UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended DECEMBER 31, 2001

 

 

MINNESOTA
(State or Other Jurisdiction of Incorporation or Organization)
111 S. CALVERT STREET, SUITE 1900 BALTIMORE, MARYLAND		21202
(Address of principal executive offices)		(Zip Code)
(410) 246-1505
(Registrant’s Telephone Number, Including Area Code)

 

SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:

 

 

SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:

Not Applicable

 

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  ý  NO  o

 

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

 

The aggregate market value of the voting stock held by non-affiliates of the registrant as of March 6, 2002 was $122,896,467 based upon the closing price of $2.74 for such stock as reported by the New York Stock Exchange on such date. Solely for purposes of this calculation, persons holding of record more than 5% of the Company’s stock have been included as “affiliates.”

 

COMMON STOCK, $.001 PAR VALUE — 74,357,431 SHARES OUTSTANDING AS OF MARCH 6, 2002

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Part of Form 10-K		Document Incorporated by Reference
III		Certain sections of the Proxy Statement for the Annual Meeting of Stockholders to be held May 3, 2002.

 

SITEL CORPORATION AND SUBSIDIARIES

 

TABLE OF CONTENTS

 

Forward Looking Statements								1
PART I
	Item 1		–		Business
					General				1
					Industry Overview				1
					Our Business				2
					The Services We Offer				2
					The Communication Channels We Use				3
					The Industries We Serve				4
					Our Clients				5
					Information Technology				5
					Human Resource Management				5
					Competition				6
					Government Regulation				6
					Quarterly Results and Seasonality				8
	Item 2		–		Properties				9
	Item 3		–		Legal Proceedings				9
	Item 4		–		Submission of Matters to a Vote of Security Holders				9
					Executive Officers of the Registrant (Instruction 3 to Item 401(b) of Regulation S-K)				10
PART II
	Item 5		–		Market for Registrant’s Common Equity and Related Stockholder Matters				10
	Item 6		–		Selected Financial Data				11
	Item 7		–		Management’s Discussion and Analysis of Financial Condition and Results of Operations
					General				12
					General Business Risks, Critical Accounting Policies and Estimates				12
					Results of Operations				14
					Financial Condition and Liquidity				17
					Other Matters				19
	Item 7A		–		Quantitative and Qualitative Disclosures About Market Risk				20
	Item 8		–		Financial Statements and Supplementary Data				20
	Item 9		–		Changes in and Disagreements with Accountants				20
PART III
	Item 10		–		Directors and Executive Officers of the Registrant				20
	Item 11		–		Executive Compensation				20
	Item 12		–		Security Ownership of Certain Beneficial Owners and Management				20
	Item 13		–		Certain Relationships and Related Transactions				20
PART IV
	Item 14		–		Exhibits, Financial Statement Schedules and Reports on Form 8-K				21
	Signatures								24
TABLE OF CONTENTS –Financial Statements and Financial Statement Schedule									F-1

 

Forward-Looking Statements

 

We make statements in this report that are considered forward-looking statements within the meaning of the Securities Exchange Act of 1934. Sometimes these statements will contain words such as “believes,” “expects,” “intends,” “should,” “will,” “plans,” and other similar words. These statements are not guarantees of our future performance and are subject to risks, uncertainties, and other important factors that could cause our actual performance or achievements to be materially different from those we project. These risks, uncertainties, and factors include, but are not limited to:

 

•             reliance on major clients,

•             conditions affecting clients’ industries,

•             clients’ budgets and plans,

•             unanticipated labor, contract or technical difficulties,

•             delays in ramp up of services under contracts,

•             reliance on major subcontractors and strategic partners,

•             risks associated with managing a global business,

•             fluctuations in operating results,

•             reliance on telecommunications and computer technology,

•             dependence on labor force,

•             industry regulation,

•             general and local economic conditions,

•             competitive pressures in our industry,

•             foreign currency risks,

•             the effects of leverage,

•             dependency on credit availability,

•             restrictions imposed by the terms of indebtedness, and

•             dependence on key personnel and control by management.

 

Given these uncertainties, you should not place undue reliance on these forward-looking statements. Please see the other sections of  this report and our other periodic reports filed with the Securities and Exchange Commission for more information on these factors.

 

PART I

Item 1. Business

 

General

 

References in this report to “we” and “our” are to SITEL Corporation and its subsidiaries, collectively.

 

We are a leading global provider of outsourced customer support services. We specialize in the design, implementation, and operation of complex, multi-channel contact centers. We support the Customer Relationship Management (CRM) strategies of many of the world’s leading brands primarily in the consumer products, financial services, insurance, telecommunications, technology, and utilities industries. By providing customer acquisition, customer care, technical support, and risk management services on an outsourced basis, we help our clients attain greater levels of customer satisfaction and loyalty. We additionally provide operational and information technology professional services for both outsourced and internal contact centers focused on delivering productivity improvements and cost efficiencies.

 

Founded in 1985, we have grown to include operations in North America, Europe, Asia Pacific, and Latin America. We have approximately 25,000 committed employees worldwide that actively represent many of the world’s leading brand names. We operate from over 18,000 workstations in 84 contact centers located in 20 countries, and offer services in more than 25 languages and dialects.

 

We operate our contact centers based on the core belief that people do business with people, a reality that persists even in the age of anonymous online communications and one-click shopping. Our customer support services are designed to enhance the quality of interaction at every stage in the customer lifecycle, from identification and acquisition of new customers, to customer service for existing customers, to the provision of technical support, help desks and assistance in managing receivables. Our operational and technology professional services are designed to optimize every aspect of the day-to-day operation of both outsourced and internal contact centers. Our value added services allow customers to select their preferred channel of communication, including voice, web, e-mail, fax, and wireless interactions.

 

Industry Overview

 

Over the last 10 years our industry has evolved from outsourcers providing customer services from primarily a low-technology, single-facility environment to supporting multi-national corporations’ CRM strategies from large, full service, multi-channel contact centers located around the world. Today, companies are increasingly focused on optimizing the value of their relationships with their customers. Fueling this trend is the explosive growth in consumer use of the Internet and e-mail, and the increasingly remote nature of customer interactions. Companies now face the business imperative to deliver consistent levels of quality customer service regardless of the channel of communication chosen.

 

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With new technologies, each customer interaction via e-mail, the web or directly with a customer service professional, allows companies to learn more about their customer’s profile, decision-making process, and channel preference. This data can then be used to update a company’s customer information database, enabling true one-to-one marketing. As a result of these advantages, contact center-based customer relationship management activity is becoming central to the way leading organizations choose to build and maintain customer relationships.

 

The contact center outsourcing market is large and is estimated to grow rapidly over the next three years.  IDC, a respected industry analysis group, estimates that the worldwide contact outsource business will grow from $30 billion in the year 2000 to $76 billion by the year 2005, or an average increase of 20% per year. Corporations are increasingly shifting key business processes from internal operations to outsourced partners. This trend has been further fueled by the growing complexity of integrating technology and communication. We expect to see the market increase as companies focus on their core competencies and rely on service providers like SITEL to deliver comprehensive contact center solutions.

 

Our Business

 

We design, implement, and operate contact centers in support of clients’ CRM strategies that allow our clients to enhance the value of their customer contacts, relationships, and information. At every stage of the customer or product lifecycle, we endeavor to give our clients’ customers an experience that will:

 

•             reinforce their trust in the brand,

•             compel them to stay loyal, and

•             encourage their advocacy and support regardless of how they communicate with our clients and their brands.

 

Whether that is an individual customer or a business customer, and whether they phone, e-mail or browse the client’s website, our mission is to create customer loyalty and value, to increase sales, and to differentiate the client’s brand in a positive manner.

 

We operate from 84 facilities in 20 countries throughout the four major regions of the globe, and offer services in more than 25 languages and dialects. We bring industry focus and expertise in the consumer products, financial services, insurance, telecommunications, technology, and utilities sectors.

 

The Services We Offer

 

We view every customer contact as an opportunity to build our clients’ brand equity and strengthen relationships with our clients’ customers. We offer a suite of added-value customer support services addressing every stage of the customer or product lifecycle, as well as operational and technology professional services that are designed to optimize every aspect of the day-to-day operation of both outsourced and internal contact centers. Each of our services leverages our contact center expertise and is tailored to meet the client’s unique business requirements. We offer the following services:

 

Customer Acquisition

Our customer acquisition services include prospect identification, campaign management, lead generation, and fulfillment. In coordination with our clients’ sales objectives, we implement and execute marketing campaigns using multi-channel communications in coordination with advertising and promotional sales programs. By tracking customer value over time against the cost of acquisition, we help our clients improve the quality and value of new customers while reducing the total cost of acquisition. We help clients find and win customers through:

 

•             list building,

•             outbound sales,

•             inbound sales or order taking,

•             lead generation,

•             direct response television/bureau,

•             product information requests related to potential sales,

•             subscription renewals, and

•             database cleaning and updating.

 

Customer Care

Focused on enhancing the customer experience, our customer care services range from utilizing self-service products for frequently asked questions, to using web chat sessions for complex installation problems, to employing highly trained technicians for product support. We specialize in the design and delivery of complex, multi-channel solutions, including the use of cost competitive offshore locations. We act as the voice of the customer to our clients, providing valuable, real time feedback on new products or campaigns. Our customer care services include:

 

•             complaint and issue resolution,

•             change of personal details and billing information,

•             thank-you or other client-initiated information contacts,

•             reservations,

 

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•             loyalty initiatives,

•             investor account inquiries,

•             government information,

•             dealer location contacts,

•             insurance claims processing,

•             fraud detection/prevention calls,

•             back office requests, such as connecting a new line, disconnecting service and requesting maintenance support,

•             warranty call handling, and

•             administrative support regarding a customer’s policy, lease or account.

 

Technical Support

Targeted at industries with dynamic product lifecycles, like high technology, we provide a broad range of technical support services focused on achieving measurable, total customer satisfaction. We employ technically trained and dedicated teams on an integrated, multi-channel platform, to provide comprehensive technical product support. We tailor the technical support processes to our clients’ needs, including required activities, escalation procedures, and system level reporting. By analyzing product-related call patterns gathered from the technical support function, we are able to provide additional insight into future product development initiatives. In providing technical support services, we:

 

•             handle troubleshooting calls,

•             respond to software and hardware problems,

•             provide support for Internet service problems,

•             manage corporate help desks, and

•             provide warranty or post-warranty support.

 

Risk Management

We provide international receivables management programs for large corporations. We believe in a consultative approach, sharing industry-wide best practices to tailor a unique solution for each of our client’s specific needs. We design programs to ensure optimal loss mitigation while emphasizing customer retention. Our risk management services include:

 

•             pre- and post-charge-off collections,

•             early fraud identification,

•             credit card activations,

•             property recovery programs,

•             skip tracing, and

•             disaster prevention and recovery.

 

Professional Services

Designed to optimize every aspect of the day-to-day operation of both outsourced and internal contact centers, we offer operational and technology professional services to clients worldwide. We help clients align their business with their customers by helping them plan and execute appropriate customer relationship management strategies. Our expertise also includes the ability to deliver complex information technology services, as well as ongoing management services related to the successful operation of large-scale contact centers. Our professional services include:

 

•             analysis and segmentation of customer databases,

•             instructional design and training delivery,

•             development and implementation of customer contact strategies,

•             systems design and development,

•             analysis of current customer sales/support environments,

•             requirements analysis and process development,

•             analysis and planning for contact center consolidation/centralization,

•             process modeling/workflow mapping,

•             contact center efficiency analysis,

•             best practice analysis and work instruction development,

•             contact center implementation planning.

 

The Communication Channels We Use

 

We use the telephone, fax, and the Internet as means of communication to provide the services we offer. Each of these communication channels is described below:

 

Telephone-Based Services

We handle approximately 400 million customer calls annually via the telephone.  We have been making and taking telephone calls on behalf of Global 1000 companies since our founding more than sixteen years ago.  We have progressively grown our telephone capabilities from operating simple outbound dialing campaigns, to offering robust customer contact strategies to our long-term partners. Our customer service professionals use the telephone as the main communication tool in support of all of our service offerings.

 

Internet-Based Services

As the Internet has become an increasingly important communications medium between our clients and their customers, we have integrated the Internet into our contact center solutions. Our Internet strategy is to bring human interaction to Internet-based contacts and to use technology enabled by the Internet to handle customer contacts more efficiently and effectively.

 

We believe that every remote customer contact, whether by telephone, fax, the Internet, or regular mail should be handled in an integrated fashion, leveraging the same customer service professional training and

 

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systems integration. We see it as a key goal within our clients’ CRM strategies to deliver a high level of integration and to provide a unified view of the customer. We see this as essential to building strong one-to-one customer relationships. Our Internet-based services are described below.

 

E-mail Handling

Our customer service professionals provide timely, knowledgeable, and comprehensive replies to incoming e-mails that request customer service and technical support. Our contact center platform also provides automated e-mail response based on key word recognition.

 

Voice and Text-Based Chat Web Site Support

We provide voice chat support — enabling customers to simultaneously talk to a customer service professional while visiting a client’s web site — using the Internet Call Center that we co-developed with Lucent Technologies in 1998. Text-based chat allows for proactive or responsive communications with any web site visitor to provide sales support or customer service. These chat services are further enabled by capabilities to push web pages to web visitors and the ability of the web agent to work collaboratively with the web visitor.

 

Self-Service and Browsing Support

The Internet can enable customers in certain situations to resolve their problems without human assistance. We are actively working with our clients to incorporate self-service capabilities into our solutions to improve customer satisfaction and reduce cost. Examples of self-service support are customers accessing the answers to frequently asked questions via an ‘intelligent’ search of a data or “knowledge base” or prospective customers completing online insurance applications that are subsequently reviewed by our licensed insurance service professionals.

 

Telephone Support

Telephone support, the largest revenue generator, includes technical support and customer service call handling for Internet services and products, as well as closed loop calling in support of electronic processes. For example, we make and receive phone calls inside a client organization ensuring that cases have been successfully closed when web site visitors ask the client organization to contact them or provide a service or information.

 

The Industries We Serve

 

We provide contact center solutions primarily across the following industries:

 

Consumer Products

We service leading consumer products, retail, manufacturing, and publishing companies, including automotive companies, in the following ways:

 

•             resolving customer problems,

•             responding to customer inquiries,

•             developing and launching new product/sales campaigns,

•             resolving technical problems with products or services,

•             acting as the voice of subscriber-based services,

•             managing product recalls, and

•             performing quality surveys and market analyses.

 

Financial Services

We work with financial services companies worldwide, including:

 

•             banks,

•             leasing companies,

•             credit card issuers,

•             mutual fund companies,

•             auto finance companies/subsidiaries,

•             retail financing companies,

•             brokerage firms,

•             service providers,

•             mortgage companies, and

•             other financial institutions.

 

We provide service activities such as:

 

•             answering questions regarding lease terms,

•             handling service requests,

•             arranging credit card balance transfers,

•             taking and processing loan applications,

•             resolving technical problems with online services, and

•             making accounts receivable management and fraud prevention calls.

 

We also conduct integrated sales activities on behalf of clients such as:

 

•             merchant and customer acquisition,

•             account retention and renewal,

•             lead generation, and

•             appointment scheduling.

 

Insurance

We provide a broad range of services to the insurance industry, including direct marketing of non-underwritten insurance products such as:

 

•             hospital accident protection,

•             hospital indemnity protection,

•             health care discount plans, and

•             mechanical breakdown and credit protection.

 

We also direct market fully underwritten Property & Casualty and Life & Health products. We also support

 

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the accidental death and disability, credit life, and supplemental health insurance markets.

 

In addition to the direct sale of insurance products for our clients, we provide the following services:

 

•             sales support,

•             after-hours agent support,

•             emergency roadside assistance,

•             claims processing, and

•             full back-office support.

 

Telecommunications, ISP and Cable

We provide a full range of sales and customer service activities to domestic and international long distance providers, local exchange carriers, cellular and PCS providers, Internet Service Providers, telecommunications equipment manufacturers, and cable and satellite TV companies, including:

 

•             account management,

•             customer acquisition,

•             fulfillment,

•             directory assistance,

•             receivables management,

•             technical support,

•             sales support and order taking,

•             facilities management,

•             new product launch, and

•             database management.

 

We provide these services for product lines such as access lines, vertical services, Internet access, long distance, cellular PCS and ISDN data services.

 

Technology

We provide technical sales, technical support and customer support services for Technology sector companies including computer hardware manufacturers, software publishers, and PDA and other wireless device suppliers. These services include:

 

•             product launches,

•             complete sales and account management programs,

•             strategic product support,

•             corporate help desk,

•             warranty or post-warranty support, and

•             sunset product support.

 

Energy and Utilities

We provide services to public and private energy and utility companies, including electric power, natural gas, water and integrated energy providers. We provide the following services to these clients:

 

•             customer acquisition,

•             customer service,

•             direct sale and cross-sale activities,

•             brand development,

•             appointment setting and schedule management,

•             loyalty campaigns,

•             database management, and

•             development and professional services.

 

Our Clients

 

We serve over 300 clients in 20 countries. Our top 20 clients accounted for 62.0% of our revenues in 2001, and include four independently managed business units of General Motors Corporation. These General Motors business units were responsible for 25.4% of our total revenues in 2001. We did not have any other clients under common control that generated more than 10% of our revenues.

 

Information Technology

 

We use industry-standard software from Microsoft, Oracle, and others across the administrative functions of our business units. Within industry sectors, we use industry-specific contact processing application systems. We have designed and implemented client (or industry) specific applications to provide highly customized solutions to clients’ specific requirements.  We also utilize a state-of-the-art technology platform (UNIX and NT architecture) with Windows 95/98/2000 and NT-based Compaq, Dell and IBM workstations, predictive dialers and automated call distributors. Our customer service professionals have the tools to initiate and receive effectively and efficiently millions of service transactions per month.

 

We have designated Siebel e-Business Applications as our preferred technology platform. Siebel interfaces with Oracle as the database engine and Avaya for the Computer Telephony Integration. This provides flexibility and continued return from our investment in existing switch and dialer platforms.

 

Human Resource Management

 

Efficient management and operation of large-scale contact center solutions is a highly people intensive business. One of our core competencies is managing a diverse, worldwide workforce. We place great emphasis on our integrated human resource management strategies, including the recruitment, training, development, and retention of our employees at all levels of the organization.

 

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We seek to locate customer contact centers in communities and cities with favorable workforce demographics and populations with necessary language skills. We are committed to equal employment opportunity in every market we serve.

 

To build rewarding careers for our employees and enable effective planning for future growth:

 

•             we have developed training and education programs, as well as performance management and career planning processes, designed to enable people to learn (both in classrooms as well as on-the job) and perform at optimum levels on the diverse range of daily e-media customer contacts, on behalf of our multiple-industry clients,

•             we encourage employee self-development, and have developed our own corporate e-Learning university (SITEL University), and

•             we aim to develop and promote individuals from within the organization as much as possible.

 

As of December 31, 2001, we had approximately 25,000 employees. In our European region, employees in Belgium, Germany, Sweden, and Spain are within the scope of government sponsored collective bargaining agreements and are represented by either a labor union or a statutory work council arrangement. In countries with labor unions or work councils, our ability to reduce our workforce or wage rates is subject to agreement or consultation with the appropriate labor union or works council. We consider relations with our employees to be good.

 

Competition

 

We are one of the largest independent companies executing contact center solutions. Our largest direct competitors include:

 

•             TeleTech Holdings, Inc.,

•             Convergys Corporation,

•             EDS’s Business Process Management division,

•             Sykes Enterprises, Incorporated,

•             SR. Teleperformance Group,

•             APAC Customer Services, Inc., and

•             West Corporation.

 

With the growth of consumer online usage, there are a number of new, smaller competitors focusing on providing e-mail and interactive chat services. We also compete with in-house customer service departments throughout the world. In-house departments continue to comprise the largest segment of contact center expenditures. Additional competitors with greater resources than we have may enter the customer relationship management industry.

 

Like us, most of the major outsourcing companies are positioning themselves as providers of contact center solutions. However, we believe we are in a leadership position in terms of global presence, large-scale project implementation and operational experience, solutions provided, and industries served. We have implemented and now manage integrated programs using all e-media across the broad range of contact center solutions designed to support the entire customer lifecycle.

 

Government Regulation

 

Our business is subject to laws and regulations concerning teleservices, web-services, collection agencies, consumer protection, and the collection and use of consumer data.

 

United States

In the United States, the Federal Trade Commission (FTC) and many states regulate teleservices, web-services, consumer privacy and the collection and use of consumer data.

 

The Federal Telephone Consumer Protection Act of 1991 (TCPA) prohibits teleservices firms from initiating telephone solicitations to residential telephone subscribers during certain times, prohibits the use of automated telephone dialing equipment to call certain telephone numbers, and requires teleservices firms to maintain a “do not call” list of residential customers.

 

FTC regulations issued pursuant to the federal Telemarketing and Consumer Fraud and Abuse Prevention Act of 1994 prohibit misrepresentation regarding products or services offered by telephone solicitation and address other perceived telemarketing abuses in the offering of prizes and the sale of business opportunities or investments.

 

There are many federal and state laws and regulations governing web-services, consumer privacy, and the collection and use of consumer data. Key federal laws include the:

 

•             Gramm-Leach-Bliley Act,

•             Health Insurance Portability and Accountability Act of 1996,

•             Children’s Online Privacy Protection Act, and

•             Federal Drivers Privacy Protection Act of 1994.

 

More than 3,000 state laws and regulations govern different aspects of collection, distribution and use of information about individuals, such as voter registration, driver license information, and consumer credit information. Numerous privacy bills are currently pending in the U.S. Congress, and we expect privacy

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bills to be introduced this year in a number of states having a legislative session.

 

Our international risk management business is required to be licensed under various federal, state and provincial collection agency laws and regulations and to comply with fair debt collection practices and consumer credit laws and regulations.

 

International

Countries outside the United States where we have substantial operations generally have not enacted detailed regulatory frameworks for teleservices. Many countries, including those in the European Union (EU), have enacted or proposed laws that regulate consumer privacy and the collection and use of consumer data.

 

EU member countries have begun issuing regulations to implement Directive 97/7/EC of 20 May 1997 (the Distance Selling Directive) for the protection of consumers concerning distance contracts. So far nine of the 15 EU member countries have passed legislation implementing the principles of the Directive.  These regulations give protections to consumers who shop by phone, mail order, on the Internet, or digital TV, including:

 

•             the right to receive clear information about goods and services before deciding to buy,

•             confirmation of this information in writing,

•             a cooling off period of seven working days in which the consumer can withdraw from the contract, and

•             protection from credit card fraud.

 

Many countries have enacted laws regulating the collection, processing, keeping, use, and disclosure of personal information, including: Argentine Republic, Australia, Austria, Belgium, Brazil, Canada, Chile, the Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, People’s Republic of China, Hungary, Iceland, Ireland, Israel, Italy, Latvia, Lithuania, Luxembourg, Mexico, the Netherlands, New Zealand, Norway, Paraguay, Peru, Poland, Portugal, the Russian Federation, the Slovak Republic, Slovenia, Republic of South Africa, Spain, Sweden, Switzerland, the Republic of China (Taiwan), and the United Kingdom.

 

Many of these laws are based on the privacy principles established by the Organisation for Economic Co-operation and Development (OCED) in its Guidelines on the Protection of Privacy and Transborder Flows of Personal Data. These laws generally provide individuals with a right to access and correct inaccurate information and many provide that personally identifiable information can only be used or disclosed for specified and lawful purposes. Many of these laws provide for civil and criminal penalties for violations.

 

On December 27, 2001, the EC Commission published a set of standard contractual clauses to be used by data controllers in the EU who wish to transfer an individual’s personal data to processors established in countries outside the EU not currently recognized by the EU as having adequate technical and organizational security measures in place to protect individuals’ personal data (currently only Canada, Hungary, Switzerland and the U.S. are recognized). The requirements are due to take effect on April 3, 2002 and supplement the Data Privacy Directive 95/46/EC, which is the basis for many of the personal data laws that have been enacted by the EU member countries. The standard clauses are designed for inclusion in contracts between such data controllers and processors. The clauses grant rights to both parties as well as the individuals whose personal data is held by the data controllers. The clauses principally oblige the controller and processor to observe and implement certain measures to protect the personal data, and thus allow the legal transmission of such data outside the EU.

 

The E-Commerce Directive 00/31/EC, published in July 2000, is in the process of being implemented by EU member countries. The chief aim of the Directive is to ensure that the EU reaps the full benefits of e-commerce by boosting consumer confidence and giving information service providers legal certainty without excessive over-regulation. The Directive includes:

 

•             transparency requirements for web advertising,

•             principles relating to contracting online,

•             limitations on the liability of Internet intermediaries, and

•             requirements for disclosure of any codes of conduct such as online-dispute settlement governing a service provider.

 

The “Telecoms” Directive 97/66/EC, adopted in 1997, establishes guidelines for the processing of personal data in the telecommunications sector. It is in various stages of implementation in EU member countries, and to date has been implemented in eight of those countries. The Directive sets out principles for:

 

•    the regulation of direct marketing to individuals by telephone and fax,

•    limitations on the processing of traffic and billing data,

•    calling or connected line identification, and

•    the right of individuals to be excluded from telephone and fax directories of subscribers.

 

Industry Regulation

The industries we serve are subject to varying degrees of government regulation. For example, our employees who complete the sale of certain U.S. insurance products are required to be variously licensed by some state insurance commissions and may also be required

 

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to participate in regular continuing education programs, which we currently provide in-house.

 

We generally rely on our clients and their advisors to develop the scripts and client information we use in making or receiving customer contacts. We generally require our clients to indemnify us against claims and expenses arising from their products or services, scripts, and directives.

 

The teleservices and web-service industries, consumer groups, and regulatory and legislative bodies are increasingly concerned about “right of privacy” issues as technological advances have dramatically increased the availability of information about consumers. Various technology and direct-marketing industry groups have been addressing the issue of consumer privacy. The Online Privacy Alliance, a broad coalition of high-technology companies, is examining fair information practices and may offer proposals for industry acceptance. The U.S. Direct Marketing Association, the leading trade association of direct marketers, recommends industry participants follow its guidelines for the fair use of information.

 

Complying with applicable laws, regulations and industry guidelines to date has not had a material adverse effect on our business. Governments, trade associations, and industry self-regulatory groups may enact more burdensome laws, regulations and guidelines, which might directly affect our business, or affect our clients’ businesses and thus indirectly our business, in material and adverse ways.

 

Many of the proposed laws and regulations are in early stages of consideration and no consensus has been reached on privacy and data usage, so we cannot yet determine the impact these proposed laws and regulations may have on our business. Future laws and regulations may require our clients to change their products or services in ways that could diminish the commercial viability of those products or services or require us to modify our contact center solutions to continue effectively meeting our clients’ CRM needs.

 

Quarterly Results and Seasonality

 

We have experienced, and expect to continue to experience, quarterly variations in our results of operations mostly due to:

 

•             the timing of our clients’ customer relationship management initiatives and customer acquisition and loyalty campaigns,

•             the commencement and terms of new contracts,

•             revenue mix,

•             the timing of additional operating, selling, and administrative expenses to support new business, and

•             the timing of recognition of incentive fees.

 

We experience periodic fluctuations in our results of operations related to both the start-up costs associated with expansion and the implementation of clients’ CRM activities. In addition, our business generally tends to be slower in the third quarter due to summer holidays in Europe, and in the first quarter due to the changeover of client marketing strategies that often occurs at the beginning of the year.

 

8

 

Item 2. Properties

 

Our executive offices are located in Baltimore, Maryland.

 

As of December 31, 2001, we operated Company Centers in various facilities that we lease and Client Centers that are on client premises, and we used the services of a Remote Operations Site (ROPS), which is owned and operated by an independent third party, as shown in the table below. In addition, we were in the process of starting operations at a client center in Panama at December 31, 2001.

 

 

We use a Remote Operations Site to meet a portion of our customer service needs, and we contract and operate out of several Client Centers to support specific client initiatives.

 

We believe our current facilities are adequate for our current operations, but additional facilities will be required to support growth. We believe suitable additional or alternative space will be available as needed on commercially reasonable terms. Our policy is to rent contact center space, but at times we have built or purchased facilities and, in certain cases, subsequently sold them in sale-leaseback transactions.

 

Item 3. Legal Proceedings

 

From time to time, we are involved in litigation incidental to our business. We cannot predict the ultimate outcome of such litigation with certainty, but management believes, after consultation with counsel, that the resolution of such matters will not have a material adverse effect on our consolidated financial position or results of operations.

 

Item 4. Submission of Matters to a Vote of Security Holders

 

Not applicable.

 

9

 

Executive Officers of the Registrant

 

Executive officers of SITEL Corporation at the date of this report are:

 

Name		Age		Present Office		Other Offices or Positions Held During Past Five Years
James F. Lynch		52		Chairman of the Board (since 1985), Chief Executive Officer (since April 2001) and Director		Chief Executive Officer, SITEL Corporation (1985 — January 1997)
Bill L. Fairfield		55		Executive Vice President, Business Development (since March 2002) and Director		Chairman, DreamField Partners, Inc.; Chairman, Chief Executive Officer, and President, Inacom Corp.
Dale W. Saville		57		Executive Vice President, Corporate Development (since October 2000)		Senior Vice President and Chief Technology Officer, Vice President — Product Development, Vice President — EMEA Customer Support Operations, and Vice President — US Customer Support Operations, Sykes Enterprises, Incorporated
Dale R. Schuster		50		Executive Vice President, Strategic Clients (since January 2001)		Senior Vice President, SITEL Corporation; Vice President — Sales & Marketing, Northern Aurora, Inc.; Vice President — Administration and Vice President — Development, CalEnergy
James E. Stevenson, Jr.		46		Executive Vice President and Chief Financial Officer (since April 2001)		Senior Vice President — Finance, SITEL Corporation; Principal — Investment Banking Division Finance, Deutsche Banc Alex.Brown Inc.; Principal and Controller, Alex.Brown Incorporated

 

PART II

 

Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters

 

Our common stock is traded on the New York Stock Exchange under the symbol SWW. The following table sets forth the high and low sale prices of our common stock for the quarters indicated, as reported by the New York Stock Exchange.

 

		2001						2000
		High			Low			High			Low
First Quarter		$	3.94		$	2.10		$	9.75		$	5.75
Second Quarter		$	2.82		$	1.57		$	7.63		$	3.81
Third Quarter		$	2.00		$	0.85		$	6.94		$	2.44
Fourth Quarter		$	2.48		$	0.72		$	3.31		$	2.13

 

Shares Outstanding and Holders of Common Stock

As of March 6, 2002, we had 74,357,431 shares of common stock outstanding and 600 record holders of our common stock.

 

Dividend Policy

We have not declared or paid any cash dividends on our common stock since our inception. The Board of Directors currently intends to retain all earnings for use in the business for the foreseeable future. Furthermore, our revolving credit facility and Senior Subordinated Notes contain restrictions on the payment of cash dividends.

 

10

 

Item 6. Selected Financial Data

 

The following Selected Financial Data should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations beginning on the following page, the Consolidated Financial Statements beginning on page F-3, and the Notes to Consolidated Financial Statements beginning on page F-7.

 

		Years Ended December 31,
		2001			2000			1999			1998			1997
		(in thousands, except per share data)
Income Statement Data:
Revenues		$	725,048		$	764,447		$	737,522		$	586,318		$	491,474
Operating expenses		708,565			722,151			709,626			567,486			456,531
Asset impairment and restructuring expenses (a)		26,185			3,520			9,596			6,607			15,681
Operating income (loss)		(9,702		)	38,776			18,300			12,225			19,262
Interest expense, net		(11,642		)	(12,067		)	(12,785		)	(12,747		)	(5,096		)
Other income (expense), net		(2,606		)	(311		)	316			263			126
Income (loss) before income taxes and minority interest		(23,950		)	26,398			5,831			(259		)	14,292
Income tax expense (benefit)		(2,317		)	12,570			6,336			966			11,306
Minority interest		947			1,087			304			(651		)	174
Net income (loss) from continuing operations		(22,580		)	12,741			(809		)	(574		)	2,812
Extraordinary loss on refinancing of debt, net of taxes		—			—			—			(514		)	—
Net income (loss)		$	(22,580	)	$	12,741		$	(809	)	$	(1,088	)	$	2,812
Weighted average common shares outstanding:
Basic		73,424			71,052			66,550			63,888			61,764
Diluted		73,424			75,201			66,550			63,888			68,811
Income (loss) from continuing operations per common share:
Basic		$	(0.31	)	$	0.18		$	(0.01	)	$	(0.01	)	$	0.05
Diluted		$	(0.31	)	$	0.17		$	(0.01	)	$	(0.01	)	$	0.04

 

		At December 31,
		2001			2000			1999			1998			1997
		(in thousands)
Balance Sheet Data:
Working capital		$	72,677		$	93,583		$	87,384		$	41,660		$	39,545
Total assets		355,466			380,222			432,909			405,610			385,880
Long-term debt, net of current portion		107,040			108,341			148,330			116,237			115,488
Stockholders’ equity		140,040			169,582			160,698			161,854			158,388

 

(a)          We discuss asset impairment and restructuring expenses in Note 10 to the Consolidated Financial Statements.

 

11

 

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

General

 

References in this report to “we” and “our” are to SITEL Corporation and its subsidiaries, collectively.

 

We are a leading global provider of outsourced customer support services. We specialize in the design, implementation, and operation of complex, multi-channel contact centers. We support the Customer Relationship Management (CRM) strategies of large corporations in North America, Europe, Asia Pacific, and Latin America. We provide customer acquisition, customer care, technical support and risk management services on an outsourced basis, as well as operational and information technology professional services for both outsourced and internal contact centers. We serve clients primarily in the consumer products, financial services, insurance, telecommunications, technology, and utilities industries.

 

In Management’s Discussion and Analysis, we provide information about our general business risks, critical accounting policies and estimates, results of operations, financial condition and liquidity, and certain other matters affecting our operating results for the periods covered by this report.

 

As you read this discussion and analysis, refer to our Consolidated Statements of Income (Loss), which present the results of our operations for 2001, 2000, and 1999, and are summarized on the following pages. We analyze and explain the differences between periods for the components of net income (loss) in the following sections. Our analysis is important in making decisions about your investment in SITEL Corporation.

 

General Business Risks, Critical Accounting Policies and Estimates

 

General Business Risks

Our business success depends on our ability to efficiently deploy our human and capital resources in the delivery of services to our clients. Consequently, the needs of our clients may significantly impact our results of operations, financial condition, and liquidity.

 

Our results of operations and operating cash flows may vary with periodic wins and losses of client contracts and with changes in the scope of client requirements. Our top 20 clients accounted for 62.0% of our revenues in 2001, and include four independently managed business units of General Motors Corporation. These General Motors business units were responsible for 25.4% of our total revenues in 2001. We did not have any other clients under common control that generated more than 10% of our revenues. The financial failure of any of these clients or the loss of any or all of their business could have an adverse impact on our operating results.

 

Our liquidity, including our ability to comply with restrictive debt covenants, may be adversely affected if we were to lose a significant client or as a result of significant changes in client demand if we are unable to efficiently re-deploy our human and capital resources.

 

In the following sections, we also discuss the importance of our critical accounting policies and the use of accounting estimates, and their potential impacts on our results of operations.

 

Critical Accounting Policies

Our significant accounting policies and practices are described in Note 1 to the Consolidated Financial Statements. Of those policies, we have identified the following to be critical accounting policies because they are the most important to the portrayal of our results of operations and financial condition, and they require management’s most difficult, subjective, or complex judgments:

 

•    estimates of uncollectible trade accounts receivable to determine an allowance for doubtful accounts,

•    estimates of the useful lives for property, equipment, and goodwill, and

•             estimates of future taxable income that is required to support the carrying value of deferred tax assets and estimates of the related valuation allowance.

 

Trade Accounts Receivable

We report our trade accounts receivable net of an allowance for doubtful accounts, which represents management’s estimates of the amount of our receivables that may not be collectible, net of recoveries of amounts previously written off. These estimates are based on a detailed aging analysis of accounts receivable, historical bad debts, client credit-worthiness, and changes in our client payment terms. The financial condition of our clients may deteriorate, which may require us to increase our allowance for doubtful accounts. We would record an increase in the allowance for doubtful accounts as operating, selling,

 

12

 

and administrative expense in our Consolidated Statements of Income, which would reduce our results of operations. Our accounts receivable balance at December 31, 2001 was $129.2 million, net of an allowance for doubtful accounts of $5.2 million.

 

Property, Equipment, and Goodwill

We record property and equipment at cost, and calculate depreciation using the straight-line method over the estimated useful lives of the assets, which range from 3 to 20 years. We amortize leasehold improvements and assets under capital leases on a straight-line basis over the shorter of the lease term or the estimated useful life of the asset.

 

Goodwill represents the difference between the purchase price we paid in acquisitions, using the purchase method of accounting, and the fair value of the net assets we acquired. We amortize goodwill on a straight-line basis over 25 years. Goodwill as of December 31, 2001 was $73.2 million, net of accumulated amortization of $18.8 million.

 

We monitor events and changes in circumstances which may require us to review the carrying value of our long-lived assets. We review the recoverability of our goodwill at each consolidated balance sheet date. We assess the recoverability of our long-lived assets and goodwill based on estimated undiscounted future operating cash flows. We measure impairment, if any, by comparing the carrying value of the asset to its fair value. We recognize an impairment loss if the carrying value exceeds the fair value. Our assessment of the recoverability of our long-lived assets, including goodwill, will be impacted if estimated future operating cash flows are not achieved.

 

In June 2001, the Financial Accounting Standards Board issued SFAS No. 142, Goodwill and Other Intangible Assets. This statement:

 

•             replaces the requirement to amortize goodwill and certain other intangible assets with an annual impairment test, and

•             requires an evaluation of the useful lives of intangible assets and an impairment test for goodwill upon adoption.

 

The provisions of this statement are effective for fiscal years beginning after December 15, 2001, so we must adopt the provisions of SFAS No. 142 in our financial statements for the quarter ended March 31, 2002. Beginning January 1, 2002, we stopped amortizing our goodwill, which means that we will not record any goodwill amortization expense in our Consolidated Statements of Income in 2002 and future years. Total goodwill amortization expense in 2001 was $3.6 million.

 

We have not yet evaluated whether or not we will have any impairment charges in our consolidated financial statements in 2002 that may result from the impairment test that is required upon adoption of this statement.

 

Deferred Income Taxes

We must report some of our revenues and expenses differently for our financial statements than we do for income tax purposes. The future tax effects of the differences in these items, as well as operating loss and tax credit carryforwards, are reported as deferred tax assets or liabilities in our Consolidated Balance Sheets.

 

We assess the likelihood that our deferred tax assets will be recovered from future estimated taxable income. To the extent we believe that recovery is not likely, we establish valuation allowances to reduce the deferred tax assets to the amount that is more likely than not to be realized. The net deferred tax asset as of December 31, 2001 was $15.8 million, net of a valuation allowance of $38.9 million.

 

Significant management judgment is required in determining any valuation allowance recorded against our deferred tax assets. We have recorded a valuation allowance of $38.9 million as of December 31, 2001, due to uncertainties related to our ability to utilize some of our deferred tax assets before they expire. These assets consist of tax amortization in excess of book amortization related to the acquisition of a business and certain net operating losses and foreign tax credits carried forward. The valuation allowance is based on our estimates of future taxable income by jurisdiction in which we operate and the period over which our deferred tax assets can be recovered. In the event that actual results differ from these estimates or we revise these estimates in future periods, we may need to adjust the valuation allowance which could materially impact our financial position and results of operations.

 

Use of Accounting Estimates

Management makes estimates and assumptions when preparing financial statements under generally accepted accounting principles that affect:

 

•             our reported amounts of assets and liabilities at the dates of the financial statements,

•             our disclosure of contingent assets and liabilities at the dates of the financial statements, and

•             our reported amounts of revenues and expenses during the reporting periods.

 

These estimates involve judgments with respect to, among other things, future economic factors that are difficult to predict and are beyond management’s control. As a result, actual amounts could differ from these estimates.

 

13

 

Results of Operations

 

In this section, we discuss our operating results and the factors affecting them. We begin with a general overview, then separately discuss the components of net income (loss) in more detail. We describe our general business risks, critical accounting policies, and estimates that are important to our operating results on the previous page. Please refer to that discussion as you read this section.

 

Overview

 

We summarize our net income (loss) and net income (loss) per common share — diluted, and the impacts of asset impairment and restructuring expenses and other items, in the following tables:

 

Net Income (Loss)

 

		Years Ended December 31,
		2001			2000			1999
		(in millions)
Net income (loss), before restructuring expenses and other items		$	0.9		$	14.7		$		7.5
Asset impairment and restructuring expenses, after tax		(24.6		)	(2.0		)	(8.3			)
Losses on disposals of fixed assets, after tax		(0.8		)	—			—
Write-off of credit acquisition costs		(0.8		)	—			—
Valuation allowance on U.K. deferred tax assets		(3.3		)	—			—
Tax benefit expected to to be realized in future years		6.0			—			—
Net income (loss)		$	(22.6	)	$	12.7		$	(0.8		)

 

Net Income (Loss) Per Common Share—Diluted

 

		Years Ended December 31,
		2001			2000			1999
Net income (loss) per share, before restructuring expenses and other items		$	0.01		$	0.20		$	0.10
Asset impairment and restructuring expenses, after tax		(0.33		)	(0.03		)	(0.11		)
Losses on disposals of fixed assets, after tax		(0.01		)	—			—
Write-off of credit acquisition costs		(0.01		)	—			—
Valuation allowance on U.K. deferred tax assets		(0.05		)	—			—
Tax benefit expected to be realized in future years		0.08			—			—
Net income (loss) per share		$	(0.31	)	$	0.17		$	(0.01	)

 

2001 Compared to 2000

We had a net loss of $22.6 million, or ($0.31) per share, in 2001, compared to net income of $12.7 million, or $0.17 per share, in 2000. Results in 2001 were primarily impacted by asset impairment and restructuring expenses and other items that we recorded in the second and third quarters of the year. These charges were offset partially by a $6.0 million net income tax benefit that we recorded as a result of our election to treat certain of our foreign operations as branches of our U.S. company for U.S. income tax purposes. All of these items are summarized in the table above.

 

Excluding the asset impairment and restructuring expenses and other items described above in 2001 and $2.0 million of after-tax asset impairment and restructuring expenses in 2000, we had net income of $0.9 million, or $0.01 per share, in 2001 compared to net income of $14.7 million, or $0.20 per share, in 2000. This decline resulted mostly from a 5.2% decrease in revenues and lower gross profit margins in 2001.

 

2000 Compared to 1999

We had net income of $12.7 million, or $0.17 per share, in 2000, compared to a net loss of $0.8 million, or ($0.01) per share, in 1999. Results in 2000 included a $2.0 million after-tax asset impairment and restructuring expense, compared to an $8.3 million after-tax expense in 1999, and Operating, Selling, and Administrative Expenses were $5.2 million lower in 2000 than in 1999.

 

Excluding asset impairment and restructuring expenses in 2000 and 1999, we had net income of $14.7 million, or $0.20 per share, in 2000 compared to net income of $7.5 million, or $0.10 per share, in 1999. This increase resulted mostly from a 3.7% decrease in revenues and lower Operating, Selling, and Administrative Expenses in 2000.

 

We describe the factors affecting our 2001, 2000, and 1999 operating results in more detail in the following section.

 

14

 

Components of Net Income (Loss)

 

As you read this section, please refer to the following table that summarizes our income statement data on a percentage-of-revenue basis

 

		Years Ended December 31,
		2001					2000					1999
		$			%		$			%		$			%
		(in thousands)
Revenues		$	725,048		100.0	%	$	764,447		100.0	%	$	737,522		100.0	%
Direct labor and telecommunications expenses		411,066			56.7	%	398,809			52.2	%	373,518			50.6	%
Subcontracted and other services expenses		36,949			5.1	%	51,452			6.7	%	59,024			8.0	%
Operating, selling, and administrative expenses		260,550			35.9	%	271,890			35.6	%	277,084			37.6	%
Asset impairment and restructuring expenses		26,185			3.6	%	3,520			0.4	%	9,596			1.3	%
Operating income (loss)		(9,702		)	(1.3	)%	38,776			5.1	%	18,300			2.5	%
Interest expense, net		(11,642		)	(1.6	)%	(12,067		)	(1.6	)%	(12,785		)	(1.7	)%
Other income (expense), net		(2,606		)	(0.4	)%	(311		)	(0.1	)%	316			0.0	%
Income (loss) before income taxes
and minority interest		(23,950		)	(3.3	)%	26,398			3.4	%	5,831			0.8	%
Income tax expense (benefit)		(2,317		)	(0.3	)%	12,570			1.6	%	6,336			0.9	%
Minority interest		947			0.1	%	1,087			0.1	%	304			0.0	%
Net income (loss)		$	(22,580	)	(3.1	)%	$	12,741		1.7	%	$	(809	)	(0.1	)%

 

2001 Compared to 2000

 

Revenues

Revenues decreased $39.4 million, or 5.2%, in 2001 compared to 2000. The changes in revenues by geographic region are shown in the following table:

 

		$			%
		(in millions)
North America		$	(3.0	)	(0.6	)%
Europe		(40.6		)	(17.1	)%
Asia Pacific		(8.6		)	(25.6	)%
Latin America		12.8			43.2	%

 

Revenues decreased in Europe mostly due to the loss of two large clients in the United Kingdom, which took their customer acquisition businesses in-house, and lower revenues in Spain. The strength of the U.S. dollar versus the British pound and Euro accounted for about $9.4 million, or 23%, of this decrease. The decrease in Asia Pacific primarily related to restructuring our operations in Japan and transferring our existing Japanese business to Bellsystem24 in the second quarter of 2000. The decrease in North America was primarily attributable to a reduction in customer acquisition revenues that was due, in part, to the September 11^th, 2001 attack on the United States. The increase in Latin America was attributable to new work we performed for clients in Brazil and Mexico.

 

Direct Labor and Telecommunications Expenses

Direct Labor and Telecommunications Expenses include the compensation of our customer service professionals and their first line supervisors and telephone usage expenses directly related to the production of revenues.

 

Direct labor and telecommunications expenses as a percentage of revenues can vary based on the nature of the contract, the nature of the work, and the market in which the services are provided. Accordingly, direct labor and telecommunications expenses as a percentage of revenues can vary, sometimes significantly, from year to year.

 

Direct Labor and Telecommunications Expenses increased $12.3 million, or 3.1%, in 2001 compared to 2000. As a percentage of revenues, Direct Labor and Telecommunications Expenses increased from 52.2% in 2000 to 56.7% in 2001. This increase was primarily due to reduced labor efficiency caused by:

 

•             an unanticipated decline in revenues,

•             a higher than normal number of client programs ramping up and ramping down during the year, and

•             some reductions in pricing.

 

Subcontracted and Other Services Expenses

Subcontracted and Other Services Expenses include services provided to clients through subcontractors and other out-of-pocket expenses. Subcontracted and Other Services Expenses decreased $14.5 million, or 28.2%, in 2001 compared to 2000. The decline in these expenses was due mostly to a reduction in the use of third party contact

 

15

 

centers in the U.S. due to a reduction in customer acquisition services and lower reimbursable expenses in the U.S. and Europe.

 

Operating, Selling and Administrative Expenses

Operating, Selling and Administrative Expenses represent expenses incurred to directly support and manage the business, including costs of management, administration, technology, facilities, depreciation and amortization, maintenance, sales and marketing, and client support services.

 

Operating, Selling and Administrative Expenses decreased $11.3 million, or 4.2%, in 2001 compared to 2000. The decline in these expenses was mostly due to our restructuring plan that began at the end of the second quarter of 2001. As a percentage of revenues, Operating, Selling and Administrative Expenses were about the same in 2001 as they were in 2000.

 

Asset Impairment and Restructuring Expenses

In 2001, we announced a restructuring plan designed to intensify our focus on core competencies, accelerate revenue growth, and improve profitability. The key components of the restructuring plan include several major organizational changes and the streamlining of contact center operations and corporate support services to improve effectiveness and drive revenue growth.

 

As part of our restructuring plan, we reduced fixed overhead to improve profitability by substantially completing the following by December 31, 2001:

 

•    eliminating approximately 350 operating, selling, and administrative positions globally, and

•             reducing excess capacity by closing nine contact centers plus three administrative offices, and downsizing another five contact centers plus two administrative offices, resulting in the elimination of approximately 2,100 workstations.

 

In connection with this restructuring, we recorded $26.2 million of asset impairment and restructuring charges in 2001. We estimate that the ongoing annual savings from the restructuring will exceed $20 million.

 

We evaluate the recoverability of our long-lived assets, including goodwill, based on estimated undiscounted future operating cash flows. While management currently believes that estimated future operating cash flows will be sufficient to recover such assets, there can be no assurance that such estimates will be achieved. If estimated future operating cash flows are not achieved, we may need to record impairment losses on these assets in future periods.

 

In 2000, we formed a strategic partnership with Bellsystem24, Inc., Japan’s largest comprehensive marketing agency. Under the terms of the partnership, Bellsystem24 provides services and support for our clients in Japan and we provide services and support for Bellsystem24’s clients in the United States. In connection with the formation of the partnership, we restructured our operations in Japan and transferred our existing Japanese business to Bellsystem24. In connection with this restructuring, we recorded a $3.5 million asset impairment and restructuring charge, or $2.0 million after tax, in 2000.

 

Operating Income (Loss)

We had an operating loss of $9.7 million in 2001, compared to operating income of $38.8 million in 2000. Excluding the asset impairment and restructuring expenses discussed earlier, operating income as a percentage of revenues was 2.3% in 2001 compared to 5.5% in 2000. This change resulted from all of the factors affecting revenues and expenses discussed earlier in this section.

 

Interest Expense, Net

Interest expense, net of interest income, was about the same in 2001 as it was in 2000.

 

Other Expense, Net

Other expense, net of other income, increased $2.3 million in 2001 compared to 2000 mostly because we recorded $1.3 million of losses on disposals of certain assets, and we wrote off $0.8 million of credit acquisition costs in connection with the amendment of our credit facility in 2001.

 

Income Tax Expense (Benefit)

We recorded an income tax benefit of $2.3 million in 2001 compared to income tax expense of $12.6 million in 2000. The 2001 benefit reflects:

 

•             a $6.0 million net deferred income tax benefit we recorded as a result of our election to treat certain of our foreign operations as branches of our U.S. company for U.S. income tax purposes, and

•             a $2.2 million tax benefit we recorded on asset impairment and restructuring charges and losses on disposals of assets in the second quarter of 2001.

 

These benefits were offset by a $3.3 million deferred income tax expense we recorded to establish a valuation allowance on deferred tax assets that were recorded in prior years related to our United Kingdom operations.

 

In 2001, income tax expense as a percentage of income before income taxes and minority interest, excluding asset impairment and restructuring expenses and the above special items, was 57.7%. The difference between income tax expense and the expense which would result from applying the statutory U.S. Federal rate of 34% was primarily due to non-deductible goodwill, net operating losses in certain subsidiaries for which no tax benefit was recognized, higher international tax rates in certain jurisdictions, and U.S. state and local income taxes.

 

16

 

2000 Compared to 1999

 

Revenues

Revenues increased $26.9 million, or 3.7%, in 2000 compared to 1999. The changes in revenues by geographic region are shown in the following table:

 

		$			%
		(in millions)
North America		$	52.1		12.7	%
Europe		(28.9		)	(10.8	)%
Asia Pacific		(7.4		)	(17.9	)%
Latin America		11.1			58.9	%

 

Revenues increased in North America mostly due to additional services we provided to our largest client and a number of our large global clients. The increase in Latin America was attributable to new work we performed for several large clients in Brazil and Mexico. The strength of the U.S. dollar versus the British pound and Euro accounted for $27.8 million of the decrease in reported revenues from our European operations. The decrease in Asia Pacific was due to the reorganization of our Japanese business and a stronger dollar compared to currencies in the region.

 

Direct Labor and Telecommunications Expenses

Direct Labor and Telecommunications Expenses increased $25.3 million, or 6.8%, in 2000 compared to 1999. As a percentage of revenues, Direct Labor and Telecommunications Expenses increased from 50.6% in 1999 to 52.2% in 2000. This increase was primarily due to higher labor costs, which were offset partially by lower telecommunications costs.

 

Subcontracted and Other Services Expenses

Subcontracted and Other Services Expenses decreased $7.6 million, or 12.8%, in 2000 compared to 1999. The decline in these expenses is due mostly to lower subcontractor costs associated with a contract we implemented for an existing client in 1999.

 

Operating, Selling and Administrative Expenses

Operating, Selling and Administrative Expenses decreased $5.2 million, or 1.9%, in 2000 compared to 1999. As a percentage of revenues, Operating, Selling, and Administrative Expenses decreased from 37.6% in 1999 to 35.6% in 2000. The decrease was primarily due to improved expense control, the combination of smaller business units into larger ones, and the elimination of smaller and unprofitable clients.

 

Asset Impairment and Restructuring Expenses

In the second quarter of 2000, we recorded a $3.5 million asset impairment and restructuring charge, or $2.0 million after tax, related to a strategic partnership we formed in May 2000 with Bellsystem24, Inc., as previously discussed.

 

In 1999, we recorded a $9.6 million asset impairment and restructuring charge primarily related to the write-down of capitalized software and related technology assets. We reviewed our capitalized software and related technology assets for impairment in connection with the change in our technology strategy as it related to the adoption of a new platform for our CRM software applications.

 

Operating Income (Loss)

Operating income increased $20.5 million in 2000 compared to 1999. Excluding the asset impairment and restructuring expenses previously discussed, operating income increased $14.4 million, or 51.6%, from $27.9 million in 1999 to $42.3 million in 2000. This change resulted from all of the factors affecting revenues and expenses discussed earlier in this section.

 

Interest Expense, Net

Interest expense, net of interest income, decreased $0.7 million or 5.6% in 2000 compared to 1999, mostly due to a lower level of debt outstanding during 2000.

 

Income Tax Expense (Benefit)

Income tax expense increased $6.2 million in 2000 compared to 1999, due primarily to higher level of operating income in 2000.

 

Income tax expense as a percentage of income before income taxes and minority interest was 47.6%. The difference between income tax expense and the expense which would result from applying the statutory U.S. Federal rate of 34% was primarily due to non-deductible goodwill, net operating losses in certain subsidiaries for which no tax benefit was recognized, higher international tax rates in certain jurisdictions, and U.S. state and local income taxes.

 

Financial Condition and Liquidity

 

In this section, we discuss our financial condition and liquidity and the factors affecting them. We separately discuss cash flows, capital resources, and contractual obligations and commitments. We describe our general business risks, critical accounting policies, and estimates that are important to our financial condition and liquidity earlier in this report. Please refer to that discussion as you read this section.

 

Cash Flows

The following table sets forth summary cash flow data for the periods indicated. Please refer to this summary as you read our discussion of the sources and uses of cash in each year.

 

17

 

 

2001

In 2001, cash provided by operating activities came from income before asset impairment and restructuring expenses, depreciation and amortization, and other charges of $45.0 million and a $15.3 million decrease in trade accounts receivable, which were partially offset by a $10.2 million decrease in other liabilities. Although accounts receivable decreased during the period, we anticipate accounts receivable will increase as we continue to grow, which may require additional financing.

 

In 2001, we used cash for investing activities mostly to purchase $40.4 million of property and equipment, and we invested $2.3 million in a joint venture in India.

 

In 2001, we used cash for financing activities mostly to repay $3.8 million of capital lease obligations.

 

2000

In 2000, cash provided by operating activities consisted mostly of income before non-cash expenses of $60.6 million and a decrease in accounts receivable of $11.1 million, partially offset by a $14.8 million decrease in accounts payable and other liabilities.

 

In 2000, we used cash for investing activities mostly to purchase $33.1 million of property and equipment. This was partially offset by $7.2 million of cash proceeds we received from sales of property and equipment.

 

In 2000, we used cash for financing activities to repay $82.3 million of debt and capital lease obligations, net of additional borrowings of $35.0 million under our revolving credit facility, resulting in net repayments of $47.3 million.

 

1999

In 1999, cash provided by operating activities consisted mostly of income before non-cash expenses of $54.8 million and a $28.1 million increase in accrued expenses and trade payables, partially offset by a $38.9 million increase in accounts receivable.

 

In 1999, we used cash for investing activities mostly to purchase $38.6 million of property and equipment. This was partially offset by $3.5 million of cash proceeds we received from sale-leasebacks of facilities and equipment. We also acquired $9.0 million of property and equipment under capital leases.

 

In 1999, cash provided by financing activities was $1.2 million, as payments we made on debt and capital lease obligations were offset by additional borrowings.

 

Capital Resources

We have historically used funds generated from operations, leases of property and equipment, equity capital, senior subordinated notes, and borrowings under credit facilities with banks to finance business acquisitions, capital expenditures, and working capital requirements.

 

We have a senior secured credit facility that expires in April 2003, under which we may borrow in U.S. dollars, British pounds sterling, and Euros, which allows us to consolidate our U.S. and European bank lines into a single multi-borrower, multi-currency facility.

 

Our obligations under the facility have been guaranteed by our domestic subsidiaries and certain foreign subsidiaries and are secured by liens on substantially all of the assets of SITEL Corporation and such subsidiaries, including a pledge of our shares in such subsidiaries and certain other foreign subsidiaries. The facility contains certain financial covenants and certain restrictions on, among other things, our ability to:

 

•             incur additional indebtedness,

•             pay dividends, repurchase stock, or make other restricted payments,

•             purchase property and equipment,

•             make certain investments,

•             sell assets, or

•             merge with another company.

 

The facility becomes due and payable upon a change of control of the Company as defined in the credit agreement.

 

At June 30, 2001, we were not in compliance with some of the original financial covenants of the facility, which are determined quarterly based on the trailing four quarters ended on each determination date. In August 2001, we obtained an amendment to the credit facility that was effective as of June 30, 2001, which waived the noncompliance with those covenants and amended our financial covenants for future periods. The amendment also:

 

•             reduced the size of the facility from $75 million to $50 million and removed our option to request an increase in the size of the facility to $100 million,

•             changed the expiration date of the facility from April 2005 to April 2003,

•             increased the interest rates on borrowings 50 to 75 basis points and the unused commitment fee 50 basis points, and

•             further restricted our ability to make certain acquisitions, restricted payments, capital expenditures, and investments.

 

18

 

As a result of the amendment, we wrote off $0.8 million of credit acquisition costs related to the original facility in 2001.

 

At December 31, 2001, we had $50 million of available borrowings under the amended facility, and were in compliance with all financial covenants of the facility.

 

We expect to finance our current operations, planned capital expenditures, and internal growth for the foreseeable future using funds generated from operations, existing cash, leases of property and equipment, and the funds available under our credit facility. We estimate that our 2002 capital expenditures will range from $25 to $32 million. Future acquisitions, if any, may require additional debt or equity financing.

 

Under a stock repurchase program that was authorized by our Board of Directors in February 2001, we may repurchase up to $10 million of our shares from time to time in the open market or in privately negotiated transactions, depending on general business and market conditions. Through the date of this report, we had repurchased a total of 171,800 shares at a total cost of $0.3 million. Our amended credit facility limits the amount of aggregate restricted payments, including stock repurchases, to $1.0 million plus certain equity transaction proceeds not currently applicable.

 

Contractual Obligations and Commitments

We have various contractual obligations and commitments that are described in the Notes to Consolidated Financial Statements. We summarize our contractual obligations and commitments at December 31, 2001 in the following table:

 

Year		Long-Term Debt			Capital Leases			Operating Leases			Total
		(in thousands)
2002		$	—		$	2,965		$	19,013		$	21,978
2003		—			1,793			15,665			17,458
2004		—			1,235			13,160			14,395
2005		—			673			10,521			11,194
2006		100,000			568			8,487			109,055
Thereafter		—			4,733			25,445			30,178
Total		$	100,000		$	11,967		$	92,291		$	204,258

 

Other Matters

 

Quarterly Results and Seasonality

We have experienced, and expect to continue to experience, quarterly variations in our results of operations mostly due to:

 

•             the timing of our clients’ customer relationship management initiatives and customer acquisition and loyalty campaigns,

•             the commencement and terms of new contracts,

•             revenue mix,

•             the timing of additional operating, selling, and administrative expenses to support new business, and

•             the timing of recognition of incentive fees.

 

We experience periodic fluctuations in our results of operations related to both the start-up costs associated with expansion and the implementation of clients’ CRM activities. In addition, our business generally tends to be slower in the third quarter due to summer holidays in Europe, and in the first quarter due to the changeover of client marketing strategies that often occurs at the beginning of the year.

 

Effects of Inflation

Inflation has not had a significant effect on our operations. However, there can be no assurance that inflation will not have a material effect on our operations in the future.

 

Accounting Pronouncements

In June 2000, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 138, Accounting for Certain Derivative Investments and Certain Hedging Activities. The standard amends certain provisions of SFAS No. 133, Accounting for Derivative Investments and Hedging Activities, which was issued in June 1998 to establish accounting standards for derivative instruments and for hedging activities. We adopted these accounting pronouncements effective January 1, 2001. The adoption of these standards, including the valuation of derivative instruments outstanding on the effective date, and the related cumulative effect of adoption, did not significantly impact our consolidated financial statements. We had no derivative financial instruments at December 31, 2001.

 

In June 2001, the Financial Accounting Standards Board issued SFAS No. 141, Business Combinations, which requires all business combinations initiated after June 30, 2001 to be accounted for using the purchase method.

 

In June 2001, the Financial Accounting Standards Board also issued SFAS No. 142, Goodwill and Other Intangible Assets. This statement:

 

•             replaces the requirement to amortize goodwill and certain other intangible assets with an annual impairment test, and

•             requires an evaluation of the useful lives of intangible assets and an impairment test for goodwill upon adoption.

 

The provisions of this statement are effective for fiscal years beginning after December 15, 2001, so we must adopt the provisions of SFAS No. 142 in our financial statements for the quarter ended March 31, 2002. Beginning January 1, 2002, we stopped amortizing our

 

19

 

goodwill, which means that we will not record any goodwill amortization expense in our Consolidated Statements of Income in 2002 and future years. Total goodwill amortization expense in 2001 was $3.6 million. We have not yet evaluated whether or not we will have any impairment charges in our consolidated financial statements in 2002 that may result from the impairment test that is required upon adoption of this statement.

 

In October 2001, the Financial Accounting Standards Board also issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. The provisions of this statement are effective for fiscal years beginning after December 15, 2001, so we must adopt the provisions of SFAS No. 144 in our financial statements for the quarter ended March 31, 2002. We do not expect the adoption of this statement to significantly impact our consolidated financial statements.

 

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

 

We are exposed to market risks associated primarily with changes in foreign currency exchange rates. We have 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. From time to time, we enter into certain hedging transactions designed to hedge foreign currency exchange risk related to short-term intercompany loans and specific foreign currency transactions, however the amounts involved have not been material.

 

We are also exposed to changes in interest rates on our variable rate borrowings. Interest rates on our Senior Subordinated Notes and capital lease obligations are fixed, but rates on borrowings under our bank credit facility are variable. During the year ended December 31, 2001, our average borrowings under our bank credit facility were $10.7 million. Based on our projected cash needs for the foreseeable future, we do not expect that our exposure to changes in interest rates will have a material impact on our interest expense.

 

Item 8. Financial Statements and Supplementary Data

 

The information called for by this item is incorporated by reference from our Consolidated Financial Statements and the related Notes to Consolidated Financial Statements beginning on page F-3.

 

Item 9. Changes in and Disagreements with Accountants

 

None.

 

PART III

 

Item 10. Directors and Executive Officers of the Registrant

 

The information required by this item with respect to directors is set forth in the Proxy Statement under the captions “Item 1: Board of Directors and Election” and “Section 16(a) Beneficial Ownership Reporting Compliance,” and is incorporated herein by reference.

 

The information required by this item with respect to executive officers of SITEL Corporation, pursuant to instruction 3 of paragraph (b) of Item 401 of Regulation S-K, is set forth following Item 4 of Part I of this Form 10-K under the caption “Executive Officers of the Registrant” and in the Proxy Statement under the caption “Section 16(a) Beneficial Ownership Reporting Compliance,” and is incorporated herein by reference.

 

Item 11. Executive Compensation

 

The information required by this item is set forth in the Proxy Statement under the captions “Annual Compensation,” “Employment Agreements,” “Benefit Plans,” “Option Grants and Holdings,” “Compensation Committee Report on Executive Compensation,” and “Performance Graph,” and is incorporated herein by reference.

 

Item 12. Security Ownership of Certain Beneficial Owners and Management

 

The information required by this item regarding security ownership of certain beneficial owners and management is set forth in the Proxy Statement under the caption “Common Stock Owned by Certain Beneficial Owners and by Executive Officers and Directors,” and is incorporated herein by reference.

 

Item 13. Certain Relationships and Related Transactions

 

The information required by this item is set forth in the Proxy Statement under the caption “Compensation Committee Interlocks and Insider Participation; Certain Transactions,” and is incorporated herein by reference.

 

20

 

PART IV

 

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K

 

(a)     The following documents are filed as a part of this report:

 

1.  Financial Statements —  beginning on page F-1 of this report.

 

•                  Report of Independent Auditors

•                  Consolidated Statements of Income (Loss) For The Years Ended December 31, 2001, 2000, and 1999

•                  Consolidated Balance Sheets at December 31, 2001 and 2000

•                  Consolidated Statements of Stockholders’ Equity For The Years Ended December 31, 2001, 2000, and 1999

•                  Consolidated Statements of Cash Flows For The Years Ended December 31, 2001, 2000, and 1999

•                  Notes to Consolidated Financial Statements

 

2.  Financial Statement Schedule — beginning on page S-1 of this report.

 

•                  Report of Independent Auditors on the Financial Statement Schedule

•                  Schedule II — Valuation and Qualifying Accounts

 

Schedules other than Schedule II are omitted as not applicable or not required.

 

3.  Exhibits — required by Item 601 of Regulation S-K:

 

 

21

 

 

22

 

 

*      Filed herewith.

 

(b)     Reports on Form 8-K:

          None

 

23

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) 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.

 

				SITEL Corporation
				(Registrant)
Date:	March 28, 2002	By	/s/	James F. Lynch
				James F. Lynch
				Chief Executive Officer

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

		Signature		Title		Date
By	/s/	James F. Lynch		Chairman of the Board,		March 28, 2002
		James F. Lynch		Chief Executive Officer and Director
By	/s/	James E. Stevenson, Jr.		Executive Vice President and Chief Financial Officer		March 28, 2002
		James E. Stevenson, Jr.		(Principal Financial Officer)
By	/s/	Elizabeth K. Sidell		Vice President and Controller		March 28, 2002
		Elizabeth K. Sidell		(Principal Accounting Officer)
By	/s/	Kelvin C. Berens		Director		March 28, 2002
		Kelvin C. Berens
By	/s/	Rohit M. Desai		Director		March 28, 2002
		Rohit M. Desai
By	/s/	Mathias J. DeVito		Director		March 28, 2002
		Mathias J. DeVito
By	/s/	Bill L. Fairfield		Executive Vice President, Business Development and Director		March 28, 2002
		Bill L. Fairfield
By	/s/	George J. Kubat		Director		March 28, 2002
		George J. Kubat

 

24

 

EXHIBIT INDEX

 

Exhibit No.
3.1		Amended and Restated Articles of Incorporation (see Exhibit 3.1 to Registration Statement on Form S-1 No. 33-91092).
3.1(a)		Articles of Amendment filed September 10, 1996 to the Amended and Restated Articles of Incorporation (see Exhibit 4.1(a) to the Company’s Registration Statement on Form S-3 No. 333-13403).
3.4		Amended and Restated Bylaws (see Exhibit 3.4 to Registration Statement on Form S-1 No. 33-91092).
3.4(a)		Amended and Restated Bylaws — conformed copy including Amendment No. 1 (see Exhibit 4.2 to the Company’s Registration Statement on Form S-3 No. 333-28131).
3.4(b)		Amendment No. 2 to Amended and Restated Bylaws (see Exhibit 3.2 to the Company’s Form 10-Q for the quarter ended September 30, 1998).
3.4(c)		Amendment No. 3 to Amended and Restated Bylaws (see Exhibit 3.1 to the Company’s Form 10Q for the quarter ended June 30, 2001).
3.4(d)		Amended and Restated Bylaws — conformed copy including all amendments through March 2, 2001 (see Exhibit 3.2 to the Company’s Form 10-Q for the quarter ended June 30, 2001).
3.5		Certificate of Designation of Series A Participating Preferred Stock (see Exhibit A to the Rights Agreement included as Exhibit 1 to the Company’s Registration Statement on Form 8-A filed August 24, 1998).
4.2		Specimen Common Stock Certificate (see Exhibit 4.2 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1996).
4.3		Rights Agreement (see Exhibit 1 to the Company’s Registration Statement on Form 8-A filed August 24, 1998).
9.1		Form of General Voting Agreement (see Exhibit 9.1 to Registration Statement on Form S-1 No. 33-91092).
10.1		SITEL Corporation Stock Option Plan for Replacement of Existing Options (see Exhibit 10.1 to Registration Statement on Form S-1 No. 33-91092).
10.1(a)		Amendment No. 1 to SITEL Corporation Stock Option Plan for Replacement of Existing Options (see Exhibit 10.1(a) to the Company’s Annual Report on Form 10-K for the year ended December 31, 1996).
10.2		SITEL Corporation Stock Option Plan for Replacement of EEBs (see Exhibit 10.2 to Registration Statement on Form S-1 No. 33-91092).
10.2(a)		Amendment No. 1 to SITEL Corporation Stock Option Plan for  Replacement of EEBs (see Exhibit 10.2(a) to the Company’s Annual Report on Form 10-K for the year ended December 31, 1996).
10.3		Amended and Restated SITEL Corporation 1995 Employee Stock Option Plan (Appendix B to the Company’s definitive Proxy Statement for Annual Meeting of Stockholders, filed September 27, 1996).
10.3(a)		Amendment No. 1 to Amended and Restated SITEL Corporation 1995 Employee Stock Option Plan (see Exhibit 10.3(a) to the Company’s Annual Report on Form 10-K for the year ended December 31, 1996).
10.3(b)		Amendment No. 2 to Amended and Restated SITEL Corporation 1995 Employee Stock Option Plan (see Appendix C to the Company’s definitive Proxy Statement for the Annual Meeting of Stockholders, filed April 30, 1997).
10.3(c)		Amendment No. 3 to Amended and Restated SITEL Corporation 1995 Employee Stock Option Plan (see Exhibit 10.3(c) to the Company’s Form 10-Q for the quarter ended March 31, 1998).
10.4		Amended and Restated SITEL Corporation 1995 Non-Employee Directors Stock Option Plan (Appendix B to the Company’s definitive Proxy Statement for the Annual Meeting of Stockholders, filed April 30, 1997).
10.4(a)		Amendment No. 1 to Amended and Restated SITEL Corporation 1995 Non-Employee Directors Stock Option Plan (see Exhibit 10.1 to the Company’s Form 10-Q for the quarter ended March 31, 1999).
10.5		SITEL Corporation Executive Wealth Accumulation Plan. (see Exhibit 10.5 to Registration Statement on Form S-1 No. 33-91092).
10.5(a)		Second Amendment to SITEL Corporation Executive Wealth Accumulation Plan (see Exhibit 10.5(a) to the Company’s Form 10-Q for the quarter ended March 31, 1998).
10.5(b)		Third Amendment to SITEL Corporation Executive Wealth Accumulation Plan (see Exhibit 10.2 to the Company’s Form 10-Q for the quarter ended June 30, 1999).

 

25

 

Exhibit No.
10.6		SITEL Corporation 1999 Stock Incentive Plan (see Exhibit 4.1 to the Company’s Registration Statement on Form S-8 No. 333-78241).
10.6(a)		Amendment No. 1 to SITEL Corporation 1999 Stock Incentive Plan (see Exhibit 4.2 to the Company’s Registration Statement on Form S-8 No. 333-78241).
10.6(b)		Amendment No. 2 to SITEL Corporation 1999 Stock Incentive Plan (see Exhibit 10.2 to the Company’s Form 10-Q for the quarter ended September 30, 2000).
10.7		Form of Right of First Refusal. (see Exhibit 10.7 to Registration Statement on Form S-1 No. 33-91092).
10.8		Form of Indemnification Agreement with Outside Directors (see Exhibit 10.8 to the Company’s Form 10-Q for the quarter ended August 31, 1995).
10.9		Form of Indemnification Agreement with Executive Officers (see Exhibit 10.9 to the Company’s Registration Statement on Form S-8 No. 33-99434).
10.10		Amended and Restated SITEL Corporation Employee Stock Purchase Plan (see Exhibit 10.12 to the Company’s Form 10-Q for the quarter ended March 31, 1998).
10.11		Credit Agreement with Bankers Trust Company as Agent (see Exhibit 10.1 to the Company’s Form 10-Q for the quarter ended June 30, 2000).
10.11(a)		First Amendment to Credit Agreement with Bankers Trust Company as Agent (see Exhibit 10.1 to the Company’s Form 10-Q for the quarter ended June 30, 2001).
10.12		Indenture governing $100,000,000 9 1/4% Senior Subordinated Notes due 2006 (see Exhibit 10.2 to the Company’s Form 8-K filed March 16, 1998).
10.12(a)		First Supplemental Indenture (see Exhibit 4.2 to the Company’s Amendment No. 1 to Form S-4 filed August 21, 1998).
10.12(b)		Registration Rights Agreement (see Exhibit 4.2 to the Company’s Registration Statement on Form S-4 filed April 24, 1998).
10.13		Separation Agreement and General Release with Phillip A. Clough (see Exhibit 10.2 to the Company’s Form 10-Q for the quarter ended March 31, 2001).
10.14		Separation Agreement and General Release with W. Gar Richlin (see Exhibit 10.3 to the Company’s Form 10-Q for the quarter ended March 31, 2001).
10.15		Employment Agreement with Antoon Vanparys (see Exhibit 10.14 to the Company’s Form 10-K for the year endedDecember 31, 1999).
10.15(a)*		Separation Agreement and General Release with Antoon Vanparys
10.16*		Amended and Restated Employment Agreement with Dale W. Saville.
10.17*		Employment letter agreement with Sheena E. Wilson.
10.18*		Amended and Restated Employment Agreement with Dale R. Schuster.
10.19		Consulting Agreement with DreamField Partners, Inc. (see Exhibit 10.1 to the Company’s Form 10-Q for the quarter ended September 30, 2000).
10.19(a)		Consulting Arrangement with DreamField Partners, Inc. (see Exhibit 10.4 to the Company’s Form 10-Q for the quarter ended March 31, 2001).
10.20*		2001 Nonemployee Director Compensation Plan.
21*		Subsidiaries.
23*		Consent of Independent Auditors.

 

*      Filed herewith.

 

26

 

SITEL CORPORATION AND SUBSIDIARIES

 

TABLE OF CONTENTS

Financial Statements and Financial Statement Schedule

 

Consolidated Financial Statements

 

Report of Independent Auditors	F-2
Consolidated Statements of Income (Loss) For The Years Ended December 31, 2001, 2000, and 1999	F-3
Consolidated Balance Sheets at December 31, 2001 and 2000	F-4
Consolidated Statements of Stockholders’ Equity For The Years Ended December 31, 2001, 2000, and 1999	F-5
Consolidated Statements of Cash Flows For The Years Ended December 31, 2001, 2000, and 1999	F-6
Notes to Consolidated Financial Statements	F-7

 

Financial Statement Schedule

 

Report of Independent Auditors on the Financial Statement Schedule	S-1
Schedule II — Valuation and Qualifying Accounts	S-2

 

F-1

 

Report of Independent Auditors

 

 

 

To the Stockholders and Board of Directors
of SITEL Corporation

 

We have audited the accompanying consolidated balance sheets of SITEL Corporation and subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of income (loss), stockholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2001. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

 

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of SITEL Corporation and subsidiaries as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America.

 

	/s/ KPMG LLP
	KPMG LLP
Baltimore, Maryland
February 1, 2002

 

F-2

 

SITEL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (LOSS)

 

		Years Ended December 31,
		2001			2000			1999
		(in thousands, except per share data)
Revenues		$	725,048		$	764,447		$	737,522
Operating expenses:
Direct labor and telecommunications expenses		411,066			398,809			373,518
Subcontracted and other services expenses		36,949			51,452			59,024
Operating, selling, and administrative expenses		260,550			271,890			277,084
Asset impairment and restructuring expenses		26,185			3,520			9,596
Total operating expenses		734,750			725,671			719,222
Operating income (loss)		(9,702		)	38,776			18,300
Other income (expense):
Interest income		924			781			523
Interest expense		(12,566		)	(12,848		)	(13,308		)
Other income (expense), net		(2,606		)	(311		)	316
Total other expense, net		(14,248		)	(12,378		)	(12,469		)
Income (loss) before income taxes and minority interest		(23,950		)	26,398			5,831
Income tax expense (benefit)		(2,317		)	12,570			6,336
Minority interest		947			1,087			304
Net income (loss)		$	(22,580	)	$	12,741		$	(809	)
Weighted average common shares outstanding:
Basic		73,424			71,052			66,550
Diluted		73,424			75,201			66,550
Income (loss) per common share:
Basic		$	(0.31	)	$	0.18		$	(0.01	)
Diluted		$	(0.31	)	$	0.17		$	(0.01	)

 

See Notes to Consolidated Financial Statements.

 

F-3

SITEL CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

		At December 31,
		2001			2000
		(in thousands, except share data)
Assets
Current assets:
Cash and cash equivalents		$	22,156		$	19,897
Trade accounts receivable (net of allowance for doubtful accounts of $5,208 and $6,456, respectively)		129,180			146,662
Prepaid expenses		6,200			8,376
Deferred income taxes		6,358			3,769
Other assets		7,133			7,968
Total current assets		171,027			186,672
Property and equipment, net		91,293			99,793
Other assets:
Goodwill, net		73,216			78,443
Deferred income taxes		9,398			7,338
Other assets		10,532			7,976
Total assets		$	355,466		$	380,222
Liabilities and Stockholders’ Equity
Current liabilities:
Notes payable		$	—		$	302
Current portion of long-term debt		—			1,120
Current portion of capital lease obligations		2,366			3,964
Trade accounts payable		25,068			27,906
Income taxes payable		4,087			4,099
Deferred income taxes		717			307
Accrued wages, salaries and bonuses		26,014			26,728
Accrued operating expenses		34,953			23,446
Deferred revenue and other		5,145			5,217
Total current liabilities		98,350			93,089
Long-term debt and other liabilities:
Long-term debt, excluding current portion		100,000			100,000
Capital lease obligations, excluding current portion		7,040			8,341
Deferred compensation		1,755			2,448
Deferred income taxes		533			461
Total liabilities		207,678			204,339
Minority interests		7,748			6,301
Commitments and contingencies (see Note 9)
Stockholders’ equity:
Common stock, voting, $.001 par value 200,000,000 shares authorized, 74,357,579 and 72,075,229 shares issued and outstanding, respectively		74			72
Paid-in capital		168,731			168,640
Accumulated other comprehensive loss		(26,148		)	(19,388		)
Retained earnings (accumulated deficit)		(2,369		)	20,258
Less treasury stock, at cost, 145,396 common shares		(248		)	—
Total stockholders’ equity		140,040			169,582
Total liabilities and stockholders’ equity		$	355,466		$	380,222

 

See Notes to Consolidated Financial Statements.

 

F-4

SITEL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

 

		Years Ended December 31, 2001, 2000, and 1999
		Common Stock			Additional Paid-in Capital			Accumulated Other Comprehensive Income (Loss)			Retained Earnings (Accumulated Deficit)			Treasury Stock			Total Stockholders' Equity
		(in thousands, except share data)
Balance, December 31, 1998		$	64		$	157,892		$	(4,428	)	$	8,326		$	—		$	161,854
Issuance of 1,616,087 shares of common stock for options exercised		2			769			—			—			—			771
Tax benefit of stock options exercised		—			541			—			—			—			541
Issuance of 2,205,333 shares of common stock for acquisition of minority interest		2			6,614			—			—			—			6,616
Other		—			54			—			—			—			54
Comprehensive loss:
Net loss		—			—			—			(809		)	—			(809		)
Currency translation adjustment		—			—			(8,329		)	—			—			(8,329		)
Total comprehensive loss		—			—			—			—			—			(9,138		)
Balance, December 31, 1999		68			165,870			(12,757		)	7,517			—			160,698
Issuance of 3,904,401 shares of common stock for options exercised		4			2,742			—			—			—			2,746
Other		—			28			—			—			—			28
Comprehensive income:
Net income		—			—			—			12,741			—			12,741
Currency translation adjustment		—			—			(6,631		)	—			—			(6,631		)
Total comprehensive income		—			—			—			—			—			6,110
Balance, December 31, 2000		72			168,640			(19,388		)	20,258			—			169,582
Purchase of 171,800 shares of treasury stock		—			—			—			—			(338		)	(338		)
Issuance of 2,282,350 shares of common stock for options exercised and 26,404 shares of treasury stock		2			119			—			(47		)	90			164
Other		—			(28		)	—			—			—			(28		)
Comprehensive income:
Net loss		—			—			—			(22,580		)	—			(22,580		)
Currency translation adjustment		—			—			(6,760		)	—			—			(6,760		)
Total comprehensive loss		—			—			—			—			—			(29,340		)
Balance, December 31, 2001		$	74		$	168,731		$	(26,148	)	$	(2,369	)	$	(248	)	$	140,040

 

See Notes to Consolidated Financial Statements.

 

F-5

SITEL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

		Years Ended December 31,
		2001			2000			1999
		(in thousands)
Cash flows from operating activities:
Net income (loss)		$	(22,580	)	$	12,741		$	(809	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Asset impairment and restructuring provision		26,185			3,520			9,596
Depreciation and amortization		39,346			44,132			45,996
Loss on disposal of assets		1,254			221			—
Write off of credit acquisition fees		837			—			—
Provision for deferred income taxes		(4,164		)	7,260			(516		)
Deferred compensation		(754		)	543			314
Changes in operating assets and liabilities:
Trade accounts receivable		15,321			11,144			(38,915		)
Other assets		5,642			407			(4,423		)
Trade accounts payable		(2,281		)	(8,388		)	7,623
Other liabilities		(10,197		)	(6,385		)	20,449
Net cash provided by operating activities		48,609			65,195			39,315
Cash flows from investing activities:
Purchases of property and equipment		(40,444		)	(33,129		)	(38,585		)
Proceeds from sale-leasebacks of facilities and equipment		—			—			3,467
Proceeds from sales of property and equipment		55			7,229			639
Increase in other assets		(3,384		)	—			—
Net cash used in investing activities		(43,773		)	(25,900		)	(34,479		)
Cash flows from financing activities:
Borrowings on notes payable		—			—			3,706
Repayments of notes payable		(302		)	(6,876		)	(26,174		)
Borrowings on debt		73,372			35,000			57,789
Repayments of debt		(73,501		)	(71,939		)	(29,823		)
Payments on capital lease obligations		(3,788		)	(3,522		)	(5,056		)
Common stock issued, net of expenses		121			2,746			771
Purchases of treasury stock, net of reissuances		(248		)	—			—
Capital contribution from minority interest		537			—			—
Other		(64		)	(46		)	(63		)
Net cash provided by (used in) financing activities		(3,873		)	(44,637		)	1,150
Effect of exchange rates on cash		1,296			2,934			1,847
Net increase (decrease) in cash		2,259			(2,408		)	7,833
Cash and cash equivalents, beginning of year		19,897			22,305			14,472
Cash and cash equivalents, end of year		$	22,156		$	19,897		$	22,305
Other cash flow information:
Interest paid		$	12,518		$	12,836		$	12,170
Income taxes paid		$	4,012		$	5,757		$	2,654
Non-cash investing and financing activities:
Tax benefit of stock options exercised		$	—		$	—		$	541
Capital leases incurred		$	689		$	787		$	9,015
Value of stock issued in connection with acquisition of businesses and minority interest		$	—		$	—		$	6,616

 

See Notes to Consolidated Financial Statements.

 

F-6

SITEL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Note 1. Significant Accounting Policies and Practices

 

Description of Our Business

References in the Notes to Consolidated Financial Statements to “we” and “our” are to SITEL Corporation and its subsidiaries, collectively.

 

We are a leading global provider of outsourced customer support services. We specialize in the design, implementation, and operation of complex, multi-channel contact centers. We support the Customer Relationship Management (CRM) strategies of large corporations in North America, Europe, Asia Pacific, and Latin America. We provide customer acquisition, customer care, technical support and risk management services on an outsourced basis, as well as operational and information technology professional services for both outsourced and internal contact centers. We serve clients primarily in the consumer products, financial services, insurance, telecommunications, technology, and utilities industries.

 

Principles of Consolidation

Our consolidated financial statements include the financial statements of SITEL Corporation and its subsidiaries. We use three different accounting methods to report our investments in our subsidiaries or other companies: consolidation, the equity method, and the cost method.

 

Consolidation

We use the consolidation method when we can exercise control over the operations and policies of a company. When we consolidate, we combine the accounts of our subsidiaries with our accounts, and we eliminate intercompany balances and transactions. We consolidate all of our subsidiaries, except those that are reported using the equity and cost methods described below.

 

The Equity Method

We use the equity method to report investments where we can exercise significant influence, but cannot exercise control, over the investee’s operations and policies, which is generally in situations where we hold a 20% to 50% voting interest. Under the equity method, we report:

 

•             our interest in the entity as an investment in our Consolidated Balance Sheets, and

•             our percentage share of the earnings from the entity in our Consolidated Statements of Income.

 

We report our investment in a joint venture in India using this method.

 

The Cost Method

We use the cost method if we hold less than a 20% voting interest in an investment and cannot exercise significant influence over the investee’s operations and policies. Under the cost method, we report our investment at cost in our Consolidated Balance Sheets. We report our investment in Context Connect, Inc., a leading provider of fixed line and wireless directory and connectivity services, using this method.

 

Translation of Foreign Currencies

Our non-U.S. subsidiaries use as their functional currency the local currency of the countries in which they operate. They translate their assets and liabilities into U.S. dollars at the exchange rates in effect at the balance sheet date. They translate their revenues and expenses at the average exchange rates during the period.

 

We include translation gains and losses as a component of stockholders’ equity, and transaction gains and losses related to short-term intercompany accounts in the determination of net income (loss).

 

Revenue Recognition

We recognize revenues as we perform services for our clients. In some cases, we are able to invoice and receive payment for our services prior to performing those services. We record such payments as deferred revenue in our Consolidated Balance Sheets and recognize the revenues when the services are performed. We recognize revenues that are based on defined performance criteria when the criteria are met. We have not recorded any revenue that is at risk due to future performance contingencies.

 

Cash Equivalents

For purposes of reporting our cash flows, we define cash equivalents as highly liquid investments that mature in three months or less.

 

Trade Accounts Receivable

Trade accounts receivable included unbilled revenues that we expect to bill, generally within thirty days, and collect in the normal course of business, as follows:

 

•    $18.7 million at December 31, 2001, and

•    $33.4 million at December 31, 2000.

 

We report our trade accounts receivable net of an allowance for doubtful accounts, which represents management’s estimates of the amount of our receivables that may not be collectible, net of recoveries of amounts previously written off. These estimates are based on a

 

F-7

 

detailed aging analysis of accounts receivable, historical bad debts, client credit-worthiness, and changes in our client payment terms.

 

Property and Equipment, net

We record property and equipment at cost, and we calculate depreciation using the straight-line method over the estimated useful lives of the assets, which range from 3 to 20 years.

 

We record equipment under capital leases at the present value of the minimum lease payments. We amortize leasehold improvements and assets under capital leases on a straight-line basis over the shorter of the lease term or the estimated useful life of the asset.

 

Deferred Income Taxes

We must report some of our revenues and expenses differently for our financial statements than we do for income tax purposes. The future tax effects of the differences in these items, as well as operating loss and tax credit carryforwards, are reported as deferred tax assets or liabilities in our Consolidated Balance Sheets.

 

We measure deferred tax assets and liabilities using income tax rates that we expect to apply to taxable income in the years when we expect those differences to be recovered or settled. We recognize the effect of a change in tax rates on deferred tax assets and liabilities in income in the period that the rate change is effective.

 

We establish valuation allowances when necessary to reduce deferred tax assets to the amount that is more likely than not to be realized. We do not accrue for income taxes for unremitted earnings of international operations that have been, or are intended to be, reinvested indefinitely.

 

Goodwill, net

Goodwill represents the difference between the purchase price we paid in acquisitions, using the purchase method of accounting, and the fair value of the net assets we acquired. We amortize goodwill on a straight-line basis over 25 years. Accumulated amortization of goodwill was:

 

•    $18.8 million at December 31, 2001, and

•    $15.5 million at December 31, 2000.

 

Asset Impairment

We monitor events and changes in circumstances which may require us to review the carrying value of our long-lived assets. We review the recoverability of our goodwill at each consolidated balance sheet date. We assess the recoverability of our long-lived assets and goodwill based on estimated undiscounted future operating cash flows. We measure impairment, if any, by comparing the carrying value of the asset to its fair value. We recognize an impairment loss if the carrying value exceeds the fair value. Our assessment of the recoverability of our long-lived assets, including goodwill, will be impacted if estimated future operating cash flows are not achieved.

 

In June 2001, the Financial Accounting Standards Board issued SFAS No. 142, Goodwill and Other Intangible Assets. This statement:

 

•   replaces the requirement to amortize goodwill and certain other intangible assets with an annual impairment test, and

•   requires an evaluation of the useful lives of intangible assets and an impairment test for goodwill upon adoption.

 

The provisions of this statement are effective for fiscal years beginning after December 15, 2001, so we must adopt the provisions of SFAS No. 142 in our financial statements for the quarter ended March 31, 2002. Beginning January 1, 2002, we stopped amortizing our goodwill, which means that we will not record any goodwill amortization expense in our Consolidated Statements of Income in 2002 and future years. Total goodwill amortization expense in 2001 was $3.6 million. We have not yet evaluated whether or not we will have any impairment charges in our consolidated financial statements in 2002 that may result from the impairment test that is required upon adoption of this statement.

 

Income (Loss) Per Common Share

We calculate income (loss) per common share by dividing our reported net income (loss) by the weighted average number of common shares and common equivalent shares outstanding during each period. Our reported net income (loss) is used in the computation of both basic and diluted income (loss) per share.

 

The difference between the number of shares used to calculate basic and diluted earnings per share represents the number of shares assumed to be issued from the

 

F-8

 

exercise of dilutive stock options under our stock option plans, less hares assumed to be purchased with proceeds from the exercise of the stock options and the related tax benefit credited to additional paid-in capital.

 

Use of Accounting Estimates

Management makes estimates and assumptions when preparing financial statements under generally accepted accounting principles that affect:

 

•   our reported amounts of assets and liabilities at the dates of the financial statements,

•   our disclosure of contingent assets and liabilities at the dates of the financial statements, and

•   our reported amounts of revenues and expenses during the reporting periods.

 

These estimates involve judgments with respect to, among other things, future economic factors that are difficult to predict and are beyond management’s control. As a result, actual amounts could differ from these estimates.

 

Stock Compensation

We recognize stock-based compensation expense using the intrinsic value method. Under that method, we do not record any compensation expense if the exercise price of employee stock options equals or exceeds the market price of the underlying stock on the date of grant. For disclosure purposes, we have provided pro forma net income (loss) and income (loss) per share as if the fair value method had been applied in Note 6.

 

Financial Instruments

We estimate that the fair values of cash and cash equivalents, trade accounts receivable, notes payable, trade accounts payable, long-term debt (other than our Senior Subordinated Notes due 2006), and capital lease obligations approximate their carrying values due to the short maturities or other characteristics of these financial instruments. The fair values of our Senior Subordinated Notes, based on market transactions near these dates, were approximately:

 

•   77.0 million at December 31, 2001, and

•   85.0 million at December 31, 2000.

 

During 2000 and 1999, we entered into forward exchange contracts designed to manage our exposure to fluctuations in the value of currencies of certain foreign countries where we had foreign-currency denominated short-term intercompany loans. We marked the forward contracts to market, and recognized gains or losses in our Consolidated Statements of Income (Loss) as other income (expense). Such amounts were not material.

 

Effective January 1, 2001, we adopted Statements of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Investments and Hedging Activities, and No. 138, Accounting for Certain Derivative Investments and Certain Hedging Activities, which establish accounting standards for derivative instruments and for hedging activities. The adoption of these standards, including the valuation of derivative instruments outstanding on the effective date, and the related cumulative effect of adoption, did not significantly impact our consolidated financial statements. We had no derivative financial instruments at December 31, 2001.

 

Comprehensive Income (Loss)

Comprehensive income (loss) is presented in our Consolidated Statements of Stockholders’ Equity. The difference between our reported net income (loss) and comprehensive income (loss) for each period presented is primarily the change in the foreign currency translation adjustment. Accumulated other comprehensive income (loss) included in our Consolidated Balance Sheets at December 31, 2001 and 2000 represents the accumulated foreign currency translation adjustment.

 

Note 2. Property and Equipment

 

Property and equipment consists of the following:

 

 

Note 3. Notes Payable and Long-Term Debt

 

Notes Payable

Notes payable mature within one year from the date of issuance. We had no notes payable outstanding at December 31, 2001.

 

F-9

 

Long-Term Debt

Long-term debt consists of the following:

 

 

9.25% Senior Subordinated Notes

In March 1998, we completed the private placement of $100 million of 9.25% Senior Subordinated Notes due March 2006 (the Notes). The proceeds from the offering were used to repay other debt outstanding at that time.

 

The Notes, which include interest payable semiannually, are our general unsecured obligations and are subordinated in right of payment to all our existing and future senior debt. The Notes are guaranteed by some of our subsidiaries and contain covenants that limit our ability and the ability of some of our subsidiaries to, among other things:

 

•   incur additional indebtedness,

•   pay dividends or make certain other restricted payments,

•   consummate certain asset sales,

•   enter into certain transactions with affiliates,

•   incur liens,

•   merge or consolidate with another company, and

•   sell or otherwise dispose of all or substantially all of our assets.

 

The Notes are redeemable, at our option, in whole or in part from time to time on or after March 15, 2002. If we redeem the Notes during the twelve-month period commencing on March 15 of the year set forth in the following table, the following redemption prices will be in effect, plus in each case, accrued and unpaid interest thereon, if any, to the date of redemption:

 

 

If we undergo a change of control, as defined, we may be required to repurchase the Notes at a price equal to 101% of the principal amount thereof, plus accrued interest to the date of repurchase.

 

Long-Term Revolving Credit Facility

We have a long-term senior secured credit facility, under which we may borrow in U.S. dollars, British pounds sterling, and Euros, which allows us to consolidate our U.S. and European bank lines into a single multi-borrower, multi-currency facility. The weighted-average interest rates for this facility were:

 

•   4.6% at December 31, 2001, and

•   7.5% at December 31, 2000.

 

Our obligations under the facility have been guaranteed by our domestic subsidiaries and certain foreign subsidiaries and are secured by liens on substantially all of the assets of SITEL Corporation and such subsidiaries, including a pledge of our shares in such subsidiaries and certain other foreign subsidiaries. The facility contains certain financial covenants and certain restrictions similar to those contained in the Notes, described earlier. The facility becomes due and payable upon a change of control of the Company as defined in the credit agreement.

 

At June 30, 2001, we were not in compliance with some of the original financial covenants of the facility, which are determined quarterly based on the trailing four quarters ended on each determination date. In August 2001, we obtained an amendment to the credit facility that was effective as of June 30, 2001, which waived the noncompliance with those covenants and amended our financial covenants for future periods. The amendment also:

 

•             reduced the size of the facility from $75 million to $50 million and removed our option to request an increase in the size of the facility to $100 million,

•             changed the expiration date of the facility from April 2005 to April 2003,

•             increased the interest rates on borrowings 50 to 75 basis points and the unused commitment fee 50 basis points, and

•             further restricted our ability to make certain acquisitions, restricted payments, capital expenditures, and investments.

 

As a result of the amendment, we wrote off $0.8 million of credit acquisition costs related to the original facility in 2001.

 

F-10

 

At December 31, 2001, we had $50 million of available borrowings under the facility, and we were in compliance with all financial covenants of the facility.

 

Maturities of Long-Term Debt

At December 31, 2001, all of our long-term debt was scheduled to mature in 2006.

 

Note 4. Income Taxes

 

Components of Pretax Income (Loss)

For financial reporting purposes, income (loss) before income taxes and minority interest includes the following components:

 

 

Provision for Income Tax Expense (Benefit)

The components of the provision for income tax expense (benefit) were:

 

 

Certain of the income tax benefits related to the exercise of stock options reduce taxes currently payable and are credited to additional paid-in capital, as presented in our Consolidated Statements of Stockholders’ Equity.

 

Deferred Tax Assets and Liabilities

The following table sets forth the tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities that are reported in our Consolidated Balance Sheets:

 

 

During 2001, we recorded a net deferred income tax benefit of $6.0 million resulting from an election to treat certain of our foreign operations as branches of our U.S. company for U.S. income tax purposes. This benefit was comprised of a $22.9 million deferred income tax asset, resulting from current and future tax-deductible goodwill, net of a $16.9 million valuation allowance. We estimate that the $6.0 million net asset will be realized in 2002 and future years.

 

Based upon our current and historical earnings, adjusted for significant deductions estimated to be available from the exercise of nonqualified stock options, management believes that it is more likely than not that we will generate sufficient taxable income to fully realize the benefits of our recorded net deferred tax assets.

 

Net Operating Loss and Alternative Minimum Tax Credit Carryforwards

At December 31, 2001, we had approximately:

 

•             $44.7 million in U.S. Federal net operating loss carryforwards, which expire in 2020 and 2021,

•             $27.5 million in foreign net operating loss carryforwards, of which $17.9 million expire between 2003 and 2011 and $9.6 million can be carried forward indefinitely,

•             $0.5 million of U.S. Federal general business credit carryforwards, which expire between 2014 and 2018, and

•             $2.9 million of U.S. Federal alternative minimum tax credit carryforwards, which can be carried forward indefinitely.

 

F-11

 

Reconciliation of Reported Income Tax Expense (Benefit) to Expected Income Tax Expense

The following table shows the reconciliation between income tax expense reported in our Consolidated Statements of Income (Loss) and the income tax expense that would have resulted from applying the U.S. Federal income tax rate of 34% to pretax income (loss):

 

		Years Ended December 31,
		2001			2000			1999
		(in thousands)
Expected Federal income tax expense (benefit)		$	(8,143	)	$	8,975		$	1,983
State taxes, net of Federal effect		(663		)	593			325
Tax credits		(1,611		)	—			—
Goodwill on foreign operations, net of valuation allowance of $16.9 million		(5,970		)	—			—
Amortization of goodwill		(5,311		)	467			350
Impact of foreign operations, including goodwill		(1,622		)	623			1,199
Valuation allowance		20,482			1,602			—
Impairment losses on intangible assets		—			—			2,181
Other		521			310			298
Total		$	(2,317	)	$	12,570		$	6,336

 

Note 5. Lease Obligations

 

Capital Leases

We are obligated under various capital leases for property and certain equipment that expire at various dates through 2015. Capitalized leased property and equipment, net of accumulated amortization, included in property and equipment was approximately:

 

•   $9.1 million at December 31, 2001 and

•   $15.5 million at December 31, 2000.

 

Operating Leases

We also lease property and certain equipment under noncancelable operating lease arrangements, which expire at various dates through 2015. Certain leases of real property provide options to extend the lease terms. Rent expense was approximately:

 

•   $19.6 million in 2001

•   $23.9 million in 2000, and

•   $26.3 million in 1999.

 

Future Minimum Lease Payments

At December 31, 2001, our future minimum payments under capital and operating leases were as follows:

 

 

Note 6. Stock-Based Compensation

 

Stock Options

The 1999 Stock Incentive Plan (1999 Plan) provides for the granting of various types of incentive awards (including incentive stock options, nonqualified options, stock appreciation rights, restricted shares, and performance shares or units) for the issuance of up to an aggregate of 7,000,000 shares of common stock to our employees, consultants and non-employee directors.

 

Vesting terms vary with each grant, and option terms may not exceed ten years. Option prices, set by the Compensation Committee of the Board of Directors, may not be less than the fair market value at date of grant for incentive stock options or less than par value for nonqualified stock options. At December 31, 2001, there were approximately 3.3 million shares available for issuance pursuant to future grants under the 1999 Plan.

 

Prior to the adoption of the 1999 Plan, we granted options under several different plans. As of December 31, 2001, options granted under these plans aggregating 4,019,755 remained outstanding. The last of these options will expire on February 1, 2009. We granted these options at prices ranging from $.0025 to $19.50. We will not grant additional options under these plans.

 

F-12

 

The following table sets forth shares subject to options:

 

 

The options exercisable at the end of each period were:

 

 

The following table summarizes stock options outstanding at December 31, 2001:

 

 

The following table summarizes stock options exercisable at December 31, 2001:

 

 

The per share weighted-average fair value of stock options granted was determined on the date of grant using the Black-Scholes option-pricing model with an expected dividend yield of 0.0%, and the following weighted-average assumptions:

 

 

The per share weighted-average fair value of stock options granted was:

 

•   $1.83 in 2001,

•   $5.07 in 2000, and

•   $0.90 in 1999.

 

If we had determined compensation cost based on the fair value at the grant date for our stock options, our net income (loss) and income (loss) per common share would have been reduced to the pro forma amounts indicated in the following table:

 

 

F-13

 

Employee Stock Purchase Plan (ESPP)

During 1998, we implemented an ESPP which enables eligible employees to purchase our stock at 85% of the current market value on a quarterly basis. We have not recognized any compensation expense in connection with this plan. Total purchases and shares purchased under the ESPP were:

 

•   $188,535 and 92,777 shares for 2001,

•   $193,384 and 35,401 shares for 2000, and

•   $206,000 and 52,262 shares for 1999.

 

Note 7. Benefit Plans

 

We sponsor a 401(k) plan, which covers substantially all domestic employees who are 18 years of age with 6 months or more of service. Participants may elect to contribute 1% to 17% of compensation. We may elect to make a year-end contribution to the 401(k) plan. We did not contribute to the plan in 2001, 2000, or 1999.

 

We also make contributions to certain executive and other employee personal retirement programs, primarily in Europe. We contributed the following amounts to those plans:

 

•   $1.2 million in 2001,

•   $1.1 million in 2000, and

•   $1.2 million in 1999.

 

We also sponsor a deferred compensation plan for certain executive employees who elect to contribute to the plan. We may voluntarily match all or a portion of the participants’ contributions. Participants are 100% vested in their contributions and our contributions vest over a 15-year period. We did not contribute to the plan in 2001, 2000, or 1999.

 

Note 8. Segment Data

 

Business Segments

Our operations are conducted in one reportable segment that includes operating segments which all provide customer relationship management services via electronic media including telephone, fax, and the Internet, and, to a lesser extent, traditional mail.

 

Our services are provided through a number of operating subsidiaries in a variety of locations around the world. However, the nature of services, the nature of the processes involved in providing those services, the types of clients, and the expected long-term operating income from these subsidiaries are similar.

 

Revenues are primarily attributed to countries based upon the location where the services are performed. Following are summaries of our revenues and long-lived assets by geographic area:

 

 

 

Major Clients

The combined total revenue of four independently managed business units of one client with operations primarily in the United States totaled:

 

•    25.4% of our revenues for the year ended December 31, 2001,

•    20.2% of our revenues for the year ended December 31, 2000, and

•    12.2% of our revenues for the year ended December 31, 1999.

 

Note 9. Contingencies

 

From time to time, we are involved in litigation incidental to our business. We cannot predict the ultimate outcome of such litigation with certainty, but management believes, after consultation with counsel, that the resolution of such matters will not have a material adverse effect on our consolidated financial position or results of operations.

 

Note 10. Asset Impairment and Restructuring Expenses

 

2001

In 2001, we announced a restructuring plan designed to intensify our focus on core competencies, accelerate revenue growth, and improve profitability. The key components of the restructuring plan include several major

 

F-14

 

organizational changes and the streamlining of contact center operations and corporate support services to improve effectiveness and drive revenue growth.

 

As part of our restructuring plan, we reduced fixed overhead to improve profitability by substantially completing the following by December 31, 2001:

 

•             eliminating approximately 350 operating, selling, and administrative positions globally, and

•             reducing excess capacity by closing nine contact centers plus three administrative offices, and downsizing another five contact centers plus two administrative offices, resulting in the elimination of approximately 2,100 workstations.

 

In connection with this restructuring, we recorded $26.2 million of asset impairment and restructuring charges, or $24.6 million after tax. Approximately $16.9 million of these charges are liabilities that we have paid or will pay in cash. At December 31, 2001, we had paid approximately $6.8 million of the liabilities. We have recorded the remaining $10.1 million of unpaid liabilities as accrued operating expenses in our December 31, 2001 Consolidated Balance Sheet.

 

The charges also included $9.3 million of asset write-downs that we recorded as a reduction of fixed assets. The fixed asset reduction consists of the following:

 

•             in facilities that are being closed or reduced immediately, we wrote off leasehold improvements and equipment that will no longer be used, and

•             in facilities that will continue to operate for a period prior to closure or space reduction, we wrote down assets to their estimated fair values considering estimated future cash flows from operations.

 

The components of the restructuring charges are:

 

 

The restructuring plan calls for:

 

•             a reorganization of our U.S. and Canadian businesses, excluding SITEL Risk Management and certain client-specific business units, by establishing six industry focused Business Units,

•             the continued organization of our businesses outside of North America on a geographic basis with five Business Units, as follows: UK and Ireland, Nordic, Central Europe (Germany, France, Netherlands and Belgium), Asia Pacific (Australia, New Zealand, and Singapore), and IBERLAT (Brazil, Mexico, Colombia, Portugal, and Spain),

•             establishment of a new Multi-National Client and Design Business Unit, recently renamed the Enterprise Solutions Group, that will have responsibility for selling, designing, building, and running complex contact center services for our multi-national clients. This unit will ensure that these complex programs deliver performance consistency across all sites and countries,

•             SITEL Risk Management to continue to provide receivables management services in North America and leverage our global footprint to grow the business internationally, and

•             streamlined and realigned corporate support functions to provide efficient and cost effective services to the Business Units.

 

2000

In 2000, we formed a strategic partnership with Bellsystem24, Inc., Japan’s largest comprehensive marketing agency. Under the terms of the partnership, Bellsystem24 will provide services and support for our clients in Japan and we will provide services and support for Bellsystem24’s clients in the United States. In connection with the formation of the partnership, we restructured our operations in Japan and transferred our existing Japanese business to Bellsystem24. In connection with this restructuring, we recorded $3.5 million of asset impairment and restructuring expenses which included a $3.3 million loss on the sale of the assets and the transfer of the business, and $0.2 million of severance for 12 employees.

 

1999

In 1999, we recorded asset impairment expenses of $10.1 million related to capitalized software and related technology assets. We reduced that amount by a $0.5 million reversal of our 1998 restructuring accrual. The $10.1 million of impairment expenses were precipitated by our decision to select an outside vendor to provide our call center software and a detailed assessment made by management of the utility and plans for future deployment

 

F-15

 

of existing software assets. These impairment expenses consisted of the following:

 

•    A write-down of $1.4 million was recorded for a software platform that we will continue to use, although on a much more limited basis. The amount of the impairment loss was determined by estimating future discounted cash flows that would be provided from utilizing the software.

•     A write-off of $6.4 million was recorded for the abandonment of internally developed software and software licenses that will not be deployed as a result of management’s decision to deploy the third party software.

•    A write-off of $2.3 million was recorded for an other-than-temporary decline of the fair value of our investment in a software development firm. The deteriorating financial condition of the investee and management’s decision to abandon plans to purchase its software contributed to the determination of the impairment loss.

 

Note 11. Shareholder Rights Plan

 

We have a Shareholder Rights Plan that provides for the issuance of preferred share purchase rights that expire in August 2008. The rights generally will be exercisable and transferable apart from the common stock in the following cases:

 

•             only after the tenth day following public disclosure that a person or group of affiliated or associated persons has acquired 20% or more of the outstanding shares of common stock (thereby becoming an “Acquiring Person”), and

•             on such date as the Board of Directors determines after the commencement or announcement of a tender or exchange offer by a person or group for 20% or more of the outstanding shares of common stock.

 

If any person or group of affiliated or associated persons acquires 20% or more of the outstanding shares of common stock and our redemption right has expired, each holder of a right (except those held by the Acquiring Person) will have the right to purchase shares of our common stock (or in certain circumstances, our shares of preferred stock or similar securities) having a value equal to two times the exercise price of the right.

 

Alternatively, if, in a transaction not approved by the Board of Directors, we are acquired in a merger or other business combination or 50% or more of our assets or earnings power are sold, and our redemption right has expired, each holder of a right will have the right to purchase that number of shares of common stock of the acquiring company having the market value of two times the exercise price of the right.

 

The rights may not be exercisable while they are redeemable. We can redeem the rights, which have a $30 exercise price, at a price of $.001 per right at any time up to and including the tenth day after the time that a person or group has become an Acquiring Person.

 

Note 12. Sale and Reacquisition of Stock of Subsidiaries

 

During 1998, we sold newly issued stock of certain subsidiaries located in the Asia Pacific region to Lend Lease Corporation Limited, Sydney, Australia and certain of its subsidiaries (Lend Lease). Lend Lease paid approximately $6.6 million for a 20% interest in these subsidiaries, which provide outsourced call center solutions throughout the region.

 

In June 1999, we reacquired the minority interest in these subsidiaries from Lend Lease in exchange for 2.2 million shares of our common stock. Additionally, Lend Lease purchased 1.5 million shares of our common stock for $4.5 million in cash from two of our shareholders in a related transaction. The shares we issued were valued at $6.6 million, based on quoted market prices of our stock.

 

Note 13. Supplemental Guarantor Financial Information

 

Our 9.25% Senior Subordinated Notes are guaranteed, on a full, unconditional and joint and several basis, by substantially all of our wholly owned domestic subsidiaries. Separate financial statements for each of the guarantor subsidiaries are not presented because they would not be material to investors. However, on the following pages we have presented the following unaudited statements of (a) SITEL Corporation, the parent, (b) the guarantor subsidiaries, (c) the nonguarantor subsidiaries, and (d) SITEL Corporation on a consolidated basis:

 

•             Condensed Consolidating Statements of Income (Loss) and Comprehensive Income (Loss) for the years ended December 31, 2001, 2000, and 1999,

•             Condensed Consolidating Balance Sheets at December 31, 2001 and 2000, and

•             Condensed Consolidating Statements of Cash Flows for the years ended December 31, 2001, 2000, and 1999.

 

F-16

 

Condensed Consolidating Statement of Income (Loss) and Comprehensive Income (Loss)

 

		Year Ended December 31, 2001
		Parent			Guarantor Subsidiaries			Nonguarantor Subsidiaries			Eliminations			Consolidated
		(in thousands)
Revenues		$	390,322		$	40,669		$	297,481		$	(3,424	)	$	725,048
Operating expenses:
Direct labor and telecommunications expenses		220,455			22,688			167,923			—			411,066
Subcontracted and other services expenses		29,621			2,193			5,135			—			36,949
Operating, selling, and administrative expenses		127,841			11,839			124,294			(3,424		)	260,550
Asset impairment and restructuring expenses		12,922			25			13,238			—			26,185
Total operating expenses		390,839			36,745			310,590			(3,424		)	734,750
Operating income (loss)		(517		)	3,924			(13,109		)	—			(9,702		)
Other income (expense):
Equity in earnings (losses) of subsidiaries, after tax		(21,445		)	(23,949		)	—			45,394			—
Interest income (expense), net		(10,979		)	80			(743		)	—			(11,642		)
Other income (expense), net		56			—			(2,662		)	—			(2,606		)
Total other income (expense)		(32,368		)	(23,869		)	(3,405		)	45,394			(14,248		)
Income (loss) before income taxes and minority interest		(32,885		)	(19,945		)	(16,514		)	45,394			(23,950		)
Income tax expense (benefit)		(10,305		)	1,500			6,488			—			(2,317		)
Minority interest		—			—			947			—			947
Net income (loss)		$	(22,580	)	$	(21,445	)	$	(23,949	)	$	45,394		$	(22,580	)
Currency translation adjustment		(6,760		)	(4,800		)	(5,678		)	10,478			(6,760		)
Comprehensive income (loss)		$	(29,340	)	$	(26,245	)	$	(29,627	)	$	55,872		$	(29,340	)

 

F-17

 

		Year Ended December 31, 2000
		Parent			Guarantor Subsidiaries			Nonguarantor Subsidiaries			Eliminations			Consolidated
		(in thousands)
Revenues		$	407,576		$	33,459		$	324,560		$	(1,148	)	$	764,447
Operating expenses:
Direct labor and telecommunications expenses		206,683			16,564			175,562			—			398,809
Subcontracted and other services expenses		39,855			2,836			8,761			—			51,452
Operating, selling, and administrative expenses		134,104			10,554			128,380			(1,148		)	271,890
Asset impairment and restructuring expenses		2,019			—			1,501			—			3,520
Total operating expenses		382,661			29,954			314,204			(1,148		)	725,671
Operating income		24,915			3,505			10,356			—			38,776
Other income (expense):
Equity in earnings (losses) of subsidiaries, after tax		4,804			2,343			—			(7,147		)	—
Intercompany charges		1,302			429			(1,731		)	—			—
Interest expense, net		(10,831		)	(130		)	(1,106		)	—			(12,067		)
Other income (expense), net		(1,862		)	(17		)	1,568			—			(311		)
Total other income (expense)		(6,587		)	2,625			(1,269		)	(7,147		)	(12,378		)
Income (loss) before income taxes and minority interest		18,328			6,130			9,087			(7,147		)	26,398
Income tax expense		5,587			1,326			5,657			—			12,570
Minority interest		—			—			1,087			—			1,087
Net income (loss)		$	12,741		$	4,804		$	2,343		$	(7,147	)	$	12,741
Currency translation adjustment		(6,631		)	(4,210		)	(5,055		)	9,265			(6,631		)
Comprehensive income (loss)		$	6,110		$	594		$	(2,712	)	$	2,118		$	6,110

 

F-18

 

		Year Ended December 31, 1999
		Parent			Guarantor Subsidiaries			Nonguarantor Subsidiaries			Eliminations			Consolidated
		(in thousands)
Revenues		$	258,905		$	130,619		$	347,998		$	—		$	737,522
Operating expenses:
Direct labor and telecommunications expenses		112,064			74,659			186,795			—			373,518
Subcontracted and other services expenses		45,930			2,344			10,750			—			59,024
Operating, selling, and administrative expenses		90,799			40,464			145,821			—			277,084
Asset impairment and restructuring expenses		3,585			—			6,011			—			9,596
Total operating expenses		252,378			117,467			349,377			—			719,222
Operating income (loss)		6,527			13,152			(1,379		)	—			18,300
Other income (expense):
Equity in earnings (losses) of subsidiaries, after tax		1,840			(7,942		)	—			6,102			—
Intercompany charges		220			2,727			(2,947		)	—			—
Interest expense, net		(10,001		)	(829		)	(1,955		)	—			(12,785		)
Other income, net		205			—			111			—			316
Total other income (expense)		(7,736		)	(6,044		)	(4,791		)	6,102			(12,469		)
Income (loss) before income taxes and minority interest		(1,209		)	7,108			(6,170		)	6,102			5,831
Income tax expense (benefit)		(400		)	5,268			1,468			—			6,336
Minority interest		—			—			304			—			304
Net income (loss)		$	(809	)	$	1,840		$	(7,942	)	$	6,102		$	(809	)
Currency translation adjustment		(8,329		)	(4,199		)	(6,264		)	10,463			(8,329		)
Comprehensive income (loss)		$	(9,138	)	$	(2,359	)	$	(14,206	)	$	16,565		$	(9,138	)

 

F-19

 

Condensed Consolidating Balance Sheet

 

		At  December 31, 2001
		Parent			Guarantor Subsidiaries			Nonguarantor Subsidiaries			Eliminations			Consolidated
		(in thousands)
Assets
Current assets:
Cash and cash equivalents		$	6,814		$	2,202		$	13,140		$	—		$	22,156
Trade accounts receivable, net		90,744			4,061			54,466			(20,091		)	129,180
Prepaid expenses and other current assets		8,237			13			11,441			—			19,691
Total current assets		105,795			6,276			79,047			(20,091		)	171,027
Property and equipment, net		31,729			2,266			57,298			—			91,293
Other assets:
Goodwill, net		19,576			—			53,640			—			73,216
Deferred income taxes		6,099			—			3,299			—			9,398
Other assets		7,771			72			2,689			—			10,532
Investments in subsidiaries		127,978			110,511			—			(238,489		)	—
Notes receivable, intercompany		—			14,086			10,804			(24,890		)	—
Total assets		$	298,948		$	133,211		$	206,777		$	(283,470	)	$	355,466
Liabilities and Stockholders’ Equity
Current liabilities:
Current portion of capital lease obligations		$	1,668		$	—		$	698		$	—		$	2,366
Trade accounts payable		5,176			3,745			36,238			(20,091		)	25,068
Accrued expenses and other current liabilities		30,345			1,488			39,083			—			70,916
Total current liabilities		37,189			5,233			76,019			(20,091		)	98,350
Long-term debt and other liabilities:
Long-term debt, excluding current portion		100,000			—			—			—			100,000
Capital lease obligations, excluding current portion		1,412			—			5,628			—			7,040
Notes payable, intercompany		10,804			—			14,086			(24,890		)	—
Deferred compensation		1,755			—			—			—			1,755
Deferred income taxes		—			—			533			—			533
Total liabilities		151,160			5,233			96,266			(44,981		)	207,678
Minority interests		—			—			7,748			—			7,748
Stockholders’ equity		147,788			127,978			102,763			(238,489		)	140,040
Total liabilities and stockholders' equity		$	298,948		$	133,211		$	206,777		$	(283,470	)	$	355,466

 

F-20

 

		At December 31, 2000
		Parent			Guarantor Subsidiaries			Nonguarantor Subsidiaries			Eliminations			Consolidated
		(in thousands)
Assets
Current assets:
Cash and cash equivalents		$	4,970		$	1,730		$	13,197		$	—		$	19,897
Trade accounts receivable, net		80,979			3,114			68,221			(5,652		)	146,662
Prepaid expenses and other current assets		6,543			25			13,545			—			20,113
Total current assets		92,492			4,869			94,963			(5,652		)	186,672
Property and equipment, net		46,062			3,303			50,428			—			99,793
Other assets:
Goodwill, net		20,571			—			57,872			—			78,443
Deferred income taxes		781			—			6,557			—			7,338
Other assets		7,804			78			94			—			7,976
Investments in subsidiaries		158,086			137,491			—			(295,577		)	—
Notes receivable, intercompany		—			14,914			11,400			(26,314		)	—
Total assets		$	325,796		$	160,655		$	221,314		$	(327,543	)	$	380,222
Liabilities and Stockholders’ Equity
Current liabilities:
Notes payable		$	—		$	—		$	302		$	—		$	302
Current portion of long-term debt		—			—			1,120			—			1,120
Current portion of capitalized lease obligations		2,570			—			1,394			—			3,964
Trade accounts payable		9,312			914			23,332			(5,652		)	27,906
Accrued expenses and other current liabilities		27,990			1,655			30,152			—			59,797
Total current liabilities		39,872			2,569			56,300			(5,652		)	93,089
Long-term debt and other liabilities:
Long-term debt, excluding current portion		100,000			—			—			—			100,000
Capitalized lease obligations, excluding current portion		2,494			—			5,847			—			8,341
Notes payable, intercompany		11,400			—			14,914			(26,314		)	—
Deferred compensation		2,448			—			—			—			2,448
Deferred income taxes		—			—			461			—			461
Total liabilities		156,214			2,569			77,522			(31,966		)	204,339
Minority interests		—			—			6,301			—			6,301
Stockholders’ equity		169,582			158,086			137,491			(295,577		)	169,582
Total liabilities and stockholders’ equity		$	325,796		$	160,655		$	221,314		$	(327,543	)	$	380,222

 

F-21

 

Condensed Consolidating Statement of Cash Flows

 

		Year Ended December 31, 2001
		Parent			Guarantor Subsidiaries			Nonguarantor Subsidiaries			Eliminations			Consolidated
		(in thousands)
Net cash provided by operating activities		$	21,455		$	10,253		$	16,901		$	—		$	48,609
Cash flows from investing activities:
Investments in subsidiaries		2,251			(7,285		)	—			5,034			—
Purchases of property and equipment		(7,330		)	(245		)	(32,869		)	—			(40,444		)
Proceeds from sales of property and equipment		15			—			40			—			55
Increase in other assets		(850		)	—			(2,534		)	—			(3,384		)
Net cash provided by (used in) investing activities		(5,914		)	(7,530		)	(35,363		)	5,034			(43,773		)
Cash flows from financing activities:
Repayments of notes payable		—			—			(302		)	—			(302		)
Borrowings on debt		52,500			—			20,872			—			73,372
Repayments of debt and capital lease obligations		(55,143		)	—			(22,146		)	—			(77,289		)
Net capital contribution from parent		—			(2,251		)	7,285			(5,034		)	—
Net borrowings and payments on intercompany balances		(10,927		)	—			10,927			—			—
Common stock issued, net of expenses		121			—			—			—			121
Purchases of treasury stock, net of reissuances		(248		)	—			—			—			(248		)
Capital contribution from minority interest		—			—			537			—			537
Other		—			—			(64		)	—			(64		)
Net cash provided by (used in) financing activities		(13,697		)	(2,251		)	17,109			(5,034		)	(3,873		)
Effect of exchange rates on cash		—			—			1,296			—			1,296
Net increase (decrease) in cash		1,844			472			(57		)	—			2,259
Cash and cash equivalents, beginning of period		4,970			1,730			13,197			—			19,897
Cash and equivalents, end of period		$	6,814		$	2,202		$	13,140		$	—		$	22,156

 

F-22

 

		Year Ended December 31, 2000
		Parent			Guarantor Subsidiaries			Nonguarantor Subsidiaries			Eliminations			Consolidated
		(in thousands)
Net cash provided by operating activities		$	46,334		$	7,329		$	11,532		$	—		$	65,195
Cash flows from investing activities:
Investments in subsidiaries		5,739			(965		)	—			(4,774		)	—
Purchases of property and equipment		(18,358		)	(997		)	(13,774		)	—			(33,129		)
Proceeds from sales of property and equipment		10			—			7,219			—			7,229
Net cash used in investing activities		(12,609		)	(1,962		)	(6,555		)	(4,774		)	(25,900		)
Cash flows from financing activities:
Repayments of notes payable		—			—			(6,876		)	—			(6,876		)
Borrowings on debt		35,000			—			—			—			35,000
Repayments of debt and capital lease obligations		(66,687		)	—			(8,774		)	—			(75,461		)
Net capital contribution from parent		—			(5,739		)	965			4,774			—
Net borrowings and payments on intercompany balances		(7,245		)	—			7,245			—			—
Common stock issued, net of expenses		2,746			—			—			—			2,746
Other		(46		)	—			—			—			(46		)
Net cash provided by (used in) financing activities		(36,232		)	(5,739		)	(7,440		)	4,774			(44,637		)
Effect of exchange rates on cash		—			—			2,934			—			2,934
Net increase (decrease) in cash		(2,507		)	(372		)	471			—			(2,408		)
Cash and cash equivalents, beginning of period		7,477			2,102			12,726			—			22,305
Cash and equivalents, end of period		$	4,970		$	1,730		$	13,197		$	—		$	19,897

 

F-23

 

		Year Ended December 31, 1999
		Parent			Guarantor Subsidiaries			Nonguarantor Subsidiaries			Eliminations			Consolidated
		(in thousands)
Net cash provided by operating activities		$	21,791		$	6,545		$	10,979		$	—		$	39,315
Cash flows from investing activities:
Investments in subsidiaries		6,592			3,528			—			(10,120		)	—
Purchases of property and equipment		(18,351		)	(2,569		)	(17,665		)	—			(38,585		)
Proceeds from sale-leasebacks of facilities		3,467			—			—			—			3,467
Proceeds from sales of property and equipment		14			—			625			—			639
Net cash provided by (used in) investing activities		(8,278		)	959			(17,040		)	(10,120		)	(34,479		)
Cash flows from financing activities:
Borrowings on notes payable		—			—			3,706			—			3,706
Repayments of notes payable		—			—			(26,174		)	—			(26,174		)
Borrowings on debt		50,150			—			7,639			—			57,789
Repayments of debt and capital lease obligations		(26,349		)	—			(8,530		)	—			(34,879		)
Net capital contribution from parent		—			(6,592		)	(3,528		)	10,120			—
Net borrowings and payments on intercompany balances		(32,955		)	—			32,955			—			—
Common stock issued, net of expenses		771			—			—			—			771
Other		(63		)	—			—			—			(63		)
Net cash provided by (used in) financing activities		(8,446		)	(6,592		)	6,068			10,120			1,150
Effect of exchange rates on cash		—			—			1,847			—			1,847
Net increase in cash		5,067			912			1,854			—			7,833
Cash and cash equivalents, beginning of period		2,410			1,190			10,872			—			14,472
Cash and equivalents, end of period		$	7,477		$	2,102		$	12,726		$	—		$	22,305

 

F-24

 

14. Quarterly Financial Data (Unaudited)

 

Our quarterly financial information has not been audited but, in management’s opinion, includes all adjustments necessary for a fair presentation. We experience periodic fluctuations in our results of operations related to both the start-up costs associated with expansion and the implementation of clients’ customer relationship management activities. In addition, our business generally tends to be slower in the third quarter due to summer holidays in Europe, and in the first quarter due to the changeover of client marketing strategies that often occurs at the beginning of the year. Accordingly, comparisons among quarters of a year may not represent overall trends and changes in operations.

 

2001 Quarterly Data

 

		Year Ended December 31, 2001
		First Quarter			Second Quarter			Third Quarter			Fourth Quarter
		(in thousands, except per share data)
Revenues		$	184,004		$	177,787		$	173,793		$	189,464
Operating income (loss)		4,492			(26,289		)	3,736			8,359
Net income (loss)		10,630			(30,241		)	(5,889		)	2,920
Income (loss) per common share:
Basic		$	0.15		$	(0.41	)	$	(0.08	)	$	0.04
Diluted		0.14			(0.41		)	(0.08		)	0.04

 

First quarter results include a $9.8 million income tax benefit that we recorded as a result of our election to treat certain of our foreign operations as branches of our U.S. company for U.S. income tax purposes.

 

Second quarter results include the following items:

 

•             $23.8 million, or $22.1 million after tax, of asset impairment and restructuring charges, as discussed in Note 10,

•             $1.3 million, or $0.8 million after tax, of losses on disposals of fixed assets, and

•             a $3.3 million valuation allowance on U.K. deferred tax assets, as discussed in Note 4.

 

Third quarter results include the following items:

 

•             $2.4 million of asset impairment and restructuring charges, as discussed in Note 10,

•             a $0.8 million charge to write off deferred credit acquisition costs in connection with the amendment of our credit facility, as discussed in Note 3, and

•             a $3.8 million increase in the allowance for deferred tax assets.

 

2000 Quarterly Data

 

		Year Ended December 31, 2000
		First Quarter			Second Quarter			Third Quarter			Fourth Quarter
		(in thousands, except per share data)
Revenues		$	198,611		$	193,805		$	185,289		$	186,742
Operating income		9,252			7,906			10,196			11,422
Net income		3,018			2,426			3,655			3,642
Income per common share:
Basic		$	0.04		$	0.03		$	0.05		$	0.05
Diluted		0.04			0.03			0.05			0.05

 

Second quarter results include an asset impairment and restructuring charge of $3.5 million, or $2.0 million after tax, as discussed in Note 10.

 

The sum of the quarterly amounts may not equal the totals for the year due to the effects of rounding.

 

F-25

 

Report of Independent Auditors on the Financial Statement Schedule

 

To the Stockholders and Board of Directors
of SITEL Corporation

 

Under date of February 1, 2002, we reported on the consolidated balance sheets of SITEL Corporation and subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of income (loss), stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2001, which are included in the Form 10-K for the year ended December 31, 2001. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related consolidated financial statement schedule of valuation and qualifying accounts in the Form 10-K. This financial statement schedule is the responsibility of the Company’s management. Our responsibility is to express an opinion on this financial statement schedule based on our audits.

 

In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects the information set forth therein.

 

	/s/ KPMG LLP
	KPMG LLP
Baltimore, Maryland
February 1, 2002

 

S-1

 

Schedule II

Valuation and Qualifying Accounts

 

Column A		Column B			Column C						Column D			Column E
					Additions
Description		Balance at beginning of period			Charged to costs and expenses			Charged to other accounts (describe)			Deductions (describe)			Balance at end of period
		(in thousands)
Allowance for doubtful accounts:
Year ended December 31, 2001		$	6,456		$	2,585		$	—		$	(3,833	)(a)	$	5,208
Year ended December 31, 2000		$	5,622		$	1,668		$	—		$	(834	)(a)	$	6,456
Year ended December 31, 1999		$	3,970		$	3,170		$	—		$	(1,518	)(a)	$	5,622

 

(a)     Represents principally net amounts charged off as uncollectible.

 

See accompanying Report of Independent Auditors on the Financial Statement Schedule.

 

S-2