West Corporation
WEST CORP (Form: 10-K, Received: 02/16/2017 15:52:27)

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-K

 

(Mark One)

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

For The Fiscal Year Ended December 31, 2016

OR

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

For the transition period from                   to                  

Commission File Number 001-35846

 

West Corporation

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

47-0777362

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

 

 

11808 Miracle Hills Drive, Omaha, Nebraska

 

68154

(Address of principal executive offices)

 

(Zip Code)

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

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Name of exchange on which registered

Common Stock ($0.001 par value)

 

NASDAQ

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       No  

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

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       No  

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

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.  

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

 

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

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

The aggregate market value of the common equity held by non-affiliates (computed by reference to the average bid and asked price of such common equity) as of June 30, 2016, the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $831.4 million. At February 10, 2017, 83,352,467 shares of the registrant’s common stock were outstanding.

Documents incorporated by reference

Applicable portions of the proxy statement for the 2017 annual meeting of stockholders are incorporated by reference in Part III of this Annual Report.

 

 

 

 


 

TABLE OF CONTENTS

 

 

 

 

 

Page

 

 

 

 

 

 

 

PART I

 

 

 

 

 

 

 

ITEM 1.

 

BUSINESS

 

2

ITEM 1A.

 

RISK FACTORS

 

23

ITEM 1B.

 

UNRESOLVED STAFF COMMENTS

 

33

ITEM 2.

 

PROPERTIES

 

33

ITEM 3.

 

LEGAL PROCEEDINGS

 

33

ITEM 4.

 

MINE SAFETY DISCLOSURES

 

33

 

 

 

 

 

 

 

PART II

 

 

 

 

 

 

 

ITEM 5.

 

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

34

ITEM 6.

 

SELECTED CONSOLIDATED FINANCIAL DATA

 

37

ITEM 7.

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

38

ITEM 7A.

 

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

63

ITEM 8.

 

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

64

ITEM 9.

 

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

64

ITEM 9A.

 

CONTROLS AND PROCEDURES

 

64

ITEM 9B.

 

OTHER INFORMATION

 

66

 

 

 

 

 

 

 

PART III

 

 

 

 

 

 

 

ITEM 10.

 

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

 

67

ITEM 11.

 

EXECUTIVE  COMPENSATION

 

67

ITEM 12.

 

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

 

67

ITEM 13.

 

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE

 

67

ITEM 14.

 

PRINCIPAL ACCOUNTANT FEES AND SERVICES

 

67

 

 

 

 

 

 

 

PART IV

 

 

 

 

 

 

 

ITEM 15.

 

EXHIBITS AND FINANCIAL STATEMENT SCHEDULE

 

68

 

 

 

SIGNATURES

 

69

 

 

 

 


 

FORWARD-LOOKING STATEMENTS

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

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

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

 

 

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PART I.

ITEM 1.

BUSINESS

Overview

West Corporation (the “Company” or “West”) is a global provider of communication and network infrastructure services. “We,” “us” and “our” also refer to West and its consolidated subsidiaries, as applicable. We help our clients more effectively communicate, collaborate and connect with their audiences through a diverse portfolio of solutions that include unified communications services, safety services, interactive services such as automated notifications, specialized agent services and telecom services.

The scale and processing capacity of our technology platforms, combined with our expertise in managing multichannel interactions, enable us to provide reliable, high-quality, mission-critical communications designed to maximize return on investment for our clients and help them build smarter, more meaningful connections. We are dedicated to delivering and improving upon new channels, new capabilities and new choices for how businesses and consumers collaborate, connect and transact.

Our clients include Fortune 1000 companies, along with small and medium enterprises in a variety of industries. We have sales and/or operations in the United States, Canada, Europe, the Middle East, Asia-Pacific, Latin America and South America.

Our focus on large addressable markets with attractive growth characteristics has allowed us to deliver steady, profitable growth. For the fiscal year ended December 31, 2016, we generated revenue from continuing operations of $2,292.0 million, $193.4 million in income from continuing operations, or 8.4% of revenue from continuing operations, Adjusted EBITDA from continuing operations of $664.1 million, or 29.0% Adjusted EBITDA margin, $428.3 million in net cash flows from continuing operating activities and $301.7 million in free cash flows from continuing operating activities. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Adjusted EBITDA” for a definition of EBITDA, Adjusted EBITDA and Free Cash Flows, which are non-GAAP measures, and a reconciliation of net income to EBITDA, cash flows from continuing operations to EBITDA, Adjusted EBITDA and Covenant Adjusted EBITDA and cash flows from continuing operations to free cash flows.

The following summaries further highlight the steps we have taken to evolve and improve our business:

Evolution to a Predominantly Technology-Based Solutions Business. Since our founding in 1986, we have invested significantly to expand our technology platforms and develop our operational processes to meet the complex communications needs of our clients. We have evolved our business mix from labor-intensive communication services to predominantly diversified technology-driven services. We have also invested approximately $3.0 billion in strategic acquisitions. We have increased our penetration into international unified communications markets, strengthened our interactive services business and established what we believe is a leadership position in safety services and healthcare advocacy services. As we continue to increase the variety of services we provide, we intend to pursue opportunities in markets where we are able to leverage our technological capabilities and industry expertise.

On March 3, 2015, we divested several of our agent-based businesses. Businesses sold included our consumer-facing customer sales and lifecycle management, account services and receivables management businesses. The divestiture is consistent with our stated objective of focusing on faster growing, more profitable lines of business. As a result of this transaction, our employee count decreased from approximately 35,000 to 10,700 at December 31, 2016, making us a significantly less labor-intensive company.

Well Positioned for Emerging Technologies and Societal Trends. We endeavor to operate at the scale and speed necessary to capitalize on emerging technologies and the advantages they will provide. We have reoriented our business in response to the emergence of fast-growing markets such as healthcare, as well as emerging technology, industry and societal trends such as Internet Protocol (“IP”) infrastructure, unified communications as a service (“UCaaS”), migration to cloud-based solutions, mobility, Internet of Things (“IoT”), consumer’s desire for personalized experiences, analytics or “Big Data,” globalization, remote workforce and video-based collaboration.

Developed and Enhanced Large Scale Technology Platforms. Investing in technology and developing specialized expertise in the industries we serve are critical components to our strategy of enhancing our services and delivering operational excellence. The scale of our technology platforms is a competitive advantage in many of the markets we serve. Our open standards-based platforms allows for the flexibility to add new capabilities as our clients demand. In addition, we have integrated mobile, social media and cloud computing capabilities into our platforms and offer those services to our clients.

Expanded Safety Services. We have invested significant resources into our safety services line of business. Since 2006, we have made several strategic acquisitions, including Intrado Inc. (“Intrado”), Positron Public Safety Systems and the 911 Enable business of Connexon Group, Inc. (“911 Enable”). In 2016, we acquired 911 Emergency Telecom Company, Inc. ("911 ETC") to

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further enhance our enterprise service offering. This combination of acquisitions has provided us with a leading platform in safety communication and in frastructure services. Today, we believe we are one of the largest providers of safety services to telecommunications service providers, government agencies and public safety organizations, based on the number of 9-1-1 calls that we and other participants in the industry facilitate and the percentage of the U.S. population covered by our services. Our presence in this market has steadily increased through substantial investments in proprietary systems, such as our Emergency Services IP Network (“ESInet”), c all handling product suite, and geographic information system (“GIS”) offerings and programs designed to upgrade the capabilities of 9-1-1 centers by delivering a broader set of features and functionality. We provide a comprehensive hosted platform that se amlessly integrates handset and network-based mobile location technologies. Our location determination services automatically apply precise locating methods to deliver accurate results. We plan to continue to develop our presence in the mobility industry i n support of wireless carriers, Voice over IP (“VoIP”) providers, telematics and cable companies, enterprises and alarm/security companies.

Expanded Interactive Services. We have grown our interactive services line of business organically and through acquisitions. We provide automated outbound notification services (voice, text/short message service ("SMS") and chat), inbound voice and speech services and cloud contact center technologies across several industries, including healthcare, utilities, financial services, telecommunications, transportation, government and public safety. Additionally, with the acquisitions in 2014, 2015 and 2016 of Reliance Holding, Inc., doing business through its wholly owned subsidiary Reliance Communications, LLC as SchoolMessenger (“SchoolMessenger”), the assets of GroupCast, LLC, doing business as SchoolReach (“SchoolReach”), substantially all of the assets of Intrafinity, Inc., doing business as SharpSchool (“SharpSchool”), and substantially all of the assets of Synrevoice Technologies, Inc. (“Synrevoice”), we expanded our interactive services into a leadership position for communications and parental engagement technology in the K-12 education market in the U.S. and Canada.

“One West” Initiative. Our history of acquisitions provided us with industry-leading brands such as Intrado, InterCall, TeleVox, SchoolMessenger and many more. These brands are well known in their respective markets. However, many of our clients were not aware of the breadth of our offerings sold under different brand names. We believe that unifying our offerings under the “West” name will allow us to leverage one brand in our marketing efforts and drive additional cross-selling opportunities.

This initiative is not limited to the branding of our services. Our management team is focused on internal programs that are intended to leverage the existing assets and expertise of our employees across all of our lines of business. We have, and will, focus on several efforts to transform the Company’s operations to be more efficient. These efforts include collaboration between employees in different lines of business, simplification and automation of certain processes, leveraging existing technology infrastructure and consolidating efforts across the Company in each of our procurement, capital expenditure and carrier management functions.

The primary goal of these initiatives is to become a more responsive organization, delivering faster innovation to satisfy our clients’ needs, and to develop the ability to offer clients solutions for their communications needs that combine services across our lines of business.

Corporate Information

Our business was founded in 1986 through a predecessor company, and West Corporation was incorporated in 1994. 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, LP and Quadrangle Group LLC (the “Sponsors”). Pursuant to the Recapitalization, a merger subsidiary was merged with and into West Corporation, with West Corporation continuing as the surviving corporation, and our publicly traded securities were cancelled in exchange for cash.

We financed the Recapitalization with equity contributions from the Sponsors and the rollover of a portion of our equity interests held by Gary and Mary West, the founders of the Company (the “Founders”), and certain members of management, along with a senior secured term loan facility, a senior secured revolving credit facility and the private placement of senior notes and senior subordinated notes.

On December 30, 2011, we completed the conversion of our outstanding Class L Common Stock into shares of Class A Common Stock (the “Conversion”) and thereafter the reclassification (the “Reclassification”) of all of our Class A Common Stock as a single class of common stock by filing amendments to our amended and restated certificate of incorporation (the “Charter Amendments”) with the Delaware Secretary of State. Upon the effectiveness of the filing of the Charter Amendments, each share of our outstanding Class L Common Stock was converted into 40.29 shares of Class A Common Stock pursuant to the Conversion, and all of the outstanding shares of Class A Common Stock were reclassified as shares of common stock pursuant to the Reclassification. Following the Conversion and Reclassification, all shares of common stock share proportionately in dividends. On March 8, 2013, we completed a 1-for-8 reverse stock split.

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On March 27, 2013, we completed our initial public offering by selling an aggregate of 21,275,000 shares of our common stock at a price to th e public of $20.00 per share. The initial public offering resulted in net proceeds to us of $398.1 million after deducting underwriting discounts and commissions of approximately $24.5 million and other offering expenses of approximately $3.0 million.

Our principal executive offices are located at 11808 Miracle Hills Drive, Omaha, Nebraska 68154, and our telephone number at that address is (402) 963-1200. Our website 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 Securities and Exchange Commission. None of the information on our website or any other website identified herein is part of this report. All websites in this report are intended to be inactive textual references only.

Our five operating segments (Unified Communications Services, Telecom Services, Safety Services, Interactive Services and Specialized Agent Services) are aggregated into four reportable segments as follows:

 

Unified Communications Services , including collaboration services, UCasS and telecom services;

 

Safety Services , including carrier services, next generation 9-1-1, government solutions and advanced services;

 

Interactive Services , including outbound (proactive notifications – voice, text/SMS and chat), inbound speech solutions (interactive voice response or “IVR”), cloud contact center technologies, web, mobile and professional services; and

 

Specialized Agent Services , including healthcare advocacy services, cost management services and revenue generation.

Financial information, including financial performance metrics for each of these business segments, is contained in Note 17 of Notes to Consolidated Financial Statements. Information regarding the components of revenue is included in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” as well as Note 17.

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Our Servi ces

We believe we have built our reputation as a best-in-class service provider by delivering differentiated, high-quality services for our clients. Our portfolio of technology-driven, communication services includes:

 

 

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Unified Communications Services

We provide our clients with a range of integrated unified communications (“UC”) services. We combine reliable, world-class technologies with deep experience and flexibility to provide solutions that are easy to use and scalable for every client’s specific needs. Our products and services can improve many aspects of business by enabling personalized engagement, meetings anywhere, enhanced productivity and immersive communication experiences.

Unified Communications Defined:

 

 

UC is commonly defined as the integration of real-time enterprise communication services with non-real-time communication services like unified messaging (email, integrated voicemail, SMS and fax). We focus specifically on mid-market and large enterprise clients with a complete UC cloud-based solution which consists of enterprise voice, conferencing and collaboration, network management, unified messaging and presence, contact center and client application integration. In addition, we continue to expand our broad communications services with support for high-end videoconferencing, Skype for Business integration, webcasts and other digital media services.

Utilizing UC services allows our clients to replace their premises-based private branch exchange (“PBX”) infrastructure with a cloud-based, hosted UC service and derive the benefits of moving from a capital expenditure investment model to a more flexible, scalable and responsive operating expense model. It also allows clients to focus their limited resources on their core business and benefit from the support, reliability and efficiency of West as their service provider. Our Unified Communications Services reportable segment includes the following:

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UCaaS. The delivery of UC technology is provided as a hosted, or cloud-based, service common ly referred to as UCaaS. Our Company has extensive experience in designing, deploying and managing UCaaS solutions as well as the ability to provide superior long-term support to our clients. Gartner, Inc., (“Gartner”) a leading research and advisory firm, has positioned West in the “Leaders” quadrant of its “Magic Quadrant for UCaaS, Worldwide” report for each of the past fi ve years. This recognition is based on W est’s ability to execute and the completeness of our vision in the UCaaS space. As one of 16 U CaaS providers assessed by Gartner for the 2016 report, West is one of five to be positioned within the “Leaders” quadrant.

In its November 2016 “Critical Capabilities for Unified Communications as a Service, Global” report, Gartner rated West as one of the top three providers of UCaaS services in its two use cases centered on the needs of the large enterprise.

West delivers solutions that include technology from leading providers such as Cisco and Microsoft, while adding our own technology to bring together a complete UC solution for clients. West holds Cisco Gold Partner, Cisco Cloud Provider and Cisco Managed Services Channel Program Master certifications and was named the 2016 Collaboration Cloud Partner of the Year for the Americas region by Cisco.

Managed Voice Services

 

Hosted IP-PBX and Enterprise Call Management allows an enterprise to upgrade its communications technology with cloud-based on-demand services including full PBX functionality, advanced enterprise and personal call management tools, contact center solution and leading-edge UC features. These services can be fully integrated with a client’s existing IP or legacy infrastructure where required, leveraging investments already made in telephony infrastructure and providing a seamless enterprise-wide solution. On October 31, 2015, we completed the acquisition of Magnetic North Software, Ltd., (“Magnetic North”), a leading U.K.-based provider of hosted customer contact center and UC solutions to enterprises. This acquisition provides us with an expanded presence in Europe, the Middle East and Africa (“EMEA”), strong partner relationships and an integrated UC contact center platform that we expect to use across our lines of business to provide clients with the capability to deliver seamless and contextual multichannel consumer experiences.

 

Hosted IP Trunking Solutions provide enterprise clients with carrier-grade service, along with the benefits of next -generation IP-based service that allows their business to run more efficiently. These solutions deliver a consistent set of voice services across an enterprise’s infrastructure, with flexible IP and time-division multiplexing ("TDM") trunking options for clients’ on-site PBX.

Network Services

 

Hosted Managed Multiprotocol Label Switching (“MPLS”) Network Services provide enterprise clients with a mechanism for transporting data and voice content along with other real-time business applications. Centralized management services provide continuous network monitoring and management.

 

Cloud-Based Network Security Services aggregate a set of technologies into one simple and scalable cloud-based solution that provides clients of our MPLS network services with network protection. This service can help protect the client’s network from spam and viruses, unauthorized intrusions and inappropriate web content, while providing simplicity and consistency of security policy management and eliminating single points of failure and bottlenecks that can occur with premise-based security solutions.

 

Professional Services and System Integration provide our clients with advice and solutions to integrate their unified communication systems. We offer consulting, design, integration, and implementation of voice, video, messaging, and collaboration systems and services.

Collaboration Services . We are the largest conferencing services provider in the world based on conferencing revenue according to Wainhouse Research. We have maintained our industry leadership position over the past eight years by adapting to changing client demands and technology. Frost & Sullivan awarded us with the 2015 “Global Conferencing Services Market Leadership” award based on our vision, early recognition of evolving customer demands, focus on technology innovation, service quality, customer value and superior customer service.

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We managed approximately 169 million conference calls in 201 6 , a 1 % increase over 201 5 . Our collaboration solutions include the following:

 

Audio Collaboration includes our global conferencing service that allows clients to initiate an audio conference at any time, on-demand or by appointment, self-service or with support from event professionals. Our on-demand audio conferencing solutions are available in over 180 countries and our global operator-assisted conferencing solutions are offered in 32 languages. MobileMeet ® is our mobile application that lets users start, join or schedule meetings from their smartphone or tablet for a seamless meeting experience. MobileMeet features include native calendar integration, push notifications and chat.

 

Web Collaboration allows clients to connect remote parties and bolster collaboration among groups. These web-based tools provide clients with the capability to make presentations and share applications and documents over the Internet. These services are offered through our proprietary product, InterCall Unified Meeting ® 5, as well as through the resale of Cisco, Microsoft and Adobe products. Web conferencing services can be customized to each client’s individual needs, and are integrated with our on-demand audio conferencing platform. Tools that support mobile devices are available to address the growing business demand for wider accessibility. In 2016, for the third consecutive year, Gartner positioned the Company in the “Visionaries” quadrant of its “Magic Quadrant for Web Conferencing.”

 

Video Collaboration gives users the ability to create a virtual face-to-face experience with customers, prospects, partners and colleagues without the time commitment and expense of travel. The 2016 introduction of West Video Meeting Gateway addressed the growing demand for videoconferencing within the Skype for Business environment by connecting any video source in a single conference, thereby extending the life of previously deployed, dedicated video endpoints in many organizations.

Digital Media Services

 

Webcasting and Webinars allow users to stream small or large digital media presentations over the Internet. We offer our clients the flexibility of streaming any combination of audio, video (desktop or high-end) or slides using any operating system. The American Business Awards presented a 2016 Gold award to our Webcast Pro platform for Best New Content Marketing Solution and a Bronze award to our Webcast Essentials platform for Best New Marketing/PR Solution.

 

Virtual Event Environments deliver targeted content directly to our clients’ audience in a fully-branded, interactive online environment. Clients are able to provide large, global audiences easy and instant access to content, experts and peers live or on-demand. Examples of virtual events include trade shows, product launches, job fairs and employee town hall meetings. We offer clients consulting, project management and implementation of these virtual event environment solutions.

 

Video Managed Services and Video Bridging Services provides clients with the ability to fully outsource the management and support of video conferencing to our experienced and trained staff.

Telecom Services. We provide local and national tandem switching services that facilitate an efficient exchange of voice traffic between originating and terminating networks throughout the U.S. We connect people and unite networks by delivering interconnection services for all types of providers, including wireless, wireline, cable and VoIP. We operate a next-generation technology-agnostic national network providing a cost-effective means for TDM to IP conversion for IP networks that require access to the Public Switched Telephone Network ("PSTN"). We provide carrier-grade interconnections that reduce cost and merge traditional telecom, mobile and IP technologies onto a common, efficient backbone. Telecom Services also provides much of the telecommunications network infrastructure that supports our conferencing business. We offer the following telecom services:

 

Toll-Free Services. We provide toll-free origination and termination services to wireless carriers, cable operators, Competitive Local Exchange Carriers (“CLECs”) and VoIP service providers. Our solutions provide a more scalable and efficient way for service providers to route toll-free calls. We employ an extensive network of interconnections, proprietary reporting and flexible online management tools so our clients can achieve optimal network operating efficiencies. Service providers using our toll-free termination service have access to an industry-leading server (Telephone Number Manager) that can be partitioned and customized to meet the unique needs of each of their customers. By leveraging the Telephone Number Manager and our wide-reaching tandem network, we are able to offer highly-customizable solutions at very competitive rates.

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Direct Inward Dialing. We are a licensed CLEC with our own telephone number ranges and network infrastructure. Our wholesale direct inward d ial (DID) service is ideal for resellers, vo ice service providers or calling card services who need a simple solution backed by a secure network. Our application programming interface and customer portal provides clients with access to our back office tools.

 

Termination Services. We provide high-quality, low-cost termination service throughout the entire North American dialing plan using our soft switch platform and direct network interconnections. By leveraging our call volume and sophisticated least cost routing, we are able to offer a variety of termination products, each of which can be customized to meet the needs of our service provider clients.

Safety Services

We provide technology solutions for wireline and wireless carriers; satellite, telematics and cable operators; VoIP service providers; alarm/security companies; as well as public safety organizations, government agencies and enterprises. West services the entire public and personal safety ecosystem with reliable networks and a deep understanding of safety needs. We continue to innovate and develop next generation industry solutions that match new technologies.

We connect people to first responders—firefighters, law enforcement, ambulance services, and the telecommunicators answering calls in public safety answering points (“PSAPs”). Our seamless, reliable, and fault tolerant infrastructure along with our data management experience and expertise are the underpinning for individuals’ requests for assistance that require the ability to be located, and have calls routed and delivered to the correct public safety agency. We provide 9-1-1 call routing, call location creation and delivery, and call delivery and accuracy compliance tools to the majority of U.S.-based telecommunications service providers including all major Incumbent Local Exchange Carriers (“ILECs”), most CLECs, as well as wireless carriers, VoIP service providers and telematics providers. We believe we are the leading database management provider in the industry, managing over 223 million ILEC, CLEC and VoIP records. We continue to develop and support new technologies for existing providers as well as support new entrants such as Over the Top (“OTT”) providers.

We believe we are one of the largest providers of safety services based on the number of 9-1-1 calls that we and other participants in the industry facilitate and the percentage of the population served by our desktop communication technology. In 2016, we facilitated approximately 444 million Automatic Location Information bids and Enhanced 9-1-1 (“E9-1-1”) transactions in support of our clients' routing and location requests.

We provide 9-1-1 voice and data services and/or call handling equipment to PSAPs across the U.S. and Canada. With over 15 years of running IP networks for 9-1-1 call delivery, we are uniquely positioned to help PSAPs, telecommunications carriers and enterprise customers meet the ever-increasing demand of emerging IP-based technologies.

We offer the following safety services:

 

Carrier Services include the systems that enable the routing and delivery of emergency calls to the appropriate PSAP. Wireline and wireless carriers, VoIP service providers, telematics and cable operators, alarm companies and satellite phone providers depend on West for location determination and routing and delivery services to support 9-1-1 operations and meet emergency communications requirements. We manage the 9-1-1 location data for over 223 million ILEC, CLEC and VoIP records.

 

Next Generation 9-1-1 services are comprised of our i3-compliant ESInet which provides the interoperability and advanced routing options that PSAPs need to meet standard requirements and move to the future of next generation 9-1-1 (“NG9-1-1”). Emerging technologies based on i3-compliant architecture provide increased flexibility and reliability in the delivery of 9-1-1 calls.

 

Government Solutions deliver our fully-integrated desktop communications technology solutions that public safety agencies use to enable E9-1-1 call handling. Our next generation 9-1-1 call handling solution is an IP-based system designed to significantly improve the information available to first responders by integrating capabilities such as the ability to send text messages, photos or video to PSAPs.

Utilizing VoIP technology, our VIPER ® system provides PSAPs with enhanced call taking efficiencies, high availability, automatic call distribution and remote deployment capabilities. VIPER has been successfully installed in thousands of call taking positions across North America.

According to Frost & Sullivan, West is the market leader, based on customer premise equipment (“CPE”) revenue, and is expected to maintain this leadership position for the entirety of Frost & Sullivan’s forecast period (through 2020). Frost & Sullivan called West a “full end-to-end solution provider” offering “all ESInet components, systems integration, IP network, GIS and CPE.”

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Advanced Services represents our focus and investment in new strategic services for our clients including Enterprise and GIS ser vices.

Our enterprise offerings help organizations of all types and sizes meet their E9-1-1 obligations by routing 9-1-1 calls and detailed location information to the appropriate PSAP. We support all subscriber endpoint types, including IP phones, soft phones, and wireless phones connected to various voice platforms. The acquisitions of 911 Enable in September 2014 and 911 ETC in December 2016 enhanced our expertise in the enterprise VoIP market to deliver improved emergency response for IP-based enterprise clients across the U.S. and Canada.

The following graphic depicts how our enterprise offering could be configured:

 

 

We deliver public safety grade GIS data management products and services for municipalities, public safety organizations and other organizations that require highly accurate GIS data that is current, accurate, aligned, and aggregated. We provide GIS products, tools and services that create, validate and maintain data. We streamline processing, deliver automated coalescence and data flow, and display through our state-of-the-art map user interface.

As the number of connected devices grows so does the need to consider connections to our safety services solutions. Emergency Aware Services (“EAS”) is our state-of-the art platform that applies complex algorithms and analytics to vast amounts of data from IoT objects such as sensors, public cameras and smart buildings. The results are compiled, organized and fed to public safety professionals, first responders, incident commanders and civic personnel to help them make better decisions in real-time. The agile, customizable nature of EAS has potential applications for public safety across a variety of markets, including transportation, utilities, smart cities, and enterprise.

 

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Interactive Services

We design, integrate, deliver, manage and optimize applications, services, platforms and networks that aim to create a better customer experience, strengthen customer engagement and drive efficiencies for our clients. We specialize in cloud-based communication solutions that drive a smart, personalized and convenient customer experience, including inbound IVR self-service, outbound proactive notifications and mobility, cloud contact center technologies, web, mobile application development and comprehensive professional services. Our applied technology incorporates an omni-channel approach that brings together multiple channels, including voice, text, email, push notification, fax, video, web, social media and cloud contact center to create a connected customer, parent and/or patient experience. In most cases, our technology directly interfaces with our client’s internal systems, including customer relationship management, PBX and enterprise reporting platforms. Our systems and platforms receive or deliver tens of millions of multichannel messages on behalf of our clients every day.

 

 

We offer the following interactive services:

 

Outbound Proactive Notifications and Mobility empower enterprises to reach out in real time, generate stronger engagement and improve the customer experience. By learning, storing and using user preferences and behaviors, our clients can personalize automated notifications to deliver exactly what their customers want in their preferred channel. We provide customized voice, email, text/SMS and machine-to-machine messaging on behalf of our clients, delivered with personalized and contextual information directly to phones, email and all mobile devices. We are a leading provider of these services in the utility, healthcare, retail pharmacy and K-12 education markets in the U.S.

Frost & Sullivan awarded West with the 2015 North American Product Leadership Award in recognition of our solutions in the contact center market for automated notifications.

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Inbound IVR & Self-Service includes integrated hosted routing, touch-tone, direct dialogue and natural language speech solutions. Examples of self-service applications used by our clients include answer supervision and routing, accessing account balances, activation of credit cards , placing orders, answering frequently asked questions and stop/start service. In addition to providing information and enabling transactions, our solutions enable clients to track their customers’ interactions across channels and devices in order to provi de a more efficient interaction.

 

Cloud Contact Center allows our clients to coordinate and more efficiently manage agents in multiple call centers with greater control, flexibility and cost-effectiveness. Our system allows for easy orchestration of new and existing communication channels to route conversations to skilled representatives anywhere in the world with the context and customer information that today’s consumer expects. Our solution integrates within a client’s current technology environment, eliminating the expense and effort of replacing existing technologies.

 

Web includes the design and development of websites, including the content development, administration and management.

 

Mobile includes the design, development and management of mobile applications to enable the delivery of messaging to a mobile device.

 

Professional Services includes network management, application design, speech science and usability testing, customer journey mapping, strategic account support and complex business intelligence and data analytics.

Specialized Agent Services

We provide our clients a combination of highly skilled subject matter experts with proven analytics and technology to provide solutions for the fast-growing healthcare market. We believe we are the leading provider of healthcare advocacy products and services to employees of large organizations. We also help health insurance payers, third-party administrators and self-insured employers improve cash flow and reduce healthcare costs by identifying and recovering overpaid and third-party liability claims. Additionally, we offer business-to-business sales across multiple vertical markets with a focus on increasing our clients’ market share and improving customer relationships. We offer the following specialized agent services:

 

Healthcare Advocacy. Our healthcare advocacy services are designed to make healthcare easier for the over 11,500 organizations and their employees and members that we serve nationwide. Our solutions are designed to leverage a unique combination of personal, compassionate support from healthcare experts using powerful medical data analytics and a proprietary technology platform, including mobile solutions, to engage people in their health and well-being. Our members enjoy a personalized concierge service that addresses clinical, administrative, wellness and behavioral needs. We believe our clients benefit from high levels of engagement, improved employee productivity and health, and reduced medical costs, while simultaneously simplifying and upgrading their health benefit offering. Additional services include wellness, employee assistance and work/life services, pricing transparency, NurseLine, biometrics screenings and chronic care solutions, among others. We entered this market through the acquisition of Health Advocate™, Inc. (“Health Advocate”) in June 2014.

 

Cost Management. As a leading national provider of healthcare cost containment solutions, we help health insurance payers, third-party administrators and self-insured organizations improve cash flow and claims payment accuracy while reducing medical and administrative expenses. We do this by providing a number of solutions across the claims payment continuum, including pre-payment claims integrity (or claims accuracy) services, post-payment claims integrity and recovery services, subrogation/third-party liability identification and recovery services, and survey services. Our investigative and survey services gather information so payers/administrators have the information they need to pay claims accurately the first time. Our data analytics expertise, long-standing client partnerships and innovative solutions allow for increased dollars saved and recovered, which we believe drives down the overall cost of healthcare.

 

Revenue Generation. We are one of the nation’s leading providers of business-to-business sales and account management services. Leveraging our three decades of experience, we use a consultative, analytically driven approach to design and implement customized sales solutions for each partner. Our associates follow a sophisticated sales methodology and use a tailored, multichannel approach to effectively engage with customers in multiple business markets. From working as a team with our partners’ outside sales teams, to delivering revenue in assigned accounts, our revenue generation solutions help our clients drive incremental sales, increase market share and strengthen relationships with their customers.

Market Opportunity

Consistent with our investment strategy, we have and will continue to target new and complementary markets that leverage our depth of expertise in technology-enabled communication services. As we continue to increase the variety of services we provide, we intend to pursue opportunities in markets where we are able to leverage our technology capabilities and industry expertise. We believe

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our strongest growth opportunities will come from UCaaS, safety services and interactive services. These businesses serve large, fast-growing markets with relatively predictable and steady growth, and are characterized by recurring, valuable transactions and strong margin profiles.

Unified Communications Services

The market for cloud-based UCaaS worldwide was approximately $13 billion in 2016 and is expected to grow at a compound annual growth rate (“CAGR”) of 15% through 2020 according to Gartner.

We are and have been the leading global provider of conferencing services since 2008 based on revenue, according to Wainhouse Research. The market for worldwide audio and web conferencing is large and mature. According to Wainhouse, in 2016, the worldwide audio conferencing market had revenue of approximately $3.6 billion and the market for standalone worldwide web conferencing was approximately $2.5 billion.

Wainhouse expects revenue growth in the mid-teens for web conferencing that is integrated with UC services over the next four years. This market had revenue of approximately $1 billion in 2016.

Safety Services

The market for safety services continues to be an attractive opportunity. Government agencies and other public safety organizations are increasingly prioritizing funding for upgrading traditional 9-1-1 services to leverage new functionality and ensure dependable delivery.

Each city, county and state in the U.S. is expected to implement changes to its 9-1-1 systems and manage the evolution to NG9-1-1 technologies in the manner most appropriate for the community’s needs. Most municipalities are currently in the process of planning or modernizing their 9-1-1 systems. As communities across the U.S. upgrade outdated 9-1-1 systems to NG9-1-1 platforms, we believe our suite of services is best suited to capture the demand. Frost & Sullivan expects the total NG9-1-1 market to grow from approximately $100 million in 2015 to over $460 million by 2021, a 29% CAGR.

Interactive Services

According to Gartner and Frost & Sullivan, the addressable market for the solutions we provide in Interactive Services, including cloud contact center; SMS/mobile apps; IVR and outbound notifications; and customer management services, in North America and Western Europe was approximately $11 billion in 2016. Industry analysts believe growth is being driven by a number of factors, including the accelerating product and technology innovation cycles leading to greater adoption of customer data analytics, self-service functions and multichannel interaction across services and consumer devices.

Technology, Industry and Societal Trends

We also believe that we are well positioned to take advantage of rapidly growing markets such as healthcare, as well as emerging technology, industry and societal trends such as IP infrastructure, UC, migration to cloud-based solutions, mobility, IoT, consumer’s desire for personalized experiences, analytics or “Big Data,” globalization, a growing remote workforce and video.

Enterprises continue to shift business applications to the cloud. According to Gartner: “As premise-based telephony infrastructure reaches end of life, organizations of all sizes will increasingly evaluate cloud telephony solutions as a preferred option to purchasing another premise-based platform.” Gartner also predicts that by 2020 over 90% of enterprise voice calls in the digital workplace will originate from collaboration applications, up from less than 30% today. We see opportunities to take advantage of this transition with our UCaaS line of business.

Continued focus by companies on meeting the needs of more demanding consumers who want self-service and a better customer experience is propelling growth in our cloud-based customer engagement solutions like those offered by our interactive services line of business. Mobile location-based services and marketing continue to grow rapidly. We believe this “mobile-centric” mindset and the use of contextual mobile advertising and customer service will drive additional growth opportunities.

The IoT is expected to grow rapidly over the next several years. Industry experts estimate that there were approximately 6 billion devices connected to the Internet in 2016, growing to an estimated 20 to 30 billion devices by 2020. We see opportunities to leverage our technology to take advantage of this growth with our Safety Services and Interactive Services reportable segments.

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We believe the he althcare market provides us with opportunities to leverage our technology capabilities across our lines of business. We currently serve healthcare providers/health systems, health plans/payers, self-insured employers, pharmaceutical companies and retail ph armacies. As every sector of healthcare moves to value-based reimbursement, each is seeking new strategies, coupled with technology, to drive an enhanced consumer experience. Healthcare consumers are being compelled to take a more active role in managing t heir health and healthcare spend. Expanded use of communication tools and technologies that cater to consumer needs are expected to continue to grow. We have communication technologies, clinical agent support services and analytics to deliver a better, mor e efficient healthcare consumer experience. The focus of our healthcare practice is to provide healthcare organizations with patient-centered communication solutions that are self-serving and automated using communication channels that include voice, text, email and mobile technologies. Our communication solutions are supporte d by robust analytics and comple mented with clinical agent support.

Our Competitive Strengths

We serve clients who place a premium both on the solutions we provide and our industry expertise. We believe the following strengths have helped us to establish a leading competitive position in the markets we serve and enable us to deliver operational excellence to clients.

Broad Portfolio of Product Offerings. Our technology platforms combined with our experience and operational expertise allow us to provide a broad range of service offerings for our clients. Our ability to provide our clients with a reliable, efficient and cost-effective alternative to process high volume, complex voice and data transactions helps them to improve their business and better serve their users and customers.

Innovative Application of Technology Enables Scalable Operating Model. Our strengths across technology and multiple channels allow us to efficiently process transactions for our clients. We cross-utilize our assets and shared service platforms, providing scale and flexibility to handle significant transaction volume, offer superior service and develop new offerings effectively and efficiently. We foster a culture of innovation and have issued approximately 395 patents and have approximately 245 pending patent applications for technology and processes we have developed. We continue to invest in new technologies and to enhance our portfolio with patented technologies, which allow us to deliver premium services to our clients.

Strong Client and Partner Relationships. We have built long-lasting, integral relationships with our clients who operate in a broad range of industries. Our ten largest clients in 2016 had an average tenure with us of over 15 years. In 2016, our 100 largest clients represented approximately 43% of our revenue and approximately 35% of our revenue came from clients purchasing multiple service offerings. We also have strong relationships with partners in many of our lines of business that significantly enhance our go-to-market sales and distribution capability. Some of our partners provide complementary technology that we integrate with our core service offerings to deliver higher value to our clients. In many of these cases, we are also able to leverage our partners’ sales and distribution capabilities. Other partners resell our services, private label our services under their brand, or integrate our services into their core products.

Operational and Service Excellence. We achieve the results our clients are seeking through increased productivity, reliability and scale. Our ability to improve upon our clients’ communications processes is an important aspect of our value proposition. We leverage our technology infrastructure and shared services platforms to manage higher value transactions and achieve cost savings for our clients and ourselves.

Ability to Optimize Cash Flows from Continuing Operating Activities. Our business generates significant cash flows from continuing operating activities. In 2016, we generated $428.3 million in cash flows from continuing operating activities. We used these funds to repay $191.1 million of long-term debt, invest $126.6 million in capital expenditures, acquire two companies, repurchase one million shares of our common stock for $22.0 million, pay $74.7 million in dividends to shareholders and reinvest in our business. In 2017, we expect to generate between $380 million and $420 million in cash flows from continuing operating activities. We expect to use this cash for dividends, to pay down debt, make acquisitions and for stock buybacks.

Experienced Management Team with Track Record of Growth. Our senior leadership has an average tenure of approximately 15 years with us and has delivered strong results through various market cycles, both as a public and a private company. As a group, this team has created a culture of superior client service and growth in revenue and profitability. Our team has also established a long track record of successfully acquiring and integrating companies to drive growth.

As demand for outsourced services grows with greater adoption of our technologies and services, we believe our long history of delivering results for our clients combined with our scale and the investments we have made in our businesses provide us with a significant competitive advantage.

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Our Business Strategy

Our strategy is to identify growing markets where we can deploy our existing assets, experience and expertise to strengthen our competitive position. Our strategy is supported by our commitment to superior client service, operational excellence and market leadership. Key aspects of our strategy include the following:

Expand Relationships with Existing Clients. We are focused on deepening and expanding relationships with our existing clients by delivering value in the form of reduced costs, improved customer relationships and enhanced revenue opportunities. Approximately 35% of our revenue in 2016 came from clients purchasing multiple service offerings from us. We intend to leverage our large global sales team and diversified client base to continue to cross-sell our services. We seek out clients with plans for growth and expect to participate in that growth along with our clients. As we demonstrate the value that our services provide, often starting with a single service, we are frequently able to expand the size and scope of our client relationships.

Develop New Client Relationships. We will continue to focus on building long-term client relationships across a wide range of industries to further diversify our revenue base. We target clients in industries in which we have expertise or other competitive advantages and an ability to deliver a wide range of solutions that have a meaningful impact on their business. By continuing to add new long-term client relationships in large and growing markets, we believe we enhance the stability and growth potential of our revenue base.

Capitalize on Select Global Opportunities. In addition to expanding and enhancing our existing relationships domestically, we will selectively pursue new client opportunities globally. Our expertise in collaboration services has allowed us to penetrate international markets. In 2016, approximately 20% of our consolidated revenue was generated outside of the U.S. We believe our distribution capabilities, including approximately 304 international sales personnel, provide us with the opportunity to drive incremental revenue. We anticipate that the 2015 acquisition of U.K.-based Magnetic North and the 2016 acquisitions of Synrevoice and 911 ETC will drive additional opportunities internationally.

Continue to Enhance Leading Technology Capabilities. We believe our service offerings are enhanced by our superior technology capabilities and track record of innovation, and we will continue to target services where our reliability, scale and efficiencies enable us to address our clients’ communication issues or enhance the results of their communications.

Continue to Enhance Our Market Position Through Selective Acquisitions. Since 2002, we have completed 35 acquisitions of businesses and technologies with a total value of approximately $3.0 billion. We will continue to expand our suite of communication services across industries, geographies and end-markets. While we expect this will occur primarily through organic growth, we also expect to continue to acquire assets and businesses that strengthen our value proposition to clients, differentiate us from our competitors and drive value to us. We have developed an internal capability to source, evaluate and integrate acquisitions that we believe has created value for shareholders.

Sales and Marketing

Generally, our sales personnel target growth-oriented clients and selectively pursue those with whom we have the greatest opportunity for long-term success. Their goals are both to maximize our current client relationships and expand our client base. To accomplish these goals, we attempt to sell additional services to existing clients and to develop new relationships. We generally pay commissions to sales professionals on both new sales and incremental revenue generated from existing clients.

At December 31, 2016, we had approximately 724 sales and marketing personnel in our Unified Communications Services reportable segment, approximately 49 sales and marketing personnel in our Safety Services reportable segment, approximately 103 sales and marketing personnel in our Interactive Services reportable segment and approximately 97 sales and marketing personnel in our Specialized Agent Services reportable segment.

Competition

Unified Communications Services

The UCaaS market is a highly competitive and fast-growing market characterized by a large number of service providers entering the mid-market to enterprise market with proprietary versions of hosted or “cloud-based” UC service offerings, as well as small to medium sized business ("SMB") targeting competitors who compete more aggressively on price. The principal competitive factors include, among others, experience in implementing and designing enterprise level networks, on-demand and integrated hosted communications and collaboration platforms and expertise in integration of a broad variety of UC applications both in implementation and professional services consultation. Our principal competitors in this industry at the enterprise level include Microsoft, AT&T, Verizon, BT, ShoreTel and Google for hosted services solutions and IBM, Hewlett-Packard, Verizon Business and regional integrated

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service vendors for professional services. We also face competition from clients who implement premise-based solutions fro m providers like Avaya, Cisco and ShoreTel. The SMB market has hundreds of regional competitors with a few, such as 8x8 and RingCentral , that compete on a national scale.

The principal competitive factors in the collaboration services market include range of service offerings, global capabilities, price and quality of service. Our principal competitors include AT&T, Verizon, PGi, BT Conferencing, Cisco Systems, Citrix, Adobe and other premise-based solution providers.

The principal competitive factors in the telecom services market include network performance, coverage, breadth of interconnections, pricing and the ability to support converging technologies (TDM or IP). Competitors in this market include Inteliquent, Peerless Network and a limited number of CLECs.

Safety Services

The market for safety services is competitive. The principal competitive factors in wireline and wireless safety services are 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 ILEC and CLEC markets generally include internally developed solutions as well as Comtech Telecommunications (formerly TeleCommunications Systems). Competitors in the mobility (wireless, VoIP, OTT, cable, alarm) market include Comtech Telecommunications and competitors in the VoIP services market include Bandwidth.com, Inc.

Competition in the public safety desktop market is driven by features, functionality, ease of use, price, reliability, upgradability, capital replacement and upgrade policies and customer service and support. Competitors in this market include Airbus DS Communications and Zuercher Technologies (formerly EmergiTech).

Interactive Services

Within interactive services, the alerts and notifications market is highly competitive and fragmented, characterized by a large number of vertically focused competitors addressing specific industries, including healthcare, travel, education, credit collection and government. The principal competitive factors in this market are speed of delivery and implementation, the ability to deliver complex and integrated communications across multiple channels, the effective use of analytics, the capacity and scalability of processing those transactions reliably and the cost of delivering solutions.

In the IVR self-service and cloud contact center market, competition ranges from large integrators and telecommunications companies to niche providers focused on singular products and software companies. Competitors in this market include Genesys, InContact, Nuance, AT&T and Verizon Business.

Specialized Agent Services

The principal competitive factors in the specialized agent services markets in which we participate include, among others, quality of service, industry-specific expertise and price. Competitors in the healthcare advocacy market include health insurance plan providers as well as companies that specialize in specific programs we offer, such as employee assistance plans or wellness programs. Competitors in the cost management industry include a company’s internal operations, Cotiviti, The Rawlings Group and Optum. Competition in the business-to-business services market generally comes from companies that perform these activities in-house.

Our Clients

Our clients vary by line of business and operate in a wide range of industries, including telecommunications, retail, financial services, government, education, utilities, technology and healthcare. We have tens of thousands of clients that use our services, ranging from small businesses to Fortune 100 clients.

Although we serve many clients, we derive a significant portion of our revenue from relatively few clients. In 2016, our 100 largest clients accounted for approximately 43% of our consolidated revenue. No client accounted for 10% or more of our consolidated revenue in 2016.

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Our Personnel

As of December 31, 2016, we had approximately 10,720 total employees, of which approximately 3,790 were employed in the Unified Communications Services reportable segment, approximately 1,020 were employed in the Safety Services reportable segment, approximately 1,180 were employed in the Interactive Services reportable segment, approximately 3,490 were employed in the Specialized Agent Services reportable segment and approximately 1,240 were employed in corporate and shared service support functions. Of the total employees, approximately 2,250 were international employees.

Employees of our subsidiaries in France and Germany are represented by local works councils. Employees in France and certain other countries are also covered by the terms of industry-specific national collective agreements. Our employees are not represented by any labor organization in the United States. We believe that our relations with our employees and the labor organizations identified above are good.

Our Technology and Systems Development

Technology is critical to our business and we believe the scale and flexibility of our platforms is a competitive strength. Our software and hardware systems, as well as our network infrastructure, are designed to offer high-quality, integrated solutions. We have made significant investments in reliable hardware systems and integrated commercially available software when appropriate. Our technology platforms are designed to handle greater transaction volume than our competitors. Because our technology is client focused, we often rely on internally developed software systems to customize our services. As of December 31, 2016, we employed a staff of approximately 2,580 professionals in our technology departments.

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 and scalable. Our facilities and systems are designed to maximize system availability and minimize the possibility of service disruption.

We have network operations centers that operate 24 hours a day, seven days a week and use both internal and external systems to effectively operate our equipment, people and sites. We interface directly with telecommunications providers and have the ability to manage capacity in real time. Our network operations centers monitor the status of elements of our network on a real-time basis. All functions of our network operations centers have the ability to be managed at backup centers.

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. At December 31, 2016, we owned approximately 395 registered patents and approximately 298 registered trademarks including several patents and trademarks that we obtained as part of our past acquisitions. Certain of our patents will expire in 2018. From time to time, we may sell a portion of our patent portfolio when we have concluded that the benefit of the sale outweighs the benefits to our business of continuing to maintain exclusive ownership of the applicable patents. We do not expect these patent expirations or sales to have a material adverse effect on our business. Trademarks continue as long as we actively use the mark. We have approximately 245 pending patent applications pertaining to technology relating to transaction processing, call center and specialized agent management, data collection, reporting and verification, collaboration and credit card processing. New patents that are issued have a life of 20 years from the date the patent application is initially filed. We believe the existence of these patents and trademarks, along with our ongoing processes to add additional patents and trademarks to our portfolio, may be a barrier to entry for specific products and services we provide and may also be used for defensive purposes in certain litigation.

Our International Operations

In 2016, revenue attributed to foreign countries was approximately 20% of our consolidated revenue and long-lived assets attributed to foreign countries were approximately 7% of our total consolidated long-lived assets.

In 2016, we operated out of facilities in the U.S. and approximately 19 foreign jurisdictions in North America, EMEA and Asia-Pacific.

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.

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Government Regulation

Privacy

We 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 and Health Information Technology for Economic and Clinical Health Act (“HITECH”) 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.

In addition to healthcare information, our databases contain personal data of our customers and clients’ customers, including credit card and other personal information. Federal law requires protection of customer proprietary network information (“CPNI”) applicable to our clients. Federal and state laws in the U.S. as well as those in the European Union require 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, and have prepared plans to comply with these notification rules should a breach occur. Any failures in our security and privacy measures, however, could adversely affect our business, financial condition and results of operations. See the risk factors related to security breaches in “Risk Factors.”

Telecommunications

Our Safety Services, Unified Communications Services and Interactive Services reportable segments are subject to significant regulation by the Federal Communications Commission (“FCC”) and state utility commissions. For some services, we are required to maintain licenses with the FCC and/or state utility commissions.

With respect to Safety Services, our wholly-owned indirect subsidiary, West Safety Communications Inc. (formerly Intrado Communications Inc.) (“West Safety Communications”) is subject to various regulations as a result of its status as a regulated CLEC, and/or an emergency services provider, and/or an inter-exchange carrier, including state utility commissions’ regulations and FCC regulations adopted under the Telecommunications Act of 1996, as amended. West Safety Communications holds licenses from public utility commissions in 45 states and the District of Columbia. Its wholly owned affiliate, West Safety Communications of Virginia Inc. holds a license in Virginia. Also, under the New and Emerging Technologies 9-1-1 Improvement Act of 2008 (NET911 Act, P.L. 11-283, 47 U.S.C. 609) and its attendant FCC regulations (WC Docket No. 08-171, Report and Order dated October 21, 2008), West’s wholly owned subsidiary, West Safety Services, Inc. (“Intrado Inc.”), is required to provide access to VoIP telephony providers certain 9-1-1 and E9-1-1 elements.

On December 12, 2013, the FCC released a Report and Order (“9-1-1 Order”), Improving 9-1-1 Reliability, Reliability and Continuity of Communications Networks, Including Broadband Technologies, FCC 13-158, requiring Covered 9-1-1 Service Providers (as defined in the 9-1-1 Order), among other things, to notify PSAPs within 30 minutes of discovering an outage and annually certify that the Covered 9-1-1 Service Provider has audited and identified critical 9-1-1 transmission and monitoring facilities and taken reasonable steps to ensure reliability. For the purpose of the annual certification, West Safety Communications may need cooperation from third party providers of network services to obtain relevant data. The providers West Safety Communications relies on may not be able to provide the necessary data or may not agree to provide the necessary data at a reasonable commercial rate.

On November 11, 2014, the FCC issued a Policy Statement and Notice of Proposed Rulemaking (“NPRM”), FCC 14-186, proposing to add additional 9-1-1 reliability requirements and to expand the scope of Covered 9-1-1 Service Providers to which the existing 9-1-1 reliability and outage notification rules apply. The NPRM also proposes certification of new Covered 9-1-1 Service Providers as well as notice and approval requirements when Covered 9-1-1 Service Providers change network configuration or discontinue service. If the rules are adopted, they could impact business operations and require costs associated with compliance.

On May 26, 2016, the FCC released a Report and Order (“Part 4 Order”), Order on Reconsideration, and Further Notice of Proposed Rulemaking (“Part 4 FNPRM”), FCC 16-63, adopting amendments to the outage reporting rules under Part 4 of the FCC’s rules concerning disruptions to communications and proposing additional outage reporting rules to address broadband network disruptions. The Part 4 Order, among other things, amends the reporting of wireless outages and expands what qualifies as a loss of communications to a PSAP. West Safety Communications may need cooperation from third-party providers to obtain relevant data required for compliance with the amended rules in the Part 4 Order and proposed rules in the Part 4 FNPRM, and the rules could impact business operations and require costs associated with compliance.

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The market in which our Safety Services business unit operates may also be influenced by legislation, regulation, and judicial or administrative determinations which seek to promote a national broadband plan, a na tionwide public safety network, next generation services, and/or competition in local telephone markets, including 9-1-1 service as a part of local exchange service, or seek to modify the Universal Service Fund (“USF”) program.

Through our wholly owned subsidiary West IP Communications, Inc. (“WIPC”), we provide interconnected VoIP services, which are subject to certain requirements imposed by the FCC, including without limitation, obligations relating to access to 9-1-1, Federal USF contributions, privacy, disability access, porting numbers and other requirements, even though the FCC has not classified interconnected VoIP services as telecommunications services. The regulatory requirements applicable to WIPC’s VoIP services could change if the FCC determines the services to be telecommunications services regulated under Part II of the Communications Act. In addition, many state regulatory agencies impose taxes and other surcharges on VoIP services. Applying these state taxes and surcharges to VoIP service can be challenging where the law has historically only been applied and interpreted for traditional telecommunications services. Certain states have recently taken the position that interconnected VoIP service can be regulated in the same manner as providers of traditional telecommunications services. The full impact of this issue on our business cannot be assessed and will not be resolved until the FCC definitely decides the regulatory classification and jurisdiction of interconnected VoIP service.

Federal laws regulating the provision of traditional telecommunications services may adversely impact our collaboration business. Our collaboration business has submitted forms to the Universal Service Administrative Company (“USAC”) and paid federal USF and similar fees since August 1, 2008, based on our good faith interpretation of the revenue reporting requirements and classification of our services. To the extent that USAC or the FCC disagrees with the methodology or classification of our services, we may be subject to additional costs and obligations applicable to more traditional telecommunications service providers. The FCC released an Order on December 16, 2016 granting Cisco WebEx LLC’s (“Cisco”) request for review of an audit of Cisco’s 2009 revenues by USAC in In the Matter of Universal Service Contribution Methodology Request for Review of a Decision of the Universal Service Administrator by Cisco WebEx LLC , WC Docket No. 06-122, DA 16-1401. We are reviewing the Cisco Order for potential impact to our business and the assessment and payment of USF.

International laws regulating the provision of VoIP, conferencing, Internet access, cloud-based communications services, and other communications services provided by the Unified Communications Services segment vary by country, and are often unsettled or more burdensome than those imposed in the U.S. Some countries have laws that prohibit the provision of certain VoIP offerings and others have laws that impose stringent licensing requirements on providers of communication services. It is often unclear in international locations how laws that have been historically applied to traditional telecommunications services will be applied to VoIP and IP-based communications services. The effect of any future laws or any changes in interpretation or enforcement of existing laws could negatively impact our operations and impose compliance costs in international locations.

Through our wholly owned indirect subsidiary, West Telecom Services, LLC (formerly HyperCube Telecom Services, LLC) (“West Telecom Services”), we act as a telecommunications carrier and provider of switching services throughout the United States. West Telecom Services routes communications traffic to all other carriers, including wireless, wireline, cable telephony and VoIP companies. West Telecom Services has obtained licenses to offer telecommunications services from the FCC and authorization to offer facilities-based and resold telecommunications services from state utility commissions in 47 states and the District of Columbia.

The FCC exercises regulatory authority over the pricing of the tandem transit and access services offered by West Telecom Services. On November 18, 2011, the FCC released a Report and Order and Further Notice of Proposed Rulemaking, FCC Release No. 11-161 (“FCC Order”) that comprehensively reforms the system under which regulated service providers compensate each other for the termination of interstate, intrastate, and local traffic. The FCC adopted bill-and-keep as the ultimate uniform, national methodology for all terminating telecommunications traffic exchanged with a local exchange carrier. Under bill-and-keep, the rate for exchanging terminating traffic is zero and terminating carriers look to their subscribers to cover the costs of providing termination services. The FCC Order did not address rate levels for tandem transit services.

The rules adopted by the FCC provide for a multi-year transition to a national uniform bill-and-keep framework. Carriers were required to cap most terminating interstate and intrastate intercarrier compensation rate elements as of December 29, 2011. To reduce the disparity between interstate and intrastate terminating end office rates, carriers were required to bring intrastate rates, where they were higher than interstate rates, to the level of interstate rates in two steps, the first by July 1, 2012, and the second by July 1, 2013. Thereafter, carriers such as West Telecom Services must reduce their interstate and intrastate termination and transport rates to bill-and-keep by July 2018.

As part of the transition of the intercarrier compensation system to bill-and-keep, the FCC also established in the FCC Order a prospective intercarrier compensation framework for traffic exchanged over PSTN facilities that originates and/or terminates in IP format (“VoIP-PSTN traffic”). The FCC found that where a providers’ interconnection agreement does not address the appropriate rate for such traffic, the default intercarrier compensation rate for all toll terminating and originating VoIP-PSTN traffic would be

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equal to interstate access rates, while the default intercarrier compensation rate for other VoIP-PSTN traffic would be the otherwise applicable reciprocal compensation rates. To collect the compensation for origi nating or terminating VoIP-PSTN traffic in IP traffic, a local exchange carrier, or its VoIP provider partner, must perform functions functionally equivalent to the switched access functions of non-VoIP-PSTN traffic performed by local exchange carriers. Th e FCC also addressed intercarrier compensation between wireline carriers and wireless providers in the FCC Order. Among other things, the FCC adopted bill-and-keep as the default methodology for all non-access traffic between wireless and wireline provider s.

In the Further Notice of Proposed Rulemaking adopted as part of the FCC Order, the FCC sought comment on the appropriate transition and recovery mechanism for the rate elements not reduced as part of the FCC Order, including originating access (including originating charges for 8YY traffic) and certain common and dedicated transport. The FCC also sought comment on the appropriate policy framework for IP-to-IP interconnection. We cannot predict the timing or outcome of these proposals.

Several states, industry groups, and other telecommunications carriers filed petitions for reconsideration with the FCC as well as petitions for review of the FCC Order in federal courts. The cases were consolidated for review before the U.S. Court of Appeals for the 10th Circuit. The 10th Circuit issued a decision in May 2014 that upheld the FCC Order. That decision was further appealed to the United States Supreme Court, and the petition for writ of certiorari was denied.

On April 25, 2012, the Commission issued a reconsideration of the FCC Order and revised the rate that local exchange carriers could recover for originating intrastate toll VoIP-PSTN traffic (regardless of whether the traffic originated and/or terminated in IP format). Specifically, the FCC directed that on and after July 1, 2014, local exchange carriers are permitted to tariff default access rates for such traffic equal to their then current interstate originating switched access rates.

In response to billing disputes between CLECs and large interexchange carriers concerning the VoIP symmetry rule adopted in the FCC Order, the FCC released a declaratory ruling on February 11, 2015, FCC 15-14, clarifying that the VoIP symmetry rule applies in a technology- and facilities-neutral manner and, under certain circumstances, allows CLECs partnering with an over-the-top ("OTT") VoIP provider to assess and collect access charges for end office (or local) switching. On November 18, 2016, the D.C. Circuit Court of Appeals vacated and remanded the FCC’s declaratory ruling, finding that the FCC Order does not support the FCC’s conclusion that CLECs provide the “functional equivalent” of end-office switching when partnering with OTT VoIP providers. This issue could negatively impact the revenues and operations of West Telecom Services if it is not able to enforce all or a portion of its access tariffs with respect to VoIP or other types of calls.  

On September 30, 2016, AT&T Services (“AT&T”) filed a petition requesting that the FCC forbear from the rules that permit tariffing of all tandem switching and tandem-switched transport charges on all traffic to or from ILECs engaged in access stimulation (even when the tandem provider is not involved in access stimulation) and from the rules permitting tariffed charges for toll-free database queries. West Telecom Services and Consolidated Communications Companies filed a joint motion for summary denial and opposition to AT&T’s petition on December 2, 2016. If granted, AT&T’s proposed forbearance could cause significant disruption and uncertainty in the tandem services market in which West Telecom Services operates.

There are initiatives in several state legislatures to lower intrastate access rates, aligning them with interstate rates, some of which may be affected by the FCC Order. Depending on whether we are a net collector or a net payer of any adjusted rate, such rate adjustments could have a negative effect on us.

On November 13, 2013, the FCC issued a Report and Order, In re Rural Call Completion, Report and Order and Further Notice of Proposed Rulemaking, FCC 13-135, mandating, among other things, that providers of long-distance voice service that make the initial long-distance call path choice for more than 100,000 domestic retail subscriber lines record and report certain data related to call completion on a quarterly basis. WIPC and West Telecom Services could be subject to enforcement action in the event that the FCC decides that their rural call completion performance is inadequate or they were not compliant with the Order.

On November 2, 2016, the FCC issued a Report and Order, In the Matter of Protecting the Privacy of Consumers of Broadband and Other Telecommunications Services , FCC 16-148, expanding consumer privacy laws and regulations for certain voice and broadband providers to protect customer personal information, which includes without limitation CPNI and personally identifiable information. If the new customer PI rules are permitted to go into effect, they will significantly alter the way covered providers collect, use and protect their subscribers’ personal information and could have a material adverse effect on our business and costs associated with compliance.

The FCC has recently intensified its efforts to eliminate fraudulent or abusive network traffic. West Telecom Services cooperates with the FCC and other authorities to investigate potential unlawful activities on its network and to minimize network vulnerabilities. Fraudulent or abusive network practices and the prevention, detection and investigation of such activity could have a material adverse effect on our business and costs associated with compliance.  

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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. Any delays in implementation of the regulatory requirements could have a material adverse effect on our business, financial condition and results of operations. See the risk factors related to the effects of such regulation on our business in “Risk Factors.”

Teleservices

Teleservices sales practices are regulated at both the federal and state level. The Telephone Consumer Protections Act of 1991 (“TCPA”), authorized and directed the FCC to regulate the telemarketing industry. The FCC set forth rules to implement the TCPA. Most significantly, the TCPA prohibits the use of automated dialers to call cellular telephones without consent of the consumer and the potential liability for violations of this provision is substantial. In 2013, several United States District Courts held that the defendant violated the TCPA when it used an automated dialing device to call a residential line that had been converted to a VoIP service or used an automated dialing device to call a cell phone number where appropriate consent had been obtained but the number had since been reassigned by the carrier to a third party without the knowledge of the caller. In addition, some United States District Courts in 2013 held calls dialed in a mode which required an employee to launch each call from their desktop could still be considered automated calls and a violation of the TCPA because the equipment used to make the calls had the “capacity” to act as an automatic telephone dialing system. In July 2015, the FCC issued a declaratory Ruling and a clarification making the rules under the TCPA more restrictive. We took necessary steps to address the Ruling by conducting training, reviewing dialing systems, and modifying contract language to ensure compliance. Violations of the TCPA carry a potential penalty of $500-$1,500 for each time a number is dialed in violation of the TCPA through a consumer private right of action. These rules, which have been amended over time, also place other restrictions on the methods and timing of telemarketing sales calls, including:

 

restrictions on calls placed by automatic dialing and announcing devices;

 

limitations on the use of predictive dialers for outbound calls;

 

institution of a National “Do-Not-Call” Registry in conjunction with the Federal Trade Commission (“FTC”);

 

guidelines on maintaining an internal “Do-Not-Call” list and honoring “Do-Not-Call” requests;

 

restricts the use of prerecorded message telemarketing calls/text messages;

 

requirements for transmitting caller identification information; and

 

restrictions on facsimile advertising.

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 to consumers and portions of some inbound telemarketing calls. The TSR generally:

 

prohibits a variety of deceptive, unfair or abusive practices in telemarketing sales;

 

subjects a portion of inbound calls to additional disclosure requirements;

 

prohibits the disclosure or receipt, for consideration, of unencrypted consumer account numbers for use in telemarketing;

 

mandates additional disclosure statements relating to certain products or services, and certain types of offers, especially those involving negative option features;

 

establishes additional authorization requirements for payment methods that do not have consumer protections comparable to those available under the Electronic Funds Transfer Act or the Truth in Lending Act, or for telemarketing transactions involving pre-acquired account information and free-to-pay conversion offers;

 

institutes a National “Do-Not-Call” Registry;

 

provides guidelines on maintaining an internal “Do-Not-Call” list and honoring “Do-Not-Call” requests;

 

limits the use of predictive dialers for outbound calls; and

 

restricts the use of pre-recorded message telemarketing calls.

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 and individual state “Do-Not-Call” registries. 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

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which have securities that are listed on a national securities exchange. In addition, employees who are involved in certain industry-specific sales activity, such as activity regarding insu rance or mortgage loans, are required to be licensed by various state commissions or regulatory bodies and to comply with regulations enacted by those bodies.

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 U.S. government and its agencies.

We specifically train our marketing representatives to handle calls in an approved manner. While we believe we are in compliance in all material respects with all federal and state telemarketing regulations, compliance with all such requirements is costly and time-consuming. In addition, notwithstanding our compliance efforts, any failure on our part to comply with the registration and other legal requirements applicable to companies engaged in telemarketing activities could have an adverse effect on our business. We could become subject to litigation by private parties and governmental bodies, alleging a violation of applicable laws or regulations, which could result in damages, regulatory fines, penalties and possible other relief under such laws and regulations and the accompanying costs and uncertainties of such litigation and enforcement actions.

 

EXECUTIVE OFFICERS OF REGISTRANT

Set forth below is information relating to our executive officers. There are no family relationships between any of our executive officers and there are no arrangements or understandings between any of our executive officers and any other person pursuant to which any of them was elected an officer, other than arrangements or understandings with our officers acting solely in their capacities as such. Our executive officers serve at the pleasure of our Board of Directors.

Our executive officers at January 31, 2017, were as follows:

 

Name

 

Age

 

Position

Thomas B. Barker

 

62

 

Chairman of the Board and Chief Executive Officer

Ronald R. Beaumont

 

68

 

President—Telecom Services and President—Safety Services

Nancee R. Berger

 

56

 

President and Chief Operating Officer

J. Scott Etzler

 

64

 

President—Unified Communications Services and President—Revenue Generation Services

Jon R. Hanson

 

50

 

President—Interactive Services

Rod J. Kempkes

 

51

 

Chief Administrative Officer

Jan D. Madsen

 

53

 

Chief Financial Officer and Treasurer

David C. Mussman

 

56

 

Executive Vice President, Secretary and General Counsel

Nicole B. Theophilus

 

46

 

Executive Vice President—Chief Human Resources Officer

David J. Treinen

 

60

 

Executive Vice President—Corporate Development and Planning

 

Thomas B. Barker is the Chairman of the Board and Chief Executive Officer of West Corporation. Mr. Barker joined West Corporation in 1991 as Executive Vice President of West Interactive Corporation. He was promoted to President and Chief Operating Officer of West Corporation in March 1995. He was promoted to President and Chief Executive Officer of the Company in September 1998 and served as our President until January 2004. Mr. Barker has been a director of the Company since 1997 and Chairman of the Board since March 2008.

Ronald R. Beaumont served as Chief Executive Officer of HyperCube LLC since its formation in 2005 until HyperCube was acquired by us in March 2012. Mr. Beaumont has served as President of HyperCube, which was renamed West Telecom Services in 2015, since acquired by West. In January 2016, Mr. Beaumont was named President of West Safety Services.

Nancee R. Berger joined West Interactive Corporation in 1989 as Manager of Client Services. Ms. Berger was promoted to Vice President of West Interactive Corporation in May 1994. She was promoted to Executive Vice President of West Interactive Corporation in March 1995 and to President of West Interactive Corporation in October 1996. She was promoted to Chief Operating Officer in September 1998 and to President and Chief Operating Officer in January 2004.

J. Scott Etzler joined InterCall, Inc. in June 1998 as President and Chief Operating Officer and was Chief Executive Officer from March 1999 until InterCall was acquired by West in May 2003. Mr. Etzler has served as President of InterCall, which was renamed West Unified Communications Services in 2016, since the acquisition in May 2003. In 2016, Mr. Etzler was also named President of West Revenue Generation Services.

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Jon R. (Skip) Hanson joined us in 1991 as a Busine ss Analyst. From 1999 until 2008, he served as Chief Administrative Officer and Executive Vice President of Corporate Services. From 2008 until 2012, Mr. Hanson was President of West Customer Management Group. In 2013, Mr. Hanson was named President of Wes t Interactive Corporation and since 2014, has served as President of West Interactive Services.

Rod J. Kempkes has served as Chief Administrative Officer since July 2012. Mr. Kempkes joined West in 1989 as part of the finance group. Throughout his tenure at West, Mr. Kempkes has held various executive roles, including President of West Direct Inc. from March 2009 until May 2012.

Jan D. Madsen joined West Corporation in December 2014 and was named Chief Financial Officer and Treasurer in 2015. Prior to joining West, Ms. Madsen served as Vice President for Finance for Creighton University from September 2010 to December 2014. Prior to joining Creighton University, Ms. Madsen served as a consultant and, prior thereto, as Chief Financial Officer for the Financial Services Division of First Data Corporation.

David C. Mussman joined West Corporation in January 1999 as Vice President and General Counsel and was promoted to Executive Vice President in 2001. Prior to joining West, Mr. Mussman was a partner at the law firm of Erickson & Sederstrom. In 2006, Mr. Mussman became Secretary of the Company.

Nicole B. Theophilus joined West in April 2016 as Chief Human Resources Officer. Prior to joining West, Ms. Theophilus served as head of Human Resources for ConAgra, Inc. from November 2009 to August 2015, after initially joining ConAgra in 2006 as its Vice President & Chief Employment Counsel. Prior to joining ConAgra, Ms. Theophilus practiced law, most recently at Blackwell Sanders Peper Martin, LLP (now known as Husch Blackwell).

David J. Treinen joined West Corporation in 2007 as Executive Vice President, Corporate Development and Planning. Prior to joining West, he served as Executive Vice President, Corporate Development and Strategy for First Data Corporation from September 2006 until September 2007. Prior to that assignment, Mr. Treinen held a number of responsibilities with First Data Corporation including Senior Vice President from February 2006 to August 2006, President of First Data Government Solutions from April 2004 to January 2006 and Managing Director of eONE Global, a First Data Corporation subsidiary, from November 2000 through March 2004.

 

 

Item 1A.

RISK FACTORS

The review of potential financial and strategic alternatives by our Board of Directors may disrupt our business or result in significant transaction expenses and unexpected liabilities.

On November 1, 2016, the Company announced that its Board of Directors had initiated a process to explore and evaluate a wide range of financial and strategic alternatives to further enhance shareholder value. The pursuit of potential financial and strategic alternatives could result in the diversion of management’s attention from our existing business; failure to achieve financial or operating objectives; incurrence of significant transaction expenses; failure to retain key personnel, customers, or contracts; and volatility in the Company’s stock price. There can be no assurance that the review process will result in a sale transaction or other strategic alternative of any kind or that the process will not have an adverse impact on our business.   We do not intend to discuss or disclose developments with respect to the process unless we determine further disclosure is appropriate or required. As a consequence, perceived uncertainties related to the future of the Company may result in the loss of potential business opportunities and may make it more difficult for us to attract and retain qualified personnel and business partners.

We may not be able to compete successfully in our highly competitive industries, which could adversely affect our business, results of operations and financial condition.

We face significant competition in many of the markets in which we do business and expect that this competition will intensify. The principal competitive factors in our business include: range of service offerings, global capabilities and price and quality of services. The trend toward international expansion by foreign and domestic competitors and continuous technological changes may erode profits by bringing new competitors into our markets and reducing prices. Our competitors’ products, 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.

We face technological advances, which have contributed to pricing pressures in the conferencing industry and could result in the loss of customer relationships. Competition in the web and video conferencing services arenas continues to increase as new vendors enter the marketplace and offer a broader range of collaboration solutions through new technologies, including, without limitation, VoIP, on-premise, PBX, UC equipment and mobile solutions.

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We also face risks from technological advances that we m ay not be able to successfully address. Some of our competitors have substantially greater personnel and financial resources than we do.

There are services 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 depend on third parties for certain services we provide and 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 price increases of our services, or any significant interruption in voice or data services, could adversely affect our business, results of operations and financial condition. In addition, if the providers of telecommunications have outages it may have a material client impact. We may not have the contractual right to be indemnified for all harm caused by an outage of our carriers and we may not be able to move the traffic to alternative carriers.

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. Introduction of new methods and technologies brings corresponding risks associated with effecting change to a complex operating environment and, in the case of adding third-party services, results in a dependency on an outside technology provider. With respect to third party technology we use to support our services, some of which is provided by our competitors, the failure of such technology or the third party becoming unable or unwilling to continue to provide the technology could interfere with our ability to satisfy customer demands and may require us to make investments in a replacement technology, which could adversely affect our business, financial condition and results of operations.

Growth in our Unified Communications Services and Safety Services businesses depends in large part on continued deployment and adoption of emerging technologies.

Growth in our UC services business and our next generation 9-1-1 solution offering is largely dependent on customer acceptance of communications services over IP-based networks, which is still in its early stages. Continued growth depends on a number of factors outside of our control. Customers may delay adoption and deployment of IP communications solutions for several reasons, including available capacity on legacy networks, internal commitment to in-house solutions and customer attitudes regarding security, reliability and portability of IP-based solutions. In the Safety Services reportable segment, adoption may be hindered by, among other factors, continued reliance by customers on legacy systems, the complexity of implementing new systems and budgetary constraints. If customers do not deploy and adopt IP-based network solutions at the rates we expect, for these or other reasons, our business, results of operations and financial condition could be adversely affected. In addition, next generation 9-1-1 deployment introduces reliability challenges greater than those of our traditional 9-1-1 services. Outages may subject the Company to liability claims as well as governmental oversight and fines.

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

Our 100 largest clients by revenue accounted for approximately 43% of our total revenue from continuing operations for the year ended December 31, 2016. If we fail to retain a significant amount of business from any of our significant clients, our business, results of operations and financial condition could be adversely affected. For example, we announced in the third quarter of 2015, a large telecom services client would not be retained. Also, in the first quarter of 2014, we announced a large conferencing client would not be retained. The impact of these actions negatively affected our operating results in 2016 and 2015.

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We serve clients and indus tries 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 de crease in our revenue and could adversely affect our business, results of operations and financial condition.

Our future success depends on our ability to retain key personnel. 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.

Our future 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. A large portion of our operations also 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.

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, whether from human error or fraud or malice on the part of employees or third parties or accidental technical failure, could expose us to liability, increase our expenses relating to the resolution of these breaches and deter our clients from selecting our services. Certain of our client contracts do not contractually limit our liability for the loss of confidential information and our insurance may not cover the expected loss. Migration of emergency communications to IP-based infrastructure increases this risk. 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. For our international operations, we are obligated to implement processes and procedures to comply with local data privacy regulations. Any failures in our security and privacy measures could adversely affect our business, financial condition and results of operations.

Growth in our Unified Communications Services and other new services may provide alternatives to our services which could adversely affect our business, results of operations and financial condition.

Our UC services and other new services and enhancements to existing services may compete with our current collaboration services. Continued growth in such emerging technologies may result in the availability of feature rich alternatives to our existing services with a more attractive pricing model. These developments could reduce the attractiveness to customers of our existing product offerings and reduce the price which we can receive from customers with respect to such services, which could adversely affect our business, results of operations and financial condition.

Global economic conditions could adversely affect our business, results of operations and financial condition, primarily through disrupting our clients’ businesses.

Uncertain and changing global economic conditions, including disruption of financial markets, could adversely affect our business, results of operations and financial condition, primarily through disruptions of our clients’ businesses. Higher rates of unemployment and lower levels of business activity generally adversely affect the level of demand for certain of our services. In addition, worsening of general market conditions in the United States, Europe or other markets important to our businesses may adversely affect our clients’ level of spending, ability to obtain financing for purchases and ability to make timely payments to us for our services, which could require us to increase our allowance for doubtful accounts, negatively impact our days sales outstanding and adversely affect our results of operations.

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 further into additional countries and regions. There are risks inherent in conducting business internationally, including the following:

 

data privacy laws that may apply to the transmission of our clients’ and employees’ data to the United States;

 

burdensome regulatory requirements and unexpected changes in these requirements, including data protection requirements;

 

difficulties in staffing and managing international operations;

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accounting (including managing internal control over financial reporting in our non-U.S. subsidiaries), tax and legal complexities arising from international operations;

 

potential difficulties in transferring funds generated overseas to the United States in a tax efficient manner;

 

localization of our services, including translation into foreign languages and associated expenses;

 

longer accounts receivable payment cycles and collection difficulties;

 

political and economic instability;

 

seasonal reductions in business activity during the summer months in Europe and other parts of the world;

 

differences between the rules and procedures associated with handling public safety in the United States and those related to IP public safety originated outside of the United States; and

 

potentially adverse tax consequences.

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

We could be subject to changes in our effective tax rates, the adoption of new U.S. or international tax legislation or exposure to additional tax liabilities.

We are subject to taxes in the U.S. and numerous foreign jurisdictions. Due to changing economic and political conditions, tax rates in various jurisdictions may be subject to significant change. Also, our future effective tax rates could be affected by changes in the mix of earnings in countries with differing statutory tax rates, changes in the valuation of deferred tax assets and liabilities, or changes in tax laws or their interpretation. Influential representatives of the U.S. government have commented publically that tax reform is a pending priority, and many countries outside the United States, including countries in which we do business, routinely consider changes to existing tax laws. Proposals enacted into legislation could have material adverse consequences on the amount of tax we are required to pay and, thereby, on our operating results, cash flows and financial condition.

We are also subject to the examination of our tax returns and other tax matters by various tax authorities and governmental bodies. We regularly assess the likelihood of an adverse outcome resulting from these examinations to determine the adequacy of its provision for taxes. There can be no assurance as to the outcome of these examinations. If our effective tax rates were to increase or if the ultimate determination of our taxes owed is for an amount in excess of amounts previously accrued, our operating results, cash flows and financial condition could be adversely affected.

Changes in foreign exchange rates may adversely affect our revenue and net income attributed to foreign subsidiaries.

We conduct business in countries outside of the United States. Revenue and expense from our foreign operations are typically denominated in local currencies, thereby creating exposure to changes in exchange rates. Revenue and profit generated by our international operations will increase or decrease compared to prior periods as a result of changes in foreign currency exchange rates. Adverse changes to foreign exchange rates could decrease the value of revenue we receive from our international operations and have a material adverse impact on our business. Generally, we do not attempt to hedge our foreign currency transactions.

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

Contracts for many of our services generally enable our clients to unilaterally terminate the contract or reduce transaction volumes upon written notice and without penalty, in many cases 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.

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 related to pending and potential litigation. 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 our business may arise in the future. Furthermore, we generally indemnify our clients against third-party claims asserting intellectual property violations and data security breaches, which may result in litigation. Regardless of the outcome of any of these

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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 condit ion. Finally, certain of the outcomes of such litigation may directly affect our business model, and thus our profitability.

Our technology and services may infringe upon the intellectual property rights of others. Intellectual property infringement claims would be time-consuming and expensive to defend and may result in limitations on our ability to use the intellectual property subject to these claims.

Third parties have asserted in the past and may assert claims against us in the future 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.

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

The United States Congress, the FCC, the FTC and the states and foreign jurisdictions where we provide services have promulgated and enacted rules and laws that govern personal privacy, the provision of telecommunication services, telephone solicitations, the provision of public safety services and data privacy. As a result, we may be subject to proceedings alleging violation of these rules and laws in the future. Additional rules and laws may regulate the pricing for our offerings or 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. Compliance with all federal and state telemarketing regulations is costly and time-consuming. In addition, notwithstanding our compliance efforts, any failure on our part to comply with the registration and other legal requirements applicable to companies engaged in telemarketing activities could have an adverse impact on our business. We could become subject to litigation by private parties and governmental bodies alleging a violation of applicable laws or regulations, which could result in damages, regulatory fines, penalties and possible other relief under such laws and regulations and the accompanying costs and uncertainties of such litigation and enforcement actions.

In addition, the FCC has adopted rules dictating the manner in which regulated service providers compensate each other for the termination of interstate, intrastate, and local traffic, as well as intercarrier compensation between wireline carriers and wireless providers. The rules adopted by the FCC provide for a multi-year transition to a national uniform terminating charge of zero, which is known as “bill-and-keep.” Carriers were required to cap all current rate elements as of December 29, 2011 and to begin reducing their termination and transport rates in annual steps, culminating with a bill-and-keep system by July 2018. In a Further Notice, the FCC is considering changes to rates charged for origination of toll-free traffic, which is a major type of traffic carried by West’s subsidiary, West Telecom Services. There are initiatives by state regulators to address, and possibly reduce, intrastate access rates. In 2016, AT&T filed a petition requesting that the FCC forbear from the rules that permit tariffing of all tandem switching and tandem-switched transport charges on all traffic to or from ILECs engaged in access stimulation (even when the tandem provider is not involved in access stimulation) and from the rules permitting tariffed charges for toll-free database queries. If granted, AT&T’s proposed forbearance could cause significant disruption and uncertainty in the tandem services market in which West Telecom Services operates.  We are unable to predict the outcome of these rulemaking efforts, and any resulting regulations could limit our ability to determine how we charge for our services and have an adverse effect on our profitability.

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

Our success depends in part upon our proprietary information and technology. 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 businesses. 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

27


 

client data may be insufficient to protect us, and we may be unable to prevent infringement of our intellectual property right s 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.

Our data and operation centers are exposed to service interruption, which could adversely affect our business, results of operations and financial condition.

Our operations depend on our ability to protect our data and operation centers against damage that may be caused by fire, natural disasters, pandemics, power failure, telecommunications failures, computer viruses, Trojan horses, other malware, failures of our software, acts of sabotage or terrorism, riots and other emergencies. In addition, for some of our services, we are dependent on outside vendors and suppliers who may be similarly affected. In the past, natural disasters such as hurricanes have caused 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 operation centers through casualty, operating malfunction, data loss, system failure or other events, 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. Failure of our infrastructure due to the occurrence of a single event may have a disproportionately large impact on our business results. 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, results of operations and financial condition. While we maintain insurance coverage that may, subject to policy terms and conditions including significant self-insured deductibles, cover certain aspects of cyber risks, such insurance coverage may be insufficient to cover significant portions of the losses.

Our failure to repatriate cash from our foreign subsidiaries, or the costs incurred to do so, could harm our liquidity.

As of December 31, 2016, the amount of cash and cash equivalents held by our foreign subsidiaries was $130.4 million. From time to time we may seek to repatriate funds held by these subsidiaries, and our ability to withdraw cash from foreign subsidiaries will depend upon the results of operations of these subsidiaries and may be subject to legal, contractual or other restrictions and other business considerations. Our foreign subsidiaries may enter into financing arrangements that limit their ability to make loans or other payments to fund payments of our debt. In addition, dividend and interest payments to us from our foreign subsidiaries may be subject to foreign withholding taxes, which could reduce the amount of funds we receive from our foreign subsidiaries. Dividends and other distributions from our foreign subsidiaries may also be subject to fluctuations in currency exchange rates and legal and other restrictions on repatriation, which could further reduce the amount of funds we receive from our foreign subsidiaries.

In general, when an entity in a foreign jurisdiction repatriates cash to the United States, the amount of such cash is treated as a dividend taxable at current United States tax rates. Accordingly, upon the distribution of cash to us from our foreign subsidiaries, we will be subject to United States income taxes. Although foreign tax credits may be available to reduce the amount of the additional tax liability, these credits may be limited based on our tax attributes. Therefore, to the extent that we use cash generated in foreign jurisdictions, there may be a cost associated with repatriating cash to the United States or other limitations that could adversely affect our liquidity.

If we are unable to complete future acquisitions or if we incur unanticipated acquisition liabilities, our business strategy and earnings may be negatively affected.

Our ability to identify and take advantage of attractive acquisitions 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.

In addition, we incur significant transaction costs associated with our acquisitions, including substantial fees for attorneys, accountants and other advisors. Any acquisition could result in our assumption of unknown and/or unexpected, and perhaps material, liabilities. Additionally, in any acquisition agreement, the negotiated representations, warranties and agreements of the selling parties may not entirely protect us, and liabilities resulting from any breaches could exceed negotiated indemnity limitations. These factors could impair our growth and ability to compete, divert resources from other potentially more profitable areas, or otherwise cause a material adverse effect on our business, financial position and results of operations.

28


 

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

Our business strategy depends on successfully integrating the assets, operations and corporate functions of businesses we have acquired and any additional businesses we may acquire in the future. The acquisition of additional businesses involves integration risks, including:

 

the diversion of management’s time and attention away from operating our business to acquisition and integration challenges;

 

the unanticipated loss of key employees of the acquired businesses;

 

the potential need to implement or remediate controls, procedures and policies appropriate for a larger company at businesses that, prior to the acquisition, lacked these controls, procedures and policies;

 

the need to integrate accounting, information management, human resources, contract and intellectual property management and other administrative systems at each business to permit effective management; and

 

our entry into markets or geographic areas where we may have limited or no experience.

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 including cost savings and synergies. The inability to achieve our planned objectives could result from:

 

the financial underperformance of these acquisitions;

 

the loss of key clients of the acquired business, which may drive financial underperformance;

 

the loss of key personnel at the acquired company; and

 

the occurrence of unanticipated liabilities or contingencies for which we are unable to receive indemnification from the prior owner of the business.

Potential future impairments of our substantial goodwill, intangible assets, or other long-lived assets could adversely affect our business, results of operations and financial condition.

As of December 31, 2016, we had goodwill and intangible assets, net of accumulated amortization, of approximately $1.9 billion and $315.5 million, respectively. Management is required to exercise significant judgment in identifying and assessing whether impairment indicators exist, or if events or changes in circumstances have occurred, including market conditions, operating results, competition and general economic conditions. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies—Goodwill and Intangible Assets.” Any changes in key assumptions about the business units and their prospects or changes in market conditions or other externalities could result in an impairment charge, and such a charge could have an adverse effect on our business, results of operations and financial condition.

We may not be able to generate sufficient cash to service all of our indebtedness 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.

At December 31, 2016, our aggregate long-term indebtedness, including the current portion, was $3,209.0 million. In 2016, our consolidated interest expense and accelerated amortization of deferred financing costs was approximately $185.2 million. 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 make assurances 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 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 or the payment of dividends, sell assets or operations, seek additional capital or restructure or refinance our indebtedness. We cannot make assurances 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 senior secured credit facilities or the indenture that governs our outstanding notes. Our senior secured credit facilities documentation and the indenture that governs the notes restrict our ability to

29


 

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 an y 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 of such debt and, as a result:

 

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

 

our debt holders under other debt subject to cross default or cross acceleration provisions could declare all outstanding principal and interest on such other debt to be due and payable;

 

the lenders under our senior secured credit facilities could terminate their commitments to lend us money and foreclose against the assets securing our borrowings; and

 

we could be forced into bankruptcy or liquidation.

Our current or future indebtedness could impair our financial condition and reduce the funds available to us for other purposes, including dividend payments, and our failure to comply with the covenants contained in our senior secured credit facilities documentation or the indenture that governs our outstanding 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 ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions, product development, general corporate purposes, refinancing of our existing obligations or other purposes may be impaired;

 

a significant portion of our cash flow from operations may be dedicated to the payment of interest and principal on our indebtedness, which will reduce the funds available to us for our operations, capital expenditures, future business opportunities or other purposes;

 

the debt service requirements of our other indebtedness could make it more difficult for us to satisfy our financial obligations;

 

because we may be more leveraged than some of our competitors, our debt may place us at a competitive disadvantage;

 

our leverage will increase our vulnerability to economic downturns and limit our ability to withstand adverse events in our business by limiting our financial alternatives;

 

our ability to capitalize on significant business opportunities and to plan for, or respond to, competition and changes in our business may be limited; and

 

limit our ability to declare or pay dividends.

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 or result in modifications to our credit terms. 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 had a negative net worth as of December 31, 2016, which may make it more difficult and costly for us to obtain financing in the future and may otherwise negatively impact our business.

As of December 31, 2016, we had a negative net worth of $441.8 million. Our negative net worth primarily resulted from the incurrence of indebtedness to finance our Recapitalization in 2006. As a result of our negative net worth, we may face greater difficulty and expense in obtaining future financing than we would face if we had a greater net worth, which may limit our ability to meet our needs for liquidity or otherwise compete effectively in the marketplace.

30


 

Despite our current indebtedness levels and the restrictive covenants set forth in agreements governing our indebtedness, we and our subsidiaries may still incur significant additional indebtedness, including secured indebtedness. Incurring additional indebtedness could increase the risks associate d with our substantial indebtedness.

Subject to the restrictions in our debt agreements, we and certain of our subsidiaries may incur significant additional indebtedness, including additional secured indebtedness. Although the terms of our debt agreements contain restrictions on the incurrence of additional indebtedness, these restrictions are subject to a number of qualifications and exceptions, and additional indebtedness incurred in compliance with these restrictions could be significant. At December 31, 2016, under the terms of our debt agreements, we would be permitted to incur up to approximately $619.2 million of additional committed term loan debt, or increase commitment to the revolving credit facility or additional secured notes, or incur debt by our foreign subsidiaries up to $250.0 million, all in addition to any current availability that is undrawn as of December 31, 2016, under our revolving credit facility and asset securitization facility. If new debt is added to our and our subsidiaries’ current debt levels, the related risks that we face could increase.

We may not generate sufficient cash flows or have sufficient restricted payment capacity under our senior secured credit facilities or the indenture governing our outstanding notes to pay our intended dividends on the common stock.

Subject to legally available funds, we intend to pay quarterly cash dividends. We will only be able to pay dividends from our available cash on hand and funds generated by us and our subsidiaries. Our ability to pay dividends to our stockholders will be subject to the terms of our senior secured credit facilities and the indenture governing the outstanding notes. Our operating cash flow and ability to comply with restricted payment covenants in our debt instruments will depend on our future performance, which will be subject to prevailing economic conditions and to financial, business and other factors beyond our control. In addition, dividend payments are not mandatory or guaranteed, and our Board of Directors could affect our dividend policy, decrease the level of dividends or entirely discontinue the payment of dividends. The following additional factors, among others, could affect our dividend policy:

 

we are not legally or contractually required to pay dividends;

 

while we currently intend to pay a regular quarterly dividend, the actual amount of dividends distributed and the decision to make any distribution is entirely at the discretion of our Board of Directors and future dividends with respect to shares of our capital stock, if any, will depend on, among other things, our results of operations, cash requirements, financial condition, business opportunities, provisions of applicable law and other factors that our Board of Directors may deem relevant;

 

the amount of dividends distributed is and will be subject to contractual restrictions under the restricted payments covenants contained in:

 

o

the indentures governing our outstanding notes;

 

o

the terms of our senior secured credit facilities;

 

o

the terms of any other outstanding indebtedness we may incur; and

 

the amount of dividends distributed is subject to state law restrictions.

As a result of the foregoing limitations on our ability to pay dividends, we cannot assure you that we will be able to make all of our intended quarterly dividend payments.

Anti-takeover provisions contained in our certificate of incorporation and bylaws, as well as provisions of Delaware law, could impair a takeover attempt that our stockholders may find beneficial.

Our amended and restated certificate of incorporation, second amended and restated bylaws and Delaware law contain provisions, in some cases that were adopted by our Board of Directors for the purpose of increasing the likelihood that a proposed acquisition is fair to and in the best interests of the stockholders, that could have the effect of rendering more difficult or discouraging an acquisition deemed undesirable by our Board of Directors. Our corporate governance documents include provisions:

 

establishing a classified Board of Directors so that not all members of our Board are elected at one time;

 

providing that directors may be removed by stockholders only for cause;

 

authorizing blank check preferred stock, which could be issued with voting, liquidation, dividend and other rights superior to our common stock;

 

limiting the ability of our stockholders to call and bring business before special meetings and to take action by written consent in lieu of a meeting;

31


 

 

limiting our ability to engage in certain business combinations wit h any “interested stockholder” (other than the Sponsors, Gary and Mary West, their affiliates and certain transferees) for a three-year period following the time that the stockholder became an interested stockholder;

 

requiring advance notice of stockholder proposals for business to be conducted at meetings of our stockholders and for nominations of candidates for election to our Board of Directors; and

 

limiting the determination of the number of directors on our Board of Directors and the filling of vacancies or newly created seats on the Board to our Board of Directors then in office.

These provisions, alone or together, could delay hostile takeovers and changes in control of our Company or changes in our management.

As a Delaware corporation, we are also subject to provisions of Delaware law. Any provision of our amended and restated certificate of incorporation or second amended and restated bylaws or Delaware law that has the effect of delaying or deterring a change in control could limit the opportunity for our stockholders to receive a premium for their shares of our common stock, and could also affect the price that some investors are willing to pay for our common stock.

In addition, our senior secured credit facilities and the indentures governing our outstanding notes contain customary “change of control” provisions which could have the effect of increasing the cost of acquiring the Company and therefore may discourage such an acquisition or reduce the price a buyer would be willing to pay to our stockholders in an acquisition.

Future sales of our common stock may lower our stock price.

If any of our significant stockholders sell a large number of shares of our common stock, the market price of our common stock could decline significantly. In addition, the perception in the public market that our significant stockholders might sell shares of common stock could depress the market price of our common stock, regardless of the actual plans of those stockholders.

Our principal stockholders possess significant influence over us. Their interests may not coincide with other stockholders and they may make decisions with which other stockholders may disagree.

Entities controlled by Gary L. West and Mary E. West, the Gary and Mary West Health Institute and investment funds associated with the Sponsors own, in the aggregate, approximately 47% of our outstanding common stock. Under our amended and restated stockholder agreement with our Sponsors and entities controlled with our founders, our Sponsors can designate up to five directors, in the aggregate, to our Board of Directors, subject to ownership of our common stock above certain thresholds. Because our Chief Executive Officer will be appointed, and may be terminated, by our Board of Directors, our Sponsors could effectively have the ability to select our Chief Executive Officer through the designation of directors, subject to ownership of our common stock above a certain threshold. As a result, these stockholders, acting individually or together, could control substantially all matters requiring stockholder approval, including the election of most directors and approval of significant corporate transactions. In addition, this concentration of ownership may delay or prevent a change in control of our Company and make some transactions more difficult or impossible without the support of these stockholders. The interests of these stockholders may not always coincide with our interests as a company or the interest of other stockholders. Accordingly, these stockholders could cause us to enter into transactions or agreements that other stockholders would not approve or make decisions with which other stockholders may disagree.

Our amended and restated certificate of incorporation contains a provision renouncing our interest and expectancy in certain corporate opportunities, which could adversely affect our business or prospects.

Our amended and restated certificate of incorporation provides that we renounce any interest or expectancy in, or in being offered an opportunity to participate in, any business opportunity that may be from time to time presented to the Sponsors or any of their officers, directors, agents, stockholders, members, partners, affiliates and subsidiaries (other than West and its subsidiaries) and that may be a business opportunity for such Sponsor, even if the opportunity is one that we might reasonably have pursued or had the ability or desire to pursue if granted the opportunity to do so, and no such person shall be liable to us for breach of any fiduciary or other duty, as a director or officer or otherwise, by reason of the fact that such person, acting in good faith, pursues or acquires any such business opportunity, directs any such business opportunity to another person or fails to present any such business opportunity, or information regarding any such business opportunity, to us unless, in the case of any such person who is our director or officer, any such business opportunity is expressly offered to such director or officer solely in his or her capacity as our director or officer. None of the Sponsors shall have any duty to refrain from engaging directly or indirectly in the same or similar business activities or lines of business as us or any of our subsidiaries.

32


 

These provisions apply subject only to certain ownership requirements of the Sponsors and other conditions. For example, our Sponsors may become aware, from time to time, of certain business opportunities, such as acquisition opportunities or ideas for product line expansions, and may direct such opportunities to other businesses in which they have invested, in which case we may not become aware of or otherwise have the ability to pursue such opportunity. Further, such businesses may choose to compete with us for these opportunities. As a res ult, our renouncing our interest and expectancy in any business opportunity that may be from time to time presented to the Sponsors could adversely impact our business or prospects if attractive business opportunities are procured by the Sponsors for their own benefit rather than for ours.

Divestitures and discontinued operations could negatively impact our business and adversely affect our financial results.

On March 3, 2015, we divested certain of our agent-based businesses. In connection with the sale we agreed to indemnify the buyer, up to the full purchase price of $275.0 million, with respect to the equity interests of the companies we sold, title to the equity and assets sold and the authority of the Company to sell the equity and assets. The Company has also agreed to indemnify the buyer for breaches of other representations and warranties in the purchase agreement for up to $13.75 million in losses, and for certain other matters.

 

 

ITEM 1B.

UNRESOLVED STAFF COMMENTS

None.

 

 

ITEM 2.

PROPERTIES

Our headquarters are located in Omaha, Nebraska. In addition, we have shared service centers in Omaha, Nebraska; Longmont, Colorado; Canada; and the Philippines.  

The majority of our facilities are leased, including all non-United States facilities.  Owned facilities include our headquarters, two facilities in Omaha, Nebraska, three facilities in Georgia and individual facilities in Alabama and Minnesota.

Information about the properties supporting our four reporting segments is as follows:

Unified Communications Services has primary business centers in Chicago, Illinois; Louisville, Kentucky; Lancaster, Texas; Singapore; and Gloucester, United Kingdom. Additional facilities are located in 15 states and in Australia, Belgium, Canada, China, Denmark, France, Germany, Hong Kong, India, Israel, Japan, Malaysia, Mexico, Singapore, South Korea, Spain, Sweden and the United Kingdom.

Safety Services has a primary business center in Longmont, Colorado and additional leased facilities in Colorado, Illinois, Texas and Canada.

Interactive Services has primary business centers in Omaha, Nebraska and Mobile, Alabama and additional facilities in these states as well as in California, Ohio, and Missouri.

Specialized Agent Services has primary business centers in Plymouth Meeting, Pennsylvania; Omaha, Nebraska; and Appleton, Wisconsin. Additional facilities are located in seven states and the Philippines.

We believe that our facilities are adequate for our current requirements and that additional space will be available as required. See Note 5 of the Notes to Consolidated Financial Statements included elsewhere in this report for information regarding our lease obligations.

 

 

ITEM 3.

LEGAL PROCEEDINGS

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

 

 

ITEM 4.

MINE SAFETY DISCLOSURES

Not applicable.

 

33


 

PART II

ITEM 5.

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STO CKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock began trading on the NASDAQ Global Select Market under the ticker symbol “WSTC” following our initial public offering (“IPO”) on March 22, 2013. The table set forth below provides the intraday high and low sales prices and dividends paid per share of our common stock in 2015 and 2016. Subject to legally available funds, we intend to continue to pay our shareholders a dividend per share, on a quarterly basis, in an amount comparable to the dividends indicated in the table. However, any future determination to pay cash dividends will be at the discretion of our Board of Directors and will depend upon our results of operations, financial condition, capital requirements and such other factors as the Board of Directors deems relevant. In addition our ability to pay dividends is subject to applicable law, our senior secured credit facilities and the indenture governing our senior notes. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Debt Covenants” and the risk factors related to our ability to pay future dividends in “Risk Factors.”

 

2015:

 

High

 

 

Low

 

 

Dividend Per Share

 

First Quarter

 

$

35.98

 

 

$

30.45

 

 

$

0.225

 

Second Quarter

 

$

33.91

 

 

$

30.00

 

 

$

0.225

 

Third Quarter

 

$

30.90

 

 

$

22.26

 

 

$

0.225

 

Fourth Quarter

 

$

26.52

 

 

$

19.64

 

 

$

0.225

 

2016:

 

 

 

 

 

 

 

 

 

 

 

 

First Quarter

 

$

23.90

 

 

$

17.26

 

 

$

0.225

 

Second Quarter

 

$

23.42

 

 

$

18.55

 

 

$

0.225

 

Third Quarter

 

$

24.36

 

 

$

18.62

 

 

$

0.225

 

Fourth Quarter

 

$

25.85

 

 

$

19.66

 

 

$

0.225

 

 

The number of shareholders of record of our common stock as of February 10, 2017 was approximately 234.

Equity Compensation Plan Information

The following table provides certain information as of December 31, 2016 concerning the shares of the Company’s common stock that may be issued under existing equity compensation plans.

 

 

 

 

 

 

 

 

 

 

 

Number of securities

 

 

 

 

 

 

 

 

 

 

 

remaining available for

 

 

 

Number of securities

 

 

Weighted-average

 

 

future issuance under equity

 

 

 

to be issued upon exercise

 

 

exercise price of

 

 

compensation plans

 

 

 

of outstanding options,

 

 

outstanding options,

 

 

(excluding securities reflected

 

 

 

warrants and rights

 

 

warrants and rights

 

 

in column(a))

 

Plan category

 

(a)

 

 

($) (b)

 

 

(c)

 

Equity compensation plans approved by

   security holders:

 

 

 

 

 

 

 

 

 

 

 

 

2013 Long-Term Incentive Plan Stock

   Options

 

 

345,892

 

 

 

23.46

 

 

 

5,333,520

 

2013 Employee Stock Purchase Plan

 

 

 

 

 

 

 

 

1,053,446

 

2006 Executive Incentive Plan Stock

   Options

 

 

1,823,413

 

 

 

28.21

 

 

 

 

Nonqualified Deferred Compensation

   Plan (1)

 

 

1,408,760

 

 

 

 

 

 

1,571,982

 

Equity compensation plans not approved

   by security holders

 

 

 

 

 

 

 

 

 

Total

 

 

3,578,065

 

 

 

 

 

 

 

7,958,948

 

 

(1)

Pursuant to the terms of the West Corporation Non-Qualified Deferred Compensation Plan (the “Deferred Compensation Plan”), eligible management, non-employee directors and other highly compensated employees who are approved for participation by the Compensation Committee of our Board of Directors may elect to defer their bonus and up to 50% of their salary, with such bonus and salary deferrals not to exceed $500,000 per plan year. In accordance with the terms of the Deferred Compensation Plan, such deferred compensation will be notionally invested in the same investments made available to participants of the 401(k) plan or our common stock. We match a percentage (50% in 2016) of any amounts notionally invested in our common stock, where matched amounts are subject to a five-year vesting schedule with 20% vesting each year after the individual first participates in the Deferred Compensation Plan. At December 31, 2016, the notionally granted common stock under the Deferred Compensation Plan, including both vested and unvested common stock was 1,408,760 shares.

34


 

Stock Performance Graph

The following line-graph presentation compares our cumulative shareholder returns with the Standard & Poor’s (“S&P”) 500 Stock Index and the S&P’s Data Processing and Outsourced Services Index since our IPO. The line graph assumes the investment of $100 in our common stock, the S&P’s Data Processing and Outsourced Services Index, and the S&P’s 500 Index on March 22, 2013 and assumes reinvestment of all dividends. The following performance graph is being furnished as part of this Annual Report on Form 10-K solely in accordance with the requirement under Rule 14a-3(b)(9) to furnish our stockholders with such information and, therefore, shall not be deemed to be filed or incorporated by reference into any filings by the Company under the Securities Act of 1933, as amended (the “Securities Act”), or the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

 

In prior years, we used the S&P North American Technology Services index, which was discontinued on March 7, 2016. Accordingly, we now the use S&P Data Processing and Outsourced Services as a replacement index. This index includes many of the companies that were previously on the S&P North American Technology Services index and which are also part of our peer group.

35


 

 

 

 

 

 

 

 

 

 

 

 

S&P 500

Data   Processing

 

 

 

West

Corporation

 

 

S&P 500

 

 

and   Outsourced

Services

 

March 22, 2013

 

$

100.00

 

 

$

100.00

 

 

$

100.00

 

June 30, 2013

 

$

118.63

 

 

$

106.77

 

 

$

113.04

 

September 30, 2013

 

$

119.92

 

 

$

112.37

 

 

$

124.68

 

December 31, 2013

 

$

140.44

 

 

$

124.18

 

 

$

146.64

 

March 31, 2014

 

$

131.97

 

 

$

126.43

 

 

$

139.23

 

June 30, 2014

 

$

149.17

 

 

$

133.04

 

 

$

139.89

 

September 30, 2014

 

$

165.38

 

 

$

134.55

 

 

$

142.14

 

December 31, 2014

 

$

186.63

 

 

$

141.18

 

 

$

165.72

 

March 31, 2015

 

$

192.08

 

 

$

142.52

 

 

$

170.06

 

June 30, 2015

 

$

172.63

 

 

$

142.92

 

 

$

172.90

 

September 30, 2015

 

$

129.65

 

 

$

133.72

 

 

$

171.11

 

December 31, 2015

 

$

125.97

 

 

$

143.14

 

 

$

186.43

 

March 31, 2016

 

$

134.69

 

 

$

145.06

 

 

$

187.46

 

June 30, 2016

 

$

117.26

 

 

$

148.63

 

 

$

184.80

 

September 30, 2016

 

$

132.98

 

 

$

154.35

 

 

$

200.08

 

December 31, 2016

 

$

150.60

 

 

$

160.25

 

 

$

200.05

 

 

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

The following table shows our purchases of our common stock during 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(d)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Approximate

 

 

 

 

 

 

 

 

 

 

 

(c)

 

 

Dollar Value of

 

 

 

 

 

 

 

 

 

 

 

Total Number of

 

 

Shares that May

 

 

 

 

 

 

 

(b)

 

 

Shares Purchased

 

 

Yet be

 

 

 

(a)

 

 

Average Price

 

 

as Part of Publicly

 

 

Purchased

 

 

 

Total Number of

 

 

Paid per Share

 

 

Announced Plans

 

 

Under the Plans

 

Period

 

Shares Purchased

 

 

(or unit)

 

 

or Programs

 

 

or Programs (1)

 

First quarter

 

 

1,000,000

 

 

$

21.94

 

 

 

1,000,000

 

 

$

53,039,122

 

Second quarter

 

 

 

 

 

 

 

 

 

 

 

 

Third quarter

 

 

 

 

 

 

 

 

 

 

 

 

Fourth quarter

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

1,000,000

 

 

$

21.94

 

 

 

1,000,000

 

 

$

53,039,122

 

 

(1)

On February 1, 2016, the Company announced that our Board of Directors had approved a share repurchase program under which the Company may repurchase up to an aggregate of $75.0 million of our outstanding common stock. Purchases under the program may be made from time to time through open market purchases, block transactions or privately negotiated transactions. In February 2016, we began to repurchase shares of our common stock in open market transactions.

During 2016, 83,129 shares of our common stock were withheld to satisfy tax withholding obligations. These shares are permanently removed from the 2013 Long-Term Incentive Plan reserve.

 

 

36


 

ITEM 6.

SELECTED CONSO LIDATED FINANCIAL DATA

The following table sets forth, for the periods presented and at the dates indicated, our selected consolidated financial data from continuing operations for each of the last five years. The selected consolidated income statement and balance sheet data have been derived from our consolidated financial statements. Our consolidated financial statements as of December 31, 2016 and 2015 and for the years ended December 31, 2016, 2015 and 2014, 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.

 

 

 

Year ended December 31,

 

 

 

2016

 

 

2015

 

 

2014

 

 

2013

 

 

2012

 

 

 

(amounts in thousands except per share amounts)

 

Income Statement Data (1):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

2,291,963

 

 

$

2,280,259

 

 

$

2,218,594

 

 

$

2,120,972

 

 

$

2,042,526

 

Cost of services

 

 

981,788

 

 

 

970,693

 

 

 

943,331

 

 

 

894,628

 

 

 

845,750

 

Selling, general and administrative expenses

 

 

865,961

 

 

 

853,116

 

 

 

813,856

 

 

 

775,050

 

 

 

753,674

 

Operating income

 

 

444,214

 

 

 

456,450

 

 

 

461,407

 

 

 

451,294

 

 

 

443,102

 

Interest expense

 

 

(148,627

)

 

 

(154,273

)

 

 

(188,102

)

 

 

(232,935

)

 

 

(263,984

)

Refinancing expense

 

 

(36,532

)

 

 

(2,304

)

 

 

(73,309

)

 

 

(23,105

)

 

 

(2,715

)

Other, net

 

 

757

 

 

 

(1,200

)

 

 

7,294

 

 

 

2,488

 

 

 

2,268

 

Income before income tax expense

 

 

259,812

 

 

 

298,673

 

 

 

207,290

 

 

 

197,742

 

 

 

178,671

 

Income tax expense

 

 

66,423

 

 

 

107,757

 

 

 

72,679

 

 

 

74,651

 

 

 

73,459

 

Income from continuing operations

 

$

193,389

 

 

$

190,916

 

 

$

134,611

 

 

$

123,091

 

 

$

105,212

 

Earnings per common share from continuing

   operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic Common

 

$

2.33

 

 

$

2.29

 

 

$

1.60

 

 

$

1.56

 

 

$

1.71

 

Diluted Common

 

$

2.29

 

 

$

2.24

 

 

$

1.57

 

 

$

1.53

 

 

$

1.66

 

Selected Operating Data (1):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating margin (2)

 

 

19.4

%

 

 

20.0

%

 

 

20.8

%

 

 

21.3

%

 

 

21.7

%

Income margin (3)

 

 

8.4

%

 

 

8.4

%

 

 

6.1

%

 

 

5.8

%

 

 

5.2

%

 

 

 

As of December 31,

 

 

 

2016

 

 

2015

 

 

2014

 

 

2013

 

 

2012

 

 

 

(amounts in thousands)

 

Balance Sheet Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

3,440,838

 

 

$

3,555,217

 

 

$

3,743,916

 

 

$

3,496,644

 

 

$

3,457,295

 

Total debt

 

$

3,209,046

 

 

$

3,400,125

 

 

$

3,658,786

 

 

$

3,525,347

 

 

$

4,017,656

 

Other Financial Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash dividends declared (4)

 

$

76,429

 

 

$

76,480

 

 

$

75,991

 

 

$

56,443

 

 

$

511,041

 

 

(1)

Operating results are from continuing operations.

(2)

Operating margin represents operating income as percentage of revenue.

(3)

Income margin represents income from continuing operations as a percentage of revenue.

(4)

Cash dividends declared in 2016, 2015, 2014, 2013 and 2012 were $0.90 per share, $0.90 per share, $0.90 per share, $0.675 per share and $8.00 per share, respectively.

 

 

37


 

ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Business Overview

We are a global provider of communication and network infrastructure services. “We,” “us” and “our” also refer to West Corporation and its consolidated subsidiaries, as applicable. We believe our products and services help our clients more effectively communicate, collaborate and connect with their audiences through a diverse portfolio of solutions that include UC services, safety services, interactive services such as automated notifications, specialized agent services and telecom services.

The scale and processing capacity of our technology platforms, combined with our expertise in managing multichannel interactions, enable us to provide reliable, high-quality, mission-critical communications designed to maximize return on investment for our clients and help them build smarter, more meaningful connections. We are dedicated to delivering and improving upon new channels, new capabilities and new choices for how businesses and consumers collaborate, connect and transact.

Our clients include Fortune 1000 companies, along with small and medium enterprises in a variety of industries. We have sales and/or operations in the United States, Canada, Europe, the Middle East, Asia-Pacific, Latin America and South America.

Financial Operations Overview

Revenue

Services in Unified Communications Services are generally billed, and revenue recognized, on a per participant minute basis or, in the case of license arrangements, generally billed in advance and revenue recognized ratably over the service life period. We also charge clients for additional features, such as conference call recording, transcription services or professional services. Some Unified Communications Services revenue is recognized on a “Per User Per Month” or network circuit basis. Telecom Services revenue is primarily comprised of switched access charges for toll-free origination services, which are paid primarily by interexchange carriers. Revenue is billed monthly and recognized based on usage.

Safety Services revenue is generated primarily from monthly fees and recognized as billed, based on the number of billing telephone numbers and cell towers covered under contract. In addition, product sales that may include hardware, software, and professional services (installation, training and project management) are generally recognized when shipment of the hardware and software has occurred and for professional services when client acceptance of a fully functional system is received. Contracts for annual recurring services such as support and maintenance agreements and contracts where guaranteed minimums exist are generally billed in advance and are recognized as revenue ratably (on a monthly basis) over the contractual periods.

Services in Interactive Services are generally billed, and revenue recognized, on a per call, per message or per minute basis, or in the case of subscription arrangements, generally billed in advance and revenue recognized ratably over the contract term.

Services in Specialized Agent Services are generally billed based on hours of input, number of contacts, number of personnel assigned, on a contingent basis or recognized in the month collection payments are received based upon a percentage of cash collected or other agreed upon contractual parameters. Revenue for healthcare advocacy services is generally based on “Per Employee Per Month” fees charged under prepayment agreements for services and is recognized ratably over the service period.

For all of our reportable segments, fees received for future service periods are deferred until the service is performed.

Cost of Services

The principal component of cost of services is our variable telephone expense, labor related expenses and commissions for our sales force. We generally pay commissions to sales professionals on both new sales and incremental revenue generated from existing clients.

Selling, General and Administrative Expenses

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

38


 

Key Drivers Affecting Our Financial Position and Results of Operations

Divestiture Activities. On March 3, 2015, we divested several of our agent-based businesses, including our consumer-facing customer sales and lifecycle management, account services and receivables management businesses, for $275.0 million in cash. We completed the divestiture pursuant to a purchase agreement executed January 7, 2015 and in accordance with a plan approved by our Board of Directors on December 30, 2014.

The divestiture resulted in a $48.2 million after tax gain in 2015 which is included within income from discontinued operations. The $48.2 million gain included a $21.6 million tax benefit in 2015 due to the deferred tax benefit associated with excess outside basis over financial reporting basis. The total after tax gain realized on the sale was $56.8 million, including an $8.6 million tax benefit associated with a higher tax basis than book basis that we were required to recognize in the fourth quarter of 2014.

Factors Related to Indebtedness. On June 17, 2016, we completed a partial refinancing of our outstanding indebtedness through an amendment (the “Seventh Amendment”) to our term and revolving senior secured credit facilities (“Senior Secured Credit Facilities”) and a private offering of $400.0 million aggregate principal amount of 4.75% senior secured notes due 2021 (the “2021 Senior Secured Notes”). The amendment to our Senior Secured Credit Facilities, among other things, established commitments for a new seven-year senior secured term loan B-12 facility in an aggregate principal amount of $870.0 million (the “2023 Maturity Term Loans”), a new five-year senior secured term loan A-2 facility in an aggregate principal amount of $650.0 million (the “2021 Maturity A Term Loans”) and a new five-year senior secured term loan B-14 facility in an aggregate principal amount of $260.0 million (the “2021 Maturity B Term Loans”). We used the proceeds of the new notes and new facilities, together with cash on hand, to repay $1,678.0 million of our existing term loan B-10 facility (the “2018 Maturity Term Loans”), $252.6 million on the term A-1 facility (the “2019 Maturity Term Loans”) and all $249.4 million outstanding on the term loan B-11 facility (“B-11 Term Loans”). In addition, the Seventh Amendment provided for an extended senior secured revolving credit facility with a maturity date of June 17, 2021 in an aggregate amount of $300.0 million.  

On December 19, 2016, we completed an eighth amendment to our Senior Secured Credit Facilities (the "Eighth Amendment"). With respect to our term loans, the Eighth Amendment provided for:

an interest rate margin applicable to the 2023 Maturity Term Loans equal to 2.50% for LIBOR rate loans and 1.50% for base rate loans, subject to a 0.75% interest rate floor for the LIBOR component of LIBOR rate 2023 Maturity Term Loans, and subject to a 1.75% interest rate floor for the base rate component of base rate 2023 Maturity Term Loans; and

an interest rate margin applicable to the 2021 Maturity B Term Loans equal to 2.50% for LIBOR rate loans, and 1.50% for base rate loans, subject to a 0.0% interest rate floor for the LIBOR component of LIBOR rate 2021 Maturity B Term Loans, and subject to a 0.0% interest rate floor for the base rate component of base rate 2021 Maturity B Term Loans.

The refinancing and use of proceeds resulted in the following benefits:

we extended our weighted-average length of maturity from 4.0 years at December 31, 2015 to 5.3 years at December 31, 2016, while maintaining an attractively priced cost of capital, with a weighted-average cost of debt of 4.07% at December 31, 2016, an increase from 3.88% as of December 31, 2015, excluding amortization of deferred financing fees and unused commitment fees; and

we increased our percentage of fixed-rate debt. In conjunction with our interest rate swaps, our fixed-rate debt as of December 31, 2016 is 52% or 58% on a pro forma basis including the 3-month LIBOR swap effective June 30, 2017.

Acquisition Activities. Identifying and successfully integrating acquisitions of value-added service providers has been a key component of our growth strategy. We will continue to seek opportunities to expand our suite of communication services across industries, geographies and end-markets. While we expect this will occur primarily through organic growth, we have and will continue to acquire assets and businesses that strengthen our value proposition to clients and drive value to us. We have developed an internal capability to source, evaluate and integrate acquisitions that we believe has created value for shareholders. Since 2002, we have invested approximately $3.0 billion in strategic acquisitions. We believe there are acquisition candidates that will enable us to expand our capabilities and markets and we intend to continue to evaluate acquisitions in a disciplined manner and pursue those that provide attractive opportunities to enhance our growth and profitability.

During 2016, we closed two acquisitions for an aggregate purchase price of $19.4 million. The acquisitions of Synrevoice and 911 ETC closed on March 14, 2016 and December 9, 2016, respectively, and their results have been included in our financial statements since their respective acquisition dates.

39


 

Overview of 2016 Results

The following overview highlights the areas we believe are important in understanding the results of our continuing operations for the year ended December 31, 2016. This summary is not intended as a substitute for the detail provided elsewhere in this annual report or for our consolidated financial statements and notes thereto included elsewhere in this annual report.

 

Our revenue increased $11.7 million, or 0.5% in 2016 compared to revenue in 2015.

 

Our operating income decreased $12.2 million, or 2.7% in 2016 compared to operating income in 2015.

 

Our cash flows from continuing operating activities were $428.3 million, an increase of $17.5 million, or 4.3%, during 2016 compared to cash flows from continuing operating activities in 2015.

 

Our earnings per share from continuing operations – diluted was $2.29 compared to $2.24 in 2015.

 

On March 14, 2016, we completed the acquisition of substantially all of the assets of Synrevoice, a provider of messaging and notification services to the K-12 education and commercial markets in North America. The purchase price was approximately $9.3 million and was funded with cash on hand. This business is included in the Interactive Services reportable segment.

 

On June 17, 2016, we entered into the Seventh Amendment to our Senior Secured Credit Facilities and issued the 2021 Senior Secured Notes. As a result of the Seventh Amendment and other accelerated debt principal payments made during 2016, we recorded $36.5 million of accelerated amortization of deferred financing costs. The Seventh Amendment also extended our weighted-average length of maturity from 4.0 years at December 31, 2015 to 5.3 years at December 31, 2016.

 

On June 21, 2016, we completed the sale of land, buildings and improvements that were previously classified as held for sale for $38.8 million, excluding related expenses. In connection with this sale, we realized a pre-tax gain of approximately $19.0 million. We also entered into a 12-year leaseback agreement for one of the buildings. This lease is classified as an operating lease and the related $5.2 million gain, included in the $19.0 million realized gain, is being deferred and will be recognized over the lease term.

 

On July 26, 2016, we entered into four interest rate swaps for hedging purposes: two 1-month LIBOR swaps with a combined beginning notional value of $275.0 million and two 3-month LIBOR swaps with a combined beginning notional value of $275.0 million, each with a maturity date of July 17, 2021. The 1-month LIBOR swaps were effective July 29, 2016, with no amortization or variable interest rate floor. The 3-month LIBOR swaps will be effective June 30, 2017, with 1% amortization per year and a 75 basis point LIBOR floor.

 

On November 1, 2016, the Company announced that its Board of Directors had initiated a process to explore and evaluate a range of financial and strategic alternatives to further enhance shareholder value.

 

On December 9, 2016, we completed the acquisition of 911 ETC, a provider of E9-1-1 services for enterprise customers in the United States and Canada. The purchase price was approximately $10.2 million and was funded with cash on hand. This business is included in the Safety Services reportable segment.

 

On December 19, 2016, we entered into the Eighth Amendment to our Senior Secured Credit Facilities. The Eighth Amendment provided for a 0.50% rate reduction on the 2023 Maturity Term Loans, a 0.25% rate reduction on the 2021 Maturity B Term Loans and reduced both the LIBOR and base rate floor on the 2021 facility from 0.75% and 1.75%, respectively, to zero. As a result of the Eighth Amendment, we expect a $5.0 million annual savings in cash interest expense, $4.6 million after annual deferred financing amortization.

 

Operating income and net income were negatively impacted by an $8.4 million restructuring charge due to a workforce reduction plan implemented in the fourth quarter as part of strategic and cost savings initiatives.

 

During the fourth quarter, we implemented legal entity changes to certain of our foreign subsidiaries which resulted in lower deferred tax on foreign unremitted earnings of approximately $23.0 million.  

40


 

The following table sets forth our Consolidated Statements of Income From Continuing Operations data a s a percentage of revenue for the periods indicated and excludes any results of our discontinued operations:

 

 

 

Year ended December 31,

 

 

 

2016

 

 

2015

 

 

2014

 

Revenue

 

 

100.0

%

 

 

100.0

%

 

 

100.0

%

Cost of services

 

 

42.8

 

 

 

42.6

 

 

 

42.5

 

Selling, general and administrative expenses

 

 

37.8

 

 

 

37.4

 

 

 

36.7

 

Operating income