Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

 

FORM 10-Q

 

 

(Mark One)

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

For the quarterly period ended September 30, 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 October 30, 2014, 84,176,835 shares of the registrant’s common stock were outstanding.

 

 

 

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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 Nine Months Ended September 30, 2014 and 2013 (unaudited)			4
Condensed Consolidated Statements of Comprehensive Income - Three and Nine Months Ended September  30, 2014 and 2013 (unaudited)			5
Condensed Consolidated Balance Sheets - September 30, 2014 and December 31, 2013 (unaudited)			6
Condensed Consolidated Statements of Cash Flows -  Nine Months Ended September 30, 2014 and 2013 (unaudited)			7
Condensed Consolidated Statements of Stockholders’ Deficit -  Nine Months Ended September 30, 2014 and 2013 (unaudited)			8
Notes to Condensed Consolidated Financial Statements (unaudited)			9
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			39
Item 3. Quantitative and Qualitative Disclosures About Market Risk			57
Item 4. Controls and Procedures			58
PART II. OTHER INFORMATION			58
Item 1. Legal Proceedings			58
Item 1A. Risk Factors			58
Item 6. Exhibits			58
SIGNATURES			61
EXHIBIT INDEX			62

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

 

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (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 September 30, 2014, and the related condensed consolidated statements of operations and of comprehensive income for the three-month and nine-month periods ended September 30, 2014 and 2013, and of stockholders’ deficit and of cash flows for the nine-month periods ended September 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

November 6, 2014

 

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WEST CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

(UNAUDITED)

 

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2014				2013				2014				2013
REVENUE		$	713,201			$	665,366			$	2,080,416			$	1,998,285
COST OF SERVICES			338,778				310,533				985,828				931,539
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES			253,473				231,407				729,867				715,292
OPERATING INCOME			120,950				123,426				364,721				351,454
OTHER INCOME (EXPENSE):
Interest expense, net of interest income of $41, $45, $228 and $208			(47,606	)			(51,242	)			(144,923	)			(181,310	)
Debt call premium and accelerated amortization of deferred financing costs			(51,735	)			—				(51,735	)			(23,105	)
Other			2,290				1,654				5,397				1,555
Other expense			(97,051	)			(49,588	)			(191,261	)			(202,860	)
INCOME BEFORE INCOME TAX EXPENSE			23,899				73,838				173,460				148,594
INCOME TAX EXPENSE			7,789				27,690				63,313				55,723
NET INCOME		$	16,110			$	46,148			$	110,147			$	92,871
EARNINGS PER COMMON SHARE:
Basic Common		$	0.19			$	0.55			$	1.31			$	1.20
Diluted Common		$	0.19			$	0.54			$	1.29			$	1.18
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:
Basic			84,090				83,581				83,950				77,274
Diluted			85,611				85,042				85,400				78,720
DIVIDENDS DECLARED:
Dividends declared per share		$	0.225			$	0.225			$	0.675			$	0.45

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

 

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WEST CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(AMOUNTS IN THOUSANDS)

(UNAUDITED)

 

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2014				2013				2014				2013
Net income		$	16,110			$	46,148			$	110,147			$	92,871
Foreign currency translation adjustments, net of tax of $7,570, $(3,744), $8,593 and $(494)			(15,658	)			6,109				(14,950	)			806
Reclassification of a cash flow hedge into earnings, net of tax of $0, $0, $0 and $1,349			—				—				—				(2,201	)
Unrealized gain on cash flow hedges, net of tax of $0, $0, $0 and $(2,444)			—				—				—				3,987
Comprehensive income		$	452			$	52,257			$	95,197			$	95,463

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

 

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WEST CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(AMOUNTS IN THOUSANDS)

(UNAUDITED)

 

		September 30,				December 31,
		2014				2013
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	165,933			$	230,041
Trust and restricted cash			23,671				21,679
Accounts receivable, net of allowance of $8,164 and $9,809			487,115				450,189
Deferred income taxes receivable			7,969				—
Prepaid assets			52,681				36,032
Deferred expenses			64,488				53,633
Other current assets			25,940				29,996
Total current assets			827,797				821,570
PROPERTY AND EQUIPMENT:
Property and equipment			1,339,486				1,280,420
Accumulated depreciation and amortization			(967,015	)			(915,655	)
Total property and equipment, net			372,471				364,765
GOODWILL			2,044,928				1,823,921
INTANGIBLE ASSETS, net of accumulated amortization of $565,704 and $528,936			404,215				231,441
OTHER ASSETS			279,814				244,567
TOTAL ASSETS		$	3,929,225			$	3,486,264
LIABILITIES AND STOCKHOLDERS’ DEFICIT
CURRENT LIABILITIES:
Accounts payable		$	99,421			$	82,678
Deferred revenue			142,365				113,405
Accrued expenses			298,221				249,682
Current maturities of long-term debt			3,121				11,877
Total current liabilities			543,128				457,642
LONG-TERM OBLIGATIONS, less current maturities			3,755,681				3,513,470
DEFERRED INCOME TAXES			137,522				112,476
OTHER LONG-TERM LIABILITIES			177,805				142,848
Total liabilities			4,614,136				4,226,436
COMMITMENTS AND CONTINGENCIES (Note 12)
STOCKHOLDERS’ DEFICIT
Common stock $0.001 par value, 475,000 shares authorized, 84,214 and 83,745 shares issued and 84,122 and 83,653 shares outstanding			84				84
Additional paid-in capital			2,149,198				2,132,441
Retained deficit			(2,801,735	)			(2,855,189	)
Accumulated other comprehensive loss			(27,150	)			(12,200	)
Treasury stock at cost (92 shares for both periods)			(5,308	)			(5,308	)
Total stockholders’ deficit			(684,911	)			(740,172	)
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT		$	3,929,225			$	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)

 

		Nine Months Ended
		September 30,
		2014				2013
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	110,147			$	92,871
Adjustments to reconcile net income to net cash flows from operating activities:
Depreciation			90,492				85,172
Amortization			53,482				49,406
Provision for share based compensation			10,179				8,154
Deferred income tax (benefit) expense			(24,627	)			3,668
Amortization of deferred financing costs			22,707				20,313
Other			10				93
Changes in operating assets and liabilities, net of business acquisitions:
Accounts receivable			(29,977	)			(12,739	)
Other assets			(60,961	)			(29,636	)
Accounts payable			25,224				(15,979	)
Accrued wages and benefits			16,594				26,774
Accrued expenses, other liabilities and income tax payable			116,980				48,632
Net cash flows from operating activities			330,250				276,729
CASH FLOWS USED IN INVESTING ACTIVITIES:
Business acquisitions			(385,457	)			(13	)
Purchases of property and equipment			(113,682	)			(87,980	)
Other			(1,993	)			(1,166	)
Net cash flows used in investing activities			(501,132	)			(89,159	)
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES:
Proceeds from issuance of notes due 2022			1,000,000				—
Payments on notes and term loan facilities			(950,000	)			(450,000	)
Proceeds from initial public offering, net of offering costs			—				398,266
Proceeds from revolving credit facilities			197,000				85,000
Payments on revolving credit facilities			(12,765	)			(85,000	)
Dividends paid			(56,751	)			(37,840	)
Payments of deferred financing and other debt related costs			(27,280	)			(30,760	)
Debt redemption premiums paid on senior and subordinated notes			(43,987	)			(16,502	)
Principal repayments on long-term obligations			(780	)			(18,132	)
Proceeds from stock options exercised and ESPP shares issued including excess tax benefits			5,418				815
Other			—				(9	)
Net cash flows from (used in) financing activities			110,855				(154,162	)
EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS			(4,081	)			(1,546	)
NET CHANGE IN CASH AND CASH EQUIVALENTS			(64,108	)			31,862
CASH AND CASH EQUIVALENTS, Beginning of period			230,041				179,111
CASH AND CASH EQUIVALENTS, End of period		$	165,933			$	210,973
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest and call premiums on senior and subordinated notes		$	177,229			$	179,317
Cash paid during the period for income taxes, net of refunds of $5,455 and $2,629		$	62,209			$	36,831
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES:
Acquisition of property through accounts payable commitments		$	4,678			$	8,585

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

 

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WEST CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

(AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)

(UNAUDITED)

 

		Common Stock				Additional Paid - in Capital				Retained Deficit				Treasury Stock				Accumulated Other Comprehensive Income (Loss)				Total Stockholders’ Deficit
BALANCE, January 1, 2014		$	84			$	2,132,441			$	(2,855,189	)		$	(5,308	)		$	(12,200	)		$	(740,172	)
Net income											110,147												110,147
Dividends declared (cash dividends / $0.675 per share)											(56,693	)											(56,693	)
Other comprehensive loss, net of tax of $8,593 (Note 10)																			(14,950	)			(14,950	)
Executive Deferred Compensation Plan activity (59,260 shares issued)							2,561																2,561
Shares issued from the Employee Stock Purchase Plan (220,220 shares)							4,759																4,759
Stock options exercised including related tax benefits (109,615 shares)			—				1,149																1,149
Share based compensation							8,288																8,288
BALANCE, September 30, 2014		$	84			$	2,149,198			$	(2,801,735	)		$	(5,308	)		$	(27,150	)		$	(684,911	)
BALANCE, January 1, 2013		$	62			$	1,720,639			$	(2,941,948	)		$	(5,308	)		$	(23,131	)		$	(1,249,686	)
Net income											92,871												92,871
Dividends declared (cash dividends / $0.45 per share)											(37,626	)											(37,626	)
Other comprehensive income, net of tax of $(1,589) (Note 10)																			2,592				2,592
Executive Deferred Compensation Plan activity							3,060																3,060
Issuance of common stock in connection with our initial public offering (21,275,000 shares)			21				401,012																401,033
Initial public offering costs							(2,767	)															(2,767	)
Stock options exercised including related tax benefits (164,827 shares)			1				1,567																1,568
Share based compensation							6,346																6,346
BALANCE, September 30, 2013		$	84			$	2,129,857			$	(2,886,703	)		$	(5,308	)		$	(20,539	)		$	(782,609	)

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 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.

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 nine months ended September 30, 2014, we managed approximately 120 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. With the acquisition on April 21, 2014, of Reliance Holding, Inc., doing business through its wholly owned subsidiary Reliance Communications, LLC as SchoolMessenger (“SchoolMessenger”), we expanded our interactive services, into the K-12 education market.

 

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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. on June 13, 2014, we expanded Agent Services’ 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 nine months ended September 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” 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 nine 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, May 15, 2014 and August 21, 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, May 5, 2014 and August 11, 2014, respectively, for a total of approximately $56.8 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.

 

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WEST CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

2. ACQUISITIONS

911 Enable

On September 2, 2014, we acquired the 911 Enable business of Connexon Group, Inc. (“911 Enable”), a provider of emergency communications solutions for IP-based enterprise customers across the United States and Canada. The purchase price was approximately $42.2 million and was funded with cash on hand.

In the preliminary purchase price allocation, goodwill of $20.2 million, not deductible for tax purposes, and finite-lived intangible assets of $21.7 million were recorded. The acquisition was integrated into our Communication Services segment, within public safety services. This will expand our enterprise VoIP 911 and public safety communications to deliver improved emergency response services to business, government, education and non-profit organizations.

The following table summarizes the preliminary estimated fair values of the assets acquired and liabilities assumed at the acquisition date for 911 Enable. The finite-lived intangible assets are comprised of trade names ($1.4 million), technology ($4.9 million), non-competition agreements ($0.2 million) and customer relationships ($15.2 million) and will be amortized over their useful lives which range from three to ten years.

 

(Amounts in thousands)		September 2, 2014
Working Capital		$	494
Property and equipment			59
Intangible assets			21,685
Goodwill			20,198
Total assets acquired			42,436
Long-term liabilities			258
Total liabilities assumed			258
Net assets acquired		$	42,178

Health Advocate

On June 13, 2014, we acquired Health Advocate, Inc. (“Health Advocate”), a leading provider of healthcare advocacy services. The purchase price was approximately $265.9 million and was funded with 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 $162.0 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.

 

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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 Health Advocate. The finite-lived intangible assets are comprised of trade names ($30.1 million), technology ($36.4 million), non-competition agreements ($2.8 million) and customer relationships ($80.9 million) and will be amortized over their useful lives which range from four to twenty years.

 

(Amounts in thousands)		June 13, 2014
Working Capital		$	(2,538	)
Property and equipment			6,055
Other assets, net			72
Intangible assets			150,190
Goodwill			161,964
Total assets acquired			315,743
Non-current deferred taxes			41,940
Long-term liabilities			7,913
Total liabilities assumed			49,853
Net assets acquired		$	265,890

SchoolMessenger

On April 21, 2014, we acquired SchoolMessenger, a leading provider of notification and mobile communication solutions for the K-12 education market. The purchase price was approximately $77.4 million and was funded with cash on hand.

In the preliminary purchase price allocation, goodwill of $52.5 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 the adjacent education vertical market.

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 ($1.7 million), technology ($8.8 million), non-competition agreements ($1.3 million) and customer relationships ($28.3 million) and will be amortized over their useful lives which range from three to twenty years.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

(Amounts in thousands)		April 21, 2014
Working Capital		$	(9,914	)
Property and equipment			1,574
Intangible assets			40,145
Goodwill			52,513
Total assets acquired			84,318
Non-current deferred taxes			4,789
Long-term liabilities			2,157
Total liabilities assumed			6,946
Net assets acquired		$	77,372

Revenue attributable to 911 Enable, Health Advocate and SchoolMessenger from their acquisition dates to September 30, 2014, was $0.8 million, $26.5 million and $11.8 million, respectively. Net income attributable to these three acquisitions from their acquisition dates was not significant.

Acquisition costs for the three months ended September 30, 2014 and 2013 were $1.5 million and $0.2 million, respectively, and are included in selling, general and administrative expenses. Acquisition costs for the nine months ended September 30, 2014 and 2013 were $3.2 million and $0.9 million, respectively, and are included in selling, general and administrative expenses.

The excess of the acquisition costs over the fair value of the assets acquired and liabilities assumed for the purchase of 911 Enable, Health Advocate and SchoolMessenger 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.

Pro forma

Assuming the acquisitions of 911 Enable, Health Advocate and SchoolMessenger occurred as of the beginning of the periods presented, our unaudited pro forma results of operations for the three and nine months ended September 30, 2014 and 2013 would have been, in thousands (except per share amounts), as follows:

 

		Three months ended September 30,								Nine months ended September 30,
		2014				2013				2014				2013
Revenue		$	715,102			$	696,112			$	2,135,780			$	2,087,373
Net Income		$	15,616			$	41,907			$	104,009			$	79,314
Earnings per share - basic		$	0.19			$	0.50			$	1.24			$	1.03
Earnings per share - diluted		$	0.18			$	0.49			$	1.22			$	1.01

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.

3. GOODWILL AND OTHER INTANGIBLE ASSETS

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

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

		Unified Communications				Communication Services				Consolidated
Balance at January 1, 2014		$	1,001,442			$	822,479			$	1,823,921
Foreign currency translation adjustment			(13,437	)			(5	)			(13,442	)
Acquisitions			52,513				182,162				234,675
Acquisition accounting adjustments			(226	)			—				(226	)
Balance at September 30, 2014		$	1,040,292			$	1,004,636			$	2,044,928
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
		September 30, 2014				December 31, 2013
Gross carrying amount		$	2,082,603			$	1,861,596
Accumulated impairment (1)			(37,675	)			(37,675	)
Net carrying amount		$	2,044,928			$	1,823,921

 

(1)	The impairment was recorded in 2010.

Other intangible assets

Below is a summary of the major intangible assets for each identifiable intangible asset, in thousands:

 

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(UNAUDITED)

 

		As of September 30, 2014
Intangible assets		Acquired Cost				Accumulated Amortization				Net Intangible Assets
Customer lists		$	667,088			$	(445,657	)		$	221,431
Technology & Patents			170,221				(80,071	)			90,150
Trade names (indefinite-lived)			37,710				—				37,710
Trade names (finite-lived)			69,834				(24,374	)			45,460
Other intangible assets			25,066				(15,602	)			9,464
Total		$	969,919			$	(565,704	)		$	404,215
		As of December 31, 2013
Intangible assets		Acquired Cost				Accumulated Amortization				Net Intangible Assets
Customer lists		$	547,860			$	(422,367	)		$	125,493
Technology & Patents			122,099				(72,549	)			49,550
Trade names (indefinite-lived)			47,110				—				47,110
Trade names (finite-lived)			27,414				(20,389	)			7,025
Other intangible assets			15,894				(13,631	)			2,263
Total		$	760,377			$	(528,936	)		$	231,441

Amortization expense for finite-lived intangible assets was $18.3 million and $13.9 million for the three months ended September 30, 2014 and 2013, respectively, and $44.5 million and $41.8 million for the nine months ended September 30, 2014 and 2013, respectively. The 2014 annual impairment analysis of goodwill and intangible assets will be in the fourth quarter. Estimated amortization expense for the intangible assets noted above for the entire year of 2014 and the next five years is as follows:

 

2014		$61.0 million
2015		$63.7 million
2016		$51.8 million
2017		$42.7 million
2018		$37.7 million
2019		$33.7 million

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

4. ACCRUED EXPENSES

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

 

		September 30, 2014				December 31, 2013
Accrued wages		$	84,837			$	61,945
Accrued phone			56,591				48,201
Interest payable			44,080				48,793
Accrued other taxes (non-income related)			39,481				42,022
Income taxes payable			28,150				5,922
Acquisition obligation			6,115				—
Accrued lease expense			4,361				3,204
Accrued employee benefit costs			3,609				5,992
Deferred income tax			—				7,697
Other accrued expenses			30,997				25,906
		$	298,221			$	249,682

5. LONG-TERM OBLIGATIONS

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

 

		September 30,				December 31,
		2014				2013
Senior Secured Term Loan Facility, due 2016		$	311,317			$	312,097
Senior Secured Term Loan Facility, due 2018			1,813,250				2,063,250
Accounts Receivable Securitization, due 2018			184,235				—
8 5/8% Senior Notes, paid in 2014			—				500,000
7 7/8% Senior Notes, due 2019			450,000				650,000
5 3/8% Senior Notes, due 2022			1,000,000				—
			3,758,802				3,525,347
Less: current maturities			(3,121	)			(11,877	)
Long-term obligations		$	3,755,681			$	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. 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 (as defined below).

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:

 

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(UNAUDITED)

 

Ÿ 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 the Senior Secured Term Loan Facilities due in 2016 (the “2016 Maturity Term Loans”) and the Senior Secured Term Loan Facilities due in 2018 (the “2018 Maturity Term Loans” and, together with the 2016 Maturity Term Loans, the “Term Loans”) 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;

Ÿ 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;

Ÿ 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;

Ÿ 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

Ÿ 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.

As of September 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 1.00% for base rate loans. The Fourth Amendment also provides for interest rate floors applicable to the term loans. The interest rate floors effective September 30, 2014 were 0.75% for the LIBOR component of LIBOR rate loans and 1.75% for the base rate component of base rate loans.

In connection with the Fifth Amendment, we incurred refinancing expenses of approximately $5.3 million, which will be amortized into interest expense over the remaining life of the 2018 Maturity Term Loans, the TLA and the Senior Secured Revolving Credit Facility.

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”).

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

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 2018 Maturity Term Loans. The total aggregate principal amount repaid on the 2018 Maturity Term Loans 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.

In connection with the 2022 Senior Notes, we incurred refinancing expenses of approximately $16.0 million, which will be amortized into interest expense over the remaining life of the 2022 Senior Notes.

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. In addition we recorded accelerated amortization of deferred financing costs of $5.9 million in connection with the redemption of the 2018 Senior Notes. Following this redemption, none of the 2018 Senior Notes remained outstanding.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

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. In addition, we recorded accelerated amortization of deferred financing costs of $1.8 million in connection with the purchase of the $200.0 million aggregate principal amount of the 2019 Senior Notes.

On October 16, 2014 we delivered a redemption notice for the remaining $450.0 million of 2019 Senior Notes. The redemption premium is $17.7 million and will be deposited with the 2019 Senior Notes indenture trustee on November 14, 2014. We intend to use proceeds from the TLA, the Senior Secured Revolving Credit Facility and cash on hand to pay in full the 2019 Senior Notes, redemption premium and accrued interest.

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

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 September 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 nine months ended September 30, 2013.

 

Amount of gain

Amount of gain

reclassified from OCI

recognized in OCI

into earnings for the

for the three months

Location of gain

three months ended

Derivatives designated

ended September 30,

reclassified from OCI

September 30,

as hedging instruments

2013

into net income

2013

Interest rate swaps

$

—

Interest expense

$

—

For the nine months

For the nine months

ended September 30,

ended September 30,

2013

2013

Interest rate swaps

$

1,786

Interest expense

$

2,985

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

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 September 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

Other Assets

Trading securities

$

63,501

$

63,501

$

—

$

—

$

63,501

 

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 5.375% senior notes and 7.875% senior notes based on market quotes, which we determined to be Level 1 inputs, at September 30, 2014 was approximately $1,394.1 million compared to the carrying amount of $1,450.0 million. The fair value of our 7.875% senior notes based on market quotes, which we determined to be Level 1 inputs, at December 31, 2013 was approximately $701.2 million compared to the carrying amount of $650.0 million. Our 8.625% senior notes were paid in full in July 2014. At December 31, 2013 the fair value or our 8.625% senior notes was $542.5 million compared to the carrying value of $500.0 million.

The fair value of our senior secured term loan facilities was estimated using current market quotes on comparable debt securities from various financial institutions. All of the inputs used to determine the fair market 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 term loan facilities at September 30, 2014 was approximately $2,118.5 million compared to the carrying amount of $2,124.6 million. The fair value of our senior secured term loan 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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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. Restricted stock granted under the 2013 LTIP vests over a period of three or four years, with a ratable portion of the restricted stock award vested on each anniversary of the grant date until fully vested, unless earlier forfeited as a result of termination of service to the Company prior to the applicable vesting date. Dividends are payable in respect of shares of unvested restricted stock either at the time of the dividend is paid to stockholder or upon vesting of the restricted stock in accordance with the terms of the applicable restricted stock award agreement.

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 nine months ended September 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			—				(50,832	)			17.64
Canceled or forfeited (2013 LTIP)			20,674				(20,674	)			23.72
Canceled or forfeited (2006 EIP)			—				(199,056	)			29.50
Restricted stock granted			(1,400,966	)			—				—
Restricted stock canceled			18,552				—				—
Balance at September 30, 2014			6,425,873				2,970,046			$	27.06

At September 30, 2014, we expect that approximately 20% of options granted will be canceled or forfeited over the vesting period. At September 30, 2014, the intrinsic value of options vested and exercisable was approximately $4.2 million. The aggregate intrinsic value of options outstanding at September 30, 2014, was approximately $11.2 million. The aggregate intrinsic value of options outstanding, vested and expected to vest at September 30, 2014, was approximately $10.4 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 September 30, 2014:

 

Outstanding														Vested and Exercisable
						Average				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			100,234				2.18			$	13.12				100,234			$	13.12
13.13 - 28.88			2,238,331				7.79				25.18				637,964				25.52
28.89 - 50.88			603,858				7.29				34.02				603,858				34.02
50.89 - 84.80			27,623				5.91				77.54				19,785				76.70
$0.00 - $84.80			2,970,046				7.48			$	27.06				1,361,841			$	29.12

 

						Options Outstanding
		Options								Weighted
		Available				Number				Average
Executive Management Rollover Options		for Grant				of Shares				Exercise Price
Balance at January 1, 2014			—				71,199			$	5.47
Exercised			—				(58,783	)			5.47
Balance at September 30, 2014			—				12,416			$	5.47

The executive rollover options are fully vested and have an average remaining life of 0.9 years. The aggregate intrinsic value of these options at September 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.

 

		Nine months ended September 30,
		2014				2013
Risk-free interest rate			2.02	%			1.45	%
Dividend yield			3.64	%			2.41	%
Expected volatility			29.10	%			35.40	%
Expected life (years)			6.25				6.25
Fair value of option award		$	4.90			$	6.73

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

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 September 30, 2014 and 2013, there was approximately $11.3 million and $15.8 million, respectively, of unrecorded and unrecognized compensation expense related to unvested stock options, awarded under the 2006 EIP and 2013 LTIP in aggregate, which will be recognized over the remaining vesting period of approximately 1.8 years as of September 30, 2014.

Restricted Stock

On July 30, 2014, 83,269 restricted shares awarded on July 30, 2013 vested, 68,040 of which were issued and 15,229 of which were retired to cover the associated payroll taxes.

During the nine months ended September 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 $0.3 million. 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.

During September 2014, we issued 1,331,150 restricted stock awards and 57,225 restricted stock units to certain key employees. These awards vest ratably with 25% of the award becoming exercisable on each of the first through fourth anniversaries of the award date. The fair value of these awards at the date of grant was approximately $41.1 million and will be recognized over the remaining vesting period of approximately 3.9 years as of September 30, 2014.

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 September 30, 2014, 220,220 shares had been issued under the ESPP. For the three and nine months ended September 30, 2014, we recognized compensation expense for this plan of $0.2 million and $0.8 million, respectively.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Stock-Based Compensation Expense

For the three months ended September 30, 2014 and 2013, stock-based compensation expense was $4.0 million and $3.1 million, respectively. For the nine months ended September 30, 2014 and 2013, stock-based compensation expense was $10.2 million and $8.2 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 assumes the exercise of stock options using the treasury stock method.

 

		Three months ended September 30,								Nine months ended September 30,
(In thousands, except per share amounts)		2014				2013				2014				2013
Earnings Per Common Share:
Basic		$	0.19			$	0.55			$	1.31			$	1.20
Diluted		$	0.19			$	0.54			$	1.29			$	1.18
Weighted Average Number of Shares Outstanding:
Basic - Common			84,090				83,581				83,950				77,274
Dilutive Impact of Equity Incentive Plans:
Common Shares			1,521				1,461				1,450				1,446
Diluted Common Shares			85,611				85,042				85,400				78,720

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 and unvested restricted stock, by application of the treasury stock method that have a dilutive effect on earnings per share and notional shares of the Company in the West Corporation Nonqualified Deferred Compensation Plan. At September 30, 2014 and 2013, 631,481 and 2,691,542 stock options were outstanding with an exercise price equal to or exceeding the market value of our common stock, and therefore the shares underlying such options were excluded from the computation of shares contingently issuable upon exercise of the options.

 

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(UNAUDITED)

 

10. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

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

 

										Accumulated
		Foreign				Cash				Other
		Currency				Flow				Comprehensive
		Translation				Hedges				Income (Loss)
BALANCE, July 1, 2014		$	(11,492	)		$	—			$	(11,492	)
Foreign currency translation adjustment, net of tax of $7,570			(15,658	)			—				(15,658	)
BALANCE, September 30, 2014		$	(27,150	)		$	—			$	(27,150	)
BALANCE, January 1, 2014		$	(12,200	)		$	—			$	(12,200	)
Foreign currency translation adjustment, net of tax of $8,593			(14,950	)			—				(14,950	)
BALANCE, September 30, 2014		$	(27,150	)		$	—			$	(27,150	)
		Foreign				Cash				Other
		Currency				Flow				Comprehensive
		Translation				Hedges				Income (Loss)
BALANCE, July 1, 2013		$	(26,648	)		$	—			$	(26,648	)
Foreign currency translation adjustment, net of tax of $(3,744)			6,109				—				6,109
BALANCE, September 30, 2013		$	(20,539	)		$	—			$	(20,539	)
BALANCE, January 1, 2013		$	(21,345	)		$	(1,786	)		$	(23,131	)
Foreign currency translation adjustment, net of tax of $(494)			806				—				806
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, September 30, 2013		$	(20,539	)		$	—			$	(20,539	)

 

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

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

11. BUSINESS 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.

 

		For the three months ended September 30,								For the nine months ended September 30,
		2014				2013				2014				2013
		(amounts in thousands)
Revenue:
Unified Communications		$	404,511			$	396,659			$	1,221,328			$	1,200,161
Communication Services			322,777				280,399				903,136				820,968
Intersegment eliminations			(14,087	)			(11,692	)			(44,048	)			(22,844	)
Total		$	713,201			$	665,366			$	2,080,416			$	1,998,285
Operating Income:
Unified Communications		$	95,166			$	105,247			$	292,186			$	299,369
Communication Services			25,784				18,179				72,535				52,085
Total		$	120,950			$	123,426			$	364,721			$	351,454
Depreciation and Amortization
(Included in operating income)
Unified Communications		$	27,654			$	25,395			$	79,386			$	73,698
Communication Services			25,210				20,404				64,588				60,880
Total		$	52,864			$	45,799			$	143,974			$	134,578
Capital Expenditures:
Unified Communications		$	14,263			$	15,978			$	36,566			$	41,135
Communication Services			16,208				11,594				44,976				33,045
Corporate			2,140				1,825				19,046				3,914
Total		$	32,611			$	29,397			$	100,588			$	78,094

 

		As of September 30,				As of December 31,
		2014				2013
		(amounts in thousands)
Assets:
Unified Communications		$	1,751,674			$	1,734,585
Communication Services			1,609,875				1,317,879
Corporate			567,676				433,800
Total		$	3,929,225			$	3,486,264

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

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

Platform-based service revenue includes services provided in both the Unified Communications and Communication Services segments, while agent-based service revenue is provided in the Communication Services segment. During the three months ended September 30, 2014 and 2013, revenue from platform-based services was $502.6 million and $483.0 million, respectively. During the nine months ended September 30, 2014 and 2013, revenue from platform-based services was $1,504.4 million and $1,459.4 million, respectively. During the three months ended September 30, 2014 and 2013, revenue from agent-based services was $213.6 million and $185.6 million, respectively. During the nine months ended September 30, 2014 and 2013, revenue from agent-based services was $586.8 million and $548.7 million, respectively. The platform-based and agent services revenues are presented prior to intercompany eliminations.

For the three months ended September 30, 2014 and 2013, revenues from non-U.S. countries were approximately 17% and 18% of consolidated revenues, respectively. For the nine months ended September 30, 2014 and 2013, revenues from non-U.S. countries were approximately 18% and 19% of consolidated revenues, respectively. During these periods no individual foreign country accounted for greater than 10% of revenue. Revenue is attributed to an organizational region based on location of the billed customer’s account. Geographic information by organizational region, in thousands, is noted below:

 

		For the three months ended September 30,								For the nine months ended September 30,
		2014				2013				2014				2013
		(amounts in thousands)
Revenue:
Americas - United States		$	589,234			$	542,673			$	1,697,826			$	1,621,745
Europe, Middle East & Africa (EMEA)			77,175				73,963				245,597				233,469
Asia Pacific			40,215				43,184				118,606				125,572
Americas - Other			6,577				5,546				18,387				17,499
Total		$	713,201			$	665,366			$	2,080,416			$	1,998,285

 

		As of September 30,				As of December 31,
		2014				2013
		(amounts in thousands)
Long-Lived Assets:
Americas - United States		$	2,883,498			$	2,432,477
Europe, Middle East & Africa (EMEA)			188,222				204,282
Asia Pacific			27,900				25,209
Americas - Other			1,808				2,726
Total		$	3,101,428			$	2,664,694

For the three months ended September 30, 2014 and 2013, the aggregate gain (loss) on transactions denominated in currencies other than the functional currency of West Corporation or any of its subsidiaries was approximately $3.4 million and ($2.9) million, respectively. For the nine months ended September 30, 2014 and 2013, the aggregate gain (loss) on transactions denominated in currencies other than the functional currency of West Corporation or any of its subsidiaries was approximately $0.7 million and ($4.0) million, respectively.

 

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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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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(AMOUNTS IN THOUSANDS)

 

		For the Three Months Ended September 30, 2014
		Parent / Issuer				Guarantor Subsidiaries				Non-Guarantor Subsidiaries				Eliminations and Consolidating Entries				Consolidated
REVENUE		$	—			$	578,662			$	134,539			$	—			$	713,201
COST OF SERVICES			—				262,594				76,184				—				338,778
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES			(439	)			208,457				45,455				—				253,473
OPERATING INCOME			439				107,611				12,900				—				120,950
OTHER INCOME (EXPENSE):
Interest Expense, net of interest income			(32,463	)			(21,512	)			6,369				—				(47,606	)
Debt call premium and accelerated amortization of deferred financing costs			(51,735	)			—				—				—				(51,735	)
Subsidiary Income			66,909				37,675				—				(104,584	)			—
Other, net (1)			53				(24,857	)			27,094				—				2,290
Other income (expense)			(17,236	)			(8,694	)			33,463				(104,584	)			(97,051	)
INCOME (LOSS) BEFORE INCOME TAX EXPENSE			(16,797	)			98,917				46,363				(104,584	)			23,899
INCOME TAX EXPENSE (BENEFIT)			(32,907	)			32,096				8,600				—				7,789
NET INCOME		$	16,110			$	66,821			$	37,763			$	(104,584	)		$	16,110
Foreign currency translation adjustments, net of tax of $7,570			(15,658	)			—				(15,658	)			15,658				(15,658	)
Comprehensive income		$	452			$	66,821			$	22,105			$	(88,926	)		$	452

 

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

 

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(AMOUNTS IN THOUSANDS)

 

		For the Nine Months Ended September 30, 2014
		Parent / Issuer				Guarantor Subsidiaries				Non-Guarantor Subsidiaries				Eliminations and Consolidating Entries				Consolidated
REVENUE		$	—			$	1,654,892			$	425,524			$	—			$	2,080,416
COST OF SERVICES			—				753,220				232,608				—				985,828
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES			5,185				580,087				144,595				—				729,867
OPERATING INCOME (LOSS)			(5,185	)			321,585				48,321				—				364,721
OTHER INCOME (EXPENSE):
Interest Expense, net of interest income			(97,792	)			(65,637	)			18,506				—				(144,923	)
Debt call premium and accelerated amortization of deferred financing costs			(51,735	)			—				—				—				(51,735	)
Subsidiary Income			215,849				103,984				—				(319,833	)			—
Other, Net (1)			8,062				(65,394	)			62,729				—				5,397
Other income (expense)			74,384				(27,047	)			81,235				(319,833	)			(191,261	)
INCOME BEFORE INCOME TAX EXPENSE			69,199				294,538				129,556				(319,833	)			173,460
INCOME TAX EXPENSE (BENEFIT)			(40,948	)			78,911				25,350				—				63,313
NET INCOME			110,147				215,627				104,206				(319,833	)			110,147
Foreign currency translation adjustments, net of tax of $8,593			(14,950	)			—				(14,950	)			14,950				(14,950	)
Comprehensive income		$	95,197			$	215,627			$	89,256			$	(304,883	)		$	95,197
(1)    Other, net includes intercompany transactions that eliminate in consolidation.

 

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

(AMOUNTS IN THOUSANDS)

 

		For the Three Months Ended September 30, 2013
		Parent / Issuer				Guarantor Subsidiaries				Non-Guarantor Subsidiaries				Eliminations and Consolidating Entries				Consolidated
REVENUE		$	—			$	535,262			$	130,104			$	—			$	665,366
COST OF SERVICES			—				240,884				69,649				—				310,533
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES			4,430				182,834				44,143				—				231,407
OPERATING INCOME (LOSS)			(4,430	)			111,544				16,312				—				123,426
OTHER INCOME (EXPENSE):
Interest Expense, net of interest income			(33,662	)			(23,171	)			5,591				—				(51,242	)
Subsidiary Income			60,175				26,000				—				(86,175	)			—
Other, net (1)			4,925				(15,904	)			12,633				—				1,654
Other income (expense)			31,438				(13,075	)			18,224				(86,175	)			(49,588	)
INCOME BEFORE INCOME TAX EXPENSE			27,008				98,469				34,536				(86,175	)			73,838
INCOME TAX EXPENSE (BENEFIT)			(19,140	)			38,350				8,480				—				27,690
NET INCOME			46,148				60,119				26,056				(86,175	)			46,148
Foreign currency translation adjustments, net of tax of $(3,744)			6,109				—				6,109				(6,109	)			6,109
Comprehensive income		$	52,257			$	60,119			$	32,165			$	(92,284	)		$	52,257

 

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

 

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

(AMOUNTS IN THOUSANDS)

 

		For the Nine Months Ended September 30, 2013
		Parent / Issuer				Guarantor Subsidiaries				Non-Guarantor Subsidiaries				Eliminations and Consolidating Entries				Consolidated
REVENUE		$	—			$	1,599,666			$	398,619			$	—			$	1,998,285
COST OF SERVICES			—				719,532				212,007				—				931,539
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES			6,222				576,908				132,162				—				715,292
OPERATING INCOME (LOSS)			(6,222	)			303,226				54,450				—				351,454
OTHER INCOME (EXPENSE):
Interest expense, net of interest income			(121,595	)			(76,354	)			16,639				—				(181,310	)
Subordinated debt call premium and accelerated amortization of deferred financing costs			(23,105	)			—				—				—				(23,105	)
Subsidiary Income			174,090				78,548				—				(252,638	)			—
Other, net (1)			7,145				(49,432	)			43,842				—				1,555
Other income (expense)			36,535				(47,238	)			60,481				(252,638	)			(202,860	)
INCOME BEFORE INCOME TAX EXPENSE			30,313				255,988				114,931				(252,638	)			148,594
INCOME TAX EXPENSE (BENEFIT)			(62,558	)			82,280				36,001				—				55,723
NET INCOME			92,871				173,708				78,930				(252,638	)			92,871
Foreign currency translation adjustments, net of tax of $(494)			806				—				806				(806	)			806
Reclassification of cash flow hedges, 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		$	95,463			$	173,708			$	79,736			$	(253,444	)		$	95,463

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SUPPLEMENTAL CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(AMOUNTS IN THOUSANDS)

 

						September 30, 2014
		Parent / Issuer				Guarantor Subsidiaries				Non-Guarantor Subsidiaries				Eliminations and Consolidating Entries				Consolidated
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	31,521			$	5,611			$	128,801			$	—			$	165,933
Trust cash			6,284				17,387				—				—				23,671
Accounts receivable, net			—				44,619				442,496				—				487,115
Intercompany receivables			—				1,149,639				—				(1,149,639	)			—
Deferred income taxes receivable			77,457				15,067				—				(84,555	)			7,969
Prepaid assets			8,170				33,592				10,919				—				52,681
Deferred expenses			—				50,048				14,440				—				64,488
Other current assets			4,122				6,683				15,135				—				25,940
Total current assets			127,554				1,322,646				611,791				(1,234,194	)			827,797
Property and equipment, net			71,477				263,134				37,860				—				372,471
INVESTMENT IN SUBSIDIARIES			2,380,017				429,761				—				(2,809,778	)			—
GOODWILL			—				1,871,456				173,472				—				2,044,928
INTANGIBLES, net			—				392,342				11,873				—				404,215
OTHER ASSETS			154,362				97,385				28,067				—				279,814
TOTAL ASSETS		$	2,733,410			$	4,376,724			$	863,063			$	(4,043,972	)		$	3,929,225
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable		$	4,539			$	55,393			$	39,489			$	—			$	99,421
Deferred revenue			—				112,721				29,644				—				142,365
Intercompany payables			1,053,688				—				95,951				(1,149,639	)			—
Accrued expenses			61,040				261,821				59,915				(84,555	)			298,221
Current maturities of long-term debt			1,078				2,043				—				—				3,121
Total current liabilities			1,120,345				431,978				224,999				(1,234,194	)			543,128
LONG - TERM OBLIGATIONS, less current maturities			2,182,671				1,388,775				184,235				—				3,755,681
DEFERRED INCOME TAXES			17,212				115,588				4,722				—				137,522
OTHER LONG-TERM LIABILITIES			98,093				62,647				17,065				—				177,805
TOTAL STOCKHOLDERS’ EQUITY (DEFICIT)			(684,911	)			2,377,736				432,042				(2,809,778	)			(684,911	)
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)		$	2,733,410			$	4,376,724			$	863,063			$	(4,043,972	)		$	3,929,225

 

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WEST CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SUPPLEMENTAL CONDENSED CONSOLIDATING 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

 

 

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WEST CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS (UNAUDITED)

(AMOUNTS IN THOUSANDS)

 

		Nine Months Ended September 30, 2014
		Parent / Issuer				Guarantor Subsidiaries				Non-Guarantor Subsidiaries				Elimination and Consolidating Entries				Consolidated
NET CASH PROVIDED BY OPERATING ACTIVITIES:		$	—			$	239,605			$	79,332			$	11,313			$	330,250
CASH FLOWS USED IN INVESTING ACTIVITIES:
Business acquisitions			(385,439	)			—				(18	)			—				(385,457	)
Purchase of property and equipment			(19,046	)			(78,271	)			(16,365	)			—				(113,682	)
Intercompany financing			379,309				—				—				(379,309	)			—
Other			—				(1,993	)			—				—				(1,993	)
Net cash flows used in investing activities			(25,176	)			(80,264	)			(16,383	)			(379,309	)			(501,132	)
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES:
Proceeds from issuance of notes due 2022			1,000,000				—				—				—				1,000,000
Payments on notes and term loan facilities			(950,000	)			—				—				—				(950,000	)
Proceeds from revolving credit and accounts receivable securitization facilities			—				—				197,000				—				197,000
Payments on revolving credit and accounts receivable securitization facilities			—				—				(12,765	)			—				(12,765	)
Dividends paid			(56,751	)			—				—				—				(56,751	)
Payments of deferred financing and other debt related costs			(27,159	)			—				(121	)			—				(27,280	)
Debt redemption premiums paid on senior notes			(43,987	)			—				—				—				(43,987	)
Principal repayments on long-term obligations			(269	)			(511	)			—				—				(780	)
Proceeds from stock options exercised and ESPP shares issued including excess tax benefits			5,418				—				—				—				5,418
Intercompany financing			—				(153,219	)			(226,090	)			379,309				—
Net cash flows from (used in) financing activities			(72,748	)			(153,730	)			(41,976	)			379,309				110,855
EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS			—				—				(4,081	)			—				(4,081	)
NET CHANGE IN CASH AND CASH EQUIVALENTS			(97,924	)			5,611				16,892				11,313				(64,108	)
CASH AND CASH EQUIVALENTS, Beginning of period			129,445				—				111,909				(11,313	)			230,041
CASH AND CASH EQUIVALENTS, End of period		$	31,521			$	5,611			$	128,801			$	—			$	165,933

 

 

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WEST CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS (UNAUDITED)

(AMOUNTS IN THOUSANDS)

 

		Nine Months Ended September 30, 2013
		Parent / Issuer				Guarantor Subsidiaries				Non-Guarantor Subsidiaries				Elimination and Consolidating Entries				Consolidated
NET CASH PROVIDED BY OPERATING ACTIVITIES:		$	—			$	211,572			$	67,456			$	(2,299	)		$	276,729
CASH FLOWS USED IN INVESTING ACTIVITIES:
Business acquisitions			—				—				(13	)			—				(13	)
Purchase of property and equipment			(3,913	)			(66,175	)			(17,892	)			—				(87,980	)
Other			—				(1,166	)			—				—				(1,166	)
Net cash flows used in investing activities			(3,913	)			(67,341	)			(17,905	)			—				(89,159	)
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES:
Payments on subordinated notes			(450,000	)			—				—				—				(450,000	)
Proceeds from initial public offering, net of offering costs			398,266				—				—				—				398,266
Proceeds from revolving credit facilities			—				—				85,000				—				85,000
Payments on revolving credit facilities			—				—				(85,000	)			—				(85,000	)
Dividends paid			(37,840	)			—				—				—				(37,840	)
Payments of deferred financing and other debt related costs			(30,760	)			—				—				—				(30,760	)
Debt redemption premiums paid on subordinated notes			(16,502	)			—				—				—				(16,502	)
Principal repayments on long-term obligations			(6,210	)			(11,922	)			—				—				(18,132	)
Proceeds from stock options exercised including excess tax benefits			815				—				—				—				815
Other			(9	)			—				—				—				(9	)
Net cash flows from (used in) financing activities			(142,240	)			(11,922	)			—				—				(154,162	)
Intercompany			169,088				(134,130	)			(34,958	)			—				—
EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS			—				—				(1,546	)			—				(1,546	)
NET CHANGE IN CASH AND CASH EQUIVALENTS			22,935				(1,821	)			13,047				(2,299	)			31,862
CASH AND CASH EQUIVALENTS, Beginning of period			106,010				1,821				71,280				—				179,111
CASH AND CASH EQUIVALENTS, End of period		$	128,945			$	—			$	84,327			$	(2,299	)		$	210,973

14. SUBSEQUENT EVENTS

On November 3, 2014, we completed the acquisition of the assets of GroupCast, L.L.C., a provider of alert and notification services for corporations, government entities and K-12 school districts that operates under two brands, GroupCast and SchoolReach. The purchase price was approximately $13.5 million and was funded with cash on hand.

 

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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 758,000 telecom ports to handle conference calls, alerts and notifications and customer service calls at September 30, 2014, we believe our platforms provide scale and flexibility to handle greater transaction volume than our competitors, offer superior service and develop new

 

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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.

Since 2005, our revenue from platform-based services has grown from 37% of total revenue to 72% for the nine months ended September 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 “Per Employee Per Month” 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, as administrative agent, and the various lenders party thereto modified Senior Secured Credit Facilities by entering into Amendment No. 3 (the “Third Amendment”), the Fourth Amendment and the Fifth Amendment to Amended and Restated Credit Agreement, respectively, in each case amending the Amended Credit Agreement (as previously 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 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 September 30, 2014 were 0.75% for the LIBOR component of LIBOR rate loans and 1.75% for the base rate component of base rate loans.

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

 

•

The 2018 Maturity Term Loans in an aggregate principal amount of approximately $1.8 billion. 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

 

•

The 2016 Maturity Term Loans in an aggregate principal amount of approximately $311.3 million. 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 1.00% for base rate loans.

On July 1, 2014, we issued $1.0 billion aggregate principal amount of our 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 2018 Senior Notes and $200.0 million aggregate principal amount of 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. The Fifth Amendment provided for a new delayed draw TLA facility 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 on 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 2016 Maturity Term Loans and 2018 Maturity Term Loans 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 TLA. Annual amortization (payable in quarterly

 

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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, in the second year following the Fifth Amendment Effective Date; 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.

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.

Acquisition Activities. Identifying and successfully integrating acquisitions of value-added service providers has been a key component of our business strategy. We will continue to seek opportunities to expand our suite of communication services across industries, geographies and end-markets. While we expect this will occur primarily through organic growth, we have and will continue to acquire assets and businesses that strengthen our value proposition to clients and drive value to us. We have developed an internal capability to source, evaluate and integrate acquisitions that we believe has created value for shareholders. Since 2005, we have invested approximately $2.4 billion in strategic acquisitions. We believe there are acquisition candidates that will enable us to expand our capabilities and markets and intend to continue to evaluate acquisitions in a disciplined manner and pursue those that provide attractive opportunities to enhance our growth and profitability.

Overview of 2014 Results

The following overview highlights the areas we believe are important in understanding our results of operations for the three and nine months ended September 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 $47.8 million, or 7.2% during the three months ended September 30, 2014 compared to revenue during the three months ended September 30, 2013.

 

•

Our revenue increased $82.1 million, or 4.1% during the nine months ended September 30, 2014 compared to revenue during the nine months ended September 30, 2013.

 

•

Our operating income decreased $2.5 million, or 2.0% during the three months ended September 30, 2014 compared to operating income during the three months ended September 30, 2013.

 

•

Our operating income increased $13.3 million, or 3.8%, during the nine months ended September 30, 2014 compared to operating income during the nine months ended September 30, 2013.

 

•

Our cash flows from operating activities increased $45.4 million, or 54.6%, during the three months ended September 30, 2014 compared to cash flows from operating activities during the three months ended September 30, 2013.

 

•

Our cash flows from operating activities increased $53.5 million, or 19.3%, during the nine months ended September 30, 2014 compared to cash flows from operating activities during the nine months ended September 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.

 

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•

On April 21, 2014, we acquired SchoolMessenger, a leading provider of notification and mobile communication solutions for the K-12 education market. The purchase price was approximately $77.4 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 a leading provider of healthcare advocacy services. The purchase price was approximately $265.9 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.

 

•

On July 1, 2014, we issued $1.0 billion aggregate principal amount of our 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 2018 Senior Notes and $200.0 million aggregate principal amount of 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.

 

•

On September 2, 2014, we acquired 911 Enable, a provider of emergency communications solutions for IP-based enterprise customers across the United States and Canada. The purchase price was approximately $42.2 million and was funded by cash on hand. The acquisition was integrated into our Communication Services segment.

Comparison of the Three and Nine Months Ended September 30, 2014 and 2013

Revenue: Total revenue for the three months ended September 30, 2014 increased $47.8 million, or 7.2%, to $713.2 million from $665.4 million for the three months ended September 30, 2013. This increase included $30.3 million from the acquisitions of 911 Enable, Health Advocate and SchoolMessenger. The remaining $17.5 million increase in revenue for the three months ended September 30, 2014 was due to organic growth.

For the nine months ended September 30, 2014, total revenue increased $82.1 million, or 4.1%, to $2,080.4 million from $1,998.3 million for the nine months ended September 30, 2013. This increase during the nine months ended September 30, 2014 included revenue of $39.1 million from the acquisitions of 911 Enable, Health Advocate and SchoolMessenger. 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 911 Enable acquisition closed on September 2, 2014. 911 Enable’s results have been included in the Communication Services segment since that date. The remaining $43.0 million increase in revenue for the nine months ended September 30, 2014, relative to the prior year period, was due to organic growth.

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

Revenue by business segment:

 

		For the three months ended September 30,																For the nine months ended September 30,
		2014				2013				Change				% Change				2014						2013				Change				% Change
Revenue in thousands:
Unified Communications		$	404,511			$	396,659			$	7,852				2.0	%		$	1,221,328					$	1,200,161			$	21,167				1.8	%
Communication Services			322,777				280,399				42,378				15.1	%			903,136						820,968				82,168				10.0	%
Intersegment eliminations			(14,087	)			(11,692	)			(2,395	)			NM				(44,048	)					(22,844	)			(21,204	)			NM
Total		$	713,201			$	665,366			$	47,835				7.2	%		$	2,080,416					$	1,998,285			$	82,131				4.1	%
NM—Not Meaningful

 

 

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For the three months ended September 30, 2014, Unified Communications revenue increased $7.9 million, or 2.0%, to $404.5 million from $396.7 million for the three months ended September 30, 2013. This increase during the three months ended September 30, 2014 included revenue of $7.1 million from the acquisition of SchoolMessenger. Revenue from our conferencing and collaboration services increased $2.9 million, while revenue from our interactive services, excluding the SchoolMessenger revenue, decreased $1.6 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 services, which accounts for the majority of our conferencing revenue, grew approximately 5.5% for the three months ended September 30, 2014 over the three months ended September 30, 2013, while the average rate per minute for reservationless services declined by approximately 9.2% for the three months ended September 30, 2014 over the three months ended September 30, 2013.

For the nine months ended September 30, 2014, Unified Communications revenue increased $21.2 million, or 1.8%, to $1,221.3 million from $1,200.2 million for the nine months ended September 30, 2013. This increase during the nine months ended September 30, 2014 included revenue of $11.8 million from the acquisition of SchoolMessenger. Revenue from our conferencing and collaboration services increased $17.2 million, while revenue from our interactive services, excluding the SchoolMessenger revenue decreased $7.0 million. 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 6.6% for the nine months ended September 30, 2014 over the nine months ended September 30, 2013, while the average rate per minute for reservationless services declined by approximately 8.1%.

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 September 30, 2014, Unified Communications’ international revenue was $116.2 million, a decrease of 0.2% over the three months ended September 30, 2013. During the nine months ended September 30, 2014, Unified Communications’ international revenue grew to $360.4 million, an increase of 1.6% over the nine months ended September 30, 2013.

For the three months ended September 30, 2014, Communication Services revenue increased $42.4 million, or 15.1%, to $322.8 million from $280.4 million for the three months ended September 30, 2013. This increase during the three months ended September 30, 2014 included revenue of $23.2 million from the acquisitions of Health Advocate and 911 Enable. The remaining increase in revenue of $19.2 million for the three months ended September 30, 2014 was due to organic growth of 6.8%. Revenue from agent-based services for the three months ended September 30, 2014, increased $28.1 million compared with the three months ended September 30, 2013. Revenue from public safety and telecom services for the three months ended September 30, 2014 increased $14.3 million compared with the three months ended September 30, 2013. $2.5 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 nine months ended September 30, 2014, Communication Services revenue increased $82.2 million, or 10.0%, to $903.1 million from $821.0 million for the nine months ended September 30, 2013. This increase during the nine months ended September 30, 2014 included revenue of $27.3 million from the acquisitions of Health Advocate and 911 Enable. The remaining increase in revenue of $54.9 million for the nine months ended September 30, 2014 was due to organic growth of 6.7%. Revenue from agent-based services for the nine months ended September 30, 2014 increased $38.1 million compared with the nine months ended September 30, 2013. Revenue from public safety and telecom services for the nine months ended September 30, 2014 increased $43.8 million compared with the nine months ended September 30, 2013. $20.0 million of the increase in public safety and telecom services revenue is internal with other West entities and eliminated in our consolidated results.

 

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Cost of services: Cost of services consists of direct labor, telephone expense and other costs directly related to providing services to clients. Cost of services for the three months ended September 30, 2014 increased approximately $28.2 million, or 9.1%, to $338.8 million, from $310.5 million for the three months ended September 30, 2013. As a percentage of revenue, cost of services increased to 47.5% for the three months ended September 30, 2014, compared to 46.7% for the three months ended September 30, 2013. Cost of services for the nine months ended September 30, 2014 increased $54.3 million, or 5.8%, to $985.8 million from $931.5 million for the nine months ended September 30, 2013. As a percentage of revenue, cost of services increased to 47.4% for the nine months ended September 30, 2014, compared to 46.6% for the nine months ended September 30, 2013.

Cost of services by business segment:

 

		For the three months ended September 30,																								For the nine months ended September 30,
						% of								% of								%								% of								% of								%
		2014				Revenue				2013				Revenue				Change				Change				2014				Revenue				2013				Revenue				Change				Change
In thousands:
Unified Communications		$	171,455				42.4	%		$	161,586				40.7	%		$	9,869				6.1	%		$	515,970				42.2	%		$	493,692				41.1	%		$	22,278				4.5	%
Communication Services			180,053				55.8	%			159,397				56.8	%			20,656				13.0	%			508,972				56.4	%			457,033				55.7	%			51,939				11.4	%
Intersegment eliminations			(12,730	)			NM				(10,450	)			NM				(2,280	)			NM				(39,114	)			NM				(19,186	)			NM				(19,928	)			NM
Total		$	338,778				47.5	%		$	310,533				46.7	%		$	28,245				9.1	%		$	985,828				47.4	%		$	931,539				46.6	%		$	54,289				5.8	%

NM—Not Meaningful

Unified Communications cost of services for the three months ended September 30, 2014 increased $9.9 million, or 6.1%, to $171.5 million from $161.6 million for the three months ended September 30, 2013. The increase in cost of services for the three months ended September 30, 2014 included $1.5 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 42.4% for the three months ended September 30, 2014 from 40.7% for the three months ended September 30, 2013.

Unified Communications cost of services for the nine months ended September 30, 2014 increased $22.3 million, or 4.5%, to $516.0 million from $493.7 million for the nine months ended September 30, 2013. The increase in cost of services for the nine months ended September 30, 2014 included $3.1 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 42.2% for the nine months ended September 30, 2014 from 41.1% for the nine months ended September 30, 2013. The increase in cost of services as a percentage of revenue for the three and nine months ended September 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 September 30, 2014 increased $20.7 million, or 13.0%, to $180.1 million from $159.4 million for the three months ended September 30, 2013. The increase in cost of services for the three months ended September 30, 2014 was partially driven by increased service volume. The increase in cost of services for the three months ended September 30, 2014 included $9.5 million from the Health Advocate and 911 Enable acquisitions. As a percentage of this segment’s revenue, Communication Services cost of services improved to 55.8% for the three months ended September 30, 2014, compared to 56.8% for the three months ended September 30, 2013.

Communication Services cost of services for the nine months ended September 30, 2014 increased $51.9 million, or 11.4%, to $509.0 million from $457.0 million for the nine months ended September 30, 2013. The increase in cost of services for the nine months ended September 30, 2014 was driven by increased service volume. The increase in cost of services for the nine months ended September 30, 2014 included $11.0 million from the Health Advocate and 911 Enable acquisitions. As a percentage of this segment’s revenue, Communication Services cost of services increased to 56.4% for the nine months ended September 30, 2014, compared to 55.7% for the nine months ended September 30, 2013. The increase in cost of services as a percentage of revenue for the nine months ended September 30, 2014 was primarily due to an increase in internal platform-based services, which had a 0.8% impact on Communication Services cost of services as a percentage of revenue during that period.

 

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Selling, general and administrative expenses: SG&A expenses increased $22.1 million, or 9.5%, to $253.5 million for the three months ended September 30, 2014, from $231.4 million for the three months ended September 30, 2013. During the three months ended September 30, 2014, SG&A expenses from the acquired entities, SchoolMessenger, Health Advocate and 911 Enable were $19.5 million in the aggregate. As a percentage of revenue, SG&A expenses increased to 35.5% for the three months ended September 30, 2014 from 34.8% for the three months ended September 30, 2013.

SG&A expenses increased $14.6 million, or 2.0%, to $729.9 million for the nine months ended September 30, 2014 from $715.3 million for the nine months ended September 30, 2013. During the nine months ended September 30, 2014, SG&A expenses from the acquired entities, SchoolMessenger, Health Advocate and 911 Enable were $26.0 million in the aggregate. SG&A expenses in the nine months ended September 30, 2013, included $25.0 million for Sponsor management fees and related termination of the management agreement in connection with the 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 improved to 35.1% for the nine months ended September 30, 2014, compared to 35.8% for the nine months ended September 30, 2013. For the nine months ended September 30, 2013, the IPO Sponsor Fees and IPO Bonuses had a 1.4% impact on SG&A expenses as a percentage of revenue.

Selling, general and administrative expenses by business segment:

 

		For the three months ended September 30,																								For the nine months ended September 30,
						% of								% of								%								% of								% of								%
		2014				Revenue				2013				Revenue				Change				Change				2014				Revenue				2013				Revenue				Change				Change
In thousands:
Unified Communications		$	137,890				34.1	%		$	129,826				32.7	%		$	8,064				6.2	%		$	413,172				33.8	%		$	407,100				33.9	%		$	6,072				1.5	%
Communication Services			116,940				36.2	%			102,823				36.7	%			14,117				13.7	%			321,629				35.6	%			311,850				38.0	%			9,779				3.1	%
Intersegment eliminations			(1,357	)			NM				(1,242	)			NM				(115	)			NM				(4,934	)			NM				(3,658	)			NM				(1,276	)			NM
Total		$	253,473				35.5	%		$	231,407				34.8	%		$	22,066				9.5	%		$	729,867				35.1	%		$	715,292				35.8	%		$	14,575				2.0	%

NM—Not Meaningful

Unified Communications SG&A expenses for the three months ended September 30, 2014 increased $8.1 million, or 6.2%, to $137.9 million from $129.8 million for the three months ended September 30, 2013. The increase in SG&A for the three months ended September 30, 2014 included $5.1 million from the SchoolMessenger acquisition. As a percentage of this segment’s revenue, Unified Communications SG&A expenses increased to 34.1% for the three months ended September 30, 2014 compared to 32.7% for the three months ended September 30, 2013.

Unified Communications SG&A expenses for the nine months ended September 30, 2014 increased $6.1 million, or 1.5%, to $413.2 million from $407.1 million for the nine months ended September 30, 2013. The increase in SG&A for the nine months ended September 30, 2014 included $8.9 million from the SchoolMessenger acquisition. As a percentage of this segment’s revenue, Unified Communications SG&A expenses improved to 33.8% for the nine months ended September 30, 2014 compared to 33.9% for the nine months ended September 30, 2013. The IPO Sponsor Fees and IPO Bonuses allocated to Unified Communications were $19.3 million for the nine months ended September 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 Unified Communications.

Communication Services SG&A expenses for the three months ended September 30, 2014 increased $14.1 million, or 13.7%, to $116.9 million from $102.8 million for the three months ended September 30, 2013. The increase in SG&A for the three months ended September 30, 2014 included $14.4 million from the Health Advocate and 911 Enable acquisitions. As a percentage of this segment’s revenue, Communication Services SG&A expenses improved to 36.2% for the three months ended September 30, 2014 compared to 36.7% for the three months ended September 30, 2013.

 

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Communication Services SG&A expenses for the nine months ended September 30, 2014 increased $9.8 million, or 3.1%, to $321.6 million from $311.9 million for the nine months ended September 30, 2013. The increase in SG&A for the nine months ended September 30, 2014 included $17.1 million from the Health Advocate and 911 Enable acquisitions. As a percentage of this segment’s revenue, Communication Services SG&A expenses improved to 35.6% for the nine months ended September 30, 2014, compared to 38.0% for the nine months ended September 30, 2013. The IPO Sponsor Fees and IPO Bonuses allocated to Communication Services were $8.7 million for the nine months ended September 30, 2013. Such allocated portion of the IPO Sponsor Fees and IPO Bonuses had a 1.1% impact on SG&A expenses as a percentage of revenue for Communication Services.

Operating income: Operating income for the three months ended September 30, 2014 decreased $2.5 million, or 2.0%, to $121.0 million from $123.4 million for the three months ended September 30, 2013. As a percentage of revenue, operating income for the three months ended September 30, 2014 decreased to 17.0%, from 18.6% for the three months ended September 30, 2013.

Operating income for the nine months ended September 30, 2014 increased $13.3 million, or 3.8%, to $364.7 million from $351.5 million for the nine months ended September 30, 2013. As a percentage of revenue, operating income for the nine months ended September 30, 2014 decreased to 17.5%, from 17.6% for the nine months ended September 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 nine months ended September 30, 2013. The IPO Sponsor Fees and IPO Bonuses had a 1.4% impact on operating income as a percentage of revenue.

Operating income by business segment:

 

		For the three months ended September 30,																								For the nine months ended September 30,
						% of								% of								%								% of								% of								%
		2014				Revenue				2013				Revenue				Change				Change				2014				Revenue				2013				Revenue				Change				Change
In thousands:
Unified Communications		$	95,166				23.5	%		$	105,247				26.5	%		$	(10,081	)			-9.6	%		$	292,186				23.9	%		$	299,369				24.9	%		$	(7,183	)			-2.4	%
Communication Services			25,784				8.0	%			18,179				6.5	%			7,605				41.8	%			72,535				8.0	%			52,085				6.3	%			20,450				39.3	%
Total		$	120,950				17.0	%		$	123,426				18.6	%		$	(2,476	)			-2.0	%		$	364,721				17.5	%		$	351,454				17.6	%		$	13,267				3.8	%

Unified Communications operating income for the three months ended September 30, 2014 decreased $10.1 million, or 9.6%, to $95.2 million from $105.2 million for the three months ended September 30, 2013. As a percentage of this segment’s revenue, Unified Communications operating income decreased to 23.5% for the three months ended September 30, 2014 from 26.5% for the three months ended September 30, 2013.

Unified Communications operating income for the nine months ended September 30, 2014 decreased $7.2 million, or 2.4%, to $292.2 million from $299.4 million for the nine months ended September 30, 2013. As a percentage of this segment’s revenue, Unified Communications operating income decreased to 23.9% for the nine months ended September 30, 2014 from 24.9% for the nine months ended September 30, 2013 due to the factors discussed above for revenue, cost of services and SG&A expenses. The IPO Sponsor Fees and IPO Bonuses, recorded during the nine months ended September 30, 2013 and allocated to Unified Communications, had a 1.6% impact on operating income as a percentage of revenue for Unified Communications.

Communication Services operating income for the three months ended September 30, 2014 increased $7.6 million, or 41.8%, to $25.8 million from $18.2 million for the three months ended September 30, 2013. As a percentage of this segment’s revenue, Communication Services operating income improved to 8.0% for the three months ended September 30, 2014 from 6.5% for the three months ended September 30, 2013 due to the factors discussed above for revenue, cost of services and SG&A expenses for Communication Services.

 

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Communication Services operating income for the nine months ended September 30, 2014 increased $20.5 million, or 39.3%, to $72.5 million from $52.1 million for the nine months ended September 30, 2013. As a percentage of this segment’s revenue, Communication Services operating income improved to 8.0% for the nine months ended September 30, 2014 from 6.3% for the nine months ended September 30, 2013. The IPO Sponsor Fees and IPO Bonuses, recorded during the nine months ended September 30, 2013 and allocated to Communication Services, had a 1.1% 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 debt redemption premiums and accelerated amortization of deferred financing costs on the redemption of our 2018 Senior Notes, partial redemption on our 2019 Senior Notes and partial repayment of our 2018 Maturity Term Loans, 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 September 30, 2014 was ($97.1) million compared to ($49.6) million for the three months ended September 30, 2013. Other income (expense) for the nine months ended September 30, 2014 was ($191.3) million compared to ($202.9) million for the nine months ended September 30, 2013. Interest expense for the three and nine months ended September 30, 2014 was $47.6 million and $145.1 million, respectively, compared to $51.3 million and $181.5 million, respectively, for the three and nine months ended September 30, 2013.

Upon completion of the full redemption of the 2018 Senior Notes and partial redemption of the 2019 Senior Notes in July, 2014, we recorded as other non-operating expense a $30.4 tender premium, a $9.9 million redemption premium, a $3.7 million make-whole premium and $7.7 million for the accelerated amortization of the remaining balance of deferred financing costs associated with the 2018 Senior Notes and pro rata acceleration of the deferred financing costs associated with the 2019 Senior Notes.

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 nine months ended September 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 nine months ended September 30, 2014, we recognized a $2.9 million gain and $3.3 million gain, respectively, on affiliate transactions denominated in foreign currencies. During the three and nine months ended September 30, 2013, we recognized a $0.9 million loss and a $3.7 million loss, respectively, on affiliate transactions denominated in foreign currencies.

During the three months ended September 30, 2014, we recognized a $0.7 million loss in marking the investments in our non-qualified retirement plans to market compared to a $2.5 million gain during the three months ended September 30, 2013. During the nine months ended September 30, 2014, we recognized a $1.8 million gain in marking the investments in our non-qualified retirement plans to market compared to a $5.0 million gain during the nine months ended September 30, 2013.

Net income: Our net income for the three months ended September 30, 2014 decreased $30.0 million, or 65.1%, to $16.1 million from $46.1 million for the three months ended September 30, 2013. Our net income for the nine months ended September 30, 2014 increased $17.2 million, or 18.6%, to $110.1 million from $92.9 million for the nine months ended September 30, 2013. Net income includes a provision for income tax expense at an effective tax rate of approximately 32.6% for the three months ended September 30, 2014 and 36.5% for the nine months ended September 30, 2014, compared to an effective tax rate of approximately 37.5% for the three and nine months ended September 30, 2013. This reduction in our effective tax rate is the result of changes in our permanently invested foreign capital and ownership of intellectual property and associated international tax involving multiple jurisdictions.

 

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For the three and nine months ended September 30, 2014, expenses associated with the refinancing of our debt had a $34.9 million negative impact on net income. For the nine months ended September 30, 2013, 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 nine months ended September 30, 2014 were $0.19 and $1.31, respectively, compared to earnings per share-basic for the three and nine months ended September 30, 2013 of $0.55 and $1.20, respectively. Earnings per common share-diluted for the three and nine months ended September 30, 2014 were $0.19 and $1.29, respectively, compared to earnings per share-diluted for the three and nine months ended September 30, 2013 of $0.54 and $1.18, 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 net cash flows by category for the periods presented:

 

		For the Nine Months Ended September 30,
In thousands:		2014				2013				Change				% Change
Net cash flows from operating activities		$	330,250			$	276,729			$	53,521				19.3	%
Net cash flows used in investing activities		$	(501,132	)		$	(89,159	)		$	(411,973	)			462.1	%
Net cash flows from (used in) financing activities		$	110,855			$	(154,162	)		$	265,017				-171.9	%

Net cash flows from operating activities increased $53.5 million, or 19.3%, to $330.3 million for the nine months ended September 30, 2014, compared to net cash flows from operating activities of $276.7 million for the nine months ended September 30, 2013. The increase in net cash flows from operating activities is primarily due to improvements in net income and the timing of vendor and interest payments offset by the timing of collections of accounts receivable.

Days sales outstanding, a key performance indicator we utilize to monitor the accounts receivable average collection period and assess overall collection risk, was 63 days at both September 30, 2014 and September 30, 2013.

Net cash flows used in investing activities increased $412.0 million, or 462.1%, to $501.1 million for the nine months ended September 30, 2014, compared to net cash flows used in investing activities of $89.2 million for the nine months ended September 30, 2013. During the nine months ended September 30, 2014, business acquisition investing was $385.4 million greater than the comparable nine months ended September 30, 2013 as a result of the acquisitions of SchoolMessenger, Health Advocate and 911 Enable. During the nine months ended September 30, 2014, cash used for capital expenditures was $113.7 million compared to $88.0 million for the nine months ended September 30, 2013. The increase in capital expenditures is due primarily to an initiative to consolidate several of our data centers and the related expansion of our network infrastructure.

Net cash flows from financing activities increased $265.0 million, to $110.9 million for the nine months ended September 30, 2014, compared to net cash flows used in financing activities of $154.2 million for the nine months ended September 30, 2013. During the nine months ended September 30, 2014, net proceeds from our $1.0 billion 2022 Senior Notes were received. $950 million of the 2022 Senior Notes proceeds were used to fully redeem the $500.0 million 2018 Senior Notes and partially redeem $200.0 million of the 2019 Senior Notes. $250.0 million was paid on the 2018 Maturity Term Loans. Proceeds from the 2022 Senior Notes were also used to pay debt redemption premiums in the aggregate of $44.0 million. During the nine months ended September 30, 2014, net proceeds from revolving credit facilities were $184.2 million During the nine months ended September 30, 2013, the

 

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revolving credit facilities were undrawn. During the nine months ended September 30, 2013, net proceeds from our IPO net of related offering costs were $398.3 million. During the nine months ended September 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 nine months ended September 30, 2014, dividends of $56.8 million were declared and paid compared to $37.8 million of dividend and dividend equivalent payments during the nine months ended September 30, 2013. During the nine months ended September 30, 2014 and 2013, deferred financing and other debt related costs of $27.3 million and $30.8 million, respectively, were paid in connection with refinancing activities during each respective period.

As of September 30, 2014, the amount of cash and cash equivalents held by our foreign subsidiaries was $106.4 million. We have accrued U.S. taxes on $205.5 million of unremitted foreign earnings and profits. We have determined foreign earnings of approximately $169.8 million will be indefinitely reinvested. 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 84.2 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 October 30, 2014, we announced a $0.225 per common share quarterly dividend. The dividend is payable November 26, 2014 to shareholders of record as of the close of business on November 17, 2014.

On November 3, 2014, we completed the acquisition of the assets of GroupCast, L.L.C., a provider of alert and notification services for corporations, government entities and K-12 school districts that operates under two brands GroupCast and SchoolReach. The purchase price was approximately $13.5 million and was funded with cash on hand.

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 September 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 1.00% for base rate loans. The Fourth Amendment also provides for interest rate floors applicable to the Term Loans. The interest rate floors as of September 30, 2014 were 0.75% for the LIBOR component of LIBOR rate loans and 1.75% for the base rate component of base rate loans.

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.

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. Our Senior Secured Credit Facilities bear interest at variable rates. At September 30, 2014, our Senior Secured Credit Facilities required 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 $1,813.3 million respectively. The effective annual interest rates, inclusive of debt amortization costs, on the Senior Secured Credit Facilities for the three and nine months ended September 30, 2014 were 4.14% and 4.05%, respectively, compared to 4.37% and 5.01%, respectively, during the three and nine months ended September 30, 2013.

 

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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 TLA facility 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 on 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 remain outstanding on such date. The proceeds of the TLA will be used at our option (i) to prepay in part 2016 Maturity Term Loans and 2018 Maturity Term Loans 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, in the second year following the Fifth Amendment Effective Date; 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.

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 $201.0 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 nine months ended September 30, 2014 and September 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 $201.0 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 mature on 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 (LIBOR plus 2.25% at September 30, 2014), and from 0.50% to 1.25% for base rate loans (base rate plus 1.25% at September 30, 2014). 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.

 

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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 September 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.

The senior secured revolving credit facilities were undrawn for the nine and twelve months ended September 30, 2014 and December 31, 2013.

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 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:

 

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Year		Percentage
2014			103.938
2015			101.969
2016 and thereafter			100.000

On October 16, 2014, we delivered a redemption notice for the 2019 Senior Notes. The redemption premium is $17.7 million and will be deposited with the 2019 Senior Notes indenture trustee on November 14, 2014. We intend to use proceeds from the TLA, the Senior Secured Revolving Credit Facility and cash on hand to pay in full the 2019 Senior Notes, redemption premium and accrued interest.

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.

Amended and Extended Asset 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

 

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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 September 30, 2014, $184.2 million was outstanding under the amended and extended asset securitization facility. At December 31, 2013, the amended and extended asset securitization facility was undrawn. The highest balance outstanding during the nine months ended September 30, 2014 and 2013 on this facility was $185.0 million and $50.0 million, respectively.

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 September 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 September 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 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 September 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,

 

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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.

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.

 

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

 

Contractual Obligations		Total				Less than 1 year				1 - 3 years				4 - 5 years				After 5 years
Senior Secured Term Loan Facility, due 2016		$	311,317			$	3,121			$	308,196			$	—			$	—
Senior Secured Term Loan Facility, due 2018			1,813,250				—				—				1,813,250				—
7 7/8% Senior Notes, due 2019			450,000				—				—				450,000				—
Amended and Extended Asset Securitization, due 2018			184,235				—				—				184,235				—
5 3/8% Senior Notes, due 2022			1,000,000				—				—				—				1,000,000
Interest payments on fixed rate debt			589,471				89,188				178,376				160,657				161,250
Estimated interest payments on variable rate debt (1)			271,113				74,370				140,735				56,008				—
Operating leases			159,949				38,675				50,418				25,880				44,976
Contractual minimums under telephony agreements (2)			154,300				79,300				75,000				—				—
Purchase obligations (3)			88,811				76,675				9,961				2,175				—
Total contractual cash obligations		$	5,022,446			$	361,329			$	762,686			$	2,692,205			$	1,206,226

 

(1)	Interest rate assumptions based on October 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 September 30, 2014, we had accrued $34.1 million, including interest and penalties for uncertain tax positions.

Capital Expenditures

Our operations continue to require significant capital expenditures for technology, capacity expansion and upgrades. Capital expenditures were $100.6 million for the nine months ended September 30, 2014, compared to $78.1 million for the nine months ended September 30, 2013. We currently estimate our capital expenditures for the remainder of 2014 to be approximately $69.4 to $89.4 million primarily for equipment and upgrades at existing facilities, the consolidation of data centers and related 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 2015 and are renewed as required. The outstanding commitment on these obligations at September 30, 2014 was $9.0 million.

Effects of Inflation

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

CRITICAL ACCOUNTING POLICIES

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

 

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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 nine months ended September 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 September 30, 2014, we had $2,124.6 million outstanding under our senior secured term loan facilities, $450.0 million outstanding under our 2019 Senior Notes, $1.0 billion outstanding under our 2022 Senior Notes and $184.2 million outstanding under our revolving trade accounts receivable financing facility.

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 September 30, 2014, would have no impact on our variable interest rate. At September 30, 2014, the 30 and 90 day LIBOR rates were approximately 0.154% and 0.2331%, respectively. As a result of the interest rate floors and prevailing LIBOR rates, material rate increases on our variable rate senior secured term loan facilities in the immediate and near term is unlikely.

Foreign Currency Risk

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

Based on our level of operating activities in foreign operations during the nine months ended September 30, 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 September 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 nine months ended September 30, 2014, revenues from non-U.S. countries were approximately 17% and 18%, respectively, of consolidated revenues. For the three and nine months ended September 30, 2013, revenues from non-U.S. countries were approximately 18% and 19%, respectively, of consolidated revenues. During these periods no individual foreign country accounted for greater than 10% of revenue. At September 30, 2014 and December 31, 2013, long-lived assets from non-U.S. countries were 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.

 

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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 September 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 September 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 the Company’s management, including its Chief Executive Officer and Chief Financial Officer as appropriate to allow timely decisions regarding required disclosure.

Changes in internal control over financial reporting. There were no changes in our internal control over financial reporting or in other factors during the 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.

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 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 2018 (incorporated by reference to Exhibit 4.2 to Form 8-K filed July 3, 2014)

 

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4.3		Supplemental Indenture No. 4, dated as of August 13, 2014, by and among West Corporation, Reliance Intermediate, Inc., Reliance Holding, Inc., Reliance Communications, LLC, Health Advocate, Inc., WellCall, Inc., Human Management Services, Inc., Corporate Care Works, Inc., RX Advocate, Inc. and The Bank of New York Mellon Trust Company, N.A., to the Indenture, dated as of November 24, 2010, by and among West Corporation, the guarantors named therein and The Bank of New York Mellon Trust Company, N.A., with respect to West Corporation’s 7.875% senior notes due 2019
4.4		Supplemental Indenture, dated as of August 13, 2014, by and among West Corporation, Reliance Intermediate, Inc., Reliance Holding, Inc., Reliance Communications, LLC, Health Advocate, Inc., WellCall, Inc., Human Management Services, Inc., Corporate Care Works, Inc., RX Advocate, Inc. and The Bank of New York Mellon Trust Company, N.A., to the 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 2022
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		Amendment Number Three to the West Corporation Nonqualified Deferred Compensation Plan, effective as of July 30, 2014 (incorporated by reference to Exhibit 10.5 to the Form 10-Q filed August 5, 2014) (1)
10.3		Form of West Corporation Restricted Stock Award Agreement (1)
10.4		Form of West Corporation Restricted Stock Unit Award Agreement (1)
10.5		Form of West Corporation Performance-Based Restricted Stock Award Agreement (1)
10.6		Form of Change in Control Severance Agreement (1)
10.7		West Corporation Executive Retirement Savings Plan Amended and Restated Effective January 1, 2015 (1)
10.8		Amendment Number One to the West Corporation 2013 Employee Stock Purchase Plan, dated as of October 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

 

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101		Financial statements from the quarterly report on Form 10-Q of West Corporation for the quarter ended September 30, 2014, filed on November 6, 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 filed 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.

 

Date: November 6, 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 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 2018 (incorporated by reference to Exhibit 4.2 to Form 8-K filed July 3, 2014)
4.3		Supplemental Indenture No. 4, dated as of August 13, 2014, by and among West Corporation, Reliance Intermediate, Inc., Reliance Holding, Inc., Reliance Communications, LLC, Health Advocate, Inc., WellCall, Inc., Human Management Services, Inc., Corporate Care Works, Inc., RX Advocate, Inc. and The Bank of New York Mellon Trust Company, N.A., to the Indenture, dated as of November 24, 2010, by and among West Corporation, the guarantors named therein and The Bank of New York Mellon Trust Company, N.A., with respect to West Corporation’s 7.875% senior notes due 2019
4.4		Supplemental Indenture No. 1, dated as of August 13, 2014, by and among West Corporation, Reliance Intermediate, Inc., Reliance Holding, Inc., Reliance Communications, LLC, Health Advocate, Inc., WellCall, Inc., Human Management Services, Inc., Corporate Care Works, Inc., RX Advocate, Inc. and The Bank of New York Mellon Trust Company, N.A., to the 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 2022
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		Amendment Number Three to the West Corporation Nonqualified Deferred Compensation Plan, effective as of July 30, 2014 (incorporated by reference to Exhibit 10.5 to the Form 10-Q filed August 5, 2014) (1)
10.3		Form of West Corporation Restricted Stock Award Agreement (1)
10.4		Form of West Corporation Restricted Stock Unit Award Agreement (1)
10.5		Form of West Corporation Performance-Based Restricted Stock Award Agreement (1)
10.6		Form of Change in Control Severance Agreement (1)
10.7		West Corporation Executive Retirement Savings Plan Amended and Restated Effective January 1, 2015 (1)
10.8		Amendment Number One to the West Corporation 2013 Employee Stock Purchase Plan, dated as of October 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 September 30, 2014, filed on November 6, 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 filed herewith.

 

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

 

 

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