opportunities within the global customer care business process outsourcing market which was estimated to be approximately $56 billion in 2012 with a projected CAGR through 2015 of approximately 6% according to IDC. We focus on high-value transactions that utilize our specialized knowledge and scale to drive enhanced profitability. We have built on our leading position in this market by investing in emerging service delivery models that provide a higher quality of service to our clients.

 

Our Services

 

We believe we have built our reputation as a best-in-class service provider by delivering differentiated, high-quality services for our clients. Our portfolio of technology-driven, communication services includes:

 

LOGO

 

66


Table of Contents

Unified Communications

 

Conferencing and 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. We managed approximately 134 million conference calls in 2012, an 11% increase over 2011. We provide our clients with an integrated global suite of meeting services. Conferencing and Collaboration Services include the following:

 

   

On-Demand Audio Conferencing is an automated conferencing service that allows clients to initiate an audio conference at any time, without the need to make a reservation or rely on an operator.

 

   

Web Conferencing and Collaboration Tools allow clients to connect remote employees and bolster collaboration among groups. These tools provide clients with the capability to make presentations and share applications and documents over the Internet. These services are offered through our proprietary product, InterCall Unified Meeting®, as well as through the resale of Cisco, Microsoft and Adobe products. Web conferencing services can be customized to each client’s individual needs.

 

   

Video Managed Services and Video Bridging allow clients to experience real-time face-to-face conferences. These services are offered through our products, InterCall Video Conferencing and InterCall Video Managed Services in conjunction with third-party equipment, and can be used for a wide variety of events, including training seminars, sales presentations, product launches and financial reporting calls.

 

Event Services. InterCall offers multimedia platforms designed to give our clients the ability to create, manage, distribute and reuse content internally and externally. Through a combination of proprietary products and strategic partnerships, our clients have the tools to support diverse internal and external multimedia requirements. Event Services Solutions include the following:

 

   

Audio and Video Webcasting Services allow users to broadcast small or large multimedia presentations over the Internet. We offer our clients the flexibility of broadcasting any combination of audio, video (desktop or high-end) or PowerPoint slides using any operating system. We enhanced our presence in this market with the acquisition of Stream57® in December 2009.

 

   

Virtual Event Design and Hosting offers clients consulting, project management and implementation of hosted and managed virtual event and virtual environment solutions. Clients are able to provide large audiences easy and instant access to content, experts and peers. Examples of virtual events include trade shows, user groups, job fairs, virtual learning environments and town hall meetings. We enhanced our presence in this market with the acquisition of Unisfair® in March 2011.

 

   

Operator-Assisted Audio Conferencing Services are pre-scheduled conferences for large-scale, complex or important events. Operator-assisted services are customized to a client’s needs and provide a wide range of scalable features and enhancements, including the ability to record, broadcast, schedule and administer meetings.

 

IP-Based Unified Communications Solutions. We provide our clients with enterprise class IP-based communications solutions including the following services:

 

   

Hosted IP-PBX and Enterprise Call Management allows an enterprise to upgrade its use of communications technology with a suite of cloud-based, on–demand services including full private branch exchange (“PBX”) functionality, advanced enterprise and personal call management tools and leading edge unified communications features. These services can be fully integrated with a client’s existing IP or legacy time-division multiplexing (“TDM”) infrastructure where required, leveraging investments already made in telephony infrastructure and providing a seamless enterprise-wide solution.

 

   

Hosted and Managed Multi-Protocol Label Switching (“MPLS”) Network is a suite of IP trunking solutions designed to provide enterprise clients with carrier–grade service along with the benefits of

 

67


Table of Contents
 

next–generation IP–based service that allow their business to run more efficiently. These solutions deliver a consistent set of voice services across an enterprise’s infrastructure, with flexible IP and TDM trunking options for clients’ on–site PBX.

 

   

Unified Communications Partner Solution Portfolio enables us to engineer flexible and scalable solutions suitable to an enterprise’s needs, leveraging a portfolio of Microsoft and Cisco offerings integrated with our products, applications and services.

 

   

Cloud-Based Security Services aggregate a set of technologies into one simple and scalable cloud–based solution that provides clients with network protection. This service can help protect the client’s network from spam and viruses, unauthorized intrusions and inappropriate web content, while providing simplicity and consistency of security policy management and eliminating single points of failure and bottlenecks that can occur with premise-based security solutions.

 

   

Professional Services and System Integration provides our clients with advice and solutions to integrate their unified communication systems. We offer consulting, design, integration, and implementation of voice, video, messaging, and collaboration systems and services.

 

Alerts and Notifications. Our technology platforms allow clients to manage and deliver automated, proactive and personalized communications. We use multiple delivery channels (voice, text messaging, email, social media and fax), based on the preference of the recipient. For example, we deliver patient notifications, confirm appointments and send prescription reminders on behalf of our healthcare clients; send and receive automated outage notifications on behalf of our utility clients and transmit emergency evacuation notices on behalf of municipalities.

 

Our scalable platform enables a high volume of messages to be sent in a short amount of time. It also enables two-way communication which allows the recipients of a message to respond to our clients. We offer the following Alerts and Notifications services:

 

   

Automated Voice Notifications are customized voice messages sent on behalf of our clients that are delivered with personalized information. Our systems provide for accurate detection of voice mail versus live answer, customized caller ID and retry logic.

 

   

Short Message Services (“SMS”)/Email Alerts and Notifications are customized electronic notifications sent on behalf of our clients directly to their customers’ handheld devices, wireless phones, two-way pagers or email inboxes.

 

   

Social Media Messaging enables clients to deliver targeted, personalized messaging to social media sites.

 

   

Multichannel Preference Management and Campaign Management Solutions allow our clients to create and manage customer information in a real-time environment. Our web-based user interface tool allows clients to upload customer contact information, create reusable notification templates and customize campaigns.

 

   

Website and Customer Portal Management is a web design service whereby we create custom-built, interactive websites for clients. We also provide a variety of additional features and services, including hosting, search engine optimization and maintenance.

 

68


Table of Contents

Communication Services

 

Emergency Communications Services. We believe we are one of the largest providers of emergency communications services, based on the number of 9-1-1 calls that we and other participants in the industry facilitate. Our services are critical in facilitating public safety agencies’ ability to receive emergency calls from citizens. Our clients generally enter into long-term contracts and fund their obligations through monthly charges on users’ telephone bills. We offer the following Emergency Communication Services:

 

   

9-1-1 Network Services are the systems that control the routing of emergency calls to the appropriate 9-1-1 centers. In 2012, we facilitated over 260 million 9-1-1 calls. Our next generation 9-1-1 call handling solution is an IP-based system designed to significantly improve the information available to first responders by integrating capabilities such as the ability to text, send photos or video to 9-1-1 centers as well as providing stored data such as building blueprints or personal medical data to first responders. Our carrier-grade Location Based Services process over 125,000 daily requests in support of our clients’ Enhanced 9-1-1 (“E9-1-1”) and commercial applications.

 

   

9-1-1 Telephony Systems and Services include our fully-integrated desktop communications technology solutions which public safety agencies use to enable E9-1-1 call handling. Our next generation 9-1-1 solution can be deployed in a variety of local, hosted and remote configurations, allowing public safety agencies to grow with minimal incremental investment. It currently operates in approximately 5,000 call-taking positions in more than 1,000 Public Safety Answering Points (“PSAPs”) in North America.

 

Automated Call Processing. We believe we have developed a best-in-class automated customer service platform. Our services allow our clients to effectively communicate with their customers through inbound and outbound 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 open standards-based platform allows the flexibility to integrate new capabilities such as mobility, social media and cloud-based services. Our Automated Call Processing includes:

 

   

Automated Customer Service Solutions range from speech/IVR applications and mobile solutions to SMS, chat and email. We help our clients engage their customers through the channels they prefer. Examples of self service applications used by our clients are: access account balances, activation of credit cards, placing orders, FAQ’s and stop/start utility service.

 

   

Voice and Data Network Management Services assist our clients as they manage or update their own contact center communications networks. We offer hosted or managed services for the operation, administration and management of voice and data networks such as Voice over Internet Protocol (“VoIP”) network management, network automated call distribution (“ACD”)/multi-channel contact routing, workforce management, quality monitoring and predictive dialing.

 

Telephony / Interconnect Services. Our telephony / interconnect Services support the merging of traditional telecom, mobile and IP technologies to service providers and enterprises. We are a leading provider of local and national tandem switching services to carriers throughout the United States. We leverage our proprietary customer traffic information system, sophisticated call routing and control facility to provide tandem interconnection services to the competitive marketplace, including wireless, wire-line, cable telephony and VoIP companies. We entered this market through the acquisition of HyperCube LLC (“HyperCube”) in March 2012.

 

   

Toll-Free Origination transports and switches toll free traffic originated by traditional wireline, VoIP, cable, and wireless carriers to all major inter-exchange carriers (“IXC”) in the United States. This service provides a highly scalable and efficient means to pass toll free traffic to IXCs.

 

   

Termination Services using our soft switch platform, national optical backbone and direct network interconnections allow for the termination of outbound toll traffic.

 

   

Tandem Transit switches local voice traffic between wireless carriers, competitive local exchange carriers (“CLECs”), VoIP providers, and cable networks.

 

69


Table of Contents

Agent-Based Services. We provide our clients with large-scale, agent-based services. We target opportunities that allow our agent-based services to be part of larger strategic client engagements and with clients for whom these services can add value. We believe that we are known in the industry as a premium provider of these services. We offer a flexible model that includes on-shore, off-shore and virtual home-based agent capabilities to fit our clients’ needs. Agent-Based Services include:

 

   

Customer Care and Acquisition Services support our clients with their consumer-based communications needs. We provide customer acquisition and retention, customer care, technical support and sales services. Our customized process strategically matches our client’s goals to the appropriate solutions to maximize results.

 

   

Business-to-Business and Account Management Services combines our experience, sales methodologies and technology to deliver an integrated suite of solutions that allow our clients to overcome a variety of common sales challenges across a multitude of business segments. Examples of these services include lead management, team sell, account management and sole territory coverage.

 

   

Receivables Management Services support many of today’s leading businesses and institutions with a fully licensed collection agency that has integrated partnerships across the telecommunications, financial services, government, healthcare and utilities industries.

 

   

Overpayment Identification and Recovery Services provides cost containment programs to organizations including: health insurance payers, third party administrators, managed care organizations, hospitals/physicians and self-insured companies. We analyze data from multiple healthcare sources, identify incorrectly paid claims, provide targeted communications and collect funds on behalf of our clients.

 

Our Competitive Strengths

 

We have developed 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 and enable us to deliver operational excellence to clients.

 

   

Broad Portfolio of Product Offerings with Attractive Value Proposition. Our technology platforms combined with our operational expertise and processes allow us to provide a broad range of service offerings for our clients. Our ability to provide our clients with a reliable, efficient and cost-effective alternative to process high volume, complex voice and data transactions, helps them meet their critical communications needs and improve their cost structure.

 

   

Robust Technology Capabilities Enable Scalable Operating Model. Our strengths across technology and multiple channels allow us to efficiently process data and voice transactions for our clients. We cross-utilize our assets and shared service platforms across our businesses, providing scale and flexibility to handle greater transaction volume, offer superior service and develop new offerings more effectively and efficiently. We foster a culture of innovation and have been issued approximately 213 patents and have approximately 328 pending patent applications for technology and processes that we have developed. We continue to invest in new platform technologies, including IP-based cloud computing environments and to enhance our portfolio with patented technologies, which allow us to deliver premium services to our clients.

 

   

Strong Client Relationships. We have built long-lasting relationships with our clients who operate in a broad range of industries, including telecommunications, retail, financial services, public safety, technology and healthcare. Our top ten clients in 2012 had an average tenure with us of over eleven years. In 2012, our 100 largest clients by revenue represented approximately 57% of our revenue and approximately 44% of our revenue came from clients purchasing multiple service offerings.

 

   

Operational Excellence. We achieve the results our clients are seeking through productivity, reliability and scale. Our ability to improve upon our clients’ communications processes is an

 

70


Table of Contents
 

important aspect of our value proposition. We leverage our proprietary technology infrastructure and shared services platforms to manage higher value transactions and achieve cost savings for our clients and ourselves.

 

   

Experienced Management Team with Track Record of Growth. Our senior leadership has an average tenure of approximately 15 years with us and has delivered strong results through various market cycles, both as a public and a private company. As a group, this team has created a culture of superior client service and, through acquisitions and organic growth, has been able to achieve 12% revenue CAGR over the past ten years. Our team has established a long track record of successfully acquiring and integrating companies to drive growth.

 

As demand for outsourced services grows with greater adoption of our technologies and services and the global trend toward business process outsourcing, we believe our long history of delivering results for our clients combined with our scale and the investments we have made in our businesses provide us with a significant competitive advantage.

 

Our Business 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 market leadership. Key aspects of our strategy include the following:

 

   

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 44% of our revenue in 2012 came from clients purchasing multiple service offerings from us. We seek out clients with plans for growth and expect to participate in that growth along with our clients. As we demonstrate the value that our services provide, often starting with a single service, we are frequently able to expand the size and scope of our client relationships.

 

   

Develop New Client Relationships. We will continue to focus on building long-term client relationships across a wide range of industries 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. By continuing to add new long-term client relationships in large and growing markets, we believe we enhance the stability and growth potential of our revenue base.

 

   

Capitalize on Select Global Opportunities. In addition to expanding and enhancing our existing relationships domestically, we will selectively pursue new client opportunities globally. Our expertise in conferencing and collaboration services has allowed us to penetrate substantial new international markets. In 2012, 19% of our consolidated revenue was generated outside of the U.S. Given the attractive growth dynamics within Europe, Asia-Pacific, South America and Latin America, we intend to further grow our unified communications business in these regions. Our distribution capabilities, including over approximately 375 dedicated international Unified Communications sales personnel, provide us with the platform to drive incremental revenue opportunities.

 

   

Continue to Enhance Leading Technology Capabilities. We believe our service offerings are enhanced by our superior technology capabilities and track record of innovation, and we will continue to target services where our reliability, scale and efficiencies enable us to solve our clients’ communications issues or enhance the results of their communications. In addition to strengthening our client relationships, we believe our focus on technology facilitates our ongoing evolution toward a diversified, predominantly platform-based and technology-driven operating model.

 

   

Continue to Enhance Our Value Proposition Through Selective Acquisitions. Since our founding in 1986, we have completed 30 acquisitions of businesses and technologies with a total value of approximately $2.7 billion. We will continue to expand our suite of communication services across

 

71


Table of Contents
 

industries, geographies and end-markets. While we expect this will occur primarily through organic growth, we have and expect to continue to acquire assets and businesses that strengthen our value proposition to clients and drive value to us. We have developed an internal capability to source, evaluate and integrate acquisitions that we believe has created value for shareholders.

 

Sales and Marketing

 

Generally, our sales personnel target growth-oriented clients and selectively pursue those with whom we have the greatest opportunity for long-term success. Their goals are both to maximize our current client relationships and expand our client base. To accomplish these goals, we attempt to sell additional services to existing clients and to develop new relationships. We generally pay commissions to sales professionals on both new sales and incremental revenue generated from existing clients.

 

Unified Communications

 

For Conferencing and Collaboration Services, Event Services, IP-Based Unified Communications Solutions and Alerts and Notifications, we maintain a sales force of approximately 930 personnel that are trained to understand and respond to our clients’ needs.

 

Communication Services

 

We maintain approximately 62 sales and marketing personnel dedicated to our Emergency Communications Services, approximately 14 sales and marketing personnel dedicated to our Automated Call Processing, approximately 13 sales and marketing personnel dedicated to our Telephony / Interconnect Services and approximately 35 sales and marketing personnel dedicated to our Agent-Based Services.

 

Competition

 

Unified Communications

 

The Conferencing and Collaboration Services market is highly competitive. The principal competitive factors include, among others, range of service offerings, global capabilities, price and quality of service. Our principal competitors include AT&T, Verizon, PGi, BT Conferencing, NTT, Cisco Systems, Microsoft, IBM and other premise-based solution providers.

 

The Event Services market has advanced from traditional audio-centric, operator-assisted conferencing solutions to more dynamic, web-centered solutions such as webcasting platforms with video, and interactive, persistent virtual environments. As a result, the market remains highly competitive and fragmented with new entrants joining as technology evolves. The principal competitive factors of operator-assisted conferencing are reliability, ease of use, price and global support. Competitors in this market include BT Conferencing, PGi and Arkadin. The principal competitive factors of the webcasting market are reliability, functionality, price, mobility, customization, ease of use and options like self service and multicasting. Competitors in this market include ON24, Thomson Reuters, Sonic Foundry, TalkPoint and cross over into the webinar market with Adobe and WebEx. The principal competitive factors of the virtual events market are ease of use, self-service, branding, integration with other solutions and global support. Competitors in this market include INXPO, ON24 and 6Connex.

 

The IP-Based Unified Communications Solutions market is a highly competitive and growing market characterized by a large number of traditional carrier service providers entering the mid-market to enterprise market with proprietary versions of hosted or “cloud-based” unified communications service offerings, as well as smaller business-size competitors who compete more aggressively on price. The principal competitive factors include, among others, experience in implementing and designing enterprise level networks, on-demand and integrated hosted communications and collaboration platforms, expertise in integration of a broad variety of

 

72


Table of Contents

unified communications applications both in implementation and professional services consultation. Our principal competitors in this industry at the enterprise level include Cisco, Microsoft, AT&T, Verizon, BT, ShoreTel and Google for hosted services solutions and IBM, Hewlett-Packard, Verizon Business and regional integrated service vendors for professional services. We also face competition from clients who implement in-house solutions. The small to medium sized business market has hundreds of regional competitors with a few like XO Communications, 8x8 and M5 that compete on a national scale.

 

The Alerts and Notifications services market is highly competitive and fragmented, characterized by a large number of vertically focused competitors addressing specific industries, including healthcare, travel, education, credit collection and government. The principal competitive factors in alerts and notifications include, among others, industry-specific knowledge and service focus, reliability, scalability, ease of use and price. Competitors in this industry include Varolii, SoundBite Communications, PhoneTree and, in the medical and dental markets, Silverlink Communications, Patient Prompt and Sesame Communications. We also face competition from clients who implement in-house solutions.

 

Communication Services

 

The market for wireline and wireless emergency communications services is competitive. The principal competitive factors in wireline and wireless emergency communications are the effectiveness of existing infrastructure, scalability, reliability, ease of use, price, technical features, scope of product offerings, customer service and support, ease of technical migration, useful life of new technology and wireless support. Competitors in the incumbent local exchange carrier and competitive local exchange carrier markets generally include internally developed solutions, competitors in the wireless market include TeleCommunications Systems and competitors in the VoIP services market include inetwork, a division of Bandwidth.com, Inc. Competition in the public safety desktop market is driven by features functionality, ease of use, price, reliability, upgradability, capital replacement and upgrade policies and customer service and support. Competitors in this market include Cassidian Communications, EmergiTech and 911-Inc.

 

The principal competitive factors in the automated call processing market are scalability, flexibility, reliability, speed of implementing client applications and price of services. Competitors in this market are primarily premise-based services, but a group of hosted providers has recently emerged.

 

The principal competitive factors in the telephony / interconnect services market include network performance, ease and breadth of interconnections to carriers, pricing and the ability to support converging technologies (TDM to IP). Competitors in this market include Inteliquent (formerly Neutral Tandem) and Peerless Network along with CLECs.

 

The agent-based services market is highly competitive. The principal competitive factors in this market include, among others, quality of service, range of service offerings, flexibility and speed of implementing customized solutions to meet clients’ needs, capacity, industry-specific experience, technological expertise and price. In the agent-based customer services market, many clients retain multiple communication services providers, which exposes us to continuous competition in order to remain a preferred vendor. Competitors in the agent-based customer services industry include Convergys, TeleTech, Sykes, NCO, GC Services, Infosys Limited and Aegis Global. We also compete with the in-house operations of many of our existing and potential clients.

 

Our Clients

 

Our clients vary by business unit. We have a large and diverse client base for our Conferencing and Collaboration Services, ranging from small businesses to Fortune 100 clients, and operating in a wide range of industries, including telecommunications, retail, financial services, technology and healthcare. Our Alerts and Notifications business serves a large number of clients, who generally operate in specific industries such as

 

73


Table of Contents

medical and dental or transportation. Traditionally, our Emergency Communications clients have been incumbent local exchange carriers and competitive local exchange carriers. Our Automated Call Processing and Agent-Based Service businesses serve larger enterprise clients operating in a wide range of industries.

 

Although we serve many clients, we derive a significant portion of our revenue from relatively few clients. In 2012, our 100 largest clients represented approximately 57% of our revenue. No client represented more than 10% of our revenue in 2012.

 

Our Personnel

 

As of December 31, 2012, we had approximately 35,700 total employees, of which approximately 30,600 were employed in the Communication Services segment (including approximately 9,270 home-based, generally part-time employees), 4,500 were employed in the Unified Communications segment and approximately 600 were employed in corporate support functions. Of the total employees, approximately 10,000 were employed in management, staff and administrative positions, and approximately 6,800 were international employees.

 

Employees of our subsidiaries in France and Germany are represented by local works councils. Employees in France and certain other countries are also covered by the terms of industry-specific national collective agreements. Our employees are not represented by any labor organization in the United States. We believe that our relations with our employees and the labor organizations identified above are good.

 

Our Technology and Systems Development

 

Technology is critical to our business and we believe the scale and flexibility of our platform is a competitive strength. Our software and hardware systems, as well as our network infrastructure, are designed to offer high-quality, integrated solutions. We have made significant investments in reliable hardware systems and integrated commercially available software when appropriate. We currently have approximately 672,000 telephony ports to handle conference calls, alerts and notifications and customer service. These ports include approximately 384,000 IP ports, which we believe provide us with the only large-scale proprietary IP-based global conferencing platform deployed and in use today. Our technological platforms are designed to handle greater transaction volume than our competitors. Because our technology is client focused, we often rely on proprietary software systems developed internally to customize our services. As of December 31, 2012, we employed a staff of approximately 2,400 professionals in our information technology departments.

 

We recognize the importance of providing uninterrupted service for our clients. We have invested significant resources to develop, install and maintain facilities and systems that are designed to be highly reliable. Our facilities and systems are designed to maximize system availability and minimize the possibility of a service disruption.

 

We have network operations centers that operate 24 hours a day, seven days a week and use both internal and external systems to effectively operate our equipment, people and sites. We interface directly with telecommunications providers and have the ability to manage capacity in real time. Our network operations centers monitor the status of elements of our network on a real-time basis. All functions of our network operations centers have the ability to be managed at backup centers.

 

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. We currently own approximately 213 registered patents and approximately 229 registered trademarks including several patents and trademarks that we obtained as part of our past acquisitions. Certain of our patents will expire in 2013. We do not expect these patent expirations to have a material adverse effect on our business. Trademarks continue as long as we actively use the mark. We have approximately 328 pending patent applications pertaining to technology relating to transaction processing, call center and agent management, data collection, reporting and verification, conferencing and credit card processing. New patents that are issued have a life of 20 years from the

 

74


Table of Contents

date the patent application is initially filed. We believe the existence of these patents and trademarks, along with our ongoing processes to add additional patents and trademarks to our portfolio, may be a barrier to entry for specific products and services we provide and may also be used for defensive purposes in certain litigation.

 

Our International Operations

 

In 2012, revenue attributed to foreign countries was approximately 19% of our consolidated revenue and long-lived assets attributed to foreign countries were approximately 9% of our total consolidated long-lived assets.

 

In 2012, our Unified Communications segment operated out of facilities in the U.S. and approximately 25 foreign jurisdictions in North and South America, Europe and Asia.

 

In 2012, our Communication Services segment operated facilities in the U.S., Canada, the Philippines, Mexico, Australia and Jamaica.

 

For additional information regarding our domestic and international revenues, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Financial Statements included herewith.

 

Properties

 

We own our corporate headquarters facility in Omaha, Nebraska. We also own two other facilities in Omaha, Nebraska used for administrative activities. Our principal operating locations are noted below.

 

Operating Segment

   Owned / Leased    Principal Activities    Number of States
in Which
Properties are
Located
   Number of Foreign
Countries in
Which Properties
are Located

Unified Communications

   Owned    Administration    3   

Unified Communications

   Owned    Production    1   

Unified Communications

   Leased    Administration /

Sales

   18    22

Unified Communications

   Leased    Production    1    2

Communication Services

   Owned    Administration    1   

Communication Services

   Owned    Production    3   

Communication Services

   Leased    Administration    9    1

Communication Services

   Leased    Production    17    3

 

Unified Communications has locations in Australia, Belgium, Brazil, Canada, China, Denmark, Finland, France, Germany, Hong Kong, India, Israel, Italy, Japan, Korea, Malaysia, Mexico, Netherlands, New Zealand, Singapore, Spain, Sweden and the United Kingdom. Communication Services locations in foreign countries include Australia, Canada, Jamaica, Mexico and the Philippines.

 

We believe that our facilities are adequate for our current requirements and that additional space will be available as required. See Note 4 of the Notes to Consolidated Financial Statements included elsewhere in this prospectus for information regarding our lease obligations.

 

Government Regulation

 

Privacy

 

The Unified Communications and Communication Services segments provide services to healthcare clients that, as providers of healthcare services, are considered “covered entities” under the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”). As covered entities, our clients must comply with standards for

 

75


Table of Contents

privacy, transaction and code sets, and data security. Under HIPAA, we are sometimes considered a “business associate,” which requires that we protect the security and privacy of “protected health information” provided to us by our clients. We have implemented HIPAA and Health Information Technology for Economic and Clinical Health Act (“HITECH”) compliance training and awareness programs for our healthcare services employees. We also have undertaken an ongoing process to test data security at all relevant levels. In addition, we have reviewed physical security at all healthcare operation centers and have implemented systems to control access to all work areas.

 

In addition to healthcare information, our databases contain personal data of our customers and clients’ customers, including credit card and other personal information. Federal law requires protection of Customer Proprietary Network Information (“CPNI”) applicable to our clients. Federal and state laws in the U.S. as well as those in the European Union require notification to consumers in the event of a security breach in or at our systems if the consumers’ personal information may have been compromised as a result of the breach. We have implemented processes and procedures to reduce the risk of security breaches, and have prepared plans to comply with these notification rules should a breach occur.

 

Telecommunications

 

Our wholly-owned subsidiary, Intrado Inc. and certain of its affiliates (collectively, “Intrado”), are subject to various regulations as a result of their status as a regulated competitive local exchange carrier, and/or an emergency services provider, and/or an inter-exchange carrier, including state utility commissions regulations and Federal Communications Commission (the “FCC”) regulations adopted under the Telecommunications Act of 1996, as amended. Also, under the New and Emerging Technologies 911 Improvement Act of 2008 (NET911 Act, P.L. 11-283, 47 U.S.C. 609) and its attendant FCC regulations (WC Docket No. 08-171, Report and Order dated October 21, 2008), Intrado® is required to provide access to VoIP telephony providers certain 9-1-1 and Enhanced, or E9-1-1, elements.

 

The market in which Intrado operates may also be influenced by legislation, regulation, and judicial or administrative determinations which seek to promote a national broadband plan, a nationwide public safety network, next generation services, and/or competition in local telephone markets, including 9-1-1 service as a part of local exchange service, or seek to modify the Universal Service Fund (“USF”) program.

 

Through our wholly owned subsidiary West IP Communications, Inc. (formerly known as Smoothstone IP Communications Corporation) (“WIPC”), we provide interconnected VoIP services, which are subject to certain requirements imposed by the FCC, including without limitation, obligations to provide access to 9-1-1, pay federal universal service fees and protect customer proprietary network information CPNI, even though the FCC has not classified interconnected VoIP services as telecommunications services. The regulatory requirements applicable to WIPC’s VoIP services could change if the FCC determines the services to be telecommunications services regulated under Part II of the Communications Act.

 

Federal laws regulating the provision of traditional telecommunications services may adversely impact our conferencing business. Our conferencing business has submitted forms to the Universal Service Administrative Company (“USAC”) and paid federal USF and similar fees since August 1, 2008 based on our good faith interpretation of the revenue reporting requirements and classification of our services. To the extent that USAC or the FCC disagrees with the methodology or classification of our services, InterCall may be subject to additional costs and obligations applicable to more traditional telecommunications service providers.

 

On March 23, 2012, we completed the acquisition of HyperCube, a telecommunications carrier and provider of switching services throughout the United States. HyperCube routes communications traffic to all other carriers, including wireless, wireline, cable telephony and VoIP companies. HyperCube Telecom, LLC, a wholly-owned subsidiary of HyperCube, has obtained licenses to offer telecommunications services from the FCC and authorization to offer facilities-based and resold telecommunications services from Public Utility Commissions (“PUCs”) in 45 states and the District of Columbia.

 

76


Table of Contents

The FCC exercises regulatory authority over the pricing of the tandem transit and access services offered by HyperCube. On November 18, 2011, the FCC released a Report and Order and Further Notice of Proposed Rulemaking, FCC Release No. 11-161 (“FCC Order”), that comprehensively reforms the system under which regulated service providers compensate each other for the termination of interstate, intrastate, and local traffic. The FCC adopted bill-and-keep as the ultimate uniform, national methodology for all terminating telecommunications traffic exchanged with a local exchange carrier. Under bill-and-keep, the rate for exchanging terminating traffic is zero and terminating carriers look to their subscribers to cover the costs of providing termination services. The FCC Order did not address rate levels for tandem transit services.

 

The rules adopted by the FCC provide for a multi-year transition to a national uniform bill-and-keep framework. Carriers were required to cap most terminating interstate and intrastate intercarrier compensation rate elements as of December 29, 2011. To reduce the disparity between intrastate and interstate terminating end office rates, carriers were required to bring intrastate rates, where they were higher than interstate rates, to the level of interstate rates in two steps, the first by July 1, 2012, and the second by July 1, 2013. Thereafter, carriers such as HyperCube must reduce their interstate and intrastate termination and transport rates to bill-and-keep by July 2018.

 

As part of the transition of the intercarrier compensation system to bill-and-keep, the FCC also established in the FCC Order a prospective intercarrier compensation framework for traffic exchanged over public switched telephone network facilities that originates and/or terminates in IP format (“VoIP-PSTN traffic”). The FCC found that where a providers’ interconnection agreement does not address the appropriate rate for such traffic, the default intercarrier compensation rate for all toll terminating and originating VoIP-PSTN traffic would be equal to interstate access rates, while the default intercarrier compensation rate for other VoIP-PSTN traffic would be the otherwise-applicable reciprocal compensation rates. To collect the compensation for originating or terminating VoIP-PSTN traffic in IP traffic, a local exchange carrier, or its VoIP provider partner, must perform functions functionally equivalent to the switched access functions of non-VoIP-PSTN traffic performed by local exchange carriers. The FCC also addressed intercarrier compensation between wireline carriers and wireless providers in the FCC Order. Among other things, the FCC adopted bill-and-keep as the default methodology for all non-access traffic between wireless and wireline providers.

 

In the Further Notice of Proposed Rulemaking adopted as part of the FCC Order, the FCC sought comment on the appropriate transition and recovery mechanism for the rate elements not reduced as part of the FCC Order, including originating access (including originating charges for 8YY traffic) and certain common and dedicated transport. The FCC also sought comment on the appropriate policy framework for IP-to-IP interconnection. We cannot predict the timing or outcome of these proposals.

 

Several states, industry groups, and other telecommunications carriers filed petitions for reconsideration with the FCC as well as petitions for review of the FCC Order in federal courts. The cases are consolidated for review before the US Court of Appeals for the 10th Circuit. The outcome of these petitions is unpredictable. On December 23, 2011, on its own motion, the FCC modified two aspects of the FCC Order, one of which impacts intercarrier compensation. The FCC determined that intercarrier compensation for local traffic exchanged between wireline and wireless carriers pursuant to an interconnection agreement in effect as of the adoption date of the FCC Order became subject to a default bill-and-keep methodology on July 1, 2012, rather than on December 29, 2011.

 

On April 25, 2012, the Commission issued a reconsideration of the FCC Order and revised the rate that local exchange carriers could recover for originating intrastate toll VoIP-PSTN traffic (regardless of whether the traffic originated and/or terminated in IP format). Specifically, the FCC directed that through June 30, 2014, for intrastate toll originating VoIP-PSTN traffic, local exchange carriers will be permitted to tariff default access rates for such traffic equal to their then current intrastate originating switched access rates, absent a contract setting a different rate. On and after July 1, 2014, local exchange carriers will be permitted to tariff default access rates for such traffic equal to their then current interstate originating switched access rates.

 

77


Table of Contents

There are initiatives in several state legislatures to lower intrastate access rates, aligning them with interstate rates, some of which may be affected by the FCC Order. Depending on whether we are a net collector or a net payer of any adjusted rate, such rate adjustments could have a negative effect on us.

 

Under the Twenty-First Century Communications and Video Accessibility Act (“CVAA”) and the FCC’s implementing rules, providers of advanced communications services will face new requirements to make their services accessible to persons with disabilities. These new obligations require that providers of electronic messaging, chat, non-interconnected VoIP and “interoperable video conferencing” must make their products and services accessible to persons with disabilities unless it is not “achievable” to do so. The CVAA and its rules also impose stringent record-keeping and annual reporting obligations on advanced communications services and on telecommunications and VoIP services previously subject to a different disabilities access standard. These new requirements could impact a variety of services we offer, and could require modifications to our services and/or increase the cost of providing affected services.

 

Any changes to these legal requirements, including those caused by the adoption of new laws and regulations or by legal challenges, could have a material adverse effect upon the market for our services and products. Any delays in implementation of the regulatory requirements could have a material adverse effect on our business, financial condition and results of operations.

 

Debt Collection and Credit Reporting