S-1/A 1 d157581ds1a.htm AMENDMENT NO. 8 TO FORM S-1 Amendment No. 8 to Form S-1
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As filed with the Securities and Exchange Commission on November 2, 2011

Registration No. 333-162292

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

AMENDMENT NO. 8 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.

 

 


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

 

PROSPECTUS (Subject to completion)

Issued November 2, 2011

 

             Shares

 

LOGO

 

West Corporation

 

 

 

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

 

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

 

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

 

 

 

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

 

 

 

Investing in our common stock involves risks. See “Risk Factors” beginning on page 16.

 

 

 

Price $         Per Share

 

 

 

      

Price to
Public

    

Underwriting
Discounts and
Commission

    

Proceeds to
Us

    

Proceeds to

Selling Stockholders

Per Share

     $              $                      $                  $                          

Total

     $                 $                          $                     $                               

 

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

 

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

 

The underwriters expect to deliver the shares to purchasers on or about                     , 2011.

 

 

 

Goldman, Sachs & Co.

Morgan Stanley

 

 

 

BofA Merrill Lynch

Citi

 

 

 

Deutsche Bank Securities   Wells Fargo Securities

 

Barclays Capital

 

 

 

Baird                                Sanford C. Bernstein                           William Blair & Company                           Credit Suisse

 

 

 

Raymond James                              Signal Hill

 

                    , 2011


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Table of Contents

TABLE OF CONTENTS

 

     Page  

Prospectus Summary

     1   

Summary Consolidated Financial Data

     13   

Risk Factors

     16   

Special Note Regarding Forward-Looking Statements

     29   

Use of Proceeds

     30   

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

     70   

Management

     86   
 

 

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                     , 2011 (25 days after the date of this prospectus), all dealers that buy, sell or trade our common stock, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

 

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

 

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PROSPECTUS SUMMARY

 

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

 

We refer to Adjusted EBITDA in various places in this prospectus. The definitions of EBITDA and Adjusted EBITDA and a reconciliation of Adjusted EBITDA to net income is set forth in note 2 to “Prospectus Summary—Summary Consolidated Financial Data” and a reconciliation of Adjusted EBITDA to cash flows from operating activities is set forth under “Management’s Discussion and Analysis of Financial Results of Operations—Debt Covenants.” References in this prospectus to compound annual growth rate, or CAGR, refer to the growth rate of the item measured over the applicable period as if it had grown at a constant rate on an annually compounded basis. We believe that the presentation of CAGR is useful to investors in assessing growth over time but caution should be taken in reliance on CAGR as a sole measure of growth as it may understate the potential effects of volatility by presenting trends at a steady rate.

 

Our Company

 

We are a leading provider of technology-driven, outsourced communications services. The scale and processing capacity of our proprietary technology platforms, combined with our expertise in managing voice and data transactions, enable us to offer a broad portfolio of services, including conferencing and collaboration, alerts and notifications, emergency communications and business processing outsourcing. Our services 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, banking, retail, financial services, public safety, technology and healthcare. We have sales and operations in the United States, Canada, Europe, the Middle East, Asia Pacific and Latin 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, or CAGR, of 13%, and improved our Adjusted EBITDA margin from 21% to 27%. For the fiscal year ended December 31, 2010, we grew revenue by 0.5% over 2009 to $2,388.2 million and generated $654.7 million in Adjusted EBITDA, or 27.4% Adjusted EBITDA margins, $60.3 million in net income and $312.8 million in net cash flows from operating activities. For the nine month period ending September 30, 2011, we grew revenue by 4.3% over the comparable period in 2010 to $1,866.4 million and generated $513.2 million in Adjusted EBITDA, or 27.5% Adjusted EBITDA margins, $106.3 million in net income and $290.6 million in cash flows from operating activities.

 

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 communications needs of our clients. We have evolved our business mix from labor-intensive communications services to predominantly diversified and platform-based, technology-driven services. As a result, our revenue from platform-based services grew from 37% of total revenue in 2005 to 68% in 2010, and our operating income from platform-based services grew from 53% of total operating income to 95% over the same period.

 

Since 2005, we have invested approximately $1.9 billion in strategic acquisitions. We have increased our penetration into higher growth international conferencing markets, strengthened our alerts and notifications

 

 

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services business and established a leadership position in emergency communication services. As technology has advanced, consumers are now able to choose how they prefer to communicate with enterprises. As a result, we have reoriented our business to address the emergence of fast-growing trends such as unified communications (UC) products, mobility, social media and cloud-based computing.

 

Today, our platform-based service lines include conferencing and event services, alerts and notifications, UC solutions, 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:

 

   

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 665,000 telephony ports, including approximately 313,000 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 recent acquisitions of TuVox and Holly Connects 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 are able to offer those services to our clients.

 

   

Expanded Emergency Communications Services Platform. We have invested significant resources into our emergency communications services. Since 2005, we made several strategic acquisitions, including 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. To complement these acquisitions, 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 life-saving features.

 

   

Expanded Our Unified Communications Platform. 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 conferencing 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 recent acquisitions of Stream57 and Unisfair, we have enhanced our event services offerings. We have increased our capabilities in IP-based UC solutions through the acquisition of Smoothstone. We are able to offer system design, project management and implementation to clients with our sales engineering and integration services.

 

   

Strengthened Alerts and Notifications Business. Since 2007, we have increased our presence in the high growth, high margin alerts and notifications market. We provide platform-based communication services across several industries, including financial services, communications, transportation, government and public safety. Additionally, through our acquisitions of TeleVox and Twenty First Century Communications, we have a strong presence in the medical and dental markets and the electric utilities industry.

 

 

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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.

 

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 global market for conferencing and collaborations, which includes hosted audio, web and video, operator-assisted conferencing and web-based event services, was $7.2 billion in 2010 and is expected to grow at a CAGR of 20% through 2014 according to Wainhouse Research. According to Tern Systems, the market for automated message delivery in the U.S. was over $850 million in 2010, and is expected to grow at an annual growth rate of 19% through 2015. We believe this growth is being driven by a number of factors, including increased globalization of business activity, focus on lower costs, increased adoption of conferencing and collaboration services, and increasing awareness of the need for rapid communication during emergencies. By leveraging our global sales team and diversified client base, we intend to continue targeting higher growth markets.

 

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 $3.8 billion of government-sponsored funds were estimated to be available for 9-1-1 software, hardware and systems expenditures in 2010 and such funds are expected to grow at a 5.4% CAGR through 2014. 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 are focused on delivering 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 $52 billion in 2010 with a projected CAGR through 2015 of approximately 5% 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.

 

 

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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, communications 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, and managed over 115 million conference calls in 2010. We provide our clients with an integrated global suite of meeting services. These include on-demand automated conferencing services, video management services and web-based collaboration tools that allow clients to make presentations and share applications and documents over the Internet, as well as video conferencing applications that allow clients to experience real-time video presentations and conferences.

 

   

Event Services. We are also the largest provider of event services globally, according to Wainhouse Research. Our event services platform provides operator-assisted services for complex audio conferences or large events, audio and video streaming and virtual event design and hosting. Examples of virtual events include job fairs, trade shows, global classrooms and town hall meetings.

 

 

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Alerts & Notifications Services. Our technology platforms allow clients to manage and deliver automated personalized communications quickly and through multiple delivery channels (voice, text messaging, email and fax) based on the preference of their customer. For example, we deliver patient notifications, appointment and prescription reminders on behalf of our healthcare clients, provide travelers with flight arrival and departure updates on behalf of our transportation clients, send and receive automated outage notifications and payment reminders on behalf of our utility clients and transmit emergency evacuation notices on behalf of municipalities. Our platform also enables two-way communication which allows the recipients of a message to respond with relevant information to our clients.

 

   

IP-Based Unified Communication Solutions. We provide our clients with enterprise class IP-based communications solutions enabled by our technology. We offer cloud-based IP private branch exchange (PBX) call management and multi-protocol label switching (MPLS) network solutions, cloud-based security services, and integrated conferencing/desktop messaging and presence tools. We support these solutions with a range of professional sales engineering and systems integration services, which provide our clients with advice and solutions to integrate their unified communication systems.

 

Communication Services

 

   

Platform-Based 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. We provide the systems that control routing of emergency calls to the appropriate 9-1-1 centers. Our clients generally enter into long-term contracts and fund their obligations through monthly charges on users’ telephone bills. We also provide fully-integrated desktop communications technology solutions to public safety agencies that enable enhanced 9-1-1 call handling. Our next generation 9-1-1 solution is 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 health data to first responders.

 

   

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.

 

   

Agent-Based Services. We provide our clients with large-scale, agent-based services. We target opportunities to provide our agent-based services as 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. For our clients’ commercial customer needs, we provide business-to-business, or B2B, sales and account management services, as well as receivables management services. We also help clients with their consumer-based communications needs, including customer acquisition and retention, and revenue lifecycle management. We have a flexible model with on-shore, off-shore and virtual home-based capabilities to fit our clients’ needs.

 

 

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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 efficiently and cost-effectively process high volume, complex voice and data transactions for our clients facilitates their critical communications and helps improve their cost structure.

 

   

Robust Technology Capabilities Enable Scalable Operating Model. Our strengths across technology and multiple channels allow us to process data and communications 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 167 patents and have approximately 336 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, as well as 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, banking, retail, financial services, public safety, technology and healthcare. Our top ten clients in 2010 had an average tenure with us of over ten years. In 2010, our 100 largest clients represented approximately 57% of our revenue and approximately 46% of our revenue came from clients purchasing multiple service offerings.

 

   

Operational Excellence. We increase productivity and performance for our clients by leveraging our expertise to efficiently deliver communications services. Our ability to improve these processes for our clients 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 13 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 a 13% 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 towards 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 Growth Strategy

 

Our strategy is to identify growing markets where we can deploy our existing assets and expertise to strengthen our competitive position. Our strategy is supported by our commitment to superior client service, operational excellence and 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

 

 

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customer relationships and enhanced revenue opportunities. Approximately 46% of our revenue in 2010 came from clients purchasing multiple service offerings from us. As we demonstrate the value that our services provide, often starting with a discrete service, we are frequently able to expand the size and scope of our client relationships.

 

   

Develop New Client Relationships. 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 2010, 17% of our consolidated revenue was generated outside of the U.S. Given the attractive growth dynamics within Europe, Asia-Pacific and Latin America, we intend to further grow our unified communications business in these regions. Our distribution capabilities, including over 385 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, patented technology capabilities and track record of innovation, and we will continue to target services that enable our clients to realize significant benefits. In addition to strengthening our client relationships, we believe our focus on technology facilitates our ongoing evolution towards a diversified, predominantly platform-based and technology-driven operating model.

 

   

Continue to Enhance Our Value Proposition Through Selective Acquisitions. Since our founding in 1986, we have made 29 acquisitions of businesses and technologies with a total value of over $2.7 billion. We will continue to expand our suite of communications 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 some of our highly competitive markets, which could adversely affect our business, results of operations and financial condition;

 

   

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

 

   

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

 

   

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

 

 

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

 

   

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

 

   

we had a negative net worth as of December 31, 2010, which may make it more difficult and costly for us to obtain financing in the future and may otherwise negatively impact our business;

 

   

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

 

   

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

 

   

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

 

   

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

 

Corporate Information

 

We are a Delaware corporation that was founded in 1986. On October 24, 2006, we completed a recapitalization (the “recapitalization”) of the company in a transaction sponsored by an investor group led by Thomas H. Lee Partners, L.P. and Quadrangle Group LLC (the “Sponsors”) pursuant to the Agreement and Plan of Merger, dated as of May 31, 2006, between us and Omaha Acquisition Corp., a Delaware corporation formed by the Sponsors for the purpose of our recapitalization. Pursuant to 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.

 

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

 

 

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The Offering

 

Common stock offered by us

             shares

 

Common stock offered by selling stockholders

             shares

 

Common stock to be outstanding after this offering

             shares
             shares

 

Use of proceeds

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

 

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

 

Principal Stockholders

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

 

Risk factors

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

 

Proposed Nasdaq Global Select Market symbol

“WSTC”

 

The number of shares of our common stock to be outstanding following this offering is based on              shares of our common stock outstanding as of             , 2011, but excludes:

 

   

             shares of common stock issuable upon exercise of options outstanding as of             , 2011 at a weighted average exercise price of $             per share;

 

   

             shares of common stock reserved for future issuance under our 2011 Employee Stock Purchase Plan; and

 

   

             shares of common stock reserved for future issuance under our stock-based compensation plans, including              shares of common stock reserved for issuance under our 2011 Long-Term Incentive Plan, which will become effective on the date of this prospectus, and          shares of common stock reserved for issuance under our Nonqualified Deferred Compensation Plan.

 

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

 

   

assuming an initial public offering price of $             per share, the mid-point of the range set forth on the cover page of this prospectus, the conversion of all outstanding shares of our Class L common

 

 

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stock into              shares of our Class A common stock in connection with this offering and the reverse stock split and reclassification in connection therewith (the “Common Stock Conversion”); and

 

   

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

 

A change in the initial public offering price from that assumed in this prospectus would change the number of shares of our common stock to be outstanding following this offering. For example, a $1.00 increase or decrease in the assumed initial public offering price of $         per share would decrease or increase the actual number of shares of common stock that will be issued and outstanding following the completion of this offering by                  or                 , respectively. See “—Common Stock Conversion.”

 

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

 

Name

   Shares
held
following
Offering
   Cash
proceeds
from
Offering  (3)

Sponsors

     

Thomas H. Lee Funds(1)

     

Quadrangle Group Funds(2)

     

Directors and Executive Officers

     

Thomas B. Barker

     

Anthony J. DiNovi(4)

     

Steven G. Felsher(4)

     

Soren L. Oberg(4)

     

Jeff T. Swenson(4)

     

Nancee R. Berger

     

Mark V. Lavin

     

Paul M. Mendlik

     

David C. Mussman

     

Steven M. Stangl

     

Todd Strubbe

     

David J. Treinen

     

 

  (1)   Includes Thomas H. Lee Equity Fund VI, L.P.; Thomas H. Lee Parallel Fund VI, L.P.; THL Equity Fund VI Investors (West), L.P.; Thomas H. Lee Parallel (DT) Fund VI, L.P.; THL Coinvestment Partners, L.P.; and THL Equity Fund VI Investors (West) HL, L.P. (collectively, the “THL Investors”); Putnam Investment Holdings, LLC; and Putnam Investments Employees’ Securities Company III LLC.
  (2)   Includes Quadrangle Capital Partners II LP; Quadrangle Select Partners II LP; and Quadrangle Capital Partners II-A LP (collectively, the “Quadrangle Investors”).
  (3)  

Includes a payment of approximately $             million to the THL Investors and $             million to the Quadrangle Investors in connection with the termination of a management agreement. See

 

 

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  “Certain Relationships and Related Party Transactions—Transactions Since the Recapitalization—Management Agreement.”
  (4)   Each of Mr. DiNovi, Mr. Felsher, Mr. Oberg and Mr. Swenson is affiliated with a Sponsor. With respect to each such director, the amounts shown include shares of common stock held or cash proceeds received by the Sponsor with which such director is affiliated. Each such director has a pecuniary interest in shares of common stock held by, and cash proceeds received by, the Sponsor with which such director is affiliated.

 

Common Stock Conversion

 

Prior to the completion of this offering, we have two classes of common stock outstanding, Class A common stock and Class L common stock. The Class L common stock is identical to the Class A common stock, except that the Class L common stock is convertible into shares of our Class A common stock as described below, and each share of Class L common stock is entitled to a priority return preference equal to the sum of the $90 per share “base amount” plus an amount sufficient to generate a 12% internal rate of return on that base amount compounded quarterly from October 24, 2006, the date of the recapitalization in which the Class L common stock was originally issued. The aggregate priority return accrued on the issued and outstanding Class L common stock since the recapitalization through                 , the date we expect to sell the shares in this offering, is $            . To the extent that the conversion of the shares of Class L common stock into shares of common stock in connection with this offering occurs on a date other than                 , the aggregate priority return accrued through such conversion date will be adjusted accordingly, based upon a per day amount per share of approximately $0.05.

 

Prior to the sales of shares in this offering, the Common Stock Conversion, in which each share of our Class L common stock will convert into shares of Class A common stock, will occur. We also intend to effect a reverse stock split at that time in connection with the Common Stock Conversion, in which each                  share of Class A common stock will be reclassified and converted into one share of our common stock. As a result of the Common Stock Conversion, each share of Class L common stock will convert into a number of shares of common stock equal to (i) one plus (ii) a fraction, the numerator of which is the unpaid priority return on such share of Class L common stock and the denominator of which is the initial public offering price of a share of common stock in this offering (net of the underwriting discounts and commissions and a pro rata portion, based upon the number of shares being sold in this offering, of the estimated offering expenses payable by us). Assuming an initial public offering price of $         per share, the mid-point of the range set forth on the front cover of this prospectus, each share of Class L common stock will convert into                  shares of Class A common stock, and after giving effect to such conversion, each                  shares of Class A common stock will be reclassified into one share of our common stock, providing for an aggregate of                  shares of common stock outstanding immediately after the Common Stock Conversion but before this offering. Because a change in the assumed initial public offering price would change the denominator in the calculation to determine the number of shares of Class A common stock into which a share of Class L common stock is convertible, the actual number of shares of our common stock that will be outstanding at the time of the completion of this offering may differ from the amount assumed in this prospectus. For example, a $1.00 increase or decrease in the assumed initial public offering price of $           per share, the mid-point of the price range set forth on the front cover of this prospectus, would decrease or increase the actual number of shares of common stock into which each share of Class L common stock is convertible by                  or                 shares, respectively, and the actual aggregate number of shares of common stock that will be issued and outstanding following the completion of this offering would decrease or increase by                  or                 , respectively.

 

 

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Related Party Payments

 

The following table sets forth total value of equity awards granted or vested in connection with this offering based on an assumed initial public offering price of $         per share, the mid-point of the range set forth on the cover page of this prospectus:

 

Executive Officer

   Value of Equity
Awards Granted or
Vested

Thomas B. Barker

  

Nancee R. Berger

  

Mark V. Lavin

  

Paul M. Mendlik

  

David C. Mussman

  

Steven M. Stangl

  

Todd Strubbe

  

David J. Treinen

  

 

Upon the completion of this offering, approximately $             million will be paid to the THL Investors and approximately $         million will be paid to the Quadrangle Investors pursuant to existing agreements with such parties. See “Use of Proceeds” and “Certain Relationships and Related Party Transactions—Transactions Since the Recapitalization—Management Agreement.”

 

 

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SUMMARY CONSOLIDATED FINANCIAL DATA

 

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

 

     Year Ended December 31,     Nine Months Ended
September 30,
 
     2008     2009     2010     2010     2011  
     (in millions, except per share amounts)  

Consolidated Statement of Operations Data:

          

Revenue

   $ 2,247.4      $ 2,375.7      $ 2,388.2      $ 1,788.8      $ 1,866.4   

Cost of services

     1,015.0        1,067.8        1,057.0        784.0        832.2   

Selling, general and administrative expenses

     881.6        907.3        911.0        695.2        660.7   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     350.8        400.6        420.2        309.6        373.5   

Interest expense

     (313.0     (254.1     (252.7     (182.4     (203.8

Refinancing expense

     —          —          (52.8     —          —     

Other income (expense)

     (8.6     1.4        6.1        2.9        1.8   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income tax expense

     29.2        147.9        120.8        130.1        171.5   

Income tax expense

     11.7        56.9        60.5        66.2        65.2   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     17.5        91.0        60.3        63.9        106.3   

Less net income (loss)—noncontrolling interest

     (2.0     2.8        —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income—West Corporation

   $ 19.5      $ 88.2      $ 60.3      $ 63.9      $ 106.3   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (loss) per common share

          

Diluted—Class L

   $ 12.24      $ 16.67      $ 16.37      $ 11.90      $ 13.22   

Diluted—Class A

   $ (1.23   $ (0.98   $ (1.25   $ (0.68   $ (0.36

Pro forma earnings per common share(1)

          

 

     Year Ended December 31,     Nine Months Ended
September 30,
 
     2008     2009     2010     2010     2011  
     (dollars in millions)  

Selected Other Data:

          

Net cash flows from operating activities

   $ 287.4      $ 272.9      $ 312.8      $ 294.2      $ 290.6   

Net cash flows used in investing activities

     (597.5     (112.6     (137.9     (113.1     (292.0

Net cash flows used in financing activities

     342.0        (271.8     (133.7     (100.9     (23.3

Capital expenditures

     108.8        122.7        122.0        84.8        72.3   

Adjusted EBITDA(2)

     633.6        647.9        654.7        491.8        513.2   

Adjusted EBITDA margin(3)

     28.2     27.3     27.4     27.5     27.5

 

     As of September 30, 2011
     Actual     Pro Forma  As
Adjusted(4)
     (in millions)

Consolidated Balance Sheet Data:

    

Cash and cash equivalents

   $ 74.8     

Working capital

   $ 173.2     

Total assets

   $ 3,222.9     

Long-term debt, net of current portion

   $ 3,504.8     

Class L common stock

   $ 1,642.3     

Total stockholders’ deficit

   $ (2,568.0  

 

 

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  (1)   Represents earnings per common share after giving effect to the Common Stock Conversion, assuming an initial public offering price of $           per share, the mid-point of the range set forth on the front cover of this prospectus. Because the number of shares of Class A common stock into which a share of Class L common stock is convertible will be determined by reference to the initial public offering price in this offering, a change in the assumed initial public offering price would have a corresponding impact on earnings per common share as presented. See “Prospectus Summary—The Offering—Common Stock Conversion.”
  (2)   The term “EBITDA” refers to earnings before interest expense, taxes, depreciation and amortization, and the term “Adjusted EBITDA” refers to earnings before interest expense, share based compensation, taxes, depreciation and amortization, non-recurring litigation settlement costs, impairments and other non-cash reserves, transaction costs and after-acquisition synergies. We present Adjusted EBITDA because our management team uses it as an important supplemental measure in evaluating our operating performance and preparing internal forecasts and budgets, and we believe it is frequently used by securities analysts, investors and other interested parties in the evaluation of companies in our industry. We also use Adjusted EBITDA as a liquidity measure in assessing compliance with our senior credit facilities. For a reconciliation of Adjusted EBITDA to cash flows from operating activities and a description of the material covenants contained in our senior credit facilities, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Debt Covenants.” We believe that the presentation of Adjusted EBITDA is useful because it provides important insight into our profitability trends and allows management and investors to analyze operating results with and without the impact of certain non-cash charges, such as depreciation and amortization, share-based compensation and impairments and other non-cash reserves, as well as certain litigation settlement and transaction costs and after-acquisition synergies. Although we use Adjusted EBITDA as a financial measure to assess the performance of our business and as a measure of our liquidity, Adjusted EBITDA is not a measure of financial performance or liquidity under generally accepted accounting principles (“GAAP”) and the use of Adjusted EBITDA is limited because it does not include certain material costs, such as depreciation, amortization and interest, necessary to operate our business and includes adjustments for synergies that have not been realized. In addition, as disclosed below, certain adjustments included in our calculation of Adjusted EBITDA are based on management’s estimates and do not reflect actual results. For example, post-acquisition synergies included in Adjusted EBITDA are determined in accordance with our senior credit facilities, which provide for an adjustment to EBITDA, subject to certain specified limitations, for reasonably identifiable and factually supportable cost savings projected by us in good faith to be realized as a result of actions taken following an acquisition. While we use net income as a measure of performance, we also believe that Adjusted EBITDA, when presented along with net income, provides balanced disclosure which, for the reasons set forth above, is useful to investors and management in evaluating our operating performance and profitability. Adjusted EBITDA included in this prospectus should be considered in addition to, and not as a substitute for, net income (loss) as calculated in accordance with GAAP as a measure of performance. Adjusted EBITDA, as presented, may not be comparable to similarly titled measures of other companies. Set forth below is a reconciliation of Adjusted EBITDA to net income.

 

 

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(continued)

 

    Year Ended December 31,     Nine Months Ended
September 30,
 
    2008     2009     2010     2010     2011  
   

(in millions)

 

Net income

  $ 17.5      $ 91.0      $ 60.3      $ 63.9      $ 106.3   

Interest expense and other financing charges

    313.0        254.1        252.7        182.4        205.9   

Depreciation and amortization

    183.5        188.3        170.3        128.3        127.9   

Income tax expense

    11.7        56.9        60.5        66.2        65.2   

Goodwill impairment

                  37.7        37.7        —     

Refinancing expense

                  52.8        —          —     

Provision for share-based compensation(a)

    1.4        3.8        4.2        2.7        3.5   

Acquisition synergies and transaction costs(b)

    21.0        18.0       
5.1
  
    4.4        9.0   

Non-cash portfolio impairments(c)

    76.4        25.5              
—  
  
   
—  
  

Site closure and other impairments(d)

    2.7        6.9        6.4        4.2        0.8   

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

    6.4        (0.2     1.2        1.7        (3.7

Litigation settlement costs(f)

           3.6        3.5        0.3        (1.7
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA(g)

  $ 633.6      $ 647.9      $ 654.7      $ 491.8      $ 513.2   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

  (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 such amount was not included in the calculation of Adjusted EBITDA for purposes of our senior credit facilities prior to 2009 and were not determined to be significant.
  (b)   Represents, for each period presented, unrealized synergies for acquisitions, consisting primarily of headcount reductions and telephony-related savings, direct acquisition expenses, transaction costs incurred with the recapitalization and the exclusion of the negative EBITDA in one acquired entity, which was an unrestricted subsidiary under the indentures governing our outstanding notes. Amounts shown are permitted to be added to “EBITDA” for purposes of calculating our compliance with certain covenants under our credit facility and the indentures governing our outstanding notes.
  (c)   Represents non-cash portfolio receivable allowances.
  (d)   Represents site closures and other asset impairments.
  (e)   Represents the unrealized loss (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 $5.6 million for the nine months ended September 30, 2011, $(1.2) million in the nine months ended September 30, 2010, $(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 Adjusted EBITDA as a percentage of revenue.
  (4)   The pro forma as adjusted column in the consolidated balance sheet data table reflects the pro forma effect of the Common Stock Conversion, assuming an initial public offering price of $           per share, the mid-point of the range set forth on the front cover of this prospectus. Because the number of shares of Class A common stock into which a share of Class L common stock is convertible will be determined by reference to the initial public offering price in this offering, a change in the assumed initial public offering price would have a corresponding impact on the pro forma as adjusted column in the consolidated balance sheet data table as presented. See “Prospectus Summary—The Offering—Common Stock Conversion.” The pro forma as adjusted column gives further effect to the sale of             shares of common stock in this offering, at an assumed initial public offering price of $             per share, the mid-point of the range set forth on the cover of this prospectus, and after deducting estimated underwriting discounts and commissions and offering expenses payable by us and the application of our net proceeds from this offering.

 

 

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RISK FACTORS

 

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

 

Risks Related to Our Business

 

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

 

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

 

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

 

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

 

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

 

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.

 

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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.

 

Growth in our IP-Based UC Solutions and Emergency Communications businesses depend 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 operating results will be materially 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 represented approximately 57% of our total revenue for the year ended December 31, 2010 with one client, AT&T, accounting for approximately 11% of our total revenue. Subject to advance notice requirements and a specified wind down of purchases, AT&T may terminate certain of its contracts with us with or without cause at any time. If we fail to retain a significant amount of business from AT&T or any of our other significant clients, our business, results of operations and financial condition could be adversely affected.

 

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

 

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 economy or other national economies important to our businesses may adversely affect our clients’ level of spending, ability to obtain financing for purchases and ability to make timely payments to us for our services, which could require us to increase our allowance for doubtful accounts, negatively impact our days sales outstanding and adversely affect our results of operations.

 

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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, 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.

 

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 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

 

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time consuming and costly. We specifically train our marketing representatives to handle calls in an approved manner. While we believe we are in compliance in all material respects with all federal and state telemarketing regulations, compliance with all such requirements is costly and time consuming. In addition, notwithstanding our compliance efforts, any failure on our part to comply with the registration and other legal requirements applicable to companies engaged in telemarketing activities could have an adverse impact on our business. We could become subject to litigation by private parties and governmental bodies alleging a violation of applicable laws or regulations, which could result in damages, regulatory fines, penalties and possible other relief under such laws and regulations and the accompanying costs and uncertainties of such litigation and enforcement actions.

 

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

 

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

 

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

 

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

 

Our 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

 

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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.

 

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 condition. In particular, the implementation of the recently enacted 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. In July 2009, the federal minimum wage rate increased to $7.25 per hour. Further increases in the minimum wage or labor regulation could increase our labor costs.

 

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 U.S.;

 

   

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

 

   

longer accounts receivable payment cycles and collection difficulties;

 

   

political and economic instability;

 

   

fluctuations in currency exchange rates;

 

   

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

 

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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.

 

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

 

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

 

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

 

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

 

   

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

 

   

the unanticipated loss of key employees of the acquired businesses;

 

   

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

 

   

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

 

   

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

 

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

 

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

 

   

the financial underperformance of these acquisitions;

 

   

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

 

   

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

 

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

 

As of September 30, 2011, we had goodwill and intangible assets, net of accumulated amortization, of approximately $1.8 billion and $350.3 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. During 2010, the Company identified impairment indicators in one of its 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 a fair value of zero. The impairment charge primarily resulted from the decline in direct response business revenue in 2010 and continued general decline in the direct response business. These events caused us to revise downward our projected future cash flows for this reporting unit. The impairment charge was recorded in SG&A and is non-deductible for tax purposes. Our receivables management reporting unit, which had approximately $228.5 million of goodwill as of September 30, 2011, is our reporting unit with the least amount of cushion (as a percentage of carrying value) between its fair value and carrying value. 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 a material 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. Any failure to

 

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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 September 30, 2011, our aggregate long-term indebtedness was $3,516.4 million. For the nine months ended September 30, 2011, our consolidated interest expense was approximately $203.8 million. Following the completion of this offering, we expect annual interest expense to be reduced by approximately $            , assuming net proceeds to us in this offering of approximately $            , based on an assumed initial public offering price of $             per share, the mid-point of the range on the cover of this prospectus. Our ability to make scheduled payments or to refinance our debt obligations and to fund our other liquidity needs depends on our financial and operating performance, which is subject to prevailing economic and competitive conditions and to certain financial, business and other factors beyond our control. We cannot assure you 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. See “Special Note Regarding Forward-Looking Statements” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”

 

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, sell assets or operations, seek additional capital or restructure or refinance our indebtedness. We cannot assure you that we would be able to take any of these actions, that these actions would be successful and permit us to meet our scheduled debt service obligations or that these actions would be permitted under the terms of our existing or future debt agreements, including our senior secured credit facilities or the indentures that govern our outstanding notes. Our senior secured credit facilities documentation and the indentures that govern the notes restrict our ability to dispose of assets and use the proceeds from the disposition. As a result, we may not be able to consummate those dispositions or use the proceeds to meet our debt service or other obligations, and any proceeds that are available may not be adequate to meet any debt service or other obligations then due.

 

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

 

   

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

 

   

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

 

   

we could be forced into bankruptcy or liquidation.

 

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

 

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

 

   

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

 

   

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

 

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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; and

 

   

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

 

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

 

We had a negative net worth as of September 30, 2011, which may make it more difficult and costly for us to obtain financing in the future and may otherwise negatively impact our business.

 

As of September 30, 2011, we had a negative net worth of $2,568.0 million. Our negative net worth primarily resulted from the incurrence of indebtedness to finance our recapitalization in 2006. As a result of our negative net worth, we may face greater difficulty and expense in obtaining future financing than we would face if we had a greater net worth, which may limit our ability to meet our needs for liquidity or otherwise compete effectively in the marketplace.

 

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

 

Subject to the restrictions in our debt agreements, we and certain of our subsidiaries may incur significant additional indebtedness, including additional secured indebtedness. Although the terms of our debt agreements contain restrictions on the incurrence of additional indebtedness, these restrictions are subject to a number of qualifications and exceptions, and additional indebtedness incurred in compliance with these restrictions could be significant. As of September 30, 2011, under the terms of our debt agreements, we would be permitted to incur up to approximately $848.6 million of additional tranches of term loans or increases to the revolving credit facility. Depending on the application of net proceeds received by us in this offering, our ability to incur additional indebtedness under our senior secured credit facilities could increase substantially and we may reborrow a portion of the debt repaid following this offering. If new debt is added to our and our subsidiaries’ current debt levels, the related risks that we face after this offering could increase.

 

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

 

The reduction in financial institutions’ willingness or ability to lend has increased the cost of capital and reduced the availability of credit. Although we currently believe that the financial institutions syndicated under our senior secured credit facilities will be able to fulfill their commitments, there is no assurance that these institutions will be able to continue to do so, which could have a material adverse impact on our business and financial condition.

 

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Risks Related to This Offering and Our Common Stock

 

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

 

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

 

The price of our common stock could be volatile.

 

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

 

   

quarterly fluctuations in our operating results;

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

general economic or political conditions.

 

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

 

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

 

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

 

After this offering, we intend to register approximately              shares of common stock that are reserved for issuance upon exercise of options granted under our stock option plans. Once we register these shares, they can be sold in the public market upon issuance, subject to restrictions under the securities laws applicable to resales by affiliates.

 

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Investors in this offering will suffer immediate and substantial dilution.

 

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

 

Moreover, we issued options in the past to acquire common stock at prices significantly below the assumed initial public offering price. As of                     , 2011,              shares of common stock were issuable upon exercise of outstanding stock options with a weighted average exercise price of $             per share. To the extent that these outstanding options are ultimately exercised, you will incur further dilution.

 

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

 

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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 bylaws or Delaware law that has the effect of delaying or deterring a change in control could limit the opportunity for our stockholders to receive a premium for their shares of our common stock, and could also affect the price that some investors are willing to pay for our common stock.

 

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

 

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

 

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our company and make some transactions more difficult or impossible without the support of these stockholders. The interests of these stockholders may not always coincide with our interests as a company or the interest of other stockholders. Accordingly, these stockholders could cause us to enter into transactions or agreements that you would not approve or make decisions with which you may disagree.

 

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

 

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

 

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

 

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

 

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

 

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

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

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

 

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

 

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

 

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USE OF PROCEEDS

 

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

 

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

 

We expect to use approximately $         million of the net proceeds from this offering received by us to repay or repurchase indebtedness, including amounts outstanding under our senior credit facilities and our senior subordinated notes. We do not currently have a firm expectation as to how we will allocate the reduction of indebtedness among these borrowing arrangements but intend to determine the allocation following the completion of this offering based on a number of factors, including remaining maturity, applicable interest rates, available pricing for repurchases, outstanding balance and ability to reborrow. As of September 30, 2011:

 

   

approximately $448.4 million was outstanding under our amended and restated senior secured term loan facility due 2013 at variable interest rates (LIBOR plus 2.375% at September 30, 2011);

 

   

approximately $1,467.9 million was outstanding under our amended and restated senior secured term loan facility due 2016 at variable interest rates (LIBOR plus 4.25% at September 30, 2011);

 

   

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

 

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

 

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

 

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

 

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DIVIDEND POLICY

 

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

 

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CAPITALIZATION

 

The following table shows our capitalization as of September 30, 2011:

 

   

on an actual basis; and

 

   

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

 

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

 

     As of September 30, 2011  
     Actual     Pro Forma
As Adjusted(1)
 
     (unaudited)
(in thousands)
 

Cash and cash equivalents

   $ 74,808      $     
  

 

 

   

 

 

 

Long-term obligations, including current portion:

    

Senior Secured Term Loan Facility, due 2013

   $ 448,434      $     

Senior Secured Term Loan Facility, due 2016

     1,467,931     

11% Senior Subordinated Notes, due 2016

     450,000     

8 5/8% Senior Notes, due 2018

     500,000     

7 7/8% Senior Notes, due 2019

     650,000     

Class L common stock, $0.001 par value, 100,000 shares authorized,              shares issued and 9,977 outstanding, actual; no shares authorized, and no shares issued and outstanding, pro forma

     1,642,283          

Stockholders’ deficit:

    

Class A common stock, $0.001 par value, 400,000 shares authorized, 88,226 shares issued and 87,896 shares outstanding, actual; no shares authorized, and no shares issued and outstanding, pro forma

     88          

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

              

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

         

Retained deficit

     (2,543,767  

Accumulated other comprehensive loss

     (21,043  

Treasury stock at cost (330 shares)

     (3,290  
  

 

 

   

Total Stockholders’ deficit

     (2,568,012  
  

 

 

   

 

 

 

Total capitalization

   $ 2,590,636      $                
  

 

 

   

 

 

 

 

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  (1)   The pro forma as adjusted information discussed above is illustrative only and will change based on the actual initial public offering price and other terms of this offering. A $1.00 increase or decrease in the assumed initial public offering price per share would decrease or increase long-term obligations, including current portion, by $             million, would increase or decrease additional paid-in capital by $             million and would decrease or increase total stockholders’ deficit and would increase or decrease total capitalization each by $             million, after deducting the underwriting discounts and commissions and the estimated offering expenses payable by us. An increase or decrease of 1.0 million shares in the number of shares offered by us would decrease or increase long-term obligations, including current portion, by $             million, would increase or decrease additional paid-in capital by $             million, would decrease or increase total stockholders’ deficit and would increase or decrease total capitalization each by approximately $             million, assuming the assumed initial public offering price of $             per share, the mid-point of the range set forth on the front cover of this prospectus, remains the same and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. In addition, because the number of shares of Class A common stock into which a share of Class L common stock is convertible will be determined by reference to the initial public offering price in this offering, a change in the initial public offering price from that assumed in this prospectus would have a corresponding impact on the number of shares to be outstanding on a pro forma basis. For example, a $1.00 increase or decrease in the initial public offering price per share from that assumed in this prospectus would decrease or increase the actual number of shares of common stock that will be issued and outstanding on a pro forma basis by                  or                 , respectively, and would result in a decrease or increase in additional paid-in capital by $             or $            , respectively. See “Prospectus Summary—The Offering—Common Stock Conversion.”

 

The share information as of September 30, 2011 shown in the table above excludes:

 

   

             shares of common stock issuable upon exercise of options outstanding as of September 30, 2011 at a weighted average exercise price of $             per share;

 

   

             shares of common stock reserved for future issuance under our 2011 Employee Stock Purchase Plan; and

 

   

             shares of common stock reserved for future issuance under our stock-based compensation plans, including              shares of common stock reserved for issuance under our 2011 Long-Term Incentive Plan, which will become effective on the date of this prospectus, and              shares of common stock reserved for issuance under our Nonqualified Deferred Compensation Plan.

 

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DILUTION

 

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

 

Our net tangible book value at September 30, 2011 was $(3.1) billion, and our pro forma net tangible book value per share was $            . Pro forma net tangible book value per share before the offering has been determined by dividing net tangible book value (total book value of tangible assets less total liabilities) by the number of shares of common stock outstanding at September 30, 2011 (after giving effect to the Common Stock Conversion at an assumed initial public offering price of $             per share, the mid-point of the range set forth on the front cover of this prospectus).

 

After giving effect to the sale of our common stock in this offering at an assumed initial public offering price of $             per share, the mid-point of the price range set forth on the cover page of this prospectus, and after deducting the underwriting discount and estimated offering expenses payable by us, our pro forma net tangible book value at September 30, 2011 would have been $             million, or $             per share. This represents an immediate increase in net tangible book value per share of $             to the existing stockholders and dilution in net tangible book value per share of $             to new investors who purchase shares in the offering. The following table illustrates this per share dilution to new investors:

 

Assumed initial public offering price per share

   $                

Pro forma net tangible book value per share as of September 30, 2011

   $     

Increase per share attributable to new investors in this offering

  

Pro forma net tangible book value per share after this offering

  

Dilution of net tangible book value per share to new investors

   $     
  

 

 

 

 

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. In addition to the effect that the change in our expected net proceeds would have on our assumed pro forma net tangible book value after this offering, because the number of shares of Class A common stock into which a share of Class L common stock is convertible will be determined by reference to the initial public offering price in this offering, a change in the initial public offering price from that assumed in this prospectus would have a corresponding impact on the number of shares to be outstanding on a pro forma basis. See “Prospectus Summary—The Offering—Common Stock Conversion.” For example, a $1.00 increase or decrease in the initial public offering price from that assumed in this prospectus of $             per share, the mid-point of the price range set forth on the front cover of this prospectus, would increase or decrease pro forma net tangible book value by approximately $             million, or approximately $             per share, and the dilution per share to investors in this offering by approximately $             per share, assuming that the number of shares offered by us set forth on the front cover of this prospectus remains the same and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. We may also increase or decrease the number of shares we are offering. An increase of 1.0 million shares in the number of shares offered by us would result in a pro forma net tangible book value of approximately $             million, or approximately $             per share, and the dilution per share to investors in this offering would be approximately $             per share, assuming the assumed initial public offering price of $             per share, the mid-point of the price range set forth on the front cover of this prospectus, remains the same and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, a decrease of 1.0 million shares in the number of shares offered by us would result in a pro forma net tangible book value of approximately $             million, or approximately $             per share, and the dilution per share to investors in this offering would be approximately $             per share, assuming the assumed initial public offering price of

 

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$             per share, the mid-point of the price range set forth on the front cover of this prospectus, remains the same and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

 

The following table summarizes, on the same pro forma basis as of September 30, 2011, the total number of shares of common stock purchased from us, the total consideration paid to us and the average price per share paid by the existing stockholders and by new investors purchasing shares in this offering (amounts in thousands, except percentages and per share data):

 

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

Existing stockholders

               $                             $                

New investors

            
  

 

  

 

 

   

 

 

    

 

 

   

 

 

 

Total

        100   $           100   $     
  

 

  

 

 

   

 

 

    

 

 

   

 

 

 

 

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

 

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SELECTED CONSOLIDATED FINANCIAL DATA

 

The following table sets forth a summary of our selected consolidated financial data. We derived the selected consolidated financial data as of December 31, 2010 and December 31, 2009 and for the years ended December 31, 2010, December 31, 2009, and December 31, 2008 from our consolidated financial statements included elsewhere in this prospectus. The selected consolidated financial data as of December 31, 2008, December 31, 2007, and December 31, 2006, and for the years ended December 31, 2007 and December 31, 2006 have been derived from our financial statements for such years, which are not included in this prospectus. In January 2009, we adopted Accounting Standards Codification Topic 810, Consolidation (“ASC 810”) (formerly Statement of Financial Accounting Standard No. 160, Noncontrolling Interests in Consolidated Financial Statements—An Amendment of ARB No. 51.), which required retrospective application and accordingly all prior periods have been recast to reflect the retrospective adoption.

 

We derived the selected consolidated financial data for the nine months ended September 30, 2011 and September 30, 2010 from our unaudited condensed consolidated financial statements included elsewhere in this prospectus, which, in the opinion of our management, have been prepared on the same basis as the audited financial statements and reflect all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of our results of operations and financial position for such periods. Results for the nine months ended September 30, 2011 and September 30, 2010 are not necessarily indicative of the results that may be expected for the entire year.

 

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

 

    Year Ended December 31,     Nine Months Ended
September 30,
 
    2006     2007     2008     2009     2010     2010     2011  
    (amounts in thousands, except per share amounts)  

Statement of Operations Data:

             

Revenue

  $ 1,856,038      $ 2,099,492      $ 2,247,434      $ 2,375,748      $ 2,388,211      $ 1,788,780      $ 1,866,441   

Cost of services

    818,522        912,389        1,015,028        1,067,777        1,057,008        783,979        832,229   

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

    800,301        840,532        881,586        907,358        911,022        695,210        660,707   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

    237,215        346,571        350,820        400,613        420,181        309,591        373,505   

Interest expense

    (94,804     (332,372     (313,019     (254,103     (252,724     (182,364     (203,756

Refinancing expense

                                (52,804     —          —     

Other income (expense)

    8,144        13,396        (8,621     1,326        6,127        2,858        1,769   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income tax expense

    150,555        27,595        29,180        147,836        120,780        130,085        171,518   

Income tax expense

    65,505        6,814        11,731        56,862        60,476        66,218        65,213   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

    85,050        20,781        17,449        90,974        60,304        63,867        106,305   

Less net income (loss)—noncontrolling interest

    16,287        15,399        (2,058     2,745               —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income—West Corporation

  $ 68,763      $ 5,382      $ 19,507      $ 88,229      $ 60,304      $ 63,867      $ 106,305   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Basic Class L

  $ 2.05      $ 11.08      $ 12.78      $ 17.45      $ 17.07      $ 12.41      $ 13.78   

Diluted Class L

  $ 1.98      $ 10.68      $ 12.24      $ 16.67      $ 16.37      $ 11.90      $ 13.22   

Basic Class A

  $ 0.66      $ (1.20   $ (1.23   $ (0.98   $ (1.25   $ (0.68   $ (0.36

Diluted Class A

  $ 0.64      $ (1.20   $ (1.23   $ (0.98   $ (1.25   $ (0.68   $ (0.36

Pro forma earnings per common share(2)

             

 

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    Year Ended December 31,     Nine Months Ended
September 30,
 
    2006     2007     2008     2009     2010     2010     2011  
    (dollars in thousands)  

Selected Other Data:

             

Net cash flows from operating activities

  $ 215,739      $ 263,897      $ 287,381      $ 272,857      $ 312,829      $ 294,202      $ 290,608   

Net cash flows used in investing activities

  $ (812,253   $ (454,946   $ (597,539   $ (112,615   $ (137,896   $ (113,115   $ (291,967

Net cash flows from (used in) financing activities

  $ 780,742      $ 118,106      $ 341,971      $ (271,844   $ (133,651   $ (100,866   $ (23,342

Capital expenditures

  $ 113,895      $ 103,647      $ 108,765      $ 122,668      $ 122,049      $ 84,825      $ 72,314   

Adjusted EBITDA(3)

  $ 501,942      $ 584,123      $ 633,551      $ 647,941      $ 654,650      $ 491,807      $ 513,188   

Adjusted EBITDA margin(4)

    27.0     27.8     28.2     27.3     27.4     27.5     27.5

 

    As of December 31,     As of September 30,  
    2006     2007     2008     2009     2010     2010     2011  
    (dollars in thousands)              

Balance Sheet Data:

             

Working capital

  $ 128,570      $ 187,795      $ 211,410      $ 175,007      $ 213,465      $ 228,652      $ 173,174   

Property and equipment, net

  $ 294,707      $ 298,645      $ 320,152      $ 333,267      $ 341,366      $ 333,384      $ 332,642   

Total assets

  $ 2,535,856      $ 2,846,490      $ 3,314,789      $ 3,045,262      $ 3,005,250      $ 3,074,293      $ 3,222,872   

Total debt

  $ 3,287,246      $ 3,596,691      $ 3,946,127      $ 3,633,928      $ 3,533,566      $ 3,534,865      $ 3,516,365   

Class L common stock

  $ 903,656      $ 1,029,782      $ 1,158,159      $ 1,332,721      $ 1,504,445      $ 1,457,257      $ 1,642,283   

Total Stockholders’ equity (deficit)

  $ (2,117,255   $ (2,227,198   $ (2,360,747   $ (2,425,465   $ (2,543,500   $ (2,501,320   $ (2,568,012

 

  (1)   Includes stock based compensation of $28,738, $1,767, $2,429, $3,840 and $4,233 for the years ended December 31, 2006, 2007, 2008, 2009 and 2010, respectively and $2,682 and $3,537 for the nine months ended September 30, 2010 and 2011, respectively. 2006 Statement of Operations Data also includes $78.7 million in recapitalization expenses.
  (2)   Represents earnings per common share after giving effect to the Common Stock Conversion, assuming an initial public offering price of $             per share, the mid-point of the range set forth on the front cover of this prospectus. Because the number of shares of Class A common stock into which a share of Class L common stock is convertible will be determined by reference to the initial public offering price in this offering, a change in the assumed initial public offering price would have a corresponding impact on earnings per common share as presented. See “Prospectus Summary—The Offering—Common Stock Conversion.”
  (3)   The term “EBITDA” refers to earnings before interest expense, taxes, depreciation and amortization, and the term “Adjusted EBITDA” refers to earnings before interest expense, share based compensation, taxes, depreciation and amortization, non-recurring litigation settlement costs, impairments and other non-cash reserves, transaction costs and after-acquisition synergies. We present Adjusted EBITDA because our management team uses it as an important supplemental measure in evaluating our operating performance and preparing internal forecasts and budgets and we believe it is frequently used by securities analysts, investors and other interested parties in the evaluation of companies in our industry. We also use Adjusted EBITDA as a liquidity measure in assessing compliance with our senior credit facilities. For a reconciliation of Adjusted EBITDA to cash flows from operating activities and a description of the material covenants contained in our senior credit facilities, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Debt Covenants.” We believe that the presentation of Adjusted EBITDA is useful because it provides important insight into our profitability trends and allows management and investors to analyze operating results with and without the impact of certain non-cash charges, such as depreciation and amortization, share-based compensation and impairments and other non-cash reserves, as well as certain litigation settlement and transaction costs and after-acquisition synergies. Although we use Adjusted EBITDA as a financial measure to assess the performance of our business and as a measure of our liquidity, Adjusted EBITDA is not a measure of financial performance or liquidity under generally accepted accounting principles (“GAAP”) and the use of Adjusted EBITDA is limited because it does not include certain material costs, such as depreciation, amortization and interest, necessary to operate our business and includes adjustments for synergies that have not been realized. In addition, as disclosed below, certain adjustments included in our calculation of Adjusted EBITDA are based on management’s estimates and do not reflect actual results. For example, post-acquisition synergies included in Adjusted EBITDA are determined in accordance with our senior credit facilities, which provide for an adjustment to EBITDA, subject to certain specified limitations, for reasonably identifiable and factually supportable cost savings projected by us in good faith to be realized as a result of actions taken following an acquisition. While we use net income as a measure of performance, we also believe that Adjusted EBITDA, when presented along with net income, provides balanced disclosure which, for the reasons set forth above, is useful to investors and management in evaluating our operating performance and profitability. Adjusted EBITDA included in this prospectus should be considered in addition to, and not as a substitute for, net income (loss) as calculated in accordance with GAAP as a measure of performance. Adjusted EBITDA, as presented, may not be comparable to similarly titled measures of other companies. Set forth below is a reconciliation of Adjusted EBITDA to net income.

 

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    For the year ended December 31,     Nine Months Ended
September 30,
 
    2006     2007     2008     2009     2010     2010     2011  
    (dollars in thousands)  

Net income

  $ 85,050      $ 20,781      $ 17,449      $ 90,974      $ 60,304      $ 63,867      $ 106,305   

Interest expense and other financing charges

    94,803        332,372        313,019        254,103        252,724        182,364        205,843   

Depreciation and amortization

    136,979        182,820        183,487        188,347        170,331        128,363        127,915   

Income tax expense

    65,505        6,814        11,731        56,862        60,476        66,218        65,213   

Goodwill impairment

                                37,675        37,675        —     

Refinancing expense

                                52,804        —          —     

Provision for share-based compensation(a)

    28,738        1,276        1,404        3,840        4,233        2,682        3,537   

Acquisition synergies and transaction costs(b)

    89,562        22,006        20,985        18,003        5,035        4,409        8,955   

Non-cash portfolio impairments(c)

           1,004        76,405        25,464               —          —     

Site closure and other impairments(d)

           1,309        2,644        6,976        6,365        4,209        810   

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

                  6,427        (229     1,199        1,690        (3,728

Litigation settlement costs(f)

           15,741               3,601        3,504        330        (1,662

Synthetic lease interest(g)

    1,305                                    —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA(h)

  $ 501,942      $ 584,123      $ 633,551      $ 647,941      $ 654,650      $ 491,807      $ 513,188   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

  (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 and $0.5 million in 2008 and 2007, respectively, as such amounts were not included in the calculation of Adjusted EBITDA for purposes of our senior credit facilities prior to 2009 and were not determined to be significant.
  (b)   Represents, for each period presented, unrealized synergies for acquisitions, consisting primarily of headcount reductions and telephony-related savings, direct acquisition expenses, transaction costs incurred with the recapitalization and the exclusion of the negative EBITDA in one acquired entity, which was an unrestricted subsidiary under the indentures governing our outstanding notes. Amounts shown are permitted to be added to “EBITDA” for purposes of calculating our compliance with certain covenants under our credit facility and the indentures governing our outstanding notes.
  (c)   Represents non-cash portfolio receivable allowances.
  (d)   Represents site closures and other asset impairments.
  (e)   Represents the unrealized loss (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)   Represents interest incurred on a synthetic building lease, which was purchased in September 2006.
  (h)   Adjusted EBITDA does not include pro forma adjustments for acquired entities of $5.6 million for the nine months ended September 30, 2011, $(1.2) million in the nine months ended September 30, 2010, $(0.1) million in 2010, $2.0 million in 2009, $49.1 million in 2008 and $9.1 million in 2007 as is permitted in our debt covenants.
  (4)   Represents Adjusted EBITDA as a percentage of revenue.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

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

 

Business Overview

 

We are a leading provider of technology-driven, outsourced communications services. The scale and processing capacity of our proprietary technology platforms, combined with our expertise in managing voice and data transactions, enable us to offer a broad portfolio of services including conferencing and collaboration, alerts and notifications, emergency communications and business processing outsourcing. Our services 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, banking, retail, financial services, public safety, technology and healthcare. We have sales and operations in the United States, Canada, Europe, the Middle East, Asia Pacific and Latin America.

 

Since our founding in 1986, we have invested significantly to expand our technology platforms and develop our operational processes to meet the complex communication needs of our clients. We have evolved our business mix from labor-intensive communications services to focus on diversified and platform-based, technology-driven services. For the fiscal year ended December 31, 2010, we grew revenue by 0.5% over 2009 to $2,388.2 million and generated $654.7 million in Adjusted EBITDA, or 27.4% in Adjusted EBITDA margins, $60.3 million in net income and $312.8 million in net cash flows from operating activities. See “Selected Consolidated Financial Data.”

 

Investing in technology and developing specialized expertise in the industries we serve are critical components to our strategy of enhancing our services and our value proposition. In 2010, we managed approximately 24.0 billion telephony minutes and over 115 million conference calls, facilitated over 260 million 9-1-1 calls, and delivered over 720 million notification calls and data messages. At September 30, 2011, with approximately 665,000 telephony ports to handle conference calls, alerts and notifications and customer service, we believe our platforms provide scale and flexibility to handle greater transaction volume than our competitors, offer superior service and develop new offerings. These ports include approximately 313,000 Internet Protocol (“IP”) ports, which we believe provide us with the only large-scale proprietary IP-based global conferencing platform deployed and in use today. Our technology-driven platforms allow us to provide a broad range of complementary automated and agent-based service offerings to our diverse client base.

 

Financial Operations Overview

 

Revenue

 

In our Unified Communications segment, our conferencing and collaboration services, 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.

 

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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 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.

 

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

 

Selling, General and Administrative Expenses

 

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

 

Key Drivers Affecting Our Results of Operations

 

Factors Related to Our Indebtedness. In connection with our recapitalization in 2006, we incurred a significant amount of additional indebtedness. Accordingly, our interest expense has increased significantly over the period since the recapitalization. During 2009 and 2010, in order to improve our debt maturity profile, we extended the maturity for $1.5 billion of our existing term loans from October 24, 2013 to July 15, 2016, repaid $500.0 million of our term loans due October 24, 2013 with the proceeds of a new $500.0 million 8 5/8% senior notes offering with a maturity date of October 1, 2018 and refinanced $650.0 million of senior notes due October 2014 with the proceeds of a new $650.0 million 7 7/8% senior notes offering with a maturity date of January 15, 2019. On September 12, 2011, the revolving trade accounts receivable financing facility was amended and extended. The amended and extended facility provides for up to $150.0 million in available financing and the maturity is extended to September 12, 2014, reduces the unused commitment fee and lowers the LIBOR spread on borrowings.

 

Evolution into a Predominantly 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 71% for the nine months ended September 30, 2011, and our operating income from platform-based services has grown from 53% of total operating income to 92% over the same period. As in the past, we will continue to seek to invest in higher margin businesses, irrespective of whether the

 

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associated services are delivered to our customers through an agent-based or 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 customer’s client the option to speak to an agent. 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 growth 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 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. Since 2005, we have invested approximately $1.9 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.

 

Valuation for Stock-Based Compensation.

 

During the nine months ended September 30, 2011, we granted options to purchase 160,000 shares of our Class A common stock. With respect to those awards, all of which were granted on February 1, 2011, the fair value of the shares of our Class A common stock was determined based on an independent third party appraisal performed as of October 31, 2010 by Corporate Valuation Advisors, Inc. and delivered to us in December 2010. We believe that such appraisal was substantially contemporaneous with our determination of fair value for purposes of such awards and that there were no significant intervening events between the date of the appraisal and the grant date for the awards.

 

Critical Accounting Policies

 

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

 

Revenue Recognition. In our Unified Communications segment, our conferencing and collaboration services, event services and IP-based unified communication solutions are generally billed and revenue recognized on a per participant minute basis or per seat basis, and our 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. As it relates to installation sales, as of January 1, 2010, we early adopted new revenue recognition guidance for multiple element arrangements. For contracts entered into prior to January 1, 2010,

 

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revenue associated with advance payments was deferred until the system installations are completed. Costs incurred on uncompleted contracts are accumulated and recorded as deferred costs until the system installations are completed. This guidance was adopted prospectively and specifically for the product sales and installation for the emergency communications services revenue. 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. Nonrefundable up-front fees and related costs are recognized ratably over the term of the contract except in certain instances where the future benefit is linked to the customer relationship, which may necessitate a longer recognition period.

 

Revenue for contingent collection services and overpayment identification and recovery services is recognized in the month collection payments are received based upon a percentage of cash collected or other agreed upon contractual parameters. In December 2010, we sold the balance of the investment in receivable portfolios and no longer purchase receivables for collection. Prior to the sale, we used either the level-yield method or the cost recovery method to recognize revenue on these purchased receivable portfolios.

 

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 September 30, 2011 were $1.8 billion and $350.3 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. 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 a fair value of zero. The impairment charge primarily resulted from the decline in direct response business revenue in 2010 and continued general decline in the direct response business. These events caused us to revise downward our projected future cash flows for this reporting unit. The impairment charge was recorded in SG&A and is non-deductible for tax purposes. At December 31, 2010, 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, 2010 as the fair value exceeded the carrying value for each of our reporting units in step one. Our receivables management reporting unit, which had approximately $225.6 million of goodwill as of

 

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December 31, 2010, is our reporting unit with the least amount of cushion (as a percentage of carrying value) between its fair value and carrying value; however, in light of the reduction in prior periods of the carrying value of our portfolio receivables and the anticipated performance of our receivables management reporting unit in total, we do not believe this reporting unit is at risk of failing the first step of the impairment test. The percentage by which this reporting unit’s fair value exceeded the carrying value as of the most recent step one test was 211%. Currently, we do not believe any reporting units are at risk of failing the step one test in the foreseeable future, but 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 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 2010, 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 September 30, 2011 that a portion of our foreign earnings are indefinitely reinvested, and therefore deferred income taxes have not been provided on such foreign subsidiary earnings.

 

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Results of Operations

 

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

 

    Year Ended December 31,     Nine Months
Ended September 30,
 
    2008     2009     2010     2010     2011  
    (in millions)              

Consolidated Statement of Operations Data:

         

Revenue

  $ 2,247.4      $ 2,375.7      $ 2,388.2      $ 1,788.8      $ 1,866.4   

Cost of services

    1,015.0        1,067.8        1,057.0        784.0       
832.2
  

Selling, general and administrative

    881.6        907.3        911.0       
695.2
  
   
660.7
  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

    350.8        400.6        420.2       
309.6
  
   
373.5
  

Interest expense

    (313.0     (254.1     (252.7    
(182.4

   
(203.8

Refinancing expense

    —          —          (52.8     —          —     

Other income (expense)

    (8.6     1.4        6.1        2.9       
1.8
  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income tax expense

    29.2        147.9        120.8       
130.1
  
   
171.5
  

Income tax expense

    11.7        56.9        60.5       
66.2
  
   
65.2
  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

    17.5        91.0        60.3       
63.9
  
   
106.3
  

Less net income (loss)—noncontrolling interest

    (2.0     2.8        —         
—  
  
   
—  
  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income—West Corporation

  $ 19.5      $ 88.2      $ 60.3      $
63.9
  
  $
106.3
  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earning (loss) per common share:

         

Basic Class L

  $ 12.78      $ 17.45      $ 17.07      $
12.41
  
  $
13.78
  

Diluted Class L

  $ 12.24      $ 16.67      $ 16.37      $
11.90
  
  $
13.22
  

Basic Class A

  $ (1.23   $ (0.98   $ (1.25   $
(0.68

  $
(0.36

Diluted Class A

  $ (1.23   $ (0.98   $ (1.25   $
(0.68

  $
(0.36

 

Nine Months Ended September 30, 2011 and 2010

 

Revenue:

 

For the nine months ended September 30, 2011, total revenue increased $77.7 million, or 4.3%, to $1,866.4 million from $1,788.8 million for the nine months ended September 30, 2010. This increase included revenue of $54.6 million from entities acquired since October 1, 2010. Acquisitions made during the nine months ended September 30, 2011 included PivotPoint, Smoothstone, Contact One, TFCC, POSTcti and Unisfair. These acquisitions closed August 10, 2011 for PivotPoint, June 3, 2011 for Smoothstone, June 7, 2011 for Contact One, February 1, 2011 for TFCC and POSTcti and March 1, 2011 for Unisfair. PivotPoint’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.

 

For the nine months ended September 30, 2011 and 2010, our largest 100 clients represented 55% and 57% of our total revenue, respectively. During the nine months ended September 30, 2011 and 2010 the aggregate revenue as a percentage of our total revenue from AT&T was approximately 10% and 11%, respectively. No other client represented more than 10% of our aggregate revenue for the nine months ended September 30, 2011 and 2010.

 

Revenue by business segment:

 

     For the nine months ended September 30,  
     2011     2010     Change     % Change  

Revenue in thousands:

        

Unified Communications

   $ 1,030,249      $ 915,817      $ 114,432        12.5

Communication Services

     844,403        877,280        (32,877     -3.7

Intersegment eliminations

     (8,211     (4,317     (3,894     -90.2
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 1,866,441      $ 1,788,780      $ 77,661        4.3
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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For the nine months ended September 30, 2011, Unified Communications revenue increased $114.4 million, or 12.5%, to $1,030.2 million from $915.8 million for the nine months ended September 30, 2010. The increase in revenue for the nine months ended September 30, 2011 included $45.9 million from acquisitions. The remaining $68.5 million increase was attributable primarily 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 11.6% for the nine months ended September 30, 2011 over the nine months ended September 30, 2010, while the average rate per minute for reservationless services declined by approximately 4.0%.

 

Our Unified Communications revenue is also experiencing organic growth at a faster pace internationally than in North America. During the nine months ended September 30, 2011, revenue in the Asia Pacific and Europe, Middle East and Africa regions grew to $333.8 million, an increase of 16.7% over the nine months ended September 30, 2010.

 

For the nine months ended September 30, 2011, Communication Services revenue decreased $32.9 million, or 3.7%, to $844.4 million from $877.3 million for the nine months ended September 30, 2010. The decrease in revenue for the nine months ended September 30, 2011 is primarily the result of decreased revenue from our agent-based services and a reduction in purchased paper revenue resulting from our decision in 2009 to discontinue portfolio receivable purchases. Revenue from agent-based services for the nine months ended September 30, 2011 decreased $30.7 million, compared with revenue for the nine months ended September 30, 2010. The decrease in agent-based services was a result of reduced call volume associated with weak economic conditions and a movement of call volume from domestic to foreign locations, which have lower rates. The movement of call volume from domestic to foreign locations is a trend that we expect to continue for the foreseeable future. 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 for the nine months ended September 30, 2011 was revenue from acquired entities of $8.7 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 for the nine months ended September 30, 2011 increased $48.3 million, or 6.2%, to $832.2 million from $784.0 million for the nine months ended September 30, 2010. As a percentage of revenue, cost of services increased to 44.6% for the nine months ended September 30, 2011, compared to 43.8% for the nine months ended September 30, 2010.

 

Cost of Services by business segment:

 

    For the nine months ended September 30,              
          % of           % of           %  
    2011     Revenue     2010     Revenue     Change     Change  

In thousands:

           

Unified Communications

  $ 420,317        40.8   $ 364,374        39.8   $ 55,943        15.4

Communication Services

    418,776        49.6     422,772        48.2     (3,996     -0.9

Intersegment eliminations

    (6,864     NM        (3,167     NM        (3,697     NM   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 832,229        44.6   $ 783,979        43.8   $ 48,250        6.2
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

NM - Not Meaningful

 

Unified Communications cost of services for the nine months ended September 30, 2011 increased $55.9 million, or 15.4%, to $420.3 million from $364.4 million for the nine months ended September 30, 2010. The increase in cost of services for the nine months ended September 30, 2011 included $21.5 million from acquired entities. 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 40.8% for the nine months ended

 

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September 30, 2011 from 39.8% for the nine months ended September 30, 2010. The increase in cost of services as a percentage of revenue for the nine months ended September 30, 2011 is due primarily to changes in the product mix, geographic mix and the impact of acquired entities.

 

Communication Services cost of services for the nine months ended September 30, 2011 decreased $4.0 million, or 0.9%, to $418.8 million from $422.8 million for the nine months ended September 30, 2010. The decrease in cost of services for the nine months ended September 30, 2011 was the result of lower revenue volume, partially offset by $1.7 million of additional costs from acquired entities. As a percentage of this segment’s revenue, Communication Services cost of services increased to 49.6% for the nine months ended September 30, 2011, compared to 48.2% for the nine months ended September 30, 2010. The increase in cost of services as a percentage of revenue for the nine months ended September 30, 2011 is due to declines in margins for agent-based services.

 

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

 

SG&A expenses decreased $34.5 million, or 5.0%, to $660.7 million for the nine months ended September 30, 2011 from $695.2 million for the nine months ended September 30, 2010. The decrease in SG&A expenses for the nine months ended September 30, 2011 reflected an improvement in our SG&A expense margin that was offset by $33.3 million of additional SG&A expenses from acquired entities and the 2010 goodwill impairment of $37.7 million. As a percentage of revenue, SG&A expenses improved to 35.4% for the nine months ended September 30, 2011, compared to 38.9% for the nine months ended September 30, 2010. The impact of the goodwill impairment charge on SG&A as a percentage of revenue was 210 basis points for the nine months ended September 30, 2010.

 

Selling, general and administrative expenses by business segment:

 

    For the nine months ended
September 30,
             
          % of           % of           %  
    2011     Revenue     2010     Revenue     Change     Change  

In thousands:

           

Unified Communications

  $ 319,172        31.0   $ 308,933        33.7   $ 10,239        3.3

Communication Services

    342,882        40.6     387,426        44.2     (44,544     (11.5 )% 

Intersegment eliminations

    (1,347     NM        (1,149     NM        (198     NM   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 660,707        35.4   $ 695,210        38.9   $ (34,503     (5.0 )% 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

NM - Not Meaningful

 

Unified Communications SG&A expenses for the nine months ended September 30, 2011 increased $10.2 million, or 3.3%, to $319.2 million from $308.9 million for the nine months ended September 30, 2010. The increase in SG&A for the nine months ended September 30, 2011 reflected an improvement in our SG&A expense margin that was offset by $25.1 million of additional SG&A expenses from acquired entities. As a percentage of this segment’s revenue, Unified Communications SG&A expenses improved to 31.0% for the nine months ended September 30, 2011 compared to 33.7% for the nine months ended September 30, 2010.

 

Communication Services SG&A expenses for the nine months ended September 30, 2011 decreased $44.5 million, or 11.5%, to $342.9 million from $387.4 million for the nine months ended September 30, 2010. The decrease in SG&A expenses for the nine months ended September 30, 2011 reflected an improvement in our SG&A expense margin that was partially offset by $8.2 million of additional SG&A expenses from acquired entities. As a percentage of this segment’s revenue, Communication Services SG&A expenses improved to 40.6% for the nine months ended September 30, 2011, compared to 44.2% for the nine months ended September 30, 2010. The impact of the goodwill impairment charge on Communication Services SG&A expenses as a percentage of revenue was 430 basis points for the nine months ended September 30, 2010.

 

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Operating income:

 

Operating income for the nine months ended September 30, 2011 increased $63.9 million, or 20.6%, to $373.5 million from $309.6 million for the nine months ended September 30, 2010. As a percentage of revenue, operating income for the nine months ended September 30, 2011 improved to 20.0%, from 17.3% for the nine months ended September 30, 2010. The impact of the goodwill impairment charge on operating income as a percentage of revenue was 210 basis points for the nine months ended September 30, 2010.

 

Operating income by business segment:

 

    For the nine months ended
September 30,
             
          % of           % of           %  
    2011     Revenue     2010     Revenue     Change     Change  

In thousands:

           

Unified Communications

  $ 290,760        28.2   $ 242,509        26.5   $ 48,251        19.9

Communication Services

    82,745        9.8     67,082        7.6     15,663        23.3
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 373,505        20.0   $ 309,591        17.3   $ 63,914        20.6
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Unified Communications operating income for the nine months ended September 30, 2011 increased $48.3 million, or 19.9%, to $290.8 million from $242.5 million for the nine months ended September 30, 2010. As a percentage of this segment’s revenue, Unified Communications operating income improved to 28.2% for the nine months ended September 30, 2011 from 26.5% for the nine months ended September 30, 2010 due to the factors discussed above for revenue, cost of services and SG&A expenses.

 

Communication Services operating income for the nine months ended September 30, 2011 increased $15.7 million, or 23.3%, to $82.7 million from $67.1 million for the nine months ended September 30, 2010. As a percentage of this segment’s revenue, Communication Services operating income improved to 9.8% for the nine months ended September 30, 2011 from 7.6% for the nine months ended September 30, 2010 due to the factors discussed above for revenue, cost of services and SG&A expenses for communication services. The impact of the goodwill impairment charge on Communication Services operating income as a percentage of revenue was 430 basis points for the nine months ended September 30, 2010.

 

Other income (expense): Other income (expense) includes interest expense from borrowings under credit facilities, interest income from short-term investments and foreign currency transaction gains (losses) on affiliate

transactions denominated in currencies other than the functional currency. Other income (expense) for the nine months ended September 30, 2011 was ($202.0) million compared to ($179.5) million for the nine months ended September 30, 2010. Interest expense for the nine months ended September 30, 2011 was $203.8 million, compared to $182.4 million, for the nine months ended September 30, 2010. The change in interest expense was primarily due to higher effective interest rates as a result of our fourth quarter 2010 bond and bank refinancing and higher borrowing levels in the nine months ended September 30, 2011.

 

During the nine months ended September 30, 2011, we recognized a $3.7 million gain on foreign currency transactions denominated in currencies other than the functional currency. During the nine months ended September 30, 2010, we recognized a $1.7 million loss on foreign currency transactions denominated in currencies other than the functional currency.

 

During the nine months ended September 30, 2011, we recognized a $3.0 million loss due to investment losses in the assets held in our deferred compensation plans. The decrease in the value of these assets was offset by corresponding decreases in our deferred compensation liabilities, which were reflected as decreases in corporate SG&A expenses. During the nine months ended September 30, 2010, we recognized a $1.2 million gain due to investment gains in the assets held in our deferred compensation plans. The increases in the value of

 

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these assets were offset by corresponding increases in our deferred compensation liabilities, which were reflected as increases in corporate SG&A expenses.

 

Net income: Our net income for the nine months ended September 30, 2011 increased $42.4 million, or 66.4%, to $106.3 million from net income of $63.9 million for the nine months ended September 30, 2010. Our net income for the nine months ended September 30, 2010 was significantly affected by a $37.7 million goodwill impairment charge and the non-deductibility of that charge for income tax purposes. Net income includes a provision for income tax expense at an effective rate of approximately 38.0% for the nine months ended September 30, 2011, compared to an effective tax rate of approximately 50.9% for the nine months ended September 30, 2010. The effective tax rate was significantly different in 2010 due primarily to the goodwill impairment charge taken in 2010, which was not deductible for income tax purposes.

 

Earnings (loss) per common share: Earnings per common L share-basic for the nine months ended September 30, 2011 improved to $13.78 from $12.41 for the nine months ended September 30, 2010. Earnings per common L share-diluted for the nine months ended September 30, 2011 improved to $13.22 from $11.90 for the nine months ended September 30, 2010.

 

Loss per common A share-basic and diluted for the nine months ended September 30, 2011 was ($0.36) compared to ($0.68) for the nine months ended September 30, 2010.

 

Years Ended December 31, 2010 and 2009

 

Revenue: Total revenue in 2010 increased $12.5 million, or 0.5%, to $2,388.2 million from $2,375.7 million in 2009. This increase included net revenue of $19.3 million from entities acquired or sold, $31.7 million for acquired entities, less $12.4 million for an entity sold. Acquisitions made in 2010 were of Stream57 assets, SKT, Holly, TuVox and Specialty Pharmacy Network. These acquisitions closed on December 31, 2009, April 1, 2010, June 1, 2010, July 21, 2010 and November 9, 2010, respectively. Revenue from agent-based services decreased $83.8 million in 2010, including a $5.5 million reduction in purchased paper revenue compared to 2009. During 2009, the Communication Services segment recorded impairment charges of $25.5 million to establish a valuation allowance against the carrying value of portfolio receivables. During 2010, no valuation allowance was required or recorded.

 

During the years ended December 31, 2010 and 2009, our largest 100 clients represented approximately 57% and 56% of total revenue, respectively. The aggregate revenue from our largest client, AT&T, as a percentage of our total revenue in 2010 and 2009 was approximately 11% and 12%, respectively. No other client accounted for more than 10% of our total revenue in 2010 or 2009.

 

Revenue by business segment:

 

     For the year ended December 31,  
     2010     % of  Total
Revenue
    2009     % of  Total
Revenue
    Change     % Change  

Revenue in thousands:

            

Unified Communications

   $ 1,220,216        51.1   $ 1,126,544        47.4   $ 93,672        8.3

Communication Services

     1,173,945        49.2     1,254,547        52.8     (80,602     -6.4

Intersegment eliminations

     (5,950     -0.3     (5,343     -0.2     (607     11.4
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 2,388,211        100.0   $ 2,375,748        100.0   $ 12,463        0.5
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Unified Communications revenue in 2010 increased $93.7 million, or 8.3%, to $1,220.2 million from $1,126.5 million in 2009. The increase in revenue included $23.3 million from the acquisition of Stream57 assets and SKT Business Communication Solutions division. The remaining $70.4 million increase was attributable primarily to the addition of new customers as well as an increase in usage primarily of our web and audio-based

 

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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 16% in 2010, while the average rate per minute for Reservationless Services declined by approximately 10%. In addition, Alerts and Notifications Services revenue increased $11.9 million, or 16.7%, due primarily to volume growth as a result of an increase in our customer base. Since we entered the conferencing services business, the average rate per minute that we charge has declined while total minutes sold has increased. This is consistent with industry trends which we expect to continue for the foreseeable future. Our Unified Communications revenue is also experiencing organic growth at a faster pace internationally than in North America. During 2010, revenue in the Asia Pacific (“APAC”) and Europe, Middle East and Africa (“EMEA”) regions grew to $383.5 million, an increase of 14.3% over 2009, representing $48.0 million, or 68%, of our organic growth in 2010.

 

Communication Services revenue in 2010 decreased $80.6 million, or 6.4%, to $1,173.9 million from $1,254.5 million in 2009. The decrease in revenue in 2010 is primarily the result of decreased revenue from our agent-based services, including a $64.5 million reduction in our consumer-based agent services, a $35.2 million reduction in our direct response agent services and a $5.5 million reduction in revenue from purchased paper operations resulting from our decision in 2009 to discontinue portfolio receivable purchases. The decrease in our consumer-based agent services was a result of reduced call volume associated with weak economic conditions and a movement of call volume from domestic to foreign locations, having lower rates, a trend that we expect to continue for the foreseeable future, and the decrease in direct response agent services, consistent with the trend over the past few years, which we expect to continue for the foreseeable future, but at a lower rate. Our Communication Services revenues were further reduced in 2010 by $12.4 million as a result of the sale of our Public Safety CAD business in December of 2009. Partially offsetting these revenue reductions in our consumer based customer service revenue and our traditional direct response business was an $18.9 million net increase in our business-to-business services ($24.4 million net of the $5.5 million reduction in revenue from purchased paper operations described above), which resulted from an increase in our customer base as well as volume growth from existing customers, as well as $12.6 million of other improvements in the Communication Services business.

 

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 2010 decreased $10.8 million, or 1.0%, to $1,057.0 million from $1,067.8 million in 2009. Cost of services from entities acquired or sold was $0.5 million. As a percentage of revenue, cost of services decreased to 44.2% for 2010 from 44.9% in 2009.

 

Cost of Services by business segment:

 

     For the year ended December 31,  
     2010     % of Revenue     2009     % of Revenue     Change     % Change  

Cost of services in thousands:

            

Unified Communications

   $ 492,263        40.3   $ 422,189        37.5   $ 70,074        16.6

Communication Services

     569,110        48.5     649,195        51.7     (80,085     -12.3

Intersegment eliminations

     (4,365     NM        (3,607     NM        (758     21.0
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 1,057,008        44.3   $ 1,067,777        44.9   $ (10,769     -1.0
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

NM—Not Meaningful

 

Unified Communications cost of services in 2010 increased $70.1 million, or 16.6%, to $492.3 million from $422.2 million in 2009. Cost of services from acquired entities increased cost of services by $12.1 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 40.3% in 2010 from 37.5% in 2009, primarily due to changes in the product and geographic mix.

 

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Communication Services cost of services in 2010 decreased $80.1 million, or 12.3%, to $569.1 million from $649.2 million in 2009. The decrease is primarily driven by decreased service volume. As a percentage of revenue, Communication Services cost of services decreased to 48.5% in 2010 from 51.7% in 2009. The impact of the valuation allowance on Communication Services cost of services as a percentage of revenue in 2009 was 100 basis points.

 

Selling, General and Administrative Expenses: SG&A expenses in 2010 increased $3.7 million, or 0.4%, to $911.0 million from $907.4 million for 2009. The increase included $17.8 million of additional expense from acquired entities. 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 the fair value of zero. The impairment primarily resulted from the decline in revenue in 2010 and continued general decline in the direct response business. These events caused us to revise downward our projected future cash flows for this reporting unit. As a percentage of revenue, SG&A expenses decreased to 38.1% in 2010 from 38.2% in 2009. 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,  
     2010     % of
Revenue
    2009     % of
Revenue
    Change     %
Change
 

SG&A in thousands:

            

Unified Communications

   $ 407,543        33.4   $ 408,258        36.2   $ (715     -0.2

Communication Services

     505,064        43.0     500,835        39.9     4,229        0.8

Intersegment eliminations

     (1,585     NM        (1,735     NM        150        NM   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 911,022        38.1   $ 907,358        38.2   $ 3,664        0.4
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

NM—Not meaningful

 

Unified Communications SG&A expenses in 2010 decreased $0.7 million, or 0.2%, to $407.5 million from $408.3 million in 2009. SG&A expenses for the segment in 2010 included $11.4 million from acquisitions. As a percentage of this segment’s revenue, Unified Communications SG&A expenses in 2010 decreased to 33.4% from 36.2% in 2009.

 

Communication Services SG&A expenses in 2010 increased $4.2 million, or 0.8%, to $505.1 million from $500.8 million in 2009. SG&A expenses for the segment in 2010 included $37.7 million goodwill impairment charge and $6.4 million from acquisitions. As a percentage of this segment’s revenue, Communication Services SG&A expenses increased to 43.0% in 2010 from 39.9% in 2009. The impact of the impairment charge on Communication Services SG&A as a percentage of revenue was 320 basis points for 2010. The impact of the valuation allowance on SG&A expenses as a percentage of revenue in 2009 was 80 basis points.

 

Operating Income: Operating income in 2010 increased by $19.6 million, or 4.9%, to $420.2 million from $400.6 million in 2009. As a percentage of revenue, operating income increased to 17.6% in 2010 from 16.9% in 2009.

 

Operating income by business segment:

 

     For the year ended December 31,  
     2010      % of
Revenue
    2009      % of
Revenue
    Change     %
Change
 

Operating income in thousands:

              

Unified Communications

   $ 320,411         26.3   $ 296,096         26.3   $ 24,315        8.2

Communication Services

     99,770         8.5     104,517         8.3     (4,747     -4.5
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total

   $ 420,181         17.6   $ 400,613         16.9   $ 19,568        4.9
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

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Unified Communications operating income in 2010 increased $24.3 million, or 8.2%, to $320.4 million from $296.1 million in 2009. As a percentage of this segment’s revenue, Unified Communications operating income was 26.3% in both 2010 and 2009.

 

Communication Services operating income in 2010 decreased $4.7 million, or 4.5%, to $99.8 million from $104.5 million in 2009. As a percentage of revenue, Communication Services operating income increased to 8.5% in 2010 from 8.3% in 2009. The impact of the impairment charge on Communication Services operating income as a percentage of revenue was 320 basis points in 2010. The impact of the valuation allowance on operating income as a percentage of revenue in 2009 was 190 basis points.

 

Other Income (Expense): Other income (expense) includes interest expense from short-term and long-term borrowings under credit facilities, refinancing expenses, the aggregate gain (loss) on debt transactions denominated in currencies other than the functional currency, sub-lease rental income and interest income. Other expense in 2010 was $299.4 million compared to $252.8 million in 2009. Interest expense in 2010 was $252.7 million compared to $254.1 million in 2009. Refinancing expense of $52.8 million includes $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 purchase of the Company’s outstanding $650 million aggregate principal amount of 2014 Senior Notes.

 

During 2010 and 2009, interest expense was reduced by $3.7 million and $6.4 million, respectively, due to an interest rate swap agreement no longer qualifying as a hedging instrument for accounting purposes.

 

Noncontrolling interest income (loss): We did not incur any non-controlling interest income or loss in 2010 compared to income attributable to non-controlling interest of $2.7 million in 2009. In December 2010, we sold the balance of the investment in receivable portfolios and no longer purchase receivables for collection. As a result of this sale, none of our subsidiaries has noncontrolling interest ownership structures. During the fourth quarter of 2009, a settlement was reached in litigation among two of our formerly majority-owned subsidiaries and one of our former portfolio receivable lenders which held non-controlling interests in such subsidiaries. As a result of this 2009 settlement, we purchased the non-controlling interest of one of the former majority-owned subsidiaries and we abandoned our interest in the other majority-owned subsidiary.

 

Net Income—West Corporation: Our net income in 2010 decreased $27.9 million, or 31.7%, to $60.3 million from $88.2 million in 2009. 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 (income tax expense divided by income before income tax and noncontrolling interest) of approximately 50.1% for 2010, compared to an effective tax rate of approximately 38.4% in 2009. The effective tax rate was higher in 2010 when compared to 2009 due primarily to the goodwill impairment charge taken in 2010, which was not deductible for income tax purposes.

 

Earnings (Loss) per common share: Earnings per common L share—basic for 2010 decreased $0.38, to $17.07, from $17.45 in 2009. Earnings per common L share—diluted for 2010 decreased $0.30, to $16.37, from $16.67 in 2009. The decrease in earnings per share was primarily the result of decreased net income attributable to Class L common shares. Loss per common A share—basic and diluted for 2010 increased $0.27, to ($1.25), from ($0.98) for 2009. The increase in (loss) per share was primarily the result of a decrease in net income attributable to the Class A common shares due to our decreased earnings in 2010.

 

Years Ended December 31, 2009 and 2008

 

Revenue: Total revenue in 2009 increased $128.3 million, or 5.7%, to $2,375.7 million from $2,247.4 million in 2008. This increase included $165.0 million of revenue from the acquisitions of HBF, Genesys and

 

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Positron. These acquisitions closed on April 1, 2008, May 22, 2008 and November 21, 2008, respectively. During 2009, decreased call volumes in our agent-based services, which we believe are attributable to the sluggish economy, resulted in reduced revenue of $133.5 million. During 2009, the Communication Services segment recorded impairment charges of $25.5 million to establish a valuation allowance against the carrying value of portfolio receivables. During 2008, the Communication Services segment recorded impairment charges of $76.4 million.

 

During each of the years ended December 31, 2009 and 2008, our largest 100 clients represented approximately 56% of total revenue. The aggregate revenue from our largest client, AT&T, as a percentage of our total revenue in 2009 and 2008 was approximately 12% and 13%, respectively. No other client accounted for more than 10% of our total revenue in 2009 or 2008.

 

Revenue by business segment:

 

     For the year ended December 31,     Change     % Change  
     2009     % of Total
Revenue
    2008     % of Total
Revenue
     

Revenue in thousands:

            

Unified Communications

   $ 1,126,544        47.4   $ 995,161        44.3   $ 131,383        13.2

Communication Services

     1,254,547        52.8     1,258,182        56.0     (3,635     -0.3

Intersegment eliminations

     (5,343     -0.2     (5,909     -0.3     566        -9.6
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 2,375,748        100.0   $ 2,247,434        100.0   $ 128,314        5.7
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Unified Communications revenue in 2009 increased $131.4 million, or 13.2%, to $1,126.5 million from $995.2 million in 2008. The increase in revenue included $95.2 million from the acquisition of Genesys which was completed in May 2008. The remaining $36.2 million increase was attributable to organic growth resulting from an increase in revenue from existing customers driven by an increase in total minutes used by those customers, partially offset by a decline in the rate per minute charged to those customers, as well as the addition of new customers. Since we entered the conferencing services business, the average rate per minute that we charge has declined while total minutes sold has increased.

 

Communication Services revenue in 2009 decreased $3.6 million, or 0.3%, to $1,254.5 million from $1,258.2 million in 2008. The decrease in revenue for 2009 is primarily the result of decreased call volumes in our agent-based services, which reduced revenue by $133.5 million. During 2009, the Communication Services segment recorded impairment charges of $25.5 million to establish a valuation allowance against the carrying value of portfolio receivables. During 2008, the Communication Services segment recorded impairment charges of $76.4 million. Partially offsetting the decrease in revenue was revenue of $69.8 million from acquired entities.

 

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 2009 increased $52.7 million, or 5.2%, to $1,067.8 million from $1,015.0 million in 2008. The acquisitions of HBF, Genesys and Positron increased cost of services by $80.5 million. As a percentage of revenue, cost of services decreased to 44.9% for 2009 from 45.2% in 2008.

 

Cost of Services by business segment:

 

     For the year ended December 31,     Change     % Change  
     2009     % of
Revenue
    2008     % of
Revenue
     

Cost of services in thousands:

            

Unified Communications

   $ 422,189        37.5   $ 351,359        35.3   $ 70,830        20.2

Communication Services

     649,195        51.7     665,571        52.9     (16,376     -2.5

Intersegment eliminations

     (3,607     NM        (1,902     NM        (1,705     89.6
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 1,067,777        44.9   $ 1,015,028        45.2   $ 52,749        5.2
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

NM—Not Meaningful

 

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Unified Communications cost of services in 2009 increased $70.8 million, or 20.2%, to $422.2 million from $351.4 million in 2008. The acquisition of Genesys increased cost of services by $25.0 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 37.5% in 2009 from 35.3% in 2008.

 

Communication Services cost of services in 2009 decreased $16.4 million, or 2.5%, to $649.2 million from $665.6 million in 2008. The decrease in cost of services in 2009 was partially offset by increased costs of $55.5 million from the operations resulting from our acquisitions of HBF and Positron. The remaining decrease is primarily driven by decreased service volume. As a percentage of revenue, Communication Services cost of services decreased to 51.7% in 2009 from 52.9% in 2008. The impact of the valuation allowance on Communication Services cost of services as a percentage of revenue in 2009 and 2008 was 100 basis points and 300 basis points, respectively.

 

Selling, General and Administrative Expenses: SG&A expenses in 2009 increased $25.8 million, or 2.9%, to $907.4 million from $881.6 million for 2008. The increase included $49.2 million from the acquisitions of HBF, Genesys and Positron. As a percentage of revenue, SG&A expenses decreased to 38.2% in 2009 from 39.2% in 2008. In 2009, in accordance with ASC 710-35 Accounting for Deferred Compensation Arrangements Where Amounts Earned Are Held in a Rabbi Trust and Invested (“ASC 710-35”), we recorded a $3.9 million increase in SG&A with a corresponding increase in other income and expense. ASC 710-35 requires that the deferred compensation obligation be classified as a liability and adjusted with the corresponding charge (or credit) to compensation cost, to reflect changes in the fair value of the amount owed to employees.

 

Selling, general and administrative expenses by business segment:

 

     For the year ended December 31,  
     2009     % of
Revenue
    2008     % of
Revenue
    Change      % Change  

SG&A (in thousands):

             

Unified Communications

   $ 408,258        36.2   $ 386,950        38.9   $ 21,308         5.5

Communication Services

     500,835        39.9     498,643        39.6     2,192         0.4

Intersegment eliminations

     (1,735     NM        (4,007     NM        2,272         NM   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Total

   $ 907,358        38.2   $ 881,586        39.2   $ 25,772         2.9
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

NM—Not Meaningful

 

Unified Communications SG&A expenses in 2009 increased $21.3 million, or 5.5%, to $408.3 million from $387.0 million in 2008. SG&A expenses included $30.8 million from the acquisition of Genesys. As a percentage of this segment’s revenue, Unified Communications SG&A expenses in 2009 decreased to 36.2% from 38.9% in 2008. The Unified Communications segment has effectively reduced SG&A expenses through realized synergies from acquisitions.

 

Communication Services SG&A expenses in 2009 increased $2.2 million, or 0.4%, to $500.8 million from $498.6 million in 2008. The acquisitions of HBF and Positron increased SG&A expenses by $18.5 million. As a percentage of this segment’s revenue, Communication Services SG&A expenses increased to 39.9% in 2009 from 39.6% in 2008. The impact of the valuation allowance on SG&A expenses as a percentage of revenue in 2009 and 2008 was 80 basis points and 220 basis points, respectively.

 

Operating Income: Operating income in 2009 increased by $49.8 million, or 14.2%, to $400.6 million from $350.8 million in 2008. As a percentage of revenue, operating income increased to 16.9% in 2009 from 15.6% in 2008.

 

 

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Operating income by business segment:

 

     For the year ended December 31,  
     2009      % of
Revenue
    2008      % of
Revenue
    Change      % Change  

Operating income (in thousands):

               

Unified Communications

   $ 296,096         26.3   $ 256,853         25.8   $ 39,243         15.3

Communication Services

     104,517         8.3     93,967         7.5     10,550         11.2
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 400,613         16.9   $ 350,820         15.6   $ 49,793         14.2
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

Unified Communications operating income in 2009 increased $39.2 million, or 15.3%, to $296.1 million from $256.9 million in 2008. As a percentage of this segment’s revenue, Unified Communications operating income increased to 26.3% in 2009 from 25.8% in 2008.

 

Communication Services operating income in 2009 increased $10.5 million, or 11.2%, to $104.5 million from $94.0 million in 2008. The increase in operating income in 2009 was driven primarily by lower valuation allowances taken in 2009, $25.5 million compared to $76.4 million in 2008. This increase was partially offset by a reduction in agent-based services operating income of $51.9 million. As a percentage of revenue, Communication Services operating income increased to 8.3% in 2009 from 7.5% in 2008. The impact of the valuation allowance on operating income as a percentage of revenue in 2009 and 2008 was 190 basis points and 530 basis points, respectively.

 

Other Income (Expense): Other income (expense) includes interest expense from short-term and long-term borrowings under credit facilities and portfolio notes payable, the aggregate gain (loss) on debt transactions denominated in currencies other than the functional currency, sub-lease rental income and interest income. Other expense in 2009 was $252.8 million compared to $321.6 million in 2008. Interest expense in 2009 was $254.1 million compared to $313.0 million in 2008. The decrease in interest expense was primarily due to lower effective interest rates, partially offset by increased average outstanding debt in 2009. Interest expense during 2009 included a reduction of $3.3 million for the decline in the fair value liability of the interest rate swap hedges, which were determined to be ineffective and therefore did not qualify for hedge accounting treatment. This compares to a $3.2 million increase in interest expense in 2008 for the increase in the fair value liability of the interest rate swap hedges. Interest expense was further reduced during 2009 by $6.4 million for hedges that did not qualify for hedge accounting treatment. This compares to a $14.5 million increase to interest expense in 2008 for hedges that did not qualify for hedge accounting treatment.

 

Noncontrolling interest income (loss): At December 31, 2009, one of the subsidiaries comprising our receivables management business is not wholly owned by us. This majority-owned subsidiary is not party to or guarantor of our senior secured term loan facility, our senior secured revolving credit facility, our senior notes or our senior subordinated notes. Accordingly, interest expense associated with the foregoing debt instruments is not attributed to this subsidiary or similar subsidiaries that were not wholly owned by us during 2009. The only interest expense attributed to these majority-owned subsidiaries is the portion of the interest expense that is accrued on our portfolio notes payable facilities which corresponds with our ownership percentage of such subsidiary. We had income attributable to noncontrolling interest of $2.7 million in 2009 compared to loss attributable to noncontrolling interest of ($2.1) million in 2008. The portfolio receivable impairments recorded in 2008 primarily caused the loss attributable to the non-controlling interest in 2008.

 

Net Income—West Corporation: Our net income in 2009 improved $68.7 million, or 352.3%, to $88.2 million from $19.5 million in 2008. The increase in net income was due to the factors discussed above for revenue, cost of services, SG&A expense and other income (expense). Net income includes a provision for income tax expense at an effective rate (income tax expense divided by income before income tax and noncontrolling interest) of approximately 38.4% for 2009, compared to an effective tax rate of approximately 40.2% in 2008.

 

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Earnings (Loss) per common share: Earnings per common L share—basic for 2009 improved $4.67, to $17.45, from $12.78 in 2008. Earnings per common L share—diluted for 2009 improved $4.43, to $16.67, from $12.24 in 2008. The improvement in earnings per share was primarily the result of increased net income attributable to Class L common shares. Loss per common A share—basic and diluted for 2009 decreased $0.25, to ($0.98), from ($1.23) for 2008. The decrease in (loss) per share was primarily the result of an increase in net income attributable to the Class A common shares due to our increased earnings in 2009.

 

Quarterly Results of Operations

 

Revenue in our segments is not significantly seasonal.

 

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

 

    Three Months Ended     Three Months Ended     Three Months Ended  
    June 30,
2009
    September  30,
2009(1)
    December 31,
2009
    March 31,
2010
    June 30,
2010
    September  30,
2010(2)
    December  31,
2010(3)
    March 31,
2011
    June 30,
2011
    September 30,
2011
 

Revenue

  $ 606,907      $ 559,012      $ 602,870      $ 599,821      $ 596,549      $ 592,410      $ 599,431      $ 610,818      $ 622,820      $ 632,803   

Cost of services

    269,268        260,570        268,889        260,823        263,433        259,723        273,029        271,603        276,220        284,406   

SG&A

    229,893        221,428        226,583        221,753        214,639        258,818        215,812        220,408        223,849        216,450   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

    107,746        77,014        107,398        117,245        118,477        73,869        110,590        118,807        122,751        131,947   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)—West Corporation

  $ 26,435      $ 3,896      $ 27,274      $ 36,003      $ 36,293      $ (8,429   $ (3,563   $
34,580
  
  $ 34,378      $ 37,347   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (loss) per common share

                   

Basic Class L

  $ 3.54      $ 3.63      $ 6.44      $ 3.97      $ 4.13      $ 4.31      $ 4.66      $ 4.39      $ 4.58      $ 4.81   

Diluted Class L

  $ 3.39      $ 3.47      $ 6.12      $ 3.81      $ 3.96      $ 4.13      $ 4.47      $ 4.21      $ 4.39      $ 4.62   

Basic Class A

  $ (0.10   $ (0.37   $ (0.42   $ (0.04   $ (0.06   $ (0.58   $ (0.57   $ (0.11   $
(0.13

  $ (0.12

Diluted Class A

  $ (0.10   $ (0.37   $ (0.42   $ (0.04   $ (0.06   $ (0.58   $ (0.57   $ (0.11   $ (0.13   $ (0.12

 

  (1)   Results of operations in the third quarter 2009 were affected by the Communication Services segment recording an impairment charge in the amount of $25.5 million to establish a valuation allowance against the carrying value of portfolio receivables.
  (2)   Results in the third quarter of 2010 were affected by the Communication Services segment recording a $37.7 million goodwill impairment charge which was not deductible for tax purposes.
  (3)   Net loss in the fourth quarter of 2010 was affected by $52.8 million of refinancing expense.

 

Liquidity and Capital Resources

 

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

 

On October 5, 2010, we issued $500.0 million aggregate principal amount of 8 5/8% 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;

 

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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 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.

 

These changes modified our capital structure by extending the weighted average maturity of funded debt from 4.5 years to 6.1 years as of October 5, 2010. We expect that these changes may provide greater flexibility for future growth plans.

 

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

 

Nine Months Ended September 30, 2011 compared to 2010

 

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

 

     For the Nine Months Ended September 30,  
In thousands:    2011     2010     Change     % Change  

Cash flows from operating activities

   $ 290,608      $ 294,202      $ (3,594     -1.2

Cash flows used in investing activities

   $ (291,967   $ (113,115   $ (178,852     158.1

Cash flows used in financing activities

   $ (23,342   $ (100,866   $ 77,524        -76.9

 

Net cash flows from operating activities decreased $3.6 million, or 1.2%, to $290.6 million for the nine months ended September 30, 2011, compared to net cash flows from operating activities of $294.2 million for the nine months ended September 30, 2010. The decrease in net cash flows from operating activities is primarily due to decreases in accrued interest and accounts payable due to the timing of interest payments and payments to vendors. Also contributing to the decrease in cash flows from operating activities was the decrease in income taxes payable.

 

Days sales outstanding (“DSO”), a key performance indicator we utilize to monitor the accounts receivable average collection period and assess overall collection risk, was 62 days at September 30, 2011 compared to 62 days at September 30, 2010.

 

Net cash flows used in investing activities increased $178.9 million, or 158.1%, to $292.0 million for the nine months ended September 30, 2011, compared to net cash flows used in investing activities of $113.1 million for the nine months ended September 30, 2010. During the nine months ended September 30, 2011, business acquisition investing was $182.1 million greater than the comparable nine months ended September 30, 2010, due primarily to the acquisitions of TFCC and Smoothstone. During the nine months ended September 30, 2011,

 

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we invested $80.5 million in capital expenditures compared to $89.1 million for the nine months ended September 30, 2010.

 

Net cash flows used in financing activities decreased $77.5 million, to $23.3 million for the nine months ended September 30, 2011, compared to net cash flows used in financing activities of $100.9 million for the nine months ended September 30, 2010. During the nine months ended September 30, 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.

 

As of September 30, 2011, the amount of cash and cash equivalents held by our foreign subsidiaries was $79.0 million. We have also accrued U.S. taxes on $116.9 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 flows 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.

 

Year Ended December 31, 2010 compared to 2009

 

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

 

     For the Years Ended December 31,     % Change  
     2010     2009     Change    

Cash flows from operating activities

   $ 312,829      $ 272,857      $ 39,972        14.6

Cash flows from (used in) investing activities

   $ (137,896   $ (112,615   $ (25,281     -22.4

Cash flows from (used in) financing activities

   $ (133,651   $ (271,844   $ 138,193        -50.8

 

Net cash flows from operating activities in 2010 increased $40.0 million, or 14.6%, to $312.8 million compared to net cash flows from operating activities of $272.9 million in 2009. The increase in net cash flows from operating activities is primarily due to improvements in operating income and working capital utilization.

 

DSO, a key performance indicator that we utilize to monitor the accounts receivable average collection period and assess overall collection risk, was 56 days at December 31, 2010. Throughout 2010, DSO ranged from 56 to 62 days. At December 31, 2009, DSO was 54 days and ranged from 54 to 59 days during 2009.

 

Net cash flows used in investing activities in 2010 increased $25.3 million, or 22.4%, to $137.9 million compared to net cash flows used in investing activities of $112.6 million in 2009. The increase in net cash flows used in investing activities was due to a reduction in collections applied to principal of portfolio receivables of $23.6 million in 2010 compared to 2009. In 2010, $33.5 million was invested for acquisitions compared to $31.7 million in 2009. We invested $118.2 million in capital expenditures during 2010 compared to $118.5 million invested in 2009.

 

Net cash flows used in financing activities in 2010 decreased $138.2 million or 50.8%, to $133.7 million compared to net cash flows used in financing activities of $271.8 million for 2009. Repayments on portfolio notes payable in 2010 were $34.0 million less than in 2009. In 2010, we paid off the remaining balances of the portfolio notes payable. Net payments on long-term obligations in 2010 were $127.4 million less than in 2009.

 

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During 2010, net payments under the senior secured revolving credit facility were $72.9 million compared to $201.7 million in 2009. At December 31, 2010, there was no outstanding balance on the senior secured revolving credit facility.

 

As of December 31, 2010, the amount of cash and cash equivalents held by our foreign subsidiaries was $94.8 million. If these funds are needed for our operations in the U.S., we would be able to repay intercompany loans of $53.5 million with no income tax effects. We have also accrued U.S. taxes on $97.8 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.

 

Year Ended December 31, 2009 compared to 2008

 

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

 

     For the Years Ended December 31,     % Change  
     2009     2008     Change    

Cash flows from operating activities

   $ 272,857      $ 287,381      $ (14,524     -5.1

Cash flows from (used in) investing activities

   $ (112,615   $ (597,539   $ 484,924        81.2

Cash flows from (used in) financing activities

   $ (271,844   $ 341,971      $ (613,815     -179.5

 

Net cash flows from operating activities in 2009 decreased $14.5 million, or 5.1%, to $272.9 million compared to net cash flows from operating activities of $287.4 million in 2008. The decrease in net cash flows from operating activities is primarily due to reductions in accrued payroll and interest due to the timing of the year-end payroll cycle and interest payment dates. This decrease in cash flows from operating activities was partially offset by increased operating income.

 

DSO, a key performance indicator that we utilize to monitor the accounts receivable average collection period and assess overall collection risk, was 54 days at December 31, 2009. Throughout 2009, DSO ranged from 54 to 59 days. At December 31, 2008, DSO was 54 days and ranged from 52 to 58 days during 2008.

 

Net cash flows used in investing activities in 2009 decreased $484.9 million, or 81.2%, to $112.6 million compared to net cash flows used in investing activities of $597.5 million in 2008. The decrease in net cash flows used in investing activities was due to reduced acquisition activity in 2009 compared to 2008. In 2009, $31.7 million was invested for acquisitions compared to $493.6 million in 2008. We invested $118.5 million in capital expenditures during 2009 compared to $105.4 million invested in 2008. Investing activities in 2009 and 2008 included the net purchase of receivable portfolios for $1.7 million and $45.4 million, respectively. Investing activities in 2009 also included cash proceeds applied to amortization of receivable portfolios of $39.1 million compared $46.4 million in 2008.

 

Net cash flows used in financing activities in 2009 increased $613.8 million, or 179.5%, compared to net cash flows from financing activities of $342.0 million for 2008. During 2009, $201.7 million was paid on the senior secured revolving credit facility and the multicurrency revolving credit facility. During 2008, net proceeds from the term loan add-on of the senior secured credit facility, senior secured revolving credit facility and the multicurrency revolving credit facility were $417.2 million and were used to finance the Genesys and Positron acquisitions.

 

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Senior Secured Term Loan Facility and Senior Secured Revolving Credit Facility

 

The senior secured term loan facility and senior secured revolving credit facility bear interest at variable rates. During 2010, we and certain of our domestic subsidiaries, as borrowers and/or guarantors, Wells Fargo Bank, National Association (“Wells Fargo”), as administrative agent, and the various lenders party thereto modified our senior secured credit facilities, including as described above, by entering into a Restatement Agreement (the “Restatement Agreement”), amending and restating the Credit Agreement, dated as of October 24, 2006, by and among us, Wells Fargo, as successor administrative agent and the various lenders party thereto, as lenders, (as so amended and restated, the “Restated Credit Agreement”).

 

After giving effect to the prepayment of amortization payments payable in respect of the term loans due 2013, the amended and restated senior secured term loan facility requires annual principal payments of approximately $15.4 million, paid quarterly, with balloon payments at maturity dates of October 24, 2013 and July 15, 2016 of approximately $450.2 million and $1,398.5 million, respectively. Pricing of the amended and restated senior secured term loan facility, due 2013, is based on the Company’s corporate debt rating and the grid ranges from 2.125% to 2.75% for LIBOR rate loans (LIBOR plus 2.375% at September 30, 2011), and from 1.125% to 1.75% for base rate loans (Base Rate plus 1.375% at September 30, 2011). The interest rate margins for the amended and restated senior secured term loans due 2016 are based on the Company’s corporate debt rating based on a grid, which ranges from 4.00% to 4.625% for LIBOR rate loans (LIBOR plus 4.25% at September 30, 2011), and from 3.00% to 3.625% for base rate loans (Base Rate plus 3.25% at September 30, 2011). The effective annual interest rates, inclusive of debt amortization costs, on the senior secured term loan facility for the nine months ended September 30, 2011 and 2010 were 6.44% and 4.85%, respectively.

 

Our senior secured revolving credit facilities provide senior secured financing of up to $250 million, of which approximately $92 million matures October 2012 (original maturity) and approximately $158 million matures January 2016 (extended maturity). We have also received commitments for approximately $43 million of additional extended maturity senior secured revolving credit facility commitments, which commitments would replace a portion of the original maturity senior secured revolving credit facility.

 

The original maturity senior secured revolving credit facility pricing is based on the Company’s total leverage ratio and the grid ranges from 1.75% to 2.50% for LIBOR rate loans (LIBOR plus 2.0% at September 30, 2011), and the margin ranges from 0.75% to 1.50% for base rate loans (Base Rate plus 1.0% at September 30, 2011). The Company is 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 is subject to adjustment based upon our total leverage ratio. The average daily outstanding balance of the original maturity senior secured revolving credit facility during the nine months ended September 30, 2011 and 2010 was $1.7 million and $17.3 million, respectively. The highest balance outstanding on the original maturity senior secured revolving credit facility during the nine months ended September 30, 2011 and 2010 was $14.7 million and $80.9 million, respectively.

 

The extended maturity senior secured revolving credit facility pricing is based on the Company’s total leverage ratio and the grid ranges from 2.75% to 3.50% for LIBOR rate loans (LIBOR plus 3.0% at September 30, 2011), and the margin ranges from 1.75% to 2.50% for base rate loans (Base Rate plus 2.0% at September 30, 2011). The Company is 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 extended maturity senior secured revolving credit facility during the nine months ended September 30, 2011 was $4.1 million. The highest balance outstanding on the extended maturity senior secured revolving credit facility during the nine months ended September 30, 2011 was $35.8 million. Prior to 2011, there had been no borrowings under the extended maturity senior secured revolving credit facility since its inception on October 5, 2010.

 

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Subsequent to September 30, 2011, the Company may request additional tranches of term loans or increases to the revolving credit facility in an aggregate amount not to exceed $848.6 million, including the aggregate amount of $617.6 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.

 

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 additional aggregate notional value of $500.0 million with interest rates ranging from 1.685% to 1.6975% and expire in June 2013. 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 forward starting interest rate swaps ranges from 2.56% to 2.60% and expire in January 2012. At September 30, 2011, the notional amount of debt outstanding under interest rate swap agreements was $1,000.0 million of the outstanding $1,916.4 million senior secured term loan facility hedged at rates from 1.685% to 2.60%.

 

Multicurrency revolving credit facility

 

InterCall Conferencing Services Limited (“ICSL”), a foreign subsidiary of InterCall, maintained a $75.0 million multicurrency revolving credit facility. The credit facility was secured by substantially all of the assets of ICSL, and was not guaranteed by us or any of our domestic subsidiaries. On November 17, 2010 we provided notice to the lenders of our intent to cancel the facility effective November 22, 2010.

 

2016 Senior Subordinated Notes

 

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

 

The Company 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  

2011

     105.500   

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 and all additional interest then owing pursuant to the registration rights agreement executed in connection with the 2018 Senior Notes, if any, 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.

 

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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 and all additional interest then owing pursuant to the registration rights agreement executed in connection with the 2018 Senior Notes, if any, 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 notes with money that we raise in one or more equity offerings, as long as: we pay 108.625% of the face amount of the 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.

 

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 and all additional interest then owing pursuant to the registration rights agreement executed in connection with the 2019 Senior Notes, if any, 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 and all additional interest then owing pursuant to the registration rights agreement executed in connection with the 2019 Senior Notes, if any, 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 notes with money that we raise in one or more equity offerings, as long as: we pay 107.875% of the face amount of the 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.

 

The Company and its subsidiaries, affiliates or significant stockholders may from time to time, in our or their sole discretion, purchase, repay, redeem or retire any of our outstanding debt or equity securities (including

 

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any publicly issued debt or equity securities), in privately negotiated or open market transactions, by tender offer or otherwise.

 

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 the maturity is extended to September 12, 2014, reduces the unused commitment fee and lowers the LIBOR spread on borrowings. 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. Borrowings under the facility are available for general corporate purposes. West Receivables LLC and West Receivables Holdings LLC are consolidated in our financial statements included elsewhere in this prospectus. At September 30, 2011 and December 31, 2010, the facility was undrawn. The highest balance outstanding during the nine months ended September 30, 2011 was $84.5 million. During the nine months ended September 30, 2010, the facility was undrawn.

 

The 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.

 

Debt Covenants

 

Senior Secured Term Loan Facility and Senior Secured Revolving Credit Facility—We are required to comply on a quarterly basis with a maximum total leverage ratio covenant and a minimum interest coverage ratio covenant. The total leverage ratio of consolidated total debt to Consolidated EBITDA (as defined by our Restated Credit Agreement) may not exceed 5.50 to 1.0 at September 30, 2011, and the interest coverage ratio of Consolidated EBITDA (as defined by our Restated Credit Agreement) to the sum of consolidated interest expense must exceed 2.0 to 1.0 at September 30, 2011. Both ratios are measured on a rolling four-quarter basis. We were in compliance with these financial covenants at September 30, 2011. The total leverage ratio will become more restrictive over time (adjusted periodically until the maximum leverage ratio reaches 5.00 to 1.0 in the fourth quarter of 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 the Employee Retirement Income Security Act of 1974, as amended (“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 our subordinated debt and a

 

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change of control of us. If an event of default occurs, the lenders under the senior secured credit facilities will be entitled to take certain actions, including the acceleration of all amounts due under the senior secured credit facilities and all actions permitted to be taken by a secured creditor.

 

2016 Senior Subordinated Notes, 2018 Senior Notes and 2019 Senior Notes—The 2016 Senior Subordinated Notes, the 2018 Senior Notes and 2019 Senior Notes indentures 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 new senior secured credit facilities could terminate their commitments to lend us money and foreclose against the assets securing our borrowings; and

 

   

we could be forced into bankruptcy or liquidation.

 

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

 

    For the year ended December 31,     Nine Months  Ended
September 30,
 
(amounts in thousands)   2010     2009     2008     2007     2006     2011     2010  

Cash flows from operating activities

  $ 312,829      $ 272,857      $ 287,381      $ 263,897      $ 215,739      $ 290,608      $ 294,202   

Income tax expense

    60,476        56,862        11,731        6,814        65,505        65,213        66,218   

Deferred income tax (expense) benefit

    (20,837     (28,274     26,446        8,917        (9,300     (22,423     (10,726

Interest expense

    252,724        254,103        313,019        332,372        94,804        203,756        182,364   

Refinancing expenses

    52,804                                             

Allowance for impairment of purchased accounts receivable

           (25,464     (76,405                            

Amortization of debt acquisition costs

    (35,263     (16,416     (15,802     (14,671     (3,411     (10,056     (12,009

Other

    (652     (375     (107     195        (876     1,889        (643

Excess tax benefit from stock options exercised

    897        1,709                      50,794                 

Changes in operating assets and liabilities, net of business acquisitions

    15,569        79,124        (19,173     (53,461     (2,180     (20,174     (38,237

Acquisition synergies and transaction costs(a)

    5,035        18,003        20,985        22,006        89,562        8,955        4,409   

Non-cash portfolio impairments(b)

           25,464        76,405        1,004                        

Site closures and other impairments(c)

    6,365        6,976        2,644        1,309               810        4,209   

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

    1,199        (229     6,427                      (3,728     1,690   

Litigation settlement costs(e)

    3,504        3,601               15,741               (1,6