10-Q 1 d244686d10q.htm FORM 10-Q Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

 

FORM 10-Q

 

 

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2011

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from             to             

Commission File Number 000-21771

 

 

West Corporation

(Exact name of registrant as specified in its charter)

 

 

 

DELAWARE

  47-0777362
(State or other jurisdiction of
incorporation or organization)
  (IRS Employer
Identification No.)
11808 Miracle Hills Drive,
Omaha, Nebraska
  68154
(Address of principal executive offices)   (Zip Code)

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

 

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

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 definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   x    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

At October 24, 2011, 87,854,914.6480 shares of the registrant’s Class A common stock and 9,971,656.8310 shares of the registrant’s Class L common stock were outstanding.


Table of Contents

INDEX

 

     Page No.  

PART I. FINANCIAL INFORMATION

  

Item 1.

  Financial Statements      3   
  Report of Independent Registered Public Accounting Firm      3   
  Condensed Consolidated Statements of Operations - Three and Nine Months Ended September 30, 2011 and 2010 (unaudited)      4   
  Condensed Consolidated Balance Sheets - September 30, 2011 and December 31, 2010 (unaudited)      5   
  Condensed Consolidated Statements of Cash Flows - Nine Months Ended September 30, 2011 and 2010 (unaudited)      6   
  Consolidated Statements of Stockholders’ Deficit - Nine Months Ended September 30, 2011 and 2010 (unaudited)      7   
  Notes to Condensed Consolidated Financial Statements (unaudited)      8   

Item 2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations      36   

Item 3.

  Quantitative and Qualitative Disclosures About Market Risk      51   

Item 4.

  Controls and Procedures      52   

PART II. OTHER INFORMATION

     53   

Item 1.

  Legal Proceedings      53   

Item 2.

  Unregistered Sales of Equity Securities and Use of Proceeds      53   

Item 6.

  Exhibits      53   

SIGNATURES

     54   

EXHIBIT INDEX

     55   

In this report, “West,” the “Company,” “we,” “us” and “our” refers to West Corporation and subsidiaries.

 

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of

West Corporation and subsidiaries

Omaha, Nebraska

We have reviewed the accompanying condensed consolidated balance sheet of West Corporation and subsidiaries (the “Company”) as of September 30, 2011, and the related condensed consolidated statements of operations for the three-month and nine-month periods ended September 30, 2011 and 2010, and stockholders’ deficit and cash flows for the nine-month periods ended September 30, 2011 and 2010. These interim financial statements are the responsibility of the Company’s management.

We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to such condensed consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of West Corporation and subsidiaries as of December 31, 2010, and the related consolidated statements of operations, stockholders’ deficit, and cash flows for the year then ended (not presented herein); and in our report dated February 23, 2011, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2010 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

/s/ Deloitte & Touche LLP

Omaha, Nebraska

November 1, 2011

 

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WEST CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

(UNAUDITED)

 

     Three Months Ended     Nine Months Ended  
     September 30,     September 30,  
     2011     2010     2011     2010  

REVENUE

   $ 632,803      $ 592,410      $ 1,866,441      $ 1,788,780   

COST OF SERVICES

     284,406        259,723        832,229        783,979   

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

     216,450        258,818        660,707        695,210   
  

 

 

   

 

 

   

 

 

   

 

 

 

OPERATING INCOME

     131,947        73,869        373,505        309,591   

OTHER INCOME (EXPENSE):

        

Interest expense, net of interest income of $54, $103, $271 and $247

     (67,342     (63,186     (203,485     (182,117

Other

     (4,314     2,796        1,498        2,611   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other expense

     (71,656     (60,390     (201,987     (179,506
  

 

 

   

 

 

   

 

 

   

 

 

 

INCOME BEFORE INCOME TAX EXPENSE

     60,291        13,479        171,518        130,085   

INCOME TAX EXPENSE

     22,944        21,908        65,213        66,218   
  

 

 

   

 

 

   

 

 

   

 

 

 

NET INCOME (LOSS)

   $ 37,347      $ (8,429   $ 106,305      $ 63,867   
  

 

 

   

 

 

   

 

 

   

 

 

 

EARNINGS (LOSS) PER COMMON SHARE:

        

Basic Class L

   $ 4.81      $ 4.31      $ 13.78      $ 12.41   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted Class L

   $ 4.62      $ 4.13      $ 13.22      $ 11.90   
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic Class A

   $ (0.12   $ (0.58   $ (0.36   $ (0.68
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted Class A

   $ (0.12   $ (0.58   $ (0.36   $ (0.68
  

 

 

   

 

 

   

 

 

   

 

 

 

WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:

        

Basic Class L Shares

     9,975        9,971        9,983        9,971   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted Class L Shares

     10,403        10,398        10,408        10,395   
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic Class A Shares

     87,865        87,890        87,926        87,955   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted Class A Shares

     87,865        87,890        87,926        87,955   
  

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements (unaudited).

 

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WEST CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(AMOUNTS IN THOUSANDS)

(UNAUDITED)

 

     September 30,     December 31,  
     2011     2010  

ASSETS

    

CURRENT ASSETS:

    

Cash and cash equivalents

   $ 74,808      $ 97,793   

Trust and restricted cash

     11,199        15,122   

Accounts receivable, net of allowance of $12,241 and $10,481

     423,377        366,419   

Deferred income taxes receivable

     15,081        29,968   

Prepaid assets

     36,382        33,667   

Other current assets

     47,355        34,058   
  

 

 

   

 

 

 

Total current assets

     608,202        577,027   

PROPERTY AND EQUIPMENT:

    

Property and equipment

     1,092,163        1,032,205   

Accumulated depreciation and amortization

     (759,521     (690,839
  

 

 

   

 

 

 

Total property and equipment, net

     332,642        341,366   

GOODWILL

     1,778,990        1,629,396   

INTANGIBLE ASSETS, net of accumulated amortization of $402,457 and $357,500

     350,319        299,685   

OTHER ASSETS

     152,719        157,776   
  

 

 

   

 

 

 

TOTAL ASSETS

   $ 3,222,872      $ 3,005,250   
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS' DEFICIT

    

CURRENT LIABILITIES:

    

Accounts payable

   $ 71,230      $ 64,149   

Accrued expenses

     352,229        283,988   

Current maturities of long-term debt

     11,569        15,425   
  

 

 

   

 

 

 

Total current liabilities

     435,028        363,562   

LONG-TERM OBLIGATIONS, less current maturities

     3,504,796        3,518,141   

DEFERRED INCOME TAXES

     133,143        93,881   

OTHER LONG-TERM LIABILITIES

     75,634        68,721   
  

 

 

   

 

 

 

Total liabilities

     4,148,601        4,044,305   

COMMITMENTS AND CONTINGENCIES (Note 11)

    

CLASS L COMMON STOCK $0.001 PAR VALUE, 100,000 SHARES AUTHORIZED, 9,977 AND 9,988 SHARES ISSUED AND OUTSTANDING

     1,642,283        1,504,445   

STOCKHOLDERS' DEFICIT

    

Class A common stock $0.001 par value, 400,000 shares authorized, 88,226 and 88,071 shares issued and 87,896 and 87,956 shares outstanding

     88        88   

Retained deficit

     (2,543,767     (2,516,315

Accumulated other comprehensive loss

     (21,043     (26,250

Treasury stock at cost (330 and 115 shares)

     (3,290     (1,023
  

 

 

   

 

 

 

Total stockholders' deficit

     (2,568,012     (2,543,500
  

 

 

   

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT

   $ 3,222,872      $ 3,005,250   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements (unaudited).

 

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WEST CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

AMOUNTS IN THOUSANDS)

(UNAUDITED)

     Nine Months Ended
September 30,
 
     2011     2010  

CASH FLOWS FROM OPERATING ACTIVITIES:

    

Net income

   $ 106,305      $ 63,867   

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

    

Depreciation

     77,340        77,156   

Amortization

     50,575        51,207   

Goodwill impairment

     —          37,675   

Provision for share based compensation

     3,537        2,682   

Deferred income tax expense

     22,423        10,726   

Amortization of debt acquisition costs

     10,056        12,009   

Other

     198        643   

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

    

Accounts receivable

     (42,159     (41,191

Other assets

     (11,430     (5,380

Accounts payable

     8,437        20,211   

Accrued wages

     15,368        15,910   

Accrued expenses, other liabilities and income tax payable

     49,958        48,687   
  

 

 

   

 

 

 

Net cash flows from operating activities

     290,608        294,202   
  

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

    

Business acquisitions, net of cash acquired of $4,780 and $2,138

     (211,531     (29,463

Purchases of property and equipment

     (80,538     (89,142

Collections applied to principal of portfolio receivables

     —          5,460   

Other

     102        30   
  

 

 

   

 

 

 

Net cash flows from investing activities

     (291,967     (113,115
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

    

Proceeds from revolving credit and accounts receivable securitization facilities

     604,500        151,850   

Payments on revolving credit and accounts receivable securitization facilities

     (604,500     (224,781

Principal repayments on long-term obligations

     (17,201     (25,448

Repurchase of common stock

     (4,829     (151

Payments of capital lease obligations

     (701     (1,895

Other

     (611     (441
  

 

 

   

 

 

 

Net cash flows from financing activities

     (23,342     (100,866
  

 

 

   

 

 

 

EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS

     1,716        (1,410

NET CHANGE IN CASH AND CASH EQUIVALENTS

     (22,985     78,811   

CASH AND CASH EQUIVALENTS, Beginning of period

     97,793        59,068   
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS, End of period

   $ 74,808      $ 137,879   
  

 

 

   

 

 

 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

    

Cash paid during the period for interest

   $ 168,189      $ 139,985   
  

 

 

   

 

 

 

Cash paid during the period for income taxes, net of refunds of $1,456 and $885

   $ 25,541      $ 20,511   
  

 

 

   

 

 

 

SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES:

    

Acquisition of property through accounts payable commitments

   $ 5,093      $ 4,317   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements (unaudited).

      

 

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WEST CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

(AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)

 

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

BALANCE, January 1, 2011

   $ 88      $ -      $ (2,516,315   $ (1,023   $ (9,065   $ (17,185   $ (2,543,500

Net income

         106,305              106,305   

Foreign currency translation adjustment, net of tax of $2,571

             (4,194       (4,194

Reclassification of cash flow hedges into earnings, net of tax of $3,180

               5,188        5,188   

Unrealized gain on cash flow hedges, net of tax of $2,582

               4,213        4,213   
              

 

 

 

Total comprehensive income

                 111,512   

Purchase of stock at cost (214,764 Class A shares)

           (2,267         (2,267

Executive Deferred Compensation Plan contributions

       2,136                2,136   

Stock options exercised including related tax benefits (58,000 Class A shares)

       128                128   

Share based compensation

       1,554                1,554   

Accretion of Class L common stock priority return preference

       (3,818     (133,757           (137,575
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

BALANCE, September 30, 2011

   $ 88      $      $ (2,543,767   $ (3,290   $ (13,259   $ (7,784   $ (2,568,012
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

BALANCE, January 1, 2010

   $ 88      $      $ (2,408,770   $ (53   $ (4,147   $ (12,583   $ (2,425,465

Net income

         63,867              63,867   

Foreign currency translation adjustment, net of tax of $4,313

             (7,037       (7,037

Unrealized loss on cash flow hedges, net of tax of $6,094

               (9,943     (9,943
              

 

 

 

Total comprehensive income

                 46,887   

Purchase of stock at cost (16,779 Class A shares)

           (151         (151

Executive Deferred Compensation Plan contributions

       (579             (579

Stock options exercised including related tax benefits (58,400 Class A shares)

       122                122   

Share based compensation

       1,563                1,563   

Accretion of Class L common stock priority return preference

       (1,106     (122,591           (123,697
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

BALANCE, September 30, 2010

   $ 88      $ -      $ (2,467,494   $ (204   $ (11,184   $ (22,526   $ (2,501,320
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

 

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WEST CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1. ORGANIZATION, CONSOLIDATION AND PRESENTATION OF FINANCIAL STATEMENTS

Business Description—West Corporation (the “Company” or “West”) is a leading provider of technology-driven, outsourced communications services. “We,” “us” and “our” also refer to West and its consolidated subsidiaries, as applicable. 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.

We operate in two business segments:

 

   

Unified Communications, including conferencing and collaboration services, event services, alerts and notification services and IP-based unified communication solutions; and

 

   

Communication Services, including emergency communication services, automated call processing and

agent-based services.

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 replacement 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. InterCall offers an event services team to help clients who would like extra assistance planning, conducting and gathering report information for large scale or high-value meetings or conferences. Event services include audio and video streaming services, virtual event design and hosting, and operator-assisted audio conferencing services.

Alerts & Notifications Services. Our proprietary technology platforms allow clients to manage and deliver automated personalized communications. We use multiple delivery channels (voice, text messaging, email and fax) based on the preferences of the recipient. For example, we deliver patient notifications, appointment reminders 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 scalable platform enables a high volume of messages to be sent in a short amount of time. Our platforms also enable two-way communications which allow the recipients of a message to respond with relevant information to our clients.

 

 

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WEST CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

— IP-Based Unified Communications 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. We provide our clients with advice and the technology solutions to integrate their corporate communications.

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. Our clients generally enter into long-term contracts and fund their obligations through monthly charges on users’ telephone bills.

Automated Call Processing. We believe we have developed a best-in-class automated customer service platform. Our services allow our clients to effectively communicate with their customers through inbound and outbound interactive voice response (IVR) applications using natural language speech recognition, automated voice prompts and network-based call routing services. In addition to these front-end customer service applications, we also provide analyses that help our clients improve their automated communications strategy. Our 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, including inbound customer care, customer acquisition and retention, business-to-business sales and account management, overpayment identification and recovery services, and receivables management solutions. 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. We have a flexible model with on-shore, off-shore and virtual home-based capabilities to fit our clients’ needs.

Basis of Consolidation—The unaudited condensed consolidated financial statements include the accounts of West and our wholly-owned subsidiaries and reflect all adjustments (all of which are normal recurring accruals) which are, in the opinion of management, necessary for a fair presentation of the financial position, operating results and cash flows for the interim periods. The unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto, together with Management’s Discussion and Analysis of Financial Condition and Results of Operations, contained in our Annual Report on

 

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WEST CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Form 10-K for the year ended December 31, 2010. All intercompany balances and transactions have been eliminated. Our results for the three and nine months ended September 30, 2011 are not necessarily indicative of what our results will be for other interim periods or for the full fiscal year.

Use of Estimates—The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Revenue Recognition—In our Unified Communications segment, our conferencing and collaboration services, event services and IP-based unified communications 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 recognized upon completion of such 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, 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 services 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.

Common Stock—Our equity investors (i.e., an investment group led by Thomas H. Lee Partners, L.P. and Quadrangle Group, LLC (the “Sponsors”), Mary and Gary West, who are the founders of West (the “Founders”) and certain members of management) own a combination of Class L and Class A shares (in strips of eight Class A shares and one Class L share per strip). Supplemental management incentive equity awards (restricted stock and option programs) have been implemented with Class A shares/options only. General terms of these securities are:

Class L shares: Each Class L share is entitled to a priority return preference equal to the sum of (x) $90 per share base amount plus (y) an amount sufficient to generate a 12% internal rate of return (“IRR”) on that base amount, compounded quarterly, from the date of the recapitalization in which the Class L shares were originally issued, October 24, 2006 until the priority return preference is paid in full. Each Class L share also participates in any equity appreciation beyond the priority return on the same per share basis as the Class A shares.

 

 

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WEST CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Class A shares: Class A shares participate in the equity appreciation after the Class L priority return is satisfied.

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

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

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

As the Class L stockholders control a majority of the votes of the board of directors through direct representation on the board of directors and the conversion and redemption features are considered to be outside the control of the Company, all shares of Class L common stock have been presented outside of permanent equity in accordance with ASC 480-10-S99, Classification and Measurement of Redeemable Securities. At September 30, 2011 and December 31, 2010, the 12% priority return preference has been accreted and included in the Class L share balance.

A reconciliation of the Class L common shares is presented below, in thousands:

 

     Nine months
ended September 30,
2011
    Nine months
ended September 30,
2010
 

Beginning of period balance

   $ 1,504,445      $ 1,332,721   

Accretion of class L common stock priority return preference

     137,575        123,697   

Executive Deferred Compensation Plan activity

     2,825        839   

Purchase of Class L shares

     (2,562     —     
  

 

 

   

 

 

 

End of period balance

   $ 1,642,283      $ 1,457,257   
  

 

 

   

 

 

 

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

 

 

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WEST CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Trust and Restricted Cash—Trust cash represents cash collected on behalf of our clients that has not yet been remitted to them. A related liability is recorded in accounts payable until settlement with the respective clients. Restricted cash primarily represents cash held as collateral for certain letters of credit.

Foreign Currency and Translation of Foreign Subsidiaries—The functional currencies of our foreign operations are the respective local currencies. All assets and liabilities of our foreign operations are translated into U.S. dollars at fiscal period-end exchange rates. Income and expense items are translated at average exchange rates prevailing during the fiscal period. The resulting translation adjustments are recorded as a component of stockholders’ deficit and comprehensive income. Foreign currency transaction gains or losses are recorded in the statement of operations.

Subsequent Events—In accordance with the provisions of ASC 855, we have evaluated subsequent events. No subsequent events requiring recognition were identified and therefore none were incorporated into the condensed consolidated financial statements presented herein.

Recent Accounting Pronouncements—In December 2010, the Financial Accounting Standards Board (“FASB”) issued guidance requiring an entity, such as the Company, with reporting units that have carrying amounts that are zero or negative to assess whether it is more likely than not that the reporting units’ goodwill is impaired. The Company is required to perform step two of the goodwill impairment test if there are any adverse qualitative factors indicating that an impairment may exist for their reporting units with a zero or negative carrying value. This guidance became effective for the Company January 1, 2011 and the adoption had no effect on our financial position, results of operations or cash flows.

In June 2011, the FASB issued ASU No. 2011- 05, Comprehensive Income (Topic 220), requiring entities to present net income and other comprehensive income in either a single continuous statement or in two separate, but consecutive, statements of net income and other comprehensive income. Reclassification adjustments between net income and other comprehensive income must be shown on the face of the statement(s), with no resulting change in net earnings. ASU No. 2011- 05 is effective for statements issued by the Company after January 1, 2012. The Company will provide the required financial reporting presentation upon the effective date.

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

2. ACQUISITIONS

PivotPoint

On August 10, 2011, we completed the acquisition of substantially all of the telecommunication business assets of PivotPoint Solutions, LLC (“PivotPoint”), a provider of wireless location accuracy compliance reporting, analysis and optimization. PivotPoint’s technology allows wireless carriers to monitor and optimize their location finding networks. The purchase price was $22.9 million and was funded by cash on hand and partial use of our revolving credit facilities. The results of the acquired PivotPoint assets have been included in the Communication Services segment since August 10, 2011.

 

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WEST CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Contact One

On June 7, 2011, we completed the acquisition of substantially all of the assets of Contact One, Inc. (“Contact One”), a provider of 9-1-1 database, mapping/GIS (Geographic Information System) and 9-1-1 products and services. The purchase price was $7.6 million and was funded by cash on hand. The results of the acquired Contact One assets have been included in the Communication Services segment since June 7, 2011.

Smoothstone

On June 3, 2011, we completed the acquisition of Smoothstone IP Communications Corporation (“Smoothstone”), a provider of cloud-based communications for the enterprise. The acquisition of Smoothstone added cloud-based IP telephony and network management to our Unified Communications solutions portfolio. The purchase price was $120.7 million and was funded by cash on hand and partial use of our revolving credit facilities. The results of Smoothstone have been included in the Unified Communications segment since June 3, 2011.

Unisfair

On March 1, 2011, we completed the acquisition of Unisfair, Inc. (“Unisfair”), a provider of hosted virtual events and business environments. These virtual events and environments offer a highly interactive experience through speaking sessions, exhibition floors and networking areas that support many business purposes, including sales and lead generation, training, product marketing and corporate and employee communications. The addition of Unisfair enhances our virtual event offering by permitting us to offer a complete end-to-end solution on a proprietary platform within our Unified Communications segment. The purchase price was $19.5 million and was funded by cash on hand. The results of Unisfair have been included in the Unified Communications segment since March 1, 2011.

TFCC

On February 1, 2011, we completed the acquisition of Twenty First Century Communications, Inc. (“TFCC”), a provider of automated alerts and notification solutions to the electric utilities industry, government, public safety and corporate markets. The addition of TFCC enhances our alerts and notifications platform and our position as a service provider to the U.S. utility industry. The purchase price was $40.5 million and was funded by cash on hand and partial use of our revolving credit facilities. The results of TFCC have been included in the Unified Communications segment since February 2, 2011.

POSTcti

On February 1, 2011, we completed the acquisition of Preferred One Stop Technologies Limited (“POSTcti”), a provider of unified communications solutions and services in Europe. POSTcti enables and provides single source communication convergence from best-of-breed industry-leading providers, combined with customized professional services implementation and dedicated ongoing product support. The purchase price included $4.3 million of non-contingent consideration paid in Sterling at closing and was funded with cash on hand. The purchase agreement for POSTcti also includes a three year contingent earn-out provision with a maximum payment of approximately £12.0 million and £0.4 million (approximately $18.7 million and $0.6 million at the September 30, 2011 exchange rate) of additional non-contingent deferred consideration withheld to secure sellers’ indemnification obligations. Based on a weighted average probability analysis, we have accrued $8.5 million at September 30, 2011 for the contingent earn-out. The results of the acquired POSTcti assets have been included in the Unified Communications segment since February 1, 2011.

 

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WEST CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

SPN

On November 9, 2010, we completed the acquisition of substantially all of the assets of Specialty Pharmacy Network, Inc. (“SPN”), a provider of billing and management information to payers and providers that participate in managing, administering and paying specialty pharmacy claims. SPN’s primary offering is a server based application whose data mining capabilities allow SPN to identify indicators of medical claim overpayment based on a proprietary library of pharmacy edits. The purchase price was $3.5 million and was funded by cash on hand. The results of the acquired SPN assets have been included in the Communication Services segment since November 9, 2010.

TuVox

On July 21, 2010, we completed the acquisition of TuVox Incorporated (“TuVox”), a provider of on-demand and interactive voice recognition applications. The purchase price was $16.5 million and was funded by cash on hand. The results of operations for TuVox have been included in the Communication Services segment since July 21, 2010.

Total acquisition costs expensed during the three and nine months ended September 30, 2011 were $0.4 million and $2.6 million, respectively, compared to $0.4 million and $1.3 million for the three and nine months ended September 30, 2010.

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the respective acquisition dates for PivotPoint, Contact One, Smoothstone, Unisfair, TFCC, POSTcti, SPN and TuVox. The finite lived intangible assets are comprised of trade names, technology, non-competition agreements and customer relationships. We are in the process of completing the valuation of certain intangible assets and the acquisition accounting allocation, and accordingly the information presented with respect to the acquisitions of PivotPoint, Contact One, Smoothstone, Unisfair, TFCC, POSTcti and SPN are provisional and subject to adjustment.

 

(Amounts in thousands)    PivotPoint      Contact One     Smoothstone     Unisfair     TFCC      POSTcti     SPN      TuVox  

Working Capital

   $ 91       $ (390   $ (423   $ (3,694   $ 1,080       $ (1,255   $ —         $ (1,245

Property and equipment

     307         56        1,484        339        3,304         18        —           242   

Other assets, net

     30         —          —          42        —           —          —           10,365   

Intangible assets

     10,791         2,785        48,610        10,960        17,250         3,859        550         7,907   

Goodwill

     11,650         5,189        90,551        15,305        18,870         10,208        2,988         1,212   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total assets acquired

     22,869         7,640        140,222        22,952        40,504         12,830        3,538         18,481   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Non-current deferred taxes

     —           —          18,472        3,452        —           —          —           2,030   

Long-term liabilities

     —           —          1,047        —          —           8,537        —           —     
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total liabilities assumed

     —           —          19,519        3,452        —           8,537        —           2,030   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Net assets acquired

   $ 22,869       $ 7,640      $ 120,703      $ 19,500      $ 40,504       $ 4,293      $ 3,538       $ 16,451   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Pro forma

Assuming acquisitions made since January 1, 2010, occurred as of the beginning of the periods presented, our unaudited pro forma results of operations for the three and nine months ended September 30, 2011 and 2010, respectively, would have been as follows, in thousands:

 

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

     Three months ended
September 30,
    Nine months ended
September 30,
 
     2011     2010     2011     2010  

Revenue

   $ 633,286      $ 611,759      $ 1,889,420      $ 1,853,911   

Net Income (Loss)

   $ 37,627      $ (11,640   $ 103,902      $ 52,913   

Earnings per common L share - basic

   $ 4.81      $ 4.31      $ 13.78      $ 12.41   

Earnings per common L share - diluted

   $ 4.62      $ 4.13      $ 13.22      $ 11.90   

Loss per common A share - basic

   $ (0.12   $ (0.62   $ (0.37   $ (0.80

Loss per common A share- diluted

   $ (0.12   $ (0.62   $ (0.37   $ (0.80

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

3. GOODWILL AND OTHER INTANGIBLE ASSETS

The following table presents the activity in goodwill by reporting segment, in thousands, for the nine months ended September 30, 2011:

 

     Unified
Communications
     Communication
Services
    Consolidated  

Balance at December 31, 2010

   $ 843,558       $ 823,513      $ 1,667,071   

Acquisitions

     134,934         16,839        151,773   

Acquisition accounting adjustments

     —           (2,907     (2,907

Foreign currency translation adjustment

     990         (262     728   
  

 

 

    

 

 

   

 

 

 

Gross carrying value at September 30, 2011

     979,482         837,183        1,816,665   

Impairment in 2010

     —           (37,675     (37,675
  

 

 

    

 

 

   

 

 

 

Balance at September 30, 2011

   $ 979,482       $ 799,508      $ 1,778,990   
  

 

 

    

 

 

   

 

 

 

The excess of the acquisition costs over the fair value of the assets acquired and liabilities assumed for the purchase of PivotPoint, Contact One, Smoothstone, Unisfair, TFCC, POSTcti and SPN were assigned to goodwill based on preliminary estimates. We are in the process of completing the acquisition accounting for certain intangible assets and liabilities. The process of completing the acquisition accounting involves numerous time consuming steps for information gathering, verification and review. We expect to finalize this process within twelve months following the respective acquisition dates. Goodwill recognized for PivotPoint, Contact One, Smoothstone, Unisfair, TFCC, POSTcti, and SPN at September 30, 2011 was approximately $11.7 million, $5.2 million, $90.6 million, $14.7 million, $18.9 million, $10.1 million and $3.0 million, respectively. During the third quarter of 2011 we finalized our acquisition accounting for the acquisition of TuVox. As a result of this finalization goodwill was reduced $0.3 million for a final working capital / escrow settlement.

 

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WEST CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Factors contributing to the recognition of goodwill

Factors that contributed to a purchase price resulting in the recognition of goodwill, non-deductible for tax purposes, for the purchase of the PivotPont assets included PivotPonts’s expertise in location accuracy compliance reporting mandated by the Federal Communications Commission, expansion of 9-1-1 products and services, market expansion and operational efficiencies.

Factors that contributed to a purchase price resulting in the recognition of goodwill, non-deductible for tax purposes, for the purchase of the Contact One assets included Contact One’s expertise in 9-1-1 database, mapping/GIS and expansion of 9-1-1 products and services.

Factors that contributed to a purchase price resulting in the recognition of goodwill, non-deductible for tax purposes, for the purchase of Smoothstone included a complete product portfolio of cloud-based, network-centric Unified Communications solutions, a flexible deployment model which enables a menu of solutions to be implemented to replace or complement customers’ existing on-premise equipment, expansion of the target market of potential clients and capital expenditure and operating cost avoidance.

A factor that contributed to a purchase price resulting in the recognition of goodwill, non-deductible for tax purposes, for the purchase of Unisfair included enhancement of our virtual events and business environment services offering.

Factors that contributed to a purchase price resulting in the recognition of goodwill, deductible for tax purposes, for the purchase of TFCC included expansion of our presence in emergency alerts and notification services particularly in the utilities industry and the potential to drive additional services into this market.

A factor that contributed to a purchase price resulting in the recognition of goodwill, non-deductible for tax purposes, for the purchase of the POSTcti assets included the expansion of our hosted and managed unified communications solutions to Europe.

Factors that contributed to a purchase price resulting in the recognition of goodwill, non-deductible for tax purposes, for the purchase of the SPN assets included SPN’s expertise and the large market opportunity in pharmacy insurance claims.

Other intangible assets

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

 

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WEST CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

     As of September 30, 2011      Weighted
Average

Amortization
Period (Years)
 

Intangible assets

   Acquired
Cost
     Accumulated
Amortization
    Net
Intangible
Assets
    

Customer lists

   $ 531,446       $ (321,568   $ 209,878         9.2   

Technology & Patents

     132,981         (60,026     72,955         10.3   

Trade names

     51,110         —          51,110         Indefinite   

Trade names (finite-lived)

     22,785         (11,390     11,395         4.3   

Other intangible assets

     14,454         (9,473     4,981         4.6   
  

 

 

    

 

 

   

 

 

    

Total

   $ 752,776       $ (402,457   $ 350,319      
  

 

 

    

 

 

   

 

 

    

 

     As of December 31, 2010      Weighted
Average

Amortization
Period (Years)
 

Intangible assets

   Acquired
Cost
     Accumulated
Amortization
    Net
Intangible
Assets
    

Customer lists

   $ 473,144       $ (289,889   $ 183,255         9.0   

Technology & Patents

     102,311         (47,376     54,935         10.5   

Trade names

     58,710         —          58,710         Indefinite   

Trade names (finite-lived)

     12,379         (10,170     2,209         4.3   

Other intangible assets

     10,641         (10,065     576         5.6   
  

 

 

    

 

 

   

 

 

    

Total

   $ 657,185       $ (357,500   $ 299,685      
  

 

 

    

 

 

   

 

 

    

Amortization expense for finite-lived intangible assets for the three and nine months ended September 30, 2011 and 2010, in thousands, was:

 

     Three months ended
September 30,
     Nine months ended
September 30,
 
     2011      2010      2011      2010  

Finite-lived intangible asset amortization

   $ 16,153       $ 15,009       $ 45,724       $ 47,188   

Estimated annual amortization expense for the intangible assets noted above for 2011 and the next five years is as follows:

 

2011

   $59.5 million

2012

   $56.5 million

2013

   $49.7 million

2014

   $41.6 million

2015

   $34.0 million

2016

   $25.9 million

 

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WEST CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

4. ACCRUED EXPENSES

Accrued expenses, in thousands, consisted of the following as of:

 

     September 30,      December 31,  
     2011      2010  

Accrued wages

   $ 67,851       $ 46,673   

Deferred revenue and customer deposits

     67,502         48,845   

Interest payable

     60,711         31,318   

Accrued other taxes (non-income related)

     39,729         38,846   

Accrued phone

     33,190         25,568   

Income taxes payable

     20,142         1,055   

Accrued employee benefit costs

     15,466         17,214   

Interest rate hedge position

     8,391         26,123   

Accrued lease expense

     6,884         8,695   

Accrued settlements

     468         4,307   

Other current liabilities

     31,895         35,344   
  

 

 

    

 

 

 
   $ 352,229       $ 283,988   
  

 

 

    

 

 

 

5. LONG-TERM OBLIGATIONS

Long-term debt is carried at amortized cost. Long-term obligations, in thousands, consist of the following as of:

 

     September 30,     December 31,  
     2011     2010  

Senior Secured Term Loan Facility, due 2013

   $ 448,434      $ 450,210   

Senior Secured Term Loan Facility, due 2016

     1,467,931        1,483,356   

11% Senior Subordinated Notes, due 2016

     450,000        450,000   

8 5/8% Senior Notes, due 2018

     500,000        500,000   

7 7/8% Senior Notes, due 2019

     650,000        650,000   
  

 

 

   

 

 

 
     3,516,365        3,533,566   
  

 

 

   

 

 

 

Less: current maturities

     (11,569     (15,425
  

 

 

   

 

 

 

Long-term obligations

   $ 3,504,796      $ 3,518,141   
  

 

 

   

 

 

 

6. HEDGING ACTIVITIES

Periodically, we have entered into interest rate swaps to hedge the cash flows from our variable rate debt, which effectively converts the hedged portion to fixed rate debt on our outstanding senior secured term loan facility. The initial assessments of hedge effectiveness were performed using regression analysis. The periodic measurements of hedge ineffectiveness are performed using the change in variable cash flows method.

The cash flow hedges are recorded at fair value with a corresponding entry, net of taxes, recorded in other comprehensive income (“OCI”) until earnings are affected by the hedged item. At September 30, 2011, the notional amount of debt outstanding under the six interest rate swap agreements was $1.0 billion. The fixed interest rate on the six interest rate swaps range from 1.685% to 2.60%. During the three months ended September 30, 2011, three interest rate swaps with a notional value of $400.0 million matured. The interest rate on these three interest rate swaps ranged from 3.38% to 3.532%.

 

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WEST CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

The following table presents, in thousands, the fair value of our derivatives and consolidated balance sheet location.

 

    

Liability Derivatives

 
    

September 30, 2011

    

December 31, 2010

 
    

Balance Sheet

Location

   Fair
Value
    

Balance Sheet

Location

   Fair
Value
 

Derivatives designated as hedging instruments:

           

Interest rate swaps

   Accrued expenses    $ 8,391       Accrued expenses    $ 21,765   

Interest rate swaps

   Other long-term liabilities      3,630       Other long-term liabilities      5,725   
     

 

 

       

 

 

 
        12,021            27,490   

Derivatives not designated as hedging instruments:

           

Interest rate swaps

   Accrued expenses      —         Accrued expenses      4,358   
     

 

 

       

 

 

 

Total derivatives

      $ 12,021          $ 31,848   
     

 

 

       

 

 

 

The following presents, in thousands, the impact of interest rate swaps on the consolidated statement of operations for the three and nine months ended September 30, 2011 and 2010, respectively.

 

Derivatives designated    Amount of gain (loss)
recognized in OCI
for the three
months ended
September 30,
    Location of gain (loss)
reclassified from OCI

into net income
     Amount of gain (loss)
reclassified from OCI
into net income  for the
three months ended
September 30,
     Amount of gain (loss)
recognized in net

income on hedges
(ineffective portion)
for the three months
ended September 30,
 

as hedging instruments

   2011      2010            2011     2010      2011      2010  

Interest rate swaps

   $ 2,058       $ (3,045     Interest expense       $ (1,297   $ —         $ —         $ (60
  

 

 

    

 

 

      

 

 

   

 

 

    

 

 

    

 

 

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

Interest rate swaps

   $ 4,213       $ (9,943     Interest expense       $ (5,188   $ —         $ 202       $ (6
  

 

 

    

 

 

      

 

 

   

 

 

    

 

 

    

 

 

 

7. FAIR VALUE DISCLOSURES

Accounting Standards Codification 820 Fair Value Measurements and Disclosures (“ASC 820”) defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The provisions of ASC 820 apply to other accounting pronouncements that require or permit fair value measurements. ASC 820:

Defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date; and

Establishes a three-level hierarchy for fair value measurements based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date.

 

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WEST CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Inputs refer broadly to the assumptions that market participants would use in pricing the asset or liability, including assumptions about risk. To increase consistency and comparability in fair value measurements and related disclosures, the fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The three levels of the hierarchy are defined as follows:

Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities.

Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly for substantially the full term of the financial instrument.

Level 3 inputs are unobservable inputs for assets or liabilities.

The categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Following is a description of the valuation methodologies used for assets and liabilities measured at fair value.

Trading Securities (Asset). The assets held in the West Corporation Executive Retirement Savings Plan and the West Corporation Non-qualified Deferred Compensation Plan represent mutual funds, invested in debt and equity securities, classified as trading securities in accordance with ASC 320 considering the employee’s ability to change the investment allocation of their deferred compensation at any time. Quoted market prices are available for these securities in an active market, therefore, the fair value of these securities is determined by Level 1 inputs.

Interest rate swaps. The effect of the interest rate swaps is to change a variable rate debt obligation to a fixed rate for that portion of the debt that is hedged. We record the interest rate swaps at fair value. The fair value of the interest rate swaps is based on a model whose inputs are observable (LIBOR swap rates); therefore, the fair value of these interest rate swaps is based on a Level 2 input.

Assets and liabilities measured at fair value on a recurring basis at September 30, 2011 and December 31, 2010, in thousands, are summarized below:

 

            Fair Value Measurements at September 30, 2011 Using:  

Description

   Carrying
Amount
     Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
     Assets /
Liabilities
at Fair
Value
 

Assets

              
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Trading securities

   $ 27,261       $ 27,261       $ —         $ —         $ 27,261   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

              
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Interest rate swaps

   $ 12,021       $ —         $ 12,021       $ —         $ 12,021   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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WEST CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

            Fair Value Measurements at December 31, 2010 Using:  

Description

   Carrying
Amount
     Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
     Assets /
Liabilities
at Fair
Value
 

Assets

              
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Trading securities

   $ 26,834       $ 26,834       $ —         $ —         $ 26,834   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

              
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Interest rate swaps

   $ 31,848       $ —         $ 31,848       $ —         $ 31,848   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following table sets forth the fair value of our long-term debt based on market quotes compared to the carrying amount, in millions, as of the dates indicated:

 

September 30, 2011

 

December 31, 2010

Fair Value

 

Carrying Value

 

Fair Value

 

Carrying Value

$ 3,449.9

  $3,516.4   $3,604.6   $3,533.6

8. STOCK-BASED COMPENSATION

The 2006 Executive Incentive Plan (“EIP”) was established to advance the interests of the Company and its affiliates by providing for the grant to participants of stock-based and other incentive awards. Awards under the EIP are intended to align the incentives of the Company’s executives and investors and to improve the performance of the Company. The administrator, subject to approval by the board, will select participants from among those key employees and directors of, and consultants and advisors to, the Company or its affiliates who, in the opinion of the administrator, are in a position to make a significant contribution to the success of the Company and its affiliates. A maximum of 359,986 Equity Strips (each comprised of eight shares of Class A common stock and one share of Class L common stock), in each case pursuant to rollover options (“Management Rollover Options”), were authorized to be delivered in satisfaction of rollover option awards under the EIP. In addition, an aggregate maximum of 11,276,291 shares of Class A common stock may be delivered in satisfaction of other awards under the EIP.

In general, stock options granted under the EIP become exercisable over a period of five years, with 20% of the stock option becoming vested and exercisable at the end of each year. Once an option has vested, it generally remains exercisable during the continuation of the option holder’s service until the tenth anniversary of the date of grant.

Stock Options

The following table presents the stock option activity under the EIP for the nine months ended September 30, 2011 and 2010, respectively:

 

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WEST CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

           Options Outstanding  
     Options
Available
for Grant
    Number of
Options
    Weighted
Average
Exercise Price
 

Balance at January 1, 2010

     454,347        2,501,500      $ 2.42   

Granted

     (235,000     235,000        9.04   

Canceled

     99,600        (99,600     (3.40

Exercised

     —          (58,400     (2.12
  

 

 

   

 

 

   

 

 

 

Balance at September 30, 2010

     318,947        2,578,500      $ 3.00   
  

 

 

   

 

 

   

 

 

 

Balance at January 1, 2011

     333,447        2,544,000      $ 3.00   

Granted

     (160,000     160,000        10.60   

Canceled

     79,500        (79,500     (5.63

Exercised

     —          (58,000     (2.20
  

 

 

   

 

 

   

 

 

 

Balance at September 30, 2011

     252,947        2,566,500      $ 3.41   
  

 

 

   

 

 

   

 

 

 

At September 30, 2011, we expect that approximately 72% of options granted will vest over the vesting period.

At September 30, 2011, the intrinsic value of vested options was approximately $13.7 million.

The following table summarizes the information on the options granted under the EIP at September 30, 2011:

 

Outstanding     Exercisable  

Range of

Exercise Prices

    Number of
Options
    Average
Remaining
Contractual
Life (years)
    Weighted
Average
Exercise
Price
    Number of
Options
    Weighted
Average
Exercise
Price
 
$ 1.64        1,731,500        5.19      $ 1.64        1,375,500      $ 1.64   
  3.61        220,000        7.25        3.61        88,000        3.61   
  6.36        255,000        6.33        6.36        153,000        6.36   
  9.04        205,000        8.58        9.04        41,000        9.04   
  10.60        155,000        9.33        10.60        —          —     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
$ 1.64 - $10.60        2,566,500        6.00      $ 3.41        1,657,500      $ 2.36   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

We account for the stock option grants under the EIP in accordance with Accounting Standards Codification 718 Compensation-Stock Compensation (“ASC 718”). The fair value of option awards granted under the EIP during 2011 and 2010 were $3.92 and $4.09 per option, respectively. We have estimated the fair value of EIP option awards on the grant date using a Black-Scholes option pricing model that uses the assumptions noted in the following table.

 

     2011     2010  

Risk-free interest rate

     1.87     3.11

Dividend yield

     0.0     0.0

Expected volatility

     33.2     40.0

Expected life (years)

     6.5        6.5   

The risk-free rate for periods within the expected life of the option is based on the zero-coupon U.S. government treasury strip with a maturity which approximates the expected life of the option at the time of grant.

 

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WEST CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

There was approximately $2.2 million and $4.0 million unrecorded and unrecognized compensation cost related to unvested, time vesting, share based compensation stock options under the EIP at September 30, 2011 and 2010, respectively.

Executive Management Rollover Options

During the three and nine months ended September 30, 2011, no Management Rollover Options were exercised. At September 30, 2011, 287,326 Equity Strip options were fully vested and outstanding. The aggregate intrinsic value of these equity strip options was approximately $47.0 million.

Stock-Based Compensation Expense

The components of stock-based compensation expense, in thousands, are presented below:

 

     Three months ended September 30,      Nine months ended September 30,  
     2011      2010      2011      2010  

Stock options

   $ 170       $ 162       $ 517       $ 446   

Restricted stock

     346         368         1,037         1,117   

Deferred compensation - notional shares

     718         424         1,983         1,119   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 1,234       $ 954       $ 3,537       $ 2,682   
  

 

 

    

 

 

    

 

 

    

 

 

 

9. EARNINGS PER SHARE

On October 2, 2009, the Company announced its intention to commence an equity offering and accordingly is providing the following information related to earnings per share.

We have two classes of common stock (Class L common stock and Class A common stock). Each Class L share is entitled to a priority return preference equal to the sum of (x) $90 per share base amount plus (y) an amount sufficient to generate a 12% internal rate of return on that base amount from the date of the recapitalization until the priority return preference is paid in full. Each Class L share also participates in any equity appreciation beyond the priority return on the same per share basis as the Class A shares. Class A shares participate in the equity appreciation after the Class L priority return is satisfied.

The Class L common stock is considered a participating stock security requiring use of the “two-class” method for the computation of basic net income (loss) per share in accordance with ASC 260 Earnings Per Share. Losses are not allocated to the Class L common stock in the computation of basic earnings per share as the Class L common stock is not obligated to share in losses.

Basic earnings per share (“EPS”) excludes the effect of common stock equivalents and is computed using the “two-class” computation method, which divides earnings attributable to the Class L preference from total earnings. Any remaining income or loss is attributed to the Class A shares. Diluted earnings per share reflects the

 

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WEST CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

potential dilution that could result if options or other contingently issuable shares were exercised or converted into common stock and notional shares from the Deferred Compensation Plan were granted. Diluted earnings per common share assumes the exercise of stock options using the treasury stock method.

 

     Three months ended September 30,     Nine months ended September 30,  
     2011     2010     2011     2010  

Net Income (Loss)

   $ 37,347      $ (8,429   $ 106,305      $ 63,867   

Less: accretion of Class L Shares (1)

     48,020        42,964        137,575        123,697   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to Class A Shares

   $ (10,673   $ (51,393   $ (31,270   $ (59,830
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) The Class L shareholders are allocated their priority return which is equivalent to the accretion, while any losses are allocated to Class A shareholders as the Class L shareholders do not have a contractual obligation to share in losses.

 

     Three months ended September 30,     Nine months ended September 30,  
     2011     2010     2011     2010  

Earnings (Loss) Per Common Share

        

Basic - Class L Shares

   $ 4.81      $ 4.31      $ 13.78      $ 12.41   

Basic - Class A Shares

   $ (0.12   $ (0.58   $ (0.36   $ (0.68

Diluted - Class L Shares

   $ 4.62      $ 4.13      $ 13.22      $ 11.90   

Diluted - Class A Shares

   $ (0.12   $ (0.58   $ (0.36   $ (0.68

Weighted Average Number of Shares Outstanding

        

Basic - Class L Shares

     9,975        9,971        9,983        9,971   

Basic and Diluted - Class A Shares

     87,865        87,890        87,926        87,955   

Dilutive impact of stock options

        

Class L Shares

     428        427        425        424   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted Class L Shares

     10,403        10,398        10,408        10,395   

 

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WEST CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

For purposes of calculating the diluted earnings per share for the Class A shares, 2.6 million options outstanding to purchase Class A shares at September 30, 2011 and 2010 have been excluded from the computation of diluted Class A shares outstanding because the income allocable to the Class A shares is a loss therefore the effect is anti-dilutive.

10. BUSINESS SEGMENTS

Unified Communications, including conferencing and collaboration services, event services, alerts and notification services and IP-based unified communication solutions; and

Communication Services, including emergency communications, automated call processing and agent-based services.

 

     For the three months ended
September 30,
    For the nine months ended
September 30,
 
     2011     2010     2011     2010  
     (amounts in thousands)  

Revenue:

        

Unified Communications

   $ 352,090      $ 307,572      $ 1,030,249      $ 915,817   

Communication Services

     283,994        286,466        844,403        877,280   

Intersegment eliminations

     (3,281     (1,628     (8,211     (4,317
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 632,803      $ 592,410      $ 1,866,441      $ 1,788,780   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating Income:

        

Unified Communications

   $ 100,279      $ 81,661      $ 290,760      $ 242,509   

Communication Services

     31,668        (7,792     82,745        67,082   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 131,947      $ 73,869      $ 373,505      $ 309,591   
  

 

 

   

 

 

   

 

 

   

 

 

 

Depreciation and Amortization

        

(Included in operating income, excludes 2010 goodwill impairment)

        

Unified Communications

   $ 21,794      $ 20,170      $ 64,021      $ 66,479   

Communication Services

     22,337        21,876        63,895        61,884   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 44,131      $ 42,046      $ 127,916      $ 128,363   
  

 

 

   

 

 

   

 

 

   

 

 

 

Capital Expenditures:

        

Unified Communications

   $ 13,257      $ 9,881      $ 32,599      $ 34,294   

Communication Services

     12,678        10,629        32,776        33,556   

Corporate

     3,026        3,605        6,939        16,975   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 28,961      $ 24,115      $ 72,314      $ 84,825   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

     As of September 30,
2011
     As of December 31,
2010
 
     (amounts in thousands)  

Assets:

     

Unified Communications

   $ 1,634,220       $ 1,401,242   

Communication Services

     1,359,746         1,375,643   

Corporate

     228,906         228,365   
  

 

 

    

 

 

 

Total

   $ 3,222,872       $ 3,005,250   
  

 

 

    

 

 

 

 

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WEST CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

For the three and nine months ended September 30, 2011 and 2010, our largest 100 clients represented the following percentages of our total revenue:

 

Three months ended September 30,

 

Nine months ended September 30,

2011

 

2010

 

2011

 

2010

55%

  58%   55%   57%

The aggregate revenue as a percentage of our total revenue from our largest client, AT&T, during the three months ended September 30, 2011 and 2010 was approximately 9% and 10%, 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 10% and 11%, respectively. No other client represented more than 10% of our aggregate revenue for the three and nine months ended September 30, 2011 and 2010.

For the three and nine months ended September 30, 2011 and 2010, revenues from non-U.S. countries as a percentage of consolidated revenue were:

 

Three months ended September 30,

 

Nine months ended September 30,

2011

 

2010

 

2011

 

2010

20%

  16%   20%   16%

During these periods no individual foreign country accounted for greater than 10% of revenue. Revenue is attributed to an organizational region based on location of the billed customer’s account. Geographic information by organizational region, in thousands, is noted below.

 

     For the three months ended
September 30,
     For the nine months ended
September 30,
 
     2011      2010      2011      2010  
     (amounts in thousands)  

Revenue:

           

Americas - United States

   $ 508,750       $ 491,588       $ 1,497,812       $ 1,488,523   

Europe, Middle East & Africa (EMEA)

     69,891         64,149         220,735         196,120   

Asia Pacific

     42,009         32,626         117,479         89,841   

Americas - Other

     12,153         4,047         30,415         14,296   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 632,803       $ 592,410       $ 1,866,441       $ 1,788,780   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     As of September 30,
2011
     As of December 31,
2010
 
     (amounts in thousands)  

Long-Lived Assets:

     

Americas—United States

   $ 2,375,997       $ 2,192,157   

Europe, Middle East & Africa (EMEA)

     215,056         210,689   

Asia Pacific

     18,964         19,646   

Americas—Other

     4,653         5,731   
  

 

 

    

 

 

 

Total

   $ 2,614,670       $ 2,428,223   
  

 

 

    

 

 

 

 

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WEST CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

The aggregate gain (loss) on transactions denominated in currencies other than the functional currency of West Corporation or any of its subsidiaries was approximately $0.1 million and ($1.9) million for the three months ended September 30, 2011 and 2010, respectively. The aggregate gain (loss) on transactions denominated in currencies other than the functional currency of West Corporation or any of its subsidiaries was approximately $2.8 million and ($3.1) million for the nine months ended September 30, 2011 and 2010, respectively.

11. COMMITMENTS AND CONTINGENCIES

West Corporation and certain of our subsidiaries are defendants in various litigation matters in the ordinary course of business, some of which involve claims for damages that are substantial in amount. We believe the disposition of claims currently pending will not have a material adverse effect on our financial position, results of operations or cash flows.

12. FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTOR AND SUBSIDIARY NON-GUARANTOR

West Corporation and our U.S. based wholly owned subsidiary guarantors, jointly, severally, fully and unconditionally are responsible for the payment of principal, premium and interest on our senior notes and senior subordinated notes. Presented below, in thousands, is condensed consolidated financial information for West Corporation and our subsidiary guarantors and subsidiary non-guarantors for the periods indicated.

 

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WEST CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

(AMOUNTS IN THOUSANDS)

 

     For the Three Months Ended September 30, 2011  
     Parent /
Issuer
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations and
Consolidating
Entries
    Consolidated  

REVENUE

   $ —        $ 501,959      $ 130,844      $ —        $ 632,803   

COST OF SERVICES

     —          228,342        56,064        —          284,406   

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

     (4,716     182,474        38,692        —          216,450   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

OPERATING INCOME

     4,716        91,143        36,088        —          131,947   

OTHER INCOME (EXPENSE):

          

Interest Expense, net of interest income

     (41,390     (29,816     3,864        —          (67,342

Subsidiary Income

     71,178        25,569        —          (96,747     —     

Other

     (4,304     3,032        (3,042     —          (4,314
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense)

     25,484        (1,215     822        (96,747     (71,656
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

INCOME BEFORE INCOME TAX EXPENSE

     30,200        89,928        36,910        (96,747     60,291   

INCOME TAX EXPENSE (BENEFIT)

     (7,147     19,674        10,417        —          22,944   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

NET INCOME

   $ 37,347      $ 70,254      $ 26,493      $ (96,747   $ 37,347   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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WEST CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

(AMOUNTS IN THOUSANDS)

 

     For the Three Months Ended September 30, 2010  
     Parent /
Issuer
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations and
Consolidating
Entries
    Consolidated  

REVENUE

   $ —        $ 481,285      $ 111,125      $ —        $ 592,410   

COST OF SERVICES

     —          217,041        42,682        —          259,723   

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

     3,695        220,424        34,699        —          258,818   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

OPERATING INCOME (LOSS)

     (3,695     43,820        33,744        —          73,869   

OTHER INCOME (EXPENSE):

          

Interest Expense, net of interest income

     (41,835     (24,337     2,986        —          (63,186

Subsidiary Income

     22,610        15,083        —          (37,693     —     

Other

     3,667        2,827        (3,698     —          2,796   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense)

     (15,558     (6,427     (712     (37,693     (60,390
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

INCOME (LOSS) BEFORE INCOME TAX EXPENSE

     (19,253     37,393        33,032        (37,693     13,479   

INCOME TAX EXPENSE (BENEFIT)

     (10,824     15,038        17,694        —          21,908   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

NET INCOME (LOSS)

   $ (8,429   $ 22,355      $ 15,338      $ (37,693   $ (8,429
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

29


Table of Contents

WEST CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

(AMOUNTS IN THOUSANDS)

 

     For the Nine Months Ended September 30, 2011  
     Parent /
Issuer
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations and
Consolidating
Entries
    Consolidated  

REVENUE

   $ —        $ 1,474,031      $ 392,410      $ —        $ 1,866,441   

COST OF SERVICES

     —          668,750        163,479        —          832,229   

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

     (1,407     545,265        116,849        —          660,707   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

OPERATING INCOME

     1,407        260,016        112,082        —          373,505   

OTHER INCOME (EXPENSE):

          

Interest expense, net of interest income

     (123,141     (90,792     10,448        —          (203,485

Subsidiary Income

     206,684        81,446        —          (288,130     —     

Other

     (1,306     13,940        (11,136     —          1,498   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense)

     82,237        4,594        (688     (288,130     (201,987
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

INCOME BEFORE INCOME TAX EXPENSE

     83,644        264,610        111,394        (288,130     171,518   

INCOME TAX EXPENSE (BENEFIT)

     (22,661     58,569        29,305        —          65,213   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

NET INCOME

   $ 106,305      $ 206,041      $ 82,089      $ (288,130   $ 106,305   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

30


Table of Contents

WEST CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

(AMOUNTS IN THOUSANDS)

 

     For the Nine Months Ended September 30, 2010  
     Parent /
Issuer
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations and
Consolidating
Entries
    Consolidated  

REVENUE

   $ —        $ 1,463,173      $ 325,607      $ —        $ 1,788,780   

COST OF SERVICES

     —          660,270        123,709        —          783,979   

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

     2,650        591,135        101,425        —          695,210   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

OPERATING INCOME (LOSS)

     (2,650     211,768        100,473        —          309,591   

OTHER INCOME (EXPENSE):

          

Interest expense, net of interest income

     (115,772     (74,074     7,729        —          (182,117

Subsidiary Income

     148,268        79,140        —          (227,408     —     

Other

     4,373        4,971        (6,733     —          2,611   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense)

     36,869        10,037        996        (227,408     (179,506
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

INCOME BEFORE INCOME TAX EXPENSE

     34,219        221,805        101,469        (227,408     130,085   

INCOME TAX EXPENSE (BENEFIT)

     (29,648     74,276        21,590        —          66,218   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

NET INCOME

   $ 63,867      $ 147,529      $ 79,879      $ (227,408   $ 63,867   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

31


Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SUPPLEMENTAL CONDENSED BALANCE SHEET

(AMOUNTS IN THOUSANDS)

 

     September 30, 2011  
     Parent /
Issuer
    Guarantor
Subsidiaries
     Non-Guarantor
Subsidiaries
    Eliminations
and

Consolidating
Entries
    Consolidated  

ASSETS

       

CURRENT ASSETS:

       

Cash and cash equivalents

   $ 2,110      $ —         $ 84,232      $ (11,534   $ 74,808   

Trust and restricted cash

     —          11,199         —          —          11,199   

Accounts receivable, net

     —          59,678         363,699        —          423,377   

Intercompany receivables

     —          535,547         —          (535,547     —     

Deferred income tax receivable

     2,584        11,006         1,491        —          15,081   

Prepaid assets

     2,470        26,026         7,886        —          36,382   

Other current assets

     4,482        300,207         (257,334     —          47,355   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total current assets

     11,646        943,663         199,974        (547,081     608,202   

PROPERTY AND EQUIPMENT, NET

     70,072        231,378         31,192        —          332,642   

INVESTMENT IN SUBSIDIARIES

     1,430,625        349,731         —          (1,780,356     —     

GOODWILL

     —          1,597,947         181,043        —          1,778,990   

INTANGIBLES, net

     —          295,806         54,513        —          350,319   

OTHER ASSETS

     99,947        50,919         1,853        —          152,719   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

TOTAL ASSETS

   $ 1,612,290      $ 3,469,444       $ 468,575      $ (2,327,437   $ 3,222,872   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)

       

CURRENT LIABILITIES:

       

Accounts payable

   $ 3,300      $ 70,826       $ 8,638      $ (11,534   $ 71,230   

Intercompany payables

     530,198        —           5,349        (535,547     —     

Accrued expenses

     27,348        254,662         70,219        —          352,229   

Current maturities of long-term debt

     1,766        9,803         —          —          11,569   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total current liabilities

     562,612        335,291         84,206        (547,081     435,028   

LONG -TERM OBLIGATIONS, less current maturities

     1,890,723        1,614,073         —          —          3,504,796   

DEFERRED INCOME TAXES

     34,471        79,176         19,496        —          133,143   

OTHER LONG-TERM LIABILITIES

     50,213        15,331         10,090        —          75,634   

CLASS L COMMON STOCK

     1,642,283        —           —          —          1,642,283   

TOTAL STOCKHOLDERS’ EQUITY (DEFICIT)

     (2,568,012     1,425,573         354,783        (1,780,356     (2,568,012
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)

   $ 1,612,290      $ 3,469,444       $ 468,575      $ (2,327,437   $ 3,222,872   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

32


Table of Contents

WEST CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SUPPLEMENTAL CONDENSED BALANCE SHEET

(AMOUNTS IN THOUSANDS)

     December 31, 2010  
     Parent /
Issuer
    Guarantor
Subsidiaries
     Non-Guarantor
Subsidiaries
    Eliminations and
Consolidating
Entries
    Consolidated  

ASSETS

           

CURRENT ASSETS:

           

Cash and cash equivalents

   $ —        $ —         $ 102,385      $ (4,592   $ 97,793   

Trust cash

     —          15,122         —          —          15,122   

Accounts receivable, net

     —          48,738         317,681        —          366,419   

Intercompany receivables

     —          416,017         —          (416,017     —     

Deferred income taxes receivable

     9,848        16,532         3,588        —          29,968   

Prepaid assets

     2,981        24,451         6,235        —          33,667   

Other current assets

     2,559        23,680         7,819        —          34,058   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total current assets

     15,388        544,540         437,708        (420,609     577,027   

PROPERTY AND EQUIPMENT, NET

     68,026        243,300         30,040        —          341,366   

INVESTMENT IN SUBSIDIARIES

     1,069,843        271,278         —          (1,341,121     —     

GOODWILL

     —          1,471,124         158,272        —          1,629,396   

INTANGIBLES, net

     —          244,833         54,852        —          299,685   

OTHER ASSETS

     110,090        288,496         (240,810     —          157,776   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

TOTAL ASSETS

   $ 1,263,347      $ 3,063,571       $ 440,062      $ (1,761,730   $ 3,005,250   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)

           

CURRENT LIABILITIES:

           

Accounts payable

   $ 7,448      $ 52,291       $ 9,002      $ (4,592   $ 64,149   

Intercompany payables

     340,974        —           75,043        (416,017     —     

Accrued expenses

     10,412        214,349         59,227        —          283,988   

Current maturities of long-term debt

     4,777        10,648         —          —          15,425   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total current liabilities

     363,611        277,288         143,272        (420,609     363,562   

LONG - TERM OBLIGATIONS, less current maturities

     1,888,775        1,629,366         —          —          3,518,141   

DEFERRED INCOME TAXES

     20,421        53,839         19,621        —          93,881   

OTHER LONG-TERM LIABILITIES

     29,595        37,644         1,482        —          68,721   

CLASS L COMMON STOCK

     1,504,445        —           —          —          1,504,445   

TOTAL STOCKHOLDERS’ EQUITY (DEFICIT)

     (2,543,500     1,065,434         275,687        (1,341,121     (2,543,500
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)

   $ 1,263,347      $ 3,063,571       $ 440,062      $ (1,761,730   $ 3,005,250   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

33


Table of Contents

WEST CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Supplemental Condensed Consolidating Statements of Cash Flows

(AMOUNTS IN THOUSANDS)

 

     Nine Months Ended September 30, 2011  
     Parent /
Issuer
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Elimination and
Consolidating
Entries
    Consolidated  

NET CASH PROVIDED BY OPERATING ACTIVITIES:

   $ —        $ 293,347      $ 8,795      $ (11,534   $ 290,608   

CASH FLOWS FROM INVESTING ACTIVITIES:

          

Business acquisitions

     —          (185,845     (25,686     —          (211,531

Purchase of property and equipment

     (6,939     (62,972     (10,627     —          (80,538

Other

     —          95        7        —          102   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash flows from investing activities

     (6,939     (248,722     (36,306     —          (291,967
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

          

Proceeds from revolving credit and accounts receivable securitization facilities

     342,500        —          262,000        —          604,500   

Payments on revolving credit and accounts receivable securitization facilities

     (342,500     —          (262,000     —          (604,500

Principal repayments on long-term obligations

     (5,327     (11,874     —          —          (17,201

Repurchase of common stock

     (4,829     —          —          —          (4,829

Payments of capital lease obligations

     (628     (47     (26     —          (701

Other

     (611     —          —          —          (611
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash flows from financing activities

     (11,395     (11,921     (26     —          (23,342
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Intercompany

     20,444        (32,704     7,668        4,592        —     

EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS

     —          —          1,716        —          1,716   

NET CHANGE IN CASH AND CASH EQUIVALENTS

     2,110        —          (18,153     (6,942     (22,985

CASH AND CASH EQUIVALENTS, Beginning of period

     —          —          102,385        (4,592     97,793   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS, End of period

   $ 2,110      $ —        $ 84,232      $ (11,534   $ 74,808   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

34


Table of Contents

WEST CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Supplemental Condensed Consolidating Statements of Cash Flows

(AMOUNTS IN THOUSANDS)

 

     Nine Months Ended September 30, 2010  
     Parent /
Issuer
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Elimination and
Consolidating
Entries
    Consolidated  

NET CASH PROVIDED BY OPERATING ACTIVITIES:

   $ —        $ 267,006      $ 37,548      $ (10,352   $ 294,202   

CASH FLOWS FROM INVESTING ACTIVITIES:

          

Business acquisitions

     —          (20,263     (9,200     —          (29,463

Purchase of property and equipment

     (17,643     (62,143     (9,356     —          (89,142

Collections applied to principal of portfolio receivables

     —          5,460        —          —          5,460   

Other

     —          30        —          —          30   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash flows from investing activities

     (17,643     (76,916     (18,556     —          (113,115
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

          

Proceeds from revolving credit and accounts receivable securitization facilities

     59,850        —          92,000        —          151,850   

Payments on revolving credit and accounts receivable securitization facilities

     (132,781     —          (92,000     —          (224,781

Principal repayments on long-term obligations

     (7,286     (18,162     —          —          (25,448

Proceeds from stock options exercised including excess tax benefits

     123        —          —          —          123   

Payments of portfolio notes payable

     —          (543     —          —          (543

Payments of capital lease obligations

     (1,806     (44     (45     —          (1,895

Debt issuance cost

     (5     —          —          —          (5

Other

     (167     —          —          —          (167
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash flows from financing activities

     (82,072     (18,749     (45     —          (100,866
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Intercompany

     174,092        (171,341     (13,014     10,263        —     

EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS

     —          —          (1,410     —          (1,410

NET CHANGE IN CASH AND CASH EQUIVALENTS

     74,377        —          4,523        (89     78,811   

CASH AND CASH EQUIVALENTS, Beginning of period

     2,349        —          66,982        (10,263     59,068   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS, End of period

   $ 76,726      $ —        $ 71,505      $ (10,352   $ 137,879   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

35


Table of Contents

FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements include estimates regarding:

the impact of changes in government regulation and related litigation;

the impact of pending litigation;

the impact of integrating or completing mergers or strategic acquisitions;

the adequacy of our available capital for future capital requirements;

our future contractual obligations;

our capital expenditures;

the cost and reliability of communication services;

the cost of labor and turnover rates;

the impact of changes in interest rates;

substantial indebtedness incurred in connection with the 2006 recapitalization and acquisitions; and

the impact of foreign currency fluctuations;

as well as other statements regarding our future operations, financial condition and prospects, and business strategies.

Forward-looking statements can be identified by the use of words such as “may,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “intends,” “continue,” or the negative of such terms, or other comparable terminology. Forward-looking statements also include the assumptions underlying or relating to any of the foregoing statements. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including the risks discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this report.

All forward-looking statements included in this report are based on information available to us on the date hereof. We assume no obligation to update any forward-looking statements.

Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the Condensed Consolidated Financial Statements (unaudited) and the Notes thereto.

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.

 

36


Table of Contents

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.

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.

 

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Key Drivers Affecting Our Results of Operations

Factors Related to Our Indebtedness. During 2009, 2010 and 2011, 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 $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.

Evolution into a Predominately Platform-based Solutions Business. We have evolved into a diversified and platform-based technology-driven service provider. Since 2005, our revenue from platform-based services has grown from 37% of total revenue to 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 and invest in higher margin businesses, irrespective of whether the associated services are delivered to our customers through an agent-based or a platform-based environment. We expect our platform-based service lines to grow at a faster pace than agent-based services and as a result will continue to increase as a percentage of our total revenue. However, many of our customers require an integrated service offering that incorporates both agent-based and platform-based services – for example, an automated voice response system with the option for the customer’s client to speak to an agent and accordingly, we expect agent-based services will continue to represent a meaningful portion of our service offerings for the foreseeable future.

Acquisition Activities. Identifying and successfully integrating acquisitions of value-added service providers has been a key component of our 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 thru organic growth, we have and will continue to acquire assets and businesses that strengthen our value proposition to clients and drive value to us. We have developed an internal capability to source, evaluate and integrate acquisitions that we believe has created value for shareholders. Since 2005, we have invested approximately $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.

Comparison of the Three and Nine Months Ended September 30, 2011 and 2010

Revenue: Total revenue for the three months ended September 30, 2011 increased $40.4 million, or 6.8%, to $632.8 million from $592.4 million for the three months ended September 30, 2010. This increase included revenue of $24.7 million from entities acquired since October 1, 2010. On August 10, 2011 we acquired the assets of PivotPoint. PivotPoint’s results have been included in the Communication Services segment since August 10, 2011.

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 in addition to PivotPoint included TFCC, POSTcti, Unisfair, Smoothstone and Contact One. These acquisitions closed February 1, 2011 for TFCC and POSTcti, March 1, 2011 for Unisfair, June 3, 2011 for Smoothstone and June 7, 2011 for Contact One. 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.

 

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For the three months ended September 30, 2011 and 2010, our largest 100 clients represented 55% and 58% of our total revenue, respectively. For the nine months ended September 30, 2011 and 2010, our largest 100 clients represented 55% and 57% of our total revenue, respectively. The aggregate revenue as a percentage of our total revenue from our largest client, AT&T, during the three months ended September 30, 2011 and 2010 was approximately 9% and 10%, 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 three and nine months ended September 30, 2011 and 2010.

Revenue by business segment:

 

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

Revenue in thousands:

                

Unified Communications

   $ 352,090      $ 307,572      $ 44,518        14.5   $ 1,030,249      $ 915,817      $ 114,432        12.5

Communication Services

     283,994        286,466        (2,472     -0.9     844,403        877,280        (32,877     -3.7

Intersegment eliminations

     (3,281     (1,628     (1,653     -101.5     (8,211     (4,317     (3,894     -90.2
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 632,803      $ 592,410      $ 40,393        6.8   $ 1,866,441      $ 1,788,780      $ 77,661        4.3
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

For the three months ended September 30, 2011, Unified Communications revenue increased $44.5 million, or 14.5%, to $352.1 million from $307.6 million for the three months ended September 30, 2010. The increase in revenue for the three months ended September 30, 2011 included $22.8 million from acquisitions. The remaining $21.7 million increase was attributable primarily to the addition of new customers as well as an increase in usage of our web and audio-based services by our existing customers. Revenue attributable to increased usage and new customer usage was partially offset by a decline in the rates charged to existing customers for those services. The volume of minutes used for our reservationless services, which accounts for the majority of our Unified Communications revenue, grew approximately 11.1% for the three months ended September 30, 2011 over the three months ended September 30, 2010, while the average rate per minute for reservationless services declined by approximately 4.0%. 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.

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 primarily attributable to the addition of new customers as well as an increase in usage primarily of our web and audio-based services by our existing customers. Revenue attributable to increased usage and new customer usage was partially offset by a decline in the rates charged to existing customers for those services. The volume of minutes used for our reservationless services, which accounts for the majority of our Unified Communications revenue, grew approximately 11.6% 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 three months ended September 30, 2011, revenue in the Asia Pacific (“APAC”) and Europe, Middle East and Africa (“EMEA”) regions grew to $110.6 million, an increase of 14.3% over the three months ended September 30, 2010. During the nine months ended September 30, 2011, revenue in APAC and EMEA regions grew to $333.8 million, an increase of 16.7% over the nine months ended September 30, 2010.

 

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For the three months ended September 30, 2011, Communication Services revenue decreased $2.5 million, or 0.9%, to $284.0 million from $286.5 million for the three 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 three and 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 three and nine months ended September 30, 2011 decreased $5.5 million and $30.7 million, respectively, compared with revenue for the three and 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 three and nine months ended September 30, 2011 was revenue from acquired entities of $1.9 million and $8.7 million, respectively.

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 three months ended September 30, 2011 increased approximately $24.7 million, or 9.5%, to $284.4 million, from $259.7 million for the three months ended September 30, 2010. As a percentage of revenue, cost of services increased to 44.9% for the three months ended September 30, 2011, compared to 43.8% for the three months ended September 30, 2010. 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 three months ended September 30,     For the nine months ended September 30,  
     2011     % of
Revenue
    2010     % of
Revenue
    Change     %
Change
    2011     % of
Revenue
    2010     % of
Revenue
    Change     %
Change
 

In thousands:

                        

Unified Communications

   $ 145,204        41.2   $ 123,702        40.2   $ 21,502        17.4   $ 420,317        40.8   $ 364,374        39.8   $ 55,943        15.4

Communication Services

     142,024        50.0     137,261        47.9     4,763        3.5     418,776        49.6     422,772        48.2     (3,996     -0.9

Intersegment eliminations

     (2,822     NM        (1,240     NM        (1,582     NM        (6,864     NM        (3,167     NM        (3,697     NM   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 284,406        44.9   $ 259,723        43.8   $ 24,683        9.5   $ 832,229        44.6   $ 783,979        43.8   $ 48,250        6.2
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

NM—Not Meaningful

                        

Unified Communications cost of services for the three months ended September 30, 2011 increased $21.5 million, or 17.4%, to $145.2 million from $123.7 million for the three months ended September 30, 2010. The increase in cost of services for the three months ended September 30, 2011 included $10.6 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 41.2% for the three months ended September 30, 2011 from 40.2% for the three months ended September 30, 2010.

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 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 three and nine months ended September 30, 2011 is due primarily to changes in the product mix, geographic mix and the impact of acquired entities.

 

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Communication Services cost of services for the three months ended September 30, 2011 increased $4.8 million, or 3.5%, to $142.0 million from $137.3 million for the three months ended September 30, 2010. The increase in cost of services for the three months ended September 30, 2011 was the result of lower margins in our agent-based service offerings and $0.4 million of additional costs from acquired entities. As a percentage of this segment’s revenue, Communication Services cost of services increased to 50.0% for the three months ended September 30, 2011, compared to 47.9% for the three months ended September 30, 2010.

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 three and 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 $42.4 million, or 16.4%, to $216.5 million for the three months ended September 30, 2011, from $258.8 million for the three months ended September 30, 2010. During the three months ended September 30, 2010, we recorded a goodwill impairment charge of $37.7 million, which represented the balance of goodwill for one of our reporting units in the Communication Services segment. The decrease in SG&A expenses for the three months ended September 30, 2011 reflected an improvement in our SG&A expense margin that was offset by $12.8 million of additional SG&A expenses from acquired entities. As a percentage of revenue, SG&A expenses improved to 34.2% for the three months ended September 30, 2011 from 43.7% for the three months ended September 30, 2010. The impact of the goodwill impairment charge on SG&A as a percentage of revenue was 630 basis points for the three months ended September 30, 2010.

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

In thousands:

                       

Unified Communications

  $ 106,606        30.3   $ 102,209        33.2   $ 4,397        4.3   $ 319,172        31.0   $ 308,933        33.7   $ 10,239        3.3

Communication Services

    110,303        38.8     156,997        54.8     (46,694     -29.7     342,882        40.6     387,426        44.2     (44,544     -11.5

Intersegment eliminations

    (459     NM        (388     NM        (71     NM        (1,347     NM        (1,149     NM        (198     NM   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 216,450        34.2   $ 258,818        43.7   $ (42,368     -16.4   $ 660,707        35.4   $ 695,210        38.9   $ (34,503     -5.0
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

NM—Not Meaningful

                       

Unified Communications SG&A expenses for the three months ended September 30, 2011 increased $4.4 million, or 4.3%, to $106.6 million from $102.2 million for the three months ended September 30, 2010. The increase in SG&A expenses for the three months ended September 30, 2011 reflected an improvement in our SG&A expense margin that was offset by $11.4 million of additional SG&A expenses from acquired entities. As a percentage of this segment’s revenue, Unified Communications SG&A expenses improved to 30.3% for the three months ended September 30, 2011 compared to 33.2% for the three months ended September 30, 2010.

 

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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 expenses 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 three months ended September 30, 2011 decreased $46.7 million, or 29.7%, to $110.3 million from $157.0 million for the three months ended September 30, 2010. During the three months ended September 30, 2010, we recorded a goodwill impairment charge of $37.7 million. The decrease in SG&A expenses for the three months ended September 30, 2011 reflected an improvement in our SG&A expense margin that was partially offset by $1.4 million of additional SG&A expenses from acquired entities. As a percentage of this segment’s revenue, Communication Services SG&A expenses improved to 38.8% for the three months ended September 30, 2011, compared to 54.8% for the three months ended September 30, 2010. The impact of the goodwill impairment charge on Communication Services SG&A expenses as a percentage of revenue was 1,300 basis points for the three 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.

Operating income: Operating income for the three months ended September 30, 2011 increased $58.1 million, or 78.6%, to $131.9 million from $73.9 million for the three months ended September 30, 2010. As a percentage of revenue, operating income for the three months ended September 30, 2011 improved to 20.9%, from 12.5% for the three months ended September 30, 2010. The impact of the goodwill impairment charge on operating income as a percentage of revenue was 630 basis points for the three months ended September 30, 2010.

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 (loss) by business segment:

 

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

In thousands:

                        

Unified Communications

   $ 100,279        28.5   $ 81,661        26.6   $ 18,618        22.8   $ 290,760        28.2   $ 242,509        26.5   $ 48,251        19.9

Communication Services

     31,668        11.2     (7,792     -2.7     39,460        NM        82,745        9.8     67,082        7.6     15,663        23.3
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 131,947        20.9   $ 73,869        12.5   $ 58,078        78.6   $ 373,505        20.0   $ 309,591        17.3   $ 63,914        20.6
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

NM—Not Meaningful

Unified Communications operating income for the three months ended September 30, 2011 increased $18.6 million, or 22.8%, to $100.3 million from $81.7 million for the three months ended September 30, 2010. As a percentage of this segment’s revenue, Unified Communications operating income improved to 28.5% for the three months ended September 30, 2011 from 26.6% for the three months ended September 30, 2010.

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.

 

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Communication Services operating income for the three months ended September 30, 2011 increased $39.5 million, to $31.7 million from an operating loss of $7.8 million for the three months ended September 30, 2010. As a percentage of this segment’s revenue, Communication Services operating income improved to 11.2% for the three months ended September 30, 2011 from (2.7%) for the three months ended September 30, 2010. The impact of the goodwill impairment charge on Communication Services operating income as a percentage of revenue was 1,300 basis points for the three months ended September 30, 2010.

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 three months ended September 30, 2011 was ($71.7) million compared to ($60.4) million for the three months ended September 30, 2010. 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 three and nine months ended September 30, 2011 was $67.4 million and $203.8 million, respectively, compared to $63.3 million and $182.4 million, respectively, for the three and 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 three and nine months ended September 30, 2011.

During the three and nine months ended September 30, 2011, we recognized a $0.2 million loss and $3.7 million gain, respectively, on foreign currency transactions denominated in currencies other than the functional currency. During the three and nine months ended September 30, 2010, we recognized a $0.5 million loss and $1.7 million loss, respectively, on foreign currency transactions denominated in currencies other than the functional currency.

During the three and nine months ended September 30, 2011, we recognized a $4.3 million loss and $3.0 million loss, respectively, due to investment losses in the assets held in our deferred compensation plans. The decreases in the value of these assets were offset by corresponding decreases in our deferred compensation liabilities, which were reflected as decreases in corporate SG&A expenses. During the three and nine months ended September 30, 2010, we recognized a $2.3 million gain and $1.2 million gain, respectively, due to investment gains in the assets held in our deferred compensation plans. The increases in the value of these assets were offset by corresponding increases in our deferred compensation liabilities, which were reflected as increases in corporate SG&A expenses.

Net income (loss): Our net income for the three months ended September 30, 2011 increased $45.8 million, to $37.4 million from net (loss) of $8.4 million for the three months ended September 30, 2010. 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 loss in the three months ended September 30, 2010 and net income in 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 (loss) includes a provision for income tax expense at an effective rate of approximately 38.1% and 38.0% for the three and nine months ended September 30, 2011, respectively, compared to an effective tax rate of approximately 162.5% and 50.9% for the three and nine months ended September 30, 2010, respectively. 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.

 

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Earnings (loss) per common share: Earnings per common L share-basic for the three months ended September 30, 2011 improved to $4.81 from $4.31 for the three months ended September 30, 2010. 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 three months ended September 30, 2011 improved to $4.62 from $4.13 for the three 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 three months ended September 30, 2011 improved to ($0.12) from ($0.58) for the three months ended September 30, 2010. Loss per common A share-basic and diluted for the nine months ended September 30, 2011 improved to ($0.36) from ($0.68) for the nine months ended September 30, 2010.

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 2, 2009, we filed a Registration Statement on Form S-1 (Registration No. 333-162292) under the Securities Act of 1933 and amendments to the Registration Statement on November 6, 2009, December 1, 2009, December 16, 2009, February 16, 2010, April 14, 2011, August 17, 2011 and September 9, 2011 pursuant to which we proposed to offer up to $500.0 million of our common stock (“Proposed Offering”). We expect to use a part of the net proceeds from the Proposed Offering received by us to repay or repurchase indebtedness. We also expect to use a part of the net proceeds from this offering to fund the amounts payable upon the termination of the management agreement entered into in connection with the consummation of our recapitalization in 2006 between us and the Sponsors. We may also use a portion of the net proceeds received by us to repurchase certain of our notes and for working capital and other general corporate purposes.

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.

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.

 

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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 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 the Company’s current levels of cash on hand, anticipated cash flows from operations and available borrowing capacity, the Company believes it has sufficient liquidity to conduct its normal operations and pursue its business strategy in the ordinary course.

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 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 our corporate debt rating and the grid ranges from 2.125% to 2.75% for LIBOR rate loans (LIBOR plus 2.375% at September 30, 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 our 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 during the three and nine months ended September 30, 2011 were 6.16% and 6.44%, respectively, compared to 5.33% and 4.85%, respectively, during the three and nine months ended September 30, 2010.

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.

 

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The original maturity senior secured revolving credit facility pricing is based on our total leverage ratio and the grid ranges from 1.75% to 2.50% for LIBOR rate loans (LIBOR plus 2.0% at September 30, 2011), and the margin ranges from 0.75% to 1.50% for base rate loans (Base Rate plus 1.0% at September 30, 2011). We are 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 three months ended September 30, 2011 and 2010 was $3.8 million and $0.0 million, respectively. 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 three months ended September 30, 2011 and 2010 was $14.7 million and $0.0 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 our 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). We are required to pay each non-defaulting lender a commitment fee of 0.50% in respect of any unused commitments under the extended maturity senior secured revolving credit facility. The commitment fee in respect of unused commitments under the extended maturity senior secured revolving credit facility is subject to adjustment based upon our total leverage ratio. The average daily outstanding balance of the extended maturity senior secured revolving credit facility during the three and nine months ended September 30, 2011 was $8.3 million and $4.1 million, respectively. The highest balance outstanding on the extended maturity senior secured revolving credit facility during the three and nine months ended September 30, 2011 was $35.8 million. Prior to 2011, there had been no borrowings on the extended maturity senior secured revolving credit facility since its inception on October 5, 2010.

Subsequent to September 30, 2011, we 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.

2016 Senior Subordinated Notes

Our $450 million aggregate principal amount of 11% senior subordinated notes due 2016 (the “2016 Senior Subordinated Notes”) bear interest that is payable semiannually.

We may redeem the 2016 Senior Subordinated Notes in whole or in part at the redemption prices (expressed as percentages of principal amount of the senior subordinated notes to be redeemed) set forth below plus accrued and unpaid interest thereon to the applicable date of redemption, subject to the right of holders of 2016 Senior Subordinated Notes of record on the relevant record date to receive interest due

 

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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.

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 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

 

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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.

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

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 in the 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 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 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 the 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.

 

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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.

Amended and Extended Asset Securitization

On September 12, 2011, the revolving trade accounts receivable financing facility between West Receivables LLC, a wholly-owned, bankruptcy-remote direct subsidiary of West Receivables Holdings LLC and Wells Fargo Bank, National Association was amended and extended. The amended and extended facility provides for $150.0 million in available financing and 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. Under the amended and extended facility, West Receivables Holdings LLC sells or contributes trade accounts receivables to West Receivables LLC, which sells undivided interests in the purchased or contributed accounts receivables for cash to one or more financial institutions. The availability of the funding is subject to the level of eligible receivables after deducting certain concentration limits and reserves. The proceeds of the facility are available for general corporate purposes. West Receivables LLC and West Receivables Holdings LLC are consolidated in our condensed consolidated financial statements included elsewhere in this report. At September 30, 2011 and December 31, 2010, the facility was undrawn. The highest balance outstanding during the three months and nine months ended September 30, 2011 was $65.3 million and $84.5 million, respectively. During the three and nine months September 30, 2010, the facility was undrawn.

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

Contractual Obligations

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

 

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The following table summarizes our contractual obligations at September 30, 2011 (dollar amounts in thousands):

 

     Payment due by period  
Contractual           Less than                    After 5  

Obligations

   Total      1 year      1 - 3 years      4 - 5 years      years  

Senior Secured Term Loan Facility, due 2013

   $ 448,434       $ —         $ 448,434       $ —         $ —     

Senior Secured Term Loan Facility, due 2016

     1,467,931         11,569         30,858         1,425,504         —     

11% Senior Suborninated Notes, due 2016

     450,000         —           —           —           450,000   

8 5/8% Senior Notes, due 2018

     500,000         —           —           —           500,000   

7 7/8% Senior Notes, due 2019

     650,000         —           —           —           650,000   

Interest payments on fixed rate debt

     997,233         143,813         287,626         287,626         278,168   

Estimated interest payments on variable rate debt (1)

     406,268         99,787         166,367         140,114         —     

Operating leases

     128,794         34,090         43,292         21,206         30,206   

Capital lease obligations

     288         286         2         —           —     

Contractual minimums under telephony agreements (2)

     133,700         86,600         47,100         —           —     

Purchase obligations (3)

     78,632         73,974         4,077         581         —     

Interest rate swaps

     12,021         8,391         3,630         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total contractual cash obligations

   $ 5,273,301       $ 458,510       $ 1,031,386       $ 1,875,031       $ 1,908,374   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Interest rate assumptions based on October 5, 2011 LIBOR U.S. dollar swap rate curves for the next five years.
(2) Based on projected telephony minutes through 2013. The contractual minimum is usage based and could vary based on actual usage.
(3) Represents future obligations for capital and expense projects that are in progress or are committed.

The table above excludes amounts to be paid for taxes and long-term obligations under our Nonqualified Executive Retirement Savings Plan and Nonqualified Executive Deferred Compensation Plan. The table also excludes amounts to be paid for income tax contingencies because the timing thereof is highly uncertain. At September 30, 2011, we have accrued $16.8 million, including interest and penalties for uncertain tax positions.

Upon completion of the Proposed Offering, the contract for management services with the affiliates of Thomas H. Lee Partners, L.P. and Quadrangle Group LLC would be terminated. The early termination of this agreement will require a payment of an amount equal to the net present value (using a discount rate equal to the then prevailing yield on the U.S. Treasury Securities of like maturity) of the $4.0 million annual management fee that would have been payable under the management services agreement from the date of termination until the seventh anniversary of such termination, such fee to be due and payable at the closing of the offering.

Capital Expenditures

Our operations continue to require significant capital expenditures for technology, capacity expansion and upgrades. Capital expenditures were $72.3 million for the nine months ended September 30, 2011, compared to $84.8 million for the nine months ended September 30, 2010. We currently estimate our capital expenditures for the remainder of 2011 to be approximately $47.7 to $57.7 million primarily for equipment and upgrades at existing facilities.

Our senior secured term loan facility discussed above includes covenants which allow us the flexibility to issue additional indebtedness that is pari passu with or subordinated to our debt under our existing credit facilities in an aggregate principal amount not to exceed $848.6 million including the aggregate amount of principal payments

 

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made in respect of the senior secured term loan, incur capital lease indebtedness, finance acquisitions, construction, repair, replacement or improvement of fixed or capital assets, incur accounts receivable securitization indebtedness and non-recourse indebtedness; provided we are in pro forma compliance with our total leverage ratio and interest coverage ratio financial covenants. We or any of our affiliates may be required to guarantee any existing or additional credit facilities.

Off – Balance Sheet Arrangements

We utilize standby letters of credit to support primarily workers’ compensation policy requirements and certain operating leases. Performance obligations of several of our subsidiaries are supported by performance bonds and letters of credit. These obligations will expire at various dates through February 2013 and are renewed as required. The outstanding commitment on these obligations at September 30, 2011 was $21.0 million.

Effects of Inflation

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

CRITICAL ACCOUNTING POLICIES

The preparation of financial statements 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. The accounting policies we consider critical are our accounting policies with respect to revenue recognition, allowance for doubtful accounts, goodwill and other intangible assets, and income taxes.

For additional discussion of these critical accounting policies, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of our Annual Report on Form 10-K for the year ended December 31, 2010.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Market Risk Management

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

Interest Rate Risk

As of September 30, 2011, we had $1,916.4 million outstanding under our senior secured term loan facility, $450 million outstanding under our 2016 Senior Subordinated Notes, $500 million outstanding under our 2018 Senior Notes and $650 million outstanding under our 2019 Senior Notes.

 

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Long-term obligations at variable interest rates subject to interest rate risk and the quarterly impact of a 50 basis point change in the variable interest rate, in thousands, at September 30, 2011 consist of the following:

 

     Outstanding at      Impact of a 0.5%  
     variable interest      change in the  
     rates      variable interest rate  

Senior Secured Term Loan Facility (1)

   $  916,365       $  1,145.5   
  

 

 

    

 

 

 

Variable rate debt

   $ 916,365       $ 1,145.5   
  

 

 

    

 

 

 
(1) Net of $1,000.0 million interest rate swaps

Foreign Currency Risk

Our Unified Communications segment conducts business in countries outside of the United States. Revenue and expenses from these foreign operations are typically denominated in local currency, thereby creating exposure to changes in exchange rates. Generally, we do not hedge the foreign currency transactions. Changes in exchange rates may positively or negatively affect our revenue and net income attributed to these subsidiaries. Based on our level of operating activities in foreign operations during the nine months ended September 30, 2011, a five percent change in the value of the U.S. dollar relative to the Euro and British Pound Sterling would have positively or negatively affected our net operating income by approximately one percent.

On September 30, 2011 and 2010, the Communication Services segment had no material revenue outside the United States. Our facilities in Canada, Jamaica, Mexico and the Philippines operate under revenue contracts denominated in U.S. dollars. These contact centers receive calls only from customers in North America under contracts denominated in U.S. dollars and therefore our foreign currency exposure is primarily for expenses incurred in the respective country.

For the three and nine months ended September 30, 2011, revenues from non-U.S. countries were approximately 20% of consolidated revenues. For the three and nine months ended September 30, 2010, revenues from non-U.S. countries were approximately 16% of consolidated revenues. During these periods no individual foreign country accounted for greater than 10% of revenue. At September 30, 2011 and December 31, 2010, long-lived assets from non-U.S. countries were 9% and 10%, respectively. We have generally not entered into forward exchange or option contracts for transactions denominated in foreign currency to hedge against foreign currency risk. We are exposed to translation risk because our foreign operations are in local currency and must be translated into U.S. dollars. As currency exchange rates fluctuate, translation of our Statements of Operations of non-U.S. businesses into U.S. dollars affects the comparability of revenue, expenses, and operating income between periods.

Investment Risk

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 interest rate swaps ranges from 2.56% to 2.60%, and expires 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%.

Item 4. Controls and Procedures

Evaluation of disclosure controls and procedures. Our management team continues to review our internal controls and procedures and the effectiveness of those controls. As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer and Treasurer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15(b) of the Securities Exchange Act of 1934, as amended. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer and Treasurer concluded that, as of September 30, 2011, our disclosure controls and procedures are effective in ensuring that the information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is (i)

 

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recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms and (ii) that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer as appropriate to allow timely decisions regarding required disclosure.

Changes in internal control over financial reporting. There were no changes in our internal control over financial reporting or in other factors during the quarter covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. No corrective actions were required or taken.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

In the ordinary course of business, we and certain of our subsidiaries are defendants in various litigation matters and are subject to claims from our clients for indemnification, some of which may involve claims for damages that are substantial in amount. We do not believe the disposition of claims currently pending will have a material adverse effect on our financial position, results of operations or cash flows.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

On May 10, 2011, the Company purchased from a former executive officer 182,864 of the Company’s Class A shares and 22,858 of the Company’s Class L shares. The purchase price per Class A share was $10.60. The purchase price per Class L share was $112.07. The respective purchase price per share 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. The aggregate purchase price was $4,500,054.40. Also, in May and August the Company purchased in the aggregate 31,900 Class A shares from former employees. The purchase price per Class A share was $10.60.

Item 6. Exhibits

 

10.01    Supplemental Indenture, dated as of September 1, 2011, by and among InterCall Communications, Inc., Holly Connects, Inc. and Unisfair, LLC, West Corporation, and The Bank of New York Mellon Trust Company, N.A., to the Indenture, dated as of October 24, 2006, by and among West Corporation, the guarantors named therein and The Bank of New York, with respect to West Corporation’s $450.0 million aggregate principal amount of 11% senior subordinated notes due October 15, 2016
10.02    Supplemental Indenture, dated as of September 1, 2011, by and among InterCall Communications, Inc., Holly Connects, Inc. and Unisfair, LLC, West Corporation, and The Bank of New York Mellon Trust Company, N.A., to the Indenture, dated as of October 5, 2010, by and among West Corporation, the guarantors named therein and The Bank of New York Mellon Trust Company, N.A., with respect to West Corporation’s $500.0 million aggregate principal amount of 8 5/8% senior notes due 2018
10.03    Supplemental Indenture, dated as of September 1, 2011, by and among InterCall Communications, Inc., Holly Connects, Inc. and Unisfair, LLC, West Corporation, and The Bank of New York Mellon Trust Company, N.A., to the Indenture, dated as of November 24, 2010, by and among West Corporation, the guarantors named therein and The Bank of New York Mellon Trust Company, N.A., with respect to West Corporation’s $500.0 million aggregate principal amount of 7 7/8% senior notes due 2019
31.01    Certification pursuant to 15 U.S.C. Section 7241, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.02    Certification pursuant to 15 U.S.C. Section 7241, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.01    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.02    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101    Financial statements from the quarterly report on Form 10-Q of West Corporation for the quarter ended September 30, 2011, filed on November 1, 2011, formatted in XBRL: (i) the Condensed Consolidated Statements of Operations; (ii) the Condensed Consolidated Balance Sheets; (iii) the Condensed Consolidated Statements of Cash Flows; (iv) Consolidated Statements of Stockholders’ Deficit and (v) the Notes to Condensed Consolidated Financial Statements furnished herewith.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

WEST CORPORATION
By:       /s/ Thomas B. Barker
 

Thomas B. Barker

Chief Executive Officer

 

By:       /s/ Paul M. Mendlik
 

Paul M. Mendlik

Chief Financial Officer and Treasurer

 

By:       /s/ R. Patrick Shields
 

R. Patrick Shields

Senior Vice President -

Chief Accounting officer

Date: November 1, 2011

 

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EXHIBIT INDEX

 

Number

  

Description

10.01    Supplemental Indenture, dated as of September 1, 2011, by and among InterCall Communications, Inc., Holly Connects, Inc. and Unisfair, LLC, West Corporation, and The Bank of New York Mellon Trust Company, N.A., to the Indenture, dated as of October 24, 2006, by and among West Corporation, the guarantors named therein and The Bank of New York, with respect to West Corporation’s $450.0 million aggregate principal amount of 11% senior subordinated notes due October 15, 2016
10.02    Supplemental Indenture, dated as of September 1, 2011, by and among InterCall Communications, Inc., Holly Connects, Inc. and Unisfair, LLC, West Corporation, and The Bank of New York Mellon Trust Company, N.A., to the Indenture, dated as of October 5, 2010, by and among West Corporation, the guarantors named therein and The Bank of New York Mellon Trust Company, N.A., with respect to West Corporation’s $500.0 million aggregate principal amount of 8 5/8% senior notes due 2018
10.03    Supplemental Indenture, dated as of September 1, 2011, by and among InterCall Communications, Inc., Holly Connects, Inc. and Unisfair, LLC, West Corporation, and The Bank of New York Mellon Trust Company, N.A., to the Indenture, dated as of November 24, 2010, by and among West Corporation, the guarantors named therein and The Bank of New York Mellon Trust Company, N.A., with respect to West Corporation’s $500.0 million aggregate principal amount of 7 7/8% senior notes due 2019
31.01    Certification pursuant to 15 U.S.C. Section 7241, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.02    Certification pursuant to 15 U.S.C. Section 7241, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.01    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.02    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101    Financial statements from the quarterly report on Form 10-Q of West Corporation for the quarter ended September 30, 2011, filed on November 1, 2011, formatted in XBRL: (i) the Condensed Consolidated Statements of Operations; (ii) the Condensed Consolidated Balance Sheets; (iii) the Condensed Consolidated Statements of Cash Flows; (iv) Consolidated Statements of Stockholders’ Deficit and (v) the Notes to Condensed Consolidated Financial Statements furnished herewith.

 

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