SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934.
For the quarterly period ended June 30, 1999
or
[ ] Transition Report Pursuant to Section
13 or 15(d) of the Securities Exchange
Act of 1934.
For the transition period _____ to ______
Commission File Number 1-12577
SITEL CORPORATION
(Exact name of registrant as specified in its charter)
MINNESOTA 47-0684333
(State or jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
111 SOUTH CALVERT, STE. 1900
BALTIMORE, MD 21202
(410) 246-1505
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
As of July 31, 1999, the Company had 67,525,984 shares of Common Stock
outstanding.
<PAGE>
SITEL CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Balance Sheets............................. 1
Consolidated Condensed Statements of Income (Loss)................ 2
Consolidated Condensed Statements of Cash Flows................... 3
Notes to Consolidated Condensed Financial Statements.............. 4
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition.................................. 14
Item 3. Quantitative and Qualitative Disclosures about Market Risk.......... 22
PART II - OTHER INFORMATION
Item 2. Changes in Securities............................................... 23
Item 4. Submission of Matters to a Vote of Security Holders................. 23
Item 6. Exhibits and Reports on Form 8-K.................................... 24
Signature.................................................................... 25
<PAGE>
SITEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
DECEMBER 31, 1998 AND JUNE 30, 1999
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
ASSETS DECEMBER 31, JUNE 30,
1998 1999
---- ----
Current assets: (unaudited)
<S> <C> <C>
Cash and cash equivalents .............................. $ 14,472 $ 16,235
Trade accounts receivable (net of allowance
for doubtful accounts of $ 3,970 and
$4,071, respectively) ................................. 129,809 143,102
Prepaid expenses ....................................... 5,257 7,962
Other assets ........................................... 6,024 6,444
Deferred income taxes .................................. 1,658 2,365
------------- -------------
Total current assets ............................... 157,220 176,108
Property and equipment, net ................................. 125,615 118,980
Deferred income taxes ....................................... 15,425 14,805
Goodwill, net ............................................... 93,288 87,477
Other assets ................................................ 14,062 14,509
------------- -------------
Total assets ....................................... $ 405,610 $ 411,879
============= =============
LIABILITES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable ........................................... $ 30,545 $ 21,614
Current portion of long-term debt ...................... 3,671 3,629
Current portion of capitalized lease
obligations .......................................... 3,650 2,144
Trade accounts payable ................................. 30,784 28,740
Income taxes payable ................................... 3,875 2,467
Accrued compensation ................................... 15,620 24,765
Accrued operating expenses ............................. 23,527 24,753
Deferred revenue and other ............................. 3,888 16,920
------------- -------------
Total current liabilities .......................... 115,560 125,032
Long-term debt, excluding current portion ................... 107,027 112,735
Capitalized lease obligations, excluding current
portion ................................................... 9,210 9,093
Deferred compensation ....................................... 1,591 1,666
Minority interest ........................................... 10,368 3,867
Stockholders' equity:
Common stock, voting, $.001 par value 200,000,000
shares authorized, 64,399,645 and 67,481,866 shares
issued and outstanding, in 1998 and 1999, respectively 64 67
Paid-in capital ........................................ 157,892 164,695
Accumulated other comprehensive (loss) ................. (4,428) (12,627)
Retained earnings ...................................... 8,326 7,351
------------- -------------
Total stockholders' equity ......................... 161,854 159,486
------------- -------------
Total liabilities and stockholders' equity ......... $ 405,610 $ 411,879
============= =============
</TABLE>
The accompanying notes are an integral part of the consolidated condensed
financial statements.
1
<PAGE>
SITEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME (LOSS)
(UNAUDITED)
<TABLE>
<CAPTION>
For The Three Months Ended For The Six Months Ended
June 30, 1998 June 30, 1999 June 30, 1998 June 30, 1999
------------- ------------- ------------- -------------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Revenues ............................................ $ 147,307 $ 177,996 $ 285,055 $ 342,181
--------- --------- --------- ---------
Operating expenses:
Cost of services ............................... 82,585 95,343 160,405 183,808
Selling, general and administrative
expenses .................................. 61,096 77,989 115,768 152,371
Restructuring expenses ......................... 6,607 -- 6,607 --
--------- --------- --------- ---------
Total operating expense ......... 150,288 173,332 282,780 336,179
--------- --------- --------- ---------
Operating income (loss) .......... (2,981) 4,664 2,275 6,002
Other income (expense):
Interest expense, net .......................... (3,375) (2,994) (5,965) (6,150)
Other income, net .............................. 34 57 169 120
--------- --------- --------- ---------
Income (loss) before income taxes
and minority interest .......................... (6,322) 1,727 (3,521) (28)
Income tax expense (benefit) ........................ (1,878) 1,086 (761) 883
Minority interest ................................... 31 133 (263) 64
--------- --------- --------- ---------
Net income (loss) from continuing operations ........ (4,475) 508 (2,497) (975)
Extraordinary loss on refinancing of debt,
net of taxes ...................................... -- -- 514 --
--------- --------- --------- ---------
Net income (loss) ................................... $ (4,475) $ 508 $ (3,011) $ (975)
========= ========= ========= =========
Income (loss) from continuing operations per common share:
Basic ............................................. $ (0.07) $ 0.01 $ (0.04) $ (0.01)
Diluted ........................................... $ (0.07) $ 0.01 $ (0.04) $ (0.01)
Income (loss) per common share:
Basic ............................................. $ (0.07) $ 0.01 $ (0.05) $ (0.01)
Diluted ........................................... $ (0.07) $ 0.01 $ (0.05) $ (0.01)
Weighted average common shares outstanding:
Basic ............................................. 63,871 65,917 63,584 65,383
Diluted ........................................... 63,871 72,197 63,584 65,383
</TABLE>
The accompanying notes are an integral part of the consolidated condensed
financial statements
2
<PAGE>
SITEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
For Six Months Ended
(dollars in thousands) June 30, 1998 June 30, 1999
------------- -------------
<S> <C> <C>
Net income (loss) ................................................ $ (3,011) $ (975)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization .................................... 19,551 22,448
Extraordinary loss on refinancing of debt ........................ 792 --
Gain on marketable securities .................................... (208) --
Restructuring provision .......................................... 6,607 --
Change in assets and liabilities:
Trade accounts receivable .................................... (21,247) (18,267)
Other assets ................................................. (1,400) (3,082)
Trade accounts payable ....................................... (4,969) (1,115)
Other liabilities ............................................ 11,352 24,007
--------- ---------
Net cash provided by operating activities ............... 7,467 23,016
--------- ---------
Cash flows from investing activities:
Purchases of property and equipment ......................... (23,986) (19,784)
Proceeds from sale-leasebacks of facilities ................. 9,397 --
Acquisition of businesses, net of cash acquired ............. (2,355) --
Sale of marketable securities ............................... 257 --
Changes in other assets, net ................................ (209) --
--------- ---------
Net cash used in investing activities ................... (16,896) (19,784)
--------- ---------
Cash flows from financing activities:
Borrowings on note payable .................................. 13,664 3,296
Repayments of note payable .................................. (2,866) (11,266)
Borrowings on long-term debt ................................ 127,339 18,935
Repayment of long-term debt and capitalized lease obligations (131,541) (14,668)
Capital contribution from subsidiary shareholder ............ 1,400 --
Sale of stock of subsidiaries ............................... 6,541 --
Other ....................................................... 2 (27)
--------- ---------
Net cash provided by (used in) financing activities ..... 14,539 (3,730)
--------- ---------
Effect of exchange rates on cash ................................. (698) 2,261
--------- ---------
Net increase in cash .................................... 4,412 1,763
Cash and cash equivalents, beginning of period ................... 24,285 14,472
--------- ---------
Cash and cash equivalents, end of period ......................... $ 28,697 $ 16,235
========= =========
</TABLE>
Supplemental schedule of non-cash financing and investing activities:
The Company issued approximately 41,000 and 2,205,333 shares of the Company's
common stock in connection with acquisitions in the first six months of 1998 and
1999, respectively.
The accompanying notes are an integral part of the consolidated condensed
financial statements.
3
<PAGE>
SITEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATMENTS
1. BASIS OF PRESENTATION:
The consolidated condensed balance sheet of SITEL Corporation and Subsidiaries
(the "Company") at December 31, 1998 was obtained from the Company's audited
balance sheet as of that date. All other financial statements contained herein
are unaudited and, in the opinion of management, contain all adjustments
necessary for a fair presentation of the financial position, operating results,
and cash flows for the periods presented. Such adjustments consist only of
normal recurring items. The consolidated condensed financial statements should
be read in conjunction with the consolidated financial statements and notes
thereto, together with management's discussion and analysis of financial
condition and results of operations, contained in the Company's Form 10-K for
the year ended December 31, 1998.
2. INCOME TAXES:
The difference between the Company's income tax expense as reported in the
accompanying financial statements and that which would be calculated using the
statutory Federal income tax rate of 34% on income is primarily due to the
impact of the change in operating results combined with non-deductible business
acquisition expenses and international, state and local income taxes.
3. COMPREHENSIVE LOSS:
The Company's comprehensive loss was $4,170,000 and $2,613,000 for the three
month periods ended June 30, 1998 and 1999, respectively, and $4,029,000 and
$9,174,000 for the six month periods ended June 30, 1998 and 1999, respectively.
The difference between the Company's reported net income (loss) and
comprehensive loss for those periods is primarily due to the change in the
currency exchange adjustment. The accumulated other comprehensive loss included
in the Company's Consolidated Condensed Balance Sheet at December 31, 1998 and
June 30, 1999 is primarily the accumulated currency exchange adjustment.
4. RESTRUCTURING:
In the second quarter of 1998, the Company recorded a $6.6 million charge for
restructuring expenses primarily related to its European operations. Included in
that charge were severance and other costs of $6.4 million related to statutory
or contractual severance and other costs for approximately 270 employees. The
restructuring expenses also included $0.2 million for the cost of excess leased
facilities. The amount of severance and other costs paid during 1998 and the six
month period ended June 30, 1999 was approximately $5.2 million.
5. ACQUISITION OF MINORITY INTEREST:
In June 1999, the Company acquired minority interests of certain of its
Asia-Pacific subsidiaries by issuing approximately 2.2 million shares of the
Company's common stock to Lend Lease Securities and Investments Pty Limited and
Lend Lease International Pty Limited (collectively "Lend Lease"). Additionally,
Lend Lease purchased approximately 1.5 million of the Company's common stock for
approximately $4.5 million in cash from two SITEL Corporation shareholders in a
related transaction. The shares issued by the Company were valued at
approximately $6.6 million, based on quoted market prices of the Company's
stock. There was no goodwill recorded on the acquisition of the minority
interests as the carrying value of the minority interests approximated the fair
value of consideration issued in the transaction.
6. STOCK OPTION PLANS:
On May 6, 1999, the Company's stockholders approved the 1999 Stock Incentive
Plan, as amended (the "1999 Plan"). Under the 1999 Plan, the Company is
authorized to grant incentive and nonqualified stock options, stock appreciation
rights, restricted stock awards, performance unit awards, stock bonus awards and
other stock-based awards to eligible employees, consultants and directors. The
1999 Plan limits the aggregate number of shares of common stock which may be
issued under the Plan's various forms of stock awards to 7,000,000 shares.
Through June 30, 1999, the Company had granted options to purchase 218,000
shares of common stock under the 1999 Plan, at exercise prices equal to the
quoted market price of the Company on the date of the grant. No other types of
awards have been made under the Plan through June 30, 1999.
4
<PAGE>
On June 3, 1999, the Company's board of directors amended the Company's Stock
Option Plan (for replacement of EEBs) and Stock Option Plan for Replacement of
Existing Options (collectively, the "Plans") and the Compensation Committee
amended the terms of approximately 6.3 million outstanding and fully-vested
stock options issued under the Plans. The amended options were held by persons
currently employed or serving as consultant to the Company. The amendment to the
Plans permitted the Company to extend the expiration date of the options to up
to ten years after the original grant date. The amendment to the certain options
extended their expiration date from May 29, 2000 to May 29, 2001. All other
contractual terms of the options were unchanged. The quoted market price of the
Company's common stock on the date of the modification was less than the sum of
the exercise price of the options and previously recognized compensation expense
recorded upon the initial grant of the options. Consequently, no compensation
expense was recorded for the amendment of the options.
7. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION:
The Company's 9.25% Senior Subordinated Notes are guaranteed, on a full,
unconditional and joint and several basis, by all wholly-owned domestic
subsidiaries of the Company. Separate financial statements of the guarantor
subsidiaries are not presented because management has determined that they would
not be material to investors. However, the following condensed consolidating
information presents:
(1) Condensed consolidating financial statements as of December 31, 1998 and
June 30, 1999, and for the three and six months ended June 30, 1998 and 1999 of
(a) SITEL Corporation, the parent, (b) the guarantor subsidiaries, (c) the
nonguarantor subsidiaries and (d) SITEL Corporation on a consolidated basis,
(2) SITEL Corporation, the parent, with the investments in all subsidiaries
accounted for on the equity method, and the guarantor subsidiaries with the
nonguarantor subsidiaries accounted for on the equity method (one of the
guarantor subsidiaries is the parent of the nonguarantor subsidiaries), and
(3) Elimination entries necessary to consolidate SITEL Corporation, the parent,
with all subsidiaries.
5
<PAGE>
SITEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
7. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (Continued):
CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
GUARANTOR NONGUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------ ------------ ------------ ------------ ------------
ASSETS
Current assets:
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents .......... $ 2,410 $ 1,190 $ 10,872 $ -- $ 14,472
Trade accounts receivable, net ..... 33,676 33,179 75,540 (12,586) 129,809
Prepaid expenses and other
current assets ................ 2,956 241 9,742 -- 12,939
--------- --------- --------- --------- ---------
Total current assets ............... 39,042 34,610 96,154 (12,586) 157,220
Property and equipment, net ........ 31,302 22,523 71,790 -- 125,615
Deferred income taxes .............. 9,390 -- 6,035 -- 15,425
Goodwill, net ...................... 1,537 21,021 70,730 -- 93,288
Other assets ....................... 10,805 126 3,131 -- 14,062
Investments in subsidiaries ........ 188,690 88,293 -- (276,983) --
Notes receivable, intercompany ..... -- 28,833 -- (28,833) --
--------- --------- --------- --------- ---------
Total assets .................. $ 280,766 $ 195,406 $ 247,840 $(318,402) $ 405,610
========= ========= ========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Notes payable ...................... $ -- $ -- $ 30,545 $ -- $ 30,545
Current portion of long-term debt .. 2,136 -- 1,535 -- 3,671
Current portion of
capitalized lease obligations . 328 81 3,241 -- 3,650
Trade accounts payable ............. 1,338 1,655 40,377 (12,586) 30,784
Accrued expenses and other
current liabilities ........... 9,963 4,922 32,025 -- 46,910
--------- --------- --------- --------- ---------
Total current liabilities ..... 13,765 6,658 107,723 (12,586) 115,560
Long-term debt, excluding
current portion ............... 103,556 -- 3,471 -- 107,027
Capitalized lease obligations,
excluding current portion ..... -- 58 9,152 -- 9,210
Notes payable, intercompany
and other ..................... -- -- 28,833 (28,833) --
Deferred compensation .............. 1,591 -- -- -- 1,591
Minority interest .................. -- -- 10,368 -- 10,368
Stockholders' equity ............... 161,854 188,690 88,293 (276,983) 161,854
--------- --------- --------- --------- ---------
Total liabilities and
stockholders' equity .......... $ 280,766 $ 195,406 $ 247,840 $(318,402) $ 405,610
========= ========= ========= ========= =========
</TABLE>
6
<PAGE>
SITEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATMENTS
7. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (Continued):
CONDENSED CONSOLIDATING BALANCE SHEET
JUNE 30, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
GUARANTOR NONGUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------ ------------ ------------ ------------ ------------
ASSETS
Current assets:
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents ............................... $ 4,483 $ 1,797 $ 9,955 $ -- $ 16,235
Trade accounts receivable, net .......................... 59,907 34,943 80,321 (32,069) 143,102
Prepaid expenses and other current
assets ................................................ 2,886 198 13,687 -- 16,771
--------- --------- --------- --------- ---------
Total current assets ............................... 67,276 36,938 103,963 (32,069) 176,108
Property and equipment, net ............................. 27,645 23,145 68,190 -- 118,980
Deferred income taxes ................................... 8,437 -- 6,368 -- 14,805
Goodwill, net ........................................... 1,492 20,570 65,415 -- 87,477
Other assets ............................................ 12,145 143 2,221 -- 14,509
Investments in subsidiaries ............................. 177,669 89,323 -- (266,992) --
Notes receivable, intercompany .......................... -- 19,978 -- (19,978) --
--------- --------- --------- --------- ---------
Total assets ....................................... $ 294,664 $ 190,097 $ 246,157 $(319,039) $ 411,879
========= ========= ========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Notes payable ........................................... $ -- $ -- $ 21,614 $ -- $ 21,614
Current portion of long-term debt ....................... 884 -- 2,745 -- 3,629
Current portion of capitalized lease
obligations ........................................... 153 76 1,915 -- 2,144
Trade accounts payable .................................. 6,877 3,065 50,867 (32,069) 28,740
Accrued expenses and other current
liabilities ........................................... 20,598 9,274 39,033 -- 68,905
--------- --------- --------- --------- ---------
Total current liabilities .......................... 28,512 12,415 116,174 (32,069) 125,032
Long-term debt, excluding current portion ............... 105,000 -- 7,735 -- 112,735
Capitalized lease obligations, excluding current
portion ............................................ -- 13 9,080 -- 9,093
Notes payable, intercompany and other ................... -- -- 19,978 (19,978) --
Deferred compensation ................................... 1,666 -- -- -- 1,666
Minority interest ....................................... -- -- 3,867 -- 3,867
Stockholders' equity .................................... 159,486 177,669 89,323 (266,992) 159,486
--------- --------- --------- --------- ---------
Total liabilities and stockholders' equity ......... $ 294,664 $ 190,097 $ 246,157 $(319,039) $ 411,879
========= ========= ========= ========= =========
</TABLE>
7
<PAGE>
SITEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATMENTS
7. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (Continued):
CONDENSED CONSOLIDATING STATEMENT OF INCOME (LOSS)
FOR THE THREE MONTHS ENDED JUNE 30, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
GUARANTOR NONGUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues ....................... $ 36,259 $ 45,810 $ 65,238 $ -- $ 147,307
--------- --------- --------- --------- ---------
Operating expenses:
Cost of services ............... 18,932 25,001 38,652 -- 82,585
Selling, general and
administrative expenses ... 17,198 15,730 28,168 -- 61,096
Restructuring expenses ......... -- -- 6,607 -- 6,607
--------- --------- --------- --------- ---------
Total operating
expenses ..................... 36,130 40,731 73,427 -- 150,288
--------- --------- --------- --------- ---------
Operating income ............... 129 5,079 (8,189) -- (2,981)
Other income (expense):
Equity in earnings (losses)
of subsidiaries, net of tax . (3,111) (6,711) -- 9,822 --
Intercompany charges ........... 65 440 (505) -- --
Interest expense, net .......... (2,467) 20 (928) -- (3,375)
Other income (expense) ......... 33 (1) 2 -- 34
--------- --------- --------- --------- ---------
Total other income (expense) ... (5,480) (6,252) (1,431) 9,822 (3,341)
--------- --------- --------- --------- ---------
Income (loss) before income
taxes and minority
interest .................. (5,351) (1,173) (9,620) 9,822 (6,322)
Income tax expense
(benefit) .................... (876) 1,938 (2,940) -- (1,878)
Minority interest .............. -- -- 31 -- 31
--------- --------- --------- --------- ---------
Net income (loss) .............. $ (4,475) $ (3,111) $ (6,711) $ 9,822 $ (4,475)
========= ========= ========= ========= =========
</TABLE>
8
<PAGE>
SITEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATMENTS
7. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (Continued):
CONDENSED CONSOLIDATING STATEMENT OF INCOME (LOSS)
FOR THE THREE MONTHS ENDED JUNE 30, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
GUARANTOR NONGUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues ........................ $ 41,084 $ 50,968 $ 85,944 $ -- $ 177,996
--------- --------- --------- --------- ---------
Operating expenses:
Cost of services ................ 17,575 29,841 47,927 -- 95,343
Selling, general and
administrative expenses ....... 23,268 15,859 38,862 -- 77,989
--------- --------- --------- --------- ---------
Total operating expenses ... 40,843 45,700 86,789 -- 173,332
--------- --------- --------- --------- ---------
Operating income ................ 241 5,268 (845) -- 4,664
Other income (expense):
Equity in earnings (losses)
of subsidiaries, net of tax ... 1,999 (1,700) -- (299) --
Intercompany charges ............ 48 438 (486) -- --
Interest expense, net ........... (2,506) (16) (472) -- (2,994)
Other income (expense) .......... 93 -- (36) -- 57
--------- --------- --------- --------- ---------
Total other income (expense) (366) (1,278) (994) (299) (2,937)
--------- --------- --------- --------- ---------
Income (loss) before income
taxes and minority interest ... (125) 3,990 (1,839) (299) 1,727
Income tax expense (benefit) .... (633) 1,991 (272) -- 1,086
Minority interest ............... -- -- 133 -- 133
--------- --------- --------- --------- ---------
Net income (loss) .......... $ 508 $ 1,999 $ (1,700) $ (299) $ 508
========= ========= ========= ========= =========
</TABLE>
9
<PAGE>
SITEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATMENTS
7. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (Continued):
CONDENSED CONSOLIDATING STATEMENT OF INCOME (LOSS)
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
GUARANTOR NONGUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues ............................. $ 70,331 $ 86,816 $ 127,908 $ -- $ 285,055
--------- --------- --------- --------- ---------
Operating expenses:
Cost of services ..................... 36,892 48,347 75,166 -- 160,405
Selling, general and
administrative expenses ............ 32,322 30,056 53,390 -- 115,768
Restructuring expenses ............... -- -- 6,607 -- 6,607
--------- --------- --------- --------- ---------
Total operating expenses ........ 69,214 78,403 135,163 -- 282,780
--------- --------- --------- --------- ---------
Operating income (loss) .............. 1,117 8,413 (7,255) 2,275
Other income (expense):
Equity in earnings (losses)
of subsidiaries, net of tax ........ (1,330) (6,874) -- 8,204 --
Intercompany charges ................. 121 876 (997) -- --
Interest expense, net ................ (3,580) (760) (1,625) -- (5,965)
Other income (expense) ............... 168 (1) 2 -- 169
--------- --------- --------- --------- ---------
Total other income (expense) .... (4,621) (6,759) (2,620) 8,204 (5,796)
--------- --------- --------- --------- ---------
Income (loss) before income
taxes and minority interest ..... (3,504) 1,654 (9,875) 8,204 (3,521)
Income tax expense (benefit) ......... (1,007) 2,984 (2,738) -- (761)
Minority interest (income) ........... -- -- (263) -- (263)
--------- --------- --------- --------- ---------
Net income (loss) from
continuing operations ............. (2,497) (1,330) (6,874) 8,204 (2,497)
Extraordinary loss on
refinancing of debt, net of taxes . 514 -- -- -- 514
--------- --------- --------- --------- ---------
Net income (loss) ............... $ (3,011) $ (1,330) $ (6,874) $ 8,204 $ (3,011)
========= ========= ========= ========= =========
</TABLE>
10
<PAGE>
SITEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATMENTS
7. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (Continued):
CONDENSED CONSOLIDATING STATEMENT OF INCOME (LOSS)
FOR THE SIX MONTHS ENDED JUNE 30, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
GUARANTOR NONGUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues ........................ $ 78,873 $ 100,839 $ 162,469 $ -- $ 342,181
--------- --------- --------- --------- ---------
Operating expenses:
Cost of services ................ 34,122 59,479 90,207 -- 183,808
Selling, general and
administrative expenses .... 45,916 31,330 75,125 -- 152,371
--------- --------- --------- --------- ---------
Total operating expenses ... 80,038 90,809 165,332 -- 336,179
--------- --------- --------- --------- ---------
Operating income (loss) ......... (1,165) 10,030 (2,863) 6,002
Other income (expense):
Equity in earnings (losses)
of subsidiaries, net of tax ... 2,493 (4,109) -- 1,616 --
Intercompany charges ............ 98 941 (1,039) -- --
Interest expense, net ........... (4,224) (814) (1,112) -- (6,150)
Other income (expense) .......... 167 -- (47) -- 120
--------- --------- --------- --------- ---------
Total other income (expense) (1,466) (3,982) (2,198) 1,616 (6,030)
--------- --------- --------- --------- ---------
Income (loss) before income
taxes and minority interest ... (2,631) 6,048 (5,061) 1,616 (28)
Income tax expense (benefit) .... (1,656) 3,555 (1,016) -- 883
Minority interest ............... -- -- 64 -- 64
--------- --------- --------- --------- ---------
Net income (loss) .......... $ (975) $ 2,493 $ (4,109) $ 1,616 $ (975)
========= ========= ========= ========= =========
</TABLE>
11
<PAGE>
SITEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATMENTS
7. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (Continued):
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
GUARANTOR NONGUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net cash provided by (used in)
operating activities .... $ (2,010) $ 10,570 $ (1,093) $ -- $ 7,467
--------- --------- --------- --------- ---------
Cash flows from investing
activities:
Investments in subsidiaries .. 2,335 (5,924) -- 3,589 --
Dividend on common stock ..... -- 10,000 -- (10,000) --
Purchases of property and
equipment ............... (7,290) (5,075) (11,621) -- (23,986)
Acquisition of subsidiary .... -- -- (2,355) -- (2,355)
Proceeds from sales of
property and equipment .. 9,397 -- -- -- 9,397
Sale of marketable
securities .............. 257 -- -- -- 257
Changes in other assets ...... -- -- (209) -- (209)
--------- --------- --------- --------- ---------
Net cash provided by (used in)
investing activities .... 4,699 (999) (14,185) (6,411) (16,896)
--------- --------- --------- --------- ---------
Cash flows from financing
activities:
Borrowings on notes payable .. -- -- 13,664 -- 13,664
Repayments of notes payable .. -- -- (2,866) -- (2,866)
Borrowings on long-term debt . 124,478 -- 2,861 -- 127,339
Repayment of long-term debt
and capital lease
obligations ............. (128,124) -- (3,417) -- (131,541)
Net capital contribution
from parent ............. -- (2,335) 5,924 (3,589) --
Net borrowings and payments
on note to parent ....... -- (7,295) 7,295 -- --
Dividend on common stock ..... -- -- (10,000) 10,000 --
Capital contribution from
subsidiary shareholder .. -- -- 1,400 -- 1,400
Sale of stock of subsidiaries -- -- 6,541 -- 6,541
Other ........................ 2 -- -- -- 2
--------- --------- --------- --------- ---------
Net cash provided by (used in)
financing activities .... (3,644) (9,630) 21,402 6,411 14,539
--------- --------- --------- --------- ---------
Effect of exchange rates on
cash .................... -- -- (698) -- (698)
--------- --------- --------- --------- ---------
Net decrease in cash ......... (955) (59) 5,426 -- 4,412
Cash and cash equivalents,
beginning of period ..... 11,514 2,075 10,696 -- 24,285
--------- --------- --------- --------- ---------
Cash and equivalents, end of
period .................. $ 10,559 $ 2,016 $ 16,122 $ -- $ 28,697
========= ========= ========= ========= =========
</TABLE>
12
<PAGE>
SITEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATMENTS
7. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (Continued):
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
GUARANTOR NONGUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net cash provided by (used in)
operating activities ........... $ (7,804) $ 17,133 $ 13,687 $ -- $ 23,016
-------- -------- -------- -------- --------
Cash flows from investing activities:
Investments in subsidiaries ......... 14,897 2,684 -- (17,581) --
Purchases of property and equipment . (4,961) (4,313) (10,510) -- (19,784)
-------- -------- -------- -------- --------
Net cash provided by (used in)
investing activities ........... 9,936 (1,629) (10,510) (17,581) (19,784)
-------- -------- -------- -------- --------
Cash flows from financing activities:
Borrowings on notes payable ......... -- -- 3,296 -- 3,296
Repayments of notes payable ......... -- -- (11,266) -- (11,266)
Borrowings on long-term debt ........ 13,000 -- 5,935 -- 18,935
Repayment of long-term debt
and capital lease
obligations .................... (13,032) -- (1,636) -- (14,668)
Net capital contribution
from (to) parent ............... -- (14,897) (2,684) 17,581 --
Other ............................... (27) -- -- -- (27)
-------- -------- -------- -------- --------
Net cash provided by (used in)
financing activities ........... (59) (14,897) (6,355) 17,581 (3,730)
-------- -------- -------- -------- --------
Effect of exchange rates on cash .... -- -- 2,261 -- 2,261
-------- -------- -------- -------- --------
Net decrease in cash ................ 2,073 607 (917) -- 1,763
Cash and cash equivalents,
beginning of period ............ 2,410 1,190 10,872 -- 14,472
-------- -------- -------- -------- --------
Cash and equivalents, end of
period ......................... $ 4,483 $ 1,797 $ 9,955 $ -- $ 16,235
======== ======== ======== ======== ========
</TABLE>
13
<PAGE>
SITEL CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATION AND
FINANCIAL CONDITION.
OVERVIEW
SITEL Corporation and subsidiaries (the "Company") provide customer relationship
management services on behalf of clients principally in the financial services,
insurance, telecommunications, technology, utilities, consumer, media,
government and travel sectors located in North America, Europe, the Asia Pacific
region, and Latin America.
The following table sets forth certain financial data and the percentage of
total revenues of the Company for the periods indicated. All amounts are in
thousands.
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
1998 (1) 1999 1998 (1) 1999
------------------ ------------------ ---------------------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues ......................... $ 147,307 100% $ 177,996 100% $ 285,055 100% $ 342,181 100%
-------------------- -------------------- ------------------------ ----------------------
Operating expenses:
Cost of services .............. 82,585 56.1% 95,343 53.6% 160,405 56.3% 183,808 53.7%
Selling, general, and
administrative expenses ..... 61,096 41.5% 77,989 43.8% 115,768 40.6% 152,371 44.5%
Restructuring ................. 6,607 4.4% -- 0.0% 6,607 2.3% -- 0.0%
-------------------- -------------------- ------------------------ ----------------------
Total operating expenses 150,288 102.0% 173,332 97.4% 282,780 99.2% 336,179 98.2%
-------------------- -------------------- ------------------------ ----------------------
Operating income (loss) (2,981) (2.0)% 4,664 2.6% 2,275 0.8% 6,002 1.8%
Interest income (expense), net ... (3,375) (2.3)% (2,994) (1.6)% (5,965) (2.1)% (6,150) (1.8)%
Other income (expense) ........... 34 0.0 % 57 0.0% 169 0.1 % 120 0.0 %
-------------------- -------------------- ------------------------ ---------------------
Income (loss) before
income taxes and minority interest (6,322) (4.3)% 1,727 1.0% (3,521) (1.2)% (28) (0.0)%
Income tax expense (benefit) ..... (1,878) (1.3)% 1,086 0.6% (761) (0.2)% 883 0.3%
Minority interest (income) ....... 31 0.0% 133 0.1% (263) (0.1)% 64 0.0%
-------------------- -------------------- ------------------------ ---------------------
Net income (loss) from
continuing operations .......... (4,475) (3.0)% 508 0.3% (2,497) (0.9)% (975) (0.3)%
Extraordinary loss on
refinancing of debt, net
of taxes ....................... -- 0.0% -- 0.0% 514 0.2 % -- 0.0%
-------------------- -------------------- ------------------------ --------------------
Net income (loss) ................ $ (4,475) (3.0)% $ 508 0.3% $ (3,011) (1.1)% $ (975) (0.3)%
==================== ==================== ======================= ===================
</TABLE>
(1) Includes restructuring expenses. Excluding those expenses, operating income,
net income, basic income per share and diluted income per share were $3.6
million, $84,000, $0.00 and $0.00 for the three month period ended June 30, 1998
and $8.9 million, $1.5 million, $0.03 and $0.02 for the six month period ended
June 30, 1998.
14
<PAGE>
SITEL CORPORATION AND SUBSIDIARIES
THREE MONTHS ENDED JUNE 30, 1999 VS. THREE MONTHS ENDED JUNE 30, 1998
REVENUES:
Revenues increased $30.7 million, or 20.8%, to $178.0 million in the three
months ended June 30, 1999 from $147.3 million in the three months ended June
30, 1998. Of this increase, $26.6 million was attributable to services initiated
for new clients and approximately $4.1 million was attributable to increased
revenues from existing clients. The increase in revenues from existing clients
was primarily the result of higher calling volumes rather than higher rates.
COST OF SERVICES:
Cost of services represents primarily labor and telephone expenses directly
related to teleservicing activities. Cost of services increased $12.8 million,
or 15.4%, to $95.3 million in the three months ended June 30, 1999 from $82.6
million in the three months ended June 30, 1998. As a percentage of revenues,
cost of services decreased to 53.6% in the second quarter of 1999 from 56.1% in
the second quarter of 1998. The decrease was primarily attributable to certain
technology revenues from a large client where the costs associated with those
revenues are included in selling, general and administrative expenses. Excluding
the impact of this particular item, cost of services as a percentage of revenues
would have decreased to 55.8% for the three months ended June 30, 1999 from
56.1% in the second quarter of 1998. The decrease as a percent of revenue was
primarily attributable to the increase in revenue in the second quarter in
several business units combined with increased call center efficiencies.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES:
Selling, general and administrative expenses represents expenses incurred to
directly support and manage the operations, including cost of management,
administration, facilities expenses, depreciation and amortization, maintenance,
sales and marketing activities, and client support services. Selling, general
and administrative expenses increased $16.9 million, or 27.6%, to $78.0 million
in the three months ended June 30, 1999 from $61.1 million in the three months
ended June 30, 1998. As a percentage of revenues, selling, general and
administrative expenses increased to 43.8% in the second quarter of 1999 from
41.5% in the second quarter of 1998. Approximately $7.1 million of this increase
was directly attributed to the technology costs for a large client noted above,
and $2.4 million was related to re-engineering costs in the United Kingdom, and
severance and consolidation costs in the Asia Pacific region.
OPERATING INCOME (LOSS):
Operating income (loss) increased to $4.7 million in the three months ended June
30, 1999 from $(3.0) million in the three months ended June 30, 1998. As a
percentage of revenues, operating income increased to 2.6% in the second quarter
of 1999 from (2.0%) in the second quarter 1998. Excluding the restructuring
expenses in 1998, operating income increased $1.0 million for the three months
ended June 30, 1999 from $3.6 million in the second quarter of 1998. This
increase was primarily the result of the Company's revenue growth and increased
call center efficiencies.
15
<PAGE>
INTEREST EXPENSE, NET:
Interest expense, net of interest income, decreased to $3.0 million in the three
months ended June 30, 1999 from $3.4 million in the three months ended June 30,
1998. This decrease was primarily due to lower outstanding borrowings during the
period.
INCOME TAX EXPENSE (BENEFIT):
Income tax expense (benefit) for the three months ended June 30, 1999 was $1.1
million compared to a benefit of $(1.9) million in the three months ended in
June 30, 1998. Excluding the restructuring expenses, income tax expense was $0.2
million for the second quarter of 1998. The income tax expense as a percent of
income before income taxes and minority interest, excluding restructuring
expenses and related tax effects, increased to 62.9% in the three months ended
June 30, 1999 from 60.0% in the three months ended June 30, 1998, primarily due
to the impact of non-deductible expenses associated with acquisitions combined
with increased operating income.
NET INCOME (LOSS):
For the reasons discussed above, net income increased to $0.5 million in the
three months ended June 30, 1999 from $(4.5) million loss in the three months
ended June 30, 1998. Excluding the restructuring expenses and the related tax
effects, net income was $0.1 million in the second quarter of 1998.
SIX MONTHS ENDED JUNE 30, 1999 VS. SIX MONTHS ENDED JUNE 30, 1998
REVENUES:
Revenues increased $57.1 million, or 20%, to $342.2 million in the six months
ended June 30, 1999 from $285.1 million in the six months ended June 30, 1998.
Of this increase, $41.1 million was attributable to services initiated for new
clients and approximately $16.0 million was attributable to increased revenues
from existing clients. The increase in revenues from existing clients was
primarily the result of higher calling volumes rather than higher rates.
COST OF SERVICES:
Cost of services increased $23.4 million, or 14.6%, to $183.8 million in the six
months ended June 30, 1999, from $160.4 million in the six months ended June 30,
1998. As a percentage of revenues, cost of services decreased to 53.7% in the
first six months of 1999 from 56.3% in the first six months of 1998. The
decrease was primarily attributable to certain revenues for a large client where
the costs associated with those revenues are included in selling, general and
administrative expenses. Excluding the impact of this particular item, cost of
services as a percentage of revenues would have been 56.3% for the six months
ended June 30, 1999 compared to 56.3% in the first six months of 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES:
Selling, general and administrative expenses increased $36.6 million, or 31.6%,
to $152.4 million in the six months ended June 30, 1999 from $115.8 million in
the six months ended June 30, 1998. This increase was primarily a result of the
Company's continued growth both internally and through acquisition. As a
percentage of revenues, selling, general and administrative expenses increased
to 44.5% in the first six months of 1999 from 40.6% in the first six months of
1998. Approximately $15.4 million of this increase was directly attributed to
the technology costs for a large client noted above. Excluding the impact of
these technology costs, selling, general and administrative expense increased to
41.9% in the first six months of 1999. This increase was primarily attributable
to re-engineering costs in the United Kingdom, severance and consolidation costs
in the Asia Pacific region and inefficiencies related to declines in certain
North America and United Kingdom operations.
16
<PAGE>
OPERATING INCOME:
Operating income increased to $6.0 million in the six months ended June 30, 1999
from $2.3 million in the six months ended June 30, 1998. This increase was
primarily due to the restructuring expenses in 1998 and the increase in selling,
general and administrative expenses as a percentage of revenues as noted above.
Excluding the restructuring expense, operating income was $8.9 million for the
six months ended June 30, 1998.
INTEREST EXPENSE, NET:
Interest expense, net of interest income, increased to $6.2 million in the six
months ended June 30, 1999 from $6.0 million in the six months ended June 30,
1998. This increase was primarily due to higher interest rates associated with
the issuance of the Company's 9.25% Senior Subordinated Notes in March, 1998,
which refunded debt that had variable short term interest rates. Also
contributing to the increase in interest expense was increased borrowings
utilized to support the Company's growth.
INCOME TAX EXPENSE (BENEFIT):
Income tax expense (benefit) for the six months ended June 30, 1999 was $0.9
million compared to a benefit of $(0.8) million in the six months ended June 30,
1998. This increase is primarily due to the impact of non-deductible expenses
associated with acquisitions combined with higher operating income. Excluding
the restructuring expenses, income tax expense was $1.3 million for the six
months ended June 30, 1998.
NET LOSS FROM CONTINUING OPERATIONS AND NET LOSS:
For the reasons discussed above, net loss from continuing operations decreased
to $1.0 million in the six months ended June 30, 1999 from $2.5 million in the
six months ended June 30, 1998. After the extraordinary loss on refinancing of
debt, net loss decreased $2.0 million in the six months ended June 30, 1999 from
$3.0 million for the six months ended June 30, 1998. Excluding the restructuring
expenses and the related tax effects, net income from continuing operations and
net income for the six months ended June 30, 1998, was $2.1 million and $1.5
million, respectively.
LIQUIDITY AND CAPITAL RESOURCES:
Cash provided by operating activities was approximately $23.0 million during the
six month period ended June 30, 1999. This was primarily the result of noncash
charges and an increase in accrued liabilities which was partially offset by an
increase in accounts receivable. The Company anticipates that the accounts
receivable will continue to grow, using working capital, as the Company
continues to grow. Cash used in investing activities in the six months ended
June 30, 1999 of approximately $19.8 million was primarily related to capital
expenditures. Cash used in financing activities in the six months ended June 30,
1999 of approximately $3.7 million primarily related to repayments of the
Company's notes payable.
At June 30, 1999, the Company had available lines of credit totaling
approximately $25 million. The Company believes that funds generated from
operations, existing cash and the funds available under the credit facility will
be sufficient to finance its current operations, planned capital expenditures
and internal growth for the foreseeable future.
17
<PAGE>
YEAR 2000 ISSUE
The Year 2000 statement which follows is a Year 2000 Readiness Disclosure,
pursuant to the Year 2000 Information and Readiness Disclosure Act, Public Law
No. 105-271.
The Company recognizes the need to ensure its operations will not be adversely
impacted by Year 2000 software and embedded system failures. Specifically,
computational errors and system failures are a known risk with respect to dates
after December 31, 1999. The Company has established a central Y2K compliance
office that reports directly to the Chief Information Officer. Each of the
Company's operating units have also designated information technology (IT)
personnel to address the issues that the unit faces and to report to the central
Y2K compliance office. The Company has implemented a system which allows it to
track all IT and non-IT systems and facility functions for compliance with
industry Y2K standards. This tracking system allows the Company to monitor and
track each functional point as a single item grouped by how critical the item is
in the Company's ability to perform its daily functions. Based on the output
from this data and an analysis of the system reports, the Company believes that
all functional points which are critical to the Company's functions have been
identified and assessed. Further, the Company has developed a remediation plan
for each item in this critical list. Part of the Company's remediation strategy
is in concert with its efforts to acquire or develop new and innovative systems
for its internal operations.
IT issues - The Company is moving all of its IT systems into a state of
readiness for the year 2000. The Company believes that it is making satisfactory
progress to ensure that it will be ready with all IT systems by the end of
December 1999. Internal systems represent approximately 28% of the overall
effort in the IT applications area. The remaining 72% of the overall effort in
the IT area is in the interface and integration of external client and vendor
application systems. The Company has implemented a three-step process of
contacting significant vendors and clients to request information about the
status of their Y2K compliance efforts. In addition to communicating with
significant vendors, the Company is testing certain critical vendor application
systems for Y2K compliance. The Company has an initiative that will identify
mitigation and contingency plans at both the business and technical IT levels.
This initiative is scheduled to be completed by September 30, 1999. In addition
to communicating with significant clients, the Company's strategy to deal with
non-compliant external client customer data is a windowing technique that will
enable such data to be used by the Company's systems.
Non IT issues (facilities) - Non-IT issues, with few exceptions, have been
classified into a non-critical category. The few exceptions include dial tone
for the Company's telephony and power from the Company's energy providers. The
Company has included these functional points in the critical category for
purposes of scheduling. Based on communications with providers of these
services, the Company believes that these services will not be interrupted by
Year 2000 failures. The Company's contingency plan for the loss of power
includes generator systems in the Company's major facilities. The Company's
contingency plan for loss of dial tone includes the distribution of network
services across several providers. This will allow the Company to minimally
maintain its service levels in the event of a failure. The Company believes that
it is making satisfactory progress to ensure that all facility related issues
will be compliant by the end of December 1999.
Phases - The Company is employing a four-phase, nine-process step Project
Methodology that covers each aspect of Y2K compliance. The four phases are:
Phase 1 Assessment
Phase 2 Remediation
Phase 3 Verification and Testing
Phase 4 Implementation
18
<PAGE>
Each process step is necessary within the framework and provides clear
management checkpoints for gauging the progress of activity during execution of
the project plan. The following table outlines the phases and process steps:
<TABLE>
<CAPTION>
Phase1 Phase 2 Phase 3 Phase 4
Verification/
Process Steps Assessment Remediation Testing Implementation
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1. Recognition/Awareness X X X X
2. Inventory X
3. Evaluation X
4. Determination X
5. Remediation X
6. Re-engineering X
7. Multi-level testing X X X X
8. Implementation X
9. Post-implementation X
</TABLE>
The Company has clearly defined each of the process steps in the Project
Methodology. The Recognition/Awareness step included communication of the Y2K
issues and their importance throughout the Company. The Inventory step included
the identification and cataloging of each item that must be verified for
compliance with Y2K processing. The Evaluation step involved the evaluation and
categorization of the critical nature of each item based on established
criteria. The Determination step includes making informed management decisions
regarding the strategy to be taken for each individual item. The Remediation
step involves repair of all components of a process that could improperly
process dates. The Re-engineering step consists of rewriting and/or replacing
whole units of software code. The Multi-level testing step involves the
development of detailed testing criteria and the implementation of those testing
plans. The Implementation step involves the coordination of the release of
applications/systems into the live systems environment. The Post-implementation
step will include the on-going monitoring of applications/systems that have been
repaired and placed into the live systems environment.
The Company has completed the Recognition /Awareness, Inventory, and Evaluation
process steps for all items. The Company estimates that approximately 84% of all
items are entirely completed. Completed items are either compliant, will be
retired prior to 2000, or are low priority items that do not affect business and
will be addressed at a later time (work around processes will be implemented).
In addition, the Company estimates that another 8% of all items that the Company
believes it needs to complete to be Y2K compliant are in process steps within
Phase 2 - Remediation, and a small number of items are in Phases 3 and 4.
Contingency Plans - The Company is developing Year 2000 Business Contingency
Plans for conducting its business operations in the event of crises. This effort
is not limited to the risks posed by the potential Year 2000 failures of the
Company's internal information systems or infrastructures, but also includes the
potential secondary impact on the Company of Year 2000 failures, including
potential systems failures of business partners and infrastructure service
providers. Completion of these contingency plans is scheduled for third quarter
1999.
Costs of Y2K Compliance - The Company currently estimates that the costs to
become Y2K compliant will approximate $12-16 million. The Company currently
anticipates that approximately 50% of these costs will be for hardware and
software and the remainder will be primarily internal personnel costs. The
Company estimates that it has incurred less than $9 million of these costs
through June 30, 1999. The estimated hardware and software costs are included in
the Company's definition of Y2K costs in cases where such expenditures have been
accelerated in order to address Y2K issues. These are the Company's current cost
estimates and they may change, perhaps materially.
Risks - There are many risks associated with the Year 2000 issue, including
without limitation the possibility that the Company will be unable to receive
client phone calls or that the Company will be unable to initiate phone calls on
behalf of its clients. Such possibilities could have a material adverse effect
on the Company depending on the
19
<PAGE>
nature of the cause and the speed with which it could be corrected or an
alternative implemented. If the Company's service providers are unable to
provide network switching capability, the Company will be unable to perform its
revenue-producing activities. If the Company's client customer data does not
have Year 2000 compliant dates, additional processing will be required before
revenue-producing activities using these data can be performed. If internal
systems or vendor application systems fail, the Company will be unable to
perform revenue-producing activities until such time as the problem can be
isolated and repaired.
As with other teleservices providers, there exists a worst case scenario
possibility that a failure to correct a Year 2000 program in one or more of the
Company's mission critical systems or IT applications could cause a significant
disruption of or interruption in certain of the Company's normal business
functions. Based on assessments and work to date, management believes that any
such material disruption to its operations due to failure of an internal system
is unlikely. However, due to the uncertainty inherent in Year 2000 issues
generally and those that are beyond the Company's control in particular (e.g.
the final Year 2000 readiness of our clients, suppliers, electric, gas and other
public utilities, telecommunications carriers, and joint venture and foreign
investment interests), there can be no assurance that one or more such failures
would not have a material impact on the Company's results of operations,
liquidity or financial condition.
The Company contracted for an external review of its Y2K compliance program by
an independent third party in order to review and validate its program, assess
its readiness, and identify areas of additional need on a worldwide basis. The
external review has been completed, generally validated the Company's Y2K
compliance program and concluded that the Company was proceeding in due course
to become Y2K ready. The Company is addressing areas of additional need
identified by the external review.
The above information is based on the Company's current best estimates, which
were derived using numerous assumptions of future events, including the
continued availability and future costs of certain technological and other
resources, third party modification actions, and other factors. Given the
complexity of these issues and possible unidentified risks, actual results may
vary materially from those anticipated and discussed above. Specific factors
that might cause such differences include, among others, the availability and
cost of personnel trained in this area, the ability to locate and correct all
affected computer code, the timing and success of Year 2000 remedial efforts of
our clients, suppliers and business partners, and similar uncertainties.
QUARTERLY RESULTS AND SEASONALITY
The Company has experienced and expects to continue to experience quarterly
variations in its results of operations principally due to the timing of
clients' teleservicing campaigns and the commencement of new contracts, revenue
mix, and the timing of additional selling, general and administrative expenses
to support new business. The Company experiences periodic fluctuations related
to both the start-up costs associated with expansion into a new region and the
implementation of clients' teleservicing activities. In addition, the Company's
business tends to be slower in the third quarter due to summer holidays in
Europe and, to a lesser degree, in the first quarter due to the changeover of
client marketing strategies which often occurs at the beginning of the year.
EFFECTS OF INFLATION
Inflation has not had a significant effect on the Company's operations. However,
there can be no assurance that inflation will not have a material effect on the
Company's operations in the future.
20
<PAGE>
ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standard ("SFAS") 133, Accounting for
Derivative Investments and Hedging Activities, was issued in June 1998. SFAS 133
establishes accounting standards for derivative instruments and for hedging
activities. The standard is effective for all fiscal quarters of fiscal years
beginning after June 15, 2001. The Company anticipates adopting this accounting
pronouncement in the third quarter of 2001; however, management believes that it
will not have a significant impact on the Company's consolidated financial
statements.
FORWARD-LOOKING STATEMENTS
This Form 10-Q contains forward-looking statements within the meaning of Section
27A of the Securities Act and Section 21E of the Exchange Act. Such statements
are identified by the use of forward-looking words or phrases which may include
but are not limited to, "intended," "will be positioned," "expects," "expected,"
"anticipates," and "anticipated," "believes" and similar expressions. The
forward-looking statements are based on the Company's current expectations. All
statements other than statements of historical facts included in this Form 10-Q,
including those regarding the Company's financial position, business strategy,
projected costs and plans and objectives of management for future operations,
are forward-looking statements. Although the Company believes that the
expectations reflected in such forward-looking statements are reasonable, there
can be no assurance that such expectations will prove to be correct. Because
forward-looking statements involve risks and uncertainties, the Company's actual
results could differ materially. Important factors that could cause actual
results to differ materially from the Company's expectations may include, but
are not limited to, the effects of leverage, restrictions imposed by the terms
of indebtedness, reliance on major clients, risks associated with managing a
global business, fluctuations in operating results, reliance on
telecommunications and computer technology, risks associated with the Company's
acquisition strategy, the dependence on telephone service, the competitive
industry, dependence on labor force, foreign currency risks, the effects of
business regulation, dependence on key personnel and control by management, and
risks associated with Year 2000 failures (see discussion above under the caption
"Year 2000 Issue"). All subsequent written and oral forward-looking statements
attributable to the Company or persons acting on behalf of the Company are
expressly qualified in their entirety by this paragraph. The Company disclaims,
however, any intent or obligation to update its forward-looking statements.
21
<PAGE>
SITEL CORPORATION AND SUBSIDIARIES
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company is exposed to market risks associated primarily with changes in
foreign currency exchange rates. The Company has operations in many parts of the
world however, both revenues and expenses of those operations are typically
denominated in the currency of the country of operations, providing a natural
hedge. The Company entered into certain hedging transactions during the first
six months of 1999, designed to hedge foreign currency exchange risk related to
short term intercompany loans, however the amounts involved were not material.
22
<PAGE>
SITEL CORPORATION AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 2. Changes in Securities.
(c) Effective June 9, 1999, the Company acquired the shares held by Lend Lease
Securities and Investments Pty Limited and Lend Lease International Pty
Limited (collectively "Lend Lease") in certain of the Company's
Asia-Pacific subsidiaries (specifically 1,880,180 shares in SITEL Asia
Pacific Holdings Pte Ltd and 1,938,903 shares in SITEL Australia Pty
Limited) by issuing an aggregate of 2,205,333 shares of its Common Stock to
Lend Lease. The cash consideration paid by Lend Lease for the newly issued
shares ($6,615,999) equaled the cash consideration paid by the Company for
Lend Lease's shares in the Asia-Pacific subsidiaries. The Company's shares
were issued in reliance on the Section 4(2) exemption from registration
under the Securities Act of 1933, as amended.
Item 4. Submission of Matters to a Vote of Security Holders.
(a) Date and Type of Meeting. The Company held its Annual Meeting of
Stockholders on May 6, 1999.
(b) Matters Voted Upon and Number of Votes Cast. There were 56,797,014 shares
of Common Stock represented at the meeting in person or by proxy. Three
proposals were presented to the stockholders and all were approved. The
voting on the proposals was as follows:
Proposal 1 (election of two directors for a three-year term)
On the election of Bill L. Fairfield as director:
55,510,756 votes for
1,286,258 votes withheld
On the election of Henk P. Kruithof as director:
55,487,920 votes for
1,309,094 votes withheld
Proposal 2 (approvals of the 1999 Stock Incentive Plan and amendment
thereto)
34,342,649 votes for 9,010,908 votes against 123,101 abstained
13,320,356 broker non-votes
Proposal 3 (ratification of the selection of KPMG LLP as independent
auditors for the year ended December 31, 1999)
56,577,838 votes for
164,181 votes against
54,995 abstained
23
<PAGE>
Item 6. Exhibits
(a) Exhibits:
(1) 10.1 Amendment No. 1 to the SITEL Corporation 1999 Stock Incentive
Plan
10.2 Third Amendment to the SITEL Corporation Executive Wealth
Accumulation Plan
27 Financial Data Schedule
-----------------------------------------------------------------
(1) Previously filed as Exhibit 4.2 to the Company's Registration Statement
on Form S-8 (Registration No. 333-78241)
24
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: August 13, 1999 SITEL Corporation
By:/s/ W. Gar Richlin
----------------------------------------------------
W. Gar Richlin
Executive Vice-President and Chief Financial Officer
(Principal Financial Officer)
25
<PAGE>
SITEL CORPORATION AND SUBSIDIARIES
Exhibits Index:
(1) 10.1 Amendment No. 1 to the SITEL Corporation 1999 Stock Incentive
Plan
10.2 Third Amendment to the SITEL Corporation Executive Wealth
Accumulation Plan
27 Financial Data Schedule
-----------------------------------------------------------------
(1) Previously filed as Exhibit 4.2 to the Company's Registration Statement
on Form S-8 (Registration No. 333-78241)
26
EXHIBIT 10.2
THIRD AMENDMENT TO SITEL CORPORATION
EXECUTIVE WEALTH ACCUMULATION PLAN
The SITEL Corporation Executive Wealth Accumulation Plan (the "Plan") is
amended, effective May 6, 1999, by adding the following new Section 7.8:
7.8 EMERGENCY DISTRIBUTION. A Participant may receive an early
withdrawal from the Plan on account of an "unforeseeable emergency,"
which shall mean an unanticipated emergency that is caused by an event
beyond the control of the Participant and which would result in severe
financial hardship to the Participant or a family member or dependent
if such early withdrawal were not permitted. Any request for an early
withdrawal shall be made in writing to the Committee and shall state
the reason for such withdrawal, the amount requested by the Participant
(which shall not exceed the total vested amount in all of the
Participant's Deferred Benefit Accounts), and shall be accompanied by a
statement signed by the Participant that the hardship for which such
distribution is requested cannot otherwise be relieved (i) through
reimbursement or compensation by insurance or otherwise, (ii) by
liquidation of the Participant's assets, to the extent the liquidation
of such assets would not itself cause severe financial hardship, or
(iii) by cessation of deferrals under the Plan. The amount of any
emergency distribution shall not exceed the amount reasonably needed to
satisfy the emergency need. If approved by the Committee, the
distribution shall be made to the Participant as soon as reasonably
possible and such Participant's Deferred Benefit Account(s) shall be
reduced by the amount of such emergency distribution.
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This schedule contains summary financial information extracted from form
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