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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

 

FORM 10-Q

 

 

(Mark One)

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

For the quarterly period ended June 30, 2014

OR

 

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

For the transition period from                      to                     

Commission File Number 001-35846

 

 

West Corporation

(Exact name of registrant as specified in its charter)

 

 

 

DELAWARE   47-0777362

(State or other jurisdiction of

incorporation or organization)

 

(IRS Employer

Identification No.)

11808 Miracle Hills Drive, Omaha, Nebraska   68154
(Address of principal executive offices)   (Zip Code)

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

 

 

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

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

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

 

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

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

At July 29, 2014, 84,033,925 shares of the registrant’s common stock were outstanding.

 

 

 


Table of Contents

INDEX

 

     Page No.  

PART I. FINANCIAL INFORMATION

     3   

Item 1. Financial Statements (Unaudited)

     3   

Report of Independent Registered Public Accounting Firm

     3   

Condensed Consolidated Statements of Operations - Three and Six Months Ended June 30, 2014 and 2013

     4   

Condensed Consolidated Statements of Comprehensive Income - Three and Six Months Ended June  30, 2014 and 2013

     5   

Condensed Consolidated Balance Sheets - June 30, 2014 and December 31, 2013

     6   

Condensed Consolidated Statements of Cash Flows - Six Months Ended June 30, 2014 and 2013

     7   

Condensed Consolidated Statements of Stockholders’ Deficit - Six Months Ended June 30, 2014 and 2013

     8   

Notes to Condensed Consolidated Financial Statements

     9   

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

     38   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     55   

Item 4. Controls and Procedures

     56   

PART II. OTHER INFORMATION

     57   

Item 1. Legal Proceedings

     57   

Item 1A. Risk Factors

     57   

Item 6. Exhibits

     57   

SIGNATURES

     59   

EXHIBIT INDEX

     60   

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

 

2


Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

West Corporation and subsidiaries

Omaha, Nebraska

We have reviewed the accompanying condensed consolidated balance sheet of West Corporation and subsidiaries (the “Company”) as of June 30, 2014, and the related condensed consolidated statements of operations and comprehensive income for the three-month and six-month periods ended June 30, 2014 and 2013, and of stockholder’s deficit and of cash flows for the six-month periods ended June 30, 2014 and 2013. These interim financial statements are the responsibility of the Company’s management.

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

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

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of West Corporation and subsidiaries as of December 31, 2013, and the related consolidated statements of operations, comprehensive income, stockholders’ deficit, and cash flows for the year then ended (not presented herein); and in our report dated February 20, 2014 (June 17, 2014 as to notes 1, 3, and 16), we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2013 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

 

/s/ Deloitte & Touche LLP

Omaha, Nebraska

August 5, 2014

 

3


Table of Contents

WEST CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

(UNAUDITED)

 

     Three Months Ended     Six Months Ended  
     June 30,     June 30,  
     2014     2013     2014     2013  

REVENUE

   $ 691,063      $ 672,695      $ 1,367,215      $ 1,332,919   

COST OF SERVICES

     330,368        311,939        647,050        621,006   

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

     238,781        226,018        476,394        483,885   
  

 

 

   

 

 

   

 

 

   

 

 

 

OPERATING INCOME

     121,914        134,738        243,771        228,028   

OTHER INCOME (EXPENSE):

        

Interest expense, net of interest income of $43, $100, $187 and $164

     (48,351     (57,190     (97,317     (130,068

Subordinated debt call premium and accelerated amortization of deferred financing costs

     —          (6,603     —          (23,105

Other

     2,395        (1,077     3,107        (99
  

 

 

   

 

 

   

 

 

   

 

 

 

Other expense

     (45,956     (64,870     (94,210     (153,272
  

 

 

   

 

 

   

 

 

   

 

 

 

INCOME BEFORE INCOME TAX EXPENSE

     75,958        69,868        149,561        74,756   

INCOME TAX EXPENSE

     28,199        26,200        55,524        28,033   
  

 

 

   

 

 

   

 

 

   

 

 

 

NET INCOME

   $ 47,759      $ 43,668      $ 94,037      $ 46,723   
  

 

 

   

 

 

   

 

 

   

 

 

 

EARNINGS PER COMMON SHARE:

        

Basic Common

   $ 0.57      $ 0.52      $ 1.12      $ 0.63   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted Common

   $ 0.56      $ 0.51      $ 1.10      $ 0.62   
  

 

 

   

 

 

   

 

 

   

 

 

 

WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:

        

Basic

     83,953        83,524        83,879        73,716   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

     85,398        84,943        85,312        75,151   
  

 

 

   

 

 

   

 

 

   

 

 

 

DIVIDENDS DECLARED:

        

Dividends declared per share

   $ 0.225      $ 0.225      $ 0.45      $ 0.225   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

4


Table of Contents

WEST CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(AMOUNTS IN THOUSANDS)

(UNAUDITED)

 

     Three Months Ended     Six Months Ended  
     June 30,     June 30,  
     2014      2013     2014      2013  

Net income

   $ 47,759       $ 43,668      $ 94,037       $ 46,723   

Foreign currency translation adjustments, net of tax of $(1,767), $(849), $(418) and $3,250

     2,993         1,385        708         (5,303

Reclassification of a cash flow hedge into earnings, net of tax of $0, $690, $0 and $1,349

     —           (1,125     —           (2,201

Unrealized gain on cash flow hedges, net of tax of $0, $(1,157), $0 and $(2,444)

     —           1,887        —           3,987   
  

 

 

    

 

 

   

 

 

    

 

 

 

Comprehensive income

   $ 50,752       $ 45,815      $ 94,745       $ 43,206   
  

 

 

    

 

 

   

 

 

    

 

 

 

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

 

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WEST CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(AMOUNTS IN THOUSANDS)

(UNAUDITED)

 

     June 30,     December 31,  
     2014     2013  

ASSETS

    

CURRENT ASSETS:

    

Cash and cash equivalents

   $ 159,701      $ 230,041   

Trust and restricted cash

     22,549        21,679   

Accounts receivable, net of allowance of $8,793 and $9,809

     467,938        450,189   

Deferred income taxes receivable

     3,401        —     

Prepaid assets

     58,644        36,032   

Deferred expenses

     60,333        53,633   

Other current assets

     26,097        29,996   
  

 

 

   

 

 

 

Total current assets

     798,663        821,570   

PROPERTY AND EQUIPMENT:

    

Property and equipment

     1,339,984        1,280,420   

Accumulated depreciation and amortization

     (964,622     (915,655
  

 

 

   

 

 

 

Total property and equipment, net

     375,362        364,765   

GOODWILL

     2,037,730        1,823,921   

INTANGIBLE ASSETS, net of accumulated amortization of $554,338 and $528,936

     401,179        231,441   

OTHER ASSETS

     263,019        244,567   
  

 

 

   

 

 

 

TOTAL ASSETS

   $ 3,875,953      $ 3,486,264   
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ DEFICIT

    

CURRENT LIABILITIES:

    

Accounts payable

   $ 101,380      $ 82,678   

Deferred revenue

     125,863        113,405   

Accrued expenses

     283,318        249,682   

Current maturities of long-term debt

     23,754        11,877   
  

 

 

   

 

 

 

Total current liabilities

     534,315        457,642   

LONG-TERM OBLIGATIONS, less current maturities

     3,686,593        3,513,470   

DEFERRED INCOME TAXES

     153,859        112,476   

OTHER LONG-TERM LIABILITIES

     173,926        142,848   
  

 

 

   

 

 

 

Total liabilities

     4,548,693        4,226,436   

COMMITMENTS AND CONTINGENCIES (Note 12)

    

STOCKHOLDERS’ DEFICIT

    

Common stock $0.001 par value 475,000 shares authorized, 84,059 and 83,745 shares issued and 83,967 and 83,653 shares outstanding, respectively

     84        84   

Additional paid-in capital

     2,142,886        2,132,441   

Retained deficit

     (2,798,910     (2,855,189

Accumulated other comprehensive loss

     (11,492     (12,200

Treasury stock at cost (92 shares for both periods)

     (5,308     (5,308
  

 

 

   

 

 

 

Total stockholders’ deficit

     (672,740     (740,172
  

 

 

   

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT

   $ 3,875,953      $ 3,486,264   
  

 

 

   

 

 

 

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

 

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WEST CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(AMOUNTS IN THOUSANDS)

(UNAUDITED)

 

     Six Months Ended  
     June 30,  
     2014     2013  

CASH FLOWS FROM OPERATING ACTIVITIES:

    

Net income

   $ 94,037      $ 46,723   

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

    

Depreciation

     59,018        55,777   

Amortization

     32,092        33,003   

Provision for share based compensation

     6,204        5,050   

Deferred income tax (benefit) expense

     (9,549     9,007   

Amortization of deferred financing costs

     9,754        15,781   

Other

     6        38   

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

    

Accounts receivable

     (16,456     8,922   

Other assets

     (50,188     (18,562

Accounts payable

     22,354        (4,196

Accrued wages and benefits

     (2,887     8,344   

Accrued interest payable

     (3,054     17,252   

Income tax payable

     18,021        (4,731

Accrued expenses and other liabilities

     42,477        21,256   
  

 

 

   

 

 

 

Net cash flows from operating activities

     201,829        193,664   
  

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

    

Business acquisitions

     (341,925     (13

Purchases of property and equipment

     (75,434     (59,527

Other

     (870     (1,462
  

 

 

   

 

 

 

Net cash flows used in investing activities

     (418,229     (61,002
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

    

Payments on subordinated notes

     —          (450,000

Proceeds from initial public offering, net of offering costs

     —          398,271   

Proceeds from revolving credit facilities

     185,000        85,000   

Payments on revolving credit facilities

     —          (50,000

Payments of deferred financing and other debt related costs

     (5,981     (30,222

Call premium paid on subordinated notes

     —          (16,502

Principal repayments on long-term obligations

     —          (12,088

Proceeds from stock options exercised and ESPP shares issued including excess tax benefits

     3,533        873   

Dividends paid

     (37,815     (19,016

Other

     —          (9
  

 

 

   

 

 

 

Net cash flows from (used in) financing activities

     144,737        (93,693
  

 

 

   

 

 

 

EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS

     1,323        (3,700

NET CHANGE IN CASH AND CASH EQUIVALENTS

     (70,340     35,269   

CASH AND CASH EQUIVALENTS, Beginning of period

     230,041        179,111   
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS, End of period

   $ 159,701      $ 214,380   
  

 

 

   

 

 

 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

    

Cash paid during the period for interest

   $ 89,799      $ 136,508   
  

 

 

   

 

 

 

Cash paid during the period for income taxes, net of refunds of $2,614 and $2,494

   $ 47,119      $ 21,536   
  

 

 

   

 

 

 

SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES:

    

Accrued obligations for the purchase of property and equipment

   $ 10,316      $ 7,636   
  

 

 

   

 

 

 

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

 

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Table of Contents

WEST CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

(AMOUNTS IN THOUSANDS, EXCEPT SHARES)

(UNAUDITED)

 

                              Accumulated        
            Additional                 Other     Total  
     Common      Paid - in     Retained     Treasury     Comprehensive     Stockholders’  
     Stock      Capital     Deficit     Stock     Loss     Deficit  

BALANCE, January 1, 2014

   $ 84       $ 2,132,441      $ (2,855,189   $ (5,308   $ (12,200   $ (740,172

Net income

          94,037            94,037   

Dividends declared (cash dividend/$0.45 per share)

          (37,758         (37,758

Other comprehensive income, net of tax of $(418) (Note 10)

              708        708   

Executive Deferred Compensation Plan activity (59,260 shares issued)

        1,358              1,358   

Shares issued from the Employee Stock Purchase Plan (153,375 shares)

        3,236              3,236   

Stock options exercised including related tax benefits (88,639 shares)

        786              786   

Share based compensation

        5,065              5,065   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

BALANCE, June 30, 2014

   $ 84       $ 2,142,886      $ (2,798,910   $ (5,308   $ (11,492   $ (672,740
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

BALANCE, January 1, 2013

   $ 62       $ 1,720,639      $ (2,941,948   $ (5,308   $ (23,131   $ (1,249,686

Net income

          46,723            46,723   

Dividends declared (cash dividend/$0.225 per share)

          (18,802         (18,802

Other comprehensive loss, net of tax of $2,155 (Note 10)

              (3,517     (3,517

Executive Deferred Compensation Plan activity (59,339 shares issued)

        2,295              2,295   

Issuance of common stock in connection with our initial public offering (21,725,000 shares)

     21         401,012              401,033   

Initial public offering costs

        (2,860           (2,860

Stock options exercised including related tax benefits (135,851 shares)

     1         1,618              1,619   

Share based compensation

        3,722              3,722   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

BALANCE, June 30, 2013

   $ 84       $ 2,126,426      $ (2,914,027   $ (5,308   $ (26,648   $ (819,473
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

 

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WEST CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

1. ORGANIZATION, CONSOLIDATION AND PRESENTATION OF FINANCIAL STATEMENTS

Business Description: West Corporation (the “Company” or “West”) is a leading provider of technology-enabled communication services. “We,” “us” and “our” also refer to West and its consolidated subsidiaries, as applicable. We offer a broad range of communication and network infrastructure solutions that help manage or support essential communications. Our services include conferencing and collaboration, public safety services, Internet Protocol (“IP”) communications, interactive services such as automated notifications, large-scale agent services and telecom services. The scale and processing capacity of our proprietary technology platforms, combined with our expertise in managing voice and data transactions, enable us to provide reliable, high-quality, mission-critical communications designed to maximize return on investment for our clients. Our clients include Fortune 1000 companies, along with small and medium enterprises in a variety of industries, including telecommunications, retail, financial services, public safety, technology and healthcare. We have sales and operations in the United States, Canada, Europe, the Middle East, Asia-Pacific, Latin America and South America.

We operate in two reportable segments:

 

    Unified Communications, including conferencing and collaboration, IP communications and interactive services; and

 

    Communication Services, including public safety services, telecom services and agent services.

Effective January 1, 2014, we implemented a revised organizational structure which our Chief Executive Officer utilizes for making strategic and operational decisions and allocating resources. Under the revised organizational structure, automated call processing services management and operations haves been moved from the Communication Services segment to the Unified Communications segment and have been combined with alerts and notifications to form interactive services. Beginning in the first quarter of 2014, all prior period comparative information has been recast to reflect this change as if it had taken place in all periods presented.

Unified Communications

Conferencing & Collaboration. Operating under the InterCall® brand, we are the largest conferencing services provider in the world based on conferencing revenue, according to Wainhouse Research. During the six months ended June 30, 2014, we managed approximately 80 million conference calls, an 8% percent increase over the same period in 2013. We provide our clients with an integrated global suite of meeting services. InterCall also offers multimedia event services designed to give our clients the ability to create, manage, distribute and reuse content internally and externally. Through a combination of proprietary products and strategic partnerships, our clients have the tools to support diverse internal and external multimedia requirements.

IP Communications. We provide our clients with enterprise class IP communications solutions enabled by our technology. We offer hosted IP-private branch exchange (“PBX”) and enterprise call management, hosted and managed multiprotocol label switching (“MPLS”) network solutions, unified communications partner solution portfolio services, cloud-based security services and professional services and systems integration expertise.

Interactive Services. We help our clients automate, navigate and solve their communication challenges across the customer lifecycle. We design, integrate, deliver and manage applications, services, platforms and networks that aim to improve the customer experience and drive efficiencies for our clients. Our technology uses an omni-channel approach that brings together voice, text, email, push notification, fax, video, web, social media, hosted contact center and mobile to create an automated customer experience across channels. In 2013, our interactive voice response (“IVR”), hosted contact center, and alerts and notifications platforms received and delivered 2.8 billion calls and data messages on behalf of our clients.

 

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WEST CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Communication Services

Public Safety Services. We believe we are one of the largest providers of public safety services, based on the number of 9-1-1 calls that we and other participants in the industry facilitate. Our services are critical in facilitating public safety agencies’ ability to receive emergency calls from citizens.

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

— Agent Services. We provide our clients with large-scale agent services. We target opportunities that allow our agent services to be a part of larger strategic client engagements and with clients for whom these services can add value. We believe that we are known in the industry as a premium provider of these services. We offer a flexible model that includes on-shore, off-shore and home-based agent capabilities to fit our clients’ needs. With the acquisition of Health Advocate, Inc (“Health Advocate”) on June 13, 2014, we expanded our Agent Service presence in the healthcare industry.

Basis of Consolidation—The unaudited condensed consolidated financial statements include the accounts of West and its wholly-owned subsidiaries and reflect all adjustments (all of which are normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the financial position, operating results, and cash flows for the interim periods. The unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto, contained in our Annual Report on Form 10-K for the year ended December 31, 2013. All intercompany balances and transactions have been eliminated. Our results for the three and six months ended June 30, 2014 are not necessarily indicative of what our results will be for other interim periods or for the full fiscal year.

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

Revenue Recognition—Conferencing services are generally billed and revenue recognized on a per participant minute basis. Web collaboration services are generally billed and revenue recognized on a per participant minute basis or, in the case of operating license arrangements, generally billed in advance and revenue recognized ratably over the service life period. IP communications services are generally billed and revenue recognized on a per seat basis. Interactive services are generally billed, and revenue recognized, on a per call, per message or per minute basis, or ratably over the contract term. We also charge clients for additional features, such as conference call recording, transcription services or professional services. Public safety services revenue is generated primarily from monthly fees based on the number of billing telephone numbers and cell towers covered under contract. In addition, product sales and installations are generally recognized upon completion of the installation and client acceptance of a fully functional system or, for contracts that are completed in stages, recognized upon completion of such stages and client acceptance. Contracts for annual recurring services such as support and maintenance agreements are generally billed in advance and are recognized as revenue ratably (on a monthly basis) over the contractual periods.

 

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WEST CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

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

Agent services revenue is generated in the month that services are performed, and services are generally billed based on call duration, hours of input, number of calls or a contingent basis. Revenue for contingent collection services and overpayment identification and recovery services is recognized in the month collection payments are received based upon a percentage of cash collected or other agreed upon contractual parameters. Revenue for health advocacy services is based on Per Employee Per Month (“PEPM”) fees charged under prepayment agreements for services and is recognized as revenue for the periods billed. Fees for future service periods are deferred until the service is performed.

Dividend—We funded the dividends paid in 2013 and the first six months of 2014 with cash generated by our operations, and we anticipate funding future dividends with cash generated by our operations. The declaration and payment of all future dividends, if any, will be at the sole discretion of our Board of Directors. On each of February 20, 2014 and May 15, 2014, we paid a $0.225 per common share quarterly dividend. The total dividend paid was approximately $18.9 million to shareholders of record as of the close of business on February 10, 2014 and May 5, 2014, respectively, for a total of $37.8 million.

Recent Accounting Pronouncements—In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09 “Revenue from Contracts with Customers” (Topic 606) (“ASU 2014-09”). ASU 2014-09 is a comprehensive new revenue recognition model requiring a company to recognize revenue to depict the transfer of goods or services to a customer at an amount reflecting the consideration it expects to receive in exchange for those goods or services. In adopting ASU 2014-09, companies may use either a full retrospective or a modified retrospective approach. ASU 2014-09 is effective for the first interim period within annual reporting periods beginning after December 15, 2016, and early adoption is not permitted. The Company will adopt ASU 2014-09 during the first quarter of fiscal 2017. We are still assessing the impact on the Company’s consolidated condensed financial statements.

 

2. ACQUISITIONS

SchoolMessenger

On April 21, 2014, we acquired Reliance Holding, Inc., doing business through its wholly owned subsidiary Reliance Communications, LLC as SchoolMessenger (“SchoolMessenger”), a leading provider of notification and mobile communication solutions for the K-12 education market. The purchase price was approximately $76.5 million and was funded by cash on hand.

In the preliminary purchase price allocation, goodwill of $51.5 million, not deductible for tax purposes, and finite-lived intangible assets of $40.1 million were recorded. The acquisition was integrated into our Unified Communications segment, within interactive services, to expand our interactive services into an adjacent market, the education vertical.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

The following table summarizes the preliminary estimated fair values of the assets acquired and liabilities assumed at the acquisition date for SchoolMessenger. The finite-lived intangible assets are comprised of trade names, technology, non-competition agreements and customer relationships.

 

(Amounts in thousands)    April 21,
2014
 

Working Capital

   $ (9,764

Property and equipment

     1,574   

Intangible assets

     40,145   

Goodwill

     51,536   
  

 

 

 

Total assets acquired

     83,491   
  

 

 

 

Non-current deferred taxes

     4,789   

Long-term liabilities

     2,157   
  

 

 

 

Total liabilities assumed

     6,946   
  

 

 

 

Net assets acquired

   $ 76,545   
  

 

 

 

Heath Advocate

On June 13, 2014, we acquired Health Advocate, Inc. (“Health Advocate”), a leading provider of healthcare advocacy services. The purchase price was approximately $265.4 million and was funded by cash on hand and use of our revolving trade accounts receivable financing facility.

Health Advocate estimates it serves over 40 million Americans through more than 10,000 client relationships, including many of the nation’s largest employers, by helping members personally navigate healthcare and insurance-related issues, saving them time and money. Health Advocate leverages the power of pricing transparency and personalized health communications to help members make better informed decisions and get more value out of the healthcare system. Additional services include wellness coaching, employee assistant programs (EAPs), a nurse line, biometrics screenings and chronic care solutions. Health Advocate’s technology platform combined with clinical and health plan and claims billing experts can support consumers with a wide range of healthcare or health insurance issues.

In the preliminary purchase price allocation, goodwill of $163.4 million, not deductible for tax purposes, and finite-lived intangible assets of $150.2 million were recorded. The acquisition was integrated into our Communication Services, within agent services, to expand our services in the healthcare industry. Further, Health Advocate’s strong competitive position in the health advocacy market and Health Advocate’s suite of consumer focused services and health solutions provides cross-selling opportunities with our existing healthcare client base.

The following table summarizes the preliminary estimated fair values of the assets acquired and liabilities assumed at the acquisition date for Health Advocate. The finite-lived intangible assets are comprised of trade names, technology, non-competition agreements and customer relationships.

 

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WEST CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

(Amounts in thousands)    June 13,
2014
 

Working Capital

   $ (2,620

Property and equipment

     6,055   

Other assets, net

     72   

Intangible assets

     150,190   

Goodwill

     163,395   
  

 

 

 

Total assets acquired

     317,092   
  

 

 

 

Non-current deferred taxes

     40,331   

Long-term liabilities

     11,400   
  

 

 

 

Total liabilities assumed

     51,731   
  

 

 

 

Net assets acquired

   $ 265,361   
  

 

 

 

Pro forma

Assuming the acquisitions of SchoolMessenger and Health Advocate occurred as of the beginning of the periods presented, our unaudited pro forma results of operations for the three and six months ended June 30, 2014 and 2013 would have been, in thousands (except per share amounts), as follows:

 

     Three months ended June 30,      Six months ended June 30,  
     2014      2013      2014      2013  

Revenue

   $ 710,059       $ 699,497       $ 1,414,549       $ 1,386,258   

Net Income

   $ 48,227       $ 41,754       $ 89,933       $ 41,944   

Earnings per share—basic

   $ 0.57       $ 0.50       $ 1.07       $ 0.57   

Earnings per share—diluted

   $ 0.56       $ 0.49       $ 1.05       $ 0.56   

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

Revenue attributable to SchoolMessenger and Health Advocate from their acquisition dates to June 30, 2014, was $4.7 million and $4.1 million, respectively. Net income attributable to these two acquisitions from their acquisition dates was not significant.

Acquisition costs for the three months ended June 30, 2014 and 2013 were $1.4 million and $0.3 million, respectively, and are included in selling, general and administrative expenses. Acquisition costs for the six months ended June 30, 2014 and 2013 were $1.7 million and $0.8 million, respectively, and are included in selling, general and administrative expenses.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

3. GOODWILL AND OTHER INTANGIBLE ASSETS

The following table presents the activity in goodwill by reporting segment, in thousands, for the six months ended June 30, 2014 and for the year ended December 31, 2013:

 

     Unified     Communication         
     Communications     Services      Consolidated  

Balance at January 1, 2014

   $ 1,001,442      $ 822,479       $ 1,823,921   

Foreign currency translation adjustment

     (896     —           (896

Acquisitions

     51,536        163,395         214,931   

Acquisition accounting adjustments

     (226     —           (226
  

 

 

   

 

 

    

 

 

 

Balance at June 30, 2014

   $ 1,051,856      $ 985,874       $ 2,037,730   
  

 

 

   

 

 

    

 

 

 

Balance at January 1, 2013

   $ 994,372      $ 822,479       $ 1,816,851   

Foreign currency translation adjustment

     7,070        —           7,070   
  

 

 

   

 

 

    

 

 

 

Balance at December 31, 2013

   $ 1,001,442      $ 822,479       $ 1,823,921   
  

 

 

   

 

 

    

 

 

 

The following table presents the gross carrying amount and accumulated impairment charge of goodwill, in thousands:

 

     As of  
     June 30, 2014     December 31, 2013  

Gross carrying amount

   $ 2,075,405      $ 1,861,596   

Accumulated impairment (1)

     (37,675     (37,675
  

 

 

   

 

 

 

Net carrying amount

   $ 2,037,730      $ 1,823,921   
  

 

 

   

 

 

 

 

(1) The impairment was recorded in 2010.

The excess of the acquisition costs over the fair value of the assets acquired and liabilities assumed for the purchase of SchoolMessenger and Health Advocate were assigned to goodwill based on preliminary estimates. We are in the process of completing the acquisition accounting for certain intangible assets and liabilities. The process of completing the acquisition accounting involves numerous time consuming steps for information gathering, verification and review. We expect to finalize this process within twelve months following the respective acquisition dates.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Other intangible assets

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

 

                         Weighted  
     As of June 30, 2014      Average  
     Acquired      Accumulated     Net Intangible      Amortization  

Intangible assets

   Cost      Amortization     Assets      Period (Years)  

Customer lists

   $ 656,296       $ (437,993   $ 218,303         10.7   

Technology & Patents

     167,981         (79,099     88,882         9.5   

Trade names (indefinite-lived)

     37,710         —          37,710         Not applicable   

Trade names (finite-lived)

     68,647         (22,525     46,122         11.3   

Other intangible assets

     24,883         (14,721     10,162         4.2   
  

 

 

    

 

 

   

 

 

    

Total

   $ 955,517       $ (554,338   $ 401,179         9.9   
  

 

 

    

 

 

   

 

 

    
                         Weighted  
     As of December 31, 2013      Average  
     Acquired      Accumulated     Net Intangible      Amortization  

Intangible assets

   Cost      Amortization     Assets      Period (Years)  

Customer lists

   $ 547,860       $ (422,367   $ 125,493         9.5   

Technology & Patents

     122,099         (72,549     49,550         8.7   

Trade names (indefinite-lived)

     47,110         —          47,110         Not applicable   

Trade names (finite-lived)

     27,414         (20,389     7,025         4.3   

Other intangible assets

     15,894         (13,631     2,263         4.3   
  

 

 

    

 

 

   

 

 

    

Total

   $ 760,377       $ (528,936   $ 231,441         8.4   
  

 

 

    

 

 

   

 

 

    

Amortization expense for finite-lived intangible assets was $13.9 million and $13.9 million for the three months ended June 30, 2014 and 2013, respectively, and $26.2 million and $27.9 million for the six months ended June 30, 2014 and 2013, respectively. Estimated amortization expense for the intangible assets noted above for the entire year of 2014 and the next five years is as follows:

 

2014

   $ 60.5 million   

2015

   $ 60.7 million   

2016

   $ 48.7 million   

2017

   $ 39.9 million   

2018

   $ 35.3 million   

2019

   $ 31.8 million   

 

4. ACCRUED EXPENSES

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

 

     June 30,      December 31,  
     2014      2013  

Accrued wages

   $ 64,629       $ 61,945   

Accrued phone

     56,475         48,201   

Interest payable

     45,738         48,793   

Accrued other taxes (non-income related)

     42,372         42,022   

Income taxes payable

     21,411         5,922   

Accrued licensing fees

     7,343         923   

Acquisition obligation

     6,115         —     

Accrued lease expense

     4,790         3,204   

Accrued employee benefit costs

     3,975         5,992   

Deferred income tax

     —           7,697   

Other accrued expenses

     30,470         24,983   
  

 

 

    

 

 

 
   $ 283,318       $ 249,682   
  

 

 

    

 

 

 

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

5. LONG-TERM OBLIGATIONS

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

 

     June 30,     December 31,  
     2014     2013  

Senior Secured Term Loan Facility, due 2016

   $ 312,097      $ 312,097   

Senior Secured Term Loan Facility, due 2018

     2,063,250        2,063,250   

Accounts Receivable Securitization, due 2018

     185,000        —     

8 5/8% Senior Notes, due 2018

     500,000        500,000   

7 7/8% Senior Notes, due 2019

     650,000        650,000   
  

 

 

   

 

 

 
     3,710,347        3,525,347   
  

 

 

   

 

 

 

Less: current maturities

     (23,754     (11,877
  

 

 

   

 

 

 

Long-term obligations

   $ 3,686,593      $ 3,513,470   
  

 

 

   

 

 

 

Senior Secured Term Loan Facility and Senior Secured Revolving Credit Facility.

On January 24, 2014, we modified our senior secured term loan facilities (“Senior Secured Credit Facilities”) by entering into Amendment No. 4 to the Amended and Restated Credit Agreement (the “Credit Agreement”) among West Corporation, certain of our domestic subsidiaries, Wells Fargo Bank, National Association (“Wells Fargo”), as administrative agent, and the various lenders party thereto (the “Fourth Amendment). The Fourth Amendment provided for a 25 basis point reduction in the applicable LIBOR interest rate margins and a 25 basis point reduction in the LIBOR interest rate floors of all term loans. As of June 30, 2014, the interest rate margins applicable to the term loans due June 30, 2018 were 2.50% for LIBOR rate loans and 1.50% for base rate loans, and the interest rate margins applicable to the term loans due July 15, 2016 were 2.0% for LIBOR rate loans and 1.0% for base rate loans. The Fourth Amendment also provides for interest rate floors applicable to the term loans. The interest rate floors effective June 30, 2014 were 0.75% for LIBOR rate loans and 1.75% for base rate loans.

In connection with the Fourth Amendment, we incurred refinancing expenses of approximately $5.8 million, which will be amortized into interest expense over the remaining life of the Amended Credit Agreement.

At June 30, 2014, we were in compliance with our financial debt covenants.

On July 1, 2014, the Company, Wells Fargo, as administrative agent, and the various lenders party thereto further modified our Senior Secured Credit Facilities by entering into Amendment No. 5 to Amended and Restated Credit Agreement (the “Fifth Amendment”, and the Credit Agreement, as previously amended and further amended by the Fifth Amendment, the “Amended Credit Agreement”). The Fifth Amendment provided for:

• a new delayed draw term loan A facility (the “TLA”) to be made available, in a single borrowing, at any time on or before December 31, 2014 in the form of TLA loans having terms substantially similar to the existing term loans under our Senior Secured Credit Facilities, except with respect to pricing, amortization and maturity, in an aggregate principal amount of $350.0 million. The TLA matures July 1, 2019. The proceeds of the TLA will be used at our option (i) to prepay in part Senior Secured Term Loan Facilities due in 2016 and 2018 and pay accrued but unpaid interest thereon, (ii) to redeem any of our 7.875% Senior Notes due 2019, (iii) for working capital and general corporate purposes and (iv) to pay fees and expenses incurred in connection with the TLA;

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

• annual amortization (payable in quarterly installments) in respect of the TLA at a 2.5% annual rate in the year ending June 30, 2015, a 5.0% annual rate in the year ending June 30, 2016, a 7.5% annual rate in the year ending June 30, 2017 and a 10.0% annual rate thereafter until the maturity date, at which point all remaining amounts outstanding under the TLA shall become due and payable;

• an interest rate margin applicable to the TLA that is based on the Company’s total leverage ratio and ranges from 1.50% to 2.25% for LIBOR rate loans and from 0.50% to 1.25% for base rate loans;

• a senior secured revolving credit facility (the “Senior Secured Revolving Credit Facility”) to be made available under the Amended Credit Agreement in replacement of, and in the form of revolving credit loans having terms substantially similar to, the existing senior secured revolving credit facility under our Credit Agreement (except with respect to pricing and maturity), in an aggregate principal amount of $300.0 million that matures July 1, 2019; and

• an interest rate margin applicable to the Senior Secured Revolving Credit Facility that is based on the Company’s total leverage ratio and ranges from 1.50% to 2.25% for LIBOR rate loans and from 0.50% to 1.25% for base rate loans.

2022 Senior Notes

On July 1, 2014, we issued $1.0 billion aggregate principal amount of our 5.375% Senior Notes due 2022 (the “2022 Senior Notes”). The 2022 Senior Notes mature on July 15, 2022 and were issued at par. The 2022 Senior Notes were offered in a private offering exempt from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”).

The net proceeds from the offering were approximately $986.5 million, after deducting underwriting discounts and offering expenses. On July 1, 2014, we used a portion of the net proceeds from the 2022 Senior Notes to repurchase pursuant to tender offers:

 

    $270.8 million aggregate principal amount of the 8.625% Senior Notes due 2018 (the “2018 Senior Notes”). The aggregate repurchase price for the 2018 Senior Notes was $298.7 million including accrued interest of $10.8 million and tender offer premium of $17.1 million;

 

    $200.0 million aggregate principal amount of the 7.875% Senior Notes due 2019 (the “2019 Senior Notes”). The aggregate repurchase price for the 2019 Senior Notes was $215.3 million including accrued interest of $2.0 million and tender offer premium of $13.3 million.

In addition, on July 1, 2014, we used a portion of the net proceeds from the 2022 Senior Notes to repay a portion of the Senior Secured Term Loan Facility due 2018. The total aggregate principal amount repaid on the Senior Secured Term Loan Facility due 2018 was $250.0 million.

On July 17, 2014, we used a portion of the net proceeds from the 2022 Senior Notes, together with cash on hand to redeem the remaining $229.2 million aggregate principal amount of the 2018 Senior Notes for an aggregate redemption price of $242.9 million including payments of the $9.9 million redemption premium, $3.7 million make-whole premium and accrued interest of $0.1 million.

The 2022 Senior Notes bear interest at a rate of 5.375% per year, payable semiannually in arrears on July 15 and January 15 of each year, beginning January 15, 2015. The 2022 Senior Notes will mature July 15, 2022. The 2022 Senior Notes are unsecured senior obligations and rank equally in right of payment with all of our future senior debt and are senior to all of our future subordinated debt. Each of our domestic wholly owned subsidiaries that guarantees our Senior Secured Credit Facilities guarantee the notes with guarantees that rank equal in right of payment to all existing and future senior debt of such subsidiary. The 2022 Senior Notes and guarantees are effectively subordinated to our existing and future secured debt and that of the guarantors to the extent of the value of the assets securing such debt.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

2018 Senior Notes

In connection with the issuance of the 2022 Senior Notes, on June 17, 2014, we commenced a tender offer to purchase any and all of our outstanding $500.0 million in aggregate principal amount of the 2018 Senior Notes. Total offer consideration for each $1,000 principal amount of the 2018 Senior Notes tendered was $1,063.09, including an early tender premium of $20.00 per $1,000 principal amount of the 2018 Senior Notes for those holders who properly tendered their 2018 Senior Notes on or before June 30, 2014. Upon consummation of the tender offer on July 1, 2014, approximately $270.8 million aggregate principal amount of the 2018 Senior Notes was purchased. Total consideration paid for the tender offer, including early tender premium payment and accrued interest, was approximately $298.7 million.

The redemption date for the call of the 2018 Senior Notes was July 17, 2014 at a redemption price equal to 104.313% of the principal amount of the 2018 Senior Notes and make whole-premium. The Company redeemed the remaining $229.2 million aggregate principal amount of the 2018 Senior Notes for an aggregate redemption price of $242.9 million including payments of the $9.9 million redemption premium, $3.7 million make-whole premium and accrued interest of $0.1 million. Following this redemption, none of the 2018 Senior Notes remained outstanding.

2019 Senior Notes

In connection with the issuance of the 2022 Senior Notes, on June 17, 2014, we commenced a tender offer to purchase up to $200.0 million in aggregate principal amount of the 2019 Senior Notes. Total offer consideration for each $1,000 principal amount of the 2019 Senior Notes tendered was $1,066.29, including an early tender premium of $20.00 per $1,000 principal amount of the 2019 Senior Notes for those holders who properly tendered their 2019 Senior Notes on or before June 30, 2014. Upon consummation of the tender offer on July 1, 2014, $200.0 million aggregate principal amount of the 2019 Senior Notes was purchased. Total consideration paid for the tender offer, including early tender premium payment and accrued interest, was approximately $215.3 million.

 

6. HEDGING ACTIVITIES

Periodically, we have entered into interest rate swaps to hedge the cash flows from our variable rate debt, which effectively converts the hedged portion under our outstanding senior secured term loan facility to fixed rate debt. The initial assessments of hedge effectiveness were performed using regression analysis. The periodic measurements of hedge ineffectiveness are performed using the change in variable cash flows method. The cash flow hedges were recorded at fair value with a corresponding entry, net of taxes, recorded in other comprehensive income (“OCI”) until earnings were affected by the hedged item. In June 2013, three interest rate swaps with an aggregate notional value of $500.0 million matured. The interest rate on these three interest rate swaps ranged from 1.685% to 1.6975%. At June 30, 2014 and December 31, 2013, we did not have any interest rate swaps.

The following presents, in thousands, the impact of interest rate swaps on the consolidated statement of operations for the three and six months ended June 30, 2013.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

                 Amount of gain  
     Amount of gain           reclassified from OCI  
     recognized in OCI           into net income for the  
     For the three months      Location of gain    three months ended  
Derivatives designated    ended June 30,      reclassified from OCI    June 30,  

as hedging instruments

   2013      into earnings    2013  

Interest rate swaps

   $ 762       Interest expense    $ 1,249   
  

 

 

       

 

 

 
     For the six months           For the six months  
     ended June 30,           ended June 30,  
     2013           2013  

Interest rate swaps

   $ 1,786       Interest expense    $ 2,985   
  

 

 

       

 

 

 

 

7. FAIR VALUE DISCLOSURES

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

 

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

 

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

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

 

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

 

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

 

    Level 3 inputs are unobservable inputs for assets or liabilities.

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

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

We evaluate classification within the fair value hierarchy at each period. There were no transfers between any levels of the fair value hierarchy during the periods presented.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Assets and liabilities measured at fair value on a recurring basis, in thousands, are summarized below:

 

     Fair Value Measurements at June 30, 2014 Using  
            Quoted Prices      Significant                
            in Active      Other      Significant      Assets /  
            Markets for      Observable      Unobservable      Liabilities  
     Carrying      Identical Assets      Inputs      Inputs      at Fair  

Description

   Amount      (Level 1)      (Level 2)      (Level 3)      Value  

Assets

              

Trading securities

   $ 63,195       $ 63,195       $ —         $ —         $ 63,195   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     Fair Value Measurements at December 31, 2013 Using  
            Quoted Prices      Significant                
            in Active      Other      Significant      Assets /  
            Markets for      Observable      Unobservable      Liabilities  
     Carrying      Identical Assets      Inputs      Inputs      at Fair  

Description

   Amount      (Level 1)      (Level 2)      (Level 3)      Value  

Other Assets

              

Trading securities

   $ 53,397       $ 53,397       $ —         $ —         $ 53,397   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The fair value of our 8.625% senior notes and 7.875% senior notes based on market quotes, which we determined to be Level 1 inputs, at June 30, 2014 was approximately $1,221.4 million compared to the carrying amount of $1,150.0 million. The fair value of our 8.625% senior notes and 7.875% senior notes based on market quotes, which we determined to be Level 1 inputs, at December 31, 2013 was approximately $1,243.7 million compared to the carrying amount of $1,150.0 million.

The fair value of our Senior Secured Credit Facilities was estimated using current market quotes on comparable debt securities from various financial institutions. All of the inputs used to determine the fair value of our senior secured term loan facilities are Level 2 inputs and obtained from an independent source. The fair value of our Senior Secured Credit Facilities at June 30, 2014 was approximately $2,361.7 million compared to the carrying amount of $2,375.3 million. The fair value of our Senior Secured Credit Facilities at December 31, 2013 was approximately $2,385.0 million compared to the carrying amount of $2,375.3 million.

 

8. STOCK-BASED COMPENSATION

2006 Executive Incentive Plan

Stock options granted under the West Corporation 2006 Executive Incentive Plan (“2006 EIP”) prior to 2012 vest over a period of five years, with 20% of the stock option becoming exercisable on each of the first through fifth anniversaries of the grant date. Stock options granted under the 2006 EIP in 2012 and 2013 vest over a period of four years, with 25% of the stock option becoming exercisable on each of the first through fourth anniversaries of the grant date. Once an option has vested, it generally remains exercisable until the tenth anniversary of the grant date so long as the participant continues to provide services to the Company.

 

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WEST CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

2013 Long-Term Incentive Plan

Prior to the completion of our initial public offering (“IPO”) on March 27, 2013, we adopted, and subsequently amended, the 2013 Long-Term Incentive Plan (as amended, “2013 LTIP”) which is intended to provide our officers, employees, non-employee directors and consultants with added incentive to remain employed by or perform services for us and align such individuals’ interests with those of our stockholders. Under the terms of the 2013 LTIP, 8,500,000 shares of common stock will be available for stock options, restricted stock or other types of equity awards granted under the 2013 LTIP, subject to adjustment for stock splits and other similar changes in capitalization. The number of available shares will be reduced by the aggregate number of shares that become subject to outstanding awards granted under the 2013 LTIP. To the extent that shares subject to an outstanding award granted under the 2013 LTIP are not issued or delivered by reason of the expiration, termination, cancellation or forfeiture of such award or by reason of the settlement of such award in cash, then such shares will again be available under the 2013 LTIP.

Stock options granted under the 2013 LTIP vest over a period of four years, with 25% of the stock option becoming exercisable on each of the first through fourth anniversaries of the grant date. Once an option has vested, it generally remains exercisable until the tenth anniversary of the grant date so long as the participant continues to provide services to the Company.

2006 Executive Incentive Plan and 2013 Long-Term Incentive Plan – Stock Options

The following table presents the stock option activity under the 2006 EIP and 2013 LTIP for the six months ended June 30, 2014.

 

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

Balance at January 1, 2014

     8,005,398        3,022,823      $ 27.21   

Options granted

     (217,785     217,785        24.72   

Options exercised

     —          (30,226     15.04   

Canceled or forfeited (2013 LTIP)

     14,048        (14,048     23.82   

Canceled or forfeited (2006 EIP)

     —          (157,294     28.27   

Restricted stock granted

     (12,591     —          —     

Restricted stock cancelled

     16,468        —          —     
  

 

 

   

 

 

   

 

 

 

Balance at June 30, 2014

     7,805,538        3,039,040      $ 27.11   
  

 

 

   

 

 

   

 

 

 

At June 30, 2014, we expect that approximately 20% of options granted will be canceled or forfeited over the vesting period. At June 30, 2014, the intrinsic value of options vested and exercisable was approximately $2.2 million. The aggregate intrinsic value of options outstanding at June 30, 2014, was approximately $5.2 million. The aggregate intrinsic value of options outstanding, vested and expected to vest at June 30, 2014, was approximately $4.8 million.

 

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WEST CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

The following table summarizes the information on the options granted under the 2006 EIP and 2013 LTIP at June 30, 2014:

 

Outstanding

     Vested and Exercisable  
            WeightedAverage      Weighted             Weighted  
            Remaining      Average             Average  
Range of    Number of      Contractual      Exercise      Number of      Exercise  

Exercise Prices

   Options      Life (years)      Price      Options      Price  

$0.00 - $13.12

     106,583         2.43       $ 13.12         106,583       $ 13.12   

13.13 - 28.88

     2,281,791         7.93         25.18         635,251         25.65   

28.89 - 50.88

     620,419         7.31         34.15         620,419         34.15   

50.89 - 84.80

     30,247         5.63         77.63         22,409         76.91   

 

  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

$0.00 - $84.80

     3,039,040         7.59       $ 27.11         1,384,662       $ 29.32   

 

  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

            Options Outstanding  

Executive Management Rollover Options

   Options            Weighted  
   Available      Number     Average  
   for Grant      of Shares     Exercise Price  

Balance at January 1, 2014

     —           71,199      $ 5.47   

Exercised

     —           (58,783     5.47   
  

 

 

    

 

 

   

 

 

 

Balance at June 30, 2014

     —           12,416      $ 5.47   
  

 

 

    

 

 

   

 

 

 

The executive management rollover options are fully vested and have an average remaining life of 1.1 years. The aggregate intrinsic value of these options at June 30, 2014 was approximately $0.3 million.

We account for the stock option grants under the 2006 EIP and 2013 LTIP in accordance with Accounting Standards Codification 718, Compensation-Stock Compensation. The fair value of each option granted was estimated on the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions for grants during the period.

 

     Six months ended June 30,  
     2014     2013  

Risk-free interest rate

     2.02     1.09

Dividend yield

     3.64     0.0

Expected volatility

     29.10     34.5

Expected life (years)

     6.25        6.25   

Fair value of the option award

   $ 4.90      $ 9.04   

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

At June 30, 2014 and 2013, there was approximately $11.4 million and $12.8 million, respectively, of unrecorded and unrecognized compensation expense related to unvested stock options under the 2006 EIP and 2013 LTIP in aggregate, which will be recognized over the remaining vesting period of approximately 2.0 years as of June 30, 2014.

 

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WEST CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Restricted Stock

During the six months ended June 30, 2014, pursuant to our agreement with our non-employee directors who are not affiliated with our former sponsors, we issued 12,591 shares of common stock with an aggregate fair value of approximately $300,000. 4,203 of these shares were granted to a new non-employee director and are fully vested subject to a pro rata forfeiture if the director does not remain on the board for at least six months. The remaining 8,388 shares were issued as an annual equity grant to our other two non-employee directors who are not affiliated with our former sponsors. These shares vest on the one-year anniversary of the date of grant.

2013 Employee Stock Purchase Plan

During the fourth quarter of 2013, we implemented the 2013 Employee Stock Purchase Plan (“ESPP”), under which the sale of 1.0 million shares of our common stock has been authorized and reserved. Employees may designate up to 50% of their annual compensation for the purchase of stock, subject to a per person limit of 2,000 shares in any offering period or calendar year. The price for shares purchased under the ESPP is 85% of the market closing price on the last day of the quarterly purchase period. No employee will be authorized to purchase common stock through the ESPP if, immediately after the purchase, the employee (or any other person whose stock would be attributed to such employee under U.S. tax law) would own stock and/or hold outstanding options to purchase stock possessing five percent (5%) or more of the total combined voting power or value of all classes of stock of the Company or of any parent of the Company or any subsidiary. In addition, no participant will be entitled to purchase stock under the ESPP at a rate which, when aggregated with his or her rights to purchase stock under all other employee stock purchase plans of the Company and its subsidiaries, exceeds $25,000 in fair market value, determined as of the date of grant (or such other limit as may be imposed by U.S. tax law), for each calendar year in which any option granted to the participant under any such plans is outstanding at any time. As of June 30, 2014, 153,375 shares had been issued under the ESPP. For the three and six months ended June 30, 2014, we recognized compensation expense for this plan of $0.3 million and $0.6 million, respectively.

Stock-Based Compensation Expense

For the three months ended June 30, 2014 and 2013, stock-based compensation expense was $2.6 million and $1.9 million, respectively. For the six months ended June 30, 2014 and 2013, stock-based compensation expense was $6.2 million and $5.0 million, respectively.

 

9. EARNINGS PER SHARE

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

 

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WEST CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

     Three months ended June 30,      Six months ended June 30,  
(In thousands, except per share amounts)    2014      2013      2014      2013  

Earnings Per Common Share:

           

Basic-Common

   $ 0.57       $ 0.52       $ 1.12       $ 0.63   

Diluted- Common

   $ 0.56       $ 0.51       $ 1.10       $ 0.62   

Weighted Average Number of Shares Outstanding:

           

Basic—Common

     83,953         83,524         83,879         73,716   

Dilutive Impact of Stock Options:

           

Common Shares

     1,445         1,419         1,433         1,435   

Diluted Common Shares

     85,398         84,943         85,312         75,151   

Diluted earnings per share are computed using the weighted-average number of common shares and dilutive potential common shares outstanding during the period. Dilutive potential common shares result from the assumed exercise of outstanding stock options, by application of the treasury stock method, that have a dilutive effect on earnings per share. At June 30, 2014 and 2013, 675,352 and 2,718,599 stock options were outstanding with an exercise price equal to or exceeding the market value of our common stock, these shares were therefore excluded from the computation of shares contingently issuable upon exercise of the options.

 

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WEST CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

10. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

Activities within accumulated other comprehensive income (loss) for the three and six months ended June 30, 2014 and 2013 were as follows (net of tax):

 

                 Accumulated  
     Foreign     Cash     Other  
     Currency     Flow     Comprehensive  
     Translation     Hedges     Income (Loss)  

BALANCE, April 1, 2014

   $ (14,485   $ —        $ (14,485

Foreign currency translation adjustment, net of tax of $(1,767)

     2,993        —          2,993   
  

 

 

   

 

 

   

 

 

 

BALANCE, June 30, 2014

   $ (11,492   $ —        $ (11,492
  

 

 

   

 

 

   

 

 

 

BALANCE, January 1, 2014

   $ (12,200   $ —        $ (12,200

Foreign currency translation adjustment, net of tax of $(418)

     708        —          708   
  

 

 

   

 

 

   

 

 

 

BALANCE, June 30, 2014

   $ (11,492   $ —        $ (11,492
  

 

 

   

 

 

   

 

 

 
                 Accumulated  
     Foreign     Cash     Other  
     Currency     Flow     Comprehensive  
     Translation     Hedges     Income (Loss)  

BALANCE, April 1, 2013

   $ (28,033   $ (762   $ (28,795

Foreign currency translation adjustment, net of tax of $(849)

     1,385        —          1,385   

Reclassification of cash flow hedge into earnings, net of tax of $690 (1)

     —          (1,125     (1,125

Unrealized gain on cash flow hedges, net of tax of $(1,157)

     —          1,887        1,887   
  

 

 

   

 

 

   

 

 

 

BALANCE, June 30, 2013

   $ (26,648   $ —        $ (26,648
  

 

 

   

 

 

   

 

 

 

BALANCE, January 1, 2013

   $ (21,345   $ (1,786   $ (23,131

Foreign currency translation adjustment, net of tax of $3,250

     (5,303     —          (5,303

Reclassification of cash flow hedge into earnings, net of tax of $1,349 (1)

     —          (2,201     (2,201

Unrealized gain on cash flow hedges, net of tax of $(2,444)

     —          3,987        3,987   
  

 

 

   

 

 

   

 

 

 

BALANCE, June 30, 2013

   $ (26,648   $ —        $ (26,648
  

 

 

   

 

 

   

 

 

 

 

(1) Recorded as interest expense in the condensed consolidated statement of operations.

 

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WEST CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

11. SEGMENTS

We operate in two business segments:

Unified Communications, including conferencing and collaboration, IP communications and interactive services; and

Communication Services, including public safety services, telecom services and agent services.

Effective January 1, 2014, we implemented a revised organizational structure which our Chief Executive Officer utilizes for making strategic and operational decisions and allocating resources. Under the revised organizational structure, automated call processing services management and operations have been moved from the Communication Services segment to the Unified Communications segment and have been combined with alerts and notifications to form interactive services. Beginning in the first quarter of 2014, all prior period comparative information has been recast to reflect this change as if it had taken place in all periods presented.

 

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WEST CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

     For the three months ended June 30,     For the six months ended June 30,  
     2014     2013     2014     2013  

Amounts in thousands

        

Revenue:

        

Unified Communications

   $ 411,900      $ 408,448      $ 816,817      $ 803,502   

Communication Services

     294,938        271,400        580,359        540,569   

Intersegment eliminations

     (15,775     (7,153     (29,961     (11,152
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 691,063      $ 672,695      $ 1,367,215      $ 1,332,919   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating Income:

        

Unified Communications

   $ 96,325      $ 113,156      $ 197,020      $ 194,122   

Communication Services

     25,589        21,582        46,751        33,906   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 121,914      $ 134,738      $ 243,771      $ 228,028   
  

 

 

   

 

 

   

 

 

   

 

 

 

Depreciation and Amortization:

        

(Included in Operating Income)

        

Unified Communications

   $ 26,705      $ 24,215      $ 51,732      $ 48,304   

Communication Services

     20,174        20,208        39,378        40,476   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 46,879      $ 44,423      $ 91,110      $ 88,780   
  

 

 

   

 

 

   

 

 

   

 

 

 

Capital Expenditures:

        

Unified Communications

   $ 12,940      $ 13,345      $ 22,303      $ 25,157   

Communication Services

     16,298        10,861        28,768        21,451   

Corporate

     11,111        1,190        16,906        2,089   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 40,349      $ 25,396      $ 67,977      $ 48,697   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

     As of June 30,      As of December 31,  
     2014      2013  

Assets:

     

Unified Communications

   $ 1,751,164       $ 1,734,585   

Communication Services

     1,584,217         1,317,879   

Corporate

     540,572         433,800   
  

 

 

    

 

 

 

Total

   $ 3,875,953       $ 3,486,264   
  

 

 

    

 

 

 

 

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WEST CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Platform-based service revenue includes services provided in both the Unified Communications and Communication Services segments, while agent service revenue is provided in the Communication Services segment. During the three months ended June 30, 2014 and 2013, revenue from platform-based services was $506.6 million and $494.9 million, respectively. During the six months ended June 30, 2014 and 2013, revenue from platform-based services was $1,001.7 million and $976.4 million, respectively. During the three months ended June 30, 2014 and 2013, revenue from agent services was $188.9 million and $181.2 million, respectively. During the six months ended June 30, 2014 and 2013, revenue from agent services was $373.2 million and $363.1 million, respectively. The platform-based and agent services revenues are presented prior to intercompany eliminations.

For the three months ended June 30, 2014 and 2013, our largest 100 clients represented 53% and 56% of our total revenue, respectively. For the six months ended June 30, 2014 and 2013, our largest 100 clients represented 53% and 55% of our total revenue, respectively.

For the three months ended June 30, 2014 and 2013, revenues from non-U.S. countries represented approximately 19% of consolidated revenues in both periods. For the six months ended June 30, 2014 and 2013, revenues from non-U.S. countries represented approximately 19% of consolidated revenues in both periods. During these periods no individual foreign country accounted for greater than 10% of revenue. Revenue is attributed to an organizational region based on location of the billed customer’s account. Geographic information by organizational region, in thousands, is noted below:

 

     For the three months ended June 30,      For the six months ended June 30,  
     2014      2013      2014      2013  

Revenue:

           

Americas—United States

   $ 562,731       $ 543,497       $ 1,108,592       $ 1,079,072   

Europe, Middle East & Africa (EMEA)

     82,750         80,382         168,422         159,506   

Asia Pacific

     39,765         42,665         78,391         82,388   

Americas—Other

     5,817         6,151         11,810         11,953   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 691,063       $ 672,695       $ 1,367,215       $ 1,332,919   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     As of June 30,      As of December 31,  
     2014      2013  

Long-Lived Assets:

     

Americas—United States

   $ 2,852,019       $ 2,432,477   

Europe, Middle East & Africa (EMEA)

     195,330         204,282   

Asia Pacific

     27,609         25,209   

Americas—Other

     2,332         2,726   
  

 

 

    

 

 

 

Total

   $ 3,077,290       $ 2,664,694   
  

 

 

    

 

 

 

For the three months ended June 30, 2014 and 2013, the aggregate loss on transactions denominated in currencies other than the functional currency of West Corporation or any of its subsidiaries was approximately $1.4 million and $0.5 million, respectively. For the six months ended June 30, 2014 and 2013, the aggregate loss on transactions denominated in currencies other than the functional currency of West Corporation or any of its subsidiaries was approximately $2.7 million and $1.1 million, respectively.

 

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WEST CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

12. COMMITMENTS AND CONTINGENCIES

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

 

13. FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS AND SUBSIDIARY NON- GUARANTORS

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

 

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WEST CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (UNAUDITED)

(AMOUNTS IN THOUSANDS)

 

     For the Three Months Ended June 30, 2014  
                        Eliminations and        
     Parent /     Guarantor     Non-Guarantor      Consolidating        
     Issuer     Subsidiaries     Subsidiaries      Entries     Consolidated  

REVENUE

   $ —        $ 541,029      $ 150,034       $ —        $ 691,063   

COST OF SERVICES

     —          246,743        83,625         —          330,368   

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

     2,529        181,362        54,890         —          238,781   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

OPERATING INCOME (LOSS)

     (2,529     112,924        11,519         —          121,914   

OTHER INCOME (EXPENSE):

           

Interest expense, net of interest income

     (32,587     (22,301     6,537         —          (48,351

Subsidiary Income

     76,775        28,967        —           (105,742     —     

Other, net (1)

     5,076        (21,238     18,557         —          2,395   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Other income (expense)

     49,264        (14,572     25,094         (105,742     (45,956
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

INCOME BEFORE INCOME TAX EXPENSE

     46,735        98,352        36,613         (105,742     75,958   

INCOME TAX EXPENSE (BENEFIT)

     (1,024     21,650        7,573         —          28,199   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

NET INCOME

     47,759        76,702        29,040         (105,742     47,759   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Foreign currency translation adjustments, net of tax of $(1,767)

     2,993        —          2,993         (2,993     2,993   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Comprehensive income

   $ 50,752      $ 76,702      $ 32,033       $ (108,735   $ 50,752   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

(1) Other, net includes intercompany transactions that eliminate in consolidation.

 

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WEST CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (UNAUDITED)

(AMOUNTS IN THOUSANDS)

 

     For the Three Months Ended June 30, 2013  
                        Eliminations and        
     Parent /     Guarantor     Non-Guarantor      Consolidating        
     Issuer     Subsidiaries     Subsidiaries      Entries     Consolidated  

REVENUE

   $ —        $ 537,117      $ 135,578       $ —        $ 672,695   

COST OF SERVICES

     —          240,223        71,716         —          311,939   

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

     187        180,731        45,100         —          226,018   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

OPERATING INCOME (LOSS)

     (187     116,163        18,762         —          134,738   

OTHER INCOME (EXPENSE):

           

Interest expense, net of interest income

     (38,338     (24,662     5,810         —          (57,190

Accelerated amortization of deferred financing costs

     (6,603     —          —           —          (6,603

Subsidiary Income

     74,712        30,300        —           (105,012     —     

Other, net (1)

     (98     (16,477     15,498         —          (1,077
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Other income (expense)

     29,673        (10,839     21,308         (105,012     (64,870
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

INCOME BEFORE INCOME TAX EXPENSE

     29,486        105,324        40,070         (105,012     69,868   

INCOME TAX EXPENSE (BENEFIT)

     (14,182     30,662        9,720         —          26,200   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

NET INCOME

     43,668        74,662        30,350         (105,012     43,668   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Foreign currency translation adjustments, net of tax of $(849)

     1,385        —          1,385         (1,385     1,385   

Reclassification of a cash flow hedge into earnings, net of tax of $690

     (1,125     —          —           —          (1,125

Unrealized gain on cash flow hedges net of tax of $(1,157)

     1,887        —          —           —          1,887   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Comprehensive income

   $ 45,815      $ 74,662      $ 31,735       $ (106,397   $ 45,815   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

(1) Other, net includes intercompany transactions that eliminate in consolidation.

 

31


Table of Contents

WEST CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (UNAUDITED)

(AMOUNTS IN THOUSANDS)

 

     For the Six Months Ended June 30, 2014  
                        Eliminations and        
     Parent /     Guarantor     Non-Guarantor      Consolidating        
     Issuer     Subsidiaries     Subsidiaries      Entries     Consolidated  

REVENUE

   $ —        $ 1,076,230      $ 290,985       $ —        $ 1,367,215   

COST OF SERVICES

     —          490,626        156,424         —          647,050   

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

     5,624        371,630        99,140         —          476,394   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

OPERATING INCOME (LOSS)

     (5,624     213,974        35,421         —          243,771   

OTHER INCOME (EXPENSE):

           

Interest expense, net of interest income

     (65,329     (44,125     12,137         —          (97,317

Subsidiary Income

     148,940        66,309        —           (215,249     —     

Other, net (1)

     8,009        (40,537     35,635         —          3,107   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Other income (expense)

     91,620        (18,353     47,772         (215,249     (94,210
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

INCOME BEFORE INCOME TAX EXPENSE

     85,996        195,621        83,193         (215,249     149,561   

INCOME TAX EXPENSE (BENEFIT)

     (8,041     46,815        16,750         —          55,524   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

NET INCOME

     94,037        148,806        66,443         (215,249     94,037   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Foreign currency translation adjustments, net of tax of $(418)

     708        —          708         (708     708   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Comprehensive income

   $ 94,745      $ 148,806      $ 67,151       $ (215,957   $ 94,745   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

(1) Other, net includes intercompany transactions that eliminate in consolidation.

 

32


Table of Contents

WEST CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (UNAUDITED)

(AMOUNTS IN THOUSANDS)

 

     For the Six Months Ended June 30, 2013  
     Parent /
Issuer
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations and
Consolidating
Entries
    Consolidated  

REVENUE

   $ —        $ 1,064,404      $ 268,515      $ —        $ 1,332,919   

COST OF SERVICES

     —          478,648        142,358        —          621,006   

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

     1,792        394,074        88,019        —          483,885   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

OPERATING INCOME (LOSS)

     (1,792     191,682        38,138        —          228,028   

OTHER INCOME (EXPENSE):

          

Interest expense, net of interest income

     (87,933     (53,183     11,048        —          (130,068

Subordinated debt call premium and accelerated amortization of deferred financing costs

     (23,105     —          —          —          (23,105

Subsidiary Income

     113,915        52,548        —          (166,463     —     

Other, net (1)

     2,220        (33,528     31,209        —          (99
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense)

     5,097        (34,163     42,257        (166,463     (153,272
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

INCOME BEFORE INCOME TAX EXPENSE

     3,305        157,519        80,395        (166,463     74,756   

INCOME TAX EXPENSE (BENEFIT)

     (43,418     43,930        27,521        —          28,033   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

NET INCOME

     46,723        113,589        52,874        (166,463     46,723   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Foreign currency translation adjustments, net of tax of $3,250

     (5,303     —          (5,303     5,303        (5,303

Reclassification of a cash flow hedge into earnings, net of tax of $1,349

     (2,201     —          —          —          (2,201

Unrealized gain on cash flow hedges net of tax of $(2,444)

     3,987        —          —          —          3,987   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 43,206      $ 113,589      $ 47,571      $ (161,160   $ 43,206   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Other, net includes intercompany transactions that eliminate in consolidation.

 

33


Table of Contents

WEST CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SUPPLEMENTAL CONDENSED BALANCE SHEET (UNAUDITED)

(AMOUNTS IN THOUSANDS)

 

     June 30, 2014  
     Parent /
Issuer
    Guarantor
Subsidiaries
     Non-Guarantor
Subsidiaries
     Eliminations and
Consolidating
Entries
    Consolidated  

ASSETS

            

CURRENT ASSETS:

            

Cash and cash equivalents

   $ 27,217      $ —         $ 137,340       $ (4,856   $ 159,701   

Trust and restricted cash

     6,284        16,215         50         —          22,549   

Accounts receivable, net

     —          28,671         439,267         —          467,938   

Intercompany receivables

     —          1,243,485         —           (1,243,485     —     

Deferred income tax receivable

     —          6,392         3,984         (6,975     3,401   

Prepaid assets

     8,873        36,197         13,574         —          58,644   

Deferred expenses

     —          47,892         12,441         —          60,333   

Other current assets

     4,187        6,284         15,626         —          26,097   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total current assets

     46,561        1,385,136         622,282         (1,255,316     798,663   

PROPERTY AND EQUIPMENT, NET

     73,406        246,323         55,633         —          375,362   

INVESTMENT IN SUBSIDIARIES

     2,337,167        809,416         —           (3,146,583     —     

GOODWILL

     —          1,637,724         400,006         —          2,037,730   

INTANGIBLES, net

     —          199,530         201,649         —          401,179   

OTHER ASSETS

     145,440        95,096         22,483         —          263,019   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

TOTAL ASSETS

   $ 2,602,574      $ 4,373,225       $ 1,302,053       $ (4,401,899   $ 3,875,953   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)

            

CURRENT LIABILITIES:

            

Accounts payable

   $ 9,063      $ 68,198       $ 28,975       $ (4,856   $ 101,380   

Intercompany payables

     1,159,270        —           84,215         (1,243,485     —     

Deferred revenue

     —          84,016         41,847         —          125,863   

Accrued expenses

     22,179        196,559         71,555         (6,975     283,318   

Current maturities of long-term debt

     9,467        14,287         —           —          23,754   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total current liabilities

     1,199,979        363,060         226,592         (1,255,316     534,315   

LONG -TERM OBLIGATIONS, less current maturities

     1,960,892        1,540,701         185,000         —          3,686,593   

DEFERRED INCOME TAXES

     16,774        85,804         51,281         —          153,859   

OTHER LONG-TERM LIABILITIES

     97,669        48,686         27,571         —          173,926   

TOTAL STOCKHOLDERS’ EQUITY (DEFICIT)

     (672,740     2,334,974         811,609         (3,146,583     (672,740
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)

   $ 2,602,574      $ 4,373,225       $ 1,302,053       $ (4,401,899   $ 3,875,953   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

 

 

34


Table of Contents

WEST CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SUPPLEMENTAL CONDENSED CONSOLIDATED BALANCE SHEETS

(AMOUNTS IN THOUSANDS)

 

     December 31, 2013  
     Parent /
Issuer
    Guarantor
Subsidiaries
     Non-Guarantor
Subsidiaries
     Eliminations and
Consolidating
Entries
    Consolidated  

ASSETS

            

CURRENT ASSETS:

            

Cash and cash equivalents

   $ 129,445      $ —         $ 111,909       $ (11,313   $ 230,041   

Trust and restricted cash

     6,283        15,396         —           —          21,679   

Accounts receivable, net

     —          67,217         382,972         —          450,189   

Intercompany receivables

     —          1,099,177         12,929         (1,112,106     —     

Deferred income taxes receivable

     95,120        9,908         —           (105,028     —     

Prepaid assets

     3,639        25,034         7,359         —          36,032   

Deferred expenses

     —          43,290         10,343         —          53,633   

Other current assets

     4,469        8,003         17,524         —          29,996   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total current assets

     238,956        1,268,025         543,036         (1,228,447     821,570   

Property and equipment, net

     68,330        248,584         47,851         —          364,765   

INVESTMENT IN SUBSIDIARIES

     1,859,586        466,182         —           (2,325,768     —     

GOODWILL

     —          1,637,725         186,196         —          1,823,921   

INTANGIBLES, net

     —          213,306         18,135         —          231,441   

OTHER ASSETS

     139,370        85,431         19,766         —          244,567   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

TOTAL ASSETS

   $ 2,306,242      $ 3,919,253       $ 814,984       $ (3,554,215   $ 3,486,264   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)

            

CURRENT LIABILITIES:

            

Accounts payable

   $ 6,705      $ 56,212       $ 31,074       $ (11,313   $ 82,678   

Intercompany payables

     898,700        —           213,406         (1,112,106     —     

Deferred revenue

     —          85,665         27,740         —          113,405   

Accrued expenses

     76,859        224,559         53,292         (105,028     249,682   

Current maturities of long-term debt

     4,102        7,775         —           —          11,877   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total current liabilities

     986,366        374,211         325,512         (1,228,447     457,642   

LONG-TERM OBLIGATIONS, less current maturities

     1,966,256        1,547,214         —           —          3,513,470   

DEFERRED INCOME TAXES

     10,603        99,817         2,056         —          112,476   

OTHER LONG-TERM LIABILITIES

     83,189        40,483         19,176         —          142,848   

TOTAL STOCKHOLDERS’ EQUITY (DEFICIT)

     (740,172     1,857,528         468,240         (2,325,768     (740,172
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)

   $ 2,306,242      $ 3,919,253       $ 814,984       $ (3,554,215   $ 3,486,264   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

 

35


Table of Contents

WEST CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS (UNAUDITED)

(AMOUNTS IN THOUSANDS)

 

     Six Months Ended June 30, 2014  
     Parent /
Issuer
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Elimination and
Consolidating
Entries
    Consolidated  

NET CASH PROVIDED BY OPERATING ACTIVITIES:

   $ —        $ 161,812      $ 33,560      $ 6,457      $ 201,829   

CASH FLOWS FROM INVESTING ACTIVITIES:

          

Business acquisitions

     (341,907     —          (18     —          (341,925

Purchase of property and equipment

     (16,906     (48,095     (10,433     —          (75,434

Intercompany investing

     296,727        —          —          (296,727     —     

Other

     —          (820     (50     —          (870
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash flows from investing activities

     (62,086     (48,915     (10,501     (296,727     (418,229
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

          

Proceeds from revolving credit and accounts receivable securitization facilities

     —          —          185,000        —          185,000   

Debt issuance costs

     (5,860     —          (121     —          (5,981

Proceeds from stock options exercised including excess tax benefits

     3,533        —          —          —          3,533   

Dividend payments

     (37,815     —          —          —          (37,815

Intercompany financing

     —          (112,897     (183,830     296,727        —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash flows from financing activities

     (40,142     (112,897     1,049        296,727        144,737   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS

     —          —          1,323        —          1,323   

NET CHANGE IN CASH AND CASH EQUIVALENTS

     (102,228     —          25,431        6,457        (70,340

CASH AND CASH EQUIVALENTS, Beginning of period

     129,445        —          111,909        (11,313     230,041   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS, End of period

   $ 27,217      $ —        $ 137,340      $ (4,856   $ 159,701   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

36


Table of Contents

WEST CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS (UNAUDITED)

(AMOUNTS IN THOUSANDS)

 

     Six Months Ended June 30, 2013  
     Parent /
Issuer
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Elimination and
Consolidating
Entries
     Consolidated  

NET CASH PROVIDED BY OPERATING ACTIVITIES:

   $ —        $ 180,415      $ 13,249      $ —         $ 193,664   

CASH FLOWS FROM INVESTING ACTIVITIES:

           

Business acquisitions

     —          —          (13     —           (13

Purchase of property and equipment

     (2,089     (42,412     (15,026     —           (59,527

Other

     —          (1,462     —          —           (1,462
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net cash flows from investing activities

     (2,089     (43,874     (15,039     —           (61,002
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

           

Payments of subordinated notes

     (450,000     —          —          —           (450,000

Proceeds from initial public offering, net of offering costs

     398,271        —          —          —          
398,271
  

Proceeds from revolving credit and accounts receivable securitization facilities

     —          —          85,000        —           85,000   

Payments on revolving credit and accounts receivable securitization facilities

     —          —          (50,000     —           (50,000

Debt issuance costs

     (30,222     —          —          —           (30,222

Principal repayments on long-term obligations

     (4,123     (7,965     —          —           (12,088

Call premium paid on subordinated notes

     (16,502     —          —          —           (16,502

Proceeds from stock options exercised including excess tax benefits

     873        —          —          —           873   

Dividend payments

     (19,016     —          —          —           (19,016

Other

     (9     —          —          —           (9
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net cash flows from financing activities

     (120,728     (7,965     35,000        —           (93,693
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Intercompany

     119,849        (123,443     3,594        —           —     

EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS

     —          —          (3,700     —           (3,700

NET CHANGE IN CASH AND CASH EQUIVALENTS

     (2,968     5,133        33,104        —           35,269   

CASH AND CASH EQUIVALENTS, Beginning of period

     106,010        1,821        71,280        —           179,111   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

CASH AND CASH EQUIVALENTS, End of period

   $ 103,042      $ 6,954      $ 104,384      $ —         $ 214,380   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

37


Table of Contents

FORWARD-LOOKING STATEMENTS

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

These forward-looking statements are only predictions. These statements relate to future events or our future financial performance and involve known and unknown risks, uncertainties and other important factors that may cause our actual results, levels of activity, performance or achievements to materially differ from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. We have described in the “Risk Factors” section contained in our Annual Report on Form 10-K for the year ended December 31, 2013 the principal risks and uncertainties that we believe could cause actual results to differ from these forward-looking statements. Because forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified, you should not rely on these forward-looking statements as guarantees of future events.

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

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

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

Business Overview

We are a leading provider of technology-enabled, communication services. We offer a broad range of communication and network infrastructure solutions that help manage or support essential communications. Our services include conferencing and collaboration, public safety services, IP communications, interactive services such as automated notifications, large-scale agent services and telecom services. The scale and processing capacity of our proprietary technology platforms, combined with our expertise in managing voice and data transactions, enable us to provide reliable, high-quality, mission-critical communications designed to maximize return on investment for our clients. Our clients include Fortune 1000 companies, along with small and medium enterprises in a variety of industries, including telecommunications, retail, financial services, public safety, technology and healthcare. We have sales and operations in the United States, Canada, Europe, the Middle East, Asia Pacific, Latin America and South America.

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

Investing in technology and developing specialized expertise in the industries we serve are critical components to our strategy of enhancing our services and delivering operational excellence. In 2013, we managed over 58 billion telecom minutes and approximately 148 million conference calls, facilitated over 290 million 9-1-1 calls, and our IVR, hosted contact center and alert and notifications platforms received and delivered over 2.8 billion calls and data messages. With approximately 768,000 telecom ports to handle conference calls, alerts and notifications and customer service calls at June 30, 2014, we believe our platforms provide scale and flexibility to handle greater transaction volume than our competitors, offer superior service and develop new offerings. These ports include approximately 465,000 IP ports, which we believe provide us with the only large-scale proprietary, distributed IP-based global conferencing platform deployed and in use today. Our technology-driven platforms allow us to provide a broad range of complementary automated and agent service offerings to our diverse client base.

 

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Since 2005, our revenue from platform-based services has grown from 37% of total revenue to 73% for the six months ended June 30, 2014, and our operating income from platform-based services has grown from 53% of total operating income to 92% over the same period. As in the past, we will continue to seek and invest in higher margin businesses, irrespective of whether the associated services are delivered to our customers through agent services or a platform-based environment. We expect our platform-based service lines to grow at a faster pace than agent services and, as a result to continue to increase as a percentage of our total revenue.

Financial Operations Overview

Revenue

In our Unified Communications segment, our interactive services are generally billed, and revenue recognized, on a per call, per message basis or per minute basis, or ratably over the contract term. Our conferencing and collaboration services and IP communications services are generally billed on a per participant minute or per seat basis. Billing rates for these services vary depending on participant geographic location, type of service (such as audio, video or web conferencing) and type of message (such as voice, text, email or fax). We also charge clients for additional features, such as conference call recording, transcription services or professional services. Since we entered the conferencing services business, the average rate per minute that we charge has declined while total minutes sold has increased. This is consistent with industry trends. We expect this trend to continue for the foreseeable future.

In our Communication Services segment, our public safety services are generally billed per month based on the number of billing telephone numbers or cell towers covered under each client contract. We also bill monthly for our premise-based database solution. In addition, we bill for sales, installation and maintenance of our communication equipment technology solutions. Our agent services are generally billed on a per minute or per hour basis. We are generally paid on a contingent fee basis for our receivables management and overpayment identification and recovery services as well as for certain other agent services. Our telecom services are generally billed based on usage of toll-free origination services. Revenue for health advocacy services is based on PEPM fees charged under prepayment agreements for services and is recognized as revenue for the periods billed. Fees for future service periods are deferred until the service is performed.

Cost of Services

The principal component of cost of services for our Unified Communications segment is our variable telephone expense. Significant components of our cost of services in this segment also include labor expense, primarily related to commissions for our sales force. Because the services we provide in this segment are largely platform-based, labor expense is less significant than the labor expense we experience in our Communication Services segment.

The principal component of cost of services for our Communication Services segment is labor expense. Labor expense in costs of services primarily reflects compensation and benefits for the agents providing our agent services, but also includes compensation for personnel dedicated to public safety database management, manufacturing and development of our premise-based public safety solution as well as commissions for our sales professionals. We generally pay commissions to sales professionals on both new sales and incremental revenue generated from existing clients. Significant components of our cost of services in this segment also include variable telephone expense.

 

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Selling, General and Administrative Expenses

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

Key Drivers Affecting Our Results of Operations

Factors Related to Our Indebtedness. On each of February 20, 2013, January 24, 2014 and July 1, 2014, West, certain domestic subsidiaries of West, as subsidiary borrowers, Wells Fargo (“Wells Fargo”), as administrative agent, and the various lenders party thereto modified Senior Secured Credit Facilities by entering into Amendment No. 3 (the “Third Amendment”), Amendment No. 4 (“the Fourth Amendment”), and Amendment No. 5 (“the Fifth Amendment”), to Amended and Restated Credit Agreement, respectively, in each case amending our Amended and Restated Credit Agreement, dated as of October 5, 2010, by and among West, Wells Fargo, as administrative agent, and the various lenders party thereto, as lenders (the “Credit Agreement” and, as amended by Amendment No. 1 to Amended and Restated Credit Agreement, dated as of August 15, 2012, Amendment No. 2 to Amended and Restated Credit Agreement, dated as of October 24, 2012, the Third Amendment, Fourth Amendment and the Fifth Amendment, the “Amended Credit Agreement”).

The Third Amendment provided for a reduction in the applicable margins and interest rate floors of all term loans, extended the maturity of a portion of the term loans due July 2016 to June 2018, and added a further step down to the applicable margins of all term loans under the Amended Credit Agreement upon satisfaction of certain conditions, which conditions were satisfied effective as of April 30, 2013, continued to apply as of December 31, 2013 and were removed as a condition pursuant to the Fourth Amendment.

The Fourth Amendment provided for a 25 basis point reduction in the applicable LIBOR interest rate margins and a 25 basis point reduction in the LIBOR interest rate floors of all Term Loans (as defined below). The Fourth Amendment also provided for interest rate floors applicable to the Term Loans. The interest rate floors effective June 30, 2014 were 0.75% for LIBOR rate loans and 1.75% for base rate loans.

As of June 30, 2014, we had outstanding the following senior secured term loans:

• Term loans in an aggregate principal amount of approximately $2.1 billion (the “2018 Maturity Term Loans”). The 2018 Maturity Term Loans will mature on June 30, 2018, and the interest rate margins applicable to the 2018 Maturity Term Loans were 2.50% for LIBOR rate loans and 1.50% for base rate loans; and

• Term loans in an aggregate principal amount of approximately $312.1 million (the “2016 Maturity Term Loans”; and, together with the 2018 Maturity Term Loans, the “Term Loans”). The 2016 Maturity Term Loans will mature on July 15, 2016, and the interest rate margins applicable to the 2016 Maturity Term Loans were 2.0% for LIBOR rate loans and 1.0% for base rate loans.

 

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On August 26, 2013, our revolving trade accounts receivable financing facility was amended and extended. The amended and extended facility provides for $185.0 million in available financing, an extension of the maturity date to June 30, 2018, a reduction of the unused commitment fee to 0.45% from 0.50% and a decrease in the LIBOR spread on borrowings to 135 basis points from 150 basis points. We further amended the amended and extended facility as of April 9, 2014 to include additional guarantors and as of June 2, 2014 to modify the eligibility criteria for certain receivables.

Overview of 2014 Results

The following overview highlights the areas we believe are important in understanding our results of operations for the three and six months ended June 30, 2014. This summary is not intended as a substitute for the detail provided elsewhere in this quarterly report or for our consolidated financial statements and notes thereto included elsewhere in this quarterly report.

 

    Our revenue increased $18.4 million, or 2.7%, during the three months ended June 30, 2014 compared to revenue during the three months ended June 30, 2013.

 

    Our revenue increased $34.3 million, or 2.6%, during the six months ended June 30, 2014 compared to revenue during the six months ended June 30, 2013.

 

    Our operating income decreased $12.8 million, or 9.5%, during the three months ended June 30, 2014 compared to operating income during the three months ended June 30, 2013.

 

    Our operating income increased $15.7 million, or 6.9%, during the six months ended June 30, 2014 compared to operating income during the six months ended June 30, 2013. This increase in operating income is primarily the result of $28.0 million of expenses recorded in connection with our IPO during the first quarter of 2013.

 

    Our cash flows from operating activities increased $8.2 million, or 4.2%, during the six months ended June 30, 2014 compared to cash flows from operating activities during the six months ended June 30, 2013.

 

    Effective January 1, 2014, we implemented a revised organizational structure. Under the revised organizational structure, automated call processing services management and operations have been moved from the Communication Services segment to the Unified Communications segment and have been combined with alerts and notifications to form interactive services. Beginning in the first quarter of 2014, all prior period comparative information has been recast to reflect this change as if it had taken place in all periods presented.

 

    On January 24, 2014, we amended our Senior Secured Credit Facilities which provided for a reduction in applicable margins and interest rate floors of all Term Loans.

 

    On April 21, 2014, we acquired Reliance Holding, Inc., doing business through its wholly owned subsidiary Reliance Communications, LLC as SchoolMessenger (“SchoolMessenger”), a leading provider of notification and mobile communication solutions for the K-12 education market. The purchase price was approximately $76.5 million and was funded by cash on hand. The acquisition was integrated into our Unified Communications segment.

 

    On June 13, 2014, we acquired Health Advocate, Inc. (“Health Advocate”), a leading provider of healthcare advocacy services. The purchase price was approximately $265.4 million and was funded by cash on hand and use of our revolving trade accounts receivable financing facility. The acquisition was integrated into our Communication Services segment.

 

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Recent Developments That Will Affect Future Results

 

    On July 1, 2014, we issued $1.0 billion aggregate principal amount of our 5.375% Senior Notes due 2022 (the “2022 Senior Notes”). In July 2014, we used a portion of the net proceeds from the 2022 Senior Notes to redeem in full $500.0 million aggregate principal amount of the 8.625% Senior Notes due 2018 (the “2018 Senior Notes”) and $200.0 million aggregate principal amount of the 7.875% Senior Notes due 2019 (the “2019 Senior Notes”). Also, on July 1, 2014, we used a portion of the net proceeds from the 2022 Senior Notes to repay $250.0 million aggregate principal amount of the 2018 Maturity Term Loans.

 

    On July 1, 2014, we modified our Senior Secured Credit Facilities by entering into the Fifth Amendment.

Comparison of the Three and Six Months Ended June 30, 2014 and 2013

Revenue: Total revenue for the three months ended June 30, 2014 increased $18.4 million, or 2.7%, to $691.1 million from $672.7 million for the three months ended June 30, 2013. This increase included $8.8 million from the acquisitions of SchoolMessenger and Health Advocate. The remaining $9.6 million increase in revenue for the three months ended June 30, 2014 was due to organic growth.

For the six months ended June 30, 2014, total revenue increased $34.3 million, or 2.6%, to $1,367.2 million from $1,332.9 million for the six months ended June 30, 2013. This increase during the six months ended June 30, 2014 included revenue of $8.8 million from the acquisitions of SchoolMessenger and Health Advocate. The SchoolMessenger acquisition closed on April 21, 2014. SchoolMessenger’s results have been included in the Unified Communications segment since that date. The Health Advocate acquisition closed on June 13, 2014. Health Advocate’s results have been included in the Communication Services segment since that date. The remaining $25.5 million increase in revenue for the six months ended June 30, 2014 relative to the prior year period was due to organic growth.

For the three months ended June 30, 2014 and 2013, our largest 100 clients represented 53% and 56% of our total revenue, respectively. For the six months ended June 30, 2014 and 2013, our largest 100 clients represented 53% and 55% of our total revenue, respectively.

Revenue by segment:

 

     For the three months ended June 30,     For the six months ended June 30,  
     2014     2013     Change     % Change     2014     2013     Change     % Change  

In thousands:

                

Unified Communications

   $ 411,900      $ 408,448      $ 3,452        0.8   $ 816,817      $ 803,502      $ 13,315        1.7

Communication Services

     294,938        271,400        23,538        8.7     580,359        540,569        39,790        7.4

Intersegment eliminations

     (15,775     (7,153     (8,622     NM        (29,961     (11,152     (18,809     NM   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 691,063      $ 672,695      $ 18,368        2.7   $ 1,367,215      $ 1,332,919      $ 34,296        2.6
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

NM - Not Meaningful

For the three months ended June 30, 2014, Unified Communications revenue increased $3.5 million, or 0.8%, to $411.9 million from $408.4 million for the three months ended June 30, 2013. This increase during the three months ended June 30, 2014 included revenue of $4.7 million from the acquisition of SchoolMessenger. Revenue from our conferencing and collaboration services increased $2.1 million, while revenue from our interactive services, excluding the SchoolMessenger revenue decreased $2.8 million. Conferencing revenue attributable to increased usage and new customer usage was offset by a decline in the rates charged to existing customers for those services. The volume of minutes used for our reservationless conferencing services,

 

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which accounts for the majority of our conferencing revenue, grew approximately 3.8% for the three months ended June 30, 2014 over the three months ended June 30, 2013, while the average rate per minute for our reservationless conferencing services declined by approximately 7.0% for the three months ended June 30, 2014 over the three months ended June 30, 2013.

For the six months ended June 30, 2014, Unified Communications revenue increased $13.3 million, or 1.7%, to $816.8 million from $803.5 million for the six months ended June 30, 2013. The increase was primarily attributable to the addition of new customers as well as an increase in usage primarily of our web and audio-based services by our existing customers and the acquisition of SchoolMessenger. Revenue attributable to increased usage and new customer usage was partially offset by a decline in the rates charged to existing customers for those services. The volume of minutes used for our reservationless conferencing services, which accounts for the majority of our conferencing revenue, grew approximately 7.1% for the six months ended June 30, 2014 over the six months ended June 30, 2013, while the average rate per minute for reservationless conferencing services declined by approximately 6.7%.

Since we entered the conferencing services business, the average rate per minute that we charge has declined while total minutes sold has increased. This is consistent with industry trends, which we expect to continue for the foreseeable future.

During the three months ended June 30, 2014, Unified Communications’ international revenue was $121.2 million, a decrease of 0.1% over the three months ended June 30, 2013. During the six months ended June 30, 2014, Unified Communications’ international revenue grew to $244.2 million, an increase of 2.5% over the six months ended June 30, 2013.

For the three months ended June 30, 2014, Communication Services revenue increased $23.5 million, or 8.7%, to $294.9 million from $271.4 million for the three months ended June 30, 2013. This increase during the three months ended June 30, 2014 included revenue of $4.1 million from the acquisition of Health Advocate. The remaining increase in revenue for the three months ended June 30, 2014 was due to organic growth. Revenue from agent-based services for the three months ended June 30, 2014 increased $7.7 million compared with the three months ended June 30, 2013. Revenue from public safety and telecom services for the three months ended June 30, 2014 increased $15.8 million compared with the three months ended June 30, 2013. $11.3 million of the increase in public safety and telecom services revenue is internal with other West entities and eliminated in our consolidated results.

For the six months ended June 30, 2014, Communication Services revenue increased $39.8 million, or 7.4%, to $580.4 million from $540.6 million for the six months ended June 30, 2013. This increase during the six months ended June 30, 2014 included revenue of $4.1 million from the acquisition of Health Advocate. The remaining increase in revenue for the six months ended June 30, 2014 was due to organic growth. Revenue from agent-based services for the six months ended June 30, 2014 increased $10.1 million compared with the six months ended June 30, 2013. Revenue from public safety and telecom services for the six months ended June 30, 2014 increased $29.5 million compared with the three months ended June 30, 2013. $22.3 million of the increase in public safety and telecom services revenue is internal with other West entities and eliminated in our consolidated results.

Cost of services: Cost of services consists of direct labor, telephone expense, commissions and other costs directly related to providing services to clients. Cost of services for the three months ended June 30, 2014 increased $18.4 million, or 5.9%, to $330.4 million from $311.9 million for the three months ended June 30,

 

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2013. As a percentage of revenue, cost of services increased to 47.8% for the three months ended June 30, 2014 from 46.4% for the three months ended June 30, 2013. Cost of services for the six months ended June 30, 2014 increased $26.0 million, or 4.2%, to $647.1 million from $621.0 million for the six months ended June 30, 2013. As a percentage of revenue, cost of services increased to 47.3% for the six months ended June 30, 2013, compared to 46.6% for the six months ended June 30, 2013.

Cost of services by segment:

 

    For the three months ended June 30,     For the six months ended June 30,  
          % of           % of           %           % of           % of           %  
    2014     Revenue     2013     Revenue     Change     Change     2014     Revenue     2013     Revenue     Change     Change  

In thousands:

                       

Unified Communications

  $ 177,495        43.1   $ 168,553        41.3   $ 8,942        5.3   $ 344,515        42.2   $ 332,106        41.3   $ 12,409        3.7

Communication Services

    166,229        56.4     149,209        55.0     17,020        11.4     328,919        56.7     297,636        55.1     31,283        10.5

Intersegment eliminations

    (13,356     NM        (5,823     NM        (7,533     NM        (26,384     NM        (8,736     NM        (17,648     NM   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 330,368        47.8   $ 311,939        46.4   $ 18,429        5.9   $ 647,050        47.3   $ 621,006        46.6   $ 26,044        4.2
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

NM - Not Meaningful

Unified Communications cost of services for the three months ended June 30, 2014 increased $8.9 million, or 5.3%, to $177.5 million from $168.6 million for the three months ended June 30, 2013. The increase in cost of services for the three months ended June 30, 2014 included $1.6 million from the SchoolMessenger acquisition. The remaining increase is primarily driven by increased service volume. As a percentage of this segment’s revenue, Unified Communications cost of services increased to 43.1% for the three months ended June 30, 2014 from 41.3% for the three months ended June 30, 2013.

Unified Communications cost of services for the six months ended June 30, 2014 increased $12.4 million, or 3.7%, to $344.5 million from $332.1 million for the six months ended June 30, 2013. The increase is primarily driven by increased service volume. As a percentage of this segment’s revenue, Unified Communications cost of services increased to 42.2% for the six months ended June 30, 2014 from 41.3% for the six months ended June 30, 2013. The increase in cost of services as a percentage of revenue for the three and six months ended June 30, 2014 is due primarily to lower average rate per minute charged to customers and changes in geographic and product mix.

Communication Services cost of services for the three months ended June 30, 2014 increased $17.0 million, or 11.4%, to $166.2 million from $149.2 million for the three months ended June 30, 2013. The increase in cost of services for the three months ended June 30, 2014 was driven by increased service volume primarily for internal platform-based services with other West entities which is eliminated in our consolidated results. The increase in cost of services for the three months ended June 30, 2014 included $1.4 million from the Health Advocate acquisition. As a percentage of this segment’s revenue, Communication Services cost of services increased to 56.4% for the three months ended June 30, 2014, compared to 55.0% for the three months ended June 30, 2013. The increase in cost of services as a percentage of revenue for the three months ended June 30, 2014 was primarily due to an increase in internal platform-based services, which had a 1.1% impact on Communication Services cost of services as a percentage of revenue.

Communication Services cost of services for the six months ended June 30, 2014 increased $31.3 million, or 10.5%, to $328.9 million from $297.6 million for the six months ended June 30, 2013. The increase in cost of services for the six months ended June 30, 2014 was driven by increased service volume primarily for internal platform-based services with other West entities which is eliminated in our consolidated results. As a percentage of this segment’s revenue, Communication Services cost of services increased to 56.7% for the six months ended June 30, 2014, compared to 55.1% for the six months ended June 30, 2013. The increase in cost of services as a percentage of revenue for the six months ended June 30, 2014 was primarily due to an increase in internal platform-based services, which had a 1.1% impact on Communication Services cost of services as a percentage of revenue.

 

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Selling, general and administrative expenses: SG&A expenses increased $12.8 million, or 5.6%, to $238.8 million for the three months ended June 30, 2014 from $226.0 million for the three months ended June 30, 2013. Acquisition costs, mark-to-market benefit plan costs and foreign currency rate changes in the second quarter of 2014 and a one-time benefit in the second quarter of 2013 accounted for $10.3 million of this increase. During the three months and six months ended June 30, 2014, SG&A expenses from the acquired entities, SchoolMessenger and Health Advocate, aggregated $6.5 million. As a percentage of revenue, SG&A expenses increased to 34.6% for the three months ended June 30, 2014 from 33.6% for the three months ended June 30, 2013.

SG&A expenses decreased $7.5 million, or 1.5%, to $476.4 million for the six months ended June 30, 2014 from $483.9 million for the six months ended June 30, 2013. SG&A expenses in the first six months of 2013 included $25.0 million for Sponsor management fees and related termination of the management agreement in connection with the our IPO and $3.0 million of IPO related bonuses (collectively, the “IPO Sponsor Fees and IPO Bonuses”). As a percentage of revenue, SG&A expenses decreased to 34.8% for the six months ended June 30, 2014, compared to 36.3% for the six months ended June 30, 2013. For the six months ended June 30, 2013, the IPO Sponsor Fees and IPO Bonuses had a 2.1% impact on SG&A expenses as a percentage of revenue.

Selling, general and administrative expenses by business segment:

 

    For the three months ended June 30,     For the six months ended June 30,  
          % of           % of           %           % of           % of           %  
    2014     Revenue     2013     Revenue     Change     Change     2014     Revenue     2013     Revenue     Change     Change  

In thousands:

                       

Unified Communications

  $ 138,080        33.5   $ 126,739        31.0   $ 11,341        8.9   $ 275,282        33.7   $ 277,274        34.5   $ (1,992     -0.7

Communication Services

    103,120        35.0     100,609        37.1     2,511        2.5     204,689        35.3     209,027        38.7     (4,338     -2.1

Intersegment eliminations

    (2,419     NM        (1,330     NM        (1,089     NM        (3,577     NM        (2,416     NM        (1,161     NM   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 238,781        34.6   $ 226,018        33.6   $ 12,763        5.6   $ 476,394        34.8   $ 483,885        36.3   $ (7,491     -1.5
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

NM - Not Meaningful

Unified Communications SG&A expenses for the three months ended June 30, 2014 increased $11.3 million, or 8.9%, to $138.1 million from $126.7 million for the three months ended June 30, 2013. The increase in SG&A expenses previously noted primarily impacted the Unified Communications segment. The increase in SG&A for the three months ended June 30, 2014 included $3.8 million from the SchoolMessenger acquisition. As a percentage of this segment’s revenue, Unified Communications SG&A expenses increased to 33.5% for the three months ended June 30, 2014 compared to 31.0% for the three months ended June 30, 2013.

Unified Communications SG&A expenses for the six months ended June 30, 2014 decreased $2.0 million, or 0.7%, to $275.3 million from $277.3 million for the six months ended June 30, 2013. As a percentage of this segment’s revenue, Unified Communications SG&A expenses decreased to 33.7% for the six months ended June 30, 2014 compared to 34.5% for the six months ended June 30, 2013. The IPO Sponsor Fees and IPO Bonuses allocated to Unified Communications were $19.3 million for the six months ended June 30, 2013. Such allocated portion of the IPO Sponsor Fees and IPO Bonuses had a 2.4% impact on SG&A expenses as a percentage of revenue for Unified Communications.

Communication Services SG&A expenses for the three months ended June 30, 2014 increased $2.5 million, or 2.5%, to $103.1 million from $100.6 million for the three months ended June 30, 2013. The increase in SG&A for the three months ended June 30, 2014 included $2.7 million from the Health Advocate acquisition. As a percentage of this segment’s revenue, Communication Services SG&A expenses improved to 35.0% for the three months ended June 30, 2014, compared to 37.1% for the three months ended June 30, 2013.

Communication Services SG&A expenses for the six months ended June 30, 2014 decreased $4.3 million, or 2.1%, to $204.7 million from $209.0 million for the six months ended June 30, 2013. As a percentage of this segment’s revenue, Communication Services SG&A expenses improved to 35.3% for the six months ended June 30, 2014, compared to 38.7% for the six months ended June 30, 2013. The IPO Sponsor Fees and IPO Bonuses allocated to Communication Services were $8.7 million for the six months ended June 30, 2013. Such allocated portion of the IPO Sponsor Fees and IPO Bonuses had a 1.6% impact on SG&A expenses as a percentage of revenue for Communication Services.

 

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Operating income: Operating income for the three months ended June 30, 2014 decreased $12.8 million, or 9.5%, to $121.9 million from $134.7 million for the three months ended June 30, 2013. This decrease was primarily due to higher SG&A expenses. As a percentage of revenue, operating income for the three months ended June 30, 2014 decreased to 17.6% from 20.0% for the three months ended June 30, 2013.

Operating income for the six months ended June 30, 2014 improved $15.7 million, or 6.9%, to $243.8 million from $228.0 million for the six months ended June 30, 2013. As a percentage of revenue, operating income for the six months ended June 30, 2014 increased to 17.8% from 17.1% for the six months ended June 30, 2013. This increase in operating income was primarily the result of the IPO Sponsor Fees and IPO Bonuses of $28.0 million recorded during the six months ended June 30, 2013. The IPO Sponsor Fees and IPO Bonuses had a 2.1% impact on operating income as a percentage of revenue.

Operating income by segment:

 

     For the three months ended June 30,     For the six months ended June 30,  
            % of            % of           %            % of            % of            %  
     2014      Revenue     2013      Revenue     Change     Change     2014      Revenue     2013      Revenue     Change      Change  

In thousands:

                             

Unified Communications

   $ 96,325         23.4   $ 113,156         27.7   $ (16,831     -14.9   $ 197,020         24.1   $ 194,122         24.2   $ 2,898         1.5

Communication Services

     25,589         8.7     21,582         8.0     4,007        18.6     46,751         8.1     33,906         6.3     12,845         37.9
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 121,914         17.6   $ 134,738         20.0   $ (12,824     -9.5   $ 243,771         17.8   $ 228,028         17.1   $ 15,743         6.9
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Unified Communications operating income for the three months ended June 30, 2014 decreased $16.8 million, or 14.9%, to $96.3 million from $113.2 million for the three months ended June 30, 2013. As a percentage of this segment’s revenue, Unified Communications operating income decreased to 23.4% for the three months ended June 30, 2014 from 27.7% for the three months ended June 30, 2013.

Unified Communications operating income for the six months ended June 30, 2014 increased $2.9 million, or 1.5%, to $197.0 million from $194.1 million for the six months ended June 30, 2013. As a percentage of this segment’s revenue, Unified Communications operating income decreased to 24.1% for the six months ended June 30, 2014 from 24.2% for the six months ended June 30, 2013. The IPO Sponsor Fees and IPO Bonuses, recorded during the six months ended June 30, 2013 and allocated to Unified Communications, had a 2.4% impact on operating income as a percentage of revenue for Unified Communications.

Communication Services operating income for the three months ended June 30, 2014 increased $4.0 million, or 18.6%, to $25.6 million from $21.6 million for the three months ended June 30, 2013. As a percentage of this segment’s revenue, Communication Services operating income improved to 8.7% for the three months ended June 30, 2014 from 8.0% for the three months ended June 30, 2013.

Communication Services operating income for the six months ended June 30, 2014 increased $12.8 million, or 37.9%, to $46.8 million from $33.9 million for the six months ended June 30, 2013. As a percentage of this segment’s revenue, Communication Services operating income improved to 8.1% for the six months ended June 30, 2014 from 6.3% for the six months ended June 30, 2013. The IPO Sponsor Fees and IPO Bonuses, recorded during the six months ended June 30, 2013 and allocated to Communication Services, had a 1.6% impact on operating income as a percentage of revenue for Communication Services.

Other income (expense): Other income (expense) includes interest expense from borrowings under credit facilities and outstanding notes, the aggregate foreign exchange gain (loss) on affiliate transactions denominated in currencies other than the functional currency and interest income from short-term investments. Other income (expense) for the three months ended June 30, 2014 was ($46.0) million compared to ($64.9) million for the three months ended June 30, 2013. Other income (expense) for the six months ended June 30, 2014 was ($94.2) million compared to ($153.3) million for the six months ended June 30, 2013. Interest expense for the three and six months ended June 30, 2014 was $48.4 million and $97.5 million, respectively, compared to $57.3 million and $130.2 million, respectively, for the three and six months ended June 30, 2013. The reduction in interest expense is primarily due to the redemption of the $450.0 million senior subordinated notes on April 26, 2013 and lower interest rates on our variable rate senior secured term loan facilities.

 

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Upon completion of the redemption of the $450.0 million senior subordinated notes on April 26, 2013, we recorded as other non-operating expense $6.6 million for the accelerated amortization of the remaining balance of deferred financing costs associated with the senior subordinated notes. During the six months ended June 30, 2013, we recorded as other non-operating expense $16.5 million for the 103.667% subordinated debt call premium of our $450.0 million senior subordinated notes.

During the three and six months ended June 30, 2014, we recognized gains of $0.4 million on affiliate foreign currency transactions denominated in currencies other than the functional currency. During the three and six months ended June 30, 2013, we recognized losses of $1.1 million and $2.8 million, respectively, on affiliate foreign currency transactions denominated in currencies other than the functional currency.

During the three months ended June 30, 2014, we recognized a $1.8 million gain in marking the investments in our non-qualified retirement plans to market compared to a $0.1 million loss during the three months ended June 30, 2013. During the six months ended June 30, 2014 and 2013 we recognized a $2.5 million gain in each period in marking the investments in our non-qualified retirement plans to market.

Net income: Net income for the three months ended June 30, 2014 increased $4.1 million, or 9.4%, to $47.8 million from net income of $43.7 million for the three months ended June 30, 2013. Our net income for the six months ended June 30, 2014 increased $47.3 million, or 101.3%, to $94.0 million from $46.7 million for the six months ended June 30, 2013. Net income includes a provision for income tax expense at an effective rate of approximately 37.125% for the three and six months ended June 30, 2014, compared to an effective tax rate of approximately 37.5% for the three and six months ended June 30, 2013. For the six months ended June 30, 2013, the IPO Sponsor Fees and IPO Bonuses, subordinated debt call premium and accelerated interest expense for the deferred financing costs associated with the Senior Subordinated Notes had a $31.9 million negative impact on net income.

Earnings per common share: Earnings per common share-basic for the three and six months ended June 30, 2014 were $0.57 and $1.12, respectively, compared to earnings per common share-basic for the three and six months ended June 30, 2013 of $0.52 and $0.63, respectively. Earnings per common share-diluted for the three and six months ended June 30, 2014 were $0.56 and $1.10, respectively, compared to earnings per common share-diluted for the three and six months ended June 30, 2013 of $0.51 and $0.62, respectively. During the six months ended June 30, 2013, the IPO Sponsor Fees and IPO Bonuses, subordinated debt call premium and accelerated interest expense for the deferred financing costs associated with the Senior Subordinated Notes had an aggregate impact of $0.43 and $0.42 on earnings per common share-basic and diluted, respectively.

Liquidity and Capital Resources

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

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

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

 

     For the Six Months Ended June 30,  
In thousands:    2014     2013     Change     % Change  

Net cash flows from operating activities

   $ 201,829      $ 193,664      $ 8,165        4.2

Net cash flows used in investing activities

   $ (418,229   $ (61,002   $ (357,227     NM   

Net cash flows from (used in) financing activities

   $ 144,737      $ (93,693   $ 238,430        NM   

NM - Not Meaningful

 

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Net cash flows from operating activities increased $8.2 million, or 4.2%, to $201.8 million for the six months ended June 30, 2014, compared to net cash flows from operating activities of $193.7 million for the six months ended June 30, 2013. The increase in net cash flows from operating activities is primarily due to improvements in net income and the timing of vendor payments offset by the timing of collections of accounts receivable.

Days sales outstanding, a key performance indicator that we utilize to monitor the accounts receivable average collection period and assess overall collection risk, was 61 days at June 30, 2014, when adjusted for the recent acquisitions of SchoolMessenger and Health Advocate, compared to 60 days at June 30, 2013. At June 30, 2014, each additional day outstanding resulted in an approximate $7.5 million reduction in our net cash flows from operating activities.

Net cash flows used in investing activities increased $357.2 million to $418.2 million for the six months ended June 30, 2014, compared to net cash flows used in investing activities of $61.0 million for the six months ended June 30, 2013. During the six months ended June 30, 2014, our business acquisition investing was $341.9 million greater than the six months ended June 30, 2013, as a result of the acquisitions of SchoolMessenger and Health Advocate. During the six months ended June 30, 2014, cash used for capital expenditures was $75.4 million compared to $59.5 million for the six months ended June 30, 2013. The increase in capital expenditures is due primarily to an initiative to consolidate several of our data centers and expansion of our network infrastructure.

Net cash flows from financing activities increased $238.4 million to $144.7 million for the six months ended June 30, 2014, compared to net cash flows used in financing activities of $93.7 million for the six months ended June 30, 2013. During the six months ended June 30, 2014, net proceeds from revolving credit facilities were $185.0 million compared to net proceeds of $35.0 million during the six months ended June 30, 2013. During the six months ended June 30, 2013, net proceeds from our IPO net of related offering costs were $398.3 million. During the six months ended June 30, 2013, we redeemed $450.0 million 11% senior subordinated notes. The redemption price was 103.667% of the principal amount of the senior subordinated notes. During the six months ended June 30, 2014, dividends of $37.8 million were declared and paid compared to $19.0 million of dividend and dividend equivalent payments during the six months ended June 30, 2013. During the six months ended June 30, 2013, deferred financing and other debt related costs of $30.2 million were paid in connection with the Third Amendment on February 20, 2013. We did not make any principal repayments on long-term obligations during the six months ended June 30, 2014 compared to $12.1 million during the six months ended June 30, 2013.

As of June 30, 2014, the amount of cash and cash equivalents held by our foreign subsidiaries was $101.9 million. We have accrued U.S. taxes on $209.8 million of unremitted foreign earnings and profits. Our intent is to permanently reinvest a portion of these funds outside the U.S. for acquisitions and capital expansion, and to repatriate a portion of these funds. Based on our current projected capital needs and the current amount of cash and cash equivalents held by our foreign subsidiaries, we do not anticipate incurring any material tax costs beyond our accrued tax position in connection with such repatriation, but we may be required to accrue for unanticipated additional tax costs in the future if our expectations or the amount of cash held by our foreign subsidiaries change.

Subject to legally available funds, we intend to pay a quarterly cash dividend at a rate equal to approximately $18.9 million per quarter (or an annual rate of $75.6 million). Based on approximately 84.0 million shares of common stock outstanding, this implies a quarterly dividend of approximately $0.225 per share (or an annual dividend of approximately $0.90 per share). We anticipate funding our dividend with cash generated by our operations. The declaration and payment of all future dividends, if any, will be at the sole discretion of our Board of Directors. On July 31, 2014, we announced a $0.225 per common share quarterly dividend. The dividend is payable August 21, 2014, to shareholders of record as of the close of business on August 11, 2014.

 

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Given our current levels of cash on hand, anticipated cash flows from operations and available borrowing capacity, we believe we have sufficient liquidity to conduct our normal operations and pursue our business strategy in the ordinary course.

Senior Secured Term Loan Facility

On January 24, 2014, we modified our Senior Secured Credit Facilities by entering into the Fourth Amendment. The Fourth Amendment provided for a 25 basis point reduction in the applicable LIBOR interest rate margins and a 25 basis point reduction in the LIBOR interest rate floors of all Term Loans. As of June 30, 2014, the interest rate margins applicable to the 2018 Maturity Term Loans were 2.50% for LIBOR rate loans and 1.50% for base rate loans, and the interest rate margins applicable to the 2016 Maturity Term Loans were 2.0% for LIBOR rate loans and 1.0% for base rate loans. The Fourth Amendment also provides for interest rate floors applicable to the Term Loans. The interest rate floors as of June 30, 2014 were 0.75% for LIBOR rate loans and 1.75% for base rate loans. The Fourth Amendment also includes a soft call option applicable to the Term Loans. The soft call option provides for a premium equal to 1.0% of the amount of the repricing payment in the event that, on or prior to the six-month anniversary of the effective date of the Fourth Amendment, West or its subsidiary borrowers enter into certain repricing transactions.

In connection with the Fourth Amendment, the Company incurred refinancing fees and expenses of approximately $5.8 million, which will be amortized into interest expense over the remaining life of the Senior Secured Credit Facilities.

Our Senior Secured Credit Facilities bear interest at variable rates. At June 30, 2014, our Senior Secured Credit Facilities required annual principal payments of approximately $23.8 million, paid quarterly with balloon payments at maturity dates of July 15, 2016 and June 30, 2018 of approximately $305.9 million and $1,985.9 million respectively. The effective annual interest rates, inclusive of debt amortization costs, on the Senior Secured Credit Facilities for the three and six months ended June 30, 2014 were 3.93% and 4.00%, respectively, compared to 4.74% and 5.33%, respectively, during the three and six months ended June 30, 2013.

On July 1, 2014, we used a portion of the net proceeds from the 2022 Senior Notes to repay a portion of the 2018 Maturity Term Loans. The total aggregate principal amount repaid on the 2018 Maturity Term Loans was $250.0 million. Subsequent to this repayment, our Senior Secured Credit Facilities requires annual principal payments of approximately $3.1 million, paid quarterly with balloon payments at maturity dates of July 15, 2016 and June 30, 2018 of approximately $305.9 million and $1,813.5 million, respectively.

On July 1, 2014, we further modified our Senior Secured Credit Facilities by entering into the Fifth Amendment. The Fifth Amendment provided for a new delayed draw term loan A facility (the “TLA”) to be made available, in a single borrowing, at any time on or before December 31, 2014 in the form of TLA loans having terms substantially similar to the existing term loans under our Senior Secured Credit Facilities, except with respect to pricing, amortization and maturity, in an aggregate principal amount of $350.0 million. The TLA matures July 1, 2019 provided that, the maturity date shall be April 2, 2018 if an aggregate principal amount of $500.0 million or greater of 2018 Maturity Term Loans remains outstanding on such date. The proceeds of the TLA will be used at our option (i) to prepay in part Senior Secured Term Loan Facilities due in 2016 and 2018 and pay accrued but unpaid interest thereon, (ii) to redeem any 2019 Senior Notes, (iii) for working capital and general corporate purposes and (iv) to pay fees and expenses incurred in connection with the incurrence of the TLA. Annual amortization (payable in quarterly installments) in respect of the TLA will be payable at: a 2.5% annual rate in the year ending June 30, 2015 (amortization to be at a 0.625% quarterly rate for the full fiscal quarters following incurrence); a 5.0% annual rate in the year ending June 30, 2016; a 7.5% annual rate in the year ending June 30, 2017; and a 10.0% annual rate thereafter until the maturity date, at which point all remaining outstanding TLA shall become due and payable.

 

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The TLA notes will bear interest at variable rates. The interest rate margin applicable to the TLA will be based on the Company’s total leverage ratio and range from 1.50% to 2.25% for LIBOR rate loans and from 0.50% to 1.25% for base rate loans.

Senior Secured Revolving Credit Facility

Prior to the Fifth Amendment, our senior secured revolving credit facility provided senior secured financing of up to $201 million and matured on January 15, 2016. We were required to pay each non-defaulting lender a commitment fee of 0.375% in respect of any unused commitments under the senior secured revolving credit facility. The commitment fee in respect of unused commitments under the senior secured revolving credit facility was subject to adjustment based upon our total leverage ratio.

The senior secured revolving credit facility was undrawn for the three and six months ended June 30, 2014 and June 30, 2013.

The Fifth Amendment provided for a new Senior Secured Revolving Credit Facility to be made available under our Amended Credit Agreement in replacement of, and in the form of revolving credit loans having terms substantially similar to, the $201 million senior secured revolving credit facility referred to above (except with respect to pricing and maturity) in an aggregate principal amount of $300.0 million that matures July 1, 2019 provided that, the maturity date shall be April 2, 2018 if an aggregate principal amount of $500.0 million or greater of 2018 Maturity Term Loans remains outstanding on such date. The proceeds of the Senior Secured Revolving Credit Facility are to be used solely (i) to prepay in full revolving credit loans outstanding under the previous senior secured credit facilities, and pay accrued but unpaid interest thereon, and to terminate all commitments under, in each case, the previous senior secured revolving credit facility in effect immediately prior to giving effect to the Fifth Amendment, (ii) for working capital and general corporate purposes (including dividends and distributions and acquisitions) and (iii) to pay fees and expenses incurred in connection with the establishment and incurrence of the TLA, the Senior Secured Revolving Credit Facility and any related transactions.

The interest rate margin applicable to the Senior Secured Revolving Credit Facility is based on our total leverage ratio and ranges from 1.50% to 2.25% for LIBOR rate loans and from 0.50% to 1.25% for base rate loans. We are required to pay each non-defaulting lender a commitment fee of 0.375% in respect of any unused commitments under the senior secured revolving credit facility. The commitment fee in respect of unused commitments under the senior secured revolving credit facility is subject to adjustment based upon our total leverage ratio.

The Fifth Amendment revised certain negative covenants contained in the Credit Agreement to reflect the size of the Company and current market terms and to extend the total leverage ratio financial covenant under the Credit Agreement in effect immediately prior to the Fifth Amendment through the maturity of the TLA and the Senior Secured Revolving Credit Facility with certain step downs in such ratio levels for test periods ending after December 31, 2015.

Subsequent to June 30, 2014, after giving effect to the Fifth Amendment, which provided for a reset to the availability under the uncommitted incremental facilities, the Company may request additional tranches of term loans or increases to the revolving credit facility in an aggregate amount not to exceed $500.0 million, plus the aggregate principal payments made in respect of the term loans thereunder following July 1, 2014 (other than such payments made with the proceeds of the 2022 Notes or the proceeds of the TLA). Availability of such additional tranches of term loans or increases to the revolving credit facility is subject to the absence of any default and pro forma compliance with financial covenants and, among other things, the receipt of commitments by existing or additional financial institutions.

 

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2018 Senior Notes

On October 5, 2010, we issued $500.0 million aggregate principal amount of 2018 Senior Notes.

In connection with the issuance of the 2022 Senior Notes, on June 17, 2014, we commenced a tender offer to purchase any and all of our outstanding $500.0 million in aggregate principal amount of the 2018 Senior Notes. Total offer consideration for each $1,000 principal amount of the 2018 Senior Notes tendered was $1,063.09, including an early tender premium of $20.00 per $1,000 principal amount of the 2018 Senior Notes for those holders who properly tendered their 2018 Senior Notes on or before June 30, 2014. Upon consummation of the tender offer on July 1, 2014, approximately $270.8 million aggregate principal amount of the 2018 Senior Notes was purchased. Total additional consideration paid for the tender offer, including early tender premium payment and accrued interest, was approximately $298.7 million.

The redemption date for the call of the 2018 Senior Notes was July 17, 2014 and the redemption price was 104.313% of the principal amount of the 2018 Senior Notes and make-whole premium. In addition, the Company paid accrued and unpaid interest on the redeemed 2018 Senior Notes up to, but not including, the redemption date. Following this redemption, none of the 2018 Senior Notes remained outstanding.

2019 Senior Notes

On November 24, 2010, we issued $650.0 million aggregate principal amount of 2019 Senior Notes.

In connection with the issuance of the 2022 Notes, on June 17, 2014, we commenced a tender offer to purchase up to $200.0 million in aggregate principal amount of the 2019 Senior Notes. Total offer consideration for each $1,000 principal amount of the 2019 Senior Notes tendered was $1,066.29 including an early tender premium of $20.00 per $1,000 principal amount of the 2019 Senior Notes for those holders who properly tendered their 2019 Senior Notes on or before June 30, 2014. Upon consummation of the tender offer on July 1, 2014, $200.0 million aggregate principal amount of the 2019 Senior Notes was purchased. Total additional consideration paid for the tender offer, including early tender premium payment and accrued interest, was approximately $215.3 million.

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

On and after November 15, 2014, we may redeem the 2019 Senior Notes in whole or in part at the redemption prices (expressed as percentages of principal amount of the 2019 Senior Notes to be redeemed) set forth below plus accrued and unpaid interest thereon to the applicable date of redemption, subject to the right of holders of 2019 Senior Notes of record on the relevant record date to receive interest due on the relevant interest payment date, if redeemed during the twelve-month period beginning on November 15 of each of the years indicated below:

 

Year

   Percentage  

2014

     103.938   

2015

     101.969   

2016 and thereafter

     100.000   

 

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2022 Senior Notes

On July 1, 2014 we issued $1.0 billion aggregate principal amount of 2022 Senior Notes. The 2022 Senior Notes mature on July 15, 2022 and were issued at par. The 2022 Senior Notes were offered in a private offering exempt from the registration requirements of the Securities Act.

At any time prior to July 15, 2017, we may redeem all or a part of the 2022 Senior Notes at a redemption price equal to 100% of the principal amount of 2022 Senior Notes redeemed plus the applicable premium (as defined in the indenture governing the 2022 Senior Notes) as of, and accrued and unpaid interest to, the date of redemption, subject to the right of holders of 2022 Senior Notes on the relevant record date to receive interest due on the relevant interest payment date.

On and after July 15, 2017, we may redeem the 2022 Senior Notes in whole or in part at the redemption prices (expressed as percentages of principal amount of the 2022 Senior Notes to be redeemed) set forth below plus accrued and unpaid interest thereon to the applicable date of redemption, subject to the right of holders of 2022 Senior Notes of record on the relevant record date to receive interest due on the relevant interest payment date, if redeemed during the twelve-month period beginning on July 15 of each of the years indicated below:

 

Year

   Percentage  

2017

     104.031   

2018

     102.688   

2019

     101.344   

2020 and thereafter

     100.000   

At any time (which may be more than once) before July 15, 2017, we can choose to redeem up to 40% of the outstanding notes with money that we raise in one or more equity offerings, as long as (i) we pay 105.375% of the face amount of the notes, plus accrued and unpaid interest; (ii) we redeem the notes within 90 days after completing the equity offering; and (iii) at least 60% of the aggregate principal amount of the notes issued remains outstanding afterwards.

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

Accounts Receivable Securitization

On August 26, 2013, the revolving trade accounts receivable financing facility between West Receivables LLC, a wholly-owned, bankruptcy-remote direct subsidiary of West Receivables Holdings LLC and Wells Fargo was amended and extended. The amended and extended facility provides for $185.0 million in available financing and the term of the facility was extended to August 27, 2018. The amended and extended facility also reduced the unused commitment fee to 0.45% from 0.50% and lowered the LIBOR spread on borrowings to 135 basis points from 150 basis points. We have further amended the amended and extended facility as of April 9, 2014 to include additional guarantors and, as of June 2, 2014, to modify the eligibility criteria for certain receivables. Under the amended and extended facility, West Receivables Holdings LLC sells or contributes trade accounts receivables to West Receivables LLC, which sells undivided interests in the purchased or contributed accounts receivables for cash to one or more financial institutions. The availability of the funding is subject to the level of eligible receivables after deducting certain concentration limits and reserves. The proceeds of the facility are available for general corporate purposes. West Receivables LLC and West Receivables Holdings LLC are consolidated in our condensed consolidated financial statements included elsewhere in this report. At June 30, 2014, $185.0 million was outstanding under the amended and extended asset securitization facility. $185.0 million was drawn on this facility to partially fund the acquisition of Health Advocate. At December 31, 2013, the amended and extended asset securitization facility was undrawn. The highest balance outstanding during the six months ended June 30, 2014 and 2013 on this facility was $185.0 million and $50.0 million, respectively.

 

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Debt Covenants

Senior Secured Credit Facilities and Senior Secured Revolving Credit Facility—We are required to comply on a quarterly basis with a maximum total leverage ratio covenant and a minimum interest coverage ratio covenant. Pursuant to the Amended Credit Agreement, the total leverage ratio of consolidated total debt to Consolidated EBITDA (as defined in our Amended Credit Agreement) may not exceed 6.50 to 1.0 at June 30, 2014, and the interest coverage ratio of Consolidated EBITDA to the sum of consolidated interest expense must be not less than 1.85 to 1.0. The total leverage ratio will become more restrictive over time (adjusted annually until the maximum leverage ratio reaches 5.5 to 1.0 as of December 31, 2017). Both ratios are measured on a rolling four-quarter basis. We were in compliance with these financial covenants at June 30, 2014. The Amended Credit Agreement also contains various negative covenants, including limitations on indebtedness, liens, mergers and consolidations, asset sales, dividends and distributions or repurchases of our capital stock, investments, loans and advances, capital expenditures, payment of other debt, transactions with affiliates and changes in our lines of business.

The Amended Credit Agreement includes certain customary representations and warranties, affirmative covenants, and events of default, including payment defaults, breaches of representations and warranties, covenant defaults, cross-defaults to certain indebtedness, certain events of bankruptcy, certain events under ERISA, material judgments, the invalidity of material provisions of the documentation with respect to the Senior Secured Credit Facilities, the failure of collateral under the security documents for the Senior Secured Credit Facilities, the failure of the Senior Secured Credit Facilities to be senior debt under the subordination provisions of certain of our subordinated debt we may have outstanding from time to time and a change of control of us. If an event of default occurs, the lenders under the Senior Secured Credit Facilities will be entitled to take certain actions, including the acceleration of all amounts due under the Senior Secured Credit Facilities and all actions permitted to be taken by a secured creditor. We believe that for the foreseeable future, the Senior Secured Credit Facilities offer us sufficient capacity for our indebtedness financing requirements and we do not anticipate that the limitations on incurring additional indebtedness included in the Amended Credit Agreement will materially impair our financial condition or results of operations.

2019 Senior Notes and the 2022 Senior Notes—The indentures governing the 2019 Senior Notes and the 2022 Senior Notes contain covenants limiting, among other things, our ability and the ability of our restricted subsidiaries to: incur additional debt or issue certain preferred shares, pay dividends on or make distributions in respect of our capital stock or make other restricted payments, make certain investments, sell certain assets, create liens on certain assets to secure debt, consolidate, merge, sell, or otherwise dispose of all or substantially all of our assets, enter into certain transactions with our affiliates and designate our subsidiaries as unrestricted subsidiaries. We were in compliance with these financial covenants at June 30, 2014.

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

Our failure to comply with these debt covenants may result in an event of default which, if not cured or waived, could accelerate the maturity of our indebtedness. If our indebtedness is accelerated, we may not have sufficient cash resources to satisfy our debt obligations and we may not be able to continue our operations as planned. If our cash flows and capital resources are insufficient to fund our debt service obligations and keep us in compliance with the covenants under our Amended Credit Agreement or to fund our other liquidity needs, we may be forced to reduce or delay capital expenditures, sell assets or operations, seek additional capital or restructure or refinance our indebtedness including the notes. We cannot ensure that we would be able to take any of these actions, that these actions would be successful and would permit us to meet our scheduled debt service obligations or that these actions would be permitted under the terms of our existing or future debt agreements, including our Senior Secured Credit Facilities and the indentures that govern the notes. The Amended Credit Agreement and the indentures that govern the notes restrict our ability to dispose of assets and use the proceeds from the disposition. As a result, we may not be able to consummate those dispositions or use the proceeds to meet our debt service or other obligations, and any proceeds that are available may not be adequate to meet any debt service or other obligations then due.

 

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

 

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

 

    the lenders under our Senior Secured Credit Facilities could terminate their commitments to lend us money and foreclose against the assets securing our borrowings; and

 

    we could be forced into bankruptcy or liquidation.

Contractual Obligations

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

The following table summarizes our contractual obligations at June 30, 2014 (amounts in thousands):

 

     Payment due by period  
Contractual           Less than                    After 5  

Obligations

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

Senior Secured Term Loan Facility, due 2016

   $ 312,097       $ 3,121       $ 308,976       $ —         $ —     

Senior Secured Term Loan Facility, due 2018

     2,063,250         20,633         41,264         2,001,353         —     

8 5/8% Senior Notes, due 2018

     500,000         —           —           500,000         —     

7 7/8% Senior Notes, due 2019

     650,000         —           —           650,000         —     

Amended and Extended Asset Securitization, due 2018

     185,000         —           —           185,000         —     

Interest payments on fixed rate debt

     442,044         94,313         188,626         159,105         —     

Estimated interest payments on variable rate debt (1)

     322,302         80,820         157,927         83,555         —     

Operating leases

     156,111         37,294         47,239         24,577         47,001   

Contractual minimums under telephony agreements (2)

     173,000         77,300         95,700         —           —     

Purchase obligations (3)

     109,575         92,851         14,455         2,269         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total contractual cash obligations

   $ 4,913,379       $ 406,332       $ 854,187       $ 3,605,859       $ 47,001   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Interest rate assumptions based on July 10, 2014 LIBOR U.S. dollar swap rate curves for the next five years.
(2) Based on projected telephony minutes through 2017. The contractual minimum is usage based and could vary based on actual usage.
(3) Represents future obligations for capital and expense projects that are in progress or are committed.

The table above excludes amounts to be paid for taxes and long-term obligations under our Nonqualified Executive Retirement Savings Plan and Nonqualified Executive Deferred Compensation Plan. The table also excludes amounts to be paid for income tax contingencies because the timing thereof is highly uncertain. At June 30, 2014, we had accrued $34.0 million, including interest and penalties for uncertain tax positions.

The table above does not include the $1.0 billion aggregate principal amount of the 2022 Senior Notes issued July 1, 2014. The 2022 Senior Notes bear interest at a rate of 5.375% per year, payable semiannually in arrears on July 15 and January 15 of each year beginning January 15, 2015 and mature on July 15, 2022. Proceeds from the 2022 Senior Notes were used to retire the $500.0 million aggregate principal amount of the 2018 Senior Notes, $200.0 million aggregate principal amount of the 2019 Senior Notes and $250.0 million aggregate principal amount of the Senior Secured Term Loan Facility, due 2018. Interest payment obligations for the 2022 Senior Notes are also not included in the table above. Interest payments for the next five years and thereafter on the 2022 Senior Notes are expected to be $29.1 million in the first year, $53.8 million in years two through five and $188.1 million after five years. See note 5 to the condensed consolidated financial statements and Liquidity and Capital Resources elsewhere in this report for additional details.

 

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Capital Expenditures

Our operations continue to require significant capital expenditures for technology, capacity expansion and upgrades. Capital expenditures were $68.0 million for the six months ended June 30, 2014, compared to $48.7 million for the six months ended June 30, 2013. We currently estimate our capital expenditures for the remainder of 2015 to be approximately $102.0 million to $122.0 million primarily for equipment and upgrades at existing facilities, the consolidation of data centers and expansion of our network infrastructure.

Off – Balance Sheet Arrangements

Performance obligations of several of our subsidiaries are supported by performance bonds and letters of credit. These obligations will expire at various dates through 2014 and are renewed as required. The outstanding commitment on these obligations at June 30, 2014 was $8.8 million.

Effects of Inflation

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

CRITICAL ACCOUNTING POLICIES

The preparation of financial statements requires the use of estimates and assumptions on the part of management. The estimates and assumptions used by management are based on our historical experiences combined with management’s understanding of current facts and circumstances. Certain of our accounting policies are considered critical as they are both important to the portrayal of our financial condition and results of operations and require significant or complex judgment on the part of management. The accounting policies we consider critical are our accounting policies with respect to revenue recognition, allowance for doubtful accounts, goodwill and other intangible assets, and income taxes.

For additional discussion of these critical accounting policies, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of our Annual Report on Form 10-K for the year ended December 31, 2013. There have not been any significant changes with respect to these policies during the six months ended June 30, 2014.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Market Risk Management

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

Interest Rate Risk

As of June 30, 2014, we had $2,375.3 million outstanding under our senior secured term loan facilities, $185.0 million outstanding under our revolving trade accounts receivable financing facility, $500.0 million outstanding under our 2018 Senior Notes and $650.0 million outstanding under our 2019 Senior Notes.

Due to the interest rate floors, our long-term obligations at variable interest rates would be subject to interest rate risk only if current LIBOR rates exceed the interest rate floors. A 50 basis point change in the variable interest rate at June 30, 2014, would have no impact on our variable interest rate. At June 30, 2014, the 30 and 90 day LIBOR rates were approximately 0.15520% and 0.23070%, respectively. As a result of the interest rate floors and prevailing LIBOR rates, rate increases on our variable debt in the immediate and near term is unlikely.

 

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Foreign Currency Risk

Our Unified Communications segment conducts business in countries outside of the United States. Revenue and expenses from these foreign operations are typically denominated in local currency, thereby creating exposure to changes in exchange rates. Generally, we do not hedge the foreign currency transactions. Changes in exchange rates may positively or negatively affect our revenue and net income attributed to these subsidiaries.

Based on our level of operating activities in foreign operations during the six months ended June 30, 2014, a five percent change in the value of the U.S. dollar relative to the Euro and British Pound Sterling would have positively or negatively affected our net operating income by less than one percent.

For the three months ended June 30, 2014 and 2013, the Communication Services segment had no material revenue outside the United States. Our facilities in Canada, Jamaica, Mexico and the Philippines receive calls only from customers in North America under contracts denominated in U.S. dollars and therefore our foreign currency exposure is primarily for expenses incurred in the respective country.

For the three and six months ended June 30, 2014, revenues from non-U.S. countries represented approximately 19% of consolidated revenues. During these periods no individual foreign country accounted for greater than 10% of revenue. At June 30, 2014 and December 31, 2013, long-lived assets from non-U.S. countries were approximately 7% and 9%, respectively. We have generally not entered into forward exchange or option contracts for transactions denominated in foreign currency to hedge against foreign currency risk. We are exposed to translation risk because our foreign operations are in local currency and must be translated into U.S. dollars. As currency exchange rates fluctuate, translation of our Statements of Operations of non-U.S. businesses into U.S. dollars affects the comparability of revenue, expenses, and operating income between periods.

Investment Risk

Periodically, we have entered into interest rate swap agreements (also referred to as cash flow hedges) to convert variable long-term debt to fixed rate debt. At June 30, 2014, we had no cash flow hedges outstanding.

Item 4. Controls and Procedures

Evaluation of disclosure controls and procedures. Our management team continues to review our internal controls and procedures and the effectiveness of those controls. As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer and Treasurer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15(b) of the Securities Exchange Act of 1934, as amended. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer and Treasurer concluded that, as of June 30, 2014, our disclosure controls and procedures are effective in ensuring that the information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms and (ii) that such information is accumulated and communicated to our management, including its Chief Executive Officer and Chief Financial Officer as appropriate to allow timely decisions regarding required disclosure.

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

 

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

In addition to the other information set forth in this report, you should carefully consider the risks described under Item 1A in our Annual Report on Form 10-K for the year ended December 31, 2013. If any of the risks described therein occur, our business, financial condition, liquidity and results of operations could be materially affected.

Item 6. Exhibits

 

4.1    Indenture, dated as of July 1, 2014, among West Corporation, the guarantors named on the signature pages thereto and The Bank of New York Mellon Trust Company, N.A., as Trustee, with respect to the 5.375% senior notes due July 15, 2022 (incorporated by reference to Exhibit 4.1 to Form 8-K filed July 3, 2014)
4.2    Supplemental Indenture, dated as of July 1, 2014, by and among West Corporation and The Bank of New York Mellon Trust Company, N.A., to the Indenture, dated as of October 5, 2010, by and among West Corporation, the guarantors named therein and The Bank of New York Mellon Trust Company, N.A., with respect to West Corporation’s $500.0 million aggregate principal amount of 8.625% senior notes due October 1, 2018 (incorporated by reference to Exhibit 4.2 to Form 8-K filed July 3, 2014)
10.1    Amendment No. 5 to Amended and Restated Credit Agreement, dated as of July 1, 2014, by and among West Corporation, the Subsidiary Borrowers party thereto, Wells Fargo Bank, National Association, as administrative agent, and the lenders party thereto, to the amended and restated credit agreement, dated as of October 5, 2010, by and among West Corporation, the lenders from time to time party thereto and Wells Fargo Bank, National Association, as administrative agent (incorporated by reference to Exhibit 10.1 to Form 8-K filed July 3, 2014)
10.2    Separation Agreement, dated May 6, 2014, between West Corporation and Paul M. Mendlik (incorporated by reference to Exhibit 10.1 to Form 8-K filed May 7, 2014)(1)
10.3    West Corporation Amended and Restated 2013 Long-Term Incentive Plan (incorporated by reference to Exhibit 10.1 to Form 8-K filed May 15, 2014)(1)
10.4    West Corporation Amended and Restated Executive Incentive Plan (incorporated by reference to Exhibit 10.1 to Form 8-K filed May 15, 2014)(1)
10.5    Amendment Number Three to the West Corporation Nonqualified Deferred Compensation Plan dated as of July 30, 2014 (1)
15.1    Letter regarding unaudited interim financial information

 

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31.01    Certification pursuant to 15 U.S.C. Section 7241, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.02    Certification pursuant to 15 U.S.C. Section 7241, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.01    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.02    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101    Financial statements from the quarterly report on Form 10-Q of West Corporation for the quarter ended June 30, 2014, filed on August 5, 2014, formatted in XBRL: (i) the Condensed Consolidated Statements of Operations; (ii) the Condensed Consolidated Statements of Comprehensive Income; (iii) the Condensed Consolidated Balance Sheets; (iv) the Condensed Consolidated Statements of Cash Flows; (v) the Condensed Consolidated Statements of Stockholders’ Deficit and (vi) the Notes to Condensed Consolidated Financial Statements furnished herewith.

 

(1) Indicates management contract or compensation plan or arrangement.

 

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SIGNATURES

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

 

WEST CORPORATION
By:  

/s/ Thomas B. Barker

  Thomas B. Barker
  Chief Executive Officer
By:  

/s/ Paul M. Mendlik

  Paul M. Mendlik
  Chief Financial Officer and Treasurer
By:  

/s/ R. Patrick Shields

  R. Patrick Shields
  Senior Vice President -
  Chief Accounting Officer

Date: August 5, 2014

 

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EXHIBIT INDEX

 

Number

  

Description

4.1    Indenture, dated as of July 1, 2014, among West Corporation, the guarantors named on the signature pages thereto and The Bank of New York Mellon Trust Company, N.A., as Trustee, with respect to the 5.375% senior notes due July 15, 2022 (incorporated by reference to Exhibit 4.1 to Form 8-K filed July 3, 2014)
4.2    Supplemental Indenture, dated as of July 1, 2014, by and among West Corporation and The Bank of New York Mellon Trust Company, N.A., to the Indenture, dated as of October 5, 2010, by and among West Corporation, the guarantors named therein and The Bank of New York Mellon Trust Company, N.A., with respect to West Corporation’s $500.0 million aggregate principal amount of 8.625% senior notes due October 1, 2018 (incorporated by reference to Exhibit 4.2 to Form 8-K filed July 3, 2014)
10.1    Amendment No. 5 to Amended and Restated Credit Agreement, dated as of July 1, 2014, by and among West Corporation, the Subsidiary Borrowers party thereto, Wells Fargo Bank, National Association, as administrative agent, and the lenders party thereto, to the amended and restated credit agreement, dated as of October 5, 2010, by and among West Corporation, the lenders from time to time party thereto and Wells Fargo Bank, National Association, as administrative agent (incorporated by reference to Exhibit 10.1 to Form 8-K filed July 3, 2014)
10.2    Separation Agreement, dated May 6, 2014, between West Corporation and Paul M. Mendlik (incorporated by reference to Exhibit 10.1 to Form 8-K filed May 7, 2014)(1)
10.3    West Corporation Amended and Restated 2013 Long-Term Incentive Plan (incorporated by reference to Exhibit 10.1 to Form 8-K filed May 15, 2014)(1)
10.4    West Corporation Amended and Restated Executive Incentive Plan (incorporated by reference to Exhibit 10.1 to Form 8-K filed May 15, 2014)(1)
10.5    Amendment Number Three to the West Corporation Nonqualified Deferred Compensation Plan dated as of July 30, 2014 (1)
15.1    Letter regarding unaudited interim financial information
31.01    Certification pursuant to 15 U.S.C. Section 7241, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.02    Certification pursuant to 15 U.S.C. Section 7241, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.01    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.02    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101    Financial statements from the quarterly report on Form 10-Q of West Corporation for the quarter ended June 30, 2014, filed on August 5, 2014, formatted in XBRL: (i) the Condensed Consolidated Statements of Operations; (ii) the Condensed Consolidated Statements of Comprehensive Income; (iii) the Condensed Consolidated Balance Sheets; (iv) the Condensed Consolidated Statements of Cash Flows; (v) the Condensed Consolidated Statements of Stockholders’ Deficit and (vi) the Notes to Condensed Consolidated Financial Statements furnished herewith.

 

(1) Indicates management contract or compensation plan or arrangement.

 

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