Source: http://apps.shareholder.com/sec/viewerContent.aspx?companyid=WTSC&docid=5350796
Timestamp: 2013-05-19 02:23:38
Document Index: 300280022

Matched Legal Cases: ['§ 1750', '§ 17200', '§ 17500', '§ 3009', '§ 1750', '§ 17200', '§ 17500']

(2) has been subject to such filing requirements for the past 90 days. Yes
accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act.
86,867,564.7 shares of the registrants Class A common stock and 9,893,445.5875 shares of the registrants Class L common stock were outstanding.
We have reviewed the accompanying condensed consolidated balance sheet of West Corporation and subsidiaries (the Company) as of June 30, 2007, and the
related condensed consolidated statements of operations for the three-month and six-month periods ended June 30, 2007 and 2006, and of cash flows for the six-month periods ended June 30, 2007 and 2006. 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
than an audit conducted in accordance with 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.
As discussed in Note 7 to
the condensed consolidated interim financial statements, effective January 1, 2007, the Company adopted Financial Accounting Standards Board Interpretation No. 48,
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, 2006, and the related consolidated statements of operations, stockholders equity, and cash flows for the year then ended (not presented
herein); and in our report dated February 26, 2007, we expressed an unqualified opinion on those consolidated financial statements and included an explanatory paragraph relating to a change in method of accounting for stock-based compensation
expense in 2006. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2006, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it
has been derived.
1,028,819
886,416
(83,465
(163,655
(79,287
743,399
(489,001
(448,692
1,284,862
2,962,244
2,535,856
3,464,352
4,146,465
3,749,455
969,285
(2,199,145
(2,206,641
(2,164,494
(2,127,554
(285,813
(602,106
(45,127
(66,145
(359,243
(650,959
 Net change in revolving bank credit facility
 The accompanying notes are an integral part of these condensed consolidated financial statements
Business Description
West Corporation (the Company or West) provides business process outsourcing services focused on
helping our clients communicate more effectively with their clients. We deliver our services through three segments:
Communication Services, including dedicated agent, shared agent, automated and business-to-business services, emergency communication systems and services and
Receivables Management, including debt purchasing and collections, contingent/third-party collections, government collections, first-party collections, commercial
collections, claims subrogation and revenue cycle management solutions.
Each of these services builds upon our core competencies of
managing technology, telephony and human capital. Many of the nations leading enterprises trust us to manage their customer contacts and communications. These enterprises choose us based on our service quality and our ability to efficiently
and cost-effectively process high volume, complex voice-related transactions.
Our Communication Services segment provides our clients with
a broad portfolio of services through the following offerings: dedicated agent, shared agent, business services, automated services, emergency communications infrastructure systems and services and notification services. These services provide
clients with a comprehensive portfolio of services largely driven by customer initiated (inbound) transactions. These transactions are primarily consumer applications. We also support business-to-business (B-to-B) applications. Our
B-to-B services include sales, lead generation, full account management and other services. Our Communication Services segment operates a network of customer contact centers and automated voice and data processing centers in the United States,
Canada, Jamaica and the Philippines. We also support the United States 9-1-1 network and deliver solutions to communications service providers and public safety organizations, including data management, network transactions, wireless data services
and notification services.
Our Conferencing Services segment provides our clients with an integrated global suite of audio, web and video
conferencing options. This segment offers four primary services: reservationless, operator-assisted, web and video conferencing. Our Conferencing Services segment operates out of facilities in the United States, the United Kingdom, Canada,
Singapore, Australia, Hong Kong, Japan, New Zealand, China, Mexico and India.
Our Receivables Management segment assists our clients in
collecting and managing their receivables. This segment offers debt purchasing and collections, contingent/third-party collections, government collections, first-party collections, commercial collections, revenue cycle management solutions to the
insurance, financial services, communications and healthcare industries and overpayment identification and claims subrogation to the insurance industry. Our Receivables Management segment operates out of facilities in the United States.
Recapitalization
On October 24, 2006, we completed a recapitalization (the
recapitalization) of the Company in a transaction sponsored by an investor group led by Thomas H. Lee Partners, L.P. and Quadrangle Group LLC (the Sponsors) pursuant to the Agreement and Plan of Merger (the Merger
Agreement), dated as of May 31, 2006, between West Corporation and Omaha Acquisition Corp., a Delaware corporation formed by the Sponsors for the purpose of recapitalizing West Corporation. Omaha Acquisition Corp. was merged with and into
West Corporation, with West Corporation continuing as the surviving corporation. Pursuant to such recapitalization, our publicly traded securities were cancelled in exchange for cash. The recapitalization has been accounted for as a leveraged
recapitalization, whereby the historical bases of our assets and liabilities have been maintained. The net recapitalization amount was first applied against additional paid-in capital in excess of par value until that was exhausted and the remainder
was applied against the accumulated deficit.
We financed the recapitalization with equity contributions from the Sponsors, and the
rollover of a portion of the equity interests in the Company held by Gary and Mary West, the founders of the registrant (the Founders), and certain members of management, along with a new $2.1 billion senior secured term loan facility, a
new senior secured revolving credit facility providing financing of up to $250.0 million (none of which was drawn at the closing of the recapitalization) and the private placement of $650.0 million aggregate principal amount of 9.5% senior notes due
2014 and $450.0 million aggregate principal amount of 11% senior subordinated notes due 2016.
The
unaudited condensed consolidated financial statements include the accounts of West and our wholly-owned and majority-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 Form 10-K for the year ended December 31, 2006. All intercompany balances
and transactions have been eliminated. Our results for the three and six months ended June 30, 2007 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
Communication Services segment recognizes revenue for agent-based services including order processing, customer acquisition, customer retention and customer care in the month that calls are processed by an agent, based on the number of calls and/or
time processed on behalf of clients or on a success rate or commission basis. Automated services revenue is recognized in the month that calls are received or sent by automated voice response units and is billed based on call duration or per call.
Our emergency communications services revenue is generated primarily from monthly fees which are recognized in the months services are performed. Notification revenue is recognized in the month services are performed. Non refundable up front fees
and related costs are recognized ratably over the term of the contract or the expected life of the customer relationship, whichever is longer.
The Receivables Management segment recognizes revenue for contingent/third-party collection services,
government collection services and claims subrogation services in the month collection payments are received based upon a percentage of cash collected or other agreed upon contractual parameters. First-party collection services on pre-charged off
receivables are recognized on an hourly rate basis.
We believe that the amounts and timing of cash collections for our purchased
receivables can be reasonably estimated; therefore, we utilize the level-yield method of accounting for our purchased receivables. We follow American Institute of Certified Public Accountants Statement of Position 03-3, Accounting for Loans or
Certain Securities Acquired in a Transfer (SOP 03-3). SOP 03-3 states that if the collection estimates established when acquiring a portfolio are subsequently lowered, an allowance for impairment and a corresponding expense are
established in the current period for the amount required to maintain the internal rate of return, or IRR, expectations. If collection estimates are raised, increases are first used to recover any previously recorded allowances and the
remainder is recognized prospectively through an increase in the IRR. This updated IRR must be used for subsequent impairment testing. Portfolios acquired prior to December 31, 2004 will continue to be governed by Accounting Standards Executive
Committee Practice Bulletin 6, as amended by SOP 03-3, which set the IRR at December 31, 2004 as the IRR to be used for impairment testing in the future. Because any reductions in expectations are recognized as an expense in the current period
and any increases in expectations are recognized over the remaining life of the portfolio, SOP 03-3 increases the probability that we will incur impairments in the future, and these impairments could be material. During the three and six months
ended June 30, 2007, no impairment allowances were required. Periodically, the Receivables Management segment will sell all or a portion of a receivables pool to third parties. The gain or loss on these sales is recognized to the extent the
proceeds exceed or, in the case of a loss, are less than the cost basis of the underlying receivables.
Common Stock
result of the recapitalization, our publicly traded securities were cancelled. Our current equity investors (i.e., the Sponsors, the Founders and certain members of management) acquired a combination of Class L and Class A shares (in
strips of eight Class A shares and one Class L share) in exchange for cash or in respect of converted shares. Supplemental management incentive equity awards (restricted stock and option programs) have been implemented with Class A
shares/options only. General terms of these securities are:
: Each Class L share is entitled to a priority return
preference equal to the sum of (x) $90 per share base amount plus (y) an amount sufficient to generate a 12% internal rate of return (IRR) on that base amount from the date of the recapitalization until the priority return
preference is paid in full. At closing of the recapitalization, the Company issued 9.8 million Class L shares. Each Class L share also participates in any equity appreciation beyond the priority return on the same per share basis as the
: Class A shares participate in the equity appreciation after the Class L
priority return is satisfied. At closing of the recapitalization, the Company issued approximately 78.2 million Class A shares.
: 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.
: Dividends and other distributions to stockholders in respect of shares, whether as part of an ordinary distribution of earnings, as
a leveraged recapitalization or in the event of an ultimate liquidation and distribution of available corporate assets, are to be paid as follows. First, holders of Class L shares are entitled to receive an amount equal to the Class L base
amount of $90 per share plus an amount sufficient to generate a 12% IRR on that base amount, compounded quarterly from the closing date of the recapitalization to the date of payment. Second, after payment of this priority return to Class L
holders, the holders of Class A shares and Class L shares participate together, as a single class, in any and all distributions by the Company.
Conversion of Class L shares
: Class L shares automatically convert into Class A
shares immediately prior to an Initial Public Offering (IPO). Also, the board of directors may elect to cause all Class L shares to be converted into Class A shares in connection with a transfer (by stock sale, merger or
otherwise) of a majority of all common stock to a third party (other than to Thomas H. Lee Partners, LP and its affiliates). In the case of any such conversion (whether on 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
As the Class L stockholders control a majority of the votes of the board of directors through direct
representation on the board of directors and the conversion and redemption features are considered to be outside the control of the Company, all shares of Class L common stock have been presented outside of permanent equity in accordance with EITF
Topic D-98,
Classification and Measurement of Redeemable Securities.
At June 30, 2007, the 12% priority return preference has been accreted and included in the Class L share balance.
In accordance with EITF Issue 98-5,
Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion
(EITF 98-5), the Company determined that the conversion feature in the Class L shares is in-the-money at the date of issuance and therefore represents a beneficial conversion feature. Under EITF 98-5, $12.2 million (the
intrinsic value of the beneficial conversion feature) of the proceeds received from the issuance of the Class L shares was allocated to additional paid-in capital, consistent with the classification of the Class A shares, creating a discount on
the Class L shares. Because the Class L shares have no stated redemption date and the beneficial conversion feature is not considered to be contingent under EITF 98-5, but can be realized immediately, the discount resulting from the allocation of
value to the beneficial conversion feature is required to be recognized immediately as a return to the Class L stockholders analogous to a dividend. As no retained earnings are available to pay this dividend at the date of issuance, the dividend is
charged against additional paid-in capital resulting in no net impact.
Cash and Cash Equivalents
We consider short-term
investments with original maturities of three months or less at acquisition to be cash equivalents.
Trust Cash
represents cash collected on behalf of our Receivables Management clients that has not yet been remitted to them. A related liability is recorded in accounts payable until settlement with the respective clients.
Stock Based Compensation
Effective January 1, 2006, we adopted the fair value recognition provisions of SFAS 123R, using the
modified-prospective-transition method.
Prior to the accelerated vesting as a result of the recapitalization, we recognized the cost of
all share-based awards on a straight-line basis over the vesting period of the award net of estimated forfeitures. Immediately following the recapitalization, each stock option issued and outstanding under our 1996 Stock Incentive Plan and 2006
Stock Incentive Plan, whether or not then vested, was canceled and converted into the right to receive payment from us (subject to any applicable withholding taxes) equal to the product of the excess of $48.75 less the respective stock option
exercise price multiplied by the number of options held. Also immediately following the recapitalization, the unvested restricted shares were vested and canceled and the holders of those securities received $48.75 per share, less applicable
withholding taxes. All options had grant date exercise prices less than $48.75. Certain members of our executive officers agreed to convert (rollover) existing vested options in exchange for new options.
In October 2006, our board of directors approved the 2006 Executive Incentive Plan (EIP).
The 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 and are accounted for in accordance with SFAS 123R.
Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 157
(SFAS 157), which defines fair value, establishes a framework for
measuring fair value, and expands disclosures about fair value measurements. The provisions of SFAS 157 are effective as of the beginning of our 2008 fiscal year. We are currently evaluating the impact, if any, SFAS 157 will have on our financial
In February 2007, the FASB issued Statement No. 159,
(SFAS 159)
This statement, which is expected to expand fair value measurement, permits entities to choose to measure many financial instruments and certain other items at fair value. SFAS 159 is effective for us
beginning in the first quarter of 2008. We are currently assessing the impact SFAS 159 may have on our financial statements.
2. MERGERS AND
On May 4, 2007, we completed our previously announced acquisition of all of the outstanding shares of Omnium Worldwide, Inc. (Omnium) pursuant to the Agreement and Plan of Merger, dated as of April 18, 2007 (the
Merger Agreement), by and among West Corporation, Platte Acquisition Corp., a wholly owned subsidiary of West Corporation, and Omnium. The purchase price including transaction costs and working capital adjustment, net of cash received of
$15.2 million, was approximately $127.4 million in cash and $11.6 million in Company equity (116,160 Class L shares and 929,280 Class A shares). We funded the acquisition with $135.0 million in proceeds from the amended senior secured term loan
facility and cash on hand. The results of Omniums operations have been included in our consolidated financial statements in the Receivables Management segment since May 1, 2007.
Omnium is a provider of revenue cycle management solutions to the insurance, financial services, communications and healthcare industries and of
overpayment identification and claims subrogation to the insurance industry. Omnium utilizes proprietary technology, data models and business processes to improve its clients cash flow. Omnium also provides services of identifying and
processing probate claims on behalf of credit grantors.
The following table summarizes the estimated fair values of the assets acquired
and liabilities assumed at May 1, 2007. The finite lived intangible assets are comprised of trade names, customer relationships and technology. We are in the process of obtaining the assistance of a third party to assist us with the valuation
of certain intangible assets. Thus, the allocation of the purchase price is subject to refinement.
On March 1, 2007, we completed our previously announced acquisition of all of the outstanding shares of Televox Software, Incorporated (Televox) pursuant to the Agreement and Plan of Merger, dated as
of January 31, 2007 (the Merger Agreement), by and among West Corporation, Ringer Acquisition Corp., a wholly owned subsidiary of West Corporation, and Televox. The purchase price, net of cash received of $5.2 million and
transaction costs, was approximately $128.8 million in cash. We funded the acquisition with cash on hand and the proceeds from the amended senior secured term loan facility. The results of Televoxs operations have been included in our
consolidated financial statements in the Communications Services segment since March 1, 2007.
TeleVox is a provider of automated
messaging services to the healthcare industry. TeleVox offers customer communication products, including message delivery, inbound inquiry, website design and hosting and secure online communication portals. TeleVox helps its customers communicate
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at
March 1, 2007. The finite lived intangible assets are comprised of trade names, customer relationships and technology. We are in the process of obtaining the assistance of a third party to assist us with the valuation of certain intangible
assets. Thus, the allocation of the purchase price is subject to refinement.
On February 1, 2007, we completed our previously announced acquisition of all of the outstanding shares of CenterPost Communications, Inc. ( CenterPost) pursuant to the Agreement and Plan of Merger,
dated as of January 31, 2007 (the Merger Agreement), by and among West Corporation, Platinum Acquisition Corp., a wholly owned subsidiary of West Corporation, and CenterPost Communications, Inc. The purchase price, net of cash
received of $1.0 million and transaction costs, was approximately $22.4 million in cash. We funded the acquisition with cash on hand. The results of CenterPosts operations have been included in our consolidated financial statements in the
Communications Services segment since February 1, 2007. On April 2, 2007 CenterPost changed its name to West Notifications Group, Inc. (WNG).
WNG is a provider of enterprise multi-channel solutions for automating communications between companies and their customers via voice, email, fax, wireless text and instant messaging. WNGs solutions are designed
to help companies acquire, care for, grow and retain customers by enabling frequent and relevant customer contact at a price-point that is superior to traditional methods. WNG provides services to some of the nations largest companies in
industries such as travel & transportation, banking & financial services, health sciences and property & casualty insurance.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at February 1, 2007. The finite lived intangible assets are comprised of customer relationships and
technology. We are in the process of obtaining the assistance of a third party to assist us with the valuation of certain intangible assets. Thus, the allocation of the purchase price is subject to refinement.
Assuming our recent acquisitions occurred as of the beginning of the periods presented, our unaudited pro forma results of operations for the three and six months ended June 30, 2007 and 2006 would have been, in
thousands, as follows:
1,060,562
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.
The following table presents the activity in goodwill by reporting segment for the
six months ended June 30, 2007, in thousands:
  94,158
  69,308
 (64,979
Factors that contributed to a purchase price resulting in goodwill, non-deductible for tax
purposes, for the purchase of Omnium include its position in a large and growing market and margin expansion opportunities due to additional scale.
Factors that contributed to a purchase price resulting in goodwill, non-deductible for tax purposes, for the purchase of WNG included its
position in a growing market and margin expansion opportunities due to additional scale. Further, WNG complements the existing offerings of our Communications Services segment, providing cross-selling opportunities.
We are in the process of obtaining the assistance of a third party to assist us with the valuation of certain intangible assets. The process of obtaining
a third-party appraisal involves numerous time consuming steps for information gathering, verification and review. We expect to finalize the WNG and Televox appraisals in the fourth quarter of 2007. We expect to finalize the Omnium appraisal in the
first quarter of 2008. Goodwill recognized in these transactions is currently estimated at $163.5 million and is not deductible for tax purposes.
During the six months ended June 30, 2007, we completed the purchase price allocation for the Raindance acquisition. The results of the valuation of certain intangible assets required an additional $14.2 million to be allocated to
finite lived intangible assets and a corresponding reduction to goodwill and an increase in deferred taxes from what was previously estimated. The estimated increase in amortization expense for the Raindance intangible assets in 2007 through 2011 is
$3.7 million, $4.1 million, $2.9 million, $2.6 million and $1.7 million, respectively.
During the six months ended June 30, 2007, we
completed the purchase price allocation for the Intrado acquisition. The results of the valuation of certain intangible assets required an additional $77.9 million to be allocated to finite lived intangible assets and a corresponding reduction to
goodwill and an increase in deferred taxes from what was previously estimated. The estimated increase in amortization expense for the Intrado intangible assets in 2007 through 2011 is $2.7 million, $3.5 million, $3.5 million, $4.4 million and $5.3
(99,367
 41,710
(118,947
 23,910
Amortization expense for finite lived intangible assets was $17.7 million and $9.5 million for the
three months ended June 30, 2007 and 2006, respectively, and $29.3 million and $16.7 million for the six months ended June 30, 2007 and 2006, respectively. Estimated amortization expense for the intangible assets acquired in all
acquisitions for 2007 and the next five years is as follows:
(169,809
(64,651
(98,882
(56,664
Stock purchase obligations related to the recapitalization remain outstanding at June 30,
2007. See Note 11 of the Notes to Consolidated Financial Statements included elsewhere in this report for information regarding this obligation.
On May 11, 2007, West Corporation, Omnium Worldwide, Inc., a subsidiary of West, as borrower and guarantor,
and Lehman Commercial Paper Inc. (Lehman), as administrative agent, entered into Amendment No. 2 (the Second Amendment) to the credit agreement, dated as of October 24, 2006, by and among West, Lehman, as
administrative agent, the various lenders party thereto, as lenders, and the other agents named therein, as amended by Amendment No. 1, dated as of February 14, 2007, among West, certain domestic subsidiaries of West and Lehman (as so
amended, the Credit Agreement).
The terms of the Second Amendment include an expansion of the term loan credit facility by
$135.0 million in incremental term loans. After the expansion of the term loan credit facility, the aggregate facility is $2.4 billion. In connection with the Second Amendment, Omnium delivered a Supplement to the Guaranty Agreement, dated as of
October 24, 2006, and a Supplement to the Security Agreement, dated as of October 24, 2006, which supplements work to, among other things, include Omnium as a guarantor and a grantor, respectively, under the Credit Agreement.
In October 2006 we
entered into a three-year interest rate swap to hedge the cash flows from our variable rate debt, which effectively converted the hedged portion to fixed rate debt. The initial and ongoing assessments of hedge effectiveness are performed using
regression analysis. The periodic measurements of hedge ineffectiveness are performed using the change in variable cash flows method. These agreements hedge notional amounts of $800.0 million, $680.0 million and $600.0 million for the years ending
October 23, 2007, 2008 and 2009, respectively, of our $2.388 billion outstanding senior secured term loan facility. In accordance with SFAS 133,
Accounting for Derivative Instruments and Hedging Activities,
these cash flow hedges are
recorded at fair value with a corresponding entry, net of taxes, recorded in other comprehensive income until earnings are affected by the hedged item. At June 30,
2007, our gross fair value asset position was approximately $4.4 million. We experienced no ineffectiveness during the three and six months ended
10/24/06-10/24/07
5.0% - 5.005%
10/24/07-10/24/08
10/24/08-10/24/09
Effective January 1, 2007, we adopted Financial Accounting Standards Board Interpretation No. 48,
(FIN 48), which clarifies the accounting for uncertainty in tax positions. After the adoption of FIN 48, we have total liabilities for unrecognized tax benefits of $14.0 million. Of this amount, $4.0 million was recorded as a
decrease to beginning retained deficit for the cumulative effect of adopting FIN 48. The entire $14.0 million is classified as a non-current liability in the condensed consolidated balance sheet.
Included in the liability for income tax payable at the date of adoption of FIN 48, January 1, 2007 were approximately $14.0 million of tax
positions that, if recognized, would affect the effective tax rate. We do not currently anticipate significant changes to the amount of unrecognized tax benefits over the next year.
We recognize accrued interest and penalties related to uncertain tax positions in income tax expense. As of the date of adoption of FIN 48, we accrued
approximately $4.3 million for the payment of tax-related interest and penalties. We file income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. All federal income tax returns are closed for years prior to
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 (8) shares of Class A Common and one (1) share of Class L Common), in each case pursuant to rollover options, are 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 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 until the tenth anniversary of the date of grant. In the case of a normal termination, the awards will
remain exercisable for the shorter of (i) the one-year period ending with the first anniversary of the participants normal termination or (ii) the period ending on the latest date on which such award could have been exercised.
   Balance at June 30, 2007
3,239,721
The following table summarizes the information on the rollover options granted under the EIP in 2006
and outstanding at June 30, 2007:
2,877,309
33.00 - $38.15
The aggregate intrinsic value of these options at June 30, 2007 was approximately $24.0
We account for the stock option grants under the EIP in accordance with SFAS 123R. The fair value of options granted under the
EIP was $1.15 per option. 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. Expected volatility was implied using the average
four year historical stock price volatility for six companies that were used in applying the market approach to value the Company for the recapitalization. The expected life of four years for the options granted was derived based on
managements view of the likelihood of a change-of-control event occurring in that time frame. The risk-free rate for periods within the expected life of the option is based on the U.S. Treasury yield curve in effect at the time of grant.
At June 30, 2007 there was approximately $2.4 million of unrecorded and unrecognized
compensation cost related to unvested share based compensation under the EIP. No share-based compensation was recorded for the management rollover options as these options were fully vested prior to the recapitalization which triggered the rollover
Grants of restricted stock under the EIP are in three tranches: 33.33% of the shares in Tranche 1, 22.22% of the shares in Tranche 2 and 44.45% of the shares in Tranche 3. Restricted stock acquired under the EIP vests
during the grantees employment by the Company or its subsidiaries in accordance with the provisions of the EIP, as follows:
Tranche 1 shares will vest over a period of five years, with 20% of the restricted stock grant vesting at the end of each annual anniversary of the grant. Notwithstanding the above, 100% of a grantees outstanding and unvested Tranche 1 shares
shall vest immediately upon a change of control.
The vesting schedule for Tranche 2 and Tranche 3 shares is subject to the total return of
the investors and the investors internal rate of return (IRR) as of an exit event, subject to the following terms and conditions: Tranche 2 shares shall become 100% vested upon an exit event if, after giving effect to any vesting
of the Tranche 2 shares on an exit event, investors total return is greater than 200% and the investor IRR exceeds 15%. Tranche 3 shares will be eligible to vest upon an exit event if, after giving effect to any vesting of the Tranche 2 shares
and/or Tranche 3 shares on an exit event, investors total return is more than 200% and the investor IRR exceeds 15%, with the amount of Tranche 3 shares vesting upon the exit event varying with the amount by which the investors total
return exceeds 200%, as follows: 100%, if, after giving effect to any vesting of the Tranche 2 shares and/or the Tranche 3 shares on an exit event, the total return to the investors is equal to or greater than 300%; 0%, if, after giving effect to
any vesting of the Tranche 2 shares and/or the Tranche 3 shares on an exit event, the total return is 200% or less; and if, after giving effect to any vesting of the Tranche 2 shares and/or the Tranche 3 shares on an exit event, the total return is
greater than 200% and less than 300%, then the Tranche 3 shares shall vest by a percentage between 0% and 100% determined on a straight line basis.
Performance conditions that affect vesting are not reflected in estimating the fair value of an award at the grant date as those conditions are restrictions that stem from the forfeitability of instruments to which employees have not yet
earned the right. Paragraph A64 of SFAS 123R requires that if the vesting of an award is based on satisfying both a service and performance condition, the company must initially determine which outcomes are probable of achievement and recognize the
compensation cost over the longer of the explicit or implicit service period. Since an exit event is currently not considered probable nor is the meeting the performance objectives, no compensation costs will be recognized on Tranches 2 or 3 until
those events become probable. The unrecognized compensation costs of Tranches 2 and 3 in the aggregate total $7.4 million.
Restricted stock activity under the EIP for the six months ended June 30, 2007 is set forth
   Canceled
The following table summarizes the information on the restricted stock granted in 2006 under the
EIP at June 30, 2007:
We account for the restricted stock grants in accordance with SFAS 123R. The fair value of the
restricted stock granted under the EIP was $1.43. We have estimated the fair value of 2006 EIP restricted stock grants on the grant date using a Black-Scholes option pricing model that uses the same assumptions noted above for the 2006 EIP option
awards. A 13% discount was applied to the fair value determined using the Black-Scholes pricing model. This discount was determined through reference to the trading multiples of public guideline companies to recognize the lack of marketability and
liquidity in our common stock.
At June 30, 2007 there was approximately $3.2 million of unrecorded and unrecognized compensation cost
related to Tranche 1 unvested restricted stock under the EIP.
The components of stock-based compensation expense in thousands are
Comprehensive income is comprised of results of operations for foreign subsidiaries translated using the average exchange rates during the period. Assets and liabilities are translated at the exchange rates in effect
on the balance sheet dates. The translation adjustment is included in comprehensive income, net of related tax expense. Also, the gain or loss on the effective portion of cash flow hedges (i.e., change in fair value) is initially reported as a
component of other comprehensive income. The remaining gain or loss is recognized in interest expense in the same period in which the cash flow hedge affects earnings.
 3,578
The Communication Services segment is comprised of dedicated agent, shared agent, automated, business-to-business services, emergency infrastructure
systems and services and notification services. The Conferencing Services segment is composed of audio, web and video conferencing services. The Receivables Management segment is composed of debt purchasing and collections, contingent/third-party
collections, government collections, first-party collections, commercial collections, overpayment identification and claims subrogation to the insurance industry and revenue cycle management solutions.
477,727
1,022,879
933,716
863,934
For the three months ended June 30, 2007 and 2006, our largest 100 clients represented 56% and 57% of our total revenue, respectively. For the six
months ended June 30, 2007 and 2006, our largest 100 clients represented 57% and 60% of our total revenue, respectively. On December 29, 2006 the Federal Communications Commission approved the merger of AT&T, Cingular, SBC and Bell
South. The aggregate revenue as a percentage of our total revenue from these entities in the three months ended June 30, 2007 and 2006 was approximately 13% and 17% of our total revenue, respectively. The aggregate revenue as a percentage of
our total revenue from these entities in the six months ended June 30, 2007 and 2006 was approximately 14% and 16% of our total revenue, respectively.
From time to time, we are subject to lawsuits and claims which arise out of our operations in the normal course of our business. 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, except for the items discussed below for which we are
currently unable to predict the outcome, the disposition of claims currently pending will not have a material adverse effect on our financial position, results of operations or cash flows.
Sanford v. West Corporation et al
., No. GIC 805541, was filed February 13, 2003 in the San Diego County, California
Superior Court. The original complaint alleged violations of the California Consumer Legal Remedies Act, Cal. Civ. Code §§ 1750 et seq., unlawful, fraudulent and unfair business practices in violation of Cal. Bus. & Prof.
Code §§ 17200 et seq., untrue or misleading advertising in violation of Cal. Bus. & Prof. Code §§ 17500 et seq., and common law claims for conversion, unjust enrichment, fraud and deceit, and negligent
misrepresentation, and sought monetary damages, including punitive damages, as well as restitution, injunctive relief and attorneys fees and costs. The complaint was brought on behalf of a purported class of persons in California who were sent a
Memberworks, Inc. (MWI) membership kit in the mail, were charged for an MWI membership program, and were allegedly either customers of what the complaint contended was a joint venture between MWI and West Corporation or West
Telemarketing Corporation (WTC) or wholesale customers of West Corporation or WTC.
On February 16, 2007, after receiving
briefing and hearing argument on class certification, the trial court certified a class consisting of All persons in California, who, after calling defendants West Corporation and West Telemarketing Corporation (collectively West
or defendants) to inquire about or purchase another product between September 1, 1998 through July 2, 2001, were; (a) sent a membership kit in the mail; (b) charged for a MemberWorks, Inc. (MWI) membership
program; and (c) customers of a joint venture between MWI and West or were wholesale customers of West (the Class). Not included in the Class are defendants and their officers, directors, employees, agents and/or
affiliates. On March 19, 2007, West and WTC filed a Petition for Writ of Mandate and Request for Stay asking the appellate court to first stay and then order reversal of the Superior Courts class certification Order.
However, this Petition was denied on June 8, 2007. Thereafter, on June 18, 2007, West and WTC filed a Petition for Review and Request for Stay in the California Supreme Court, but this Petition was denied on June 27, 2007. Discovery
in the Superior Court is ongoing with merits discovery scheduled to close on August 16, 2007 and expert discovery set to close on November 16, 2007. The Superior Court has indicated that it will schedule a trial in or
around March 2008.
Patricia Sanford, the original plaintiff in the litigation described above, had previously filed a
complaint on March 28, 2002 in the United States District Court for the Southern District of California, No. 02-cv-0601-H, against WTC and West Corporation and MWI alleging, among other things, claims under 39 U.S.C. § 3009.
Federal court dismissed the federal claims against WTC and West Corporation and declined to exercise supplemental jurisdiction over the remaining state law claims. Plaintiff proceeded to arbitrate her claims with MWI and refiled her claims as to WTC
and West Corporation in the Superior Court of San Diego County, California as described above. Plaintiff has contended that the order of dismissal in federal court was not a final order and that the federal case is still pending against West
Corporation and WTC. The District Court on December 30, 2004 confirmed the arbitration award in the arbitration between plaintiff and MWI. Plaintiff filed a Notice of Appeal on January 28, 2005. Preston Smith and Rita Smith, whose motion
to intervene was denied by the District Court, have also sought to appeal. WTC and West Corporation moved to dismiss the appeal and joined in a motion to dismiss the appeal filed by MWI. On April 16, 2007 the Ninth District affirmed the
district courts dismissal of the claims against West Corporation but vacated the order compelling arbitration with MWI and remanded the case to the district court. WTC and West Corporation are currently unable to predict the outcome or
reasonably estimate the possible loss, if any, or range of losses associated with the claims in the state and federal actions described above.
Brandy L. Ritt, et al. v. Billy Blanks Enterprises, et al.
was filed in January 2001 in the Court of Common Pleas in Cuyahoga County, Ohio, against two of our clients. The suit, a purported class action, was amended for the
third time in July 2001 and West Corporation was added as a defendant at that time. The suit, which seeks statutory, compensatory, and punitive damages as well as injunctive and other relief, alleges violations of various provisions of Ohios
consumer protection laws, negligent misrepresentation, fraud, breach of contract, unjust enrichment and civil conspiracy in connection with the marketing of certain membership programs offered by our clients. On February 6, 2002, the court
denied the plaintiffs motion for class certification. On July 21, 2003, the Ohio Court of Appeals reversed and remanded the case to the trial court for further proceedings. The plaintiffs filed a Fourth Amended Complaint naming West
Telemarketing Corporation as an additional defendant and a renewed motion for class certification. One of the defendants, NCP Marketing Group (NCP), filed for bankruptcy and on July 12, 2004 removed the case to federal court.
Plaintiffs filed a motion to remand the case back to state court. On August 30, 2005, the U.S. Bankruptcy Court for the District of Nevada remanded the case back to the state court in Cuyahoga County, Ohio. The Bankruptcy Court also
approved a settlement between the named plaintiffs and NCP and two other defendants, Shape The Future International LLP and Integrity Global Marketing LLC. West Corporation and West Telemarketing Corporation filed motions for judgment on the
pleadings and a motion for summary judgment. On March 28, 2006, the state trial court certified a class of Ohio residents. West and WTC filed a notice of appeal from that decision, and plaintiffs cross-appealed. The appeal was briefed
and was then argued on February 26, 2007. On April 12, 2007, the Court of Appeal affirmed in part and reversed in part the trial courts Order. The Court of Appeal ordered certification of a class of: All
residents of Ohio who, from September 1, 1998 through July 2, 2001 (a) called a toll-free number, marketed by West and MWI, to purchase any Tae-Bo product, (b) purchased a Tae-Bo product; (c) subsequently were enrolled in an
MWI membership program; and (d) were charged for the MWI membership on their credit/debit card. Not included in the class are defendants, and their officers, directors, employees, agents, and/or affiliates. West and WTC sought
review of this ruling by the Ohio Supreme Court on June 7, 2007 which is currently pending. On April 20, 2006, the trial court denied West and WTCs motion for judgment on the pleadings. West and WTCs summary judgment
motion remains pending. The trial court has stayed all further action in the case pending resolution of the appeal. West Corporation and West Telemarketing Corporation are currently unable to predict the outcome or reasonably estimate the
possible loss, if any, or range of losses associated with this claim.
Polygon Appraisal.
On October 19, 2006, Polygon Global Opportunity Master Fund
(Polygon) notified the Company that it was asserting appraisal rights with respect to 3,500,000 shares of the Companys common stock outstanding prior to the recapitalization. On February 9, 2007, Polygon filed a petition for
appraisal in the Court of Chancery of the State of Delaware, New Castle County, seeking to have the Court determine the fair value of its shares at the time of the recapitalization and a monetary award of the fair value, along with interest and
costs. We included in our condensed consolidated balance sheet at June 30, 2007, a liability relating to the Polygon shares for approximately $170.6 million, which is based on the $48.75 per share consideration Polygon would have received in
the recapitalization if it did not perfect its appraisal rights. We do not believe that any difference between this accrual and the final award or settlement in the appraisal proceedings (including any potential interest award) will have a material
effect on our financial position, results of operations, or cash flows. The Court has scheduled a trial for January 28 through February 1, 2008.
Federal Communications Commission Inquiry.
On June 22, 2007 we received a letter from the Investigations and Hearing Division of the Federal Communications Commission (FCC) Enforcement Bureau regarding
registration, filing and regulatory surcharge remittance requirements applicable to traditional telephone companies. We believe that we operate as a provider of unregulated information services. Consequently, we do not believe that we are subject to
the FCC or state public utility commission regulations applicable to providers of traditional telecommunications services in the U.S. and responded to the FCCs inquiry accordingly. We believe that we exercise reasonable efforts to monitor
telecommunications laws, regulations, decisions and trends and to comply with any applicable legal requirements. However, if we fail to comply with any applicable government regulations, or if we are required to submit to the jurisdiction of such
government authorities as a provider of traditional telecommunications services, we could be temporarily prohibited from providing portions of our services, be required to restructure portions of our services or be subject to ongoing reporting and
compliance obligations, including being subject to litigation, fines, regulatory surcharge remittance requirements (past and/or future) or other penalties for any non-compliance. West Corporation is currently unable to predict the outcome or
reasonably estimate the possible loss, if any, or range of losses associated with this inquiry.
12. FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTOR AND
SUBSIDIARY NON- GUARANTOR
In connection with the issuance of the senior notes and senior subordinated notes, West Corporation and our
U.S. based wholly owned subsidiaries guaranteed the payment of principal, premium and interest. Presented below is consolidated financial information for West Corporation and our subsidiary guarantors and subsidiary non-guarantors for the periods
SUPPLEMENTAL CONDENSED
 202,579
 206,305
 89,575
 3,570
(41,198
(38,533
 (83,465
 (25,559
(38,996
 3,519
  4,257
 4,257
(33,190
 401,899
 399,368
 186,160
 6,832
(72,465
 (163,655
 (58,445
 1,276
(76,319
(58,445
 10,927
  8,155
 8,155
 186,390
 185,052
 76,503
 824
 (12,205
 (23,183
 597
 23,921
  4,048
 4,048
 370,201
 341,110
 147,892
 1,163
 (16,426
 (64,119
 814
(64,119
 48,005
  6,624
 6,624
 20,669
  20,669
 281,456
 308,839
 1,849,008
 (1,849,008
 Portfolio receivables, current portion
  56,664
 56,664
 51,406
2,185,723
(1,849,008
 297,083
  120,321
 120,321
 (2,074,770
 1,284,862
  1,284,862
 388,958
 389,185
 151,929
4,163,134
(3,923,778
 52,440
 401,611
  39,524
 39,524
 5,988
2,063,882
  65,532
 65,532
1,940,307
  3,464,352
 47,744
 39,271
  10,988
 10,988
   969,285
2,003,557
(2,074,770
 7,104
  7,104
 262,723
 285,087
  (95,680
  64,651
 64,651
 54,382
(95,680
 294,707
  85,006
 85,006
1,794,851
 (1,824,967
 1,186,375
  1,186,375
 194,996
 195,412
 148,200
1,929,691
(1,920,647
 32,248
 375,957
   21,000
  59,656
 59,656
 360
  27,590
 27,590
   3,179,000
 26,959
  10,299
 10,299
   903,656
1,794,234
(1,824,967
Supplemental Condensed Consolidating Statements of Cash
 (285,813
  (66,145
(34,893
  38,817
(319,827
(32,279
 (11,649
  (2,279
  56,791
  (38,980
  (4,772
(61,685
 EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS
  (231
(489,405
 (602,106
  (36,224
  32,192
(492,182
(150,404
  470,000
  30,792
  (24,717
  17,094
  8,926
 (2,590
  (66
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.
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.
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.
We provide business process outsourcing services focused on helping our clients communicate more effectively with their clients. We help our clients
maximize the value of their customer relationships and derive greater value from each transaction that we process. We deliver our services through three segments:
collections, revenue cycle management solutions to the insurance, financial services, communications and healthcare industries and overpayment identification and claims subrogation to the insurance industry.
Each of these services builds upon our core competencies of managing technology, telephony and human capital. Many of the nations leading enterprises trust us to
manage their customer contacts and communications. These enterprises choose us based on our service quality and our ability to efficiently and cost-effectively process high volume, complex voice-related transactions.
The following overview highlights the areas we believe are important in understanding our results of operations for the three and six months ended June 30, 2007. This summary is not intended as a substitute for
the detail provided elsewhere in this quarterly report and our unaudited condensed consolidated financial statements included elsewhere in this quarterly report.
Accounting for Uncertainty in Income Taxesan
(FIN 48), which clarifies the accounting for uncertainty in tax positions. FIN 48 requires that we recognize in our financial statements, the impact of a tax position, if that
position is more likely than not to be sustained on audit, based on the technical merits of the position. In accordance with FIN 48 we recorded a $4.0 million tax liability and a corresponding charge to retained deficit.
On February 1, 2007, we completed our acquisition of all of the outstanding shares of CenterPost Communications, Inc. (CenterPost) now known as
West Notifications Group, Inc. (WNG) pursuant to the Agreement and Plan of Merger, dated as of January 31, 2007, by and among West Corporation, Platinum Acquisition Corp., a wholly owned subsidiary of West Corporation, and
CenterPost Communications, Inc. The purchase price, net of cash received of $1.0 million, and estimated transaction costs were approximately $22.4 million in cash. We funded the acquisition with cash on hand.
On February 14, 2007 we amended the senior secured term loan facility. The general terms of the amendment were a repricing, an expansion of the facility by $165.0
million and a soft call option. The repricing calls for a pricing grid based on our debt rating from 2.75% to 2.125% for LIBOR rate loans, currently priced at 2.375%, and 1.75% to 1.125% for base rate loans, currently priced at 1.375%. The soft call
option provides for a premium equal to 1.0% of the amount of the repricing prepayment in the event that prior to February 14, 2008, we transact another repricing amendment at a lower interest rate.
On March 1, 2007, we completed our acquisition of all of the outstanding shares of Televox Software, Incorporated (Televox) pursuant to the
Agreement and Plan of Merger, dated as of January 31, 2007, by and among West Corporation, Ringer Acquisition Corp., a wholly owned subsidiary of West Corporation, and Televox. The purchase price, net of cash received of $5.2 million, and estimated
transaction costs were approximately $128.8 million in cash. We funded the acquisition with cash on hand and the proceeds from the amended senior secured term loan facility.
On March 30, 2007 we filed with the Securities and Exchange Commission a Form S-4 Registration Statement to exchange, our 9.5% Senior Notes due October 15, 2014
(the exchange senior notes) and our 11% Senior Subordinated Notes due October 15, 2016 (the exchange senior subordinated notes and, collectively with the exchange senior notes, the exchange notes), for all of our
outstanding 9.5% Senior Notes due October 15, 2014 (the outstanding senior notes) and all of our outstanding 11% Senior Subordinated Notes due October 15, 2016 (the outstanding senior subordinated notes and, collectively with
the outstanding senior notes, the outstanding notes and, collectively with the exchange notes, the notes), respectively. The terms of the exchange notes are identical to the terms of the outstanding notes except that the
exchange notes have been registered under the Securities Act of 1933, as amended (the Securities Act), and therefore, are freely transferable.
On May 4, 2007, we completed our acquisition of all of the outstanding shares of Omnium Worldwide, Inc. (Omnium) pursuant to the Agreement and Plan
of Merger, dated as of April 18, 2007 (the Merger Agreement), by and among West Corporation, Platte Acquisition Corp., a wholly owned subsidiary of West Corporation, and Omnium. The purchase price including transaction costs and
working capital adjustment, net of cash received of $15.2 million, was approximately $127.4 million in cash, $11.6 million in Company equity (116,160 Class L shares and 929,280 Class A shares). We funded the acquisition with $135.0 million in
proceeds from the amended senior secured term loan facility and cash on hand.
On May 11, 2007, West Corporation, Omnium Worldwide, Inc., a subsidiary of West, as borrower and guarantor, and Lehman Commercial Paper Inc.
(Lehman), as administrative agent, entered into Amendment No. 2 (the Second Amendment) to the credit agreement, dated as of October 24, 2006, by and among West, Lehman, as administrative agent, the various lenders
party thereto, as lenders, and the other agents named therein, as amended by Amendment No. 1, dated as of February 14, 2007, among West, certain domestic subsidiaries of West and Lehman (as so amended, the Credit Agreement).
The terms of the Second Amendment include an expansion of the term loan credit facility by $135.0 million in incremental term loans. After the expansion of the term loan credit facility, the aggregate facility is $2.4 billion.
Consolidated revenues increased 12.7% and 16.1% for the three months and six months ended June 30, 2007, respectively, as compared to the three and six months
ended June 30, 2006. This increase was derived from organic growth and the acquisitions of Intrado, Inc. (Intrado), Raindance Communications, Inc. (Raindance), InPulse Response Group Inc.(Inpulse), WNG,
Televox and Omnium.
Operating income increased 17.1% and 25.9% for the three and six months ended June 30, 2007, respectively, as compared to the three and six months ended
June 30, 2006. This increase was attributable to the acquisitions of Intrado, Raindance, InPulse, WNG, Televox and Omnium as well as increases in operating income relating to organic growth.
Comparison of the Three and Six Months
Ended June 30, 2007 and 2006
For the second quarter of 2007, revenue increased $58.5 million, or 12.7%, to
$520.2 million from $461.7 million for the second quarter of 2006. For the six months ended June 30, 2007, revenue increased $142.4 million, or 16.1%, to $1,028.8 million from $886.4 million for the six months ended June 30, 2006. The
increase in revenue for the three and six months ended June 30, 2007 included $28.7 million and $100.9 million, respectively, from the acquisitions of Intrado, Raindance, InPulse, WNG, Televox and Omnium. These acquisitions closed on
April 4, 2006, April 6, 2006, October 2, 2006, February 1, 2007, March 1, 2007 and May 4, 2007, respectively. In accordance with paragraph 48 of SFAS No. 141 Business Combinations,
an accounting date of April 1, 2006 was used for the Intrado and Raindance acquisitions, October 1, 2006 for the InPulse acquisition and May 1, 2007 for the Omnium acquisition.
For the three and six months ended June 30, 2007, our top one hundred clients represented 56% and 57% of total revenue, respectively. This compares
to 57% and 60% for each of the comparable periods in 2006. On December 29, 2006 the Federal Communications Commission approved the merger of AT&T, Cingular, SBC and Bell South. The aggregate revenue as a percentage of our total revenue from
these entities in the three months ended June 30, 2007 and 2006 was approximately 13% and 17% of our total revenue, respectively. The aggregate revenue as a percentage of our total revenue from these entities in the six months ended
June 30, 2007 and 2006 was approximately 14% and 16% of our total revenue, respectively.
Communication services revenue for the second quarter of 2007 increased $16.0 million, or 6.4%, to
$264.3 million from $248.3 million for the second quarter of 2006. The increase in revenue for the three months ended June 30, 2007 is primarily due to organic growth and the acquisitions of InPulse, WNG and Televox, which collectively
accounted for $16.2 million of this increase. Our inbound dedicated agent business declined $9.5 million during the three months ended June 30, 2007 compared to the same period in 2006, due to a reduction in services for AT&T and a
reduction in non-recurring programs. For the six months ended June 30, 2007, communication services revenue increased $59.2 million, or 12.4%, to $537.0 million from $477.7 million for the six months ended
June 30, 2006. The increase in revenue for the six months ended June 30, 2007 is primarily due to the acquisitions of Intrado, InPulse, WNG and
Televox, which collectively accounted for $69.0 million of this increase. Our inbound dedicated agent business declined $18.1 million during the six months ended June 30, 2007 compared to the same period in 2006, due to a reduction in services
for AT&T and a reduction in non-recurring programs.
Conferencing services revenue for the second quarter of 2007 increased $27.8
million, or 17.8%, to $183.7 million from $155.9 million for the second quarter of 2006. The increase in revenue for the three months ended June 30, 2007 was entirely organic driven by minutes growing at a faster rate than downward pricing
pressure. For the six months ended June 30, 2007, conferencing services revenue increased $67.1 million, or 22.9%, to $359.8 million from $292.7 million for the six months ended June 30, 2006. The increase in revenue for the six months
ended June 30, 2007, included $19.4 million from the acquisition of Raindance.
Receivables management revenue for the second quarter
of 2007 increased $14.6 million, or 24.8%, to $73.7 million from $59.0 million for the second quarter of 2006. The increase in revenue for the three months ended June 30, 2007 is primarily due to the acquisition of Omnium, which accounted for
$12.5 million of this increase. For the six months ended June 30, 2007, receivables management revenue increased $15.6 million, or 13.1% to $134.8 million from $119.2 million for the six months ended June 30, 2006. The increase in revenue
for the six months ended June 30, 2007 is primarily due to the acquisition of Omnium, which accounted for $12.5 million of this increase. Sales of portfolio receivables during the three and six months ended June 30, 2007 resulted in
revenue of $2.5 million and $6.1 million, respectively, compared to $4.7 million and $9.2 million for the same periods in 2006.
Cost of services consists of direct labor, telephone expense and other costs directly related to providing services to clients. Cost of services increased $24.2 million, or 12.1%, in the second quarter of 2007 to $224.3 million,
from $200.1 million for the comparable period of 2006. As a percentage of revenue, cost of services decreased to 43.1% for the second quarter of 2007, compared to 43.3% for the comparable period in 2006. Cost of services increased $45.9 million, or
11.5%, in the six months ended June 30, 2007 to $443.3 million from $397.4 million for the comparable period in 2006. As a percentage of revenue, cost of services decreased to 43.1% for the six months ended June 30, 2007, compared to 44.8%
for the comparable period in 2006. The decrease in cost of services as a percentage of revenue during the six months ended June 30, 2007 is primarily attributable to the acquisition of Intrado which has a lower cost of services percentage than
our other businesses and the growth in our conferencing services segment which historically has had lower percentages of direct costs to revenue than our other two segments.
Communication services costs of services increased $4.9 million, or 4.2%, in the second quarter of 2007 to $121.8 million from $116.9 million for the
second quarter of 2006. The increase in cost of services for the three months ended June 30, 2007, included $5.6 million from the acquisitions of InPulse, WNG and Televox, which closed for accounting purposes on October 1,
2006, February 1, 2007 and March 1, 2007, respectively. As a percentage of revenue, communication services cost of services decreased to 46.1% for the second quarter of 2007, compared to 47.1% for the comparable period in 2006.
Communication services costs of services increased $14.1 million, or 6.0%, in the six months ended June 30, 2007 to $247.2 million from $233.1
million for the six months ended June 30, 2006. The increase in cost of services for the six months ended June 30, 2007 included $19.4 million,
from the acquisitions of Intrado, Inpulse, WNG and Televox. As a percentage of revenue, communication services cost of services decreased to 46.0% for the six months ended June 30, 2007, compared to 48.8% for the comparable period in 2006. The
decrease as a percentage of revenue is due to the acquisition of Intrado, which has historically had a lower percentage of direct costs to revenue than our consolidated results.
Conferencing services cost of services for the second quarter of 2007 increased $14.6 million, or 27.2%, to $68.2 million from $53.6 million for the
second quarter of 2006. As a percentage of revenue, conferencing services cost of services increased to 37.1% for the second quarter of 2007, compared to 34.4% for the comparable period in 2006. Conferencing services cost of services for the six
months ended June 30, 2007 increased $27.2 million, or 25.9%, to $132.2 million from $105.0 million for the six months ended June 30, 2006. As a percentage of revenue, conferencing services cost of services increased to 36.7% for the six
months ended June 30, 2007, compared to 35.9% for the comparable period in 2006. The increase in cost of services for the six months ended June 30, 2007 included $5.1 million, from the acquisition of Raindance, which we acquired on
Receivables management cost of services for the second quarter of 2007 increased $4.6 million, or 15.1%, to $35.5
million from $30.8 million for the second quarter of 2006. As a percentage of revenue, receivables management cost of services decreased to 48.2% for the second quarter of 2007, compared to 52.2% for the comparable period in 2006. This decrease as a
percentage of revenue is partially due to the acquisition of Omnium, which has a lower cost of services as a percentage of revenue than our historical receivables management segment. Receivables management cost of services for the six months ended
June 30, 2007 increased $4.0 million, to $66.1 million from $62.1 million for the six months ended June 30, 2006. As a percentage of revenue, receivables management cost of services decreased to 49.1% for the six months ended June 30,
2007, compared to 52.1% for the comparable period in 2006. The increase in cost of services for the three and six months ended June 30, 2007 included $4.7 million, from the acquisition of Omnium, which closed for accounting purposes on
Selling, general and administrative expenses (
SG&A):
$21.3 million, or 11.5%, to $206.3 million for the second quarter of 2007, from $185.0 million for the comparable period of 2006. This increase included $21.1 million from the acquisitions of InPulse, WNG, Televox and Omnium. These acquisitions
closed for accounting purposes on October 1, 2006, February 1, 2007, March 1, 2007 and May 1, 2007, respectively. Total stock compensation expense recognized during the three and six months ended June 30, 2007 was
$0.3 million and $0.6 million, respectively, compared to $3.6 million and $7.2 million, respectively, for the three and six months ended June 30, 2006. This reduction in share based compensation was the result of our recapitalization on
October 24, 2006. On that date, the vesting of all outstanding equity and stock options were accelerated and exchanged for a cash payment. The stock compensation expense recognized in 2007 results from grants made under the 2006 Executive
Incentive Plan. As a percentage of revenue, SG&A expenses decreased to 39.7% of revenue for the second quarter of 2007 compared to 40.1% for the comparable period of 2006.
SG&A expenses increased by $58.3 million, or 17.1%, to $399.4 million for the six months ended June 30, 2007 from $341.1 million for the
comparable period of 2006. This increase included $53.3 million from the acquisitions of Intrado, Raindance, InPulse, WNG, Televox and Omnium. As a percentage of revenue, SG&A expenses increased to 38.8% for the six months ended June 30,
2007, compared to 38.5% for the comparable period of 2006.
Communication services SG&A expenses increased by $9.1 million, or 8.7%, to $113.5 million for the second quarter of 2007 from $104.4 million for the
second quarter 2006. The increase in SG&A for the three months ended June 30, 2007 included $12.5 million of expenses from the acquisitions of InPulse, WNG and Televox. As a percentage of revenue, communication services SG&A expenses
increased to 42.9% for the second quarter of 2007 compared to 42.0% for the comparable period of 2006. Communication services SG&A expenses increased by $36.1 million, or 19.1%, to $224.5 million for the six months ended June 30, 2007 from
$188.4 million for the six months ended June 30, 2006. The increase in SG&A for the six months ended June 30, 2007 included $45.9 million of expenses from the acquisitions of Intrado, InPulse, WNG and Televox. As a percentage of
revenue, communication services SG&A expenses increased to 41.8% for the six months ended June 30, 2007 compared to 39.4% for the comparable period of 2006.
Conferencing services SG&A for the second quarter of 2007 increased $5.8 million, or 9.3%, to $68.5 million from $62.7 million for the second quarter 2006. As a percentage of revenue, conferencing services
SG&A expenses decreased to 37.3% for the second quarter of 2007 compared to 40.2% for the comparable period of 2006. Conferencing services SG&A for the six months ended June 30, 2007 increased $16.9 million, or 14.4%, to $134.1 million
from $117.2 million for the six months ended June 30, 2006. The increase in SG&A for the six months ended June 30, 2007 included $7.4 million from the acquisition of Raindance. As a percentage of revenue, conferencing services SG&A
expenses decreased to 37.3% for the six months ended June 30, 2007 compared to 40.0% for the comparable period of 2006.
management SG&A for the second quarter of 2007 increased $6.3 million, or 34.5%, to $24.5 million from $18.2 million for the second quarter 2006. As a percentage of revenue, receivables management SG&A increased to 33.3% for the second
quarter of 2007, compared to 30.9% for the comparable period in 2006. Receivables management SG&A for the six months ended June 30, 2007, increased $5.5 million, or 15.2%, to $41.4 million from $35.9 million for the six months ended
June 30, 2006. The increase in SG&A for the three and six months ended June 30, 2007 included $8.6 million from the acquisition of Omnium. As a percentage of revenue, receivables management SG&A increased to 30.7% for the six
months ended June 30, 2007, compared to 30.1% for the comparable period in 2006.
increased by $13.1 million, or 17.1%, to $89.6 million for the second quarter of 2007 from $76.5 million for the comparable period of 2006. As a percentage of revenue, operating income increased to 17.2% for the second quarter of 2007, compared to
16.6% for the corresponding period in 2006. Operating income increased by $38.3 million, or 25.9%, to $186.2 million for the six months ended June 30, 2007, from $147.9 million for the comparable period of 2006. As a percentage of revenue,
operating income increased to 18.1% for the six months ended June 30, 2007, compared to 16.7% for the corresponding period in 2006. The increase in operating income was driven by increased revenue as previously noted as well as successful
Communication services operating income increased $2.0 million, or 7.2%, to $29.0 million for the
second quarter of 2007 from $27.0 million for the second quarter 2006. As a percentage of revenue, communication services operating income increased to 11.0% for the second quarter of 2007, compared to 10.9% for the corresponding period in 2006.
Communication services operating income increased $9.1 million, or 16.3%, to $65.3 million for the six months ended June 30, 2007 from $56.2 million for the comparable period of 2006. As a percentage of revenue, communication services operating
income increased to 12.2% for the six months ended June 30, 2007, compared to 11.8% for the corresponding period in 2006.
Conferencing services operating income for the second quarter of 2007 increased $7.4 million, or 18.7%, to $46.9 million from $39.5 million for the second quarter 2006. As a percentage of revenue, conferencing services operating income
increased to 25.5% for the second quarter of 2007, compared to 25.3% for the corresponding period in 2006. Conferencing services operating income for the six months ended June 30, 2007 increased $23.1 million, or 32.7%, to $93.6 million from
$70.5 million for the six months ended June 30, 2006. As a percentage of revenue, conferencing services operating income increased to 26.0% for the six months ended June 30, 2007 compared to 24.1% for the corresponding period in 2006.
Receivables management operating income for the second quarter of 2007 increased $3.7 million, or 37.3%, to $13.7 million from $10.0
million for the second quarter 2006. As a percentage of revenue, receivables management operating income increased to 18.6% for the second quarter of 2007, compared to 16.9% for the comparable period in 2006. Receivables management operating income
for the six months ended June 30, 2007 increased $6.1 million, or 28.7%, to $27.3 million from $21.2 million for the six months ended June 30, 2006. As a percentage of revenue, receivables management operating income increased to 20.2% for
the six months ended June 30, 2007, compared to 17.8% for the comparable period in 2006.
income (expense) includes interest expense from short-term and long-term borrowings under credit facilities and portfolio notes payable, interest income from short-term investments and sub-lease rental income. Other income (expense) for the second
quarter of 2007 was ($79.3) million compared to ($10.8) million for the second quarter of 2006. Other income (expense) for the six months ended June 30, 2007 was ($155.5) million compared to ($14.4) million for the six months ended June 30,
2006. The change in other expense for the three and six months ended June 30, 2007 compared to the same period in 2006 was primarily due to interest expense on increased outstanding debt incurred in connection with our recapitalization and
higher interest rates in 2007 than we experienced during the comparable period in 2006.
: Net income decreased by
$35.3 million, or 93.3%, for the second quarter of 2007 to $2.5 million from net income of $37.8 million for the second quarter of 2006. Net income decreased by $67.3 million, or 85.4%, for the six months ended June 30, 2007 to $11.5 million
from net income of $78.8 million for the six months ended June 30, 2006. Net income includes a provision for income tax expense at an effective rate of approximately 58.4% and 48.7% for the three and six months ended June 30, 2007,
respectively, compared to an effective tax rate of approximately 38.8% and 37.9% for the same periods in 2006. The increase in the effective tax rate for the three and six months ended June 30, 2007 is primarily due to U.S. and foreign
valuation allowances, losses in a majority owned subsidiary which is not consolidated for U.S. tax purposes and current year losses of certain foreign entities.
We have historically financed our operations and capital expenditures primarily through cash flows from operations, supplemented by borrowings under our bank credit facilities and specialized credit facilities
established for the purchase of receivable portfolios.
Our current and anticipated uses of our cash, cash equivalents and marketable
securities are to fund operating expenses, acquisitions, capital expenditures, purchase of portfolio receivables, minority interest distributions, interest payments, tax payments and the repayment of principal on debt.
On June 30, 2007 the outstanding balance on the indebtedness incurred in connection with the recapitalization in October 2006 and the amendments to the
senior secured term loan facility to finance the WNG, the Televox and Omnium acquisitions in February and May 2007 was $2.388 billion under the senior secured term loan facility. The senior secured term loan facility is subject to scheduled
amortization of $6.0 million per quarter with variable interest at 2.375% over the selected LIBOR. Our senior secured revolving credit facility providing financing of up to $250.0 million had a $0 balance outstanding on June 30, 2007. On June
30, 2007 our $650.0 million aggregate principal amount of 9.5% senior notes due 2014 and $450.0 million aggregate principal amount of 11% senior subordinated notes due 2016 were outstanding. Interest on the notes is payable semiannually in arrears
on April 15 and October 15 of each year, which commenced on April 15, 2007.
The following table summarizes our cash flows
by category for the periods presented (in thousands):
(199,569
Net cash flow from operating activities decreased $28.2 million, or 18.1%, to $127.2 million for
the six months ended June 30, 2007, compared to net cash flows from operating activities of $155.3 million for the comparable period in 2006. The decrease in net cash flows from operating activities is primarily due to the decrease in net
income, share based compensation and deferred tax expense. During the six months ended June 30, 2007, $123.0 million was paid for interest compared to $10.4 million in the comparable period last year. Increases in accrued interest payable on
additional indebtedness incurred in connection with the recapitalization, increases in depreciation and amortization expense and debt amortization partially offset the decrease in operating cash flows.
Days sales outstanding, a key performance indicator we utilize to monitor the accounts receivable average collection period and assess overall collection
risk, was 52 days for the three months ended June 30, 2007. For the three months ended June 30, 2006 the days sales outstanding was 50 days.
Net cash used in investing activities increased $291.7 million, or 44.8%, to $359.2 million for the six months ended June 30, 2007, compared to net cash used in investing activities of $651.0 million for the six
months ended June 30, 2006. We invested $275.0 million for the acquisition of WNG, Televox and Omnium during the six months ended June 30, 2007 compared to $593.2 million in acquisition invested for the acquisitions of Intrado and
Raindance during the six months ended June 30, 2006. During the six months ended June 30, 2007 we paid the $10.9 million final earn out obligation for the acquisition of Attention, LLC. We invested $47.0 million in capital expenditures
during the six months ended June 30, 2007 compared to $45.1 million for the six months ended June 30, 2006. The capital expenditures in 2007 were mainly related to telephone switching equipment, computer networks and computer hardware and
software. Investing activities during the six months ended June 30, 2007 included the purchase of receivable portfolios for $66.1 million and cash proceeds applied to the amortization of receivable portfolios of $38.8 million, compared to $36.2
million for the purchase of receivable portfolios and $32.2 million of cash proceeds applied to the amortization of receivable portfolios during the six months ended June 30, 2006.
Net cash flow from financing activities decreased $199.6 million, to $298.6 million for the six months
ended June 30, 2007, compared to net cash flow used in financing activities of $498.2 million for the comparable period in 2006. During the six months ended June 30, 2007 proceeds from the expansion of our senior secured term loan facility
were $300.0 million and were used to finance the WNG, Televox and Omnium acquisition. During the six months ended June 30, 2007, net cash flow used in financing activities was primarily for payments on portfolio notes payable of $39.0 million.
During the six months ended June 30, 2006, net proceeds on the previous bank credit facility were $470.0 million and payments on portfolio notes payable were $24.7 million. Proceeds from issuance of portfolio notes payable were $56.8 million
for the six months ended June 30, 2007 compared to $30.8 million for the same period in 2006. There were no proceeds from our stock-based employee benefit programs for the six months ended June 30, 2007 compared to $17.1 million for the
In addition to the principal and interest rate noted above, the senior secured term loan facility also requires the Company to pay each lender a
commitment fee of 0.50% in respect of any unused commitments under the revolving credit facility. The commitment fee in respect of unused commitments under the revolving credit facility will be subject to adjustment based upon the Companys
leverage ratio. The Company is required to comply, on a quarterly basis, with a maximum leverage ratio covenant and a minimum interest coverage ratio covenant. The consolidated leverage ratio of funded debt to adjusted earnings before interest
expense, stock-based compensation, taxes, depreciation and amortization, recapitalization costs, certain acquisition costs, synthetic lease costs, acquisition synergies and a minority interest adjustment (adjusted EBITDA) may not exceed
7.75 to 1.0, and the consolidated fixed charge coverage ratio of adjusted EBITDA to the sum of consolidated interest expense must exceed 1.25 to 1.0. Both ratios are measured on a rolling four-quarter basis. We were in compliance with the financial
covenants at June 30, 2007. These financial covenants will become more restrictive over time. 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 the Companys 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 the Companys subordinated indebtedness, including the senior subordinated notes; and changes in the Companys lines of business. The effective annual interest rate, inclusive of debt
amortization costs, on the senior secured term loan facility during the three and six months ended June 30, 2007 was 8.02% and 8.10%, respectively.
The senior secured credit facilities include certain customary representations and warranties, affirmative covenants, and events of default, including payment defaults, breach of representations and warranties,
covenant defaults, cross-defaults to certain indebtedness, certain events of bankruptcy, certain events under the Employee Retirement Income Security Act of 1974, material judgments, the invalidity of material provisions of the documentation with
respect to the senior secured credit facilities, the failure of collateral under the security documents for the senior secured credit facilities, the failure of the senior secured credit facilities to be senior debt under the subordination
provisions of certain of the Companys subordinated debt and a change of control of the Company. If an event of default occurs, the lenders under the senior secured credit facilities will be entitled to take certain actions, including the
acceleration of all amounts due under the senior secured credit facilities and all actions permitted to be taken by a secured creditor.
The Company may request additional tranches of term loans or increases to the revolving credit facility
in an aggregate amount not to exceed $500.0 million plus the aggregate amount 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.
consist of $650.0 million aggregate principal amount of 9.5% senior notes due 2014. Interest is payable semiannually. The senior notes contain covenants limiting, among other things, the Companys ability and the ability of the Companys
restricted subsidiaries to: incur additional debt or issue certain preferred shares; pay dividends on or make distributions in respect of the Companys 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 the Companys assets; enter into certain transactions with the Companys affiliates; and designate the
Companys subsidiaries as unrestricted subsidiaries.
At any time prior to October 15, 2010, the Company may redeem all or a part
of the senior notes, at a redemption price equal to 100% of the principal amount of senior notes redeemed plus the applicable premium, outlined below, and accrued and unpaid interest and all additional interest then owing pursuant to the applicable
registration rights agreement, if any, to the date of redemption, subject to the rights of holders of senior notes on the relevant record date to receive interest due on the relevant interest payment date.
On and after October 15, 2010, the Company may redeem the senior notes, in whole or in part, at the redemption prices (expressed as percentages of
principal amount of the senior notes to be redeemed) set forth below, plus accrued and unpaid interest thereon to the applicable date of redemption, subject to the right of holders of senior notes of record on the relevant record date to receive
interest due on the relevant interest payment date, if redeemed during the twelve-month period beginning on October 15 of each of the years indicated below:
In addition, until October 15, 2009, the Company may, at its option, on one or more occasions redeem
up to 35% of the aggregate principal amount of senior notes issued by it at a redemption price equal to 109.50% of the aggregate principal amount thereof, plus accrued and unpaid interest thereon to the applicable date of redemption, subject to the
right of holders of senior notes of record on the relevant record date to receive interest due on the relevant interest payment date, with the net cash proceeds of one or more equity offerings; provided that at least 65% of the sum of the aggregate
principal amount of senior notes originally issued under the senior indenture issued under the senior indenture after the issue date remains outstanding immediately after the occurrence of each such redemption; provided further that each such
redemption occurs within 90 days of the date of closing of each such equity offering.
The senior subordinated notes consist of $450.0 million aggregate principal amount of 11% senior subordinated notes due 2016. Interest is payable
semiannually. The senior subordinated indenture contains covenants limiting, among other things, the Companys ability and the ability of the Companys restricted subsidiaries to: incur additional debt or issue certain preferred shares;
pay dividends on or make distributions in respect of the Companys 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 the Companys assets; enter into certain transactions with the Companys affiliates; and designate the Companys subsidiaries as unrestricted subsidiaries.
At any time prior to October 15, 2011, the Company may redeem all or a part of the senior subordinated notes at a redemption price equal to 100% of
the principal amount of senior subordinated notes redeemed plus the applicable premium, outlined below, and accrued and unpaid interest to the date of redemption, subject to the rights of holders of senior subordinated notes on the relevant record
date to receive interest due on the relevant interest payment date.
On and after October 15, 2011, the Company may redeem the senior
subordinated notes in whole or in part, at the redemption prices (expressed as percentages of principal amount of the senior subordinated notes to be redeemed) set forth below, plus accrued and unpaid interest thereon to the applicable date of
redemption, subject to the right of holders of senior subordinated notes of record on the relevant record date to receive interest due on the relevant interest payment date, if redeemed during the twelve-month period beginning on October 15 of
each of the years indicated below:
In addition, until October 15, 2009, the Company may, at its option, on one or more occasions
redeem up to 35% of the aggregate principal amount of senior subordinated notes issued by it at a redemption price equal to 111% of the aggregate principal amount thereof, plus accrued and unpaid interest thereon to the applicable date of
redemption, subject to the right of holders of senior subordinated notes of record on the relevant record date to receive interest due on the relevant interest payment date, with the net cash proceeds of one or more equity offerings (as defined in
the senior subordinated indenture); provided that at least 65% of the sum of the aggregate principal amount of senior subordinated notes originally issued under the senior subordinated indenture issued under the senior subordinated indenture after
the issue date remains outstanding immediately after the occurrence of each such redemption; provided further that each such redemption occurs within 90 days of the date of closing of each such equity offering.
The Company and its subsidiaries, affiliates or significant shareholders may from time to time, in their sole discretion, purchase, repay, redeem or
retire any of the Companys 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.
We maintain through a majority-owned subsidiary revolving financing facilities with CVI GVF FINCO, LLC (the Lender), an affiliate of the Cargill Financial Services Corp (Cargill). The Lender is
a minority interest holder in our majority-owned subsidiary. Pursuant to this agreement, we will borrow up to 85% of the purchase price of each receivables portfolio purchase from Cargill and the majority-owned subsidiary will fund the remaining
purchase price. Interest accrues on the outstanding debt at a variable rate of 2.75% over prime. The debt is collateralized by all of the assets of the majority-owned subsidiary, including receivable portfolios within a loan series. Each loan series
contains a group of portfolio asset pools that have an aggregate original principal amount of approximately $20 million. Payments are due monthly for two years from the date of origination. At June 30, 2007, we had
$105.1 million of non-recourse portfolio notes payable outstanding under this facility, compared to $87.3 million outstanding at December 31, 2006.
Our contractual obligations are disclosed in our Annual Report on Form 10-K for the year ended
December 31, 2006. On February 14, and May 11, 2007, we amended the senior secured term loan facility, see the discussion above under Liquidity and Capital Resources. The net impact on interest expense from the
repricing and facility expansion will increase interest expense by approximately $13.8 million in 2007. During April 2007 we paid $10.9 million of the remaining earn out commitment related to the acquisition of Attention LLC. We assumed capital
lease obligations with the Omnium acquisition. The remaining obligation under these capital leases is approximately $1.8 million over the next two years. These were the only material changes to our contractual obligations since December 31,
operations continue to require significant capital expenditures for technology, capacity expansion and upgrades. Capital expenditures were $47.0 million for the six months ended June 30, 2007. Capital expenditures were $45.1 million for the six
months ended June 30, 2006. We currently estimate our capital expenditures for the remainder of 2007 to be approximately $44.0 to $64.0 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 $500.0 million plus the aggregate amount of principal payments made in respect of the senior secured term loan, incur capital
lease indebtedness, finance acquisitions, construction, repair, replacement or improvement of fixed or capital assets, incur accounts receivable securitization indebtedness and non-recourse indebtedness, provided, we are in pro forma compliance with
our total leverage ratio and interest coverage ratio financial covenants. We, or any of our affiliates, may be required to guarantee any existing or additional credit facilities.
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.
Off 
preparing financial statements requires the use of estimates on the part of management. The estimates used by management are based on our historical experience 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, stock options 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
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.
As of June 30, 2007, we had $2.388 billion outstanding under our senior secured term loan facility, $0 outstanding under our senior secured revolving
credit facility, $650.0 million outstanding under our 9.5% senior notes, $450.0 million outstanding under our 11% senior subordinated notes and $105.1 million outstanding under the Cargill facility.
The $2.388 billion senior secured term loan facility and senior secured revolving credit facility bear interest at a variable rate. Amounts borrowed by
the Company under these senior secured credit facilities initially bear interest at a rate equal to an applicable margin plus, at the Companys option, either (a) a base rate determined by reference to the higher of (1) the prime
lending rate as set forth on the British Banking Association Telerate Page 5 and (2) the federal funds effective rate from time to time plus 0.50% or (b) a LIBOR rate determined by reference to the costs of funds for deposits for the
interest period relevant to such borrowing, adjusted for certain costs. The repriced senior secured term loan facility and senior secured revolving credit facility calls for a pricing grid based on our debt rating from 2.75% to 2.125% for LIBOR rate
loans, currently priced at 2.375%, and 1.75% to 1.125% for base rate loans, currently priced at 1.375%.
In October 2006, we entered into a
three year interest rate swap (cash flow hedge) agreement to convert variable long-term debt to fixed rate debt. We hedged $800.0 million, $680.0 million and $600.0 million, respectively, for the three years ending October 23, 2007, 2008 and
2009 of the currently outstanding $2.388 billion senior secured term loan facility. We hold and issue these swaps only for the purpose of hedging interest rate risk, not for speculation. In accordance with SFAS 133,
Instruments and Hedging Activities,
these cash flow hedges are reported on the balance sheet at fair value. The critical terms of the interest rate swap agreements and the interest-bearing debt associated with the swap agreements must be the
same to qualify for the change in variable cash flow method of accounting. Changes in the effective portion of the fair value of the interest rate swap agreement are recognized in other comprehensive income, net of tax effects, until the hedged item
is recognized into earnings. All the hedges were highly effective, therefore the gain, which is included in interest expense, is attributable to the portion of the change in fair value of the derivative hedging instruments excluded from the
assessment of the effectiveness of the hedges and is recognized in the same period in which the hedged transaction affects earnings.
on our unhedged obligation under the senior secured term loan facility at June 30, 2007 a 50 basis point change in interest rates would increase or decrease our quarterly interest expense by approximately $2.0 million.
We maintain through a majority-owned subsidiary revolving financing facilities
with CVI GVF FINCO, LLC (the Lender), an affiliate of Cargill Financial Services Corp (Cargill). The Lender is a minority interest holder in our majority-owned subsidiary. Pursuant to this agreement, we will borrow up to 85%
of the purchase price of each receivables portfolio purchase from Cargill and the majority-owned subsidiary will fund the remaining purchase price. Interest accrues on the outstanding debt at a variable rate of 2.75% over prime. The debt is
collateralized by all of the assets of the majority-owned subsidiary, including receivable portfolios within a loan series. Each loan series contains a group of portfolio asset pools that have an aggregate original principal amount of approximately
$20 million. Payments are due monthly for two years from the date of origination. At June 30, 2007, we had $105.1 million of non-recourse portfolio notes payable outstanding under this facility. Based on our obligation under
this facility, a 50 basis point change in interest rates would increase or decrease our quarterly interest expense by approximately $0.1 million.
On June 30, 2007, the Communication Services segment had no material revenue or assets outside
the United States. The facilities in Canada, Jamaica 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.
In addition to the United States, the Conferencing Services segment operates facilities in the United Kingdom, Canada, Singapore,
Australia, Hong Kong, Japan, New Zealand, China, Mexico and India. Revenues and expenses from these foreign operations are typically denominated in local currency, thereby creating exposure to changes in exchange rates. Changes in exchange rates may
positively or negatively affect our revenues and net income attributed to these subsidiaries.
At June 30, 2007, our Receivables
Management segment operated facilities in the United States only.
For the three and six months ended June 30, 2007 and 2006, revenues
and assets from non-U.S. countries were less than 10% of consolidated revenues and assets. We do not believe that changes in future exchange rates would have a material effect on our financial position, results of operations, or cash flows. We have
not entered into forward exchange or option contracts for transactions denominated in foreign currency to hedge against foreign currency risk.
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 Executive Vice President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 Executive Vice PresidentChief Financial Officer and Treasurer concluded that, as of
June 30, 2007, our disclosure controls and procedures are effective in timely alerting them to material information relating to us (including our consolidated subsidiaries) required to be included in our periodic Securities and Exchange
Commission filings.
financial reporting or in other factors during the period 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
From time to time, we are
subject to lawsuits and claims which arise out of our operations in the normal course of our business. West 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, except for the items discussed below for which we are currently unable to predict the outcome, the disposition of claims currently pending will not have a material adverse effect on our
., No. GIC 805541, was
filed February 13, 2003 in the San Diego County, California Superior Court. The original complaint alleged violations of the California Consumer Legal Remedies Act, Cal. Civ. Code §§ 1750 et seq., unlawful, fraudulent and
unfair business practices in violation of Cal. Bus. & Prof. Code §§ 17200 et seq., untrue or misleading advertising in violation of Cal. Bus. & Prof. Code §§ 17500 et seq., and common law claims for
conversion, unjust enrichment, fraud and deceit, and negligent misrepresentation, and sought monetary damages, including punitive damages, as well as restitution, injunctive relief and attorneys fees and costs. The complaint was brought on behalf of
a purported class of persons in California who were sent a Memberworks, Inc. (MWI) membership kit in the mail, were charged for an MWI membership program, and were allegedly either customers of what the complaint contended was a joint
venture between MWI and West Corporation or West Telemarketing Corporation (WTC) or wholesale customers of West Corporation or WTC.
On February 16, 2007, after receiving briefing and hearing argument on class certification, the trial court certified a class consisting of All persons in California, who, after calling defendants West Corporation and West
Telemarketing Corporation (collectively West or defendants) to inquire about or purchase another product between September 1, 1998 through July 2, 2001, were; (a) sent a membership kit in the mail;
(b) charged for a MemberWorks, Inc. (MWI) membership program; and (c) customers of a joint venture between MWI and West or were wholesale customers of West (the Class). Not included in the Class are defendants and
their officers, directors, employees, agents and/or affiliates. On March 19, 2007, West and WTC filed a Petition for Writ of Mandate and Request for Stay asking the appellate court to first stay and then order reversal of
the Superior Courts class certification Order. However, this Petition was denied on June 8, 2007. Thereafter, on June 18, 2007, West and WTC filed a Petition for Review and Request for Stay in the California Supreme Court, but
this Petition was denied on June 27, 2007. Discovery in the Superior Court is ongoing with merits discovery scheduled to close on August 16, 2007 and expert discovery set to close on November 16, 2007. The Superior Court has
indicated that it will schedule a trial in or around March 2008.
On October 19, 2006, Polygon Global
Opportunity Master Fund (Polygon) notified the Company that it was asserting appraisal rights with respect to 3,500,000 shares of the Companys common stock outstanding prior to the recapitalization. On February 9, 2007,
Polygon filed a petition for appraisal in the Court of Chancery of the State of Delaware, New Castle County, seeking to have the Court determine the fair value of its shares at the time of the recapitalization and a monetary award of the fair value,
along with interest and costs. We included in our condensed consolidated balance sheet at June 30, 2007, a
liability relating to the Polygon shares for approximately $170.6 million, which is based on the $48.75 per share consideration Polygon would have received
in the recapitalization if it did not perfect its appraisal rights. We do not believe that any difference between this accrual and the final award or settlement in the appraisal proceedings (including any potential interest award) will have a
material effect on our financial position, results of operations, or cash flows. The Court has scheduled a trial for January 28 through February 1, 2008.
Federal communications commission inquiry
. On June 22, 2007 we received a letter from the Investigations and Hearing Division of the Federal Communications Commission (FCC) Enforcement Bureau regarding
the FCC or state public utility commission regulations applicable to providers of traditional telecommunications services in the U.S and responded to the FCCs inquiry accordingly. We believe that we exercise reasonable efforts to monitor
compliance obligations, including being subject to litigation, fines, regulatory surcharge remittance requirements (past and/or future) or other penalties for any non-compliance.
You should carefully consider the
risks described below and those disclosed under Item 1A in our Annual Report on Form 10-K for the year ended December 31, 2006. If any of the risks occur, our business, financial condition, liquidity and results of operations could be
seriously harmed.
Pending and future litigation may divert managements time and attention and result in substantial costs of defense, damages or settlement, which could
adversely affect our business, results of operations and financial condition.
Increases in the cost of voice and data services or significant interruptions in these services could adversely affect our business, results of operations and
Our inability to continue to attract and retain a sufficient number of qualified employees could adversely affect our business, results of operations and financial
Because we have operations in countries outside of the United States, we may be subject to political, economic and other conditions affecting these countries that
could result in increased operating expenses and regulation.
The financial results of our Receivables Management segment depend on our ability to purchase charged-off receivable portfolios on acceptable terms and in
sufficient amounts. If we are unable to do so, our business, results of operations and financial condition could be adversely affected.
Because of the length of time involved in collecting charged-off consumer receivables on acquired portfolios and the volatility in the timing of our collections, we
may not be able to identify trends and make changes in our purchasing strategies in a timely manner.
Our current or future indebtedness under our senior secured credit facilities, senior notes and senior subordinated notes could impair our financial condition and
reduce the funds available to us for other purposes and our failure to comply with the covenants contained in our senior secured credit facilities documentation or the indentures that govern the senior notes and senior subordinated notes could
result in an event of default that could adversely affect our results of operations.
We may not be able to generate sufficient cash to service all of our indebtedness, including the senior notes and senior subordinated notes, and fund our other
liquidity needs, and we may be forced to take other actions, which may not be successful, to satisfy our obligations under our indebtedness.
The notes and the related guarantees are effectively subordinated to all of our secured debt and if a default occurs, we may not have sufficient funds to fulfill
our obligations under the notes and the related guarantees.
The senior notes and senior subordinated notes are structurally subordinated to all indebtedness of our existing or future subsidiaries that do not become
guarantors of the senior notes and senior subordinated notes.
If we default on our obligations to pay our indebtedness, we may not be able to make payments on the senior notes and senior subordinated notes.
We may not be able to repurchase the senior notes and senior subordinated notes upon a change of control.