UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

 

Form 10-K

 

 

Commission File Number 000-21771

 

West Corporation

(Exact name of registrant as specified in its charter)

 

 

Registrant’s telephone number, including area code: (402) 963-1200
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act: None.

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o     No þ

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.  Yes þ     No o

 

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 o     No þ

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o

 

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

Large accelerated filer  þ     Accelerated filer  o     Non-accelerated filer  o

 

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

 

On October 24, 2006, the registrant completed a recapitalization in a transaction sponsored by an investor group led by Thomas H. Lee Partners, L.P. and Quadrangle Group LLC pursuant to an Agreement and Plan of Merger, dated as of May 31, 2006, between the registrant and a corporation formed to effect the recapitalization. Pursuant to the recapitalization, the registrant’s publicly traded securities (other than certain shares held by Gary and Mary West, the founders of the registrant, certain shares held by members of management who elected to invest in the surviving corporation and those shares owned by stockholders who were entitled and who properly exercised appraisal rights under Delaware law) were cancelled in exchange for cash. As a result of the recapitalization, the registrant became a privately held corporation and its equity securities are no longer publicly traded. At December 31, 2006, 85,938,284.7 shares of the registrant’s Class A common stock and 9,777,285.5875 shares of the registrant’s Class L common stock were outstanding.

 

 

TABLE OF CONTENTS

 

FORWARD LOOKING STATEMENTS

 

This report contains forward-looking statements. These forward-looking statements include estimates regarding:

 

 

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

 

On October 24, 2006, we completed a recapitalization of West Corporation, a Delaware corporation (“West,” the “Company” or “we”), in a transaction sponsored by an investor group led by Thomas H. Lee Partners, L.P. and Quadrangle Group LLC (the “Sponsors”) pursuant to an Agreement and Plan of Merger, dated as of May 31, 2006, between the Company and Omaha Acquisition Corp., a Delaware corporation formed by the Sponsors for the purpose of recapitalizing the Company. Upon satisfaction of the conditions set forth in the Merger Agreement, Omaha Acquisition Corp. was merged with and into the Company, with the Company continuing as the surviving corporation. Subsequent to closing the recapitalization, our common stock is no longer publicly traded. In addition to the factors noted above, the Company believes that the following factors with respect to the recapitalization could cause actual results to differ materially from those discussed in the forward-looking statements:

 

 

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

 

Overview

 

West is a premier provider of business process outsourcing services to many of the world’s largest companies, organizations and government agencies. Our services are focused on helping our clients communicate more effectively with their clients. We offer a comprehensive set of solutions under each of our three business segments: Communication Services, Conferencing Services and Receivables Management.

 

We compete in a broad business process outsourcing industry. We have targeted and will continue to selectively seek markets that meet our criteria for size, secular growth and profit potential. Our diverse markets include customer service, sales and marketing, emergency communication services, business-to-business sales support, conferencing and accounts receivable management outsourcing, among others. While we compete with a broad range of competitors in each discrete market, we do not believe that any of our competitors provides all of the services we provide in all of the markets we serve. We believe that our reputation for service quality, leading technology and shared services model provide us with significant competitive advantages in the markets we serve. Each of our segments, Communications Services, Conferencing Services and Receivables Management, addresses several markets within the broader business process outsourcing industry.

 

Each of our segments builds upon our core competencies of managing technology, telephony and human capital across a broad range of outsourced service offerings. Some of the nation’s leading enterprises use us to manage their most important communications. Our ability to efficiently and cost-effectively process high volume, complex, voice-related transactions for our clients helps them reduce operating costs, increase cash flow, improve customer satisfaction and facilitate effective communications. In 2006, our operations managed and processed:

 

 

We have developed a robust shared services infrastructure, which provides us with the ability to deploy assets and resources across business segments and services. This shared infrastructure also provides us with a highly flexible and capital-efficient operating model, which has been a critical factor in driving our profitability and cash flow.

 

West Corporation, a Delaware corporation, was founded in 1986 and is headquartered in Omaha, Nebraska. Our principal executive offices are located at 11808 Miracle Hills Drive, Omaha, Nebraska 68154. Our telephone number is (402) 963-1200. Our website address is www.west.com where our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports are available, without charge, as soon as reasonably practicable following the time they are filed with or furnished to the SEC. None of the information on our website or any other website identified herein is part of this report. All website addresses in this report are intended to be inactive textual references only.

 

Recapitalization

 

On October 24, 2006, we completed a recapitalization (the “recapitalization”) of the Company in a transaction sponsored by an investor group led by Thomas H. Lee Partners, L.P. and Quadrangle Group LLC (the “Sponsors”) pursuant to an Agreement and Plan of Merger (the “Merger Agreement”), dated as of May 31, 2006, between the Company and Omaha Acquisition Corp., an entity formed by the Sponsors to effect the recapitalization. Pursuant to the recapitalization, our publicly traded securities were cancelled in exchange for cash. Immediately following the recapitalization, the Sponsors owned approximately 72.1% of our outstanding Class A and Class L common stock, Gary L. and Mary E. West, the founders of the Company (the “Founders”), owned approximately 24.9% of our outstanding Class A and Class L common stock, and certain executive officers had beneficial ownership of the remaining approximately 3.0% of our outstanding Class A and Class L common stock. The recapitalization has been accounted for as a leveraged recapitalization, whereby the historical bases of our assets and liabilities have been maintained.

 

We financed the recapitalization with equity contributions from the Sponsors and the rollover of a portion of the equity interests in the Company held by the Founders and certain members of management, along with a new $2.1 billion senior secured term loan facility, a new senior secured revolving credit facility providing financing of up to $250.0 million (none of which was drawn at the closing of the recapitalization) and the private placement of $650.0 million aggregate principal amount of 9.5% senior notes due 2014 and $450.0 million aggregate principal amount of 11% senior subordinated notes due 2016. To consummate the recapitalization, Omaha Acquisition Corp. was merged with and into the Company, with the Company continuing as the surviving corporation. In connection with the closing of the recapitalization, the Company terminated and paid off the outstanding balance of its existing

$800.0 million unsecured revolving credit facility. As a result of the recapitalization, our common stock is no longer publicly traded.

 

Businesses

 

Communication Services

 

Our Communication Services segment addresses the broadly-defined outsourced voice-related markets, including customer relationship management (“CRM”) and emergency communication services. The CRM market includes multi-channel customer care, acquisition, and retention. The emergency communication services market includes the provision of core 9-1-1 infrastructure management and emergency communications services to participants in the telecommunications network, including telecommunications carriers, public safety organizations and government agencies.

 

Customer Relationship Management Services.  The CRM market is driven by companies who wish to outsource their customer service functions and achieve the following objectives:

 

 

To capture the benefits of lower labor costs and the availability of skilled labor, a number of providers have expanded offshore to varying degrees. Some providers, including us, have opted to provide a “best-shore” approach, strategically combining onshore and offshore initiatives on the basis of optimizing cost structure while seeking to maintain or exceed clients’ service level expectations.

 

Emergency Communications Services.  The emergency communication services market is characterized by a recurring stream of data management and call transport transactions. Because the services we provide are supportive of regulatory compliance and public safety, funding for this market is not dependent upon economic conditions. Long-term contracts are typical, providing visibility to future revenue streams. The growth of the emergency communication services market is driven by the following factors:

 

 

Carriers fund their 9-1-1 obligations in part by a monthly charge on users’ local access bills.

 

Service Offerings.  We are one of the largest providers of outsourced voice-related communications services in the United States. We provide our clients with a comprehensive portfolio of integrated voice-related services, including the following five primary services:

 

 

 

Substantially all of our contacts are inbound, or initiated by the end-user, with the exception of our business-to-business transactions.

 

We provide our services using a “best-shore” approach, which combines automated customer contact services with domestic, offshore and home agent platforms. Our Communication Services segment operates contact centers throughout the United States and in Canada, Jamaica and the Philippines.

 

Our proprietary home agent service is a remote call handling model that uses individuals who work out of their homes or other remote offices. This service offers a number of distinct advantages, including a higher quality of service resulting from our ability to attract a highly educated agent pool and an extremely efficient model which improves variable labor costs, significantly lowers capital requirements and provides a midpoint price option between domestic agent service and offshore solutions. Frost & Sullivan selected us as the recipient of its 2006 Product Differentiation Innovation Award in the North American Outsourced Contact Center Market, principally as a result of our home agent service offering.

 

Call Management Systems.  We specialize in processing large and recurring transaction volumes. We work closely with our clients to accurately project future transaction volumes and meet the needs of our clients.

 

Sales and Marketing.  We target growth-oriented clients with large volume programs and selectively pursue those clients with whom and services with which we have the greatest opportunity for success. We maintain approximately 50 sales and marketing personnel dedicated to our Communication Services segment. Their goal is to both maximize our current client relationships and to expand our existing client base. To accomplish these goals, we attempt to sell additional services to existing clients and to develop new long-term client relationships. We generally pay commissions to sales professionals on both new sales and incremental revenues generated from new and existing clients.

 

Competition.  Our Communication Services segment addresses the broadly-defined outsourced voice-related markets, including CRM and emergency communication services. Many clients retain multiple communication services providers, which expose us to continuous competition in order to remain a preferred vendor. We also compete with the in-house operations of many of our existing clients and potential clients. The principal competitive factors in our Communication Services segment include, among others, quality of service, range

of service offerings, flexibility and speed of implementing customized solutions to meet clients’ needs, capacity, industry-specific experience, technological expertise and price.

 

Competitors in the CRM industry include call center specialists such as Convergys Corporation, TeleTech Holdings, Inc. and ClientLogic Corporation; prime contractors such as IBM Corporation and Accenture Ltd.; and international outsourcers such as Infosys Technologies Limited.

 

The market for wireline and wireless emergency communications solutions is also competitive, predominantly affected by the effectiveness of existing infrastructure, scalability, reliability, ease of use, price, technical features, scope of product offerings, customer service and support, ease of technical migration, useful life of new technology and wireless support. Competitors in the wireless market include TeleCommunications Systems, Inc. for the provision of emergency communications data management services to wireless carriers. Competitors in the incumbent local exchange carrier and competitive local exchange carrier markets include internally developed solutions of major carriers.

 

Quality Assurance.  We believe we differentiate the quality of our services through our ability to understand our clients’ needs and expectations and our ability to meet or exceed them. We maintain quality functions throughout our agent-based and automated service offering organizations.

 

Conferencing Services

 

Conferencing Industry.  The conferencing services industry consists of audio, web and video conferencing services that are marketed to businesses and individuals worldwide. Demand has been driven by a number of key factors:

 

 

We were attracted to the conferencing services business because it gives us the ability to use our existing technology and assets to manage additional transactions for a large and growing market.

 

Service Offerings.  We believe we are the largest conferencing services provider in the world. In January 2007, Frost & Sullivan awarded us the North American Conferencing Service of the Year Award for our continued growth in market share, revenues, profitability, innovation in the market and commitment to customer satisfaction. Our Conferencing Services segment provides our clients with an integrated, global suite of collaboration tools including audio, web, and video conferencing. We expanded our presence within this segment through the acquisitions of the conferencing-related assets of Sprint Conferencing (“Sprint”) and Raindance Communication Inc. (“Raindance”) in June 2005 and April 2006, respectively. The segment provides four primary services globally:

 

 

 

Sales and Marketing.  We maintain a sales force of approximately 500 personnel that is focused exclusively on understanding our clients’ needs and delivering conferencing solutions. We generally pay commissions to sales professionals on both new sales and incremental revenues generated from new and existing clients.

 

Our Conferencing Services segment manages sales and marketing through five dedicated channels:

 

 

In connection with the acquisition of the assets of the conferencing business of Sprint, we entered into a sales and marketing agreement whereby we are the exclusive provider of conferencing services for Sprint and its customers. Under this agreement, we have agreed to jointly market and sell conferencing services with Sprint.

 

We train our meeting consultants to assist clients in using conference calls as a replacement for face-to-face meetings. We believe this service-intensive effort differentiates our conferencing services business from that of our competitors.

 

Competition.  Our Conferencing Services segment addresses the audio, web and video conferencing markets. These markets are highly competitive. The principal competitive factors in our Conferencing Services segment include, among others, range of service offerings, global offerings, price and quality of service. Competitors in this industry range from integrated telecommunications providers, such as AT&T Inc., Verizon Inc. and Global Crossing Ltd., to independent providers, such as WebEx Communications, Inc., Premiere Global Services, Inc. and Genesys Conferencing, Inc.

 

Receivables Management

 

Receivables Management Industry.  The accounts receivable management (“ARM”) market includes the collection of delinquent debt on a contingent basis (as an agent on behalf of clients) and on a principal basis (purchase of delinquent receivables from clients for subsequent collection by the buyer for its own account). An increasing number of providers offer both contingent/agent and principal services for their clients. The growth in the ARM market is driven by a number of factors:

 

 

 

We were attracted to the receivables management business because of our ability to use our existing infrastructure to address the needs of a large and growing market and to sell these services to our existing clients.

 

Service Offerings.  We are one of the leading providers of receivables management services in the United States. The Receivables Management segment consists of the following services:

 

 

Competition.  The ARM market includes the collection of delinquent debt on a contingent basis (as an agent on behalf of clients) and on a principal basis (purchase of delinquent receivables from clients for subsequent collection by the buyer for its own account). This market is highly competitive and fragmented. Significant competitors in our Receivables Management market include large collectors and debt purchasers such as Portfolio Recovery Associates, Inc., Asset Acceptance Capital Corporation, NCO Group, Inc., and GC Services, LP and a host of smaller players throughout the United States. Many clients retain multiple receivables management providers, which expose us to continuous competition in order to remain a preferred vendor. We believe that the primary competitive factor in obtaining and retaining clients is the percentage of the receivables that are collected and returned to the client.

 

Financing of Portfolio Purchases.  We work with a portfolio lender, Cargill, to finance the purchase of portfolios. The lender advances 80% to 85% of the purchase price of each portfolio and we fund the remaining 15% to 20%. The debt from the lender accrues interest at a variable rate, with the lender also sharing in the profits of the portfolio after collection expenses and the repayment of principal and interest. The debt from the lender is non-recourse and is collateralized by all receivable portfolios within a loan series.

 

For further discussion of the results of operations of each of our business segments, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.

 

The remainder of this section applies to our entire enterprise.

 

Our Clients

 

Our clients operate in a wide range of industries, including telecommunications, banking, retail, financial services, technology and health care. We derive a significant portion of our revenue from relatively few clients. During the year ended December 31, 2006, our 100 largest clients represented approximately 61% of our revenues, with one client, AT&T (formerly AT&T, Bell South, Cingular and SBC Communications), representing approximately 17% of our revenues.

 

Revenue in our three segments is not significantly seasonal.

 

Our Personnel and Training

 

As of December 31, 2006, we had approximately 29,200 total employees, of which approximately 24,400 were employed in the Communication Services segment, 2,500 were employed in the Conferencing Services segment, 1,700 were employed in the Receivables Management segment and approximately 600 were employed in corporate support functions. Of these employees, approximately 6,200 were employed in management, staff and administrative positions.

 

We believe that the quality of our employees is a key component of our success. As a large scale service provider, we continually refine our approach to recruiting, training and managing our employees. We have established procedures for the efficient weekly hiring, scheduling and training of hundreds of qualified personnel. These procedures enable us to provide flexible scheduling and staffing solutions to meet client needs.

 

We offer extensive classroom and on-the-job training programs for personnel, including instruction regarding call-processing procedures, direct sales techniques, customer service guidelines and telephone etiquette. Operators receive professional training lasting from four to 35 days, depending on the client program and the services being provided. In addition to training designed to enhance job performance, employees are also informed about our organizational structure, standard operating procedures and business philosophies.

 

We consider our relations with our employees to be good. None of our employees is represented by a labor union.

 

Our Technology and Systems Development

 

Our software and hardware systems, as well as our network infrastructure, are designed to offer high-quality and integrated solutions. We have made significant investments in reliable hardware systems and integrate commercially available software when appropriate. Because our technology is client focused, we often rely on proprietary software systems developed in-house to customize our services.

 

Our Facilities and Service Reliability

 

We recognize the importance of providing uninterrupted service for our clients. We have invested significant resources to develop, install and maintain facilities and systems that are designed to be highly reliable. Our facilities and systems are designed to maximize system in-service time and minimize the possibility of a telecommunications outage, a commercial power loss or an equipment failure.

 

Our Network Operations Center

 

Our Network Operations Center, based in Omaha, Nebraska, operates 24 hours a day, seven days a week and uses both internal and external systems to effectively operate our equipment, people and sites. We interface directly with long distance carriers and have the ability to immediately allocate call volumes. The Network Operations Center monitors the status of all elements of our network on a real-time basis. We monitor for unexpected events such as weather-related situations or high volume calling and we can react appropriately to maintain expected performance. A back-up facility is available, if needed, and is capable of sustaining all the critical functionality of the primary Network Operations Center. Personnel are regularly scheduled to work from the back-up facility to ensure the viability of the Network Operations Centers business continuity plan.

 

Our International Operations

 

As of December 31, 2006, our total revenue and assets outside the United States were less than 10% of our consolidated revenue and assets.

 

Our Communication Services segment operates facilities in Canada, Philippines and Jamaica.

 

Our Conferencing Services segment has international sales offices or sales agents in Canada, Australia, Hong Kong, Ireland, the United Kingdom, Singapore, Germany, Japan, France, New Zealand and India. Our Conferencing Services segment operates out of facilities in the United States, the United Kingdom, Canada, Mexico, Singapore, Australia, Hong Kong, New Zealand, and India.

 

Our Receivables Management segment does not operate in any international locations.

 

For additional information regarding our domestic and international revenues, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Financial Statements included herewith.

 

Intellectual Property

 

We rely on a combination of copyright, patent, trademark and trade secret laws, as well as on confidentiality procedures and non-compete agreements, to establish and protect our proprietary rights in each of our segments. We currently own 50 registered patents, including several that we obtained as part of our past acquisitions. Further, we have 274 pending patent applications pertaining to technology relating to intelligent upselling, transaction processing, call center and agent management, data collection, reporting and verification, conferencing and credit card processing.

 

Government Regulation

 

The Receivables Management and Communications Services segments provide services to healthcare clients that, as providers of healthcare services, are considered “covered entities” under the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”). As covered entities, our clients must comply with standards for privacy, transaction and code sets, and data security. Under HIPAA, we are sometimes considered a “business associate,” which requires that we protect the security and privacy of “protected health information” provided to us by our clients. We have implemented HIPAA compliance training and awareness programs for our healthcare services employees. We also have undertaken an ongoing process to test data security at all relevant levels. In addition, we have reviewed physical security at all healthcare operation centers and have implemented systems to control access to all work areas.

 

Our wholly-owned subsidiary, Intrado Communications, Inc., is also subject to various regulations as a result of its status as a regulated competitive local exchange carrier or an inter-exchange carrier. These include regulations adopted under the Telecommunications Act of 1996. This market may also be influenced by legislation, regulation, and judicial or administrative determinations to open local telephone markets, including 9-1-1 service as a part of local exchange service, to competition; responsibilities of local exchange carriers to provide subscriber records to emergency service providers under the Wireless Communications and Public Safety Act of 1999; and various federal and state regulations on wireless carriers that provide Enhanced 9-1-1, or E9-1-1, services, including, but not limited to, regulations imposed by the Federal Communications Commission (“FCC”) in C.C. Docket No. 94-102.

 

Any changes to these legal requirements, including those caused by the adoption of new laws and regulations or by legal challenges, could have a material adverse effect upon the market for our services and products. In particular, additional delays in implementation of the regulatory requirements imposed by the FCC on voice-over-internet protocol services could have a material adverse effect on our business, financial condition and results of operation.

 

The accounts receivable management business is regulated both at the federal and state level. The Federal Trade Commission (“FTC”) has the authority to investigate consumer complaints against debt collectors and to recommend enforcement actions and seek monetary penalties. The Federal Fair Debt Collection Practices Act (“FDCPA”) establishes specific guidelines and procedures that debt collectors must follow in communicating with consumer debtors, including:

 

 

The accounts receivable management and collection business is also subject to the Fair Credit Reporting Act (“FCRA”), which regulates the consumer credit reporting industry. Under the FCRA, liability may be imposed on furnishers of data to credit reporting agencies to the extent that adverse credit information reported is false or inaccurate.

 

The accounts receivable management business is also subject to state regulations. Some states require debt collectors be licensed or registered, hold a certificate of authority and/or be bonded. Failure to comply may subject the debt collector to penalties and/or fines. In addition, state licensing authorities, as well as state consumer protection agencies, in many cases, have the authority to investigate debtor complaints against debt collectors and to recommend enforcement actions and seek monetary penalties against debt collectors for violations of state or federal laws.

 

Many states have enacted privacy legislation requiring notification to consumers in the event of a security breach in or at our systems if the consumers’ personal information may have been compromised as a result of the breach. We have implemented processes and procedures to reduce the risk of security breaches, but we believe we are ready to comply with these notification rules should a breach occur.

 

Teleservices sales practices are regulated at both the federal and state level. The Telephone Consumer Protection Act (“TCPA”), enacted in 1991, authorized and directed the FCC to regulate the telemarketing industry. The FCC set forth rules to implement the TCPA, which have been amended over time. These rules currently place restrictions on the methods and timing of telemarketing sales calls, including:

 

 

The Federal Telemarketing Consumer Fraud and Abuse Act of 1994 authorized the FTC to issue regulations designed to prevent deceptive and abusive telemarketing acts and practices. The FTC’s Telemarketing Sales Rule (“TSR”) became effective in January 1996 and has been amended over time. The TSR applies to most outbound telemarketing calls and portions of some inbound telemarketing calls. The TSR generally prohibits a variety of deceptive, unfair or abusive practices in telemarketing sales, including:

 

 

In addition to the federal regulations, there are numerous state statutes and regulations governing telemarketing activities. These include restrictions on the methods and timing of telemarketing calls as well as disclosures

required to be made during telemarketing calls. Some states also require that telemarketers register in the state before conducting telemarketing business in the state. Such registration can be time consuming and costly. Many states have an exemption for companies who are publicly traded or have securities listed on a national securities exchange. As a result of the recapitalization and our securities being no longer publicly traded or listed on a national securities exchange, we will not be able to avail ourselves of the exemption from state telemarketer registration requirements applicable to companies with securities listed on a national securities exchange. While we believe that we can operate our business in compliance with the various states’ registration requirements, there can be no assurance that we will meet all states’ requirements in a timely manner or that compliance with all such requirements would not be costly or time consuming. Any failure on our part to comply with the registration requirements applicable to companies engaged in telemarketing activities could have an adverse impact on our business.

 

Several states also continue to operate their own state “Do-Not-Call” registries. Employees who are involved in certain types of sales activity, such as activity regarding insurance or mortgage loans, are required to be licensed by various state commissions or regulatory bodies and to comply with regulations enacted by those bodies.

 

We specifically train our marketing representatives to handle calls in an approved manner and believe we are in compliance in all material respects with all federal and state telemarketing regulations.

 

The industries that we serve are also subject to varying degrees of government regulation, including laws and regulations relating to contracting with the government and data security. We are subject to some of the laws and regulations associated with government contracting as a result of our contracts with our clients and also as a result of contracting directly with the United States government and its agencies. With respect to marketing scripts, we rely on our clients and their advisors to develop the scripts to be used by us in making consumer solicitation on behalf of our clients. We generally require our clients to indemnify us against claims and expenses arising with respect to the scripts and products provided by our clients.

 

We discuss the risks associated with governmental regulation in Item 1A “Risk Factors.”

Item 1A.  Risk Factors

 

We may not be able to compete successfully in our highly competitive industries.

 

We face significant competition in the markets in which we do business and expect that this competition will intensify. The principal competitive factors in our three business segments are technological expertise, service quality, capacity, industry-specific experience, range of service offerings, the ability to develop and implement customized products and services and the cost of services. In addition, we believe there has been an industry trend to move agent-based operations towards offshore sites. We believe this trend will continue. This movement could result in excess capacity in the United States, where most of our current capacity exists. The trend towards international expansion by foreign and domestic competitors and continuous technological changes may bring new and different competitors into our markets and may erode profits because of reduced prices. Our competitors’ products and services and pricing practices, as well as the timing and circumstances of the entry of additional competitors into our markets, could adversely affect our business, results of operations and financial condition.

 

Our Communication Services segment’s business and growth depend in large part on the industry trend toward outsourcing. This trend may not continue, or may continue at a slower pace, as organizations may elect to perform these services themselves. In addition, our Communication Services segment faces risks from technological advances that we may not be able to successfully address.

 

Our Conferencing Services segment faces technological advances and consolidation which have contributed to pricing pressures. Competition in the web and video conferencing services arenas continues to develop as new vendors enter the marketplace and offer a broader range of conferencing solutions through new technologies, including, without limitation, voice-over-internet-protocol, on-premise solutions, private branch exchange (“PBX”) solutions and equipment and handset solutions.

 

Our Receivables Management segment competes with a wide range of purchasers of charged-off consumer receivables, third-party collection agencies, other financial service companies and credit originators and other

owners of debt that fully manage their own charged-off consumer receivables. Some of these companies have substantially greater personnel and financial resources than we do. In addition, companies with greater financial resources than we have may elect in the future to enter the consumer debt collection business. Competitive pressures affect the availability and pricing of receivables portfolios as well as the availability and cost of qualified debt collectors.

 

There are services in each of our business segments that are experiencing pricing declines. If we are unable to offset pricing declines through increased transaction volume and greater efficiency, our business, results of operations and financial condition could be adversely affected.

 

We are subject to extensive regulation that could limit or restrict our activities and impose financial requirements or limitations on the conduct of our business.

 

The United States Congress, the FCC, various states and other foreign jurisdictions have promulgated and enacted rules and laws that govern the methods and processes of making and completing telephone solicitations, sales and collecting of consumer debt and the provision of emergency communication services. As a result, we may be subject to proceedings alleging violation of these rules and laws in the future. Additional rules and laws may require us to modify our operations or service offerings in order to meet our clients’ service requirements effectively, and these regulations may limit our activities or significantly increase the cost of regulatory compliance.

 

There are numerous state statutes and regulations governing telemarketing activities that do or may apply to us. For example, some states place restrictions on the methods and timing of telemarketing calls and require that certain mandatory disclosures be made during the course of a telemarketing call. Some states also require that telemarketers register in the state before conducting telemarketing business in the state. Such registration can be time consuming and costly. Many states have an exemption for companies who are publicly traded or have securities listed on a national securities exchange. While we believe that we can operate our business in compliance with the various states’ registration requirements, there can be no assurance that we will meet all states’ requirements in a timely manner or that compliance with all such requirements would not be costly or time consuming. Any failure on our part to comply with the registration requirements applicable to companies engaged in telemarketing activities could have an adverse impact on our business.

 

Pending and future litigation may divert management’s time and attention and result in substantial costs of defense, damages or settlement, which could adversely affect our business, results of operations and financial condition.

 

We face uncertainties relating to the pending litigation described in “Part I, Item 3. Legal Proceedings” and we may not ultimately prevail or otherwise be able to satisfactorily resolve this litigation. In addition, other material suits by individuals or certified classes, claims, or investigations relating to the same or similar matters as those described in this Annual Report on Form 10-K or other aspects of our business, including our obligations to market additional products to our clients’ customers may arise in the future. Furthermore, we generally indemnify our customers against third-party claims asserting intellectual property violations, which may result in litigation. Regardless of the outcome of any of these lawsuits or any future actions, claims or investigations relating to the same or any other subject matter, we may incur substantial defense costs and these actions may cause a diversion of management’s time and attention. Also, we may be required to alter our business practices or pay substantial damages or settlement costs as a result of these proceedings, which could adversely affect our business, results of operations and financial condition. Finally, certain of the outcomes of such litigation may directly affect our business model, and thus profitability, including the potential for recharacterization of our independent contractors as employees and any ensuing reduction in such staff.

 

Our business, results of operations and financial condition could be adversely affected if we are unable to maximize the use of our contact centers.

 

Our profitability depends largely on how effectively we manage the use of our contact centers, which we refer to as capacity utilization. To the extent that we are not able to effectively utilize our contact centers, our business, results of operations and financial condition could be adversely affected.

 

We also consider opening new contact centers in order to create the additional capacity necessary to accommodate new or expanded outsourcing projects. However, additional centers may result in idle capacity until any new or expanded program is fully implemented.

 

In addition, if we lose significant clients, if clients’ call volumes decline or if significant contracts are not implemented as anticipated, our operating results are likely to be harmed to the extent that we are not able to manage our call center capacity utilization by reducing expenses proportionally or successfully negotiating contracts with new clients to generate additional revenues at comparable levels. As a result, we may not be able to achieve or maintain optimal contact center capacity in the future.

 

If we are unable to integrate or achieve the objectives of our recent and future acquisitions, our overall business may suffer.

 

Our business strategy depends on successfully integrating the assets, operations and corporate functions of businesses we have acquired, including those acquired in the recent acquisitions of Raindance and Intrado, both of which we acquired in April 2006, and our acquisition of InPulse in October 2006, and any additional businesses we may acquire in the future. The acquisition of additional businesses involves integration risks, including:

 

 

We may be unable to effectively or efficiently integrate businesses we have acquired or may acquire in the future without encountering the difficulties described above. Failure to integrate these businesses effectively could adversely affect our business, results of operations and financial condition.

 

In addition to this integration risk, our business, results of operations and financial condition could be adversely affected if we are unable to achieve the planned objectives of an acquisition. The inability to achieve our planned objectives could result from:

 

 

Our ability to recover charged-off consumer receivables may be limited under federal and state laws.

 

Federal and state consumer protection, privacy and related laws and regulations extensively regulate the relationship between debt collectors and debtors. Federal and state laws may limit our ability to recover on our charged-off consumer receivables regardless of any act or omission on our part. Some laws and regulations applicable to credit card issuers may preclude us from collecting on charged-off consumer receivables we purchase if the credit card issuer previously failed to comply with applicable laws in generating or servicing those receivables. Additional consumer protection and privacy protection laws may be enacted that would impose additional or more stringent requirements on the enforcement of and collection on consumer receivables.

 

Any new laws, rules or regulations as well as existing consumer protection and privacy protection laws may adversely affect our ability to collect on our charged-off consumer receivable portfolios and adversely affect our business, results of operations and financial condition. In addition, federal and state governments are considering, and may consider in the future, other legislative proposals that would further regulate the collection of consumer

receivables. Any failure to comply with any current or future laws applicable to us could limit our ability to collect on our charged-off consumer receivable portfolios, which could adversely affect our business, results of operations and financial condition.

 

Increases in the cost of voice and data services or significant interruptions in these services could adversely affect our business, results of operations and financial condition.

 

We depend on voice and data services provided by various telecommunications providers. Because of this dependence, any change to the telecommunications market that would disrupt these services or limit our ability to obtain services at favorable rates could adversely affect our business, results of operations and financial condition. While we have entered into long-term contracts with many of our telecommunications providers, there is no obligation for these vendors to renew their contracts with us or to offer the same or lower rates in the future. In addition, these contracts are subject to termination or modification for various reasons outside of our control. An adverse change in the pricing of voice and data services that we are unable to recover through the price of our services, or any significant interruption in voice or data services, could adversely affect our business, results of operations and financial condition.

 

We depend on key personnel.

 

Our success depends on the experience and continuing efforts and abilities of our management team and on the management teams of our operating subsidiaries. The loss of the services of one or more of these key employees could adversely affect our business, results of operations and financial condition.

 

Our inability to continue to attract and retain a sufficient number of qualified employees could adversely affect our business, results of operations and financial condition.

 

A large portion of our operations require specially trained employees. From time to time, we must recruit and train qualified personnel at an accelerated rate in order to keep pace with our clients’ demands and our resulting need for specially trained employees. If we are unable to continue to hire, train and retain a sufficient labor force of qualified employees, our business, results of operations and financial condition could be adversely affected.

 

Increases in labor costs and turnover rates could adversely affect our business, results of operations and financial condition.

 

Our Communication Services and Receivables Management segments are very labor intensive and experience high personnel turnover. Significant increases in the employee turnover rate could increase recruiting and training costs and decrease operating effectiveness and productivity. Moreover, many of our employees are hired on a part-time basis, and a significant portion of our costs consists of wages to hourly workers. Increases in the minimum wage or labor regulation could increase our labor costs. Recently, there has been increased legislative activity at the state and federal level to increase the minimum wage. Increases in our labor costs, costs of employee benefits or employment taxes could adversely affect our business, results of operations and financial condition.

 

Because we have operations in countries outside of the United States, we may be subject to political, economic and other conditions affecting these countries that could result in increased operating expenses and regulation.

 

We operate or rely upon businesses in numerous countries outside the United States. We may expand into additional countries and regions. There are risks inherent in conducting business internationally, including: political and economic conditions, exposure to currency fluctuations, greater difficulties in accounts receivable collection, difficulties in staffing and managing foreign operations and potential adverse tax consequences.

 

If we cannot manage our international operations successfully, our business, results of operations and financial condition could be adversely affected.

 

A large portion of our revenues are generated from a limited number of clients, and the loss of one or more key clients would result in the loss of net revenues.

 

Our 100 largest clients represented approximately 61% of our total revenue for the year ended December 31, 2006 with one client, AT&T (formerly AT&T, Bell South, Cingular and SBC Communications), accounting for approximately 17% of our total revenue. Subject to advance notice requirements and a specified wind down of purchases, AT&T may terminate its contract with us with or without cause at any time. If we fail to retain a significant amount of business from AT&T or any of our other significant clients, our business, results of operations and financial condition could be adversely affected.

 

We serve clients and industries that have experienced a significant level of consolidation in recent years. Additional consolidation could occur in which our clients could be acquired by companies that do not use our services. The loss of any significant client would result in a decrease in our revenues and could adversely affect our business, results of operations and financial condition.

 

The financial results of our Receivables Management segment depend on our ability to purchase charged-off receivable portfolios on acceptable terms and in sufficient amounts. If we are unable to do so, our business, results of operations and financial condition could be adversely affected.

 

If we are unable to purchase charged-off consumer receivables from credit originators and other debt sellers on acceptable terms and in sufficient amounts, our business, results of operations and financial condition could be adversely affected. The availability of portfolios that generate an appropriate return on our investment depends on a number of factors both within and beyond our control, including:

 

 

Because of the length of time involved in collecting charged-off consumer receivables on acquired portfolios and the volatility in the timing of our collections, we may not be able to identify trends and make changes in our purchasing strategies in a timely manner.

 

In our Receivables Management segment, we entered into a number of forward-flow contracts during 2006. These contracts commit a third party to sell to us regularly, and commit us to purchase regularly, charged-off receivable portfolios for a fixed percentage of their face amount. Consequently, our business, results of operations and financial condition could be adversely affected if the fixed percentage price is higher than the market price we would have paid absent the forward-flow commitment. We plan to enter into similar contracts in the future, depending on market conditions. To the extent new or existing competitors enter into similar forward-flow arrangements, the pool of portfolios available for purchase may be diminished.

 

Security and privacy breaches of the systems we use to protect personal data could adversely affect our business, results of operations and financial condition.

 

Our databases contain personal data of our clients’ customers, including credit card and healthcare information. Any security or privacy breach of these databases could expose us to liability, increase our expenses relating to the resolution of these breaches and deter our clients from selecting our services. Our data security procedures may not effectively counter evolving security risks, address the security and privacy concerns of existing or potential clients or be compliant with federal, state, and local laws and regulations in all respects. Any failures in our security and privacy measures could adversely affect our business, financial condition and results of operations.

 

Our contracts are generally not exclusive and typically do not provide for revenue commitments.

 

We seek to sign multi-year contracts with our clients. However, our contracts generally enable the clients to unilaterally terminate the contract or reduce transaction volumes upon written notice and without penalty,

oftentimes based on our failure to attain certain service performance levels. The terms of these contracts are often also subject to renegotiation at any time. In addition, most of our contracts are not exclusive and do not ensure that we will generate a minimum level of revenue. Many of our clients also retain multiple service providers with whom we must compete. As a result, the profitability of each client program may fluctuate, sometimes significantly, throughout the various stages of a program.

 

Our data and contact centers are exposed to interruption.

 

Our outsourcing operations depend on our ability to protect our data and contact centers against damage that may be caused by fire, natural disasters, power failure, telecommunications failures, computer viruses, failures of our software, acts of sabotage or terror and other emergencies. In the past, natural disasters such as hurricanes have provided significant employee dislocation and turnover in the areas impacted. If we experience temporary or permanent employee dislocation or interruption at one or more of our data or contact centers through casualty, operating malfunction or other acts, we may be unable to provide the services we are contractually obligated to deliver. As a result, we may experience a reduction in revenue or be required to pay contractual damages to some clients or allow some clients to terminate or renegotiate their contracts. Any interruptions of this type could result in a prolonged interruption in our ability to provide our services to our clients, and our business interruption and property insurance may not adequately compensate us for any losses we may incur. These interruptions could adversely affect our business, financial condition and results of operations.

 

Acts of terrorism or war could adversely affect our business, results of operations and financial condition.

 

Acts of terrorism or war could disrupt our operations. For example, our agent-based business may experience significant reductions in call volume during and following any significant terrorist event. These disruptions could also cause service interruptions or reduce the quality level of the services we provide, resulting in a reduction in our revenues. In addition, an economic downturn as a result of these activities could negatively impact the financial condition of our clients, which may cause our clients to delay or defer decisions to use our services or decide to use fewer of our services. As a result, war and terrorist attacks and any resulting economic downturn could adversely affect our business, results of operations and financial condition.

 

We may not be able to adequately protect our proprietary information or technology.

 

Our success is dependent upon our proprietary information and technology. We rely on a combination of copyright, trade secret and contract protection to establish and protect our proprietary rights in our information and technology. Third parties may infringe or misappropriate our patents, trademarks, trade names, trade secrets or other intellectual property rights, which could adversely affect our business, results of operations and financial condition, and litigation may be necessary to enforce our intellectual property rights, protect our trade secrets or determine the validity and scope of the proprietary rights of others. The steps we have taken to deter misappropriation of our proprietary information and technology or client data may be insufficient to protect us, and we may be unable to prevent infringement of our intellectual property rights or misappropriation of our proprietary information. Any infringement or misappropriation could harm any competitive advantage we currently derive or may derive from our proprietary rights. In addition, because we operate in many foreign jurisdictions, we may not be able to protect our intellectual property in the foreign jurisdictions in which we operate or others.

 

Our technology and services may infringe upon the intellectual property rights of others.

 

Third parties have asserted in the past and may, in the future, assert claims against us alleging that we are violating or infringing upon their intellectual property rights. Any claims and any resulting litigation could subject us to significant liability for damages. An adverse determination in any litigation of this type could require us to design around a third party’s patent, license alternative technology from another party or reduce or modify our product and service offerings. In addition, litigation is time-consuming and expensive to defend and could result in the diversion of our time and resources. Any claims from third parties may also result in limitations on our ability to use the intellectual property subject to these claims.

 

Our business depends on our ability to keep pace with our clients’ needs for rapid technological change and systems availability.

 

Technology is a critical component of our business. We have invested in sophisticated and specialized computer and telephone technology and we anticipate that it will be necessary for us to continue to select, invest in and develop new and enhanced technology on a timely basis in the future in order to remain competitive. Our future success depends in part on our ability to continue to develop technology solutions that keep pace with evolving industry standards and changing client demands.

 

If we are unable to complete future acquisitions, our business strategy and earnings may be negatively affected.

 

Our ability to identify and take advantage of attractive acquisition or other business development opportunities is an important component in implementing our overall business strategy. We may be unable to identify, finance or complete acquisitions or to do so at attractive valuations.

 

Risks Related to Our Outstanding Indebtedness

 

On October 24, 2006, we completed a recapitalization of the Company. We financed the recapitalization in part along with a new $2.1 billion senior secured term loan facility, a new senior secured revolving credit facility providing financing of up to $250.0 million and the private placement of $650.0 million aggregate principal amount of 9.5% senior notes due 2014 and $450.0 million aggregate principal amount of 11% senior subordinated notes due 2016. In connection with the closing of the recapitalization, we repaid our existing $800.0 million unsecured revolving credit facility.

 

Our current or future indebtedness under our senior secured credit facilities, senior notes and senior subordinated notes could impair our financial condition and reduce the funds available to us for other purposes and our failure to comply with the covenants contained in our senior secured credit facilities documentation or the indentures that govern the senior notes and senior subordinated notes could result in an event of default that could adversely affect our results of operations.

 

Our current or future indebtedness could adversely affect our business, results of operations or financial condition, including the following:

 

 

Our debt agreements contain, and any agreements to refinance our debt likely will contain, financial and restrictive covenants that limit our ability to incur additional debt, including to finance future operations or other capital needs, and to engage in other activities that we may believe are in our long-term best interests, including to

dispose of or acquire assets. Our failure to comply with these 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.

 

We may not be able to generate sufficient cash to service all of our indebtedness, including the senior notes and senior subordinated notes, and fund our other liquidity needs, and we may be forced to take other actions, which may not be successful, to satisfy our obligations under our indebtedness.

 

Our ability to make scheduled payments or to refinance our debt obligations and to fund our other liquidity needs depends on our financial and operating performance, which is subject to prevailing economic and competitive conditions and to certain financial, business and other factors beyond our control. We cannot assure that we will maintain a level of cash flows from operating activities sufficient to permit us to pay the principal, premium, if any, and interest on our indebtedness, including the senior notes and the senior subordinated notes, and to fund our other liquidity needs.

 

If our cash flows and capital resources are insufficient to fund our debt service obligations and 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 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 new senior secured credit facilities or the indentures that govern the notes. Our new senior secured credit facilities documentation and the indentures that govern the notes restrict our ability to dispose of assets and use the proceeds from the disposition. As a result, we may not be able to consummate those dispositions or use the proceeds to meet our debt service or other obligations, and any proceeds that are available may not be adequate to meet any debt service or other obligations then due.

 

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

 

 

The notes and the related guarantees are effectively subordinated to all of our secured debt and if a default occurs, we may not have sufficient funds to fulfill our obligations under the notes and the related guarantees.

 

The notes and the related guarantees are our and the guarantors’ unsecured obligations, respectively, but our obligations under our new senior secured credit facilities and each guarantor’s obligations under its respective guarantee of our new senior secured credit facilities are secured by a security interest in substantially all of our tangible and intangible assets, including the stock of most of our wholly-owned U.S. subsidiaries and 65% of the stock of our material first-tier non-U.S. subsidiaries. The notes and the guarantees are effectively subordinated to all our and the guarantors’ secured indebtedness to the extent of the value of the assets securing that indebtedness. We are also permitted, subject to receipt of additional commitments from participating lenders and certain other conditions, to incur additional indebtedness under our new senior secured credit facilities in an aggregate amount of up to $500.0 million, plus the aggregate amount of principal payments previously made in respect of the term loan facility, which additional indebtedness has the same security and guarantees as the other indebtedness under our new senior secured credit facilities. In addition, the notes, subject to some limitations, permit us to incur additional secured indebtedness, and the notes and any related guarantees are effectively junior to any additional secured indebtedness we may incur.

 

In the event of our bankruptcy, liquidation, reorganization or other winding up, our assets that secure our secured indebtedness will be available to pay obligations on the notes only after all secured indebtedness, together with accrued interest, has been repaid in full from our assets. Likewise, because our new senior secured credit

facilities are secured obligations, our failure to comply with the terms of our new senior secured credit facilities would entitle those lenders to declare all the funds borrowed thereunder, together with accrued interest, immediately due and payable. If we were unable to repay such indebtedness, the lenders could foreclose on substantially all of our assets which serve as collateral. In this event, our secured lenders would be entitled to be repaid in full from the proceeds of the liquidation of those assets before those assets would be available for distribution to other creditors, including holders of the notes. Furthermore, if the lenders foreclose and sell the pledged equity interests in any subsidiary guarantor under the notes, then that guarantor will be released from its guarantee of the notes automatically and immediately upon such sale. In any such event, because the notes are not secured by any of our assets or the equity interests in subsidiary guarantors, it is possible that there would be no assets remaining from which claims of the holders of the notes could be satisfied or, if any assets remained, they might be insufficient to satisfy such claims fully.

 

The senior notes and senior subordinated notes are structurally subordinated to all indebtedness of our existing or future subsidiaries that do not become guarantors of the senior notes and senior subordinated notes.

 

Holders of our notes will not have any claim as a creditor against any of our existing subsidiaries that are not guarantors of the notes or against any of our future subsidiaries that do not become guarantors of the notes. Indebtedness and other liabilities, including trade payables, whether secured or unsecured, of those subsidiaries will be effectively senior to claims of noteholders against those subsidiaries.

 

For the year ended December 31, 2006, our non-guarantor subsidiaries collectively represented approximately 14.9% of our revenues (approximately 8.0% not including the revenues of our non-guarantor receivables management subsidiary, Worldwide Asset Purchasing LLC (“WAP”)), approximately 40.9% of our operating income (13.5% not including WAP), approximately 25.3% of our Adjusted EBITDA (approximately 7.0% not including WAP) and approximately 23.0% of our cash flows from operating activities (approximately 6.6% not including WAP). At December 31, 2006, our non-guarantor subsidiaries collectively represented approximately 8.7% of our total assets (2.2% not including WAP) and had approximately $29.6 million of outstanding total liabilities, (approximately $25.5 million not including WAP) including trade payables, but excluding intercompany liabilities and non-recourse debt, all of which would have been structurally senior to the notes. While WAP is not a guarantor of the notes, it is contractually obligated to distribute its excess cash each month to us and its minority shareholder. Accordingly, we believe that presentation of the foregoing financial information of our non-guarantor subsidiaries, but excluding WAP, is helpful to noteholders in assessing the credit risk associated with the notes.

 

In addition, the indentures governing the notes, subject to some limitations, permit these subsidiaries to incur additional indebtedness and do not contain any limitation on the amount of other liabilities, such as trade payables, that may be incurred by these subsidiaries.

 

If we default on our obligations to pay our indebtedness, we may not be able to make payments on the senior notes and senior subordinated notes.

 

Any default under the agreements governing our indebtedness, including a default under our new senior secured credit facilities that is not waived by the required lenders, and the remedies sought by the holders of such indebtedness, could make us unable to pay principal, premium, if any, and interest on the notes and substantially decrease the market value of the notes. If we are unable to generate sufficient cash flow and are otherwise unable to obtain funds necessary to meet required payments of principal, premium, if any, and interest on our indebtedness, or if we otherwise fail to comply with the various covenants, including financial and operating covenants, in the agreements governing our indebtedness (including covenants in the indentures governing the notes and our new senior secured credit facilities documentation), we could be in default under the terms of those agreements. In the event of such default, the holders of such indebtedness could elect to declare all the funds borrowed thereunder to be due and payable, together with accrued and unpaid interest, the lenders under our new senior secured credit facilities could elect to terminate their commitments thereunder and cease making further loans and institute foreclosure proceedings against our assets, and we could be forced into bankruptcy or liquidation. If our operating performance declines, we may in the future need to obtain waivers from the required lenders under our new senior secured credit facilities to avoid being in default. If we breach our covenants under our new senior secured credit facilities and seek a waiver, we may not be able to obtain a waiver from the required lenders. If this occurs, we would be in default

under our new senior secured credit facilities, the lenders could exercise their rights, as described above, and we could be forced into bankruptcy or liquidation.

 

We may not be able to repurchase the senior notes and senior subordinated notes upon a change of control.

 

Upon the occurrence of specific kinds of change of control events, we will be required to offer to repurchase all outstanding notes at 101% of their principal amount, plus accrued and unpaid interest. We may not be able to repurchase the notes upon a change of control because we may not have sufficient funds. Further, we are contractually restricted under the terms of our new senior secured credit facilities, and may be restricted under the terms of other future senior indebtedness, from repurchasing all of the notes tendered by holders upon a change of control. Accordingly, we may not be able to satisfy our obligations to repurchase notes unless we are able to refinance or obtain waivers under our new senior secured credit facilities. In addition, the indenture governing the senior notes does not permit us to repurchase the tendered senior subordinated notes upon a change of control until all senior notes tendered have been repurchased, which increases the possibility that we will not have the funds necessary to repurchase all tendered senior subordinated notes. Our failure to repurchase the notes upon a change of control would cause a default under the indentures governing the notes and a cross-default under our new senior secured credit facilities. Our new senior secured credit facilities documentation also provides that a change of control, as defined in such documentation, will be a default that permits lenders to accelerate the maturity of borrowings thereunder and, if such debt is not paid, to enforce security interests in the collateral securing such debt, thereby limiting our ability to raise cash to repurchase the notes, and reducing the practical benefit of the offer-to-purchase provisions to the holders of the notes. Any of our future debt agreements may contain similar provisions.

 

The lenders under our new senior secured credit facilities have the discretion to release the guarantors under our new senior secured credit facilities in a variety of circumstances, which will cause those guarantors to be released from their guarantees of the senior notes and senior subordinated notes.

 

If the lenders under our new senior secured credit facilities release a guarantor from its guarantee of obligations under our new senior secured credit facilities documentation and the guarantor is no longer a guarantor of obligations under our new senior secured credit facilities or any of our or any other guarantor’s other indebtedness, then the guarantee of the notes by such guarantor will be released without action by, or consent of, any holder of the notes or the trustee under the indentures governing the notes. The lenders under our new senior secured credit facilities have the discretion to release the guarantees under our new senior secured credit facilities in a variety of circumstances. A holder of notes will not have a claim as a creditor against any subsidiary that is no longer a guarantor of the notes, and the indebtedness and other liabilities, including trade payables, whether secured or unsecured, of those subsidiaries will effectively be senior to claims of noteholders.

 

None.

 

Our corporate headquarters is located in Omaha, Nebraska. Our owned headquarters facility encompasses approximately 134,000 square feet of office space. We also own two facilities in Omaha, Nebraska totaling approximately 161,800 square feet, which is used primarily for administrative activities.

 

In our Communication Services segment, we own six contact centers located in San Antonio, Texas, El Paso, Texas and Pensacola, Florida, totaling approximately 216,000 square feet.

 

In our Communication Services segment, we lease contact centers and automated voice and data processing centers totaling approximately 1,306,000 square feet in 15 states and three foreign countries: Saanichton, Victoria, British Columbia, Canada; Mandaluyong City and Makati City, Philippines; and Portmore, Jamaica.

 

In our Conferencing Services segment, we own two operator-assisted conferencing centers totaling approximately 42,000 square feet and lease two others totaling approximately 79,000 square feet in the United States. Our Conferencing Services segment leases two operator-assisted conferencing centers in the United Kingdom and Australia totaling approximately 20,000 square feet, as well as approximately 225,000 square feet of office space for sales and administrative offices in 15 states and six foreign countries. Our Conferencing Services segment also owns two facilities in West Point, Georgia and Valley, Alabama totaling approximately 75,000 square feet used for administrative activities.

 

In our Receivables Management segment, we lease 17 contact centers totaling approximately 321,000 square feet in 11 states. Our Receivables Management segment also leases approximately 40,000 square feet of office space for administrative activities.

 

We believe that our facilities are adequate for our current requirements and that additional space will be available as required. See Note 6 of the Notes to Consolidated Financial Statements included elsewhere in this report for information regarding our lease obligations.

 

From time to time, West and certain of our subsidiaries are subject to lawsuits and claims which arise out of our operations in the normal course of our business, some of which involve claims for damages that are substantial in amount. We believe, except for the items discussed below for which we are currently unable to predict the outcome, the disposition of claims currently pending will not have a material adverse effect on our financial position, results of operations or cash flows.

 

Sanford v. West Corporation et al., No. GIC 805541, was filed February 13, 2003 in the San Diego County, California Superior Court. The original complaint alleged violations of the California Consumer Legal Remedies Act, Cal. Civ. Code §§ 1750 et seq., unlawful, fraudulent and unfair business practices in violation of Cal. Bus. & Prof. Code §§ 17200 et seq., untrue or misleading advertising in violation of Cal. Bus. & Prof. Code §§ 17500 et seq., and common law claims for conversion, unjust enrichment, fraud and deceit, and negligent misrepresentation, and sought monetary damages, including punitive damages, as well as restitution, injunctive relief and attorneys fees and costs. The complaint was brought on behalf of a purported class of persons in California who were sent a Memberworks, Inc. (“MWI”) membership kit in the mail, were charged for an MWI membership program, and were allegedly either customers of what the complaint contended was a joint venture between MWI and West Corporation or West Telemarketing Corporation (“WTC”) or wholesale customers of West Corporation or WTC. WTC and West Corporation filed a demurrer in the trial court on July 7, 2004. The court sustained the demurrer as to all causes of action in plaintiff’s complaint, with leave to amend. WTC and West Corporation received an amended complaint and filed a renewed demurrer. On January 24, 2005, the Court entered an order sustaining West Corporation and WTC’s demurrer with respect to five of the seven causes of action. On February 14, 2005, WTC and West Corporation filed a motion for judgment on the pleadings seeking a judgment as to the remaining claims. On April 26, 2005 the Court granted the motion without leave to amend. The Court also denied a motion to intervene filed on behalf of Lisa Blankenship and Vicky Berryman. The Court entered judgment in West Corporation’s and WTC’s favor on May 5, 2005. The plaintiff and proposed intervenors appealed the judgment and the order denying intervention. On June 30, 2006, the Fourth Appellate District Court of Appeals affirmed the entry of judgment against the original plaintiff, Patricia Sanford, but reversed the denial of the motion to intervene and remanded the case for the trial court to determine whether Berryman and Blankenship should be added as plaintiffs through intervention or amendment of the complaint.

 

On December 1, 2006, the trial court permitted Berryman and Blankenship to join the action pursuant to a second amended complaint which contained the same claims as Sanford’s original complaint. West Corporation and WTC filed a demurrer to the second amended complaint. The Court overruled that the demurrer, with one exception, on December 4, 2006. On February 16, 2007, after receiving briefing and hearing argument on class certification, the trial court certified a class consisting of “All persons in California, who, after calling defendants West Corporation and West Telemarketing Corporation (collectively “West” or “defendants”) to inquire about or purchase another product between September 1, 1998 through July 2, 2001, were; (a) sent a membership kit in the mail; (b) charged for a MemberWorks, Inc. (“MWI”) membership program; and (c) customers of a joint venture

between MWI and West or were wholesale customers of West (the “Class”). Not included in the Class are defendants and their officers, directors, employees, agents and/or affiliates.” West and WTC intend to seek appellate review of this decision. Discovery in the case is ongoing. The trial court has indicated that it will schedule a trial in or around February 2008.

 

Patricia Sanford, the original plaintiff in the litigation described above, had previously filed a complaint on March 28, 2002 in the United States District Court for the Southern District of California, No. 02-cv-0601-H, against WTC and West Corporation and MWI alleging, among other things, claims under 39 U.S.C. § 3009. The federal court dismissed the federal claims against WTC and West Corporation and declined to exercise supplemental jurisdiction over the remaining state law claims. Plaintiff proceeded to arbitrate her claims with MWI and refiled her claims as to WTC and West Corporation in the Superior Court of San Diego County, California as described above. Plaintiff has contended that the order of dismissal in federal court was not a final order and that the federal case is still pending against West Corporation and WTC. The District Court on December 30, 2004 confirmed the arbitration award in the arbitration between plaintiff and MWI. Plaintiff filed a Notice of Appeal on January 28, 2005. Preston Smith and Rita Smith, whose motion to intervene was denied by the District Court, have also sought to appeal. WTC and West Corporation moved to dismiss the appeal and joined in a motion to dismiss the appeal filed by MWI. The motions to dismiss have been referred to the merits panel, and the case has been fully briefed in the Ninth Circuit Court of Appeals. On February 9, 2007, the Ninth Circuit heard oral argument on the appeal. WTC and West Corporation are currently unable to predict the outcome or reasonably estimate the possible loss, if any, or range of losses associated with the claims in the state and federal actions described above.

 

Brandy L. Ritt, et al. v. Billy Blanks Enterprises, et al. was filed in January 2001 in the Court of Common Pleas in Cuyahoga County, Ohio, against two of our clients. The suit, a purported class action, was amended for the third time in July 2001 and West Corporation was added as a defendant at that time. The suit, which seeks statutory, compensatory, and punitive damages as well as injunctive and other relief, alleges violations of various provisions of Ohio’s consumer protection laws, negligent misrepresentation, fraud, breach of contract, unjust enrichment and civil conspiracy in connection with the marketing of certain membership programs offered by our clients. On February 6, 2002, the court denied the plaintiffs’ motion for class certification. On July  21, 2003, the Ohio Court of Appeals reversed and remanded the case to the trial court for further proceedings. The plaintiffs filed a Fourth Amended Complaint naming West Telemarketing Corporation as an additional defendant and a renewed motion for class certification. One of the defendants, NCP Marketing Group (“NCP”), filed for bankruptcy and on July 12, 2004 removed the case to federal court. Plaintiffs filed a motion to remand the case back to state court. On August 30, 2005, the U.S. Bankruptcy Court for the District of Nevada remanded the case back to the state court in Cuyahoga County, Ohio. The Bankruptcy Court also approved a settlement between the named plaintiffs and NCP and two other defendants, Shape The Future International LLP and Integrity Global Marketing LLC. West Corporation and West Telemarketing Corporation have filed motions for judgment on the pleadings and a motion for summary judgment. On March 28, 2006, the state court certified a class of Ohio residents. West and WTC have filed a notice of appeal from that decision, and plaintiffs have cross-appealed. West and WTC filed their opening brief on appeal on June 23, 2006. Plaintiffs’ filed their opening brief on appeal on August 17, 2006. West and WTC filed their reply brief on September 15, 2006. Plaintiffs’ reply brief was filed on September 28, 2006. The appeal was argued on February 26, 2007. On April 20, 2006, the trial court denied West and WTC’s motion for judgment on the pleadings. West and WTC’s summary judgment motion remains pending. The trial court has stayed all further action in the case pending resolution of the appeal. West Corporation and West Telemarketing Corporation are currently unable to predict the outcome or reasonably estimate the possible loss, if any, or range of losses associated with this claim.

 

Polygon Litigation. On July 31, 2006, Polygon Global Opportunity Master Fund (“Polygon”) commenced an action against West Corporation, captioned Polygon Global Opportunity Master Fund v. West Corporation, in the Court of Chancery of the State of Delaware, New Castle County. The complaint alleged, among other things, that Polygon had complied with the statutory demand requirements of Section 220, and that Polygon’s purposes for the inspection sought included: (i) valuing its West Corporation stock, (ii) evaluating whether members of West Corporation’s special committee or board breached their fiduciary duties in approving the Agreement and Plan of Merger dated as of May 31, 2006 between West Corporation and Omaha Acquisition Corp. (“Merger Agreement”), in connection with our recapitalization and (iii) communicating with other West Corporation stockholders

regarding the vote on the Merger Agreement. The complaint sought an order compelling West to permit the inspection sought and an award of Polygon’s costs and expenses. A hearing was held on September 21, 2006. On October 12, 2006, the Court of Chancery of the State of Delaware dismissed the complaint and entered judgment in favor of West Corporation. On October 19, 2006, Polygon notified the Company that it was asserting appraisal rights with respect to 3,500,000 shares of the Company’s common stock outstanding prior to the recapitalization. On February 9, 2007, Polygon filed a petition for appraisal in the Court of Chancery of the State of Delaware, New Castle County, seeking to have the Court determine the fair value of its shares and a monetary award of the fair value, along with interest and attorney’s fees and costs. Included in our accrued expenses at December 31, 2006, is a stock purchase obligation for approximately $170.6 million for this stock purchase obligation. We do not believe that any difference between this accrual and the final settlement will have a material effect on our financial position, results of operations or cash flows.

 

A special meeting of the stockholders of the Company was held on October  23, 2006 in connection with our recent recapitalization. The stockholders were asked to consider a vote to approve (a) a proposal to adopt the Agreement and Plan of Merger, dated May 31, 2006, between Omaha Acquisition Corp. and the Company, with the Company continuing as the surviving corporation, and (b) the conversion of each outstanding share of common stock of the Company (other than the shares held by Gary and Mary West, certain shares held by certain members of management who elected to invest in the surviving corporation and any shares owned by any stockholders who were entitled to and who properly exercised appraisal rights under Delaware law) into the right to receive $48.75 per share in cash, without interest. Pursuant to the merger agreement, Gary and Mary West, holders of approximately 56% of our outstanding common stock, converted approximately 85% of their West common stock, or approximately 33.8 million shares, into the right to receive $42.83 per share in cash and their remaining 15%, or approximately 5.8 million shares, were converted into shares of the surviving corporation.

 

 

Our common stock was traded on the Nasdaq National Market under the symbol “WSTC” until the recapitalization on October 24, 2006. The following table sets forth, for the periods indicated, the high and low sales prices of our common stock as reported on the Nasdaq National Market.

 

 

We are subject to certain restrictions regarding the payment of cash dividends to our shareholders under our credit agreement and indentures. At December 31, 2006, we were in a deficit position and have no amount available for dividends.

 

There were no stock repurchases by the Company in the fourth quarter. As of February 16, 2007, there were 40 holders of record of our Class A and Class L common stock.

 

The following table sets forth, for the periods presented and at the dates indicated, our selected historical consolidated financial data. The selected consolidated historical income statement and balance sheet data has been derived from our audited historical consolidated financial statements. Our consolidated financial statements as of December 31, 2006 and 2005, and for the years ended December 31, 2006, 2005 and 2004, which have been audited by Deloitte & Touche LLP, an independent registered public accounting firm, are included elsewhere in this annual report. The information is qualified in its entirety by the detailed information included elsewhere in this annual report and should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business” and the “Consolidated Financial Statements and Notes” thereto included elsewhere in this annual report.

 

 

 

 

 

 

 

 

Business Overview

 

We provide business process outsourcing services focused on helping our clients communicate more effectively with their clients. We help our clients maximize the value of their customer relationships and derive greater value from each transaction that we process. We deliver our services through three segments:

 

 

Each of these services builds upon our core competencies of managing technology, telephony and human capital. Many of the nation’s leading enterprises trust us to manage their customer contacts and communications. These enterprises choose us based on our service quality and our ability to efficiently and cost-effectively process high volume, complex voice-related transactions.

 

Overview of 2006 Results

 

The following overview highlights the areas we believe are important in understanding our results of operations for the year ended December 31, 2006. This summary is not intended as a substitute for the detail provided elsewhere in this annual report, our consolidated financial statements or our condensed consolidated financial statements and notes thereto included elsewhere in this annual report.

 

 

 

Outlook

 

On January 31, 2007, we announced our 2007 financial outlook. In that announcement, we stated that our revenue expectation is $2.05 billion to $2.13 billion, expected adjusted EBITDA is $540 million to $560 million and expected capital expenditures are $90 million to $110 million. This guidance included the expected results of CenterPost Communications and Televox Software, Inc. acquisitions which were also announced January 31, 2007.

 

The following table sets forth our Consolidated Statement of Operations Data as a percentage of revenue for the periods indicated:

 

 

Years Ended December 31, 2006 and 2005

 

Revenue:  Revenue increased $332.1 million, or 21.8%, to $1,856.0 million in 2006 from $1,523.9 million in 2005. $235.2 million of this increase was derived from the acquisitions of Sprint’s conferencing assets, Intrado, Raindance and InPulse which closed for accounting purposes on June 3, 2005, April 1, 2006, April 1, 2006 and October 1, 2006, respectively.

 

During 2006 and 2005, revenue from our 100 largest customers, included $15.0 million and $37.5 million, respectively, of revenue derived from new clients.

 

During the year ended December 31, 2006, our largest 100 clients represented approximately 61% of revenues compared to 63% for the year ended December 31, 2005. This reduced concentration was due to our strategic acquisitions in 2006 and 2005 and to organic growth. Late in 2006, AT&T, Cingular, SBC and Bell South were merged. The aggregate revenue provided by these clients as a percentage of our total revenue in 2006 and 2005 were approximately 17% and 19%, respectively. No other client accounted for more than 10% of our total 2006 revenue. In 2005 Cingular accounted for 12% of total revenue.

 

Revenue by business segment:

 

 

Communication Services revenue increased $146.3 million, or 16.7%, to $1,020.2 million in 2006. The increase included $128.0 million from the acquisitions of Intrado and InPulse on April 1, 2006 and October 1, 2006, respectively. Organic growth in our inbound dedicated agent business during 2006 was offset by an anticipated reduction of $42.2 million in our consumer outbound business.

 

Conferencing Services revenue increased $168.9 million, or 38.5%, to $607.5 million in 2006. The increase in revenue included $107.2 million from the acquisition of Sprint’s conferencing assets on June 3, 2005 and Raindance on April 1, 2006. The remaining $61.7 million increase was attributable to organic growth. 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 the industry trend which is expected to continue for the foreseeable future.

 

Receivables Management revenue increased $18.3 million to $234.5 million in 2006. Sales of receivable portfolios in 2006 and 2005 resulted in revenue of $19.9 million and $13.5 million, respectively. The Receivables Management revenue growth was all organic.

 

Cost of Services:  Cost of services represents direct labor, variable telephone expense, commissions and other costs directly related to providing services to clients. Cost of services increased $131.1 million, or 19.1%, to $818.5 million in 2006, from $687.4 million for the comparable period of 2005. The increase in cost of services included $67.9 million in costs associated with services offered resulting from the acquisitions of Sprint, Intrado, Raindance and InPulse. As a percentage of revenue, cost of services decreased to 44.1% for 2006, compared to 45.1% in 2005.

 

Cost of Services by business segment:

 

 

Communication Services cost of services increased $58.8 million, or 13.7%, in 2006 to $489.0 million. The increase in cost of services included $33.8 million in costs associated with services offered resulting from the acquisitions of Intrado and InPulse. The remaining increase is associated with the organic increase in revenue. As a percentage of this segment’s revenue, Communication Services cost of services decreased to 47.9% in 2006, compared to 49.2% in 2005. The decrease as a percentage of revenue in 2006 was due to the acquisition of Intrado, which historically had a lower percentage of direct costs to revenue than our Communication Services segment results.

 

Conferencing Services cost of services increased $59.6 million, or 39.4%, in 2006 to $210.8 million. The increase in cost of services included $34.1 million in costs associated with services offered resulting from the acquisitions of Sprint’s conferencing assets and Raindance. As a percentage of this segment’s revenue, Conferencing Services cost of services increased to 34.7% in 2006, compared to 34.5% for the comparable period in 2005.

 

Receivables Management cost of services increased $13.9 million, or 12.6%, in 2006 to $124.0 million. As a percentage of this segment’s revenue, Receivables Management cost of services increased to 52.9% in 2006, compared to 50.9%, for the comparable period in 2005.

 

Selling, General and Administrative Expenses:  SG&A expenses increased $230.4 million, or 40.4%, to $800.3 million in 2006 from $569.9 million for 2005. The acquisitions of Sprint, Intrado, Raindance and InPulse increased SG&A expense by $122.3 million. Total share based compensation expense (“SBC”) recognized from the adoption of Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123R”) during 2006 was $28.7 million compared to $0.5 million in 2005. We also recognized $78.8 million in expenses associated with our recapitalization in 2006. As a percentage of revenue, SG&A expenses increased to 43.1% in 2006, compared to 37.4% in 2005.

 

As set forth below, base selling, general and administrative expense, by business segment, excludes recapitalization expense and SBC and is a non-GAAP measure. Management believes these measures provide an alternative presentation of results that more accurately reflects on-going operations, without the distorting effects of the recapitalization expense and SBC items. The following table includes reconciliations for 2006 selling, general and administrative expense, by business segment, excluding the recapitalization expense and SBC, to reported selling, general and administrative expense.

 

Selling, general and administrative expenses by business segment:

 

 

Communication Services SG&A expenses increased $120.5 million, or 37.5%, to $442.2 million in 2006. The acquisitions of Intrado and InPulse increased SG&A expense by $79.8 million. Total SBC recognized during 2006 was $17.1 million compared to $0.2 million in 2005. We also recognized $36.3 million in expenses associated with our recapitalization in 2006. As a percentage of this segment’s revenue, Communication Services SG&A expenses increased to 43.3% in 2006 compared to 36.8% in 2005. SG&A before recapitalization expense and SBC was $388.8 million or 38.1% of this segment’s revenue in 2006.

 

Conferencing Services SG&A expenses increased $95.7 million, or 52.7%, to $277.2 million in 2006. The increase in SG&A included $42.5 million from the acquisition of Sprint’s conferencing assets on June 3, 2005 and Raindance on April 1, 2006. Total SBC recognized during 2006 was $6.8 million compared to $0.1 million in 2005. We also recognized $34.0 million in expenses associated with our recapitalization in 2006. As a percentage of this segment’s revenue, Conferencing Services SG&A expenses increased to 45.6% in 2006 compared to 41.4% in 2005. SG&A before recapitalization expense and SBC was $236.4 million or 38.9% of this segment’s revenue in 2006.

 

Receivables Management SG&A expenses increased $14.5 million, or 21.6%, to $81.8 million in 2006. Total SBC recognized during 2006 was $4.8 million compared to $0.3 million in 2005. We also recognized $8.5 million in expenses associated with our recapitalization in 2006. As a percentage of this segment’s revenue, Receivables Management SG&A increased to 34.9% in 2006, compared to 31.1% in 2005. SG&A before recapitalization expense and SBC was $68.5 million or 29.2% of this segment’s revenue in 2006.

 

Operating Income:  Operating income in 2006 decreased by $29.5 million, or 11.0%, to $237.2 million from $266.7 million in 2005. As a percentage of revenue, operating income decreased to 12.8% in 2006 compared to 17.5% in 2005 due to the factors discussed above for revenue, cost of services and SG&A expenses.

 

As set forth below, base operating income, by business segment, excludes recapitalization expense and SBC and is a non-GAAP measure. Management believes these measures provide an alternative presentation of results that more accurately reflects on-going operations, without the distorting effects of the recapitalization expense and SBC items. The following table includes reconciliations for 2006 operating income, by business segment, excluding the recapitalization expense and SBC, to reported operating income.

 

Operating income by business segment:

 

Communication Services operating income in 2006 decreased by $33.0 million, or 27.0%, to $89.1 million. The decrease in operating income was due primarily to recapitalization expenses and SBC, previously discussed. This decrease was partially offset by acquisitions of Intrado and Inpulse which in the aggregate added $14.3 million to operating income. As a percentage of this segment’s revenue, Communication Services operating income decreased to 8.7% in 2006 compared to 14.0% in 2005. Operating income before recapitalization expense and SBC was $142.5 million or 14.0% of this segment’s revenue in 2006.

 

Conferencing Services operating income in 2006 increased by $13.6 million, or 12.9%, to $119.4 million. The increase in operating income included $30.6 million from the acquisitions of Sprint’s conferencing assets and Raindance. This increase was partially reduced by recapitalization expenses and SBC, previously discussed. As a percentage of this segment’s revenue, Conferencing Services operating income decreased to 19.7% in 2006, compared to 24.1% in 2005. Operating income before recapitalization expense and SBC was $160.3 million or 26.4% of this segment’s revenue in 2006.

 

Receivables Management operating income in 2006 decreased by $11.1 million, or 26.0% to $28.7 million. The decrease in operating income was due primarily to recapitalization expenses and SBC, previously discussed. As a percentage of this segment’s revenue, Receivables Management operating income decreased to 12.2% in 2006, compared to 18.0% in 2005. Operating income before recapitalization expense and SBC was $42.0 million or 18.0% of this segment’s revenue in 2006.

 

Other Income (Expense):  Other income (expense) includes sub-lease rental income, interest income from short-term investments and interest expense from short-term and long-term borrowings under credit facilities and portfolio notes payable. Other expense in 2006 was $86.7 million compared to $13.2 million in 2005. The change in other expense in 2006 was primarily due to interest expense on increased outstanding debt incurred in connection with our recapitalization and higher interest rates in 2006 than we experienced in 2005. We also experienced higher interest rates on outstanding indebtedness than rates under our previous credit facility.

 

Minority Interest:  Effective September 30, 2004, our portfolio receivable lenders, CFSC Capital Corp. XXXIV, (“Cargill”) exchanged its rights to share profits in certain receivables portfolios under its revolving financing facility with us for a 30% minority interest in one of our subsidiaries, Worldwide Asset Purchasing, LLC (“WAP”). Effective January 1, 2006, and in connection with the renegotiation of the revolving financing facility, we acquired 5% of additional interest in WAP in exchange for an exclusivity agreement with Cargill, which reduced their minority interest to 25%. The minority interest in the earnings of WAP for 2006 was $17.1 million compared to $16.1 million for 2005.

 

Net Income:  Net income decreased $81.6 million, or 54.3%, to $68.8 million in 2006 compared to $150.4 million in 2005. The decrease in net income was due to the factors discussed above for revenues, cost of services, SG&A expense and other income (expense) as well as an increase in our effective tax rate. Net income includes a provision for income tax expense at an effective rate of approximately 48.8% for 2006 compared to 36.9% in 2005. The 2006 effective income tax rate was impacted by approximately $40.0 million of recapitalization transaction costs which we expect to be non-deductible for income tax purposes.

 

Years Ended December 31, 2005 and 2004

 

Revenue:  Revenue increased $306.6 million, or 25.2%, to $1,523.9 million in 2005 from $1,217.3 million in 2004. $195.5 million of this increase was derived from the acquisitions of Worldwide, ECI and Sprint’s conferencing assets which closed on August 1, 2004, December 1, 2004 and June 3, 2005, respectively. During 2005 and 2004, revenue from our largest 100 customers, included $37.5 million and $28.5 million, respectively, of revenue derived from new clients.

 

During the year ended December 31, 2005, our largest 100 clients represented 63% of revenues compared to 69% for the year ended December 31, 2004. This reduced concentration is due to our strategic acquisitions in 2005 and 2004 and organic growth. In 2005 and 2004, we had one customer, Cingular, which accounted for 12% and 9%, respectively, of total revenue.

 

Revenue by business segment:

 

 

Communication Services revenue increased $56.3 million, or 6.9%, to $874.0 million in 2005. This revenue increase was offset by a decline in outbound consumer revenue of $18.9 million due to the anticipated reduction in outbound consumer calling. The increase in revenue is primarily due to growth in our dedicated and shared agent business and a short term customer engagement of $17.0 million in outbound consumer revenue.

 

Conferencing Services revenue increased $136.1 million, or 45.0%, to $438.6 million in 2005. The increase in revenue included $98.3 million from the acquisition of Sprint’s conferencing assets on June 3, 2005 and the full year impact of the ECI acquisition, which occurred on December 1, 2004. 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 the industry trend which is expected to continue for the foreseeable future.

 

Receivables Management revenue increased $116.8 million, or 117.5%, to $216.2 million in 2005. The increase in revenue includes $97.2 million from the full year impact of Worldwide, which we acquired on August 1, 2004. Sales of portfolio receivables during the year ended December 31, 2005 and the five months ended December 31, 2004 resulted in revenue of $13.5 million and $2.4 million, respectively.

 

Cost of Services:  Cost of services represents direct labor, variable telephone expense, commissions and other costs directly related to providing services to clients. Cost of services increased $145.4 million, or 26.8%, to $687.4 million in 2005, from $542.0 million for the comparable period of 2004. As a percentage of revenue, cost of services increased to 45.1% for 2005, compared to 44.6% in 2004.

 

Cost of Services by business segment:

 

 

Communication Services cost of services increased $33.2 million, or 8.4%, in 2005 to $430.2 million. The increase is primarily due to higher labor costs associated with the increase in revenue. As a percentage of this segment’s revenue, Communication Services cost of services increased to 49.2% in 2005, compared to 48.5% in 2004. This increase is partially attributed to the growth in our inbound dedicated agent business, which has a higher cost of services as a percentage of revenues as compared to our other Communication Service offerings.

 

Conferencing Services cost of services increased $55.2 million, or 57.4%, in 2005 to $151.3 million. The increase in cost of services included $33.8 million in costs associated with services offered resulting from the acquisitions of ECI and Sprint’s conferencing assets, which we acquired on December 1, 2004 and June 3, 2005, respectively. As a percentage of this segment’s revenue, Conferencing Services cost of services increased to 34.5% in 2005, compared to 31.8%, for the comparable period in 2004.

 

Receivables Management cost of services increased $59.5 million, or 117.4%, in 2005 to $110.1 million. The cost of services includes costs attributable to Worldwide since our acquisition of the business on August 1, 2004. As a percentage of this segment’s revenue, Receivables Management cost of services remained at 50.9% in 2005, compared to 50.9%, for the comparable period in 2004.

 

Selling, General and Administrative Expenses:  SG&A expenses increased $82.4 million, or 16.9%, to $569.9 million in 2005 from $487.5 million for the comparable period of 2004. The acquisitions of Worldwide, ECI and Sprint increased SG&A expense by $62.8 million. As a percentage of revenue, SG&A expenses decreased to 37.4% in 2005, compared to 40.0% in 2004.

 

Selling, general and administrative expenses by business segment:

 

 

Communication Services SG&A expenses increased $6.6 million, or 2.1%, to $321.7 million in 2005. During 2005, site expansion activities took place in four domestic contact centers and two international contact centers and we opened a new domestic contact center which contributed to increases in SG&A and capital expenditures. As a percentage of this segment’s revenue, Communication Services SG&A expenses decreased to 36.8% in 2005 compared to 38.5% in 2004. Our ability to support increased revenues with a relatively low corresponding increase in SG&A expenses and a reduction in depreciation expense of $3.3 million were the primary reasons for the lower SG&A as a percentage of revenue.

 

Conferencing Services SG&A expenses increased $42.4 million, or 30.5%, to $181.5 million in 2005. The increase in SG&A included $35.9 million from the acquisitions of ECI and Sprint’s conferencing assets on December 1, 2004 and June 3, 2005, respectively. As a percentage of this segment’s revenue, Conferencing Services SG&A expenses decreased to 41.4% in 2005 compared to 46.0% in 2004. The decline in SG&A as a percentage of revenue is partially due to synergies achieved with the acquisitions of ECI and Sprint’s conferencing assets as well as the spreading of fixed costs over a larger revenue base. For example, depreciation expense increased to $23.1 million in 2005 from $18.3 million in 2004, as a percent of revenue depreciation declined to 5.3% from 6.1%.

 

Receivables Management SG&A expenses increased $33.5 million, or 99.2%, to $67.3 million in 2005. The increase in SG&A included $26.9 million for the full year affect of the acquisition of Worldwide, which we acquired on August 1, 2004. As a percentage of this segment’s revenue, Receivables Management SG&A decreased to 31.1% in 2005, compared to 34.0% in 2004. This decline is due to a business mix change related to the addition of debt purchasing as a result of the Worldwide acquisition.

 

Operating Income:  Operating income in 2005 increased by $78.8 million, or 41.9%, to $266.7 million from $187.9 million in 2004. As a percentage of revenue, operating income increased to 17.5% in 2005 compared to 15.4% in 2004 due to the factors discussed above for revenue, cost of services and SG&A expenses.

 

Operating income by business segment:

 

 

Communication Services operating income in 2005 increased by $16.4 million, or 15.6%, to $122.1 million. As a percentage of this segment’s revenue, Communication Services operating income increased to 14.0% in 2005 compared to 12.9% in 2004. The improved operating income as a percentage of this segment’s revenue resulted from increased revenue, a reduction in SG&A expense as a percentage of revenue, additional operating income of approximately $4.0 million in the second quarter related to settlement of a contractual relationship and the impact of the short term customer engagement mentioned in the revenue section previously.

 

Conferencing Services operating income in 2005 increased by $38.5 million, or 57.3%, to $105.8 million. The increase in operating income included $28.6 million from the acquisitions of ECI and Sprint’s conferencing assets. As a percentage of this segment’s revenue, Conferencing Services operating income increased to 24.1% in 2005, compared to 22.2% in 2004.

 

Receivables Management operating income in 2005 increased by $23.8 million, or 158.9% to $38.8 million. The increase in operating income included $22.1 million from the acquisition of Worldwide on August 1, 2004. As a percentage of this segment’s revenue, Receivables Management operating income increased to 18.0% in 2005, compared to 15.1% in 2004.

 

Other Income (Expense):  Other income (expense) includes sub-lease rental income, interest income from short-term investments and interest expense from short-term and long-term borrowings under credit facilities and portfolio notes payable. Other expense in 2005 was $13.2 million compared to $6.4 million in 2004. The change in other expense in 2005 is primarily due to interest expense on increased outstanding debt incurred for acquisitions, interest expense on portfolio notes payable and rising interest rates.

 

Minority Interest:  Effective September 30, 2004, one of our portfolio receivable lenders, Cargill, exchanged its rights to share profits in certain portfolio receivables for a minority interest of approximately 30% in one of our subsidiaries, WAP. We became a party to the Cargill relationship as a result of the Worldwide acquisition. The minority interest in the earnings of WAP for 2005 was $16.1 million compared to $2.6 million for 2004.

 

Net Income:  Net income increased $37.1 million, or 32.9%, to $150.3 million in 2005 compared to $113.2 million in 2004. The increase in net income was due to the factors discussed above for revenues, cost of services and SG&A expense.

 

Net income includes a provision for income tax expense at an effective rate of approximately 36.9% for 2005 compared to 36.8% in 2004.

 

Liquidity and Capital Resources

 

We have historically financed our operations and capital expenditures primarily through cash flows from operations, supplemented by borrowings under our bank credit facilities and specialized credit facilities established for the purchase of receivable portfolios.

 

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

 

We financed the recapitalization with equity contributions from the Sponsors, and the rollover of a portion of the equity interests in the Company held by the Founders, and certain members of management, along with a new $2.1 billion senior secured term loan facility, a new senior secured revolving credit facility providing financing of up to $250.0 million

(none of which was drawn at the closing of the recapitalization) and the private placement of $650.0 million aggregate principal amount of 9.5% senior notes due 2014 and $450.0 million aggregate principal amount of 11% senior subordinated notes due 2016. In connection with the closing of the recapitalization, the Company terminated and paid off the outstanding balance of its existing $800.0 million unsecured revolving credit facility.

 

The following table summarizes our cash flows by category for the periods presented (in thousands):

 

 

Net cash flow from operating activities in 2006 decreased $79.7 million, or 28.8%, to $196.6 million, compared to net cash flows from operating activities of $276.3 million in 2005. The decrease in net cash flows from operating activities is primarily due to the recapitalization expenses and interest paid on additional indebtedness incurred in connection with the recapitalization resulting in a decrease in net income, increases in accounts receivable and other assets. Increases in depreciation and amortization expense, share based compensation, deferred tax expense and accrued expenses partially offset the decrease in operating cash flows. Days sales outstanding, a key performance indicator that we utilize to monitor the accounts receivable average collection period and assess overall collection risks was 51 days at December 31, 2006, and ranged from 49 to 51 days during the year. At December 31, 2005, the days sales outstanding was 49 days and ranged from 48 to 49 days during the year.

 

Net cash used in investing activities in 2006 increased $515.1 million, or 173.3%, to $812.3 million, compared to net cash used in investing activities of $297.2 million in 2005. The increase in cash used in investing activities was due to $643.7 million of acquisition costs incurred in 2006 for the acquisitions of Intrado, Raindance and InPulse compared to $209.6 million of acquisition costs incurred in 2005 for the acquisition of Sprints conferencing assets. We invested $113.9 million in capital expenditures during 2006 compared to $76.9 million invested in 2005. The increase in capital expenditures was primarily due to the purchase of a building for $30.5 million which we previously leased under a synthetic lease arrangement. Investing activities in 2006 also included the purchase of receivable portfolios for $114.6 million and cash proceeds applied to amortization of receivable portfolios of $59.4 million compared to $75.3 million and $64.4 million, respectively, in 2005. $16.5 million of the increase in the purchase of receivable portfolios was due to the termination of the Sallie Mae facility which resulted in dissolution of a non-consolidated qualified special purpose entity (“QSPE”). The portfolios of the QSPE were purchased by us with funding pursuant to the Cargill facility. The Sallie Mae facility purchases were accounted for under an off balance sheet arrangement.

 

Net cash flow from financing activities in 2006 increased $776.6 million, to $799.8 million, compared to net cash flow from financing activities of $23.2 million for 2005. The primary sources of financing in 2006 were $3.2 billion of proceeds from the new debt and bonds, $725.8 million in equity proceeds from the sponsors and proceeds and related tax benefits of $69.3 million from our stock-based employee benefit programs in connection with our recapitalization. $2,910.5 million of the recapitalization transaction proceeds were used to acquire the common stock and stock options in the recapitalization. The proceeds were also used to pay off the $663.3 million balance of our previous revolving credit facility, including accrued interest. Debt acquisition costs incurred in 2006 were $109.6 million. Also, during 2006, net cash from financing activities was partially offset by payments on portfolio notes payable of $51.1 million compared to $54.7 million in 2005. Proceeds from issuance of portfolio notes payable in 2006 were $97.9 million compared to $66.8 million in 2005.

 

The indebtedness incurred in connection with the recapitalization consists of $2.1 billion under a senior secured term loan facility which will be subject to scheduled amortization of $21.0 million per year with variable interest at 2.75% over the selected LIBOR; a new senior secured revolving credit facility providing financing of up to $250.0 million (none of which was drawn during 2006); and the private placement of $650.0 million aggregate principal amount of 9.5% senior notes due 2014 and $450.0 million aggregate principal amount of 11% senior subordinated notes due 2016. Interest on the notes is payable semiannually in arrears on April 15 and October 15 of each year, commencing on April 15, 2007.

 

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

 

The $2.1 billion senior secured term loan facility and new $250 million senior secured revolving credit facility bear interest at a variable rate. Amounts borrowed by the Company under these senior secured credit facilities initially bear interest at a rate equal to an applicable margin plus, at the Company’s option, either (a) a base rate determined by reference to the higher of (1) the prime lending rate as set forth on the British Banking Association Telerate Page 5 and (2) the federal funds effective rate from time to time plus 0.50% or (b) a LIBOR rate determined by reference to the costs of funds for deposits for the interest period relevant to such borrowing, adjusted for certain costs. Initially, the applicable margin percentage is a percentage per annum equal to, (x) for term loans, 1.75% for base rate loans and 2.75% for LIBOR rate loans and (y) for revolving credit loans, 1.50% for base rate loans and 2.50% for LIBOR rate loans. The applicable margin percentage with respect to borrowings under the revolving credit facility will be subject to adjustments based upon the Company’s leverage ratio. Overdue amounts (after giving effect to any applicable grace periods) bear interest at a rate per annum equal to the then applicable interest rate plus 2.00% per annum. Initially, the Company is required to pay each lender a commitment fee of 0.50% in respect of any unused commitments under the revolving credit facility. The commitment fee in respect of unused commitments under the revolving credit facility will be subject to adjustment based upon the Company’s leverage ratio. The Company is required to comply, on a quarterly basis, with a maximum leverage ratio covenant and a minimum interest coverage ratio covenant. The consolidated leverage ratio of funded debt to adjusted earnings before interest expense, stock-based compensation, taxes, depreciation and amortization, recapitalization costs, certain acquisition costs, synthetic lease costs, acquisition synergies and a minority interest adjustment (“adjusted EBITDA”) may not exceed 7.75 to 1.0, and the consolidated fixed charge coverage ratio of adjusted EBITDA to the sum of consolidated interest expense must exceed 1.25 to 1.0. Both ratios are measured on a rolling four-quarter basis. We were in compliance with the financial covenants at December 31, 2006. These financial covenants will become more restrictive over time. The senior secured credit facilities also contain various negative covenants, including limitations on indebtedness; liens; mergers and consolidations; asset sales; dividends and distributions or repurchases of the Company’s capital stock; investments, loans and advances; capital expenditures; payment of other debt, including the senior subordinated notes; transactions with affiliates; amendments to material agreements governing the Company’s subordinated indebtedness, including the senior subordinated notes; and changes in the Company’s lines of business. The effective annual interest rate, inclusive of debt amortization costs, on the senior secured term loan facility from October 24, 2006 through December 31, 2006 was 8.86%.

 

The senior secured credit facilities include certain customary representations and warranties, affirmative covenants, and events of default, including payment defaults, breach of representations and warranties, covenant defaults, cross-defaults to certain indebtedness, certain events of bankruptcy, certain events under the Employee Retirement Income Security Act of 1974, material judgments, the invalidity of material provisions of the documentation with respect to the senior secured credit facilities, the failure of collateral under the security documents for the senior secured credit facilities, the failure of the senior secured credit facilities to be senior debt under the subordination provisions of certain of the Company’s subordinated debt and a change of control of the Company. If an event of default occurs, the lenders under the senior secured credit facilities will be entitled to take certain actions, including the acceleration of all amounts due under the senior secured credit facilities and all actions permitted to be taken by a secured creditor.

 

The Company may request additional tranches of term loans or increases to the revolving credit facility in an aggregate amount not to exceed $500.0 million plus the aggregate amount of principal payments previously made in respect of the term loan facility. Availability of such additional tranches of term loans or increases to the revolving credit facility is subject to the absence of any default pro forma compliance with financial covenants and, among other things, the receipt of commitments by existing or additional financial institutions.

 

Subsequent to December 31, 2006, we refinanced the senior secured term loan facility. The general terms of the refinancing included a repricing, an expansion of the facility by $165.0 million and a soft call option. The repricing calls for a pricing grid based on our debt rating ranging from 2.75% to 2.125% for LIBOR rate loans, currently priced at 2.375%, and ranging from 1.75% to 1.125% for base rate loans, currently priced at 1.375%. After the expansion of the senior secured term loan facility, the aggregate facility is $2.265 billion. The soft call option provides for a premium equal to 1.0% of the amount of the repricing payment in the event that prior to the first anniversary of the refinancing we elect another refinancing amendment.

 

Senior Notes

 

The senior notes consist of $650.0 million aggregate principal amount of 9.5% senior notes due 2014. Interest is payable semiannually. The senior notes contain covenants limiting, among other things, the Company’s ability and the ability of the Company’s restricted subsidiaries to: incur additional debt or issue certain preferred shares; pay dividends on or make distributions in respect of the Company’s capital stock or make other restricted payments; make certain investments; sell certain assets; create liens on certain assets to secure debt; consolidate, merge, sell, or otherwise dispose of all or substantially all of the Company’s assets; enter into certain transactions with the Company’s affiliates; and designate the Company’s subsidiaries as unrestricted subsidiaries.

 

At any time prior to October 15, 2010, the Company may redeem all or a part of the senior notes, at a redemption price equal to 100% of the principal amount of senior notes redeemed plus the applicable premium and accrued and unpaid interest and all additional interest then owing pursuant to the applicable registration rights agreement, if any, to the date of redemption, subject to the rights of holders of senior notes on the relevant record date to receive interest due on the relevant interest payment date.

 

On and after October 15, 2010, the Company may redeem the senior notes, in whole or in part, at the redemption prices (expressed as percentages of principal amount of the senior notes to be redeemed) set forth below, plus accrued and unpaid interest thereon to the applicable date of redemption, subject to the right of holders of senior notes of record on the relevant record date to receive interest due on the relevant interest payment date, if redeemed during the twelve-month period beginning on October 15 of each of the years indicated below:

 

 

In addition, until October 15, 2009, the Company may, at its option, on one or more occasions redeem up to 35% of the aggregate principal amount of senior notes issued by it at a redemption price equal to 109.50% of the aggregate principal amount thereof, plus accrued and unpaid interest thereon to the applicable date of redemption, subject to the right of holders of senior notes of record on the relevant record date to receive interest due on the relevant interest payment date, with the net cash proceeds of one or more equity offerings; provided that at least 65% of the sum of the aggregate principal amount of senior notes originally issued under the senior indenture issued under the senior indenture after the issue date remains outstanding immediately after the occurrence of each such redemption; provided further that each such redemption occurs within 90 days of the date of closing of each such equity offering.

 

Senior Subordinated Notes

 

The senior subordinated notes consist of $450.0 million aggregate principal amount of 11% senior subordinated notes due 2016. Interest is payable semiannually. The senior subordinated indenture contains covenants limiting, among other things, the Company’s ability and the ability of the Company’s restricted subsidiaries to: incur additional debt or issue certain preferred shares; pay dividends on or make distributions in respect of the Company’s capital stock or make other restricted payments; make certain investments; sell certain assets; create liens on certain assets to secure debt; consolidate, merge, sell, or otherwise dispose of all or substantially all of the Company’s assets; enter into certain transactions with the Company’s affiliates; and designate the Company’s subsidiaries as unrestricted subsidiaries.

 

At any time prior to October 15, 2011, the Company may redeem all or a part of the senior subordinated notes at a redemption price equal to 100% of the principal amount of senior subordinated notes redeemed plus the applicable premium and accrued and unpaid interest to the date of redemption, subject to the rights of holders of senior subordinated notes on the relevant record date to receive interest due on the relevant interest payment date.

 

On and after October 15, 2011, the Company may redeem the senior subordinated notes in whole or in part, at the redemption prices (expressed as percentages of principal amount of the senior subordinated notes to be redeemed) set forth below, plus accrued and unpaid interest thereon to the applicable date of redemption, subject to the right of holders of senior subordinated notes of record on the relevant record date to receive interest due on the

relevant interest payment date, if redeemed during the twelve-month period beginning on October 15 of each of the years indicated below:

 

 

In addition, until October 15, 2009, the Company may, at its option, on one or more occasions redeem up to 35% of the aggregate principal amount of senior subordinated notes issued by it at a redemption price equal to 111% of the aggregate principal amount thereof, plus accrued and unpaid interest thereon to the applicable date of redemption, subject to the right of holders of senior subordinated notes of record on the relevant record date to receive interest due on the relevant interest payment date, with the net cash proceeds of one or more equity offerings (as defined in the senior subordinated indenture); provided that at least 65% of the sum of the aggregate principal amount of senior subordinated notes originally issued under the senior subordinated indenture issued under the senior subordinated indenture after the issue date remains outstanding immediately after the occurrence of each such redemption; provided further that each such redemption occurs within 90 days of the date of closing of each such equity offering.

 

Registration Rights

 

On October 24, 2006, the Company entered into registration rights agreements with respect to the senior notes and the senior subordinated notes. Pursuant to the registration rights agreements, the Company has agreed that it will use its reasonable best efforts to register with the Securities and Exchange Commission notes having substantially identical terms as the senior notes and notes having substantially identical terms as the senior subordinated notes as part of offers to exchange freely tradable exchange notes for each series of notes (each, an “Exchange Offer”). The Company is required to use its reasonable best efforts to cause each Exchange Offer to be completed or, if required, to have one or more shelf registration statements declared effective, within 315 days after the issue date of each of the senior notes and the senior subordinated notes. If the Company fails to meet this target the annual interest rate on the applicable series of notes will increase by 0.25%. The annual interest rate on the applicable series of notes will increase by an additional 0.25% for each subsequent 90-day period during which the registration default continues, up to a maximum additional interest rate of 0.5% per year over the applicable interest rate described above. If the registration default is corrected, the applicable interest rate on the applicable series of notes will revert to the original level.

 

Bank Revolving Credit Facility

 

At December 31, 2005, we maintained a bank revolving credit facility of $400 million which was to mature November 15, 2009. The facility bore interest at a variable rate over a selected LIBOR based on our leverage. At December 31, 2005, $220.0 million was outstanding on the revolving credit facility. The highest balance outstanding on the credit facility during 2005 was $365.0 million. The average daily outstanding balance of the revolving credit facility during 2005 was $257.9 million. The effective annual interest rate, inclusive of debt amortization costs, on the revolving credit facility for the year ended December 31, 2005 was 4.53%. The commitment fee on the unused revolving credit facility at December 31, 2005 was 0.175%.

 

We amended and restated our bank revolving credit facility on March 30, 2006. The Amended and Restated Credit Agreement included the following features: increased the revolving credit available from $400 million to $800 million; included an uncommitted add-on facility allowing an additional increase in the revolving credit available from $800 million to $1.2 billion; increased the letter of credit commitment amount from $20 million to $50 million; increased the swingline loan commitment amount from $10 million to $25 million; reduced the required Consolidated Leverage Ratio from “2.5 to 1.0” to “3.0 to 1.0”; reduced the minimum commitment fee from 15 basis points to 8 basis points; reduced the maximum commitment fee from 25 basis points to 17.5 basis points; reduced the maximum interest rate over the alternative base rate from 25 basis points to 0 basis points; reduced the minimum interest rate over LIBOR from 75 basis points to 40 basis points; and reduced the

maximum interest rate over LIBOR from 125 basis points to 87.5 basis points. The average daily outstanding balance of the revolving credit facility from January 1, 2006 through October 23, 2006 was $540.3 million. The effective annual interest rate, inclusive of debt amortization costs, on the revolving credit facility from January 1, 2006 through October 23, 2006 was 6.05%. The commitment fee on the unused revolving credit facility at October 23, 2006 was 0.15%. At October 24, 2006, the outstanding balance, including accrued interest, due under the bank revolving credit facility of approximately $663.3 million, was paid in full in connection with the consummation of the recapitalization. We also charged to interest expense $3.9 million of unamortized debt issuance costs related to the paid off bank revolving credit facility.

 

Cargill Facility.  We maintain, through a majority-owned subsidiary, Worldwide Asset Purchasing, LLC (“WAP”), a revolving financing facility with a third-party specialty lender, CFSC Capital Corp. XXXIV (“Cargill”). The lender is also a minority interest holder in WAP. Pursuant to this arrangement, we will borrow 80% to 85% of the purchase price of each receivables portfolio purchase from Cargill and we will fund the remaining purchase price. Interest accrues on the outstanding debt at a variable rate of 2% over prime. The debt is non-recourse and is collateralized by all receivable portfolios within a loan series. Each loan series contains a group of portfolio asset pools that have an aggregate original principal amount of approximately $20 million. Payments are due monthly for two years from the date of origination. At December 31, 2006, we had $87.2 million of non-recourse portfolio notes payable outstanding under this facility compared to $40.5 million outstanding at December 31, 2005. The increase in the purchase of receivable portfolios was primarily due to the Sallie Mae facility which was terminated in September 2006. The obligations under that off-balance sheet arrangement were purchased by the Company through financing from Cargill and merged with the obligations under the Cargill facility. Effective January 1, 2006, this facility was renegotiated reducing Cargill’s percentage interest in WAP from approximately 30% to 25% in return for an exclusivity agreement, under which WAP grants Cargill the sole right to finance certain customer obligations acquired by WAP. The renegotiated agreement also includes a commitment to finance $150.0 million of accounts receivable purchases over three years.

 

Contractual Obligations

 

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

 

The following table summarizes our contractual obligations at December 31, 2006 (dollars in thousands):