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As filed with the Securities and Exchange Commission on December 7, 2009

No. 333-                    

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

LL Services Inc.

to be renamed

LANGUAGE LINE SERVICES HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

 

Delaware   4899   27-1316758
(State or other jurisdiction of incorporation or organization)  

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification No.)

 

 

One Lower Ragsdale Drive

Monterey, California 93940

(877) 886-3885

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

 

 

Dennis G. Dracup

Chairman and Chief Executive Officer

Language Line Services Holdings, Inc.

One Lower Ragsdale Drive

Monterey, California 93940

(831) 648-5811

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

 

 

Copies of all communications, including communications sent to agent for service, should be sent to:

 

 

Joshua N. Korff, Esq.

Kirkland & Ellis LLP

601 Lexington Avenue

New York, New York 10022

(212) 446-4800

  

Richard D. Truesdell, Jr., Esq.

Davis Polk & Wardwell LLP

450 Lexington Avenue

New York, New York 10017

(212) 450-4000

Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective.

 

 

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

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

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

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

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

 

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

CALCULATION OF REGISTRATION FEE

 

 
Title of Each Class of Securities
to be Registered
 

Proposed Maximum Aggregate

Offering Price(1)(2)

  Amount of
Registration Fee(2)

Common Stock, $0.01 par value per share

  $400,000,000   $22,320
 
 
(1) Includes shares of common stock that may be sold if the over-allotment option granted to the underwriters is exercised in full.
(2) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended.

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

 

 

 


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The information in this preliminary prospectus is not complete and may be changed. We and the selling stockholder may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

 

PROSPECTUS (Subject to Completion)

Issued December 7, 2009

             Shares

LOGO

LANGUAGE LINE SERVICES HOLDINGS, INC.

Common Stock

 

 

Language Line Services Holdings, Inc. is offering                  shares of its common stock and the selling stockholder is selling                  shares. We will not receive any of the proceeds from the shares of common stock being sold by the selling stockholder. This is our initial public offering and no public market exists for our shares. We anticipate that the initial public offering price will be between $             and $             per share.

Investing in our common stock involves risk. See “Risk Factors” beginning on page 15 to read about factors you should consider before buying shares of our common stock.

 

 

We intend to apply to list our common stock on The NASDAQ Global Market under the symbol “            .”

 

 

 

     Per Share      Total

Price to Public

   $            $     

Underwriting Discounts and Commissions

   $            $     

Proceeds, Before Expenses, to Language Line Services Holdings, Inc.

   $            $     

Proceeds, Before Expenses, to the Selling Stockholder

   $            $     

The underwriters may also purchase up to an additional              shares of common stock from the selling stockholder at the public offering price, less the underwriting discount, within 30 days from the date of this prospectus to cover over-allotments, if any.

 

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

The underwriters expect to deliver the shares to purchasers on                     , 2010.

 

Morgan Stanley   Credit Suisse   BofA Merrill Lynch

 

 

                    , 2010.


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[ARTWORK]

 

 

 


Table of Contents

TABLE OF CONTENTS

 


 

 

You should rely only on the information contained in this prospectus or in any free-writing prospectus we may specifically authorize to be delivered or made available to you. We have not, the selling stockholder has not and the underwriters have not authorized anyone to provide you with additional or different information. We and the selling stockholder are offering to sell, and seeking offers to buy, shares of our common stock only in jurisdictions where such offers and sales are permitted. The information in this prospectus or a free-writing prospectus is accurate only as of its date, regardless of its time of delivery or of any sale of shares of our common stock. Our business, financial condition, results of operations and prospects may have changed since that date.

Until                     , 2010 (25 days after the commencement of the offering), all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This delivery requirement is in addition to the dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to unsold allotments or subscriptions.

 

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PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this prospectus. This summary does not contain all of the information that you should consider in making your investment decision. You should read the following summary together with the entire prospectus, including the more detailed information regarding us, the common stock being sold in this offering and our financial statements and the related notes appearing elsewhere in this prospectus. You should carefully consider, among other things, the matters discussed in the sections entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this prospectus before deciding to invest in our common stock. Some of the statements in this prospectus constitute forward-looking statements. See “Forward-Looking Statements.”

We are a newly formed Delaware corporation that has not, to date, conducted any activities other than those incident to our formation and the preparation of this registration statement. We were formed solely for the purpose of reorganizing the organizational structure of Language Line Holdings LLC, our parent, in order for the registrant to be a corporation rather than a limited liability company. Our predecessor is Language Line Holdings LLC. Except where the context otherwise requires or where otherwise indicated, prior to the Reorganization, as defined below, the terms “Language Line,” “we,” “us,” “our,” “our company,” “the Company” and “our business” refer to our predecessor and after the Reorganization, these terms refer to Language Line Services Holdings, Inc. and its consolidated subsidiaries as a combined entity. Certain differences in the numbers in the tables and text throughout this prospectus may exist due to rounding.

Our Company

We believe we are a global leader in providing on-demand language interpretation services. Supporting over 170 languages, we provide our interpretation services to businesses, government and other public sector clients primarily via telephone interpretation. We also provide video and in-person interpretation services. Within seconds of receiving an inbound call, 24 hours a day and seven days a week, we provide our clients with an over-the-phone interpreter with the appropriate language and topic-specific skill set who can help facilitate a conversation between our client and our client’s limited English proficiency, which we refer to as LEP, customers. In 2008, we helped more than 35 million people communicate across linguistic barriers by providing over-the-phone interpretation, which we refer to as OPI, services to our clients. We focus on high-value interactions that require immediate availability of our multi-lingual resources, including emergency rooms or 911 calls, or flexible, customized interpretation services to businesses, such as mortgage or insurance claims processing. Our interpretation services enable our clients to increase their revenue and deliver mission-critical services to their customers, thereby improving their customer loyalty. We also help clients comply with applicable laws and regulations by providing in-language support to our clients’ growing population of current and prospective LEP customers in the growing and largely underserved LEP marketplace.

We offer a wide range of language interpretation services across a diverse group of industry verticals, including healthcare, government, financial services, insurance, telecommunications and utilities. We have over 10,000 clients, including approximately 60% of the Fortune 500 companies and all of the top 20 emergency 911 response centers in the U.S. For the nine months ended September 30, 2009, our largest client represented less than 5% of revenue and our largest vertical market, healthcare, represented less than 30% of revenue. Our diverse industry focus and delivery of revenue-enhancing and mission-critical services have driven increased demand and interpreter minutes growth even in challenging economic times. For example, throughout the current recessionary environment, we have provided interpretation services for calls related to mortgage foreclosure, helping our clients’ customers understand terms or negotiate payments. These applications complement our financial services clients’ traditional use of our services, which include resolving credit card problems, increasing collections, opening new accounts, providing home buyer education and producing credit reports. Our insurance

 

 

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industry clients use our services to process claims, improve claim investigations, evaluate questionable claims, enhance help desk service and explain benefits. We assist healthcare clients by facilitating emergency room and critical care situations, accelerating triage and medical advice, simplifying patient admission processes, improving billing and increasing collections. We also support emergency 911 services, disaster relief, citizen support 311 services and other services for governments and municipalities.

We leverage our industry-leading operating scale, interpreter workforce and proprietary technology to deliver to our clients a high quality, cost-effective, on-demand alternative to staffing in-house multilingual employees or utilizing face-to-face interpretation services, which we refer to as FFI. Our clients rely on the quality, accuracy and professionalism of our highly skilled interpreters who facilitated over 21 million calls in 2008, helping people communicate across linguistic barriers. Our low-cost delivery model and focus on operating efficiency has enabled us to be competitive in the pricing of our services, while maintaining strong profitability levels. Given the strong secular trends for our services and the uniquely low capital requirements of our business model, we have consistently grown our business and delivered strong free cash flow. We have grown our revenue to $278.2 million in 2008 from $185.3 million in 2006, representing a compounded annual growth rate, which we refer to as CAGR, of 22.5%. Our income from operations for 2008 was $70.3 million, and from 2006 to 2008 our ratio of annual capital expenditure to revenue has averaged 1.7%.

Our compelling value proposition in providing high quality language services of a mission-critical nature has contributed to our client retention and recurring revenue. Many of our clients are required or mandated by law and regulation to service their customers in the customers’ native language. Our client churn in the United States (as measured by lost minutes) was less than 5% in 2008, and 90% of our 250 largest U.S. clients in 2008 have been procuring our services for over five years. The majority of our revenue is generated from long-term subscriptions from corporate clients who are charged on a “pay for use” basis that optimizes a client’s outsourcing costs relative to less efficient and capital intensive in-house solutions. Our clients incur minimal start-up costs and can transition to our on-demand interpretation services solution within days of selecting us as a vendor.

Over our 27-year history, we have established the world’s largest language interpretation workforce consisting of over 4,000 well-trained, dedicated interpreters who deliver quality, accurate and professional interpretation services on a 24/7 basis. Our delivery model is scalable and requires low capital investment to maintain and grow, as the majority of our interpreters work from home in the United States, supplemented by interpreters located in six domestic and international interpretation centers. This model enables our cost structure to be variable, optimizing interpreter availability with fluctuations in demand across multiple languages and skill sets without the fixed cost burden of facilities-based agent models.

We continually invest in our proprietary technology platforms to provide operating leverage in our outsourcing model and to sustain high barriers to competitive entry. Our scalable call-routing and interpreter scheduling technologies augment our ability to offer superior service at a lower cost than our competitors. Our call routing technology, Telephone Interpretation Technology and Networking, which we refer to as TITAN, handles thousands of calls simultaneously and, within seconds, sources our highest quality, lowest cost available interpreters with an optimized interpretive skill set, whether they are working at home or in one of our global interpretation centers. Additionally, we developed a fully integrated interpreter scheduling system to forecast and optimize interpreter utilization across multiple languages and skill sets based on a proprietary 10-year call history database.

Our Market Opportunity

The language services market represents a large and rapidly growing market opportunity. According to Common Sense Advisory, Inc., Norbridge, Inc. and management estimates, the language services market in the United States was estimated at approximately $12.1 billion in 2007 and is expected to grow 14.6% annually,

 

 

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reaching $24.0 billion by 2012. We primarily participate in the $3.4 billion “spoken word” language services sector, which is comprised of the $1.6 billion OPI market and the $1.8 billion FFI market, both of which have grown at an annual rate of approximately 10% since 2007.

We believe that growth in the language services market will be driven primarily by a number of macro trends including growth in the immigrant population, regulatory and public policy initiatives, an increasing focus on ethnic marketing and continued outsourcing of language services. Immigration in the U.S. has reached record high levels in recent years, and population growth is occurring fastest in geographies including California, Arizona and Florida, where a significant percentage of families do not speak English as a primary language. In addition, legislation is being enacted on a federal and statewide basis that encourages, and in some cases mandates, serving LEP populations in their native language, including Title VI of the Civil Rights Act of 1964. Additionally, ethnic marketing needs have increased as LEP households’ buying power has grown significantly, and corporations look to gain customers within these populations. Finally, we expect continued outsourcing of language-based services and believe it will be a significant growth driver; today we estimate that less than 25% of the OPI market opportunity is currently outsourced to third-party providers such as Language Line.

Immigrant Population

Immigrants comprise a significant portion of the U.S. population and are expected to continue to grow as a percentage of the overall population. According to the Pew Research Center, the population of the United States will rise from 296 million people in 2005 to 438 million people in 2050. Of this expected growth, approximately 82% or 117 million people will be from immigrants arriving from 2005 to 2050 and their U.S.-born descendants. As a result, nearly one in five Americans will be an immigrant in 2050, compared with one in eight in 2005. Additionally, the Hispanic population, which is already the largest minority group in the United States, will triple in size and make up 29% of the U.S. population by 2050, compared with 14% in 2005. We expect the growth in the immigrant population to drive an increase in LEP speakers, the primary users of language services, as evidenced by the U.S. Census Bureau’s 2000 Census that concluded that 83% of immigrants in 2000 spoke a language other than English at home.

Public Policy

Legislation at the national and local levels frequently mandates public services for LEP populations in their native language. For example, an executive order pursuant to Title VI of the Civil Rights Act of 1964 requires that healthcare, government agencies and social services have language interpretation services available for non-English speakers in order to receive government funding. On August 11, 2000, President Clinton signed Executive Order 13166, “Improving Access to Services for Persons with Limited English Proficiency,” which required Federal agencies to examine the services they provide, identify any need for services to those with limited English proficiency and develop and implement a system to provide those services so LEP persons can have meaningful access to them. This Executive Order also requires that Federal agencies work to ensure that recipients of Federal financial assistance provide meaningful access to their LEP applicants and beneficiaries. These public policy initiatives are also occurring at the state and local level. For example, in January 2009, legislation went into effect in California that requires health insurers to provide LEP customers with access to translated documents and language assistance when seeking any form of medical care. Similar public policy initiatives supporting the need for interpretation related services are in effect in other English-speaking countries, including the Human Rights Charter in the United Kingdom and the Canadian Charter of Rights and Freedoms.

Ethnic Marketing in the United States

Ethnic segments, especially Asians and Hispanics, continue to have a growing impact on the U.S. economy. For instance, according to the Selig Center for Economic Growth, Asian buying power has increased almost

 

 

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five-fold from $116 billion in 1990 to $509 billion in 2008, and Hispanic buying power has grown 349% from $212 billion in 1990 to $951 billion in 2008. According to a study published by K&L Advertising, LEP customers are nearly four times more likely to purchase products and services from companies that communicate with them in their native language. While the combined buying power for the Hispanic and Asian population is greater than $1.0 trillion today, a significant number of Hispanic and Asian households are “linguistically isolated,” making native language based interaction vital for client acquisition and retention. For example, according to First Data Corporation, in 2007 53% of the Mexican immigrant population in the United States does not have a checking account or is “un-banked,” compared with 17% of the U.S. born population. Additionally, according to Pew Hispanic Center and LIMRA International in 2006, among the Hispanic population, home ownership was approximately 49% compared with approximately 68% for the population as a whole, and only 36% of households have life insurance compared with 54% for the population as a whole. We believe that demand for OPI and other language services will continue to grow as companies focus on ethnic marketing opportunities as a way to grow revenue, increase market share and build profitable client relationships in populations that are largely under-served today.

Our Business Model

A majority of our revenue is generated from subscribed interpretation, which is designed for clients with frequent interpretation needs. Usage for the majority of clients is billed in one-minute increments. Price per billed minute is typically based on the language requested and time of day, subject to discounts related to billed minute volume pricing arrangements with certain clients.

Our top 10 languages accounted for over 91% of our billed minutes in 2008; Spanish language accounted for approximately 70% of our billed minutes in 2008, which is consistent with historical percentages. We provide a number of complementary services that allow us to offer a full service language solution to our clients. Included among those services are FFI, document translation, video interpretation services, which we refer to as VIS, and American Sign Language.

Our Competitive Strengths

We believe we have established ourselves as the market leader for OPI services as a result of significant investments in technology and network infrastructure, the breadth of languages we offer, the quality of our interpreters, our significant cost advantage and our consistent and reliable performance. In-house interpretation, performed either by bilingual call center agents or face-to-face agents, presents our largest form of competition; however, in-house interpretation services generally offer fewer languages, reduced on-demand interpreter availability, slower call handling times and higher cost of service. Additionally, while there are some technology solutions offered at lower price points with high availability, such as web self-service, Interactive Voice Recognition, which we refer to as IVR, and machine translation, these options offer fewer language capabilities, have limited flexibility and cannot provide interpretation for critical situations.

Additionally, we have targeted the FFI market both as a growth opportunity and a vehicle to enhance client retention and new client acquisition. A key strategy of our service offering is to migrate a portion of client FFI sessions to a more efficient and cost-effective OPI service. We intend to leverage our global interpreter network, technology platform and strong market position to expand our presence in the FFI market over time.

Our global presence, scalable operating platform, proprietary technology, highly skilled interpreter workforce and low-cost services delivery model create a unique client value proposition, and we believe these factors have established our company as a leading provider of on-demand interpretation services.

 

 

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Industry-leading operating scale and global interpreter workforce

We believe we are the largest independent provider of OPI services globally. We offer high quality and accurate interpretation services to over 10,000 clients in the U.S., Canada and the U.K. through our over 4,000 skilled and professionally trained interpreters. We successfully connect our clients with interpreters on a 24/7 basis offering over 170 different languages in less than twenty seconds over 99.5% of the time. We believe our scale affords us the ability to deliver a greater breadth of services at a significantly lower cost than our competitors.

Attractive value proposition leading to long-term, recurring client relationships

We have a differentiated service offering that includes on-demand interpreter availability on a 24/7 basis, customized interpretation solutions and a pay-for-use client pricing model. Demand for our services continues to grow through economic cycles due to the mission-critical nature of our services, our diverse client base and the multitude of the language service applications we provide. The majority of our client revenue is generated from subscribed interpretation, which is designed for clients with frequent interpretation needs. The stability and predictability of our revenue is attributable to the diversified client base and to our proven ability to retain a large percentage of our clients. Our client churn in the United States (as measured by lost minutes) was less than 5% in 2008, and 90% of our 250 largest U.S. clients in 2008 have been procuring our services for over five years.

Innovative interpreter workforce recruiting, training and monitoring

We believe the quality of our interpreter services is among the best in the industry, driven by our rigorous and industry-recognized interpreter recruiting, training, certification and retention programs. By using predominantly dedicated employee interpreters, unlike our competitors who largely utilize independent contractor interpreters, we are able to achieve a higher degree of control over the training and management of our interpreters and can better ensure the quality of the interpretation service. In our front-end recruiting process, only one out of every 12 applicants is selected. Our screening and recruiting process ensures high quality interpreters since skills in language, inter-cultural communication and customer service are monitored by our dedicated Quality Assurance department. Once hired, all employee interpreters undergo training on ethical standards, client requirements, interpretation and customer service. Additionally, the interpreters participate in industry-specific training programs developed in collaboration with industry experts, such as Medical Interpreting Training, Insurance Interpreter Training, Finance Interpreter Training, 911 Interpreter Training and Legal and Court Interpreting Training. Our specialized interpreter certification program is a significant competitive differentiator and value-added service. As of September 30, 2009, approximately 50% of our interpreters have been awarded or are pending certification under the Federal Government Security Requirements issued by the U.S. Department of Homeland Security and approximately 8% have certifications in medical interpretation. We meet and exceed the rigorous American Society for Testing and Materials standards for interpreter quality and training.

Proprietary call handling and skills-based routing technology platforms

We continually invest in our proprietary and patented technology platforms to maintain the best service metrics in the OPI industry, to provide operating leverage in our on-demand outsourcing model and to sustain high barriers to entry. Our patented and scalable call-routing technology, TITAN, helps drive continued client loyalty through skills-based call routing and fast connect times. TITAN enables us to efficiently handle thousands of simultaneous calls, allowing us to quickly connect our interpreters to our clients and ensure a high-quality client experience. For the nine months ended September 30, 2009, our average answer time was 0.4 seconds, and our interpreter connect time was less than 20 seconds, with Spanish, our most popular

 

 

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language, connecting at an average of less than 15 seconds. Some of our clients, for example, include 911 emergency response centers and hospitals, for which high-quality language services with fast connect times are often critical. Depending on the type of service required, calls are routed on a skills-basis to interpreters who are able to interpret general and customer service calls as well as more specialized interpreters trained by industry experts in the fields of healthcare, insurance and financial terminology, as well as emergency and 911 procedures. Our TITAN system is further supported by a state-of-the-art telecom infrastructure that provides increased reliability and business continuity.

Operational excellence and focus on low-cost delivery of services

Our focus on operational excellence and globally deployed best operating practices assures that we can deliver a consistent, scalable and high-quality interpretation experience to our clients and our clients’ customers from any of our interpreters working from home and from our six interpretation centers located in domestic and international locations. Our scale, coupled with our call delivery technology, helps drive down our unit costs, which is important to delivering our value proposition. Our delivery system includes an efficient interpreter sourcing strategy balancing interpreter location and skills mix, continuous improvement in interpreter productivity and scalability as our business grows. Our proprietary database of call arrival patterns, combined with our fully integrated scheduling program maximizes the efficiency and utilization of our global interpreter workforce and optimizes our fixed cost base. This system continually synthesizes over ten years of historical call volume data in rolling 15-minute increments and analyzes patterns of total call volume, language usage, industry distribution and client distribution to optimize the time our interpreters are occupied. Our interpreter productivity (defined as the number of revenue-generating interpreted minutes compared with the number of minutes paid to interpreters), for example, improved by 55% between 1999 and 2008. Our ability to maximize the productivity of an interpreter during each working hour as well as the competitive salaries we can afford to pay to attract talented interpreters are significant competitive differentiators in terms of profitability and operating leverage.

Proven, experienced management team

We have a proven, experienced management team that has been instrumental in establishing and expanding our industry leadership position. Combined, management has over 50 years of experience with us. Management has instituted a number of initiatives to position us for growth; management has (i) aggressively managed and invested in our sales and marketing function in order to drive same-client revenue growth and revenues from new client acquisitions; (ii) developed and invested in patented technologies in order to introduce new language service offerings and improve operating efficiency; (iii) implemented process improvements to increase our operating efficiency and profitability; and (iv) successfully integrated multiple acquisitions, one of which expanded our presence into the U.K. Management has grown our revenue to $278.2 million in 2008 from $185.3 million in 2006, representing a CAGR of 22.5%.

Our Growth Strategies

We expect our future growth to be driven by the continued secular growth of the overall language services market; however, we have also undertaken several key strategic initiatives intended to outpace market growth, including:

Further penetration of our existing client base

We believe less than 25% of the OPI market opportunity today has been outsourced to third-party OPI providers such as Language Line. We offer a wide range of OPI applications for over 10,000 clients across a number of diverse industry verticals, including healthcare, government, financial services, insurance, telecommunications and utilities. We have a strong track record of extending the scope of these client

 

 

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relationships over time by selling other proven industry applications. As an example, one national property and casualty insurance company grew the number of LEP calls serviced from 628 since becoming a client in 1990, to 140,000 calls in 2008. This client began using us for auto and homeowner claims and has extended its use of our services over time to include customer service centers and its sales agent network. We leverage our industry specific expertise and partner with our clients to identify additional areas of need for interpretation to expand our services. As a result, we have compiled a detailed database of our existing clients’ in-house OPI operations, which enables us to be highly-targeted, effective and efficient in our sales efforts. From 2006 to 2008, revenue from current U.S. clients as of December 31, 2008 (excluding clients gained through acquisitions) grew approximately 14% annually on a compounded basis.

Acquisition of new clients

We aim to develop new client relationships and further diversify our client base by targeting clients and industry verticals that exhibit a demonstrated need for language interpretation services. For example, we estimate penetration in the insurance, healthcare, utilities and telecommunications industries was approximately 33%, 20%, 19% and 12%, respectively, of the available interpretation minute opportunity in 2007. We believe that our unique service offerings, breadth of language capabilities, interpreter quality, technology and call-routing infrastructure and industry-specific knowledge position us to attract new clients. We have been successful acquiring new clients in the past. New U.S. clients acquired since 2006 represented approximately 12% of our revenue in 2008.

Expand addressable market opportunities with new products and services, including face-to-face interpretation

By providing a comprehensive language services offering, we intend to further enhance client retention, pursue new clients and create incremental profit margin contribution. For example, we have only recently begun to penetrate the large and fragmented FFI market, which represents an opportunity for us to accelerate our growth and achieve profitable incremental scale. We plan to launch these services in selected geographic markets, supplementing our traditional OPI services with FFI. Other targeted complementary services include document translation and Language Line University, our service to test, train and certify interpreters that may work for us or directly for our customers.

Pursue international expansion opportunities

We have expanded our service offering into the U.K. and Canada by deploying our sales force in those countries and also by acquiring what we believe was the leading OPI provider in the U.K. We believe there is further opportunity to grow our business in these countries. According to Norbridge, Inc., in 2006 there were approximately 7.6 million LEP speakers in the U.K. and approximately 3.5 million in Canada, and both countries encourage, and in a growing number of cases mandate, companies to serve its customers in their native language. Given our limited penetration of these markets and the potential market opportunity, we believe further growth opportunities exist to expand our client base outside of the United States.

Pursue accretive bolt-on acquisitions

Although we have significant market share of the outsourced OPI market in the United States, the remaining domestic and international markets are highly fragmented. Given the scale in our operating platform, we have historically made successful accretive bolt-on acquisitions. We have a demonstrated track record of successful execution and integration of our past acquisitions, including OnLine Interpreters, Language Line Limited in the U.K. and TeleInterpreters, over the last seven years.

 

 

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Our Principal Stockholder

Following the completion of this offering, ABRY Partners, LLC, which we refer to as ABRY Partners, through its affiliated funds, will beneficially own approximately     % of our outstanding common stock, or       % if the underwriters’ over-allotment option is fully exercised. This ownership of our shares by ABRY Partners and its affiliated funds will result in its ability to have a majority vote over fundamental and significant corporate matters and transactions. See “Risk Factors—Risks Related to this Offering and Ownership of Our Common Stock.”

Founded in 1989, ABRY Partners is a leading media, communications and information services-focused private equity investment firm. ABRY Partners invests in high quality companies and partners with management to help build their businesses. Since its founding, ABRY Partners has completed over $21.0 billion of transactions, including private equity, mezzanine and preferred equity placements, representing investments in approximately 450 businesses. ABRY Partners is headquartered in Boston, Massachusetts.

Our Corporate Structure

LL Services Inc. was incorporated in Delaware in November 2009. We are a newly formed Delaware corporation that has not, to date, conducted any activities other than those incident to our formation and the preparation of this registration statement. Prior to completion of this offering, we will be renamed Language Line Services Holdings, Inc. We are a wholly-owned subsidiary of Language Line Holdings LLC. Prior to completion of this offering, Language Line Holdings LLC, our parent, will contribute all of its ownership interest in Language Line Holdings II, Inc., our principal U.S. operating subsidiary, and Language Line Services U.K. Limited, our principal foreign operating subsidiary, to us, which will make each of Language Line Holdings II, Inc. and Language Line Services U.K. Limited wholly-owned subsidiaries of ours. In exchange for that contribution, we will issue                  shares of our common stock to Language Line Holdings LLC. We refer to these transactions as the Reorganization. At September 30, 2009, funds affiliated with ABRY Partners and our management and directors had ownership interests in Language Line Holdings LLC of approximately     % and     %, respectively.

After the completion of this offering, Class A common units, which we refer to as Class A units, mandatorily redeemable Class D common units, which we refer to as Class D units, and any vested and unvested Class C restricted common units, which we refer to as Class C-1, C-2, C-3, C-4, C-5 and C-6 units or, collectively, Class C units, of Language Line Holdings LLC will be exchanged for cash and shares of our common stock valued at $                 based upon the price to public set forth on the cover page of this prospectus. The number of shares of our common stock issued in connection with the Reorganization will not be adjusted based on the actual initial offering price of our common stock, although the allocation of shares among the current unitholders of Language Line Holdings LLC may change. We refer to these transactions as the Exchange. Language Line Holdings LLC will dissolve after the Exchange. Upon completion of this offering, we intend to issue                  shares of restricted stock and stock options to exercise                  shares of common stock to our directors and director nominees and certain other officers and key employees.

In November 2009, Language Line Holdings LLC, our parent, refinanced a large portion of our existing balance sheet debt with a $575.0 million senior secured credit agreement. Proceeds were used to refinance our existing senior secured credit facilities, mezzanine facility, mandatorily redeemable convertible Coto preferred units, which we refer to as Coto preferred units, 11 1/8% senior subordinated notes, which we refer to as the Senior Subordinated Notes and 14 1/8% senior discount notes, which we refer to as the Discount Notes. We refer to these transactions as the Refinancing.

 

 

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LOGO

LOGO

Corporate and Other Information

Our principal executive offices are located at One Lower Ragsdale Drive, Monterey, California 93940 and our telephone number is (877) 886-3885. Our corporate website address is www.languageline.com. We do not incorporate the information contained on, or accessible through, our corporate website into this prospectus, and you should not consider it part of this prospectus.

 

 

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THE OFFERING

 

Common stock offered by us

             shares.

Common stock offered by the selling

stockholder

             shares.

Common stock to be outstanding immediately

after this offering

             shares.

 

Over-allotment option

The selling stockholder has granted the underwriters an option to purchase up to an additional              shares of common stock within 30 days of the date of this prospectus in order to cover over-allotments, if any.

 

Use of proceeds

We estimate that the net proceeds to us from this offering, after deducting underwriting discounts and commissions and estimated offering expenses, will be approximately $             million, assuming the shares are offered at $             per share, the midpoint of the price range set forth on the cover page of this prospectus. If the underwriters’ over-allotment option to purchase additional shares is exercised, we do not expect to receive any additional proceeds. We will not receive any of the proceeds from the shares of common stock being sold by the selling stockholder.

We intend to use the net proceeds we receive from this offering to (i) pay a dividend to Language Line Holdings LLC, our parent, which it will use to redeem in whole its mandatorily redeemable series A preferred units, which we refer to as series A preferred units, which amounts to approximately $             million, approximately $             million of which is owned by affiliates of ABRY Partners and approximately $             of which is owned by an affiliate of Merrill Lynch, Pierce, Fenner & Smith Incorporated, an underwriter of this offering, and (ii) approximately $             million to repay outstanding term loans pursuant to a credit agreement among Language Line Holdings II, Inc., one of our direct subsidiaries, and Citicorp USA, Inc., which we refer to as the Citi Loan, $             of which is to pay ABRY Partners a fee for guaranteeing the Citi Loan. See “Use of Proceeds,” “Certain Relationships and Related Party Transactions,” and “Description of Certain Indebtedness.”

 

Dividend policy

We have not historically declared or paid any dividends on our common stock. We cannot pay any dividends on our common stock until Language Line Holdings LLC, our parent, has redeemed and paid in full its series A preferred units. We intend to use a portion of the net proceeds we

 

 

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receive from this offering to pay a dividend to Language Line Holdings LLC, which it will use to redeem in whole its series A preferred units. Our ability to pay dividends on our common stock is also limited by the covenants of our senior secured credit agreement and may be further restricted by the terms of any of our future debt or preferred securities. See “Dividend Policy.”

 

Proposed symbol for trading on The NASDAQ Global Market

“        ”

 

Directed share program

At our request, the underwriters have reserved up to     % of the shares of common stock offered hereby for sale at the initial public offering price to persons who are directors, officers or employees, or who are otherwise associated with us, through a directed share program. The sales will be made by Credit Suisse Securities (USA) LLC through a directed share program. We do not know if these persons will choose to purchase all or any portion of these reserved shares, but any purchases they do make will reduce the number of shares available to the general public. See “Underwriting.”

 

Conflicts of interest

An affiliate of one of the underwriters is a holder of series A preferred units of Language Line Holdings LLC and will receive a portion of the net proceeds of this offering. See “Conflicts of Interest.”

 

Risk factors

Investing in our common stock involves a high degree of risk. See “Risk Factors” beginning on page 15 of this prospectus for a discussion of factors you should carefully consider before deciding to invest in our common stock.

Unless otherwise indicated or context otherwise requires, all information contained in this prospectus:

 

   

assumes no exercise of the underwriters’ option to purchase up to              additional shares of common stock from the selling stockholder to cover over-allotments, if any;

 

   

assumes that the common stock to be sold in this offering is sold at $            , which is the midpoint of the range set forth on the cover page of this prospectus; and

 

   

gives effect to the Reorganization.

Except as otherwise noted, the number of shares of our common stock stated in this prospectus to be outstanding after this offering excludes              Class C units of Language Line Holdings LLC issued under its existing incentive unit agreements, which will be exchanged into          shares of our common stock after this offering in connection with the Exchange, and              shares of restricted stock and stock options to purchase              shares of common stock reserved for issuance under our 2010 Omnibus Incentive Plan that we plan to adopt in connection with this offering.

 

 

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SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA

The following table sets forth our predecessor’s summary consolidated financial and other data for the periods and at the dates indicated. Our predecessor is Language Line Holdings LLC. The summary consolidated financial data for each of the years in the three-year period ended December 31, 2008 and as of December 31, 2008 have been derived from the audited consolidated financial statements included elsewhere in this prospectus. The historical financial data for the nine months ended September 30, 2008 and the nine months ended September 30, 2009 and as of September 30, 2009 have been derived from the unaudited condensed consolidated financial statements included elsewhere in this prospectus. The unaudited condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and, in the opinion of our management, reflect all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of this data. The results for any interim period are not necessarily indicative of the results that may be expected for a full year.

The historical results presented below are not necessarily indicative of the results to be expected for any future period. This information should be read in conjunction with “Risk Factors,” “Selected Consolidated Financial and Other Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the consolidated financial statements and the related notes included elsewhere in this prospectus.

 

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

Statement of Operations Data:

         

Revenues

  $ 185,340      $ 202,924      $ 278,174      $ 204,580      $ 227,474   
                                       

Cost of revenues (exclusive of items shown separately below)

    64,911        71,029        101,469        75,352        79,118   

Selling, general and administrative

    35,417        40,316        65,714        40,208        91,885   

Depreciation and amortization expense

    38,016        34,398        40,700        29,120        27,527   

Impairment of goodwill

    5,293        1,342        —          —          —     
                                       

Total operating costs and expenses

    143,637        147,085        207,883        144,680        198,530   
                                       

Income from operations

    41,703        55,839        70,291        59,900        28,944   

Interest expense

    79,377        76,612        76,783        58,781        60,433   

Interest and other income, net

    1,591        1,514        537        780        300   
                                       

Net income (loss) before income taxes

    (36,083     (19,259     (5,955     1,899        (31,189

Income tax (benefit) expense

    (2,517     404        8,615        6,461        11,525   
                                       

Net loss before noncontrolling interest

    (33,566     (19,663     (14,570     (4,562     (42,714

Noncontrolling interest (preferred stock dividends of a subsidiary)

    —          —          1,829        1,336        1,518   
                                       

Net loss

  $ (33,566   $ (19,663   $ (16,399   $ (5,898   $ (44,232
                                       

 

 

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    Year Ended December 31,     Nine Months Ended
September 30,
     
    2006     2007     2008     2008     2009      
    (in thousands, except per unit and per share data)      

Net loss per Class A unit, basic and diluted

  $ (0.25   $ (0.14   $ (0.11   $ (0.04)      $ (0.31  

Weighted average number of Class A units, basic and diluted

    132,364        139,707        139,707        139,707        139,707     

Net loss per Class D unit, basic and diluted

  $ (0.21   $ (0.12   $ (0.10   $ (0.04   $ (0.26  

Weighted average number of Class D units, basic and diluted

    5,091        5,091        5,091        5,091        5,091     

Pro forma net income (loss) per share of common stock, basic and diluted (1)

      $          $              

Pro forma weighted average shares outstanding, basic and diluted (1)

           

Other Financial Data:

           

Adjusted EBITDA (2)

  $ 85,807      $ 91,908      $ 121,755      $ 89,092      $ 106,139     

Other Non-Financial Data:

           

Billed minute growth

    24.8     17.5     42.8     39.8     17.4  

ARPM decline

    (1.3 %)      (7.1 %)      (7.3 %)      (7.0 %)      (4.7 %)   

 

          As of September 30, 2009
     As of
December 31,
2008
   Actual     As
Adjusted(3)(4)(5)
     (in thousands)

Balance Sheet Data:

       

Cash and cash equivalents

   $ 24,577    $ 68,495     

Working capital

     39,027      101,353     

Total assets

     949,146      977,212     

Series A preferred units

    
160,274
    
178,954
  
 

Total debt (6)

     557,796      548,144     

Total temporary equity

    
25,529
    
39,567
  
 

Total members’/stockholders’ equity (deficit)

     26,853      (30,377  

 

(1) For a description of the pro forma adjustments used to calculate pro forma net loss per share of common stock for the year ended December 31, 2008 and for the nine months ended September 30, 2009, refer to Note 1 “Pro forma earnings per share” to the notes to the consolidated financial statements included elsewhere in this prospectus.
(2) We define Adjusted EBITDA as net loss before noncontrolling interest, interest expense and other income, net, income tax (benefit) expense, depreciation and amortization, impairment of goodwill, equity-based compensation expense and merger related expenses. We use Adjusted EBITDA to facilitate a comparison of our operating performance on a consistent basis from period to period that, when viewed in combination with our results under U.S. generally accepted accounting principles, which we refer to as GAAP, and the following reconciliation, we believe provides a more complete understanding of factors and trends affecting our business than GAAP measures alone. We believe Adjusted EBITDA assists our board of directors, management and investors in comparing our operating performance on a consistent basis because it removes the impact of our capital structure (such as interest expense and other income, net, and noncontrolling interest), asset base (such as depreciation and amortization) and items outside the control of our management team (such as income taxes), as well as other items which are non-cash (such as equity-based compensation expense and impairment of goodwill) and non-recurring items (such as merger related expenses), from our operations. Despite the importance of this measure in analyzing our business and evaluating our operating performance, Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation, or as a substitute for analysis of our results as reported under GAAP; nor is Adjusted EBITDA intended to be a measure of liquidity or free cash flow for our discretionary use. Some of the limitations of Adjusted EBITDA are:

 

   

Adjusted EBITDA does not reflect all of our cash expenditures or future requirements for capital expenditures or contractual commitments;

 

 

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Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;

 

   

Adjusted EBITDA does not reflect the interest expense or the cash requirements to service interest or principal payments under our senior secured credit agreement;

 

   

Adjusted EBITDA does not reflect income tax payments we are required to make; 

 

   

Although equity-based compensation expense is a non-cash charge, Adjusted EBITDA does not reflect the cash requirements for vested units we elected to repurchase upon the cessation of employment during the years ended December 31, 2006, December 31, 2007, December 31, 2008 and nine months ended September 30, 2008 and September 30, 2009 totaling $42,000, $15,000, $26,000, $1,000 and $0, respectively; and

 

   

Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized often will have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacements.

To properly and prudently evaluate our business, we encourage you to review the financial statements included elsewhere in this prospectus and not rely on any single financial measure to evaluate our business. We also strongly urge you to review the reconciliation of net loss before noncontrolling interest from continuing operations to Adjusted EBITDA. Adjusted EBITDA, as presented in this prospectus, may differ from and may not be comparable to similarly titled measures used by other companies because Adjusted EBITDA is not a measure of financial performance under GAAP and is susceptible to varying calculations. The following table sets forth a reconciliation of net loss before noncontrolling interest a comparable GAAP-based measure, to Adjusted EBITDA. All of the items included in the reconciliation from net loss before noncontrolling interest to Adjusted EBITDA are either (i) non-cash items (such as depreciation and amortization, equity-based compensation expense and impairment of goodwill), (ii) items that management does not consider in assessing our on going operating performance (such as income taxes and interest expense and other income, net) or (iii) non-recurring items (such as merger related expenses). In the case of the non-cash items, management believes that investors can better assess our comparative operating performance because the measures without such items are less susceptible to variances in actual performance resulting from depreciation, amortization and other non-cash charges and more reflective of other factors that affect operating performance. In the case of the other items, management believes that investors can better assess our operating performance if the measures are presented without these items because their financial impact does not reflect ongoing operating performance.

The following is a reconciliation of net loss before noncontrolling interest to Adjusted EBITDA for the periods presented.

 

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

Net loss before noncontrolling interest

   $ (33,566   $ (19,663   $ (14,570   $ (4,562   $ (42,714

Interest expense and other income, net

     77,786        75,098        76,246        58,001        60,133   

Income tax (benefit) expense

     (2,517     404        8,615        6,461        11,525   

Depreciation and amortization

     38,016        34,398        40,700        29,120        27,527   

Impairment of goodwill

     5,293        1,342                        

Equity-based compensation

     —          329        10,398        72        49,668   

Merger related expenses

     795               366                 
                                        

Adjusted EBITDA

   $ 85,807      $ 91,908      $ 121,755      $ 89,092      $ 106,139   
                                        

 

(3) Reflects              shares of common stock outstanding as of                  , 2009.

 

(4) A $1.00 increase (decrease) in the assumed initial public offering price of $             per share, the midpoint of the price range set forth on the cover of this prospectus, would increase (decrease) each of cash and cash equivalents, total assets and total stockholders’ equity by approximately $             million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, if we change the number of shares offered by us, the net proceeds we receive will increase or decrease by the increase or decrease in the number of shares sold, multiplied by the offering price per share, less the incremental estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

(5) The as adjusted column in the balance sheet data table above reflects the balance sheet data as further adjusted for (i) our receipt of the estimated net proceeds from the sale of shares of common stock offered by us at an assumed initial public offering price of $             per share, the midpoint of the price range set forth on the cover page of this prospectus, after deducting the estimated underwriting discount and estimated offering expenses payable by us; (ii) the payment of a dividend and repayment of outstanding indebtedness as described in “Use of Proceeds”; (iii) the Refinancing; and (iv) the Reorganization. See “Capitalization” and “Use of Proceeds.”

 

(6) Total debt at December 31, 2008 includes long-term obligations, net of current portion of $533.4 million and current portion of long-term obligations of $18.6 million, and the related party loan of $5.8 million. Total debt at September 30, 2009 includes long-term obligations, net of current portion of $537.9 million and current portion of long-term obligations of $3.9 million, and the related party loan of $6.3 million.

 

 

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RISK FACTORS

This offering and an investment in our common stock involve a high degree of risk. You should consider carefully the risks described below, together with the financial and other information contained in this prospectus, before you decide to purchase shares of our common stock. If any of the following risks actually occurs, our business, financial condition, results of operations, cash flow and prospects could be materially and adversely affected. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also materially and adversely affect our business, financial condition, results of operations, cash flow and prospects. As a result, the trading price of our common stock could decline and you could lose all or part of your investment in our common stock.

Risks Related to Our Business

If we are unable to retain our existing clients, our business, financial condition and results of operations could suffer.

Our success depends substantially upon the retention of our clients. Historically, we have benefited from high client retention rates; however, we may not be able to maintain high client retention rates in the future. Although no single client accounted for more than 5% of our revenue in 2008, the loss of a large client may have an adverse effect on our business. Continued client retention depends on us improving efficiencies and cost-effectiveness in providing our language interpretation services and effectively complying with a complex array of regulatory requirements. We also may not be able to retain our clients if we do not fulfill their language interpretation services in a cost-effective manner, fail to provide accurate language interpretation services or otherwise fail to meet the service standards of our clients or if our proprietary call-routing software fails to perform properly. Many of our clients may look to perform their language interpretation services through the use of internal personnel rather than outsourcing the language interpretation services to us. The failure to maintain our existing clients may cause our revenue to decrease and our results from operations could suffer.

If we are unable to successfully implement and execute our business strategy, our business, financial condition and results of operations could be adversely affected.

The implementation and execution of our business strategy will place significant demands on our senior management and operational, financial and marketing resources. The successful implementation of our business strategy involves the following principal risks, which could adversely affect our business, financial condition and results of operations:

 

   

the operation of our business may place significant or unachievable demands on our management team;

 

   

we may be unable to increase our penetration of the OPI market at an average revenue per billed minute of service which is acceptable to us;

 

   

we may be unable to continue to achieve cost reductions on a per billed minute basis consistent with our low-cost provider strategy; and

 

   

we may be unable to recruit a sufficient number of qualified interpreters.

Our continued success depends on our clients’ trend toward outsourcing OPI services.

Our business depends on the continued need for outsourced OPI services as driven by general economic and public policy factors. These trends may not continue, as businesses and organizations may either elect to perform OPI services in-house or discontinue OPI services, both of which would have a negative effect on our revenues.

 

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Additionally, Spanish-English interpretation services accounted for the majority of our total OPI billed minutes in 2008 and the first nine months of 2009. A decision by our clients to conduct an increasing amount of OPI services in-house, especially for the rapidly growing Spanish-speaking community, could have an adverse effect on our business, financial condition and results of operations.

Our profitability may suffer as a result of competition in our markets.

Our interpretation services are subject to significant price competition. Our existing contracts with our clients generally are non-exclusive, terminable after a period of notice and have no requirement for a minimum amount of billed minutes. Our competitors offer services that are largely similar to ours, and we generally obtain our clients through a competitive bidding process, usually by responding to a request for proposal, in which a potential client may negotiate among multiple interpretation service providers. In addition, the cost incurred by our clients to switch or use multiple interpretation service providers is minimal. From time to time, we may need to reduce our prices or offer other concessions for some of our services to respond to competitive and client pressures and to maintain market share. These concessions include volume discounts, waiving fees and reduction in the prices we charge for our services. Such pressures also may restrict our ability to offset our costs to provide interpretation services. Any reduction in prices as a result of competitive pressures, or any failure to increase prices when our costs increase, would harm profit margins and, if our volume of billed minutes fails to grow sufficiently to offset any reduction in margins, our business, financial condition and results of operations may be adversely affected.

The OPI services market in which we compete is highly competitive and our failure to compete effectively could erode our market share.

Our failure to compete effectively in the outsourced OPI services market that we serve could erode our market share and negatively impact our ability to service our debt. We expect that our existing competitors will strive to improve their outsourced OPI services and introduce new services with competitive price and customer service characteristics. From time to time we may lose clients as a result of competition. Certain of our potential competitors may attempt to leverage their existing infrastructure to compete with us. For example, a large call center company may have the requisite scale to enter into the OPI services market. If this were to occur, the outsourced OPI industry may become more competitive and may force us to decrease our profit margins in order to maintain our market position.

We compete on a number of factors including, but not limited to, quality of interpreters, breadth of languages, connection speeds, reliability and price. We believe these service attributes are key considerations in the purchase decisions of our clients. If we are unsuccessful in competing on these factors, our business, financial condition and results of operations may be adversely affected.

Our average revenue per billed minute, which we refer to as ARPM, has been declining.

One of our responses to competition in our markets has been, from time to time, to lower the amount we charge to clients, and as such, our average rate per billed minute has declined over the past 5 years, and the first nine months of 2009 and is anticipated to decline in the future. This response encourages our clients to purchase more billed minutes but results in lower profitability. If we are unable to attract sufficient volume to offset lower per minute charges or if average revenue per billed minute decrease beyond our expectations, we may be unable to generate revenue growth or maintain current revenue levels in the future.

Client consolidations could result in a loss of clients or contract concessions that would adversely affect our operating results.

We serve clients in targeted industries that have historically experienced a significant level of consolidation. If one of our clients is acquired by another company, including one of our existing clients, provisions in certain

 

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contracts allow these clients to cancel or renegotiate their contracts, or to seek contract concessions. Such consolidations may result in the termination or phasing out of an existing client contract, volume discounts and other contract concessions that may adversely affect our business, financial condition and results of operations.

Our contracts generally provide for early termination, have no minimum level of billing requirement and often do not designate us as the exclusive provider of services, all of which may have an adverse effect on our operating results.

Most of our contracts do not ensure that we will generate a minimum level of revenue, and the profitability of each client program may fluctuate, sometimes significantly, throughout the various stages of a program. Our objective is to sign multi-year contracts with our clients. However, our contracts generally enable the clients to terminate the contract or reduce the volume of billed minutes. If our clients terminate or reduce demand for our services, our business, financial condition and results of operations may be adversely affected.

Our financial results depend on our interpreter productivity, in particular our ability to route calls and forecast our clients’ customer demand to make corresponding decisions regarding staffing levels, investments and operating expenses.

Our interpreter productivity has a substantial and direct effect on our profitability, and we may not achieve desired productivity levels or maintain our historically increasing level of productivity. Our productivity is affected by a number of factors, including:

 

   

our ability to predict our clients’ customer demand for our services and thereby to make corresponding decisions regarding staffing levels, investments and other operating expenditures;

 

   

our effective utilization of technology and information, including our call-routing technology and our database of historical call volume data;

 

   

our ability to hire and assimilate new employees and manage employee turnover; and

 

   

our need to devote time and resources to training, professional development and other non-chargeable activities.

Some of our contracts with our clients provide that we must meet certain performance criteria, including average connect times and interpreter availability thresholds. To meet these criteria, we use our proprietary call routing technology to connect our clients and our clients’ customers from any of our interpreters working from home and from our six interpretation centers located in domestic and international locations. Our continued success depends on our ability to meet these performance criteria by effectively routing calls and accurately forecasting our clients’ demand for interpretation services, and if our existing technology fails or becomes obsolete, our business, financial condition and results of operations may be adversely affected.

We may not be able to use intellectual property rights to protect our proprietary technologies, trademarks and other intellectual property.

We use proprietary technologies to competitively offer interpretation services. Our policy is to enter into confidentiality agreements with our employees, outside consultants, agency employees and independent contractors. We also use patent and trademarks, in addition to contractual restrictions, to protect our technology or other intellectual property. In spite of these legal protections, it may be possible for a third party to obtain and use our proprietary technology without authorization. Although we hold registered or pending United States

 

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patents and foreign patents covering certain aspects of our technology, we cannot assure you of the level of protection that these patents will provide. We may have to resort to litigation to enforce our intellectual property rights, to protect trade secrets or know-how, or to determine their scope, validity or enforceability. The laws of other countries may afford us little or no effective protection of our intellectual property rights. Enforcing or defending rights in our proprietary technology may be expensive, cause diversion of our resources and ultimately be unsuccessful. Our inability to prevent others from using our proprietary technologies or trademarks may reduce our competitiveness in offering interpretation services, which may adversely affect our business, financial condition and results of operations.

Unfavorable conditions in the U.S. and global economies may adversely affect demand for our services.

As demand for our services is sensitive to changes in the level of economic activity, our business may suffer during an economic downturn or recession. Our clients’ customers are sensitive to changes in economic conditions, and a reduction in demand for our clients’ products or services may result in a decrease in demand for our services. Slowing economic activity may also result in our clients canceling or delaying projects, or a reduction of the scope or breadth of services, including a reduction in the number of languages in which our clients provide products or services to their clients. If demand for our clients’ products or services decreases, then demand for our services may decrease, which may adversely affect our business, financial condition and results of operations.

More generally, the current unfavorable changes in global economic conditions, including recession, inflation, fluctuating energy costs, geopolitical issues, the availability and cost of credit, the U.S. mortgage market and a declining real estate market in the U.S., have contributed to increased volatility and diminished expectations for the global economy and expectations of slower global economic growth going forward. These factors, combined with volatile oil prices, declining business and consumer confidence and increased unemployment, have precipitated an economic slowdown. If the economic climate in the U.S. or abroad does not improve from its current condition or further deteriorates, our business and profitability may be negatively impacted. More specifically, our clients or potential clients may reduce their demand for our services, which may adversely impact our business, financial condition and results of operations.

Further reduction in the availability of credit on terms favorable to our clients may adversely affect the ability of our clients to obtain financing for their operations and could result in a decrease in demand for or cancellation of our services. There is no assurance that government responses to the disruptions in the financial markets will restore business and consumer confidence, stabilize the markets or increase liquidity and the availability of credit. In addition, during economic downturns, companies may slow the rate at which they pay their vendors or become unable to pay their debts as they become due. If our clients do not pay amounts owed to us in a timely manner or become unable to pay such amounts to us at a time when we have substantial amounts receivable from such client, reserves for doubtful accounts and write-offs of accounts receivable may increase, and in turn our cash flow and profitability may suffer.

Further, recent events, including the fallout from problems in the U.S. credit markets, indicate a moderate to severe recession in the U.S. and world economies, which could have an impact on our clients and the volume of business they are able to conduct with us and their ability to pay for services rendered. Additionally, the securities and credit markets have recently been experiencing volatility and disruption, which could impact our ability to access capital.

We cannot predict when global economic conditions will begin to recover or when and to what extent conditions affecting our clients will improve. Also, we cannot assure you that the actions we have taken or may take in the future in response to these global economic conditions will be successful or that our business, financial condition and results of operations will not be adversely impacted by these conditions.

 

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Our business could be adversely affected by a variety of factors related to doing business internationally.

We currently conduct operations internationally. Although our OPI services constitute generally accepted business practices in the United States, such practices may not be accepted in certain international markets. To the extent there is consumer, business or government resistance to the use of OPI services in international markets we target, our international growth prospects could be affected. In addition, our international operations are subject to numerous inherent challenges and risks, including the difficulties associated with operating in multilingual and multicultural environments, varying and potentially burdensome regulatory requirements, fluctuations in currency exchange rates, political and economic conditions in various jurisdictions, tariffs and other trade barriers, longer accounts receivable collection cycles, barriers to the repatriation of earnings and potentially adverse tax consequences. Moreover, expansion into new geographic regions will require considerable management and financial resources and, as a result, may negatively impact our business, financial condition and results of operations.

Pursuing and completing potential acquisitions could divert management attention and financial resources and may not produce the desired business results.

As part of our business strategy, we intend to continue pursuing and making selected acquisitions of complementary businesses. While we currently do not have commitments or agreements with respect to any acquisitions, our management regularly explores potential acquisitions of complementary businesses or operations. However, we do not have specific personnel dedicated solely to pursuing and making acquisitions. As a result, if we pursue any acquisition, our management, in addition to their operational responsibilities, could spend a significant amount of time and management and financial resources to pursue and integrate the acquired business with our existing business. To fund the purchase price of an acquisition, we may use capital stock, cash or a combination of both. Alternatively, we may borrow money from a bank or other lenders. If we use capital stock, our stockholders, including purchasers of our stock in this offering, will experience dilution. If we use cash or debt financing, our financial liquidity may be reduced. In addition, an acquisition may involve amortization of significant amounts of intangible assets and potential write-offs related to the impairment of goodwill that could adversely affect our profitability.

Despite the investment of these management and financial resources, an acquisition may not produce the revenue, earnings or business synergies that we anticipated or may produce such synergies less rapidly than anticipated for a variety of reasons, including:

 

   

difficulties in acquiring suitable companies on favorable terms due to competition from other companies for potential acquisition candidates;

 

   

difficulties in the assimilation of the operations, operational systems deployments, technologies, services, products and personnel of the acquired company;

 

   

failure of acquired technologies and services to perform as expected;

 

   

risks of entering markets in which we have no, or limited, prior experience;

 

   

effects of any undisclosed or potential legal or tax liabilities of the acquired company;

 

   

compliance with additional laws, rules or regulations that we may become subject to as a result of an acquisition that might restrict our ability to operate; and

 

   

the loss of key employees of the acquired company.

 

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We may not be able to successfully address these problems. Our future operating results may depend to a significant degree on our ability to successfully integrate acquisitions and manage operations while controlling expenses and cash outflows. If we do not fully complete the integration of acquired businesses successfully and in a timely manner, we may not realize the anticipated benefits of the acquisitions to the extent anticipated, or as rapidly as anticipated, which may adversely affect our business, financial condition or results of operations.

Improper disclosure of client data could result in liability, litigation and harm our reputation.

From time to time, our services involve the interpretation of our clients’ customers’ personal data, including information of its employees and resources. We have established policies and procedures to help protect the security and privacy of this information. It is possible that our security controls over personal and other data and other practices we and our third party service providers follow may not prevent the improper access to or disclosure of personally identifiable or otherwise confidential information. Such disclosure could harm our reputation and subject us to liability under our contracts and laws that protect personal data and confidential information, which may adversely affect our business, financial condition and results of operations.

Some of our contracts with our clients subject us to privacy or confidentiality obligations, including provisions of the Standards for Privacy of Individually Identified Health Information, the Health Insurance Portability & Accountability Act and the Gramm-Leach-Bliley Act. Further, data privacy is subject to frequently changing rules and regulations, which sometimes conflict among various jurisdictions and countries in which we provide services. Our failure to adhere to or successfully implement processes in response to changing regulatory requirements in this area could result in legal liability or impairment to our reputation in the marketplace. A breach of such obligations may result in our requirement to indemnify our clients or pay penalties under the contracts with our clients, which may adversely affect our business, financial condition and results of operations.

We may be required to indemnify our clients for claims and costs.

Our contracts with our clients generally obligate us to indemnify them for property damage or personal injury caused by us during the engagement of our services. Risks related to these activities include (i) claims arising out of the actions or inactions of our personnel and (ii) claims by our clients relating to our personnel misusing their customers’ proprietary information, or other similar claims. We may incur losses from our indemnity obligations. In addition, some or all of these claims may give rise to litigation, which could be time-consuming to our management team and costly and have a negative impact on our business. We cannot assure you that we will not experience these problems in the future. We also cannot assure you that we have or will be able to obtain appropriate types or levels of insurance for employment-related or other claims, and we cannot assure that the insurance will be sufficient in amount or scope to cover all claims that may be asserted against us. If the ultimate judgments and settlements exceed our insurance coverage, our business, financial condition and results of operations may be adversely affected.

Our continued success depends on our ability to retain senior management.

Our success is largely dependent upon the efforts, direction and guidance of our senior management. Our continued growth and success also depends in part on our ability to attract and retain qualified managers and on the ability of our executive officers and key employees to manage our operations successfully. The loss of Dennis Dracup, Chief Executive Officer, Louis Provenzano, President and Chief Operating Officer, or Michael Schmidt, Chief Financial Officer, or our inability to attract, retain or replace key management personnel in the future may have an adverse effect on our business, financial condition and results of operations.

Our continued success depends on our ability to attract and retain qualified personnel.

Our business is labor intensive and places significant importance on our ability to recruit and retain a qualified base of interpreters and technical and professional personnel. We continuously recruit and train replacement personnel as a result of our changing and expanding work force. A higher turnover rate among our personnel would increase our hiring and training costs and decrease operating efficiencies and productivity. We may not be successful in attracting and retaining the personnel that we require to conduct our operations successfully.

 

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Our business can be adversely affected by an emergency interruption and is highly dependent on the availability of telephone service.

Our operations are dependent upon our ability to protect our OPI interpretation centers against damage that may be caused by fire, severe weather conditions, power failure, telecommunications failures, unauthorized intrusion, computer viruses and other emergencies. We have taken precautions to protect ourselves and our clients from events that could interrupt delivery of our services. These precautions include fire protection and physical security systems, rerouting of telephone calls to one or more of our other OPI interpretation centers in the event of an emergency, backup power generators and a disaster recovery plan. We also maintain business interruption insurance in amounts that we believe is adequate, but may not adequately compensate us for any losses that we incur. Notwithstanding such precautions, a fire, natural disaster, human error, equipment malfunction or inadequacy, or other events could result in a prolonged interruption in our ability to provide services to our clients.

Our business is highly dependent upon telephone service provided by various local and long distance telephone companies. Any significant disruption in telephone service could adversely affect our business. Additionally, limitations on the ability of telephone companies to provide us with increased capacity in the future could adversely affect our growth prospects. Rate increases imposed by these telephone companies would have the effect of increasing our operating expenses. In addition, our operation of global interpretation centers causes us to rely on the availability of telephone service outside the United States. Any significant disruption in telephone service in the countries where we operate global interpretation centers could adversely affect our business, financial condition and results of operations.

Our level of indebtedness could adversely affect our ability to raise additional capital to fund our operations, potentially limiting our ability to react to changes in the economy or our industry.

As a result of our new senior secured credit agreement that we entered into on November 4, 2009, upon completion of this offering, our debt under the senior secured credit agreement will be comprised of a $525.0 million tranche B term loan, which we refer to as the Term Loan Facility, a $50.0 million revolving credit facility, which we refer to as the Revolving Credit Facility, a $50.4 million term loan under the Citi Loan and a $17.5 million credit loan under the Citi Loan. The Revolving Credit Facility also allows us to borrow using letters of credit. The outstanding principal amount of the Term Loan Facility at November 15, 2009 was $525.0 million. The outstanding principal amount under the Citi Loan was $40.8 million as of November 15, 2009. Our significant level of consolidated debt could have important consequences to you including the following:

 

   

limit our ability to obtain additional debt or equity financing for working capital, capital expenditures, debt service requirements, acquisitions, and general corporate purposes;

 

   

restrict our ability to pay dividends;

 

   

require a substantial portion of our cash flow from operations to make debt service payments;

 

   

require us to seek waivers from our banks as we may from time to time fail to be in compliance with covenants under debt agreements;

 

   

limit our flexibility to plan for, or react to, changes in our business and industry conditions;

 

   

place us at a competitive disadvantage compared to our less leveraged competitors; and

 

   

increase our vulnerability to the impact of adverse economic and industry conditions and, to the extent interest on our outstanding debt is variable, the impact of increases in interest rates.

 

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Our senior secured credit agreement contains various covenants that may restrict our financial and operating flexibility.

Our senior secured credit agreement contains various covenants that limit our ability to engage in specified types of transactions. These covenants limit our and our subsidiaries’ ability to, among other things:

 

   

declare dividends on our common stock;

 

   

incur additional indebtedness or issue certain preferred stock;

 

   

create certain liens or encumbrances;

 

   

enter into transactions with affiliates;

 

   

merge or consolidate with other entities;

 

   

sell assets;

 

   

enter into covenants that restrict our ability to pledge assets;

 

   

engage in different lines of business;

 

   

enter into sale and leaseback transactions and certain hedging agreements; and

 

   

make certain distributions, investments and other restricted payments.

Our senior secured credit agreement contains covenants that require us to maintain certain financial ratios, including our total leverage ratio and consolidated fixed charge coverage ratio, within specific limits. In addition, our senior secured credit agreement requires that, on the occurrence of certain events, we must make mandatory prepayments on our outstanding indebtedness. Such events include the incurrence of indebtedness that is prohibited under the senior secured credit agreement, sales of certain assets, receipt of proceeds from insurance claims and, for fiscal years after December 31, 2010, the incidence of excess cash flow. See “Description of Certain Indebtedness—Senior Secured Credit Agreement.”

A breach of a covenant or restriction contained in the senior secured credit agreement could result in a default that could in turn permit the affected lender to accelerate the repayment of principal and accrued interest on our outstanding loans and terminate their commitments to lend additional funds. If the lenders under such indebtedness accelerate the repayment of our borrowings, we cannot assure you that we will have sufficient assets to repay those borrowings as well as other indebtedness.

Under our senior secured credit agreement, if a person, whether acting singly or in concert with other persons, other than ABRY Partners, the funds affiliated with ABRY Partners, Dennis Dracup, Michael Schmidt and Louis Provenzano, beneficially owns (i) capital stock with voting power greater than that of ABRY Partners and the funds affiliated with ABRY Partners and (ii) 35% or more of the total voting power of our capital stock, the lenders may require us to repay all outstanding amounts under such agreement and a prepayment premium.

In connection with our senior secured credit agreement, we entered into a security agreement that pledged a significant portion of our and our subsidiaries’ assets as collateral. If we are unable to repay those borrowings, the lenders under our senior secured credit agreement could proceed against the collateral granted to them to secure the indebtedness. Our ability to comply with the covenants in our senior secured credit agreement can be affected by events beyond our control, including the other risks described herein, and we cannot assure you that we will meet these covenants or, in the event of default, we cannot be assured that waivers, amendments or alternative or additional financings could be obtained, or if obtained, would be on terms acceptable to us.

 

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Some of our debt has variable rates of interest, which could result in higher interest expense in the event of an increase in interest rates.

As of November 15, 2009, approximately $565.8 million of our loans under our senior secured credit agreement and the Citi Loan were subject to variable interest rates. Based on the November 15, 2009 borrowings, a hypothetical 1% increase in the interest rate we are charged on our debt would increase our annual interest expense by an estimated $5.7 million. If we borrow additional amounts under the Revolving Credit Facility, the interest rates on those borrowings may vary depending on the base rate or Eurodollar Rate (LIBOR), and other debt we incur also could be variable-rate debt. If market interest rates rise, any debt subject to variable interest rates will create higher debt service requirements, which could adversely affect our cash flow. While we have and may in the future enter into agreements limiting our exposure to higher interest rates, any such agreements may not offer complete protection from this risk. We and our subsidiaries may be able to incur substantial indebtedness in the future, subject to the restrictions contained in our senior secured credit agreement. If new indebtedness is added to our current debt levels, the related risks that we now face could intensify.

A write-off of all or a part of our identifiable intangible assets or goodwill would hurt our operating results and reduce our net worth.

We have significant identifiable intangible assets and goodwill, which represent the excess of the total purchase price of our acquisitions over the estimated fair value of the net assets acquired. As of September 30, 2009, we had $328.5 million of identifiable intangible assets, net of accumulated amortization and $484.1 million of goodwill on our balance sheet, which represented in excess of 83% of our total assets. We amortize identifiable intangible assets over their estimated useful lives which range from 3 to 20 years. We also evaluate our goodwill for impairment at least annually using a combination of valuation methodologies. Because one of the valuation methodologies we use is impacted by market conditions, the likelihood and severity of an impairment charge increases during periods of market volatility, such as the one that recently occurred as a result of the general weakening of the global economy. If we are unable to retain our existing customers, or if our billed minutes or average rate per minute decreases, we may incur future impairment charges. We are not permitted to amortize goodwill under U.S. accounting standards. In the event an impairment of goodwill is identified, a charge to earnings would be recorded. Although it does not affect our cash flow, a write-off in future periods of all or a part of these assets would adversely affect our business, financial condition and results of operations. During 2006 and 2007, we recorded a goodwill impairment charge of $5.3 million and $1.3 million, respectively in the Language Line U.K. segment. We determined the fair value of Language Line U.K. segment reporting unit using a combination of the market and income approaches, which require estimates of future operating results and cash flows discounting using an estimated discount rate. In 2006, our estimates resulted from loss of two key customers in the U.K. In 2007, we experienced continued erosion of business among our other customers and began to observe competitive pricing pressures in our key revenue channel, the U.K. government sector.

We have identified a material weakness in our internal control over financial reporting that, if not corrected, could result in material misstatements in our financial statements.

In connection with the preparation of our financial statements for the year ended December 31, 2008, we have identified a certain matter involving our internal control over financial reporting that constitutes a material weakness under standards established by the Public Company Accounting Oversight Board, which we refer to as PCAOB.

The PCAOB defines a material weakness as a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of a company’s annual or interim financial statements will not be prevented or detected on a timely basis. A significant deficiency is defined as a deficiency, or a combination of deficiencies, in internal control over financial reporting that is less severe than a material weakness, yet important enough to merit attention by those responsible for

 

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oversight of a company’s financial reporting. A deficiency in internal control over financial reporting exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect misstatements on a timely basis.

We identified a material weakness where we did not have effective controls over the accounting for business combinations to ensure that we completely and accurately accounted for the acquisition of Coto Global Solutions, which we refer to as Coto. We have taken steps to address this material weakness by hiring additional personnel with technical accounting expertise and implementing enhanced training for our finance and accounting personnel to familiarize them with our accounting policies. However, we will not be able to confirm that we have remediated this material weakness until our newly implemented procedures have been working for a sufficient period of time. As a result of this and similar activities, management’s attention may be diverted from other business concerns, which could have a material adverse effect on our business, financial condition and results of operations.

If the remedial policies and procedures we implement and resources we hire are insufficient to address the identified material weakness, or if additional material weaknesses or significant deficiencies in our internal controls are discovered in the future, we may fail to meet our future reporting obligations, our financial statements may contain material misstatements and our operating results may be adversely affected. Any such failure could also adversely affect the results of the annual management evaluations and annual auditor attestation reports regarding the effectiveness of our internal control over financial reporting, which are required under Section 404 of the Sarbanes-Oxley Act of 2002. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Internal Controls Over Financial Reporting.”

We cannot predict the outcome of various measures in Congress aimed at limiting the transfer of U.S. jobs overseas or the impact of healthcare reform legislation.

A number of our interpreters are located in global interpretation centers outside of the United States. Although hourly wages for our off-shore interpreters are often above the average wage rate in their respective countries, these off-shore interpreters are paid less than comparable U.S.-based interpreters, and the global interpretation centers have a meaningful cost advantage over our domestic interpretation centers. Several measures have been introduced in Congress aimed at prohibiting, or at least limiting, the transfer of U.S. jobs to foreign countries. It is not clear whether these legislative proposals will eventually become law or what impact they may have on our business.

It is not clear whether and in what form healthcare legislation currently considered by Congress may impact our workforce. However, the legislation may result in increased benefits costs for some of our interpreters.

Risks Related to this Offering and Ownership of Our Common Stock

Concentration of ownership among our existing executive officers, directors and principal stockholders may prevent new investors from influencing significant corporate decisions.

We are controlled, and after this offering and the Exchange are completed will continue to be controlled, by ABRY Partners and the funds affiliated with ABRY Partners. ABRY Partners and the funds affiliated with ABRY Partners will own, in the aggregate, approximately     % of our outstanding common stock after the consummation of this offering and the Exchange (and approximately     % if the option granted to the underwriters is exercised in full). ABRY Partners will have the ability to elect a majority of our board of directors. As a result, ABRY Partners will be able to exercise control over all matters requiring stockholder approval, including the election of directors, amendment of our amended and restated certificate of incorporation and approval of significant corporate transactions and will have significant control over our management and policies. The interests of this stockholder may not be consistent with your interests as a stockholder.

 

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This control may deter hostile takeovers, delay, defer or prevent acquisitions by a third party or other changes in control or changes in management, or limit the ability of our other stockholders to approve transactions that they may deem to be in the best interests of our company. As a result, our stockholders could be deprived of the opportunity to receive a premium for their common stock as part of a sale of us and might ultimately affect the market price of our common stock. In addition, our amended and restated certificate of incorporation provides that the provisions of Section 203 of the Delaware General Corporation Law, which we refer to as the DGCL, that relate to business combinations with interested stockholders do not apply to us.

Our amended and restated certificate of incorporation also provides that the doctrine of corporate opportunity does not apply to ABRY Partners or any of our directors who are employees of, or are affiliated with, ABRY Partners, in a manner that would prohibit them from investing or participating in competing businesses. ABRY Partners is in the business of making investments in companies and may from time to time acquire and hold interests in business that compete directly or indirectly with us. ABRY Partners may also pursue acquisition opportunities that are complementary to our business and, as a result, those acquisition opportunities may not be available to us. To the extent they invest in such other businesses, ABRY Partners may have differing interests than our other stockholders.

So long as ABRY Partners and the funds affiliated with ABRY Partners continue to own a significant amount of our common stock, either directly or indirectly, even if such amount is less than 50%, ABRY Partners will continue to be able to strongly influence or effectively control our business.

We will be a “controlled company” within the meaning of the rules of the The NASDAQ Global Market, which we refer to as NASDAQ, and, as a result, will rely on exemptions from certain corporate governance requirements that provide protection to stockholders of other companies.

Upon completion of this offering, ABRY Partners and the funds affiliated with ABRY Partners will continue to control a majority of the voting power of our outstanding common stock. As a result, we will be a “controlled company” under NASDAQ corporate governance standards. As a controlled company, exemptions under NASDAQ standards will free us from the obligation to comply with certain corporate governance requirements, including the requirements:

 

   

that a majority of our board of directors consists of “independent directors,” as defined under the rules of NASDAQ;

 

   

that we have a corporate governance and nominating committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities; and

 

   

that we have a compensation committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities.

Accordingly, for so long as we are a “controlled company,” you will not have the same protections afforded to stockholders of companies that are subject to all of the NASDAQ corporate governance requirements.

There may not be a viable public market for our common stock.

Prior to this offering, there has been no public market for our common stock. The initial public offering price for our common stock will be determined through negotiations between us and the representatives of the underwriters and may not be indicative of the market price of our common stock after this offering. If you purchase shares of our common stock, you may not be able to resell those shares at or above the initial public offering price. We cannot predict the extent to which investor interest in our company will lead to the development of an active trading market on NASDAQ or otherwise or how liquid that market might become. An active public market for our common stock may not develop or be sustained after the offering. If an active public market does not develop or is not sustained, it may be difficult for you to sell your shares of common stock at a price that is attractive to you or at all.

 

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Our stock price may be volatile or may decline regardless of our operating performance, and you may not be able to resell your shares at or above the initial public offering price.

After this offering, the market price for our common stock is likely to be volatile, in part because our shares have not been traded publicly. In addition, the market price of our common stock may fluctuate significantly in response to a number of factors, most of which we cannot control, including those described under the heading “Forward-Looking Statements” below.

In addition, the stock markets, and in particular NASDAQ, have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies in our industry. In the past, stockholders have instituted securities class action litigation following periods of market volatility. If we were involved in securities litigation, we could incur substantial costs and our resources and the attention of management could be diverted from our business.

Future sales of our common stock, or the perception in the public markets that these sales may occur, may depress our stock price.

Sales of substantial amounts of our common stock in the public market after this offering, or the perception that these sales could occur, could adversely affect the price of our common stock and could impair our ability to raise capital through the sale of additional shares. Upon completion of this offering, we will have                      shares of common stock outstanding. The shares of common stock offered in this offering will be freely tradable without restriction under the Securities Act of 1933, as amended, or the Securities Act, except for any shares of our common stock that may be held or acquired by our directors, executive officers and other affiliates, as that term is defined in the Securities Act, which will be restricted securities under the Securities Act. Restricted securities may not be sold in the public market unless the sale is registered under the Securities Act or an exemption from registration is available.

We, each of our officers, directors, the selling stockholder and certain other unitholders of Language Line Holdings LLC have agreed, subject to certain exceptions, with the underwriters not to dispose of or hedge any of their common stock or securities convertible into or exchangeable for shares of common stock, including units of Language Line Holdings LLC, during the period from the date of this prospectus continuing through the date 180 days (subject to extension) after the date of this prospectus. Morgan Stanley and Credit Suisse may, in their sole discretion, release any of these shares from these restrictions at any time without notice. See “Underwriting” and “Shares Eligible for Future Sale” for a more detailed description of the restrictions on selling shares of our common stock after this offering.

In the future, we may also issue our securities in connection with investments or acquisitions. The amount of shares of our common stock issued in connection with an investment or acquisition could constitute a material portion of our then-outstanding shares of our common stock.

Anti-takeover provisions in our charter documents and Delaware law might discourage or delay acquisition attempts for us that you might consider favorable.

Our amended and restated certificate of incorporation and amended and restated bylaws will contain provisions that may make the acquisition of our company more difficult without the approval of our board of directors. These provisions:

 

   

establish a classified board of directors so that not all members of our board of directors are elected at the same time;

 

   

authorize the issuance of undesignated preferred stock, the terms of which may be established and the shares of which may be issued without stockholder approval, and which may include super voting, special approval, dividend, or other rights or preferences superior to the rights of the holders of common stock;

 

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prohibit stockholder action by written consent, which requires all stockholder actions to be taken at a meeting of our stockholders unless such action is recommended by all directors then in office;

 

   

provide that the board of directors is expressly authorized to make, alter, or repeal our amended and restated bylaws; and

 

   

establish advance notice requirements for nominations for elections to our board or for proposing matters that can be acted upon by stockholders at stockholder meetings.

These anti-takeover provisions and other provisions under Delaware law could discourage, delay or prevent a transaction involving a change in control of our company, even if doing so would benefit our stockholders. These provisions could also discourage proxy contests and make it more difficult for you and other stockholders to elect directors of your choosing and cause us to take other corporate actions you desire.

If you purchase shares of common stock sold in this offering, you will incur immediate and substantial dilution.

If you purchase shares of common stock in this offering, you will incur immediate and substantial dilution in the amount of $             per share, because the initial public offering price of $             per share, based on the midpoint of the price range set forth on the cover page of this prospectus, is substantially higher than the pro forma net tangible book value per share of our outstanding common stock. This dilution is due in large part to the fact that our earlier investors paid substantially less than the initial public offering price when they purchased their units. In addition, you may also experience additional dilution upon future equity issuances or the exercise of stock options to purchase common stock granted to our employees, consultants and directors under our stock option and equity incentive plans. See “Dilution.”

If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our stock price and trading volume could decline.

The trading market for our common stock will depend in part on the research and reports that securities or industry analysts publish about us or our business. We do not currently have and may never obtain research coverage by securities and industry analysts. If no securities or industry analysts commence coverage of our company, the trading price for our stock would be negatively impacted. If we obtain securities or industry analyst coverage and if one or more of the analysts who covers us downgrades our stock or publishes inaccurate or unfavorable research about our business, our stock price would likely decline. If one or more of these analysts ceases coverage of us or fails to publish reports on us regularly, demand for our stock could decrease, which could cause our stock price and trading volume to decline.

We do not expect to pay any cash dividends for the foreseeable future.

The continued operation and expansion of our business will require substantial funding. Accordingly, we do not anticipate that we will pay any cash dividends on shares of our common stock for the foreseeable future. Any determination to pay dividends in the future will be at the discretion of our board of directors and will depend upon results of operations, financial condition, contractual restrictions, restrictions imposed by applicable law and other factors our board of directors deems relevant. Accordingly, if you purchase shares in this offering, realization of a gain on your investment will depend on the appreciation of the price of our common stock, which may never occur. Investors seeking cash dividends in the foreseeable future should not purchase our common stock.

 

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FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements that are subject to risks and uncertainties. All statements other than statements of historical fact included in this prospectus are forward-looking statements. Forward-looking statements give our current expectations and projections relating to our financial condition, results of operations, plans, objectives, future performance and business. You can identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. These statements may include words such as “anticipate,” “estimate,” “expect,” “project,” “plan,” “intend,” “believe,” “may,” “will,” “should,” “can have,” “likely” and other words and terms of similar meaning in connection with any discussion of the timing or nature of future operating or financial performance or other events. For example, all statements we make relating to our estimated and projected earnings, revenues, costs, expenditures, cash flows, growth rates and financial results, our plans and objectives for future operations, growth or initiatives, strategies, are forward-looking statements. All forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those that we expected, including:

 

   

our ability to retain our existing clients;

 

   

our ability to implement our business strategy;

 

   

our clients’ trend toward outsourcing OPI services;

 

   

competition in our markets and our ability to compete in those markets;

 

   

the continued reduction in our average revenue per minute;

 

   

client consolidations;

 

   

limitations placed by our contracts;

 

   

our ability to increase interpreter productivity;

 

   

our ability to protect our intellectual property;

 

   

market conditions or trends in our industry or the economy as a whole;

 

   

factors related to doing business internationally;

 

   

our ability to pursue and complete acquisitions;

 

   

changes in key personnel;

 

   

the availability of telephone service and emergency interruption of operations;

 

   

impairment of goodwill;

 

   

our ability to remediate our material weakness in our internal control over financial reporting;

 

   

the financial projections we may provide to the public, any changes in these projections or our failure to meet these projections;

 

   

changes in operating performance and stock market valuations of other companies; and

 

   

other events or factors, including those resulting from war, acts of terrorism, natural disasters or responses to these events.

 

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We derive many of our forward-looking statements from our operating budgets and forecasts, which are based upon many detailed assumptions. While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the impact of known factors, and it is impossible for us to anticipate all factors that could affect our actual results. Important factors that could cause actual results to differ materially from our expectations, or cautionary statements, are disclosed under “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this prospectus. All written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by the cautionary statements in this prospectus as well as other cautionary statements that are made from time to time in our public communications. You should evaluate all forward-looking statements made in this prospectus in the context of these risks and uncertainties.

We caution you that the important factors referenced above may not contain all of the factors that are important to you. In addition, we cannot assure you that we will realize the results or developments we expect or anticipate or, even if substantially realized, that they will result in the consequences or affect us or our operations in the way we expect. The forward-looking statements included in this prospectus are made only as of the date hereof. We undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law.

 

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USE OF PROCEEDS

We estimate that the net proceeds to us from this offering, after deducting underwriting discounts and commissions and estimated offering expenses, will be approximately $             million, assuming the shares are offered at $             per share, the midpoint of the price range set forth on the cover page of this prospectus. If the underwriters’ over-allotment option to purchase additional shares is exercised, we do not expect to receive any additional proceeds. We will not receive any of the proceeds from the shares of common stock being sold by the selling stockholder.

A $1.00 increase or decrease in the assumed initial public offering price of $             per share would increase or decrease the net proceeds we receive from this offering by approximately $             million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same.

We intend to use the net proceeds we receive from this offering to (i) pay a dividend to our parent, Language Line Holdings LLC, which it will use to redeem in whole its series A preferred units, which amounts to approximately $             million, approximately $             million of which is owned by affiliates of ABRY Partners and approximately $             of which is owned by an affiliate of Merrill Lynch, Pierce, Fenner & Smith Incorporated, an underwriter of this offering, and (ii) approximately $             to repay outstanding term loans pursuant to the Citi Loan, approximately $             of which is to pay ABRY Partners a fee for guaranteeing the Citi Loan.

As of September 30, 2009, we had approximately $40.8 million of borrowings outstanding under the Citi Loan. The Citi Loan matures on December 31, 2010 and had an interest rate of 4.75% at September 30, 2009, which includes fees payable to ABRY Partners in exchange for guaranteeing this loan. In addition, there were approximately $179.0 million of series A preferred units outstanding as of September 30, 2009. The series A preferred units accrue a yield of 15% per year compounded quarterly on the sum of any unreturned capital value of the units plus the unpaid yield on such units, provided that the accrual will be 17% per year from and after the date of an event of default until such event of default is cured.

 

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DIVIDEND POLICY

We have not historically declared or paid cash dividends on our common stock. We do not expect to pay dividends on our common stock for the foreseeable future, except for the dividend to be paid to our parent, Language Line Holdings LLC, from a portion of the net proceeds we will receive from this offering. Instead, we anticipate that all of our earnings in the foreseeable future will be used to operate and grow our business and service and repay existing indebtedness. Any future determination to pay dividends to our common stockholders may only occur after Language Line Holdings LLC has redeemed in full its series A preferred units, which it intends to redeem in whole in connection with this offering, and will be at that discretion of our board of directors, subject to compliance with certain contractual restrictions, including under our senior secured credit agreement and agreements for other indebtedness or preferred securities we may incur or issue, which restrict or limit our ability to pay dividends, and will depend upon, among other things, our results of operations, financial condition, capital requirements and other contractual restrictions. See “Description of Certain Indebtedness.”

 

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CAPITALIZATION

The following table sets forth our cash and cash equivalents and our capitalization as of September 30, 2009 on:

 

   

an actual basis;

 

   

a pro forma basis to give effect to the Refinancing; and

 

   

a pro forma as adjusted basis to give effect to the following:

 

   

the Reorganization;

 

   

the sale of              shares of our common stock in this offering by us at an assumed initial public offering price of $             per share, the midpoint of the price range set forth on the cover page of this prospectus, after deducting the underwriting discount and estimated offering expenses payable by us; and

 

   

the application of the net proceeds from this offering as described under “Use of Proceeds.”

You should read the following table in conjunction with the sections titled “Use of Proceeds,” “Selected Consolidated Financial and Other Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and related notes included elsewhere in this prospectus.

 

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

(in thousands)

Cash and cash equivalents

   $ 68,495      $ 23,108      $  
                      

Debt:

      

Senior term loans(2)

     188,362        525,000     

Senior Subordinated Notes(2)

     163,126       
—  
  
 

Discount Notes(2)

     108,993        —       

Citi Loan

     40,755        40,755     

U.K. senior and mezzanine loan(2)

     20,457        —       

Coto senior secured credit agreement(2)

     26,451        —       
                      

Total debt

     548,144        565,755     
                      

Liability classified units:

      

Class C unit liability

     60,354        60,354     

Series A preferred units

     178,954        178,954     
                      

Total liability classified units

     239,308        239,308     
                  

Temporary equity:

      

Coto preferred units(2)

     15,867        —       

Class D units

     23,700        23,700     
                      

Total temporary equity

     39,567        23,700     
                      

Members’/stockholders’ equity (deficit):

      

Class A units

     276,160        276,160     

Common stock,              shares authorized,              shares outstanding pro forma as adjusted

     —          —       

Additional paid in capital(1)

     —          —       

Accumulated other comprehensive loss

     (1,267     (1,267  

Accumulated deficit

     (305,270     (305,270  
                  

Total members’/stockholders’ equity (deficit)(1)

     (30,377     (30,377  
                      

Total capitalization(1)

   $ 796,642      $ 798,386      $  
                      

 

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(1) A $1.00 increase or decrease in the assumed initial public offering price of $             per share, the midpoint of the range set forth on the cover page of this prospectus, would increase or decrease the amount of additional paid-in capital, total members’/stockholders’ equity (deficit) and total capitalization by approximately $             million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discount and estimated offering expenses payable by us.

 

(2) In November 2009, we entered into our senior secured credit agreement. We used a portion of the proceeds from our senior secured credit agreement to payoff in full the Coto preferred units, the U.S. senior loan, the U.K. senior loan, the U.K. mezzanine loan, Coto senior secured loan, the Senior Subordinated Notes and Discount Notes.

 

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DILUTION

Dilution is the amount by which the portion of the offering price paid by the purchasers of the common stock to be sold in this offering exceeds the net tangible book value or deficiency per share of our common stock after the offering. Net tangible book value or deficiency per share of our common stock is determined at any date by subtracting our total liabilities from our total assets less our intangible assets and dividing the difference by the number of shares of common stock deemed to be outstanding at that date.

Our net tangible book value as of September 30, 2009 (after giving effect to the Reorganization) was approximately $             million, or $             per share of common stock. The pro forma net tangible book value of our common stock as of September 30, 2009 after giving effect to the Reorganization and the Refinancing was approximately $             million, or approximately $             per share of common stock, based upon the number of shares of common stock outstanding upon the closing of this offering.

Investors participating in this offering will incur immediate, substantial dilution. After giving effect to:

 

   

the Reorganization and the Refinancing;

 

   

the exchange of all Class C units of Language Line Holdings LLC;

 

   

the sale of common stock by us in this offering at an assumed initial public offering price of $             per share, the mid point of the price range set forth on the cover page of this prospectus after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us; and

 

   

the use of the net proceeds to us from this offering as described in “Use of Proceeds,”

our pro forma as adjusted net tangible book value as of September 30, 2009 would have been approximately $             million, or approximately $             per share of common stock. This represents an immediate increase in the pro forma net tangible book value of $             per share to existing common stockholders, and an immediate dilution of $             per share to investors participating in this offering.

The following table illustrates this dilution on a per share basis:

 

Assumed initial public offering price per share of common stock

      $             

Net tangible book value per share as of September 30, 2009 after giving effect to the Reorganization

     

Pro forma net tangible book value per share as of September 30, 2009 after giving effect to the Reorganization and the Refinancing

   $                

Increase per share attributable to this offering

     
         

Pro forma as adjusted net tangible book value per share after giving effect to the Reorganization, the Refinancing and this offering

     
         

Dilution in pro forma net tangible book value per share to new investors

      $  
         

Each $1.00 increase (decrease) in the assumed initial public offering price of $             per share, the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) our pro forma as adjusted net tangible book value by $             million, or $             per share after giving effect to the Reorganization, the Refinancing and the dilution in net tangible book value per share to investors in this offering by $             per share, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same. The as adjusted information is illustrative only and, following the completion of this offering, will be adjusted based on the actual initial public offering price and other terms of this offering determined at pricing.

 

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The following table summarizes as of                          the differences between our existing stockholders and new investors with respect to the number of shares of our common stock sold in this offering, the total consideration paid and the average price per share paid. The calculations with respect to shares purchased by new investors in this offering reflect an assumed initial public offering price of $             per share, the midpoint of the range set forth on the cover page of this prospectus, before deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us:

 

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

Existing stockholders

        $                   $             

New investors

            
                              

Total

      100   $      100   $  
                              

A $1.00 increase (decrease) in the assumed initial public offering price of $             per share, the mid-point of the price range set forth on the cover page of this prospectus, would increase (decrease) the total consideration paid by investors participating in this offering by         %, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

The tables and calculations above are based on              shares of common stock issued and outstanding as of the closing of this offering and excludes              shares of restricted stock and stock options to purchase              shares of common stock reserved for issuance under our 2010 Omnibus Incentive Plan that we plan to adopt in connection with this offering.

To the extent that any outstanding options are exercised, new investors will experience further dilution.

 

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SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA

The following tables set forth our predecessor’s selected consolidated financial and other data for the periods and as of the dates indicated. The selected consolidated statements of operations data for the years ended December 31, 2006, December 31, 2007 and December 31, 2008 and selected consolidated balance sheet data as of December 31, 2007 and December 31, 2008 are derived from our audited consolidated financial statements included elsewhere in this prospectus. The unaudited consolidated statements of operations data for the periods from January 1, 2004 through June 11, 2004 and June 12, 2004 through December 31, 2004 and for the year ended December 31, 2005 and the unaudited consolidated balance sheet data as of December 31, 2004, December 31, 2005 and December 31, 2006 are derived from our unaudited consolidated financial statements that are not included elsewhere in this prospectus. The selected consolidated statements of operations data for the nine months ended September 30, 2008 and 2009 and the selected consolidated balance sheet data as of September 30, 2009 have been derived from our unaudited condensed consolidated financial statements included elsewhere in this prospectus. The unaudited condensed consolidated financial statements have been prepared on the same basis as our audited consolidated financial statements and, in the opinion of our management, reflect all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of this data. The results for any interim period are not necessarily indicative of the results that may be expected for a full year. Our two principal operating subsidiaries, Language Line Holdings II, Inc. and Language Line Services U.K. Limited, were previously 100.0% owned by Language Line Holdings LLC, our parent. Language Line Holdings LLC, our parent, will contribute its ownership interest in Language Line Holdings II, Inc. and Language Line Services U.K. Limited to us prior to completion of this offering, which will make each of Language Line Holdings II, Inc. and Language Line Services U.K. Limited, a wholly-owned subsidiary of ours. We anticipate this transaction being accounted for as a reorganization of entities under common control, and accordingly, there will be no change in the basis of the underlying assets and liabilities.

 

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You should read this selected consolidated financial data in conjunction with the financial statements and related notes and the information under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere in this prospectus. The historical results set forth below are not necessarily indicative of results of operations to be expected in any future period.

 

    Entity Prior
to the
Predecessor
              Nine Months Ended
September 30,
 
    January 1 to
June 11,

2004
  June 12 to
December 31,
2004
    Year Ended December 31,    
        2005     2006     2007     2008     2008     2009  
      (in thousands, except per unit and per share data)   

Statement of Operations Data:

   

Revenues

  $ 64,692   $ 80,284      $ 144,878      $ 185,340      $ 202,924      $ 278,174      $ 204,580      $ 227,474   
                                                             

Cost of revenues (exclusive of items shown separately below)

    21,512     25,973        49,275        64,911        71,029        101,469        75,352        79,118   

Selling, general and administrative

    20,271     12,857        24,323        35,417        40,316        65,714        40,208        91,885   

Depreciation and amortization expense

    1,735     21,709        39,217        38,016        34,398        40,700        29,120        27,527   

Impairment of goodwill

    —       —          —          5,293        1,342        —          —          —     
                                                             

Total operating costs and expenses

    43,518     60,539        112,815        143,637        147,085        207,883        144,680        198,530   
                                                             

Income from operations

    21,174     19,745        32,063        41,703        55,839        70,291        59,900        28,944   

Interest expense

    5,982     34,572        69,918        79,377        76,612        76,783        58,781        60,433   

Interest and other income, net

    —       287        285        1,591        1,514        537        780        300   
                                                             

Net income (loss) before income taxes

    15,192     (14,540     (37,570     (36,083     (19,259     (5,955     1,899        (31,189

Income tax (benefit) expense

    5,968     (1,614     (9,273     (2,517     404        8,615        6,461        11,525   
                                                             

Net income (loss) before noncontrolling interest

    9,224     (12,926     (28,297     (33,566     (19,663     (14,570     (4,562     (42,714

Noncontrolling interest (preferred stock dividends of subsidiary)

    —       —          —          —          —          1,829        1,336        1,518   
                                                             

Net income (loss)

  $ 9,224   $ (12,926   $ (28,297   $ (33,566   $ (19,663   $ (16,399   $ (5,898   $ (44,232
                                                             

Net loss per Class A unit, basic and diluted

        $ (0.23   $ (0.25   $ (0.14   $ (0.11   $ (0.04   $ (0.31

Weighted average number of Class A units, basic and diluted

          120,000        132,364        139,707        139,707        139,707        139,707   

Net loss per Class D unit, basic and diluted

        $ (0.16   $ (0.21   $ (0.12   $ (0.10   $ (0.04   $ (0.26

Weighted average number of Class D units, basic and diluted

          5,091        5,091        5,091        5,091        5,091        5,091   

Pro forma net income (loss) per
share of common stock basic and diluted (unaudited)(1)

              $          $     

Pro forma weighted average shares of common stock outstanding, basic and diluted(1)

                 
 

Other Financial Data:

                 

Adjusted EBITDA(2)

  $ 32,757   $ 41,870      $ 70,968      $ 85,807      $ 91,908      $ 121,755      $ 89,092      $ 106,139   
 

Other Non-Financial Data:

                 

Billed minute growth

            24.8     17.5     42.8     39.8     17.4

ARPM decline

            (1.3 %)      (7.1 %)      (7.3 %)      (7.0 %)      (4.7 %) 

 

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    As of December 31,   As of
September 30,
 
    2004   2005   2006   2007   2008   2009  
    (in thousands)  

Balance Sheet Data:

           

Cash and cash equivalents

  $ 12,167   $ 15,774   $ 24,627   $ 18,587   $ 24,577   $ 68,495   

Working capital

    610     11,824     23,555     19,433     39,027     101,353   

Total assets

    914,338     879,092     913,722     879,079     949,146     977,212   

Series A preferred units

    88,986     105,300     119,357    
138,311
   
160,274
    178,954   

Total debt(3)

    530,481     516,603     541,603     515,819     557,796     548,144   

Total temporary equity

    5,100     4,100     4,200    
6,100
   
25,529
    39,567   

Total members’ equity (deficit)

    107,185     82,928     70,078     49,535     26,853     (30,377

 

 

(1) For a description of the pro forma adjustments used to calculate pro forma net loss per share of common stock for the year ended December 31, 2008 and for the nine months ended September 30, 2009, refer to Note 1 “Basic and diluted net loss per unit and pro forma earnings per share” to the notes to the consolidated financial statements included elsewhere in this prospectus.
(2) We define Adjusted EBITDA as net income (loss) before noncontrolling interest, interest expense and other income, net, income tax (benefit) expense, depreciation and amortization, impairment of goodwill, equity-based compensation expense and merger related expenses. We use Adjusted EBITDA to facilitate a comparison of our operating performance on a consistent basis from period to period that, when viewed in combination with our results under U.S. generally accepted accounting principles, which we refer to as GAAP, and the following reconciliation, we believe provides a more complete understanding of factors and trends affecting our business than GAAP measures alone. We believe Adjusted EBITDA assists our board of directors, management and investors in comparing our operating performance on a consistent basis because it removes the impact of our capital structure (such as interest expense and other income, net, and noncontrolling interest), asset base (such as depreciation and amortization) and items outside the control of our management team (such as income taxes), as well as other items which are non-cash (such as equity-based compensation expense and impairment of goodwill) and non-recurring items (such as merger related expenses), from our operations. Despite the importance of this measure in analyzing our business and evaluating our operating performance, Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation, or as a substitute for analysis of our results as reported under GAAP; nor is Adjusted EBITDA intended to be a measure of liquidity or free cash flow for our discretionary use. Some of the limitations of Adjusted EBITDA are:

 

   

Adjusted EBITDA does not reflect all of our cash expenditures or future requirements for capital expenditures or contractual commitments;

 

   

Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;

 

   

Adjusted EBITDA does not reflect the interest expense or the cash requirements to service interest or principal payments under our senior secured credit agreement;

 

   

Adjusted EBITDA does not reflect income tax payments we are required to make;

 

   

Although equity-based compensation expense is a non-cash charge, Adjusted EBITDA does not reflect the cash requirements for vested units we elected to repurchase upon the cessation of employment during the years ended December 31, 2006, December 31, 2007, December 31, 2008 and nine months ended September 30, 2008 and September 30, 2009 totaling $42,000, $15,000, $26,000, $1,000 and $0, respectively; and

 

   

Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized often will have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacements.

To properly and prudently evaluate our business, we encourage you to review the financial statements included elsewhere in this prospectus and not rely on any single financial measure to evaluate our business. We also strongly urge you to review the reconciliation of net loss before noncontrolling interest to Adjusted EBITDA. Adjusted EBITDA, as presented in this prospectus, may differ from and may not be comparable to similarly titled measures used by other companies because Adjusted EBITDA is not a measure of financial performance under GAAP and is susceptible to varying calculations. The following table sets forth a reconciliation of net income (loss) before noncontrolling interest, a comparable GAAP-based measure, to Adjusted EBITDA. All of the items included in the reconciliation from net income (loss) before noncontrolling interest to Adjusted EBITDA are either (i) non-cash items (such as depreciation and amortization, equity-based compensation expense and impairment of goodwill), (ii) items that management does not consider in assessing our on going operating performance (such as income taxes and interest expense and other income, net) or (iii) non-recurring items (such as merger related expenses). In the case of the non-cash items, management believes that investors can better assess our comparative operating performance because the measures without such items are less susceptible to variances in actual performance resulting from depreciation, amortization and other non-cash charges and more reflective of other factors that affect operating performance. In the case of the other items, management believes that investors can better assess our operating performance if the measures are presented without these items because their financial impact does not reflect ongoing operating performance.

The following is a reconciliation of net loss before noncontrolling interest to Adjusted EBITDA for the periods presented.

 

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     January 1
to June 11,

2004
   June 12 to
December 31,
2004
    Year Ended December 31,     Nine Months
Ended
September 30,
 
          2005     2006     2007     2008     2008     2009  
    

(in thousands)

 

Net income (loss) before noncontrolling interest

   $ 9,224    $ (12,926   $ (28,297   $ (33,566   $ (19,663   $ (14,570   $ (4,562   $ (42,714

Interest expense and other income, net

     5,982      34,285        69,633        77,786        75,098        76,246        58,001        60,133   

Income tax (benefit) expense

     5,968      (1,614     (9,273     (2,517     404        8,615        6,461        11,525   

Depreciation and amortization

     1,735      21,709        39,217        38,016        34,398        40,700        29,120        27,527   

Impairment of goodwill

     —        —          —          5,293        1,342                        

Equity-based compensation

     —        312        (312            329        10,398        72        49,668   

Merger related expenses

     9,848      104        —          795               366         —          
                                                               

Adjusted EBITDA

   $ 32,757    $ 41,870      $ 70,968      $ 85,807      $ 91,908      $ 121,755      $ 89,092      $ 106,139   
                                                               

 

(3) Total debt at December 31, 2008 includes long-term obligations, net of current portion of $533.4 million and current portion of long-term obligations of $18.6 million, and the related party loan of $5.8 million. Total debt at September 30, 2009 includes long-term obligations, net of current portion of $537.9 million and current portion of long-term obligations of $3.9 million, and the related party loan of $6.3 million.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion together with “Selected Consolidated Financial and Other Data,” and the historical financial statements and related notes included elsewhere in this prospectus. This report contains forward-looking statements that are based upon current expectations. We sometimes identify forward-looking statements with such words as “may”, “will”, “expect”, “anticipate”, “estimate”, “seek”, “intend”, “believe” or similar words concerning future events. The forward-looking statements contained herein, include, without limitation, statements concerning future revenue sources and concentration, selling and marketing expenses, general and administrative expenses, capital resources, average revenue per billed minute, billed minutes, additional financings or borrowings and additional losses and are subject to risks and uncertainties including, but not limited to, those discussed below and elsewhere in this prospectus that could cause actual results to differ materially from the results contemplated by these forward-looking statements. We also urge you to carefully review the risk factors set forth herein. Our actual results may differ materially from those contained in or implied by any forward-looking statements.

Business Overview

We believe we are a global leader in providing on-demand language interpretation services. Supporting over 170 languages, we provide our interpretation services to businesses, government and other public sector clients primarily via telephone interpretation. We also provide video and in-person interpretation services. Within seconds of receiving an inbound call, 24 hours a day and seven days a week, we provide our clients with an over-the-phone interpreter with the appropriate language and topic-specific skill set who can help facilitate a conversation between our client and our client’s LEP customers. In 2008, we helped more than 35 million people communicate across linguistic barriers by providing over-the-phone interpretation, which we refer to as OPI, services to our clients. We focus on high-value interactions that require immediate availability of our multi-lingual resources, including emergency rooms or 911 calls, or flexible, customized interpretation services to businesses, such as mortgage or insurance claims processing. Our interpretation services enable our clients to increase their revenue and deliver mission-critical services to their customers, thereby improving their customer loyalty. We also help clients comply with applicable laws and regulations by providing in-language support to our clients’ growing population of current and prospective LEP customers in the growing and largely underserved LEP marketplace.

We offer a wide range of language interpretation services across a diverse group of industry verticals, including healthcare, government, financial services, insurance, telecommunications and utilities. We have over 10,000 clients, including approximately 60% of the Fortune 500 companies and all of the top 20 emergency 911 response centers in the U.S. For the nine months ended September 30, 2009, our largest client represented less than 5% of revenue and our largest vertical market, healthcare, represented less than 30% of revenue. Our diverse industry focus and delivery of revenue-enhancing and mission-critical services have driven increased demand and interpreter minutes growth even in challenging economic times. For example, throughout the current recessionary environment, we have provided interpretation services for calls related to mortgage foreclosure, helping our clients’ customers understand terms or negotiate payments. These applications complement our financial services clients’ traditional use of our services, which include resolving credit card problems, increasing collections, opening new accounts, providing home buyer education and producing credit reports. Our insurance industry clients use our services to process claims, improve claim investigations, evaluate questionable claims, enhance help desk service and explain benefits. We assist healthcare clients by facilitating emergency room and critical care situations, accelerating triage and medical advice, simplifying patient admission processes, improving billing and increasing collections. We also support emergency 911 services, disaster relief, citizen support 311 services and other services for governments and municipalities.

We leverage our industry-leading operating scale, interpreter workforce and proprietary technology to deliver to our clients a high quality, cost-effective, on-demand alternative to staffing in-house multilingual

 

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employees or utilizing FFI services. Our clients rely on the quality, accuracy and professionalism of our highly skilled interpreters who facilitated over 21 million calls in 2008, helping people communicate across linguistic barriers. Our low-cost delivery model and focus on operating efficiency has enabled us to be competitive in the pricing of our services, while maintaining strong profitability levels. Given the strong secular trends for our services and the uniquely low capital requirements of our business model, we have consistently grown our business and delivered strong free cash flow. We have grown our revenue to $278.2 million in 2008 from $185.3 million in 2006, representing a CAGR of 22.5%. Our income from operations for 2008 was $70.3 million, and from 2006 to 2008 our ratio of annual capital expenditure to revenue has averaged 1.7%.

Our Corporate History

On June 11, 2004, pursuant to the terms of the Agreement and Plan of Merger dated April 14, 2004, by and among Language Line Holdings, Inc., a Delaware corporation and a predecessor company formed in 1999, Language Line Acquisition, Inc., an indirect wholly-owned subsidiary of Language Line Holdings LLC and our parent, and Language Line, Inc., an indirect subsidiary of ABRY Partners. Language Line, Inc. acquired control of Language Line Holdings, Inc. After the merger, Language Line Acquisition, Inc. was renamed Language Line Holdings, Inc., which is a subsidiary of Language Line Holdings LLC.

LL Services Inc. was incorporated in Delaware in November 2009. We are a newly formed Delaware corporation that has not, to date, conducted any activities other than those incident to our formation and the preparation of this registration statement. Prior to completion of this offering, we will be renamed Language Line Services Holdings, Inc. We are a wholly-owned subsidiary of Language Line Holdings LLC. Prior to completion of this offering, Language Line Holdings LLC, our parent, will contribute all of its ownership interest in Language Line Holdings II, Inc., our principal U.S. operating subsidiary, and Language Line Services U.K. Limited, our principal foreign operating subsidiary, to us, which will make each of Language Line Holdings II, Inc. and Language Line Services U.K. Limited wholly-owned subsidiaries of ours. In exchange for that contribution, we will issue              shares of our common stock to Language Line Holdings LLC. At September 30, 2009, funds affiliated with ABRY Partners and our management and directors had ownership interests in Language Line Holdings LLC of approximately       % and       %, respectively. Language Line Holdings LLC will dissolve after the Exchange.

Our Business Segments

We conduct our operations in three business segments: U.S. Interpretation Services, Language Line U.K. and Ancillary Services.

Our U.S. Interpretation segment predominantly provides OPI services to business, government and other public service clients primarily via telephone interpretation in over 170 languages. Within seconds of receiving an inbound call, 24 hours a day and seven days a week, we provide our clients with an over-the-phone interpreter with the appropriate language and topic-specific skill set who can help facilitate a conversation between our client and our client’s LEP customers.

Our Language Line U.K. segment provides OPI services, FFI and document translation services in the U.K. Our FFI services consist of on-site interpretations, primarily to healthcare, police, emergency and government clients, as well as commercial work.

We provide localization of client documents and materials as well as in-person translation resources to a variety of professional fields through our Ancillary Services operating segment. We specialize in the localization of technical documentation, software, on-line applications and all types of multi-media output, training materials,

 

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e-learning solutions and business systems. We believe that our ability to complete complex, multi-language projects on time with superior quality sets us apart from our competition.

Internal Controls Over Financial Reporting

In connection with the preparation of our financial statements for the year ended December 31, 2008, we have identified certain matters involving our internal control over financial reporting that constitute a material weakness under standards established by the Public Company Accounting Oversight Board, which we refer to as the PCAOB.

The PCAOB defines a material weakness as a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of a company’s annual or interim financial statements will not be prevented or detected on a timely basis. A significant deficiency is defined as a deficiency, or a combination of deficiencies, in internal control over financial reporting that is less severe than a material weakness, yet important enough to merit attention by those responsible for oversight of a company’s financial reporting. A deficiency in internal control over financial reporting exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect misstatements on a timely basis.

We identified a material weakness where we did not have effective controls over the accounting for business combinations to ensure that we completely and accurately accounted for the acquisition of the Coto Global Solutions business. In order to remediate the material weakness identified, we have taken the following steps:

 

   

We recruited additional personnel trained in financial reporting under accounting principles generally accepted in the United States; and

 

   

We implemented enhanced training for our finance and accounting personnel to familiarize them with our accounting policies.

Financial Operations Overview

Revenue

Our revenues are primarily derived from OPI and also includes FFI, document translation and localization. Our OPI revenue is based on the volume of minutes for which we provide our interpretation services and the rate per minute which we bill. Usage for the majority of clients is billed in one-minute increments. Price per billed minute is typically based on the language requested and time of day, subject to discounts related to billed minute volume pricing arrangements with certain clients. Billing rates for these services also vary depending on participant geographic location and type of service. We also charge clients for a number of complementary services that allow us to provide a full service language solution. Included among those services are FFI, document translation, video interpretation services and American Sign Language.

FFI revenues are derived based on actual time for the interpretation and negotiated rates per hour, fractions thereof or minimums, if applicable.

Revenues from document translation of written media and localization are generally recognized at the time the finished product is delivered to the client.

Trends toward outsourcing OPI services.    Our business depends on the continued need for outsourced OPI services as driven by general economic and public policy factors. There is a possibility that these trends may not continue, as businesses and organizations may either elect to perform OPI services in-house or discontinue OPI

 

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services, both of which would have a negative effect on our revenues. Additionally, Spanish-English interpretation services accounted for the majority of our total OPI billed minutes in 2008 and the first nine months of 2009. A decision by our clients to conduct an increasing amount of OPI services in-house, especially for the rapidly growing Spanish-speaking community, could have an adverse effect on our business, financial condition and results of operations.

Competition.    Our interpretation services are subject to price competition. Our existing contracts with our clients generally are non-exclusive, terminable after a period of notice and have no requirement for a minimum amount of billed minutes. We generally obtain our clients through a competitive bidding process, usually by responding to a request for proposal, in which a potential client may negotiate among multiple interpretation service providers. In addition, the cost incurred by our clients to switch or use multiple interpretation service providers is minimal. From time to time, we may need to reduce our prices or offer other concessions for some of our services to respond to competitive and client pressures and to maintain market share. These concessions include volume discounts, waiving fees and reduction in the prices we charge for our services. Such pressures also may restrict our ability to offset our costs to provide interpretation services. Any reduction in prices as a result of competitive pressures will negatively impact ARPM and our revenues.

Our ARPM has declined over the past five years and the first nine months of 2009, and is anticipated to continue to decline in the future. We have undertaken a strategy to manage pricing per billed minute as a strategic tool to encourage our clients to purchase more billed minutes and to optimize our market share. This is consistent with industry trends, which are expected to continue for the foreseeable future. If we are unable to attract sufficient volume to offset lower per minute charges, or if average revenue per billed minute decreases beyond our expectations, our revenues will be negatively impacted.

Customer demand and economic stability.    Our success depends in part upon continued demand for our services from our clients within the industries we serve. A significant downturn in the insurance, healthcare, financial services or government industries, which together accounted for a majority of our revenues in 2008 and the first nine months of 2009 or a trend in any of these industries to reduce or eliminate their use of OPI services may negatively impact our revenues.

Demand for our services is sensitive to changes in the level of economic activity, and our business may suffer during an economic downturn or recession. Our clients’ customers are sensitive to changes in economic conditions, and a reduction in demand for our clients’ products or services may result in a decrease in demand for our services. Slowing economic activity may also result in our clients canceling or delaying projects or a reduction of the scope or breadth of services, including a reduction in the number of languages in which our clients provide products or services to their clients. If demand for our clients’ products or services deceases, the demand for our services may decrease, which will adversely affect our revenues.

More generally, the current unfavorable changes in global economic conditions, including recession, inflation, fluctuating energy costs, geopolitical issues, the availability and cost of credit, the U.S. mortgage market and a declining real estate market in the U.S., have contributed to increased volatility and diminished expectations for the global economy and expectations of slower global economic growth going forward. These factors, combined with volatile oil prices, declining business and consumer confidence and increased unemployment, have precipitated an economic slowdown. If the economic climate in the U.S. or abroad does not improve from its current condition or further deteriorates, our revenues may be negatively impacted. More specifically, our clients or potential clients may reduce their demand for our services, which would adversely impact our revenues.

Cost of Revenues

Cost of revenues are (i) labor costs associated with our interpreters and call agents, (ii) telecommunication expenses for calls related to providing service for our clients, (iii) FFI service costs and (iv) vendors providing translation of written media on our behalf.

 

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Selling, General and Administrative

The principal component of our selling, general and administrative expense, which we refer to as SG&A, is salary and benefits for our sales force, customer service staff, technology and development personnel, senior management and other personnel involved in business support functions. SG&A also includes certain fixed telephone costs as well as other expenses that support the ongoing operation of our business, such as facilities costs, certain service contract costs, equipment depreciation and maintenance, and amortization of finite-lived intangible assets. We expect our SG&A expense to increase in future periods as we continue to invest in corporate infrastructure and incur additional expenses associated with being a public company, including increased legal and accounting costs, investor relations, higher insurance premiums and compliance costs in connection with Section 404 of the Sarbanes-Oxley Act of 2002.

Depreciation and Amortization Expense

Depreciation expense consists primarily of depreciation of property and equipment. Our amortization expense consists of the amortization of all intangible assets, primarily resulting from acquisitions.

Impairment of Goodwill

We hold significant amounts of goodwill and intangible assets. We evaluate these assets for impairment as further discussed in “Critical Accounting Policies and Estimates.” These evaluations have, in the past, resulted in impairment charges for certain of these assets based on the specific facts and circumstances surrounding those assets. Based on a continuation of the current economic conditions or other factors, we may be required to take additional impairment charges to reflect further declines in our asset and/or investment values.

Interest Expense

Interest expense consists of interest expense related to our long-term debt, yield on the series A preferred units, adjustments to the fair value pursuant to the Citi Loan capital call agreement, as described further in Note 7, Debt Obligations, to the notes to the consolidated financial statements included elsewhere in this prospectus and the ABRY Partners guarantee fee pursuant to the Citi Loan. We expect interest expense to decrease in future periods as we anticipate paying off the entire balance of the outstanding series A preferred units as well as the Citi Loan with proceeds associated with our initial public offering.

Income Tax Expense

Income tax expense consists of federal and state income taxes in the United States and various foreign jurisdictions. Due to our redemption of our Discount Notes, we expect a lower effective tax rate in the fourth quarter of 2009 as we will be able to claim a deduction for a portion of the accredited value of the notes from prior periods.

Effect of Foreign Currency Exchange Rate Fluctuations

A portion of our operations are conducted in functional currencies other than in the U.S. dollar, our reporting currency. As a result, we are required to translate those results from the functional currency into U.S. dollars at the average exchange rate during the periods reported. When comparing our results of operations between periods, there may be material portions of the changes in our revenues or expense that are derived from fluctuations in exchange rates experienced between those periods.

 

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Key Drivers Affecting Our Results of Operations

Factors Related to Our Indebtedness.    In connection with our acquisition by ABRY Partners in 2004, we incurred a significant amount of indebtedness. Accordingly, we have incurred significant interest expense over the period since the acquisition. In November 2009, we refinanced a large portion of our then existing balance sheet debt with a $575.0 million senior secured financing, consisting of the $525.0 million six-year Term Loan Facility and the $50.0 million five-year Revolving Credit Facility. Proceeds were used to refinance our existing senior secured credit facilities, mezzanine facility, Coto preferred units, Senior Subordinated Notes and the Discount Notes. While recent economic conditions have generally resulted in a tightening of credit availability, the recent refinancing helped improve our liquidity profile, particularly when combined with the anticipated reduction of our outstanding indebtedness using a portion of the proceeds of this offering, and also significantly reduced our interest expense.

Acquisition Activities.    Identifying and successfully integrating acquisitions of complementary service providers has been a component of our growth strategy. We will continue to seek opportunities to expand our capabilities across industries and service offerings. We expect this will occur through a combination of organic growth, as well as strategic partnerships, alliances and acquisitions to expand into new services offerings as well as into new industries. Since 2005, we have invested approximately $129 million in strategic acquisitions. We believe there are acquisition candidates that will enable us to expand our capabilities and markets and intend to continue to evaluate acquisitions in a disciplined manner and pursue those that provide attractive opportunities to enhance our growth and profitability.

Critical Accounting Policies and Estimates

The preparation of our consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts. The estimates and assumptions are evaluated on a regular basis and are based on historical experience and various other factors that we believe are reasonable. Estimates and assumptions include, but are not limited to, revenue recognition, allowance for doubtful accounts, goodwill and other intangible assets, equity-based compensation, income taxes and claims and legal proceedings.

We believe the following represent our more critical estimates and assumptions used in the preparation of the consolidated financial statements. See Note 1 to the notes to the consolidated financial statements included elsewhere in this prospectus.

Revenue Recognition

We earn revenue through three primary sources: a) OPI services, b) FFI and c) translation of written media. We recognize revenue when all of the following four revenue recognition criteria have been met:

 

   

persuasive evidence of an arrangement exists;

 

   

the services have been performed;

 

   

the price is fixed or determinable; and

 

   

collection is reasonably assured.

Revenue from OPI services is recognized as interpretation services are performed based on actual time that is tracked for each call at the negotiated rate per minute for the customer. FFI revenues are derived based on actual time for the interpretation and negotiated rates per hour, fractions thereof or minimums, if applicable, and are recognized when the service is performed. Our translation services are generally performed under written contracts, and revenue is generally recognized at the time the finished product is delivered to the client. In the

 

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event cash is received from customers prior to our recognition of the underlying revenue on the contract, we record this amount as deferred revenue, which is included as an accrued liability in the accompanying consolidated balance sheet contained in this prospectus.

Allowance for Doubtful Accounts

We closely monitor our cash collection trends and the aging of accounts receivable. Provisions for doubtful accounts are primarily estimated based on cash collection analyses and accounts receivable aging reports. In evaluating the adequacy of allowances for doubtful accounts, we assess a number of factors, including historical collection experience, customer concentrations, past due accounts and current economic trends. Accounts receivable are written off after collection efforts have been pursued in accordance with our policies and procedures. While our debt losses have historically been within our expectations and the allowance established, we might not continue to experience the same loss rates that we have in the past. If the financial condition of individual clients or the general worldwide economy were to vary materially from the estimates and assumptions made by us, the allowance may require adjustment in the future. We evaluate the adequacy of the allowance on a regular basis, modifying, as necessary, its assumptions, updating its record of historical experience and adjusting reserves as appropriate.

Goodwill and Other Intangible Assets

Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired in a business combination. Intangible assets resulting from the acquisitions of entities accounted for using the purchase method of accounting are estimated by management based on the fair value of net assets received. Identifiable intangible assets are comprised of customer relationships, trademarks and trade names, and other intangible assets. Identifiable intangible assets are being amortized over the period of estimated benefit using principally the straight-line method and estimated useful lives ranging from one to twenty years. Goodwill is not subject to amortization, but is subject to at least an annual assessment for impairment, applying a fair-value based test.

We evaluate goodwill, at a minimum, on an annual basis and whenever events and changes in circumstances suggest that the carrying amount may not be recoverable. Goodwill is allocated to various reporting units, which are generally an operating segment. Following the acquisition of Coto, we have five reporting units, and goodwill has been allocated to three of the reporting units. The goodwill arising from the acquisition of Coto is reported in the U.S. Interpretation Services reporting segment. The fair values of the reporting units are estimated using a combination of the income or discounted cash flows approach and the market approach, which utilize comparable companies’ data. If the carrying amount of the reporting unit exceeds its fair value, goodwill is considered impaired, and a second step is performed to measure the amount of impairments loss, if any. Based on our annual impairment test in 2006 and 2007, we concluded that the carrying amount of our Language Line U.K. reporting unit exceeded its fair value and recorded an impairment charge of $5.3 million and $1.3 million during the years ended December 31, 2006 and 2007, respectively. The impairment charge was determined by comparing the carrying value of goodwill in our Language Line U.K. reporting unit with the implied fair value of the goodwill. See Note 4, Goodwill, to the notes to consolidated financial statements included elsewhere in this prospectus. There were no events or circumstances from December 31, 2007 through December 31, 2008 and September 30, 2009 (unaudited) that would impact this assessment.

We determined the fair value of the reporting units based on a weighting of market and income approaches. Under the market approach, we estimated the fair value based on market multiples of EBITDA. Under the income approach, we measured fair value of the reporting unit based on a projected cash flow method using a discount rate determined by our management which is commensurate with the risk inherent in our current business model. Our discounted cash flow projections were based on our annual financial forecasts developed

 

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internally by management for use in managing our business. Given the current economic environment and the uncertainties regarding the impact on our business, there can be no assurance that the estimates and assumptions made for purposes of our goodwill impairment testing at December 31, 2008 will prove to be accurate predictions of the future. If our assumptions regarding forecasted revenues or gross margin rates are not achieved, we may be required to record goodwill impairment charges in future periods, whether in connection with the next annual impairment testing or prior to that if any change constitutes a triggering event outside of the period when the annual goodwill impairment test is performed. It is not possible at this time to determine if any such future impairment charge would result or, if it does, whether such charge would be material. We believe that the assumptions and rates used in our impairment test are reasonable. However, they are judgmental, and variations in any of the assumptions or rates could result in materially different calculations of impairment amounts.

Based on our valuation results, we determined that the fair value of our reporting units continued to exceed their carrying value. Therefore, management determined that no goodwill impairment charge was required as of December 31, 2008. We have determined that a 10% change in our cash flow assumptions or a marginal change in our discount rate as of the date of the most recent goodwill impairment test would not have changed the outcome of the test.

We amortize other intangible assets over their estimated useful lives. We record an impairment charge on these assets if we determine that their carrying value may not be recoverable. The carrying value is not recoverable if it exceeds the undiscounted cash flows resulting from the use of the asset and its eventual disposition. Our estimates of future cash flows attributable to our other intangible assets require significant judgment based on our historical and anticipated results and are subject to many factors. We assess the impairment of identifiable intangibles and long-lived assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable or that the life of the asset may need to be revised. Factors we consider important which could trigger an impairment review include the following:

 

   

significant negative industry or economic trends;

 

   

significant loss of clients; and

 

   

significant changes in the manner of our use of the acquired assets or the strategy for our overall business.

When we determine that the carrying value of intangibles or other long-lived assets may not be recoverable based upon the existence of one or more of the above indicators of impairment, we measure the potential impairment based on a projected discounted cash flow method using a discount rate determined by our management to be commensurate with the risk inherent in our current business model. An impairment loss is recognized only if the carrying amount of the intangible asset or other long-lived asset is not recoverable and exceeds its fair value. Different assumptions and judgments could materially affect the calculation of the fair value of our other intangible assets and other long-lived assets.

Equity-Based Compensation

Language Line Holdings LLC has an equity-based compensation plan, see Note 1, Organization and Summary of Significant Accounting Policies and Note 10, Equity-Based Compensation, to the notes to consolidated financial statements included elsewhere in this prospectus for a complete discussion of its equity-based compensation.

These equity-based awards are accounted for under the provisions of SFAS 123(R), Share-Based Payment. Under SFAS 123(R), stock-based compensation expense for employees is measured at the grant date, based on the calculated fair value of the award and recognized as an expense over the requisite employee service period (generally the vesting period of the grant).

 

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Language Line Holdings LLC, our parent, is authorized to issue an unlimited number of Class C units. Under the Class C incentive unit agreements, officers and employees received grants of Class C units. The Class C units are classified as liability awards (as the employee does not share the risks of stock ownership) because Language Line Holdings LLC has the option to repurchase vested shares upon the cessation of employment and has historically exercised this option. The Class C units liability was measured at fair value at the end of each reporting period. Language Line Holdings LLC has determined the fair value of the Class C units using the probability-weighted expected return method. Under this method, the fair value of an enterprise’s common stock is estimated from an analysis of the future values for such company assuming various possible future liquidity events. Language Line Holdings LLC has recognized compensation expense for only the portion of units that were expected to vest, rather than recording forfeitures when they occurred. If the actual number of forfeitures differed from these estimates, additional adjustments to compensation expense would have been required in future periods.

Language Line Holdings LLC has determined the value of each of the Class C units as of December 31, 2008, December 31, 2007 and December 31, 2006. Each valuation was prepared in accordance with the methodologies prescribed by the American Institute of Certified Accountants, which we refer to as AICPA, Practice Aid, Valuation of Privately-Held-Company, Equity Securities Issued as Compensation. In accordance with the AICPA guidance, three equity allocation methods were considered being (i) the Probability-Weighted Expected Return Method, which we refer to as PWERM, (ii) the Option-Pricing Method and (iii) the Current-Value Method. The PWERM methodology was selected and considered the most appropriate given the following: (a) the probability that our future liquidity event was determined with reasonable certainty as of the valuation dates by management and (b) the complex capital structure, consisting of three common units (Class A units, Class C units and Class D units) and preferred units (series A preferred units). Under the PWERM methodology, the equity was estimated from an analysis of future values assuming various possible future liquidity events.

Under the PWERM methodology, the fair value of the equity is based upon an analysis of the future values assuming various possible liquidity events. The enterprise values concluded in the PWERM analysis were based on the application of the Market Approach, specifically the Guideline Company Method and Similar Transaction Method. This approach provided future pre-money value indications based on valuation multiples calculated from the operating data of guideline companies and similar transactions in the business services industry. A range of possible future values was estimated based on two possible liquidity events: (i) an initial public offering and (ii) sale / merger. Staying private was not considered an option and chances of dissolutions seemed remote, and, therefore, were not considered. In addition to the Market Approach, the Income Approach was applied, specifically the Discounted Cash Flow Method, to verify the reasonableness of the value indications under the Market Approach.

Once management determined the enterprise value for each scenario, the enterprise value was allocated to the various unit holder classes based upon the rights afforded each class with the assumption that each class of unit holder will seek to maximize its value. The expected unit value under each class, including the Class C units, was then discounted to present value as of the valuation date using an appropriate discount rate. Probabilities were then assigned to each of the possible outcomes and the probability-weighted value of each class of equity was then calculated.

For the Class C units, an additional step in the valuation process involved applying discounts to reflect the lack of marketability inherent in the ownership of the Class C units. The level of discount was impacted by numerous factors, including restrictions on the transferability of the units, the estimated term before those restrictions would lapse and the estimated holding period of the units, which is impacted by the time period(s) from the measurement date to when a liquidity event might take place.

 

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The following discussion is a summary of the significant drivers that were utilized in estimation of the Class C units’ fair value based on the PWERM analysis for the relevant dates:

 

   

Valuation at December 31, 2006 – The Class C1, C2 and C3 units’ fair value estimate as of December 31, 2006 remained constant at $0.00 per unit, The Class C4, C5 and C6 units’ fair value estimate as of December 31, 2006 remained constant at $0.00 per unit. Management utilized an IPO EBITDA multiple range of 7.25—8.25 based on market value multiples for comparable publicly traded companies. Management utilized a sale/merger EBITDA multiple range of 8.00—8.75 based on similar transactions. Management assumed a 30% probability of an IPO, a 70% probability of a sale/merger and a liquidation date of December 31, 2009. A 30% marketability discount was assumed.

 

   

Valuation at December 31, 2007 – The Class C1, C2 and C3 units’ fair value estimate as of December 31, 2007 increased $0.02 to $0.02 per unit from the prior valuation date. The Class C4, C5 and C6 units’ fair value estimate as of December 31, 2007 increased $0.03 to $0.03 per unit from the prior valuation date. Management utilized both a higher IPO EBITDA multiple range of 7.75—8.50, due to an increase in market multiples for comparable public companies and similar transactions, and a higher sale/merger EBITDA multiple range of 8.25—9.00, due to higher multiples on similar transactions. The forecasted EBITDA utilized increased 12% from the prior valuation date due to a more favorable performance by the Company. Management continued to assume a 30% probability of an IPO, a 70% probability of a sale/merger and a liquidation date of December 31, 2009. Management lowered its assumed marketability discount from the prior valuation to 20% due to a reduction in the time to the assumed liquidation date.

 

   

Valuation at December 31, 2008 – The Class C1, C2 and C3 units’ fair value estimate as of December 31, 2008 increased to $0.54 per unit, or 2600% from the prior valuation date. The Class C4, C5 and C6 units’ fair value estimate as of December 31, 2008 increased to $0.62 per unit, or 1967% from the prior valuation date. Management utilized a lower IPO EBITDA multiple range of 7.50—8.00, and a lower sale/merger EBITDA multiple range of 8.00—8.50, both due to a decrease in market multiples for comparable companies and similar transactions. The forecasted EBITDA utilized increased 23% from the prior valuation date due to the inclusion of Coto Global Solutions, LLC which was acquired by the Company in 2008 combined with a more favorable performance by the Company. Management continued to assume a 30% probability of an IPO and a 70% probability of a sale/merger and a liquidation date of December 31, 2009. Management continued to assume a 20% marketability discount. The increase in the Class C unit fair value from the prior valuation date is driven by (i) an increase in the Company’s enterprise value which was primarily due to the 23% increase in the forecasted EBITDA utilized from the prior valuation date and (ii) a 21% increase in funds available to equity holders as a result of the higher enterprise value resulting in more funds available to participatory units such as the Class C units, after the required capital and yields for the Series A preferred units, Coto preferred units and Class A units were distributed.

 

   

Valuation at September 30, 2009 – The Class C1, C2 and C3 units’ fair value estimate as of September 30, 2009 increased to $2.72 per unit, or 403% from the prior valuation date. The Class C4, C5 and C6 units’ fair value estimate as of September 30, 2009 increased to $2.84 per unit, or 358% from the prior valuation date. Management utilized a higher IPO EBITDA multiple range of 10.50—11.00 and a higher sale/merger EBITDA multiple range of 9.50—10.00, both due to an increase in market multiples for comparable companies and similar transactions. The forecasted EBITDA utilized increased 10.6% from the prior valuation date. Management utilized a higher probability of an IPO of 70% and a lower probability of a sale/merger of 30%. The probability assigned to the likelihood of an IPO increased from the prior valuation period due to (1) overall growth, (2) improvement in operating profitability, and (3) changes in management’s overall assessment of the likelihood of a successful initial public offering given the state of the public equity markets. Management extended the liquidation date to June 30, 2010. Management continued to assume a 20% marketability discount. The increase in the Class C unit fair value from the prior valuation is primarily due to an increase in the Company’s enterprise value resulting from the higher EBITDA multiples combined with a 10.6% increase in the forecasted EBITDA utilized from the prior valuation date.

 

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In all valuations above management applied a 30% expected annual return on Class C units. Other than the factors discussed above, there were no significant changes to input assumptions or changes in valuation methodologies.

Determining the fair value of our equity involves complex and subjective judgments. These judgments include estimates of revenues, earnings, determinations of the appropriate valuation methods and, when utilizing a market-based approach, the selection and weighting of appropriate market comparables and valuation multiples. Although each time management prepares such forecasts for use in the valuation management uses what we believe to be reasonable and appropriate assumptions, there can be no assurance that any such estimate for earlier periods or future periods will prove to be accurate. For these and other reasons, the assessed fair values used to compute share-based compensation expense for financial reporting purposes may not reflect the fair values that would result from the application of other valuation methods, including accepted valuation methods, assumptions and inputs for tax purposes.

Equity-based compensation expense related to the Class C units, recognized for the nine months ended September 30, 2008 and 2009, and for the years ended December 31, 2006, 2007 and 2008 was $0.1 million, $49.7 million, $0.0, $0.3 million and $10.4 million, respectively. As of September 30, 2009 and December 31, 2008, total unrecognized compensation cost, net of estimated forfeitures, was $13.4 million and $4.4 million, respectively, related to the Class C units. The unrecognized compensation cost was expected to be recognized over a weighted-average period of 3.0 years.

The Class C units will be exchanged for our common stock pursuant to the Exchange. Based upon the offering price of $             per share, the aggregate intrinsic value of the Class C units outstanding as of September 30, 2009 was $             million, of which $             million related to vested units and $             million to unvested units.

Income Taxes

Income taxes are accounted for using an asset and liability approach. Deferred income taxes reflect the net effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, and operating loss and tax credit carry forwards measured by applying currently enacted tax laws. A valuation allowance is provided to reduce net deferred tax assets to an amount that is more likely than not to be realized. Further, we account for uncertain tax positions in accordance with current accounting guidance, which clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements. Accordingly, we report a liability for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in a tax return.

Significant management judgment is also required in evaluating our uncertain tax positions. Our evaluation of uncertain tax positions is based on factors including, but not limited to, changes in facts or circumstances, changes in tax law, effectively settled issues under audit, and new audit activity. If the actual settlements differ from these estimates or we adjust these estimates in future periods, we may need to recognize a tax benefit or an additional tax charge that could materially impact our financial position and results of operations.

Significant management judgment is required in determining our provision for income taxes, income tax credits, deferred tax assets and liabilities. The recording of a liability based on additional tax exposure is based on estimates of taxable income by the jurisdictions in which we operate and the period over which amounts would be recoverable. In the event that actual results differ from these estimates or we adjust these estimates in future periods, we may need to adjust our income tax liability, which could impact our financial position and results of operations.

 

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In February 2009, California budget legislation was signed into law that, among other things, contained several state tax law changes that affected our state tax rate. As a result of these changes, we re-evaluated our state deferred tax liabilities and assets in the first quarter of 2009. The impact of these tax law changes reduced the blended state tax rates applied to our recorded deferred tax liabilities, which had the effect of reducing our income tax provision in 2009 by approximately $4.1 million.

Claims and Legal Proceedings

In the normal course of business, we are party to various claims and legal proceedings. We record a reserve for these matters when an adverse outcome is probable, and we can reasonably estimate our potential liability. Although the outcome of these matters is currently not determinable, we do not believe that the resolution of these matters in a manner adverse to our interest will have a material effect upon our financial condition, results of operations or cash flows for any interim or annual period.

 

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Historical Performance

Results of Operations

The following table summarizes our consolidated results of operations from selected items in our financial statements for the periods indicated:

 

    Year Ended December 31,     Nine Months Ended
September 30,
 
    2006     2007     2008     2008     2009  
                     

(unaudited)

 
    (in thousands)  

Statement of Operations Data:

       

Revenues

  $ 185,340      $ 202,924      $ 278,174      $ 204,580      $ 227,474   
                                       

Cost of revenues (exclusive of items shown separately below)

    64,911        71,029        101,469        75,352        79,118   

Selling, general and
administrative

    35,417        40,316        65,714        40,208        91,885   

Depreciation and amortization expense

    38,016        34,398        40,700        29,120        27,527   

Impairment of goodwill

    5,293        1,342        —          —          —     
                                       

Total operating costs and expenses

    143,637        147,085        207,883        144,680        198,530   
                                       

Income from operations

    41,703        55,839        70,291        59,900        28,944   

Interest expense

    79,377        76,612        76,783        58,781        60,433   

Interest and other income, net

    1,591        1,514        537        780        300   
                                       

Net income (loss) before income taxes

    (36,083     (19,259     (5,955     1,899        (31,189 )  

Income tax (benefit) expense

    (2,517     404        8,615        6,461        11,525   
                                       

Net loss before noncontrolling interest

    (33,566     (19,663     (14,570     (4,562     (42,714

Noncontrolling interest (preferred stock dividends of a subsidiary)

    —          —          1,829        1,336        1,518   
                                       

Net loss

  $
(33,566

  $ (19,663   $ (16,399   $ (5,898   $
(44,232

                                       

Other Financial Data:

         

Adjusted EBITDA

  $ 85,807      $ 91,908      $ 121,755      $ 89,092      $ 106,139   

Other Non-Financial Data:

         

Billed minute growth

    24.8     17.5     42.8     39.8     17.4

ARPM decline

    (1.3 %)      (7.1 %)      (7.3 %)      (7.0 %)      (4.7 %) 

 

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The following table sets forth the percentage of revenue that certain items of operating data constitute for the periods indicated:

 

     Year Ended December 31,     Nine Months Ended
September 30,
 
       2006         2007         2008           2008             2009      
                      

(unaudited)

 
Statement of Operations Data:                         

Revenues

   100.0  %    100.0  %    100.0  %    100.0  %    100.0  % 

Cost of revenues (exclusive of items shown separately below)

   35.0      35.0      36.5      36.8      34.8   

Selling, general and administrative

   19.1      19.9      23.6      19.7      40.4   

Depreciation and amortization expense

   20.5      17.0      14.6      14.2      12.1   

Impairment of goodwill

   2.9      0.7      0.0      0.0      0.0   
                              

Total operating costs and expenses

   77.5      72.5      74.7      70.7      87.3   
                              

Income from operations

   22.5      27.5      25.3      29.3      12.7   

Interest expense

   42.8      37.8      27.6      28.7      26.6   

Interest and other income, net

   0.9      0.7      0.2      0.4      0.1   
                              

Net income (loss) before income taxes

   (19.5   (9.5   (2.1   0.9      (13.7

Income tax (benefit) expense

   (1.4   0.2      3.1      3.2      5.1   
                              

Net loss before noncontrolling interest

   (18.1   (9.7   (5.2   (2.2   (18.8

Noncontrolling interest (preferred stock dividends of a subsidiary)

   0.0      0.0      0.7      0.7      0.7   
                              

Net loss

   (18.1 )%    (9.7 )%    (5.9 )%    (2.9 )%    (19.4 )% 
                              

Use of Non-GAAP Financial Measures

A non-GAAP financial measure is generally defined as one that purports to measure historical or future financial performance, financial position or cash flows, but excludes or includes amounts that would not be so adjusted in the most comparable GAAP measure. In this prospectus, we define and use Adjusted EBITDA, a non-GAAP measure as set forth below.

We define Adjusted EBITDA as net loss before noncontrolling interest, interest expense and other income, net, income tax (benefit) expense, depreciation and amortization, impairment of goodwill, equity-based compensation expense, and merger related expenses. We use Adjusted EBITDA to facilitate a comparison of our operating performance on a consistent basis from period to period that, when viewed in combination with our results under U.S. generally accepted accounting principles, which we refer to as GAAP, and the following reconciliation, we believe provides a more complete understanding of factors and trends affecting our business than GAAP measures alone. We believe Adjusted EBITDA assists our board of directors, management and investors in comparing our operating performance on a consistent basis because it removes the impact of our capital structure (such as interest expense and other income, net, and noncontrolling interest), asset base (such as depreciation and amortization) and items outside the control of our management team (such as income taxes), as well as other items which are non-cash (such as equity-based compensation expense and impairment of goodwill) and non-recurring items (such as merger related expenses), from our operations. Despite the importance of this measure in analyzing our business and evaluating our operating performance, Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation, or as a substitute for analysis of our results as reported under GAAP; nor is Adjusted EBITDA intended to be a measure of liquidity or free cash flow for our discretionary use. Some of the limitations of Adjusted EBITDA are:

 

   

Adjusted EBITDA does not reflect all of our cash expenditures or future requirements for capital expenditures or contractual commitments;

 

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Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;

 

   

Adjusted EBITDA does not reflect the interest expense or the cash requirements to service interest or principal payments under our senior secured credit agreement;

 

   

Adjusted EBITDA does not reflect income tax payments we are required to make;

 

   

Although equity-based compensation expense is a non-cash charge, Adjusted EBITDA does not reflect the cash requirements for vested units we elected to repurchase upon the cessation of employment during the years ended December 31, 2006, December 31, 2007, December 31, 2008 and nine months ended September 30, 2008 and September 30, 2009 totaling $42,000, $15,000, $26,000, $1,000 and $0, respectively; and

 

   

Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized often will have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacements.

To properly and prudently evaluate our business, we encourage you to review the financial statements included elsewhere in this prospectus and not rely on any single financial measure to evaluate our business. We also strongly urge you to review the reconciliation of net loss before noncontrolling interest to Adjusted EBITDA. Adjusted EBITDA, as presented in this prospectus, may differ from and may not be comparable to similarly titled measures used by other companies because Adjusted EBITDA is not a measure of financial performance under GAAP and is susceptible to varying calculations. The following table sets forth a reconciliation of net loss before noncontrolling interest, a comparable GAAP-based measure, to Adjusted EBITDA. All of the items included in the reconciliation from net loss before noncontrolling interest to Adjusted EBITDA are either (i) non-cash items (such as depreciation and amortization, equity-based compensation expense and impairment of goodwill), (ii) items that management does not consider in assessing our on going operating performance (such as income taxes and interest expense and other income, net) or (iii) non-recurring items (such as merger related expenses). In the case of the non-cash items, management believes that investors can better assess our comparative operating performance because the measures without such items are less susceptible to variances in actual performance resulting from depreciation, amortization and other non-cash charges and more reflective of other factors that affect operating performance. In the case of the other items, management believes that investors can better assess our operating performance if the measures are presented without these items because their financial impact does not reflect ongoing operating performance.

The following is a reconciliation of net loss before noncontrolling interest to Adjusted EBITDA for the periods presented (in thousands):

 

     Year Ended December 31,     Nine Months
Ended
September 30,
 
     2006     2007     2008     2008     2009  

Net loss before noncontrolling interest

   $ (33,566   $ (19,663   $ (14,570   $ (4,562   $ (42,714

Interest expense and other income, net

     77,786        75,098        76,246        58,001        60,133   

Income tax (benefit) expense

     (2,517     404        8,615        6,461        11,525   

Depreciation and amortization

     38,016        34,398        40,700        29,120        27,527   

Impairment of goodwill

     5,293        1,342                        

Equity-based compensation

            329        10,398        72        49,668   

Merger related expenses

     795               366                 
                                        

Adjusted EBITDA

   $ 85,807      $ 91,908      $ 121,755      $ 89,092      $ 106,139   
                                        

 

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Consolidated Results

Comparison of nine months ended September 30, 2009 and 2008

Our revenues increased by $22.9 million, or 11.2%, to $227.5 million during the nine months ended September 30, 2009 from $204.6 million for the nine months ended September 30, 2008. OPI billed minutes increased 17.4% for the nine months ended September 30, 2009 when compared to the nine months ended September 30, 2008. Clients acquired through our strategic relationship with Network Omni, which became effective in August 2008, drove 6.2% of the OPI billed minute growth, while the remaining OPI billed minute growth was attributable to existing client growth as well as new client wins in the U.S. OPI ARPM declined 4.7% during the nine months ended September 30, 2009 when compared to the nine months ended September 30, 2008. Of the OPI ARPM decline, 0.6% was attributable to clients acquired from Network Omni, which on average had lower prices than our average contracts, while 2.3% was attributable to existing and new clients in the U.S. The remaining OPI ARPM decline was primarily driven by the Language Line U.K., due to competitive pressures in the U.K. and currency effect.

Our cost of revenues increased by $3.8 million, or 5.0%, to $79.1 million, during the nine months ended September 30, 2009 from $75.3 million for the nine months ended September 30, 2008. Interpreter costs, which comprise the majority of our cost of revenues, increased $3.0 million due to OPI billed minute growth, which was partially offset by an increase in interpreter productivity. Our average interpreter costs per billed OPI minute declined 10.6% for the nine months ended September 30, 2009. The remaining $0.8 million increase in cost of services was attributable to higher FFI cost of services resulting from higher revenues.

SG&A expenses increased $51.7 million, or 129%, to $91.9 million during the nine months ended September 30, 2009 from $40.2 million for the nine months ended September 30, 2008. This increase was primarily due to higher equity-based compensation expense of $49.6 million on our Class C units. In addition, sales and marketing expenses due to commissions paid on revenue from contracts acquired from Network Omni increased $3.3 million. These cost increases are partially offset by a reduction of costs due to integration expenses associated with the Coto acquisition incurred during the nine months ended September 30, 2008.

Interest expense increased $1.7 million, or 2.8%, to $60.4 million for the nine months ended September 30, 2009 from $58.8 million for the nine months ended September 30, 2008. This increase was due to a $3.3 million charge as a result of a reduction in the fair value of the Citi Loan capital call agreement, as described further in Note 7, Debt Obligations, to the notes to the consolidated financial statements included elsewhere in this prospectus, and a $2.5 million increase in interest on the series A preferred units, partially offset by lower interest on our secured senior debt due to lower interest, combined with a lower average principal balance during the period for this senior secured debt.

Depreciation and amortization was $27.5 million for the nine months ended September 30, 2009 compared to $29.1 million for the nine months ended September 30, 2008. This decrease was principally due to certain assets that became fully depreciated period over period.

Income tax expense increased $5.0 million, or 78.4%, to $11.5 million for the nine months ended September 30, 2009 from $6.5 million for the nine months ended September 30, 2008. Our income tax expense was affected by recent tax law legislation in California which required us to re-evaluate our state deferred tax liabilities and assets in the first quarter of 2009, which was estimated to have an income tax benefit of $4.1 million. Additionally, our income tax expense was affected by the interest expense incurred on our Discount Notes, which is non-deductible for income tax purposes.

As a result of the factors described above, net loss was $44.2 million for the nine months ended September 30, 2009 as compared to a net loss of $5.9 million for the nine months ended September 30, 2008.

 

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Comparison of the years ended December 31, 2008 and 2007

Our revenues increased by $75.3 million, or 37.1%, to $278.2 million during the year ended December 31, 2008 from $202.9 million for the year ended December 31, 2007. OPI billed minutes increased 42.8% for the year ended December 31, 2008 when compared to the year ended December 31, 2007. OPI billed minute growth of 26.3% was attributable to Coto, which was acquired in January 2008, 3.4% of growth attributable to clients acquired from Network Omni, with the remaining increase attributable to existing and other new clients. OPI ARPM declined 7.3% during the year ended December 31, 2008 compared to the year ended December 31, 2007. Of this decline, 4.9% was attributable to the Coto acquisition and contracts acquired from Network Omni, which on average had lower prices than our average contracts. The remaining 1.3% decline was attributable to existing and other new clients in the U.S. The remainder of overall OPI ARPM decline was driven by a decline in the Language Line U.K. segment due to competitive pricing pressures in the U.K.

Our cost of revenues increased by $30.4 million, or 42.9%, to $101.5 million for the year ended December 31, 2008 from $71.0 million for the year ended December 31, 2007. Interpreter costs, which comprise the majority of our cost of services, increased $20.3 million due to OPI billed minute growth, which was partially offset by an increase in interpreter productivity. Our average interpreter costs per billed OPI minute declined 6.3% for the year ended December 31, 2008. Telecommunication costs increased $2.6 million also due to the higher OPI billed minutes. Cost of revenues for our Ancillary Services segment increased $4.8 million due to our acquisition of Coto in 2008. The remaining $2.7 million increase in cost of revenues is primarily attributable to higher translation and FFI cost of services resulting from higher revenues.

SG&A expenses increased $25.4 million, or 63.0%, to $65.7 million for the year ended December 31, 2008 from $40.3 million for the year ended December 31, 2007. This increase was due to incremental SG&A costs of $11.3 million attributable to Coto, which was acquired in 2008, higher sales and marketing expenses of $2.2 million due to commissions paid on revenue from contracts acquired from Network Omni, higher equity-based compensation expense of $10.1 million on our Class C units, along with overall higher operations support and information technology costs.

Interest expense increased $0.2 million, or 0.2%, to $76.8 million for the year ended December 31, 2008 from $76.6 million for the year ended December 31, 2007. This increase was primarily attributable to a higher average principal balance in 2008 due to debt associated with the acquisition of Coto, offset by an increase in the fair value of The Citi loan capital call of $3.4 million. The interest rate on our senior secured debt at December 31, 2008 was 4.7% as compared to 8.3% at December 31, 2007.

Depreciation and amortization was $40.7 million for the year ended December 31, 2008 compared to $34.4 million for the year ended December 31, 2007. This increase was due principally to the near full year incremental amortization of intangible assets associated with the acquisition of Coto in January 2008.

Income tax expense increased $8.2 million, or 2032%, to $8.6 million for the year ended December 31, 2008 from $0.4 million for the year ended December 31, 2007. Our income tax expense was affected by the interest expense incurred on our Discount Notes incremental accretion on the series A preferred units, and increased equity-based compensation expense, all of which are non-deductible for income tax purposes.

As a result of the factors described above, net loss was $16.4 million for the year ended December 31, 2008 as compared to a net loss of $19.7 million for the year ended December 31, 2007.

Comparison of the years ended December 31, 2007 and 2006

Our revenues increased by $17.6 million, or 9.5%, to $202.9 million during the year ended December 31, 2007 from $185.3 million for the year ended December 31, 2006. OPI billed minutes increased 17.5% for the

 

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year ended December 31, 2007 when compared to the year ended December 31, 2006. OPI billed minute growth, attributable to existing and new client growth in the U.S., was 18.2%. This increase was partially offset by a decline in the Language Line U.K. segment as a result of increased competition. OPI ARPM declined 7.1% during the year ended December 31, 2007 when compared to the year ended December 31, 2006. The U.S. Interpretation Services segment comprised 6.7% of the decline with the remainder of overall OPI ARPM decline driven by the Language Line U.K. segment. This decline was due to competitive pressures in the U.K.

Our cost of revenues increased by $6.1 million, or 9.4%, to $71.0 million for the year ended December 31, 2007 from $64.9 million for the year ended December 31, 2006. Interpreter costs, which comprise the majority of our cost of services, increased $5.0 million due to OPI billed minute growth, which was partially offset by an increase in interpreter productivity. Our average interpreter costs per billed OPI minute declined 7.3% for the year ended December 31, 2007. Telecommunication costs increased $0.6 million also due to the higher OPI billed minutes. The remaining increase in cost of services was primarily attributable to higher translation and FFI cost of services resulting from higher revenues.

SG&A expenses increased $4.9 million, or 13.8%, to $40.3 million for the year ended December 31, 2007 from $35.4 million for the year ended December 31, 2006. This increase was due to higher interpreter and support costs of $2.2 million, an increase of $1.0 million in sales and marketing initiatives and higher equity- based compensation expense of $0.3 million on our Class C units. The remaining increase in SG&A expenses was primarily attributable to higher information technology, finance and general administration costs.

Interest expense decreased $2.8 million, or 3.5%, to $76.6 million for the year ended December 31, 2007 from $79.4 million for the year ended December 31, 2006. This decrease was primarily attributable to lower average principal balances on our senior secured debt, coupled with a lower interest rate of 8.3% at December 31, 2007 as compared to 8.6% at December 31, 2006.

Depreciation and amortization was $34.4 million for the year ended December 31, 2007 compared to $38.0 million for the year ended December 31, 2006. This decrease was principally attributable to intangible assets becoming fully amortized in 2007.

Income tax expense increased $2.9 million to $0.4 million for the year ended December 31, 2007 from an income tax benefit of $2.5 million for the year ended December 31, 2006. Our income tax expense was affected by the interest expense incurred on our Discount Notes, which is non-deductible for income tax purposes.

As a result of the factors described above, net loss was $19.7 million for the year ended December 31, 2007 as compared to a net loss of $33.6 million for the year ended December 31, 2006.

Results of Operations

Segment Results

For financial reporting purposes, our operations are grouped into three reportable business segments: U.S. Interpretation Services, Language Line U.K. and Ancillary Services.

The following table presents comparisons of our revenues and direct contribution for each of those segments and in total for the years ended December 31, 2006, December 31, 2007 and December 31, 2008, and for the nine months ended September 30, 2008 and September 30, 2009. Direct contribution consists of net revenues from external clients less direct costs. Direct costs include specific costs of net revenues including OPI and FFI costs and translation costs.

 

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

Revenues by Segment:

              

U.S. Interpretation Services

   $ 162,814    $ 182,954    $ 249,564    $ 182,402    $ 208,118

Language Line U.K.

     22,526      19,970      19,136      14,807      13,999

Ancillary Services

               9,474      7,371      5,357
                                  

Total Company

   $ 185,340    $ 202,924    $ 278,174    $ 204,580    $ 227,474
                                  

Direct contribution by Segment:

              

U.S. Interpretation Services

   $ 104,898    $ 118,187    $ 160,771    $ 116,717    $ 137,608

Language Line U.K.

     15,531      13,708      12,474      9,814      8,377

Ancillary Services

               3,460      2,697      2,371
                                  

Total Company

   $ 120,429    $ 131,895    $ 176,705    $ 129,228    $ 148,356
                                  

Comparison of nine months ended September 30, 2009 and 2008

U.S. Interpretation Services. Revenues increased by $25.7 million, or 14.1%, to $208.1 million during the nine months ended September 30, 2009 from $182.4 million for the nine months ended September 30, 2008. OPI billed minutes increased 17.4% for the nine months ended September 30, 2009 as compared to the nine months ended September 30, 2008. Of the OPI billed minute growth, 6.3% was attributable to clients from our strategic relationship with Network Omni which became effective in August 2008, and the remaining 11.1% of growth was attributable to existing clients and new client wins. OPI ARPM declined 3.3% during the nine months ended September 30, 2009 when compared to the nine months ended September 30, 2008. An ARPM decline of 1.1% was attributable to clients from our strategic relationship with Network Omni, which on average had lower prices than our typical contracts, with the remaining decline attributable to existing and new clients.

Direct contribution increased by $20.9 million, or 17.9%, to $137.6 million during the nine months ended September 30, 2009 from $116.7 million for the nine months ended September 30, 2008. Direct contribution for the nine months ended September 30, 2009 was higher as a percentage of revenue primarily as a result of our average interpreter and telecommunication costs per billed OPI minute which declined 10.6% compared to the nine months ended September 30, 2008.

Language Line U.K. Revenues decreased by $0.8 million, or 5.5%, to $14.0 million during the nine months ended September 30, 2009 from $14.8 million for the nine months ended September 30, 2008. On a constant dollar basis, revenues for the nine months ended September 30, 2009 increased 17.9% compared to the nine months ended September 30, 2008. Revenue growth on a constant dollar basis was primarily driven by higher FFI volume.

Direct contribution decreased by $1.4 million, or 14.6%, to $8.4 million during the nine months ended September 30, 2009 from $9.8 million for the nine months ended September 30, 2008. On a constant dollar basis for the nine months ended September 30, 2009, direct contribution increased 9.0% compared to the nine months ended September 30, 2008. Direct contribution for the nine months ended September 30, 2009 was lower as a percentage of revenues as growth was driven by FFI volumes, which have a lower direct contribution than other Language Line U.K. services.

Ancillary Services. Revenues decreased by $2.0 million, or 27.3%, to $5.4 million during the nine months ended September 30, 2009 from $7.4 million for the nine months ended September 30, 2008. The revenue decrease was driven by a decline in both localization and onsite interpretation service volumes.

 

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Direct contribution decreased by $0.3 million, or 12.1%, to $2.4 million during the nine months ended September 30, 2009 from $2.7 million for the nine months ended September 30, 2008. Direct contribution for the nine months ended September 30, 2009 was higher as a percentage of revenues primarily due to reduced costs for localization services.

Comparison of the years ended December 31, 2008 and 2007

U.S. Interpretation Services. Revenues increased by $66.6 million, or 36.4%, to $249.6 million for the year ended December 31, 2008 from $183.0 million for the year ended December 31, 2007. OPI billed minutes increased 44.4% for the year ended December 31, 2008 when compared to the year ended December 31, 2007. Of the OPI billed minute growth, 27.3% was attributable to the Coto acquisition, which took place in January 2008, 3.5% attributable to clients from our strategic relationship with Network Omni and the remaining 13.6% of growth was attributable to existing and new clients. OPI ARPM declined 5.2% during the year ended December 31, 2008 when compared to the year ended December 31, 2007. Of this decline, 3.4% was attributable to clients from our Coto acquisition and from our strategic relationship with Network Omni, which on average had lower prices than our typical contracts. The remaining decline was attributable to existing and new clients.

Direct contribution increased by $42.6 million, or 36.0%, to $160.8 million for the year ended December 31, 2008 from $118.2 million for the year ended December 31, 2007. Direct contribution for the year ended December 31, 2008 decreased a nominal 0.2% as a percentage of revenues when compared to the year ended December 31, 2007.

Language Line U.K. Revenues decreased by $0.8 million, or 4.2%, to $19.1 million for the year ended December 31, 2008 from $20.0 million for the year ended December 31, 2007. On a constant dollar basis, revenues for the year ended December 31, 2008 increased 3.9% compared to the year ended December 31, 2007. Revenue growth on a constant dollar basis was primarily driven by higher FFI and translation sales volume, which was partially offset by lower OPI revenues.

Direct contribution decreased by $1.2 million, or 9.0%, to $12.5 million for the year ended December 31, 2008 from $13.7 million for the year ended December 31, 2007. On a constant dollar basis for the year ended December 31, 2008, direct contribution decreased 4.6% compared to the year ended December 31, 2007. Direct contribution was lower as a percentage of revenue primarily as a result of revenue growth being driven by FFI and translation volumes, which have a lower direct contribution than OPI.

Ancillary Services. Revenues were $9.5 million for the year ended December 31, 2008 compared to $0.0 for the year ended December 31, 2007. The Ancillary Services segment was acquired by Language Line Holdings LLC in January 2008 as part of the Coto acquisition. Direct contribution was $3.5 million for the year ended December 31, 2008.

Comparison of the years ended December 31, 2007 and 2006

U.S. Interpretation Services. Revenues increased by $20.2 million, or 12.4%, to $183.0 million for the year ended December 31, 2007 from $162.8 million for the year ended December 31, 2006. OPI billed minutes increased 19.2% for the year ended December 31, 2007 when compared to the year ended December 31, 2006. OPI billed minute growth was attributable to existing client usage and new clients growth. OPI ARPM declined 5.6% during the year ended December 31, 2007 when compared to the year ended December 31, 2006.

Direct contribution increased by $13.3 million, or 12.7%, to $118.2 million for the year ended December 31, 2007 from $104.9 million for the year ended December 31, 2006. Direct contribution for the year ended December 31, 2007 was higher as a percentage of revenue primarily as a result of lower average interpreter costs per billed OPI minute compared to the year ended December 31, 2006.

 

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Language Line U.K. Revenues decreased by $2.5 million, or 11.3%, to $20.0 million for the year ended December 31, 2007 from $22.5 million for the year ended December 31, 2006. On a constant dollar basis, revenues for the year ended December 31, 2007 decreased 22.4% compared to the year ended December 31, 2006. The revenue decline on a constant dollar basis was primarily driven by lower OPI revenues due to competitive pressures in the U.K.

Direct contribution decreased by $1.8 million, or 11.7%, to $13.7 million for the year ended December 31, 2007 from $15.5 million for the year ended December 31, 2006. On a constant dollar basis for the year ended December 31, 2007, direct contribution decreased 23.2% compared to the year ended December 31, 2006, due to lower revenues.

Liquidity and Capital Resources

Operating Activities

Net cash provided by operating activities for the nine months ended September 30, 2009 and the year ended December 31, 2008 was $68.4 million and $43.3 million, respectively. For each of these time periods, these values reflect net loss of $44.2 million and $16.4 million, respectively, non-cash charges of $94.8 million and $80.6 million, respectively, and cash provided/(used) for operating assets and liabilities (net) of $17.8 million and $(20.9) million, respectively. Non-cash charges include depreciation and amortization, amortization of deferred financing costs, deferred income taxes, impairment of goodwill, accretion of discount on debt, interest on series A preferred units, Coto preferred unit dividends and equity-based compensation. Net cash provided by operating activities for year ended December 31, 2007 was $35.9 million. This reflects a net loss of $19.7 million, non-cash charges of $58.4 million, offset by cash used for operating assets and liabilities (net) of $2.9 million. Net cash provided by operating activities was $33.9 million for the year ended December 31, 2006. This reflects principally a net loss of $33.6 million, non-cash charges of $62.9 million, partially offset by cash provided by operating assets and liabilities (net) of $4.6 million.

Investing Activities

Net cash used in investing activities was $4.3 million for the nine months ended September 30, 2009, primarily for capital expenditures. Net cash used in investing activities was $70.8 million for the year ended December 31, 2008, primarily due to cash of $66.4 million used for the acquisition of Coto and capital expenditures of $4.3 million. Net cash used in investing activities was $3.7 million for the year ended December 31, 2007 primarily for capital expenditures. Net cash used in investing activities was $49.8 million for the year ended December 31, 2006, reflecting net cash used for the acquisition of Language Line U.K. of $46.6 million and $3.3 million for capital expenditures.

Financing Activities

On November 4, 2009, our subsidiaries refinanced a significant portion of their balance sheet debt with a $575.0 million senior secured credit agreement. Proceeds of this new senior secured credit agreement were used to pay off the senior secured credit facilities, Coto preferred units, Senior Subordinated Notes, Discount Notes and a mezzanine facility.

Net cash used in the financing activities in the nine months ended September 30, 2009 was $20.5 million, reflecting payments on the company’s debt obligations. Net cash provided by financing activities for the year ended December 31, 2008 was $35.0 million. This amount reflects debt proceeds of $82.9 million for the Coto acquisition, partially offset by payments made on our debt obligations of $46.9 million. Net cash used by

 

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financing activities for the year ended December 31, 2007 was $38.3 million, resulting from payments made on our debt of $39.8 million partially offset by $1.6 million of debt proceeds. Net cash provided by financing activities for the year ended December 31, 2006 was $24.6 million, reflecting debt proceeds of $24.1 million and proceeds from related parties of $22.7 million which were utilized for the acquisition of Language Line U.K. During this period the Company made payments of $24.6 million on debt, financing fees, and convertible notes. At November 4, 2009, the maximum amount available under the Revolving Credit Facility was $50.0 million.

Our principal sources of liquidity are cash flow from operations and borrowings available under our revolving credit facility. We believe that these funds will provide us with sufficient liquidity and capital resources for us to meet our financial obligations for the next 12 months, including our scheduled principal and interest payments, as well as to provide funds for working capital, capital expenditures and other needs. Our principal uses of cash are debt service requirements, capital expenditures and working capital requirements. We expect to generate positive working capital through our operations; however, we cannot predict whether our current operating trends and conditions will continue, or the effect on our business from the competitive environment in which we operate.

Debt Service

As of December 31, 2008, we had total indebtedness of $557.8 million and $40.0 million of borrowings available under our revolver credit facility, as defined in our previous loan agreement which has already been repaid.

On November 4, 2009, our subsidiaries entered into a senior secured credit agreement. The senior secured credit agreement effects a refinancing and replacement of much of the prior outstanding debt, including the prior senior secured credit facilities, a mezzanine facility, Coto preferred units, Senior Secured Notes and Discount Notes. The aggregate principal amount of the loan is equal $575.0 million; $525.0 million available under the Term Loan Facility and $50.0 million available under the Revolving Credit Facility. Borrowings under the senior secured credit agreement bear interest, at our option, at either the: (i) alternate base rate, defined as the higher of (a) the rate published by the Federal Reserve Bank of New York for overnight Federal funds transactions with members of the Federal Reserve System plus 1/2 of 1.0% and (b) the rate published by the Bank of America, N.A., as administrative agent, as its “prime rate”, provided that in no event shall the alternate base rate be less than 3.0% per annum, plus the applicable margin; or (ii) Eurodollar base rate, defined as the 1 month LIBOR plus the applicable margin. The applicable margin is 2.5% for the alternate base rate and 3.5% for the Eurodollar base rate.

The Revolving Credit Facility also provides for a commitment fee of  1/2 of 1.0% per annum on the average daily amount of the available revolving credit commitment of lenders during the period for which payment is made. These fees are payable quarterly in arrears on the last day of each March, June, September and December and on the revolving credit termination date. Swingline loans are not considered utilization of the revolving credit facility for purposes of this calculation.

Capital Expenditures

We expect to spend approximately $5.0 million in 2009 to fund our capital expenditures as well as normal investments in telecommunications and company equipment. We plan to fund these expenditures through net cash flows from operations.

We believe that the cash generated from operations will be sufficient to meet our debt service, capital expenditures and working capital requirements. Subject to restrictions in our senior secured credit agreement, we may incur more debt for working capital, capital expenditures, acquisitions and for other purposes. In addition,

 

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we may require additional financing if our plans materially change in an adverse manner or prove to be materially inaccurate. There can be no assurance that such financing, if permitted under the terms of our debt agreements, will be available on terms acceptable to us or at all.

Recent events, including the dislocation in the U.S. credit markets, indicate a moderate to severe recession in the U.S. and world economies, which could have an impact on our clients and the volume of business they are able to conduct with us, as well as the prices we are able to charge for our services. Additionally, the securities and credit markets have experienced volatility and disruption, which could impact our ability to access capital. Our principal sources of liquidity are cash flow from operations and borrowings available under our Revolving Credit Facility pursuant to the senior secured credit agreement. We believe that these funds will be sufficient to meet our debt service, capital expenditures and working capital requirements. Subject to restrictions in our senior secured credit agreement, we may incur more debt for working capital, capital expenditures, acquisitions and for other purposes. In addition, we may require additional financing if our plans materially change in an adverse manner or prove to be materially inaccurate. There can be no assurance that such financing, if permitted under the terms of our debt agreements, will be available on terms acceptable to us or at all. However, we believe the lenders participating in our Revolving Credit Facility will be willing and able to provide financing in accordance with the terms of the agreement, and to date, our access to credit under our Revolving Credit Facility has not been adversely affected by recent market conditions. Finally, we monitor the financial strength of our third-party financial institutions, including those that hold our cash, and attempt to diversify our concentration of cash that we hold at any point in time.

Contractual Obligations

The following table sets forth our long-term contractual cash obligations as of December 31, 2008 (dollars in thousands):

 

     Total    Less than
1 year
   1 - 3 years    3 - 5 years    More than
5 years

Long-term debt obligations

   $ 557,796    $ 18,646    $ 238,435    $ 287,377    $ 13,338

Series A preferred units

     299,018      —        —        299,018      —  

Interest payments

     163,574      38,879      86,685      36,669      1,341

Unrecognized tax benefits

     1,112      375      —        —        737

Operating leases

     5,900      2,376      2,950      574      —  

Service contract commitments

     9,809      3,880      5,929      —        —  
                                  

Total cash contractual obligations(1)

   $ 1,037,209    $ 64,156    $ 333,999    $ 623,638    $ 15,416
                                  

 

(1) This table does not reflect our current long-term contractual cash obligations.

The expected timing of payment of the obligations discussed above is estimated based on current information. Timing of payments and actual amounts paid may be different depending on the time of receipt of services or changes to agreed-upon amounts for some obligations.

Off-Balance Sheet Arrangements

We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

 

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Effects of Inflation

We do not believe that our sales or operating results have been materially impacted by inflation during the periods presented in our financial statements. There can be no assurance, however, that our sales, cost of sales or operating results will not be impacted by inflation in the future.

Recently Issued Accounting Pronouncements

Derivative Instruments and Hedging Activities

In March 2008, new accounting guidance was issued that applies to all derivative instruments and related hedged items accounted for under existing derivative accounting and reporting guidance. This new guidance requires entities to provide greater transparency about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under this guidance, and (c) how derivative instruments and related hedged items affect an entity’s financial position, results of operations and cash flows. To meet these objectives, this guidance requires (1) qualitative disclosures about objectives for using derivatives by primary underlying risk exposure and by purpose or strategy, (2) information about the volume of derivative activity in a flexible format that the preparer believes is the most relevant and practicable, (3) tabular disclosures about balance sheet location and gross fair value amounts of derivative instruments by type of contract, and (4) disclosures about credit-risk related contingent features in derivative agreements. This guidance is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The adoption of this guidance on January 1, 2009 did not have a material impact on our results of operations, cash flows or financial position.

Purchase Method of Accounting for Acquisitions

In December 2007, the FASB revised the accounting guidance for business combinations. This guidance establishes principles and requirements for how an acquirer in a business combination recognizes and measures in its financial statements the identifiable assets acquired, liabilities assumed and any noncontrolling interests in the acquired entity, as well as the goodwill acquired. Significant changes from current practice resulting from this guidance include the expansion of the definitions of a “business” and a “business combination.” For all business combinations (whether partial, full or step acquisitions), the acquirer will record 100.0% of all assets and liabilities of the acquired business, including goodwill, generally at their fair values; contingent consideration will be recognized at its fair value on the acquisition date and, for certain arrangements, changes in fair value will be recognized in earnings until settlement; and acquisition-related transaction and restructuring costs will be expensed rather than treated as part of the cost of the acquisition. The accounting guidance also establishes disclosure requirements to enable users to evaluate the nature and financial effects of the business combination. This guidance applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Earlier adoption is not permitted. The accounting guidance may have an impact on our consolidated financial statements when effective in the event a business combination occurs. The nature and magnitude of the specific effects will depend upon the nature, terms and size of the acquisition consummated after the effective date.

Fair Value Measurements

In September 2006, the FASB issued accounting guidance for fair value measurements, which defines fair value, establishes a framework for measuring fair value under GAAP and expands disclosure requirements about fair value measurements. This accounting guidance applies to other accounting pronouncements that require or permit fair value measurements. The fair value measurement of financial assets and financial liabilities is effective for us beginning in fiscal year 2008. Other FASB Staff Positions, which we refer to as FSPs, on this

 

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guidance were subsequently issued. The first FSP, issued on February 14, 2008, excluded other accounting pronouncements that address fair value measurements for purposes of lease classification or measurement. However, this scope exception does not apply to assets acquired and liabilities assumed in a business combination, which are required to be measured at fair value under other authoritative GAAP. The second FSP, issued on February 12, 2008 delayed the effective date of the accounting for fair value measurements for non-financial assets and non-financial liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis. This FSP became effective for us in fiscal year 2009. The impact of this FSP was not material to our consolidated financial statements.

Interim Disclosures about Fair Value of Financial Instruments

In April 2009, new accounting guidance was issued that requires disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. This guidance also requires that those disclosures are made in summarized financial information at interim reporting periods. This guidance is effective for interim and annual reporting periods ending after June 15, 2009. The adoption of this guidance did not have a material impact on our consolidated financial statements.

Determination of Useful Lives of Intangible Assets

In April 2008, the FASB issued new guidance over the determination of the useful lives of intangible assets. This guidance amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under existing accounting standards. This new guidance applies to intangible assets that are acquired individually or with a group of other assets after the effective date of either a business combination or an asset acquisition. The intent of this new guidance is to improve the consistency between the useful life of a recognized intangible asset under existing guidance and the period of expected cash flows used to measure the fair value of the asset under other U.S. GAAP. The new guidance also contains new disclosure requirements with respect to recognized intangible assets and is effective for fiscal years beginning after December 15, 2008 and for interim periods within such fiscal years. The adoption of this new guidance may have an impact on our financial statements in the event we acquire intangible assets in either a business combination or asset acquisition. The nature and magnitude of the specific effects will depend upon the nature, terms and size of the business combination or asset acquisition consummated after the effective date.

Noncontrolling Interests in Consolidated Financial Statements

In December 2007, the FASB issued new guidance which has been codified into Accounting Standards Codification 810, which we refer to as ASC 810, Consolidation, and which establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary and clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. Additionally, this guidance changes the way the consolidated income statement is presented by requiring consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the noncontrolling interest. This also requires expanded disclosures in the consolidated financial statements that clearly identify and distinguish between the interests of the parent’s owners and the interests of the noncontrolling owners of a subsidiary, including a reconciliation of the beginning and ending balances of the equity attributable to the parent and the noncontrolling owners and a schedule showing the effects of changes in a parent’s ownership interest in a subsidiary on the equity attributable to the parent. This guidance does not change authoritative existing guidance related to consolidation purposes or consolidation policy or the requirement that a parent consolidate all entities in which it has a controlling financial interest. This guidance does, however, amend certain consolidation procedures to make them consistent with the

 

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new requirements as well as to provide definitions for certain terms and to clarify some terminology. This guidance is effective on January 1, 2009 for us. Earlier adoption was prohibited. This guidance must be applied prospectively as of the beginning of the fiscal year in which it is initially applied, except for the presentation and disclosure requirements, which must be applied retrospectively for all periods presented.

Subsequent Events

In May 2009, new accounting guidance was issued that establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued. We adopted this guidance for the nine months ended September 30, 2009 and included additional disclosures as described in Note 17 to the financial statements included elsewhere in the prospectus.

Quantitative and Qualitative Disclosures about Market Risk

We are exposed to certain market risks as part of our ongoing business operations. Primary exposure includes changes in interest rates, as borrowings under our senior secured credit agreement bears interest at floating rates based on LIBOR or the base rate, in each case plus an applicable borrowing margin. We will manage our interest rate risk by balancing our amount of fixed-rate and floating-rate debt. For fixed-rate debt, interest rate changes do not affect our earnings or cash flows. Conversely, for floating-rate debt, interest rate changes generally impact our earnings and cash flows, assuming other factors are held constant.

As of November 15, 2009, approximately $565.8 million of our loans were subject to a variable interest rate. Based on these November 15, 2009 borrowings, a hypothetical 1% increase in the interest rate we are charged on our debt would increase our annual interest expense by an estimated $5.7 million. See “Description of Certain Indebtedness.”

Changes in economic conditions could result in higher interest rates, thereby increasing our interest expense and other operating expenses and reducing our funds available for capital investment, operations or other purposes. In addition, a substantial portion of our cash flow must be used to service debt, which may affect our ability to make future acquisitions or capital expenditures. Subject to certain limitations in our senior secured credit agreement, we may from time to time use interest rate protection agreements to minimize our exposure to interest rate fluctuation. However, there can be no assurance that hedges will achieve the desired effect. We may experience economic loss and a negative impact on earnings or net assets as a result of interest rate fluctuations.

 

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BUSINESS

Our Company

We believe we are a global leader in providing on-demand language interpretation services. Supporting over 170 languages, we provide our interpretation services to businesses, government and other public sector clients primarily via telephone interpretation. We also provide video and in-person interpretation services. Within seconds of receiving an inbound call, 24 hours a day and seven days a week, we provide our clients with an over-the-phone interpreter with the appropriate language and topic-specific skill set who can help facilitate a conversation between our client and our client’s LEP customers. In 2008, we helped more than 35 million people communicate across linguistic barriers by providing over-the-phone interpretation, which we refer to as OPI, services to our clients. We focus on high-value interactions that require immediate availability of our multi-lingual resources, including emergency rooms or 911 calls, or flexible, customized interpretation services to businesses, such as mortgage or insurance claims processing. Our interpretation services enable our clients to increase their revenue and deliver mission-critical services to their customers, thereby improving their customer loyalty. We also help clients comply with applicable laws and regulations by providing in-language support to our clients’ growing population of current and prospective LEP customers in the growing and largely underserved LEP marketplace.

We offer a wide range of language interpretation services across a diverse group of industry verticals, including healthcare, government, financial services, insurance, telecommunications and utilities. We have over 10,000 clients, including approximately 60% of the Fortune 500 companies and all of the top 20 emergency 911 response centers in the U.S. For the nine months ended September 30, 2009, our largest client represented less than 5% of revenue and our largest vertical market, healthcare, represented less than 30% of revenue. Our diverse industry focus and delivery of revenue-enhancing and mission-critical services have driven increased demand and interpreter minutes growth even in challenging economic times. For example, throughout the current recessionary environment, we have provided interpretation services for calls related to mortgage foreclosure, helping our clients’ customers understand terms or negotiate payments. These applications complement our financial services clients’ traditional use of our services, which include resolving credit card problems, increasing collections, opening new accounts, providing home buyer education and producing credit reports. Our insurance industry clients use our services to process claims, improve claim investigations, evaluate questionable claims, enhance help desk service and explain benefits. We assist healthcare clients by facilitating emergency room and critical care situations, accelerating triage and medical advice, simplifying patient admission processes, improving billing and increasing collections. We also support emergency 911 services, disaster relief, citizen support 311 services and other services for governments and municipalities.

We leverage our industry-leading operating scale, interpreter workforce and proprietary technology to deliver to our clients a high quality, cost-effective on-demand alternative to staffing in-house multilingual employees or utilizing FFI services. Our clients rely on the quality, accuracy and professionalism of our highly skilled interpreters who facilitated over 21 million calls in 2008, helping people communicate across linguistic barriers. Our low-cost delivery model and focus on operating efficiency has enabled us to be competitive in the pricing of our services, while maintaining strong profitability levels. Given the strong secular trends for our services and the uniquely low capital requirements of our business model, we have consistently grown our business and delivered strong free cash flow. We have grown our revenue to $278.2 million in 2008 from $185.3 million in 2006, representing a CAGR of 22.5%. Our income from operations for 2008 was $70.3 million, and from 2006 to 2008 our ratio of annual capital expenditure to revenue has averaged 1.7%.

Our compelling value proposition in providing high quality language services of a mission-critical nature has contributed to our client retention and recurring revenue. Many of our clients are required or mandated by law and regulation to service their customers in the customers’ native language. Our client churn in the United

 

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States (as measured by lost minutes) was less than 5% in 2008, and 90% of our 250 largest U.S. clients in 2008 have been procuring our services for over five years. We have measured our 2008 churn by calculating (i) the number of minutes lost when comparing our total minutes from our 2007 fiscal year attributable to clients that reduced their total billed minutes by 90% or more in our 2008 fiscal year, and (ii) dividing such number by the total minutes we accumulated in 2007. The majority of our revenue is generated from long-term subscriptions from corporate clients who are charged on a “pay for use” basis that optimizes a client’s outsourcing costs relative to less efficient and capital intensive in-house solutions. Our clients incur minimal start-up costs and can transition to our on-demand interpretation services solution within days of selecting us as a vendor.

Over our 27-year history, we have established the world’s largest language interpretation workforce consisting of over 4,000 well-trained, dedicated interpreters who deliver quality, accurate and professional interpretation services on a 24/7 basis. Our delivery model is scalable and requires low capital investment to maintain and grow, as the majority of our interpreters work from home in the United States, supplemented by interpreters located in six domestic and international interpretation centers. This model enables our cost structure to be variable, optimizing interpreter availability with fluctuations in demand across multiple languages and skill sets without the fixed cost burden of facilities-based agent models.

We continually invest in our proprietary technology platforms to provide operating leverage in our outsourcing model and to sustain high barriers to competitive entry. Our scalable call-routing and interpreter scheduling technologies augment our ability to offer superior service at a lower cost than our competitors. Our call routing technology, TITAN, handles thousands of calls simultaneously and, within seconds, sources our highest quality, lowest cost available interpreters with an optimized interpretive skill set, whether they are working at home or in one of our global interpretation centers. Additionally, we developed a fully integrated interpreter scheduling system to forecast and optimize interpreter utilization across multiple languages and skill sets based on a proprietary 10-year call history database.

 

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Our Services

Our interpretation services enable our clients to increase their revenue and deliver mission-critical services to their customers, thereby improving their customer loyalty. We focus on providing our clients with flexible and high-value interactions that require immediate availability of our multi-lingual resources. We also aim to help clients comply with applicable laws and regulations by providing in-language support to our clients’ growing population of current and prospective LEP clients. Listed below is a selected listing of our service offerings.

LOGO

Our Market Opportunity

The language services market represents a large and rapidly growing market opportunity. According to Common Sense Advisory, Inc., Norbridge, Inc. and management estimates, the language services market in the United States was estimated at approximately $12.1 billion in 2007 and is expected to grow 14.6% annually, reaching $24.0 billion by 2012. We primarily participate in the $3.4 billion “spoken word” language services sector, which is comprised of the $1.6 billion OPI market and the $1.8 billion FFI market, both of which have grown at an annual rate of approximately 10% since 2007.

We believe that growth in the language services market will be driven primarily by a number of macro trends including growth in the immigrant population, regulatory and public policy initiatives, an increasing focus on ethnic marketing and continued outsourcing of language services. Immigration in the U.S. has reached record high levels in recent years, and population growth is occurring fastest in geographies including California, Arizona and Florida, where a significant percentage of families do not speak English as a primary language. In addition, legislation is being enacted on a federal and statewide basis that encourages, and in some cases mandates, serving LEP populations in their native language, including Title VI of the Civil Rights Act of 1964. Additionally, ethnic marketing needs have increased as LEP households’ buying power has grown significantly, and corporations look to gain customers within these populations. Finally, we expect continued outsourcing of language-based services and believe it will be a significant growth driver; today we estimate that less than 25% of the OPI market opportunity is currently outsourced to third-party providers such as Language Line.

 

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Immigrant Population

Immigrants comprise a significant portion of the U.S. population and are expected to continue to grow as a percentage of the overall population. According to the Pew Research Center, the population of the United States will rise from 296 million people in 2005 to 438 million people in 2050. Of this expected growth, approximately 82% or 117 million people will be from immigrants arriving from 2005 to 2050 and their U.S.-born descendants. As a result, nearly one in five Americans will be an immigrant in 2050, compared with one in eight in 2005. Additionally, the Hispanic population, which is already the largest minority group in the United States, will triple in size and make up 29% of the U.S. population by 2050, compared with 14% in 2005. We expect the growth in the immigrant population to drive an increase in LEP speakers, the primary users of language services, as evidenced by the U.S. Census Bureau’s 2000 Census that concluded that 83% of immigrants in 2000 spoke a language other than English at home.

Public Policy

Legislation at the national and local levels frequently mandates public services for LEP populations in their native language. For example, an executive order pursuant to Title VI of the Civil Rights Act of 1964 requires that healthcare, government agencies and social services have language interpretation services available for non-English speakers in order to receive government funding. On August 11, 2000, President Clinton signed Executive Order 13166, “Improving Access to Services for Persons with Limited English Proficiency,” which required Federal agencies to examine the services they provide, identify any need for services to those with limited English proficiency and develop and implement a system to provide those services so LEP persons can have meaningful access to them. This Executive Order also requires that Federal agencies work to ensure that recipients of Federal financial assistance provide meaningful access to their LEP applicants and beneficiaries. These public policy initiatives are also occurring at the state and local level. For example, in January 2009, legislation went into effect in California that requires health insurers to provide LEP customers with access to translated documents and language assistance when seeking any form of medical care. Similar public policy initiatives supporting the need for interpretation related services are in effect in other English-speaking countries, including the Human Rights Charter in the United Kingdom and the Canadian Charter of Rights and Freedoms.

Ethnic Marketing in the United States

Ethnic segments, especially Asians and Hispanics, continue to have a growing impact on the U.S. economy. For instance, according to the Selig Center for Economic Growth, Asian buying power has increased almost five-fold from $116 billion in 1990 to $509 billion in 2008, and Hispanic buying power has grown 349% from $212 billion in 1990 to $951 billion in 2008. According to a study published by K&L Advertising, LEP customers are nearly four times more likely to purchase products and services from companies that communicate with them in their native language. While the combined buying power for the Hispanic and Asian population is greater than $1.0 trillion today, a significant number of Hispanic and Asian households are “linguistically isolated,” making native language based interaction vital for client acquisition and retention. For example, according to First Data Corporation, in 2007 53% of the Mexican immigrant population in the United States does not have a checking account or is “un-banked,” compared with 17% of the U.S. born population. Additionally, according to Pew Hispanic Center and LIMRA International in 2006, among the Hispanic population, home ownership was approximately 49% compared with approximately 68% for the population as a whole, and only 36% of households have life insurance compared with 54% for the population as a whole. We believe that demand for OPI and other language services will continue to grow as companies focus on ethnic marketing opportunities as a way to grow revenue, increase market share and build profitable client relationships in populations that are largely under-served today.

 

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Our Business Model

A majority of our revenue is generated from subscribed interpretation, which is designed for clients with frequent interpretation needs. Usage for the majority of clients is billed in one-minute increments. Price per billed minute is typically based on the language requested and time of day, subject to discounts related to billed minute volume pricing arrangements with certain clients.

Our top 10 languages accounted for over 91% of our billed minutes in 2008; Spanish language accounted for approximately 70% of our billed minutes in 2008, which is consistent with historical percentages. We provide a number of complementary services that allow us to offer a full service language solution to our clients. Included among those services are FFI, document translation, VIS and American Sign Language.

Our Competitive Strengths

We believe we have established ourselves as the market leader for OPI services as a result of significant investments in technology and network infrastructure, the breadth of languages we offer, the quality of our interpreters, our significant cost advantage and our consistent and reliable performance. In-house interpretation, performed either by bilingual call center agents or face-to-face agents, presents our largest form of competition; however, in-house interpretation services generally offer fewer languages, reduced on-demand interpreter availability, slower call handling times and higher cost of service. Additionally, while there are some technology solutions offered at lower price points with high availability, such as web self-service, IVR services and machine translation, these options offer fewer language capabilities, have limited flexibility and cannot provide interpretation for critical situations.

Additionally, we have targeted the FFI market both as a growth opportunity and a vehicle to enhance client retention and new client acquisition. A key strategy of our service offering is to migrate a portion of client FFI sessions to a more efficient and cost-effective OPI service. We intend to leverage our global interpreter network, technology platform and strong market position to expand our presence in the FFI market over time.

Our global presence, scalable operating platform, proprietary technology, highly skilled interpreter workforce and low-cost services delivery model create a unique client value proposition, and we believe these factors have established our company as a leading provider of on-demand interpretation services.

Industry-leading operating scale and global interpreter workforce

We believe we are the largest independent provider of OPI services globally. We offer high quality and accurate interpretation services to over 10,000 clients in the U.S., Canada, and the U.K. through our over 4,000 skilled and professionally trained interpreters. We successfully connect our clients with interpreters on a 24/7 basis offering over 170 different languages in less than twenty seconds over 99.5% of the time. We believe our scale affords us the ability to deliver a greater breadth of services at a significantly lower cost than our competitors.

Attractive value proposition leading to long-term, recurring client relationships

We have a differentiated service offering that includes on-demand interpreter availability on a 24/7 basis, customized interpretation solutions and a pay-for-use client pricing model. Demand for our services continues to grow through economic cycles due to the mission-critical nature of our services, our diverse client base and the multitude of the language service applications we provide. The majority of our client revenue is generated from subscribed interpretation, which is designed for clients with frequent interpretation needs. The stability and

 

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predictability of our revenue is attributable to the diversified client base and to our proven ability to retain a large percentage of our clients. Our client churn in the United States (as measured by lost minutes) was less than 5% in 2008, and 90% of our 250 largest U.S. clients in 2008 have been procuring our services for over five years.

Innovative interpreter workforce recruiting, training and monitoring

We believe the quality of our interpreter services is among the best in the industry, driven by our rigorous and industry-recognized interpreter recruiting, training, certification and retention programs. By using predominantly dedicated employee interpreters, unlike our competitors who largely utilize independent contractor interpreters, we are able to achieve a higher degree of control over the training and management of our interpreters and can better ensure the quality of the interpretation service. In our front-end recruiting process, only one out of every 12 applicants is selected. Our screening and recruiting process ensures high quality interpreters since skills in language, inter-cultural communication and customer service are monitored by our dedicated Quality Assurance department. Once hired, all employee interpreters undergo training on ethical standards, client requirements, interpretation and customer service. Additionally, the interpreters participate in industry-specific training programs developed in collaboration with industry experts, such as Medical Interpreting Training, Insurance Interpreter Training, Finance Interpreter Training, 911 Interpreter Training and Legal and Court Interpreting Training. Our specialized interpreter certification program is a significant competitive differentiator and value-added service. As of September 30, 2009, approximately 50% of our interpreters have been awarded or are pending certification under the Federal Government Security Requirements issued by the U.S. Department of Homeland Security and approximately 8% have certifications in medical interpretation. We meet and exceed the rigorous American Society for Testing and Materials standards for interpreter quality and training.

Proprietary call handling and skills-based routing technology platforms

We continually invest in our proprietary and patented technology platforms to maintain the best service metrics in the OPI industry, to provide operating leverage in our on-demand outsourcing model and to sustain high barriers to entry. Our patented and scalable call-routing technology, TITAN, helps drive continued client loyalty through skills-based call routing and fast connect times. TITAN enables us to efficiently handle thousands of simultaneous calls, allowing us to quickly connect our interpreters to our clients and ensure a high-quality client experience. For the nine months ended September 30, 2009, our average answer time was 0.4 seconds, and our interpreter connect time was less than 20 seconds, with Spanish, our most popular language, connecting at an average of less than 15 seconds. Some of our clients, for example, include 911 emergency response centers and hospitals, for which high-quality language services with fast connect times are often critical. Depending on the type of service required, calls are routed on a skills-basis to interpreters who are able to interpret general and customer service calls as well as more specialized interpreters trained by industry experts in the fields of healthcare, insurance and financial terminology, as well as emergency and 911 procedures. Our TITAN system is further supported by a state-of-the-art telecom infrastructure that provides increased reliability and business continuity.

Operational excellence and focus on low-cost delivery of services

Our focus on operational excellence and globally deployed best operating practices assures that we can deliver a consistent, scalable and high-quality interpretation experience to our clients and our clients’ customers from any of our interpreters working from home and from our six interpretation centers located in domestic and international locations. Our scale, coupled with our call delivery technology, helps drive down our unit costs, which is important to delivering our value proposition. Our delivery system includes an efficient interpreter sourcing strategy balancing interpreter location and skills mix, continuous improvement in interpreter productivity and scalability as our business grows. Our proprietary database of call arrival patterns, combined

 

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with our fully integrated scheduling program maximizes the efficiency and utilization of our global interpreter workforce and optimizes our fixed cost base. This system continually synthesizes over ten years of historical call volume data in rolling 15-minute increments and analyzes patterns of total call volume, language usage, industry distribution and client distribution to optimize the time our interpreters are occupied. Our interpreter productivity (defined as the number of revenue-generating interpreted minutes compared with the number of minutes paid to interpreters), for example, improved by 55% between 1999 and 2008. Our ability to maximize the productivity of an interpreter during each working hour as well as the competitive salaries we can afford to pay to attract talented interpreters are significant competitive differentiators in terms of profitability and operating leverage.

Proven, experienced management team

We have a proven, experienced management team that has been instrumental in establishing and expanding our industry leadership position. Combined, management has over 50 years of experience with us. Management has instituted a number of initiatives to position us for growth; management has (i) aggressively managed and invested in our sales and marketing function in order to drive same-client revenue growth and revenues from new client acquisitions; (ii) developed and invested in patented technologies in order to introduce new language service offerings and improve operating efficiency; (iii) implemented process improvements to increase our operating efficiency and profitability; and (iv) successfully integrated multiple acquisitions, one of which expanded our presence into the U.K. Management has grown our revenue to $278.2 million in 2008 from $185.3 million in 2006, representing a CAGR of 22.5%.

Our Growth Strategies

We expect our future growth to be driven by the continued secular growth of the overall language services market; however, we have also undertaken several key strategic initiatives intended to outpace market growth, including:

Further penetration of our existing client base

We believe less than 25% of the OPI market opportunity today has been outsourced to third-party OPI providers such as Language Line. We offer a wide range of OPI applications for over 10,000 clients across a number of diverse industry verticals, including healthcare, government, financial services insurance, telecommunications and utilities. We have a strong track record of extending the scope of these client relationships over time by selling other proven industry applications. As an example, one national property and casualty insurance company grew the number of LEP calls serviced from 628 since becoming a client in 1990, to 140,000 calls in 2008. This client began using us for auto and homeowner claims and has extended its use of our services over time to include customer service centers and its sales agent network. We leverage our industry specific expertise and partner with our clients to identify additional areas of need for interpretation to expand our services. As a result, we have compiled a detailed database of our existing clients’ in-house OPI operations, which enables us to be highly-targeted, effective and efficient in our sales efforts. From 2006 to 2008, revenue from current U.S. clients as of December 31, 2008 (excluding clients gained through acquisitions) grew approximately 14% annually on a compounded basis.

Acquisition of new clients

We aim to develop new client relationships and further diversify our client base by targeting clients and industry verticals that exhibit a demonstrated need for language interpretation services. For example, we estimate penetration in the insurance, healthcare, utilities and telecommunications industries, was approximately 33%, 20%, 19% and 12%, respectively, of the available interpretation minute opportunity in 2007. We believe that our unique service offerings, breadth of language capabilities, interpreter quality, technology and call-routing

 

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infrastructure and industry-specific knowledge position us to attract new clients. We have been successful acquiring new clients in the past. New U.S. clients acquired since 2006 represented approximately 12% of our revenue in 2008.

Expand addressable market opportunities with new products and services, including face-to-face interpretation

By providing a comprehensive language services offering, we intend to further enhance client retention, pursue new clients and create incremental profit margin contribution. For example, we have only recently begun to penetrate the large and fragmented FFI market, which represents an opportunity for us to accelerate our growth and achieve profitable incremental scale. We plan to launch these services in selected geographic markets, supplementing our traditional OPI services with FFI. Other targeted complementary services include document translation and Language Line University, our service to test, train and certify interpreters that may work for us or directly for our customers.

Pursue international expansion opportunities

We have expanded our service offering into the U.K. and Canada by deploying our sales force in those countries and also by acquiring what we believe was the leading OPI provider in the U.K. We believe there is further opportunity to grow our business in these countries. According to Norbridge, Inc., in 2006 there were approximately 7.6 million LEP speakers in the U.K. and approximately 3.5 million in Canada, and both countries encourage, and in a growing number of cases mandate, companies to serve its customers in their native language. Given our limited penetration of these markets and the potential market opportunity, we believe further growth opportunities exist to expand our client base outside of the United States.

Pursue accretive bolt-on acquisitions

Although we have significant market share of the outsourced OPI market in the United States, the remaining domestic and international markets are highly fragmented. Given the scale in our operating platform, we have historically made successful accretive bolt-on acquisitions. We have a demonstrated track record of successful execution and integration of our past acquisitions, including OnLine Interpreters, Language Line Limited in the U.K. and TeleInterpreters over the last seven years.

Clients

We serve a diverse population of over 10,000 clients, including Fortune 1000 companies and Small Office Home Office, which we refer to as SOHO, firms requiring OPI services. Our core target industries, including healthcare, government, financial services, insurance, telecom and utilities, accounted for approximately 28%, 19%, 17%, 14%, 9% and 3% of revenue, respectively in 2008. We also serve clients in retail, manufacturing and business services, which account for 10% of revenues. In 2008, our largest client accounted for approximately 3% of our revenue and our largest 100 clients represented 55% of our revenue. In 2008, 90% of our 250 largest U.S. clients have been procuring our services for over five years.

Technology Platforms

We have made significant capital investments in proprietary technology over the past twenty years to network globally, create more efficient processes, provide business continuity and systems redundancy, allow more stability in the systems and make available a scalable technology platform for future expansion.

 

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Our proprietary call routing system enables us to efficiently handle significantly more call volume than our OPI competitors. Our call-handling system, TITAN, allows us to efficiently handle thousands of simultaneous calls. This allows us to quickly connect our interpreters to our clients.

We rely upon a fully integrated scheduling system that generates monthly forecasts of volume by language against planned interpreter attendance to produce a schedule for the following month. This system also captures historical transaction records (e.g., hours worked by interpreter) from the database servers and provides linkage to the payroll system. The scheduling program incorporates over ten years of historical call volume data in fifteen minute increments and analyzes patterns of total call volume, language usage, industry distribution and client distribution in order to optimize the time our interpreters are occupied. This system enables us to forecast and optimize interpreter occupancy for twelve months into the future.

Our technology systems are comprised of an Avaya Call Manager with ESS (Enterprise business continuity/survivability feature), Conversant and Voice Portal IVR systems, and redundant computer-telephony, referred to as CTI servers. We also utilize multiple database servers. We maintain multiple systems and servers in order to provide valuable redundancy in the event of an interruption in service.

We rely on a combination of trademark and patent laws, as well as on confidentiality procedures and non-compete agreements to establish and protect our proprietary rights. We currently own 3 registered patents and 49 registered trademarks including those patents and trademarks we obtained through our past acquisitions. These patents do not begin to expire until 2022, and our trademarks continue as long as we actively use them. We have 5 pending patent applications pertaining to technology relating to intelligent call routing and processing as well as interpreter management. New patents that are issued have a life of 20 years from the date the patent application is initially filed. We believe the existence of these patents and trademarks, along with our ongoing processes to add additional patents and trademarks to our portfolio, may create barriers to entry for our current and future competitors and may also be used for defensive purposes in certain litigation.

Sales and Marketing

Generally, we target a long-term partnership with clients that have a demonstrated need for interpretation services. We continue to expand our sales and marketing team and currently have over 100 dedicated sales and marketing personnel located in our Monterey, California Headquarters and throughout the United States, in Canada and in the United Kingdom. Our sales and marketing teams focus on both expanding the scope of our current client relationships and developing new client relationships. Our sales teams are grouped within a channel coverage plan, each targeting clients within specific segments as defined by a client’s size. We generally pay commissions to sales professionals on both new sales and incremental revenue generated from existing clients.

We have deployed sales and marketing resources in the United Kingdom and Canada, and have begun to demonstrate our ability to leverage our United States infrastructure to penetrate these two markets. Similar to our United States strategy, we have begun to penetrate established industry segments by increasing our presence with current clients and acquiring new high-value OPI clients in our target industries. We are utilizing our cost advantages, industry experience and increase the interpreter pool to provide the best product and competitive pricing in these markets.

Competition

We believe that we are the leading outsourced OPI provider in the U.S. with greater scale, scope, expertise and technical capabilities than our other outsourced OPI competitors.

 

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Our most significant United States competitors include Lionbridge Technologies, Inc., Pacific Interpreters and Cyracom. We believe that our largest competitor in the United Kingdom is TheBigWord and our largest competitor in Canada is CanTalk.

The following attributes are important to our clients: connection speeds, reliability, breadth of languages, quality of interpreters and price. We believe that our performance compared to the performance of our competitors is more desirable to our clients. These service attributes are key considerations in the purchase decisions for our clients. This is particularly true for organizations concerned with compliance with Title VI of the Civil Rights Act of 1964, which requires companies to have interpretation services for LEP speakers in order to qualify for federal funding.

The primary alternatives to outsourced OPI include:

 

   

client-provided language service through bilingual agents, referred to as in-house, and face-to-face interpreters;

 

   

client relationship management, referred to as CRM, providers with foreign language capabilities; and

 

   

technology such as web self-service, IVR units and machine translation.

When deciding whether to use a language alternative to OPI, we believe our clients’ primary selection criteria are the levels of customer service, the critical nature of a call (e.g., emergency 911 or hospital emergency room), the cost to service the transaction and the availability of bilingual resources.

Client-Provided Language Service

While in-house bilingual agents can potentially offer comparable services to our OPI outsourced service, benefits are often not realized due to inefficiencies resulting from the need to manage internal productivity levels. Moreover, managing these bilingual agents can be a significant management distraction in light of the relative minor usage by the LEP customer base. As for service quality, clients are typically inexperienced in recruiting, testing, training and managing a multi-lingual workforce and often lack the resources to service their customers in more than 170 languages, 24 hours a day, seven days a week. Face-to-face interpreters can deliver more personal service, although interpreters represent a fixed cost that may become expensive if not managed efficiently. Moreover, face-to-face interpreters generally are not always available on demand when needed and cannot assist in call center applications.

CRM Providers

Many third party CRM providers offer language solutions as part of their larger outsourcing offering. Generally, the number of languages offered are limited (in many cases, only one). These offerings are usually focused on program-specific, scripted sales offers and lack the flexibility OPI provides to customer service and other critical applications. Many companies choose not to outsource critical client relationships to third party CRM providers.

Technology

Web and IVR technology provide low cost language alternatives, although the use of these technologies currently is limited to simple transactions and lacks the flexibility OPI provides for typical customer service and other critical applications. Moreover, clients still need to provide a “zero out” option when LEP speakers cannot

 

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continue with menus provided or require additional assistance beyond the basic applications. Machine translation has evolved to handle simple transactions with accuracy in the range of 80% to 90%, much less than the accuracy required to interpret the customized interpretations handled by us. Similar to CRM providers and IVR technology, machine translation lacks the flexibility desired by clients for interactions with their own clients.

Legislation

Several measures have been introduced in Congress aimed at discouraging the transfer of U.S. jobs to foreign countries including a bill that would deny federal contracts to companies with offshore operations and a bill that would require notification of workers when companies plan to outsource and require the Department of Labor to compile statistics on the trend. These legislative proposals are being challenged in state court. It is not clear whether these or similar legislative proposals will eventually become law and what, if any, impact they would have on our business and operations.

The potential passage of healthcare legislation introduced in Congress may also impact our business. Such legislation may serve to increase demand for our services if the government requires access to and reimbursement for interpretation and translation services for patients under certain circumstances.

Employees

As of December 31, 2008, we employed directly or indirectly 4,634 workers as follows:

 

Function

   Employees    Agency
Employees
   Total

Interpreters

   1,899    2,359    4,258

Operations

   153    11    164

Sales & Marketing

   107    5    112

Customer Care

   20    1    21

Information Technology

   29    1    30

Finance

   23    3    26

Administrative

   16    7    23
              

Total

   2,247    2,387    4,634
              

We have multiple worker relationships within our workforce. Many of our workers are employed directly by us. We also contract with third-party agencies to employ workers, principally interpreters, exclusively for us. This relationship facilitates compliance with local labor laws (particularly in foreign jurisdictions where we operate), recruiting and market entry. We also use independent contractors for a small portion of our interpretation needs, principally for peak volumes and for lower-volume languages. During November 2009, we used 416 independent OPI contractors, whose interpreter activity equated to 133 full-time equivalents.

The majority of our interpreters work from home in the United States, Canada and the United Kingdom, with the balance located in global interpretation centers which are mainly located in Central America.

As of December 31, 2008, all of our employees were non-unionized. Effective February 2009, a portion of our agency employees located in Panama became subject to a collective bargaining agreement.

Legal Proceedings

We are subject to various legal proceedings and claims which arise in the ordinary course of our business. Although the outcome of these and other claims cannot be predicted with certainty, management does not believe that the ultimate resolution of these matters will have a material adverse effect on our financial condition or on our operations. We maintain general liability insurance coverage in amounts we deem adequate for our business.

 

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Properties

We do not own any real property. Our principal executive offices are in Monterey, California. The following is a list of our principal facilities of our subsidiaries and their principal functions:

 

Location

  

Purpose

  

Sq. Ft.

  

Expiration

Monterey, CA    Headquarters    28,020    December 2010
London, U.K.    U.K. Headquarters    6,000    July 2010
Elk Grove, IL    Interpretation Center    5,026    November 2011
Dominican Republic    Interpretation Center    16,527    October 2012
Panama (2 leases)    Interpretation Centers    12,273/10,076    April 2010 and November 2011
Costa Rica (2 leases)    Interpretation Centers    11,190/11,153    April 2010 and 2011
Portland, OR   

Ancillary Services

   11,956    March 2013

We believe that our facilities are generally adequate for current and anticipated future use, although we may from time to time lease new facilities or vacate existing facilities as our operations require.

 

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MANAGEMENT

Directors and Executive Officers

Set forth below are the name, age, position and a description of the business experience of each of our executive officers and directors as of November 15, 2009.

 

Name

   Age   

Position

Dennis G. Dracup

   56    Chief Executive Officer and Chairman

Louis F. Provenzano

   50    President, Chief Operating Officer and Director

Michael F. Schmidt

   47    Chief Financial Officer, Senior Vice President of Finance and Director

James L. Moore Jr.

   64    Chief Information Officer

Yung-Chung Heh

   47    Vice President of Global Operations

Karen Gilhooly

   50    Senior Vice President of Sales

Jeffrey M. Johnson

   44    Vice President of Business Development

Vanessa Eke

   44    Managing Director of Language Line Limited

Peggy Koenig

   52    Director

C.J. Brucato

   36    Director

Azra Kanji

   29    Director

Lauren Rich Fine

   50    Director Nominee

Vince Kelly

   50    Director Nominee

Robert P. MacInnis

   43    Director Nominee

Executive Officers

Dennis G. Dracup joined us in 2004 as President and Chief Executive Officer. Since October 2006, Mr. Dracup has served as our Chief Executive Officer. Prior to joining us and since 1996, Mr. Dracup was the Chief Executive Officer of Gemkey.com and the President of Pitney Bowes Software Solutions. Mr. Dracup earned his Executive Management Certificate from Northwestern University, M.S. in Information Systems from Roosevelt University, M.B.A. from State University of New York at Buffalo and B.A. in English from Canisius College.

Louis F. Provenzano has served as our President and Chief Operating Officer since October 2006 and as Executive Vice President of Sales and Marketing since November 2004. Prior to joining us in November 2004 and since December 2002, Mr. Provenzano was Vice President of Worldwide Sales and Account Management for Metavante (acquired by Fidelity National Information Services). Prior to that and since 1989, Mr. Provenzano held positions of Vice President of Worldwide Sales for Alysis Technologies (acquired by Pitney Bowes) and Senior Vice President of Loan Pricing Corporation (acquired by Reuters). Mr. Provenzano earned a B.A. degree from Boston College.

Michael F. Schmidt has served as our Senior Vice President of Finance since July 2007 and Chief Financial Officer since August 2007. Prior to joining us and since April 2004, Mr. Schmidt was Chief Financial Officer and Executive Vice President of Autobytel. From April 2002 to April 2004, Mr. Schmidt was Chief Financial Officer at Telephia Inc., a provider of performance information for the mobile telecommunications industry. From December 2000 to August 2001, Mr. Schmidt was Chief Financial Officer of Autoweb.com, Inc., an

 

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automotive marketing services company. Mr. Schmidt began his career as a certified public accountant with Ernst & Whinney. Mr. Schmidt received a Bachelors of Business Administration and Accounting from Cleveland State University.

James L. Moore Jr. joined us in 2000 as Chief Information Officer. Prior to joining us and since 1998, Mr. Moore was the Chief Information Officer of Borland Software Corporation and Director of Information Systems of Softbank Content Services Inc. Mr. Moore earned his M.S. and B.A. in Engineering from California State University Northridge.

Yung-Chung Heh joined us in 1989. Prior to her current position as Vice President, Global Operations, she was Vice President of International Sales. Prior to that, she was Director of Marketing and Sales and Director of Operations. Ms. Heh has an A.A. degree in Accounting, and a B.A. in English. She earned her M.A. in Translation and Interpretation (Chinese/English) from the Monterey Institute of International Studies.

Karen Gilhooly joined us in September 2006. Prior to joining us, Ms. Gilhooly was with Citigroup where she served as Managing Director of the Global Transactions group in the Corporate Investment Bank. In this capacity, Ms. Gilhooly led the North America sales effort for international payments and product franchising. Though the majority of Ms. Gilhooly’s career was spent with Citigroup in a variety of business management roles, she also held senior leadership positions in companies engaged in the emerging online bill payment technologies including Metavante, Intelidata and Princeton eCom. Ms. Gilhooly attended the University of Illinois where she majored in History and English.

Jeffrey M. Johnson has served as our Vice President, Business Development since July 2006. Mr. Johnson joined us in 2002 in a market management position and in 2004 held the Director of Marketing position. Prior to that, Mr. Johnson held senior operations and marketing positions at Pitney Bowes. Mr. Johnson holds an MBA with distinction from Northwestern University’s J.L. Kellogg Graduate School of Management, and a Bachelor of Science degree with honors from California Polytechnic State University.

Vanessa Eke has served as Vice President and Managing Director of Language Line Limited since 2006. Prior to joining us and since 2002, Ms. Eke was the Managing Director of Nielsen Media Research U.K. and Ireland, under which also resided the Adex International Division of AC Nielsen. Prior to that and since 1999, she was employed at PearsonPlc, Financial Times Business Limited where she was Strategic Development and Research Director. Until that time and since 1986, Ms. Eke held a number of increasingly responsible management positions with VNU Business Publications. Her early career began at Peat Marwick (now KPMG) following a B.A. Honours degree in English Literature and Philosophy from the University of East Anglia.

Our executive officers are appointed by our board of directors and serve until their successors have been duly elected and qualified or their earlier resignation or removal. There are no family relationships among any of our directors or executive officers.

Directors

Peggy Koenig became a Director of our parent in June 2004. Ms. Koenig is a Managing Partner of ABRY Partners, our largest stockholder, which she joined in 1993. From 1988 to 1992, Ms. Koenig was a Vice President, Partner and member of the board of directors of Sillerman Communication Management Corporation, a merchant bank, which made investments principally in the radio industry and was responsible for the formation of the public radio company, SFX Broadcasting, Inc. From 1986 to 1988, Ms. Koenig was the Director of Finance for Magera Management, an independent motion picture financing company for Columbia and Tri-Star Pictures. She is presently a director (or the equivalent) of KnowledgePoint360 Group and MP Media Investment. Ms. Koenig received her undergraduate degree from Cornell University and an M.B.A. from the Wharton School of the University of Pennsylvania.

 

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C.J. Brucato became a Director of our parent in June 2004. Mr. Brucato is a Partner of ABRY Partners, our largest stockholder, which he joined in 1996. Prior to joining ABRY Partners, Mr. Brucato was a member of the Media, Telecommunications and Entertainment Investment Banking Group at Prudential Securities, Inc. He is presently a director (or the equivalent) of CapRock Communications Holdings, Inc., KnowledgePoint360 Group, CyrusOne, Hosted Solutions and Q9 Networks. Mr. Brucato earned his B.S.E. from Princeton University.

Azra Kanji became a Director of our parent in June 2004. Ms. Kanji is a Vice President at ABRY Partners, our largest stockholder, which she joined in 2003. From 2001 to 2003, Ms. Kanji was an analyst in the Communications, Media and Entertainment group at Goldman, Sachs & Co. She is presently a director of Grande Communications and KnowledgePoint360 Group. Ms. Kanji received her undergraduate degree from Duke University.

Director Nominees

Lauren Rich Fine has been nominated, and has agreed to serve, as a Director upon the completion of this offering. From October 2007, Ms. Fine has held the position of a Practitioner in Residence at Kent State University School of Journalism & Mass Communication. Ms. Fine is also a director (or the equivalent) at Dolan Media, Brand Muscle, the Cleveland Film Society, the Chantaugua Foundation, Cleveland Jewish News, Laurel School, Urban Community School Cleveland and In Counsel with Women. From October 2008 through July 2009, Ms. Fine also served as the Director of Research of ContentNext Media. From March 1988 through April 2007, Ms. Fine worked at Merrill Lynch Securities Research & Economic Division, where she was serving as Managing Director. Ms. Fine received an M.B.A. from the Stern School of Business at New York University.

Vince Kelly has been nominated, and has agreed to serve, as a Director prior to our listing of our common stock on NASDAQ. Mr. Kelly is currently the President and Chief Executive Officer and a member of the board of directors of USA Mobility, Inc. From August 1995 to February 2003, Mr. Kelly served as the Chief Financial Officer of Metrocall, the predecessor of USA Mobility, Inc. Mr. Kelly served as the Audit Committee chairman of Penton Media in 2006 and 2007. Mr. Kelly received his Bachelor of Science from George Mason University and his CPA in Virginia.

Rob MacInnis has been nominated, and has agreed to serve, as a Director upon the completion of this offering. Mr. MacInnis has worked at ABRY Partners since December 1998 where he is currently a Partner. Mr. MacInnis also currently serves on the audit committee of the board of directors of Muzak LLC and as a board member of Proquest, Gould & Lamb, Psychological Services, Inc. and F&W Media. In the past, Mr. MacInnis has served on the board of Consolidated Theatres and Hispanic Yellow Pages Network. Prior to working at ABRY Partners, Mr. MacInnis was a senior manager at PricewaterhouseCoopers LLP from June 1991 through May 1997. Mr. MacInnis graduated summa cum laude from Merrimack College with a B.S. in business and received an M.B.A. summa cum laude from Boston University.

Corporate Governance

Board Composition

Our business and affairs will be managed under the direction of our board of directors. Our amended and restated bylaws will provide that our board of directors will be fixed from time to time by resolution adopted by the affirmative vote of a majority of the total directors then in office. Our board of directors currently consists of six directors. Currently, all of our directors are either employed by us or affiliated with ABRY Partners, our largest unitholder, and elected pursuant to the members agreement among Language Line Holdings LLC and its members, which we refer to as the Members Agreement. See “Certain Relationships and Related Party Transactions—Members Agreement.” Upon completion of this offering, our board of directors will be comprised of seven directors. Immediately following completion of this offering, we expect Mr. Provenzano, our President and Chief Operating Officer, and Mr. Schmidt, our Chief Financial Officer, to resign as members of our board of directors. We intend to increase the size of our board of directors and nominate Ms. Fine and Messrs. Kelly and

 

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MacInnis to our board of directors. Immediately following the completion of this offering, we expect that at least        members of our board of directors will be independent. The directors will have discretion to increase or decrease the size of the board of directors.

Our board of directors will be divided into three classes, with each director serving a three-year term and one class being elected at each year’s annual meeting of stockholders.                      and                      will serve as Class I directors with an initial term expiring in 2011.                      and                      will serve as Class II directors, with an initial term expiring in 2012.                      and                      will serve as Class III directors with an initial term expiring in 2013.

Upon completion of this offering, ABRY Partners and the funds affiliated with ABRY Partners will continue to control a majority of the voting power of our outstanding common stock. As a result, we will be a “controlled company” under NASDAQ corporate governance standards. As a controlled company, exemptions under NASDAQ standards will free us from the obligation to comply with certain NASDAQ corporate governance requirements, including the requirements:

 

   

that a majority of our board of directors consists of “independent directors,” as defined under the rules of NASDAQ;

 

   

that we have a corporate governance and nominating committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities; and

 

   

that we have a compensation committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities.

These exemptions do not modify the independence requirements for our Audit Committee, and we intend to comply with the applicable requirements of the Sarbanes-Oxley Act and NASDAQ rules with respect to our Audit Committee within the applicable time frame. See “—Audit Committee.”

Board Committees

Our board of directors will establish the following committees prior to the completion of this offering: an Audit Committee, a Compensation Committee and a Nominating and Corporate Governance Committee. The composition and responsibilities of each committee are described below. Members serve on these committees until their resignation or until otherwise determined by our board.

Audit Committee

We plan to establish an Audit Committee prior to completion of this offering. Upon the completion of this offering, our Audit Committee will consist of Peggy Koenig, Lauren Rich Fine and Vince Kelly, with Mr. Kelly serving as chair of the Audit Committee. Our Audit Committee will have responsibility for, among other things:

 

   

selecting and hiring our independent auditors, and approving the audit and non-audit services to be performed by our independent auditors;

 

   

evaluating the qualifications, performance and independence of our independent auditors;

 

   

monitoring the integrity of our financial statements and our compliance with legal and regulatory requirements as they relate to financial statements or accounting matters;

 

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reviewing the adequacy and effectiveness of our internal control policies and procedures;

 

   

discussing the scope and results of the audit with the independent auditors and reviewing with management and the independent auditors our interim and year-end operating results; and

 

   

preparing the Audit Committee report that the SEC requires in our annual proxy statement.

The SEC rules and NASDAQ rules require us to have one independent Audit Committee member upon the listing of our common stock on NASDAQ, a majority of independent directors within 90 days of the date of the completion of this offering and all independent Audit Committee members within one year of the date of the completion of this offering. Our board of directors has affirmatively determined that Lauren Rich Fine and Vince Kelly meet the definition of “independent directors” for purposes of serving on an Audit Committee under applicable SEC and NASDAQ rules, and we intend to comply with these independence requirements within the time periods specified. In addition, Mr. Kelly will qualify as our “audit committee financial expert.”

Our board of directors will adopt a written charter for the Audit Committee, which will be available on our corporate website at www.lanuageline.com upon the completion of this offering. Our website is not part of this prospectus.

Compensation Committee

Upon completion of this offering, our Compensation Committee will consist of                     ,                      and                     .                      will be the chairperson of our Compensation Committee. The Compensation Committee will be responsible for, among other things:

 

   

reviewing and approving compensation of our executive officers including annual base salary, annual incentive bonuses, specific goals, equity compensation, employment agreements, severance and change in control arrangements, and any other benefits, compensation or arrangements;

 

   

reviewing succession planning for our executive officers;

 

   

reviewing and recommending compensation goals, bonus and stock compensation criteria for our employees;

 

   

determining the compensation of our directors;

 

   

reviewing and discussing annually with management our “Executive Compensation—Compensation Discussion and Analysis” disclosure required by SEC rules;

 

   

preparing the Compensation Committee report required by the SEC to be included in our annual proxy statement; and

 

   

administrating, reviewing and making recommendations with respect to our equity compensation plans.

Our board of directors will adopt a written charter for the Compensation Committee, which will be available on our corporate website at www.languageline.com upon the completion of this offering. Our website is not part of this prospectus.

 

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Corporate Governance and Nominating Committee

Upon completion of this offering, our corporate governance and nominating committee will consist of                     ,                      and                     .                      will be the chairperson of this committee. The Corporate Governance and Nominating Committee is responsible for, among other things:

 

   

assisting our board of directors in identifying prospective director nominees and recommending nominees for each annual meeting of stockholders to the board of directors;

 

   

reviewing developments in corporate governance practices and developing and recommending governance principles applicable to our board of directors;

 

   

overseeing the evaluation of our board of directors and management; and

 

   

recommending members for each Board committee of our board of directors.

Our board of directors will adopt a written charter for the corporate governance and nominating committee, which will be available on our corporate website at www.languageline.com upon the completion of this offering. Our website is not part of this prospectus.

Compensation Committee Interlocks and Insider Participation

None of the members of our Compensation Committee will be an officer or employee of our company. None of our executive officers currently serves, or in the past year has served, as a member of the board of directors or Compensation Committee of any entity that has one or more executive officers serving on our board of directors or Compensation Committee.

Code of Ethics

We have a code of business conduct and ethics applicable to our principal executive, financial and accounting officers and all persons performing similar functions that we plan to amend in connection with this offering. A copy of that code will be available on our corporate website at www.languageline.com upon completion of this offering. We expect that any amendments to the code, or any waivers of its requirements, will be disclosed on our website. Our website is not part of this prospectus.

Director Compensation

Prior to this offering, our directors have not received compensation for their services as directors, except for reimbursement of reasonable and documented costs and expenses incurred by directors in connection with attending any meetings of the board of directors or any committee thereof. Directors who are officers of, or employed by, us or any of our subsidiaries do not receive additional compensation for service on the board of directors or its committees.

We did not pay any compensation to members of our board of directors during 2008 because all of our directors were either employees of our company or affiliated with ABRY Partners, our largest unitholder.

Upon completion of this offering, our executive officers who are members of our board of directors and the directors who continue to provide services to, or are affiliated with, ABRY Partners will not receive compensation from us for their service on our board of directors. Accordingly, Mr. Dracup, Ms. Koenig, Mr. MacInnis, Mr. Brucato and Ms. Kanji will not receive compensation from us for their service on our board of

 

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directors. Only those directors who are considered independent directors under the corporate governance rules of NASDAQ and are not affiliated with ABRY Partners are eligible to receive compensation from us for their service on our board of directors. Mr. Kelly and Ms. Fine and all other non-employee directors not affiliated with ABRY Partners will be paid quarterly in arrears:

 

   

$25,000 annual retainer;

 

   

$1,500 for each board or committee meeting attended in person with the exception of being paid $750 for attending a committee meeting the same day as a board meeting;

 

   

$750 for each board or committee meeting attended via telephone; and

 

   

$7,500 for serving as the chairman of the Audit Committee.

In addition, upon initial election to our board of directors, each non-employee director not affiliated with ABRY Partners will receive an option grant equal to $60,000, which will vest one year from the date of grant. Each grant will be subject to the same terms as those of our employees as described in the 2010 Omnibus Incentive Plan. See “Executive Compensation—2010 Omnibus Incentive Plan.” We will also reimburse directors for reasonable expenses incurred to attend meetings of our board of directors or committees.

 

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EXECUTIVE COMPENSATION

Compensation Discussion and Analysis

The purpose of this compensation discussion and analysis section is to provide information about the material elements of compensation that are paid, awarded to, or earned by, our “named executive officers,” who consist of our principal executive officer, principal financial officer, and the three other most highly compensated executive officers. For fiscal year 2008, our named executive officers, were:

 

   

Dennis G. Dracup, Chief Executive Officer;

 

   

Louis F. Provenzano, President and Chief Operating Officer;

 

   

Michael F. Schmidt, Chief Financial Officer and Senior Vice President of Finance;

 

   

James L. Moore, Jr., Chief Information Officer;

 

   

Karen Gilhooly, Senior Vice President of Sales; and

 

   

Solange Jerolimov, Former Interim Chief Financial Officer.

Compensation Philosophy and Objectives

Our Compensation Committee is responsible for reviewing and approving the compensation of our named executive officers, as well as reviewing and approving our equity incentive plans. The review and approval of compensation and incentives to be awarded by the Compensation Committee to the named executive officers is typically undertaken on an annual basis as part of our budget review process. Once the Compensation Committee has completed its review and approval process, the Compensation Committee submits its recommendations to the board of directors for the board of directors further review, discussion and final approval.

We believe that our compensation program must support our strategy, be competitive and provide both significant rewards for outstanding performance and clear financial consequences for underperformance. We also believe that a significant portion of the named executive officers’ compensation should be “at risk” in the form of annual and long-term incentive awards that are paid, if at all, based upon corporate performance. We have strived to create an executive compensation program that balances short-term versus long-term payments and awards, cash payments versus equity awards and fixed versus contingent payments and awards in ways that we believe are most appropriate to motivate our executive officers. Our executive compensation program is designed to:

 

   

attract and retain talented and experienced executives in our industry;

 

   

reward executives whose knowledge, skills and performance are critical to our success;

 

   

align the interests of our executive officers and stockholders by motivating executive officers to increase stockholder value and rewarding executive officers when stockholder value increases;

 

   

ensure fairness among the executive management team by recognizing the contributions each executive officer makes to our success;

 

   

foster a shared commitment among executives by aligning their individual goals with the goals of the executive management team and our company; and

 

   

compensate our executives in a manner that incentivizes them to manage our business to meet our long-range objectives.

 

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After this offering, the Compensation Committee will meet outside the presence of all of our executive officers, including our named executive officers, to consider appropriate compensation for our Chairman and Chief Executive Officer. For all other named executive officers, the Compensation Committee will meet outside the presence of all executive officers except our Chairman and Chief Executive Officer. Our Chairman and Chief Executive Officer annually reviews each other named executive officer’s performance and recommends appropriate base salary, cash performance awards and grants of long-term equity incentive awards for all other executive officers. Going forward, based upon the recommendations from our Chairman and Chief Executive Officer and in consideration of the objectives described above and the principles described below, the Compensation Committee will approve the annual compensation packages of our executive officers other than our Chairman and Chief Executive Officer. The Compensation Committee annually analyzes our Chairman and Chief Executive Officer’s performance and determines his base salary, cash performance awards and grants of long-term equity incentive awards based on its assessment of his or her performance.

Compensation amounts historically have been based on a variety of factors, including, in addition to the factors listed above, experience of the individual, the need for that particular position to be filled and general understanding of the compensation levels of our other executive officers, each as of the time of the applicable compensation decision. This informal consideration was based on the general knowledge possessed by our Chairman and Chief Executive Officer regarding the compensation given to some of the executive officers of other companies in our industry through informal discussions with recruiting firms, research and personal knowledge of the competitive market. As a result, our Chairman and Chief Executive Officer and Compensation Committee historically have applied their subjective discretion to make compensation decisions and did not benchmark executive compensation against a particular set of comparable companies or use a formula to set the compensation for our executives in relation to survey data. We anticipate that our Compensation Committee will more formally benchmark executive compensation against a peer group of comparable companies in the future. We also anticipate that our Compensation Committee may make adjustments in executive compensation levels in the future as a result of this more formal benchmarking process.

In October 2009, management engaged Towers Perrin to review the current design of our executive compensation plans in preparation for an initial public offering. Management intends to use the information provided by Towers Perrin and other resources and tools to develop recommendations to be presented and approved by our board of directors. Towers Perrin has not recommended specific compensation amounts or the form of payment for any of our named executive officers. Management’s review and analysis of our executive compensation program is ongoing and has not been completed.

Elements of our Compensation Program

In fiscal year 2008, total compensation for our named executive officers consisted of the following components:

 

   

base salary;

 

   

annual incentive cash payments;

 

   

grants of long-term equity-based compensation, such as restricted stock units; and

 

   

insurance, retirement and other employee benefits and compensation.

Executive compensation includes both fixed components (base salary and benefits) and variable components (annual bonus/incentive and equity-based incentive grants) with the heaviest weight generally placed on the variable components. Each component is linked to one or more of the strategic objectives listed above. The fixed components of compensation are designed to be competitive in order to induce talented executives to join our company. Revisions to the fixed components of compensation occur infrequently aside from our annual salary

 

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review, which generally results in salary increases that range from 0% to 5.0% or upon promotions or substantial increases to the executive’s scope of responsibility. Salary increases are, in part, designed to reward executives for their management activities during the year and to maintain their level of income with respect to cost of living increases.

The variable components are tied specifically to the achievement of our annual financial objectives and are designed so that above average performance is rewarded with above average rewards. Bonus levels, as a percentage of base salary, are set once the executive is hired and generally relate to his or her scope of responsibility, with revisions typically occurring upon promotions or substantial increases to the executive’s scope of responsibility. Although bonus levels, as a percentage of base salary, generally do not change, the opportunity to accelerate bonus payments to twice the target amount for any one year does exist for an executive based upon our overall financial performance. Our bonus policy is designed to align each executive’s annual goals for their respective area of responsibility with the financial goals of the entire business as set by our Compensation Committee. The other material element to variable compensation is equity incentive awards that have historically involved the issuance of Class C units of our parent, Language Line Holdings LLC.

We combine these elements to formulate compensation packages that provide competitive pay, reward the achievement of financial, operational and strategic objectives and align the interests of our executive officers and other senior personnel with those of our stockholders.

All of our named executive officers are currently employed at-will, without employment agreements, severance payment agreements or payment arrangements that would be triggered by a change of control, with the exception of an employment agreement for Mr. Dracup, our Chairman and Chief Executive Officer, as described below in the “—Employment Agreements and Severance and Change in Control Benefits” section. Upon completion of this offering, we intend to amend Mr. Dracup’s employment agreement and enter into employment agreements with each of Mr. Provenzano, our President and Chief Operating Officer, and Mr. Schmidt, our Chief Financial Officer. For additional information, see “—Base Salary” and “—New Employment Agreements” below.

Base Salary

Base salaries are intended to provide a fixed level of compensation sufficient to attract and retain an effective management team when considered in combination with other performance-based components of our executive compensation program. We believe that the base salary element is required in order to provide our executive officers with a stable income stream that is commensurate with their responsibilities and competitive market conditions. Generally, the goal is to achieve a salary that is competitive with the salary for similar positions of similar size companies in the business services industry. Our Chairman and Chief Executive Officer and/or Compensation Committee determine market level compensation for base salaries based on our executives’ experience in the industry with reference to the base salaries of similarly situated executives in other companies operating in the business services industry. This determination is informal and based primarily on the general knowledge of our Chairman and Chief Executive Officer of the compensation practices within our industry. We offer market-competitive base salaries for executives in similar positions with similar responsibilities at comparable companies to mitigate the volatility in compensation that our executives may experience based on fluctuations in our overall performance and objectives. Salaries are reviewed during the annual review process during which an increase, if any, is determined. In addition, base salaries may be adjusted on occasion to realign a particular salary with current market conditions or changes in responsibility or authority.

Mr. Dracup’s employment agreement sets forth his annual salary and provides that his salary will increase by 5.0% on June 11 of each year. Effective June 11, 2008, his base salary was increased to $425,439 and, effective June 11, 2009, his base salary was increased to $446,711.

Base salaries are reviewed during the fiscal year by our Chairman and Chief Executive Officer, and salary increases typically take effect in June of each year, unless business circumstances require otherwise. In past

 

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years, our Chairman and Chief Executive Officer and/or board of directors reviewed the performance of all executive officers, and based on this review and any relevant informal competitive market data made available to him or them during the preceding year, through informal discussions with recruiting firms, research and informal benchmarking against our Chairman and Chief Executive Officer and/or board of directors’ personal knowledge of the competitive market, set the salary level for each executive officer for the coming year.

As part of our annual review process, in June 2008, our Chairman and Chief Executive Officer approved annual merit salary increases for each of our named executive officers, except for himself. These merit increases for our named executive officers for fiscal year 2008 were 3.0% and took into account accomplishments of each individual, as well as economic conditions that existed during fiscal year 2008. For 2009, our Chairman and Chief Executive Officer decided to keep salaries for our named executive officers consistent with salary levels in 2008.

Upon completion of this offering, we intend to amend and restate Mr. Dracup’s employment agreement. Mr. Dracup’s amended and restated employment agreement will provide for an initial term of five years with automatic one-year renewals unless otherwise terminated earlier or either party gives notice not to renew. In addition, Mr. Dracup will be paid a base salary of $560,000 per year, subject to an increase by 5.0% on each anniversary of the amended and restated employment agreement. In addition, we intend to enter into employment agreements with each of Mr. Provenzano, our President and Chief Operating Officer, and Mr. Schmidt, our Chief Financial Officer. Mr. Provenzano’s employment agreement will provide for an initial term of five years with automatic one-year renewals unless otherwise terminated earlier or either party gives notice not to renew. In addition, Mr. Provenzano will be paid a base salary of $350,000 per year, subject to an increase by 5.0% on each anniversary of the employment agreement. Mr. Schmidt’s employment agreement will provide for an initial term of five years with automatic one-year renewals unless otherwise terminated earlier or either party gives notice not to renew. In addition, Mr. Schmidt will be paid a base salary of $300,000 per year, subject to an increase by 5.0% on each anniversary of the employment agreement.

Annual Cash Incentives

Our Chairman and Chief Executive Officer and/or Compensation Committee have authority to award annual cash bonuses to our executive officers. The annual cash bonuses are intended to offer incentive compensation by rewarding the achievement of corporate objectives linked to our financial results.

On an annual basis, or at the commencement of an executive officer’s employment with us, our Chairman and Chief Executive Officer and/or Compensation Committee typically sets a target level of bonus compensation that is structured as a percentage of such executive officer’s annual base salary. Depending upon corporate performance, an executive officer may receive from 0.0% to 100.0% of his or her base salary. For fiscal year 2008, Mr. Dracup’s target bonus amount was set in accordance with his employment agreement at 50.0%. For fiscal year 2008, Messrs Provenzano and Schmidt’s target bonus amount was each set in accordance with their respective employment offer letters at 50.0%. For fiscal year 2008, Mr. Moore, Ms. Gilhooly and Ms. Jerolimov’s target bonus amount was set based upon each executive’s scope of responsibility and impact upon our performance. The annual cash incentives paid in 2009 for fiscal year 2008 were based upon corporate performance in fiscal year 2008.

The actual bonuses awarded in any year, if any, may be more or less than the target, depending on the achievement of corporate objectives, as discussed below. In addition, our Chairman and Chief Executive Officer and/or Compensation Committee may adjust bonuses due to extraordinary or nonrecurring events, such as significant financings, equity offerings or acquisitions. We believe that establishing cash bonus opportunities helps us attract and retain qualified and highly skilled executives. These annual bonuses are intended to reward executive officers who have a positive impact on corporate results.

 

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We establish our corporate financial performance objective and target amounts with reference to achieving pre-set levels of desired financial performance, and with consideration given to our annual and long-term financial plan, as well as to macroeconomic conditions. With respect to our Chairman and Chief Executive Officer, President and Chief Operating Officer and Chief Financial Officer, the annual cash bonus is linked to the achievement of adjusted EBITDA targets as set forth in their respective employment agreement or offer letter. Under their respective employment agreement or offer letter, adjusted EBITDA is based upon the operating income of the combined entity, which includes both U.S. and non-U.S. based operations. For fiscal year 2008, the annual cash bonus was linked to achievement of adjusted EBITDA of $96.9 million. We believe this corporate performance objective and the proportionate weighting assigned, as discussed below, reflected our overall company goals for fiscal year 2008, which balanced the achievement of revenue growth and improving our operating efficiency. For purposes of our cash bonus program in fiscal year 2008, adjusted EBITDA was defined as earnings before interest, taxes, depreciation and amortization, excluding approximately $10.4 million in equity-based compensation expense and $1.9 million in operating expense associated with management fees payable to Coto, which were not taken into account when setting fiscal year 2008 financial targets. Our Chairman and Chief Executive Officer and/or Compensation Committee determined that these unplanned costs and expenses were outside management’s control and excluded them when measuring adjusted EBITDA achievement under the cash bonus program. As a result, for fiscal year 2008, our actual adjusted EBITDA, as calculated for the purpose of the annual cash bonus, was $123.4 million.

The corporate performance objective is based upon the achievement of adjusted EBITDA targets that are set at a threshold amount, a target amount and a maximum amount for the fiscal year by our Chairman and Chief Executive Officer and/or Compensation Committee. The following table sets forth the adjusted EBITDA targets for fiscal year 2008.

 

Adjusted EBITDA

   Fiscal Year Targets

Threshold

   $ 87.2 million

Target

   $ 96.9 million

CEO Maximum

   $ 116.3 million

COO and CFO Maximum

   $ 135.7 million

Based upon our achievement of adjusted EBITDA as calculated under our cash bonus program, our Compensation Committee determined to award Messrs. Dracup, Provenzano and Schmidt a cash incentive bonus of approximately 67.5%, 83.8% and 83.8% of base salary, respectively.

With respect to our other named executive officers, the annual cash bonus was linked to both revenue and adjusted EBITDA growth over the prior year. For this purpose, the adjusted EBITDA is based upon operating income of our U.S. operations only. Our Chairman and Chief Executive Officer and Compensation Committee have established a matrix that sets forth the target bonus amount (as a percentage of salary) based upon a growth rate between 0.0% and 25.0% for each of revenue and adjusted EBITDA with the target bonus amount increasing as revenue and adjusted EBITDA growth rates increase. We believe these corporate performance objectives and their proportionate weightings assigned reflected our overall company goals for fiscal year 2008, which balanced the achievement of revenue growth and improving our operating efficiency. For purposes of our cash bonus program in fiscal year 2008, adjusted EBITDA was defined as earnings before interest, taxes, depreciation and amortization, excluding approximately $10.4 million in equity-based compensation expense and $3.3 million in operating expense associated with management fees, which were not taken into account when setting fiscal year 2008 financial targets. Our Chairman and Chief Executive Officer and/or Compensation Committee determined that these unplanned costs and expenses were outside management’s control and excluded them when measuring adjusted EBITDA achievement under the cash bonus program. As a result, for fiscal year 2008, our revenue and adjusted EBITDA, as calculated for the purpose of the annual cash bonus, growth rates were approximately 15.0% and 18.2%, respectively.

 

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Based upon the growth rates of revenue and adjusted EBITDA, as calculated under our cash bonus program, over the prior year, our Compensation Committee determined to award each of Mr. Moore and Ms. Gilhooly a cash incentive bonus of approximately 65.0% of base salary.

There are no policies regarding the recovery of awards or payments in the event the performance measures upon which the awards or payments are based are restated or otherwise adjusted in a manner that would have reduced the size of the awards or payments.

Long-Term Incentives

We believe that our long term success depends upon aligning executives’ and ownerships’ interests. To support this objective, we have historically provided our executives with means to become significant equity holders in the our business through the issuance of Class C units of our parent, Language Line Holdings LLC, which we believe supported the long-term retention of executives and reinforced our longer-term goals.

Equity Ownership.    The Class C units of Language Line Holdings LLC vested according to a specified schedule and were expensed to compensation over the five year vesting period. Vesting accelerates upon a change of control of Language Line Holdings LLC, as such term is defined in the applicable incentive unit agreement, and upon certain types of sales of our company. Vesting ceases if the individual ceases to be employed by Language Line Holdings LLC or any of its subsidiaries. If the individual ceases to be employed by Language Line Holdings LLC, or any of its subsidiaries, Language Line Holdings LLC will have the option to purchase all or any portion of the vested and/or the unvested Class C units. The aggregate purchase price for all unvested units will be $1.00, and the purchase price for each vested unit will be the fair market value for such unit as of the date of individual’s termination. If, however, we terminate the individual’s employment for cause, the aggregate purchase price of all vested units will be $1.00. Language Line Holdings LLC’s right to repurchase the individual’s units will terminate upon a change of control, provided that the individual is employed by Language Line Holdings LLC, or any of its subsidiaries, at the time of the change of control. After completion of this offering, all vested and unvested Class C units will be exchanged for cash and              shares of our common stock based upon a share price of $                 per share, the price to public set forth on the cover page of this prospectus. The shares of common stock to be issued in connection with any unvested Class C units will be subject to the same vesting schedule as the Class C units for which they were exchanged and will accelerate upon a change of control of our company.

Historically, the date upon which the Class C unit awards have been granted has not been fixed, but are considered upon the recommendation of our Chairman and Chief Executive Officer.

Option Awards.    We do not currently utilize options as part of our executive compensation program. However, we intend to adopt the Language Line Services Holdings, Inc. 2010 Omnibus Incentive Plan, or the 2010 Plan, in connection with our initial public offering. The 2010 Plan provides for grants of stock options, stock appreciation rights, restricted stock, other stock-based awards and other cash-based awards.

Upon completion of this offering, we intend to issue                  shares of restricted stock and stock options to exercise                  shares of common stock to our directors and director nominees and certain other officers and key employees.

Other Executive Benefits and Perquisites

We provide the following benefits to our executive officers on the same basis as other eligible employees:

 

   

health insurance;

 

   

vacation, personal holidays and sick days;

 

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life insurance and supplemental life insurance;

 

   

short-term and long-term disability; and

 

   

a 401(k) profit-sharing plan with matching contributions.

We believe these benefits are generally consistent with those offered by other companies and specifically with those companies with which we compete for employees.

Employment Agreements and Severance and Change in Control Benefits

We have entered into an employment agreement that contains severance benefits and change in control provisions with Mr. Dracup, our Chairman and Chief Executive Officer, the terms of which are described under the heading “—Potential Payments Upon Termination or Change in Control.” We believe these severance and change in control benefits are essential elements of our executive compensation package and assist us in recruiting and retaining talented individuals. In addition, upon completion of this offering, we intend to amend Mr. Dracup’s employment agreement and enter into employment agreements with each of Mr. Provenzano, our President and Chief Operating Officer, and Mr. Schmidt, our Chief Financial Officer. Such employment agreements will contain severance benefits and change in control provisions.

Summary Compensation Table

The following table sets forth the total compensation earned by each of the named executive officers for the three fiscal years ended December 31, 2008.

 

Name and Principal Position

  Year   Salary ($)   Bonus   Unit Awards(5) ($)   Non-Equity
Incentive Plan
Compensation(6)
  All Other
Compensation(7) ($)
  Total ($)

Dennis G. Dracup

  2008   $ 415,310   $   $ 6,242,185   $ 271,268   $ 18,302   $ 6,947,065

Chief Executive Officer

  2007     395,526         187,584     184,357     22,647     790,114
  2006     377,708             192,938     132     570,778

Louis F. Provenzano(1)

  2008   $ 262,631   $   $ 522,283   $ 145,547   $ 13,885   $ 944,346

President and Chief Operating Officer

  2007     254,375         12,442     107,125     13,937     387,879
  2006     217,667             25,000     12,910     255,577

Michael F. Schmidt(2)

  2008   $ 253,750   $   $ 95,816   $ 63,281   $ 10,072   $ 422,919

Chief Financial Officer & SVP Finance

  2007     110,208         668             110,876
  2006                        

James L. Moore Jr.

  2008   $ 205,012   $   $ 395,704   $ 135,329   $ 10,211   $ 746,256

Chief Information Officer

  2007     199,041         11,663     88,245     10,166     309,115
  2006     194,100             25,000     19,337     238,437

Karen Gilhooly(3)

  2008   $ 191,713   $   $ 134,680   $ 123,950   $ 603   $ 450,946

Senior Vice President of Sales

  2007     185,000         2,480     27,473     558     215,511
  2006     61,667     65,000                 126,667

Solange Jerolimov(4)

  2008   $ 86,477   $   $ 21,983   $ 51,500   $ 8,997   $ 168,957

Former Interim Chief Financial Officer

  2007     136,875         431     8,550     9,646     155,502
  2006     51,004                 2,145     53,149

 

(1) Mr. Provenzano was appointed President and Chief Operating Officer in October 2006. Amounts earned during the year ended December 31, 2006 includes $154,617 earned as Executive Vice President of Sales and Marketing, and $62,500 earned as President and Chief Operating Officer, where his annualized salary was $250,000.

 

(2) Mr. Schmidt joined us on July 23, 2007. He was appointed Senior Vice President of Finance on July 23, 2007 and Chief Financial Officer on August 15, 2007.

 

(3) Ms. Gilhooly joined us on September 1, 2006 as Vice President of Sales. Ms. Gilhooly received a signing bonus of $65,000 upon joining us.

 

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(4) Ms. Jerolimov was our acting Chief Financial Officer for the period June 16, 2007 through August 14, 2007. Ms. Jerolimov was our Controller prior to this period and again from August 15, 2007 through August 29, 2008, at which time she left our company for personal reasons. Upon her departure, Ms. Jerolimov forfeited 135,000 Language Line Holdings LLC Class C units.

 

(5) The amounts of the unit awards shown in the table represent the expense reported for financial reporting purposes in 2008, 2007 and 2006 for the fair value of Language Line Holdings LLC Class C units granted in 2008 as well as prior fiscal years in accordance with SFAS No. 123(R). For additional information, refer to the “Equity-Based Compensation” section of Note 10 to the notes to the consolidated financial statements included elsewhere in this prospectus.

 

(6) Amounts included in this column include amounts paid as annual incentive compensation (bonus), with the exception of Mr. Dracup, whose amounts represent those earned as a bonus and payable in the following year. For example, the $271,268 amount listed in the 2008 column represents Mr. Dracup’s bonus earned in 2008 that will be paid to him in March 2009. Subject to his employment agreement, Mr. Dracup’s bonus is payable upon his being employed through the last day of the year in which the bonus is earned, and he does not have to be employed in March of the following year, when the bonus amounts are generally paid.

 

(7) Represents matching contributions to the employee’s respective company 401(k) account, medical benefits paid by us and life insurance premiums paid by us, respectively, for the following individuals in 2008: Mr. D. Dracup—$8,265, $8,759 and $1,278; Mr. L. Provenzano—$8,879, $4,205 and $801; Mr. M. Schmidt—$3,434, $6,638 and $0; Mr. J. Moore—$7,986, $1,598 and $627; Ms. K. Gilhooly—$0, $0 and $603; and Ms. J. Jerolimov—$2,692, $6,039 and $266. In 2007 the following amounts were paid: Mr. D. Dracup—$8,493, $12,936 and $1,218; Mr. L. Provenzano—$8,925, $4,235 and $777; Mr. J. Moore—$7,962, $1,598 and $606; and Ms. K. Gilhooly—$0, $0, and $558. In 2006 the following amounts were paid: Mr. D. Dracup—$8,406, $10,661 and $1,065; Mr. L. Provenzano—$8,667, $3,553 and $690; Mr. J. Moore—$7,764, $11,029 and $544; and Ms. K. Gilhooly—$0, $0.

2008 Grants of Awards Table

The following table describes the Language Line Holdings LLC Class C units granted to our named executive officers during the year ended December 31, 2008. There are no outstanding or exercisable options with respect to any stock incentive plans at December 31, 2008. We currently have no stock option incentive plans.

2008 GRANTS OF AWARDS TABLE

 

Name

  Grant
Date