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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark one)
[ X ] Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended May 31, 1996
[ ] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from to
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Commission File Number 0-26152
SITEL CORPORATION
(Exact name of registrant as specified in its charter)
MINNESOTA 47-0684333
(State or jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
13215 BIRCH STREET
OMAHA, NEBRASKA 68164
(402) 498-6810
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
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Securities Registered Pursuant to Section 12(b) of the Act:
NONE
Securities Registered Pursuant to Section 12(g) of the Act:
COMMON STOCK, $.001 PAR VALUE
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
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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.
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The aggregate market value of the voting stock held by non-affiliates of
the registrant as of August 15, 1996, was $379,641,296 based upon the closing
bid price of $33.50 for such stock as quoted by the Nasdaq Stock Market 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".
As of August 15, 1996, the Company had 20,054,646 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: Portions of the registrant's
definitive proxy statement for the annual meeting of stockholders to be held on
October 29, 1996, are incorporated into Part III.
This 10-K consists of 50 pages. The Exhibit Index is on page 27.
PART I
ITEM 1. BUSINESS.
SITEL Corporation ("SITEL" or the "Company") is a leader in providing
outsourced telephone-based customer service and sales programs on behalf of
large corporations in the U.S., Canada and Spain. In North America, SITEL
operates primarily through divisions specialized by industry to provide
teleservices to the insurance, telecommunications, financial services and
publishing industries. The Company's principal services include responding to
customer service inquiries, direct telephone sales, generating customer
leads, managing customer retention programs, taking customer orders, as well
as updating customer data and reporting program effectiveness. SITEL creates,
manages and implements programs on its clients' behalf primarily through the
efforts of its telephone service representatives and other SITEL employees
who are dedicated exclusively to, and thoroughly trained in, a specific
client's programs. The Company also makes extensive use of leading edge call
management technology, including proprietary computer software, automated
call distributors, predictive dialers and digital switches. The Company
employs approximately 9,100 people and operates over 4,300 workstations in 37
call centers throughout North America and in Europe. See "BUSINESS-RECENT
DEVELOPMENTS".
The Company has developed substantial expertise in providing
solution-oriented teleservices in each of the following focus industries.
INSURANCE. In addition to the direct sale on behalf of its clients of
insurance products such as accidental death and disability, credit life and
supplemental health insurance, SITEL's Insurance Division provides a variety
of support services specifically designed to enhance the identification,
service and retention of insurance customers. The division employs
approximately 475 licensed agents, which the Company believes to be the most
of any independent teleservicing company.
TELECOMMUNICATIONS. SITEL's Telecommunications Division works primarily with
major telephone companies, long distance carriers, cellular telephone service
providers and telecommunications equipment suppliers. This division creates and
manages dedicated customer service and direct sales programs dealing with
various products and services such as long distance, cellular and caller ID as
well as other customer service issues such as line installation, billing
discrepancies and rate changes.
FINANCIAL SERVICES. SITEL's Financial Services Division works primarily with
the nation's largest credit card issuers to provide customer acquisition,
retention and renewal, as well as customer services such as arranging credit
card balance transfers, accepting account applications, providing account
information and making overdue balance reminder calls. The division also
provides teleservices for financial institutions regarding other products such
as mortgage refinancings, auto loans and home equity line of credit programs.
PUBLISHING. SITEL's Publishing Division works primarily with major magazine
and newspaper publishers and book clubs to sell and renew subscriptions and
memberships, cross-sell other client publications and reinstate expired
subscriptions or memberships. The division recently has begun to provide its
services to new media publishers such as on-line service providers and software
publishers.
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SITEL seeks clients with large customer bases that can generate recurring
revenues because of their ongoing customer service and sales requirements. SITEL
also seeks to increase revenues from existing clients by assuming teleservicing
programs that previously were performed internally and by identifying or
offering new teleservices that traditionally have not been part of its clients'
customer service or direct sales efforts. Although, SITEL has recently begun to
enter into multi-year agreements with its clients, the Company generally
operates under month-to-month contracts. That notwithstanding, SITEL has
provided an average of approximately five years of service to its 20 largest
clients, which generated 83.2% of the Company's revenues in fiscal 1996. The
Company is typically paid by its clients based on a negotiated hourly rate.
Because SITEL service representatives deal directly with clients' customers, the
quality and effectiveness of SITEL's services are critical to its clients and
positively affect the rates the Company can charge. Therefore, SITEL emphasizes
employee selection, training and management as well as the use of sophisticated
call and data management technology. Management believes that the effectiveness
of SITEL's services to its clients can be measured by higher sales productivity
and lower cost per transaction.
SITEL believes there are significant opportunities to expand its business.
The Company's growth strategy has five key elements; (i) increase revenues from
existing clients through cross-selling of existing services, (ii) expand its
client base within existing industry specializations, (iii) add new industry
specializations, (iv) create new value-added teleservicing applications and
(v) continue to explore strategic acquisitions domestically and internationally.
The Company was founded in 1985 by James F. Lynch, its Chief Executive
Officer. Mr. Lynch and the senior SITEL management team have over 150 years
of combined industry expertise. As of July 31, 1996, more than 350 employees
and managers other than Mr. Lynch owned SITEL Common Stock or options to
acquire SITEL Common Stock.
RECENT DEVELOPMENTS
During fiscal year 1996, SITEL focused on several strategic business
combinations which were intended to position SITEL as a global leader in
teleservicing. One of these strategic combinations, the acquisition of C.T.C.
Canadian Telephone Corporation ("CTC, and the acquisition, the "CTC
Acquisition"), was completed during fiscal 1996 and two others, the acquisitions
of Tele-Action, S.A. ("Teleaction", and the acquisition, the "Teleaction
Acquisition") and National Action Financial Services, Inc. ("NAFS", and the
acquisition, the "NAFS Acquisition"), were completed after the close of the
fiscal year. A fourth strategic combination, the acquisition of Mitre plc
("Mitre", and the proposed acquisition, the "Mitre Acquisition"), is expected to
be consummated in September 1996.
SITEL acquired the assets of CTC in February 1996 for a purchase price,
including acquisition expenses, of approximately $4.2 million. Founded in
1993, CTC (now SITEL Teleservices Canada, Inc.) provides teleservices for
long-distance carriers, principally Sprint Canada Inc., from four
teleservicing facilities located in Montreal, Quebec; Toronto, Ontario;
Calgary, Alberta; and Vancouver, British Columbia. For the fiscal year ended
April 30, 1995, CTC had revenues of approximately $6.3 million.
In June 1996, SITEL acquired a 69.2% interest in Teleaction for
approximately $24.2 million in cash. SITEL will acquire the remaining 30.8% of
Teleaction in 1998 for a minimum purchase price of $10.8 million and a
potentially higher purchase price based upon Teleaction's profitability in 1996
and 1997. Founded in 1985, Teleaction is a leading Spanish teleservicing company
with headquarters in Madrid, Spain and has over 100 active clients including
many leading Spanish corporations and government agencies as well as a number of
major international corporations. Teleaction operates from eight call centers,
as well as from certain of its clients' facilities, in Spain and Portugal,
primarily answering inbound customer service calls on behalf of its clients.
For the fiscal year ended December 31, 1995, Teleaction had revenues of
approximately $30.5 million.
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SITEL acquired NAFS in June 1996 by issuing 1,371,226 shares of Common
Stock in exchange for all of the outstanding NAFS common stock. Founded in
1994, NAFS is a financial services firm specializing in telephone-based accounts
receivable management services, collections, and unique customer services
applications. NAFS operates from two call centers in Atlanta, Georgia and
Buffalo, New York, providing services to more than 20 large corporations in the
U.S., and has more than 350 employees. For the fiscal year ended December 31,
1995, NAFS had revenues of approximately $8.3 million.
On August 28, 1996, SITEL will hold a special stockholders meeting to
vote on approval of its proposed acquisition of Mitre. If approved by the
stockholders, the Mitre Acquisition is expected to close in September 1996.
At the closing of the Mitre Acquisition, SITEL is to issue 9,170,533 common
shares in exchange for all of the outstanding Mitre ordinary shares. Mitre
is a leader in providing outsourced telephone-based customer service and
sales programs on behalf of large corporations in Europe. Mitre is the
parent company for a number of teleservicing businesses, including the
predecessor company which was founded in 1985. Mitre operates three call
centers in the United Kingdom and a fourth call center in Belgium that have
the capability to handle calls and respond to electronic mail via the
Internet in over 20 languages and dialects. In May, 1996, Mitre opened a
fifth call center in Tokyo, Japan. Mitre has approximately 1,430 operational
workstations in its five call centers and employs approximately 3,400 people.
For the fiscal year ended December 31, 1995, Mitre had revenues of
approximately $58.4 million.
INDUSTRY OVERVIEW
Teleservicing includes telephone-based direct sales programs, customer
service programs and consumer research. The ability to implement large scale,
professional teleservicing programs has improved dramatically over the past ten
years with the development of sophisticated call and data management systems,
including specialized computer software, predictive dialers, automatic call
distributors and digital switches. Industry sources estimate that teleservicing
expenditures were $77 billion in 1995, and the industry has experienced
substantial growth over the past ten years. The teleservicing industry is highly
fragmented and most independent teleservicers are small, single facility
operations. There are a large number of teleservicing operations in the United
States, although the Company believes that less than 1,000 are independent
teleservicing companies such as SITEL.
The advantages of teleservicing include high response rates, low cost per
transaction, direct interaction with customers and on-line access to detailed
customer or product information to immediately respond to customer inquiries.
Significantly, even when a customer chooses not to make a purchase,
teleservicing often permits the client to learn more about the customer's
decision-making process and to update customer information in the client's
database. As a result of these advantages, teleservicing has become one of the
fastest growing forms of direct marketing. According to trade publication
sources, approximately 43% of direct marketers expect to increase spending on
teleservicing in 1996.
With the proliferation of toll-free "800" numbers, the telephone is
becoming the principal means of providing customer service. Professional
teleservicers make extensive use of computer technology to quickly access
specific customer and product information necessary to successfully address
customer inquiries. Customers find the immediate response available via the
telephone a great convenience, while clients are able to gain important customer
feedback and update their customer databases during most service calls. SITEL
believes large corporations will continue to find new ways of enhancing customer
service through teleservicing programs.
Increasingly, large corporations are outsourcing their teleservicing
activities as part of an overall effort to focus internal resources on their
core competencies while improving operating efficiencies and reducing costs. The
Company believes that only large, professional independent teleservicing
companies such as SITEL can provide the expertise and sophisticated
technological resources necessary to effectively serve the sustained
teleservicing needs of large corporations. Additionally, because teleservicing
involves direct interaction with the client's customers, the teleservicer's
reputation for quality of service is critical to winning new clients.
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The increasing regulation of telemarketing practices is forcing small,
independent telemarketers to adopt operating practices viewed as standard by
large, professional independent teleservicers such as SITEL. The Company
believes these regulations will increase consumer confidence in telemarketing.
The Company also believes that this trend towards increased regulation of
telemarketing is another reason corporations are seeking outsourcing
relationships with large, professional independent teleservicers such as SITEL.
BUSINESS STRATEGY
Key elements of SITEL's business strategy include:
INDUSTRY SPECIALIZATION AND DIVISIONAL STRUCTURE. SITEL's industry focus
differentiates it from its competitors and has allowed it to develop substantial
expertise in serving clients in the insurance, telecommunications, financial
services, and publishing industries. Management believes that the Company's
divisional structure offers marketing advantages over competitors with a
generalized service approach inasmuch as the Company's divisional
sales personnel, teleservice representatives and customer service personnel
concentrate their efforts to understanding and responding to the competitive and
regulatory issues affecting the division's clients. The Company's divisional
operating structure also allows SITEL to respond quickly to its clients' needs
and new business opportunities as well as to better develop its management
depth. Revenues from the insurance, telecommunications, financial services, and
publishing divisions represented 41%, 20%, 17%, and 9%, respectively, of
revenues in fiscal 1996. The balance of the Company's revenues for these periods
was attributable to inbound and other teleservicing activities.
FOCUS ON LARGE CORPORATE CLIENTS. SITEL seeks clients with large customer
bases which can generate recurring revenues because of their ongoing direct
sales and customer service needs. Establishing long-term relationships with
these clients often leads to additional business opportunities as these
corporations continue to outsource more of their teleservicing activities and
also positions SITEL as an integral part of its clients' sales and customer
service programs. By de-emphasizing one-time event driven and promotion-oriented
business and focusing instead on long-term relationships, the Company is able to
improve its profitability and service levels by: (i) improving the
predictability of its facility and labor requirements, (ii) providing employee
training on specific client programs and industry issues and (iii) continually
developing technological and process improvements to better serve its long-term
clients.
COMMITMENT TO QUALITY SERVICE. SITEL's commitment to quality service is
critical to its clients and its ability to perform large scale teleservicing
programs. SITEL provides quality service in the teleservicing industry through
its industry specialization, emphasis on employee selection, training and
management, as well as the use of sophisticated call and data management
technology.
SOPHISTICATED AND FLEXIBLE CALL AND DATA MANAGEMENT TECHNOLOGY. SITEL makes
extensive use of call and data management technology, including proprietary
computer software, predictive dialers, automated call distributors and digital
switches to provide superior client service and perform large scale
teleservicing programs. In addition, because the technological requirements of
the client tend to vary based on the client's industry, each of SITEL's
divisions is responsible for its own call and data management systems which
increases the Company's flexibility in developing technical solutions to its
clients' teleservicing issues.
EMPLOYEE OWNERSHIP. Management believes that SITEL's broad-based employee
ownership, together with its incentive bonus compensation plans, contribute to
high employee productivity and better client service and have been a key factor
in the Company's success. As of July 31, 1996, more than 350 employees and
managers other than Mr. Lynch owned Common Stock or options to acquire Common
Stock. Management intends to continue its strategy of providing equity
incentives and incentive bonus compensation to a broad range of key employees.
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GROWTH STRATEGY
In light of increasing direct marketing expenditures by large corporations,
greater emphasis on teleservicing programs and the trend toward outsourcing of
teleservicing activities, SITEL believes there are significant opportunities to
expand its business. The Company's growth strategy has five key elements:
INCREASE REVENUES FROM EXISTING CLIENTS. The Company believes there is a
significant opportunity to increase revenues from existing clients.
Specifically, SITEL is targeting opportunities to capture an increasing share of
its clients' direct sales and customer service activities and to cross-sell its
other teleservices. For example, SITEL was awarded contracts to provide customer
services to Allstate Insurance Company's policyholders and members of the
Allstate Motor Club. Previously, SITEL primarily conducted direct sales programs
for Allstate Motor Club.
OBTAIN NEW CLIENTS WITHIN EXISTING INDUSTRY SPECIALIZATIONS. The insurance,
telecommunications, financial services and publishing industries include many
large corporations which rely on teleservicing for a substantial portion of
their direct sales and customer service needs. SITEL believes there is
significant opportunity for each of its divisions to grow by targeting new
clients in its focus industries that are seeking to outsource their existing or
new teleservicing programs. The Company believes it has a competitive advantage
in competing for these new clients because of its expertise and reputation for
quality service with clients in these industries. For example, the Company's
Financial Services Division added 12 new credit card issuers and other
financial service institutions as clients during fiscal 1996.
ADD NEW INDUSTRY SPECIALIZATIONS. The Company is evaluating several industries
which are expected to substantially increase expenditures on direct sales and
customer service teleservicing applications. The Company's divisional structure
facilitates adding new industry groups without commensurate increases in
corporate overhead. The Company may enter new industries through acquisition,
joint venture or internal expansion.
CREATE NEW VALUE-ADDED TELESERVICING APPLICATIONS. SITEL regularly seeks to
create new value-added services which have not historically been offered by
independent teleservicers. Creating additional value-added services should both
increase the average account size and, more importantly, strengthen the
long-term relationships between SITEL and its clients. For example, the Company
now makes reminder calls to customers with modestly past-due accounts on behalf
of major credit card issuers.
EXPLORE STRATEGIC ACQUISITIONS. SITEL intends to take advantage of the
fragmented nature of the telemarketing industry by making strategic domestic and
international acquisitions. Through selected strategic acquisitions, SITEL seeks
to serve new industries or complement its client base in one of its current
industry specializations. For example, SITEL began to serve the
telecommunications and publishing industries through the Company's acquisition
of May Telemarketing, Inc. in October 1992. Through the Teleaction, NAFS and CTC
Acquisitions and the proposed Mitre Acquisition, the Company will be positioned
to become a global leader in the teleservicing industry. See "BUSINESS - Recent
Developments." The Company may seek additional international acquisitions. The
Company evaluates acquisitions using numerous criteria including management
strength, service quality, industry focus, diversification of client base and
operating characteristics.
OPERATIONS OVERVIEW
SITEL's teleservices involve direct communication with its clients'
customers by telephone. This contact is either outbound (SITEL initiated) or
inbound (customer initiated).
OUTBOUND SALES. Outbound telemarketing refers to direct sales activities that
commence when SITEL places calls to parties targeted by the client to offer
products or services or to obtain information. In most instances, SITEL receives
customer data electronically from its clients. These files have been selected to
match the demographic profile of the targeted customer for the product or
service being offered and contain each targeted customer's name, address, phone
number and other relevant data. SITEL's data management system sorts the records
and electronically assigns them to one of its outbound call centers. Telephone
calls are controlled by computerized call management systems that utilize
predictive dialers to automatically dial the telephone numbers in the files,
determine
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if a live connection is made and present connected calls to a telephone service
representative who has been trained for the client's program. When a call is
presented, the customer's name, other information about the customer and the
program script simultaneously appear on the service representative's computer
screen. The service representative then uses the script to solicit an order for
the product or service or to request information that will be added to the
client's database.
INBOUND CUSTOMER SERVICE. Inbound telemarketing is the process by which a call
from a client's customer is received, identified, routed to a SITEL service
representative and answered. The information and results of the call are
captured and reported to SITEL's clients for order processing, customer service
and data management. Typically, a customer calls a toll- free "800" number to
request product or service information, place an order for an advertised product
or service or obtain assistance regarding a previous order or purchase. To
properly handle these functions, SITEL utilizes automated call distributors and
digital switches to identify each inbound call by "800" number and immediately
route the call to a SITEL service representative trained for that program.
Simultaneously with receipt of the call, the service representative's computer
screen will display information pertinent to the call. For example, if the call
is in response to a catalog sent to the customer, the service representative
will be able to reference the catalog items and their prices on the computer
screen.
In some cases, the Company provides an automated answer to an inbound call.
SITEL's automated call distribution system detects, based on the incoming "800"
number, the client and program associated with the call and greets the customer
with a prerecorded message, usually scripted by the client with SITEL's
assistance. The customer is then asked to respond to information requests by
telephone touch pad. For example, a client beginning a new promotion may publish
a toll-free number for customers to call. SITEL's interactive system would
answer the call, provide the customer with basic information about the promotion
and any eligibility requirements and then route customers who believe they
qualify for the promotion or need additional assistance to a SITEL service
representative, thereby both screening the call and communicating useful
information to the customer.
QUALITY ASSURANCE. During the course of each teleservicing campaign, the
Company carefully monitors its service representatives to ensure strict
compliance with the client's script and to maintain quality and efficiency.
Sales confirmations are recorded with the customer's consent to insure accuracy
and provide a record in the event a customer later questions or challenges the
accuracy of a transaction. If requested by the client, a SITEL quality assurance
representative will call back customers to verify order information. SITEL also
allows its clients to monitor teleservicing calls on a real-time basis. The
Company's information systems enable SITEL to provide its client with hourly
reports, if necessary, on the status of an ongoing teleservicing campaign and
can transmit summary data and captured information electronically to clients if
desired. Access to these data enables SITEL's client to modify or enhance an
ongoing campaign to improve its effectiveness.
SITEL BUSINESS DIVISIONS
SITEL conducts its business primarily through five divisions, four of which
focus on specific industries and, to take advantage of economies of scale, a
fifth, called Client Services, which handles those activities which do not fit
in one of the industry groups, including new initiatives the Company is seeking
to develop into additional industry groups. Each industry-specific division is
managed by its own president and a number of divisional managers who are
responsible not only for the division's operations but also for its budgeting,
sales and marketing, staffing requirements, selection of call and data
management hardware, development of proprietary software and facilities
management. SITEL's senior corporate officers focus on strategic planning,
overall marketing, finance, acquisitions, human resources, legal and other
division support. The Company believes that this industry focus provides SITEL a
competitive advantage over other large teleservicers who take a general services
approach to the teleservicing business. SITEL's divisions are better able to
understand the specific industry issues and vernacular of clients and prospects
and to use that knowledge in the design of solution-oriented teleservicing
programs that provide greater value to their clients.
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INSURANCE
The Insurance Division is the Company's largest operating division and was
formed in fiscal 1992 as the Company's first industry specific division. The
division provides outsourced direct selling and customer support services
primarily to insurance companies, most of which are focused on the direct
marketing of specialty insurance products such as accidental death and
disability, credit life and supplemental health insurance. The Company recently
formed an inbound calling group within the division to handle inbound
teleservices for several insurance company clients.
DIRECT RESPONSE INSURANCE SALES. In fiscal 1996, SITEL sold more than 1.6
million insurance policies for clients including J.C. Penney Life Insurance
Company, Advanta Life Insurance Company, Providian Insurance Company and
American Security Group. Direct response insurance companies typically do not
have sales forces or relationships with independent insurance agents but rely
instead on in-house and outsourced telemarketing as a major distribution
channel for their products. The market for direct response insurance has
experienced rapid growth in recent years, which is expected to continue.
These insurance products have become more easily understood by the average
consumer and more affordable, with monthly premiums generally ranging from $7
to $30. Insurance products sold by the division are typically designed by the
insurance carrier and marketed, for ease of premium payment, in conjunction
with a credit card issuer. In addition, most sales of direct response
insurance products are not subject to subsequent underwriting approval by the
insurance company which further enhances the ability to distribute them by
telephone.
The Insurance Division operates ten sites. SITEL believes that its
strategy of serving the insurance industry with approximately 475 licensed
agents holding approximately 10,500 state licenses has created a competitive
advantage and will lead to continued growth for the division. Management
believes it has the largest group of licensed insurance agents of any
independent teleservices company in the United States and that it is the only
company in its industry to offer state approved on-site insurance licensing
and continuing insurance education classes for its employees. The Company
believes that its substantial investment in licensing and continuing
education, and its expertise at maintaining compliance with insurance
regulations, have created a competitive advantage while enabling it to
provide a high level of service to its clients.
CUSTOMER SUPPORT SERVICES. In addition to the direct sale of insurance
products for its clients, SITEL provides a variety of support services
specifically designed to enhance the identification, servicing and retention of
insurance customers. For example, as a service to Allstate insurance agents,
SITEL service representatives answer customer calls when the local agent is not
available. Through SITEL's data management system, the service representative
can access Allstate's database of policyholder information to answer questions
regarding the customer's policy. SITEL service representatives also generate
leads for Allstate's insurance agents by calling existing policyholders to
determine their interest in other insurance products. The Company also processes
applications for insurance and provides claims reporting services 24 hours per
day, seven days per week.
TELECOMMUNICATIONS
SITEL's Telecommunications Division works primarily with major telephone
companies, long distance carriers, cellular telephone service providers and
telecommunications equipment suppliers. The division's principal activities
include the direct sale of products and services to its clients' consumer and
business customers. Among the products and services marketed by the division are
caller ID and call waiting, long distance, cellular and "800" telephone service
and telephones and related products.
SITEL provides teleservices for most of the regional Bell operating
companies ("RBOCs") including Bell Atlantic, BellSouth, PacBell and US West. The
division's other principal clients include GTE Corporation and LDDS Worldcom
Inc., the fourth largest U.S. long-distance carrier. The Telecommunications
Division was formed in fiscal 1994 following the acquisition of
May Telemarketing and operates eight facilities.
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Management expects the telecommunications industry to outsource more of its
telemarketing due primarily to heightened competition in the industry which has
led telecommunications companies to seek to control costs and improve
efficiencies by outsourcing their teleservicing activities. The Company also
expects that the industry's teleservicing activities will increase with the
development of new telecommunications products and services.
FINANCIAL SERVICES
The Financial Services Division works primarily with the nation's largest
credit card issuers as well as other financial institutions. For credit card
issuers, the division provides customer acquisition, retention and renewal, as
well as customer services such as arranging credit card balance transfers,
accepting account applications and providing account information. The Company
also conducts teleservicing to enroll merchants in credit card programs. More
recently, the division has begun to provide teleservices on behalf of financial
institutions including direct sales of mortgage refinancing and home equity line
of credit programs.
The Company's principal financial services clients include Advanta
National Bank, Chevy Chase Savings Bank and Novus Services, Inc. SITEL's
Financial Services Division was formed in fiscal 1994 and operates six
facilities.
PUBLISHING
The Publishing Division works primarily with major magazine and newspaper
publishers and book clubs to sell and renew subscriptions and book club
memberships, cross-sell other client publications and reinstate expired
subscriptions or memberships. The division's principal clients include Time Life
Inc., Forbes Inc., Meredith Corporation, publisher of national publications such
as BETTER HOMES AND GARDENS, McGraw-Hill, Inc., publisher of BUSINESS WEEK, and
the NEW YORK TIMES. Formed following the acquisition of May Telemarketing, Inc.
in fiscal 1993, the Publishing Division operates three facilities.
SITEL believes that the market for traditional magazine and newspaper and
book club outbound teleservicing provided by independent teleservicing firms is
a mature industry. Management anticipates that future growth opportunities will
come from creating teleservices to meet the needs of publishers of electronic
media, such as CD-ROM software and on-line computer services. The Company
believes that most of the current telemarketing of software and on-line services
is conducted by in-house teleservicing organizations. The Company expects that
as the demand for software and on-line services increases there will be a
corresponding trend to outsource teleservices.
CLIENT SERVICES
The fifth division, called Client Services, handles those activities which
do not fit in one of the industry groups, including new initiatives the Company
is seeking to develop into additional industry groups. SITEL has identified a
number of other industries that it believes are candidates for SITEL's
teleservices. Companies in these industries generally have large customer bases.
The Company typically focuses initially on serving clients in these industries
on a project-by-project basis in order to gain a better understanding of the
industry and to develop new telemarketing concepts. The Company's objective is
to develop these projects into long-term growth opportunities and potential new
industry specializations.
SALES AND MARKETING
SITEL's marketing strategy centers around providing solutions to each
client's direct sales and customer service needs. Each division has its own
sales personnel, who have an in-depth understanding of their focus industry
and extensive experience in the teleservicing industry which allows them to
create and tailor teleservicing programs to address the specific needs of the
target client. The sales personnel from the various divisions meet as a group
on
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a monthly basis to provide market feedback and discuss ideas and selling
techniques. The divisions also work together to take advantage of potential
cross-selling opportunities. The sales personnel are compensated by salary and
bonuses based on individual performance and overall division profitability.
A SITEL service team works directly with each client or potential client to
develop an effective telephone-based direct marketing plan based upon customer
dynamics and the client's needs. Often, SITEL initially develops a pilot program
for a new client to demonstrate the Company's abilities and the effectiveness of
teleservicing as a direct marketing and customer service strategy. SITEL's
sales personnel also assist clients in identifying target customers and
developing programs to reach those customers, communicate results of the
programs and assist clients in modifying programs for future use. SITEL's
experience and specific industry knowledge allow it to provide clients with a
superior level of service at a competitive rate.
CLIENT RELATIONSHIPS
The Company generally operates under month-to-month contractual
relationships. The pricing component of a contract is often comprised of an
initial fee, a base service charge and separate charges for ancillary services.
The initial fee and base service charges are usually based upon an hourly rate
and in some instances may be based upon the number of completed calls. On
occasion, the Company performs services for a commission on successful sales
under contracts terminable by the Company with 30 or fewer days notice.
SITEL targets those companies within its focus industries with the
greatest potential to generate recurring revenues because of their ongoing
direct sales and customer service needs and also those which have large
customer bases which can benefit from targeted teleservicing programs. Many
of SITEL's current clients have sizable in-house teleservicing operations,
and the Company often competes against those in-house operations for the
client's business. At May 31, 1996, SITEL provided direct sales and customer
service to approximately 130 clients. The Company's 20 and ten largest
clients accounted for 83.2% and 64.1%, respectively, of the Company's
revenues during fiscal 1996. In fiscal 1996, J.C. Penney Life Insurance
Company and Allstate Insurance Company represented 11.6% and 11.0%,
respectively, of total revenues.
PERSONNEL AND TRAINING
Management believes that a key component of SITEL's success is the
quality of its employees. The Company offers extensive in-house classroom
and on-the-job training programs for its personnel including instruction on
the industries which SITEL serves and on proper teleservicing techniques. For
example, the Insurance Division offers on-site, state approved insurance
licensing and continuing education classes for SITEL insurance agents. The
amount of classroom and on-the-job training before an employee can qualify to
take the insurance agent license examination is approximately 150 hours. The
Company utilizes approximately one floor supervisor for each eight telephone
service representatives, encourages employee self-development and usually
promotes individuals from within the organization.
As is typical in the teleservicing industry, approximately 70% of the
Company's service representatives are part-time employees. The Company
compensates its service representatives on an hourly basis and competes with
other employers for individuals seeking supplemental income, including
homemakers and college students. The Company's decision to locate calling
facilities outside of Omaha relates in part to the high concentration of other
teleservicing firms in Omaha that compete with SITEL for available qualified
employees. As of May 31, 1996, SITEL had 6,703 employees, of which 4,963
were service representatives. None of SITEL's employees is represented by a
labor union. The Company considers its relations with its employees to be good.
10
COMPETITION
SITEL is one of the largest non-captive teleservicing operations in the
United States, along with MATRIXX Marketing Inc., APAC TeleServices Inc., ITI
Marketing Services, Inc. and West Telemarketing Corporation. The teleservicing
industry is extremely competitive and highly fragmented, and most independent
telemarketers are small, single facility operations. The Company also competes
with in-house telemarketing organizations throughout the United States. In-house
teleservicing organizations providing direct sales and customer service
functions continue to comprise by far the largest segment of the telemarketing
industry. The Company also competes with direct mail, television, radio and
other advertising media. SITEL believes that high response rates, among other
advantages of teleservicing, have contributed significantly to the growth of the
industry.
GOVERNMENT REGULATION
Telemarketing sales practices are regulated both federally and at the state
level. The federal Telephone Consumer Protection Act of 1991 (the "TCPA")
prohibits telemarketing firms from initiating telephone solicitations to
residential telephone subscribers before 8:00 a.m. or after 9:00 p.m., local
time, and prohibits the use of automated telephone dialing equipment to call
certain telephone numbers. In addition, the TCPA requires telemarketing firms to
maintain a list of residential customers that have stated that they do not want
to receive telephone solicitations and, thereafter, to avoid making calls to
such consumers' telephone numbers.
Regulations issued by the Federal Trade Commission (the "FTC") under the
federal Telemarketing and Consumer Fraud and Abuse Prevention Act of 1994 (the
"TCFAPA") prohibit misrepresentation in telemarketing sales. Generally, the
FTC's rules prohibit misrepresentation regarding the cost, terms,
restrictions, performance or duration of products or services offered by
telephone solicitation and specifically address other perceived telemarketing
abuses in the offering of prizes and the sale of business opportunities or
investments. The Company believes that it is in compliance with the TCPA and the
FTC's rules. The Company trains its telephone service representatives to comply
with the TCPA and programs its call management system to avoid telephone calls
during restricted hours or to individuals maintained on SITEL's "do-not-call"
list.
A number of states have enacted or are considering legislation to regulate
telemarketing. For example, telephone sales in certain states cannot be final
unless a written contract is delivered to and signed by the buyer and may be
cancelled within three business days. At least one state also prohibits
telemarketers from requiring credit card payment, and several other states
require certain telemarketers to obtain licenses and post bonds. From time to
time, bills are introduced in Congress which, if enacted, would regulate the use
of credit information. The Company cannot predict whether this legislation will
be enacted and what effect, if any, it would have on the teleservicing industry.
The industries served by the Company's divisions are also subject to
varying degrees of government regulation. Generally, the Company relies on its
clients and their advisors to develop the scripts to be used by SITEL in making
consumer solicitations. The Company generally requires its clients to indemnify
SITEL against claims and expenses arising with respect to the Company's services
performed on its clients' behalf. The Company has never been held responsible
for regulatory noncompliance by a client. SITEL employees who complete the sale
of insurance products are required to be licensed by various state insurance
commissions and participate in regular continuing education programs, which are
currently provided in-house by the Company.
MANAGEMENT INFORMATION SYSTEMS
SITEL's management information systems have been designed to provide
quality service to its clients and to manage and effectively control all aspects
of its business. Each division has its own information systems that
electronically link the division's facilities and which generate reports for
electronic transmission to clients through interfaces with clients' computer
systems. The Company maintains a wide area network to connect its divisions with
the corporate offices. The Company recently installed a new information system
for its human resources group to enable the Company's divisions to share
information regarding past, current and prospective employees. The
11
Company believes its computer security system sufficiently protects the
integrity and confidentiality of its computer systems and data. SITEL also has
established arrangements for off-site disaster back-up storage.
INSURANCE
The Company carries property damage, directors' and officers' liability and
workers' compensation insurance coverage in amounts management considers
sufficient to protect the Company.
12
ITEM 2. PROPERTIES.
SITEL's corporate headquarters are located in Omaha, Nebraska in leased
facilities consisting of approximately 13,560 square feet of office space. The
initial term of this lease expires in October 1998, and there are two five-year
renewal options. The Company also leases the following facilities for its call
centers:
NUMBER OF
OPERATING UNIT FACILITY LOCATION WORKSTATIONS
-------------- ------------------ ------------
Insurance Omaha, Nebraska 442
McCook, Nebraska 58
North Platte, Nebraska 79
Fort Collins, Colorado 74
Atlantic, Iowa 84
Carroll, Iowa 73
Laramie, Wyoming 87
Beatrice Nebraska 76
Telecommunications Omaha, Nebraska 96
Aurora, Colorado 72
San Angelo, Texas 297
San Antonio, Texas 128
Toronto, Ontario 78
Montreal, Quebec 36
Calgary, Alberta 36
Vancouver, B.C. 39
Financial Services Omaha, Nebraska 271
Hastings, Nebraska 108
LaGrange, Georgia 84
Brookings, South Dakota 112
Rome, Georgia 72
Publishing Omaha, Nebraska 64
Norfolk, Nebraska 80
Amarillo, Texas 80
Client Services Omaha, Nebraska 324
Spain(a) Madrid 500
Barcelona 225
Sevilla 90
Valencia 70
Bilbao 62
Oviedo 30
Lisbon, Portugal 70
La Coruna 55
Credit Services Buffalo, New York 99
Atlanta, Georgia 174
Total workstations 4,325
___________
(a) Includes workstations staffed by employees located on certain clients'
premises.
The leases of these facilities generally expire between July 1996 and
October 2001, and most leases contain renewal options. The above schedule
does not include facilities with approximately 1,430 operational workstations
which will be added upon completion of the Mitre Acquisition. The Company
believes that its current facilities are suitable and adequate for its
current operations, but additional facilities will be required to support
growth. In May 1996, the Company's Insurance Division signed a lease for a
call center facility in Savannah, Georgia. This facility is expected to
include up to 250 workstations
13
and began limited operations in June 1996. The Company has also made
arrangements for facilities in Abilene, Corpus Christi, and Odessa, Texas
which are expected to include up to a total of 344 workstations. SITEL
believes that suitable additional or alternative space will be available as
needed on commercially reasonable terms.
In addition to its own call centers, SITEL has contracts with eleven
additional remote operation sites ("ROPS") which contain an aggregate of 483
workstations. These ROPS are owned and operated by independent third parties and
are used by SITEL to meet a portion of its outbound teleservicing needs. A
number of the ROPS are affiliated with local telephone companies. SITEL actively
monitors the quality and performance of each ROPS facility. The owner-operator
of each ROPS is responsible for all costs associated with maintaining and
staffing the facility and is generally compensated at negotiated hourly rates.
ITEM 3. LEGAL PROCEEDINGS.
From time to time, the Company is involved in litigation incidental to its
business. In the opinion of management, no litigation to which the Company is
currently a party is likely to have a materially adverse effect on the Company's
results of operations or financial condition, if decided adversely to the
Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
* * *
EXECUTIVE OFFICERS OF THE REGISTRANT
The present executive officers of SITEL are James F. Lynch (Chairman of the
Board and Chief Executive Officer), Michael P. May (President), Barry S. Major
(Executive Vice President-Finance and Chief Financial Officer), Edward R. Taylor
III (Executive Vice President-Sales and Marketing), Nancy C. Noack (Senior Vice
President-Accounting and Administration, Secretary and Treasurer). Information
concerning such executive officers appears in the following paragraphs:
Mr. Lynch, age 47, founded SITEL in 1985 and has served as Chairman, Chief
Executive Officer and a director since its inception. Prior to founding SITEL,
he served as President of HQ800, Inc., a subsidiary of United Technologies that
provided telemarketing services to third parties. SITEL was formed when
Mr. Lynch negotiated the purchase of the assets of HQ800 from United
Technologies. From 1980 to 1984, Mr. Lynch served as Director of Sales and
Marketing for WATTS Marketing of America, a former subsidiary of First Data
Resources, a credit card processing firm. WATTS is now part of MATRIXX Marketing
Inc., a provider of telemarketing services. Mr. Lynch is Mr. Fischer's first
cousin.
Mr. May, age 46, has served as President of SITEL since June 1996. Prior
to assuming his duties as President, Mr. May was Executive Vice President from
October 1992, when SITEL acquired May Telemarketing, Inc., which Mr. May founded
in 1985. Prior to founding May Telemarketing, he was a director, executive
officer and treasurer between 1976 and 1982 of Applied Communications, Inc., a
publicly-traded software products company, now known as Transaction Systems
Architects, Inc.
Mr. Major, age 39, has served as Executive Vice President-Finance and Chief
Financial Officer since June 1996. Prior to that, since joining SITEL in
October 1995, Mr. Major was Senior Vice President--Finance. From 1985 to 1995,
Mr. Major served in various executive positions with American National
Corporation, a bank holding company, most recently as President.
14
Mr. Taylor, age 38, has served as an executive officer of the Company since
1986 and was a director of the Company until July 1995. He currently serves as
Executive Vice President-Sales and Marketing. From 1983 to 1986, Mr. Taylor was
an executive for NICE Corporation, the predecessor to MATRIXX Marketing Inc.
Ms. Noack, age 54, has been Treasurer and Secretary since the Company's
inception and was a director until July 1995. Ms. Noack served as Senior Vice
President-Finance from 1994 to 1995 and now serves as Senior Vice President-
Accounting & Administration. Ms. Noack is a Certified Public Accountant.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
SITEL completed the initial public offering of its Common Stock on June 8,
1995. Since that date, the Common Stock has been traded in the over-the-counter
market on the Nasdaq Stock Market under the symbol "SITL". The following table
sets forth, for the periods indicated, the high and low closing prices for the
Common Stock, as reported on the Nasdaq Stock Market since June 8, 1995 (these
prices reflect a two for one stock split on May 13, 1996).
HIGH LOW
---- ---
FISCAL 1996
First Quarter (from June 8, 1995). . . . . . . . . . . $11.31 $7.44
Second Quarter . . . . . . . . . . . . . . . . . . . . 13.50 9.88
Third Quarter. . . . . . . . . . . . . . . . . . . . . 19.56 12.88
Fourth Quarter . . . . . . . . . . . . . . . . . . . . 28.94 19.88
Holders of SITEL Common Stock are entitled to receive dividends out of the
funds legally available when and if declared by the Board of Directors. SITEL
has not paid dividends in the past. SITEL believes that it is in the best
interest of its stockholders to use future earnings principally to support
operations and to finance the growth of the business. It is unlikely that SITEL
will pay dividends in the foreseeable future.
As of August 15, 1996, there were 89 record holders of the registrant's
Common Stock. The Company believes that there are more than 2,100 beneficial
owners of its Common Stock.
15
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.
The following selected consolidated financial data of the Company are
qualified by reference to and should be read in conjunction with "SITEL
Management's Discussion and Analysis of Financial Condition and Results of
Operations" and with the Company's consolidated financial statements and
notes thereto included elsewhere in this report. The selected financial data
presented below as of and for each of the years in the five-year period ended
May 31, 1996 are derived from the Company's financial statements which have
been audited by Coopers & Lybrand L.L.P.
FISCAL YEARS ENDED MAY 31,
--------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
-----------------------------------
Statement of Operations Data:
Revenues . . . . . . . . . . . . . . . $31,824 $55,498 $68,855 $101,378 $140,259
Operating expenses
Cost of services . . . . . . . . . . 17,849 31,553 37,052 55,054 74,528
Division selling, general and
administrative expenses. . . . . . 9,942 17,847 23,810 32,979 44,555
Corporate general and
administrative expenses. . . . . . 3,064 3,664 5,567 6,160 7,606
Special compensation expense . . . . - - - 34,585(a) -
----- ----- ----- --------- -----
Operating income (loss). . . . . . . 969 2,434 2,426 (27,400)(b) 13,570
Interest income (expense), net . . . . (256) (757) (538) (702) 989
Other income (expense) . . . . . . . . 279 106 1,371 399 (5)
----- ----- ----- ----- -----
Income (loss) before income
taxes and cumulative effect
of accounting change . . . . . . . . 992 1,783 3,259 (27,703) 14,554
Income tax expense (benefit) . . . . . 258 575 391 (9,603) 5,188
Cumulative effect of accounting
change(c). . . . . . . . . . . . . . 354 - - - -
----- ----- ----- ----- -----
Net income (loss). . . . . . . . . . . $1,088 $1,208 $2,868 ($18,100)(b) $9,366
------ ------ ------ ------------ ------
------ ------ ------ ------------ ------
Per common share:
Earnings (loss) per common
and common equivalent
share. . . . . . . . . . . . . . . $0.07 $0.07 $0.17 ($1.05)(b) $0.43
----- ----- ----- ---------- -----
Weighted average common and
common equivalent shares
outstanding . . . . . . . . . . . . 15,264 16,600 17,207 17,207 21,876
BALANCE SHEET DATA:
Working capital (deficit). . . . . . . $1,011 ($2) $2,485 $4,644 $67,979
Total assets . . . . . . . . . . . . . 9,840 23,457 24,283 45,967 116,496
Long-term debt, net of current
portion(d) . . . . . . . . . . . . . 1,387 3,650 3,364 2,885 125
Stockholders' equity . . . . . . . . . 3,068 5,859 8,510 24,843 104,734
___________
(a) Represents a non-recurring, non-cash compensation expense of $34.6 million
incurred in February 1995 resulting from the grant of stock options with an
exercise price of $0.005 per share to 265 employees of the Company to replace
stock appreciation rights previously granted under the Company's Employee Equity
Benefit Plan and previously granted stock options. See Note 11 of Notes to
Consolidated Financial Statements.
(b) Excluding the special compensation expense and a one-time forgiveness of
$528,040 owed by two stockholders, operating income, net income and earnings
per share would have been $7.6 million, $5.2 million and $0.30, respectively,
for the year ended May 31, 1995.
(c) During fiscal 1992, the Company changed its method of accounting for income
taxes.
(d) Includes note payable to related party.
16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
OVERVIEW
SITEL was founded in 1985 by its Chief Executive Officer, James F. Lynch.
From its inception, the Company has focused on clients in the insurance and
financial services industries. In October 1992, SITEL acquired
May Telemarketing, Inc., which primarily served companies in the
telecommunications and publishing industries. The Company formed its first
industry group in fiscal 1992 when it separated its insurance activities into a
separate division. After realizing the important competitive advantages created
by this divisional structure, the Company decided to organize its other
operations into four additional divisions. Each division operates autonomously
and has its own management team and call and data management systems.
Four of these divisions focus on specific industries. To take advantage of
economies of scale, the fifth division historically handled the Company's
inbound teleservicing activities. In recent years as the amount of revenues from
inbound customer service applications has increased, these inbound activities
have been moved into the appropriate industry-focused division. Today, the fifth
division, called Client Services, handles those activities which do not fit in
one of the industry groups, including new initiatives the Company is seeking to
develop into additional industry groups.
As a result of this divisional structure, the Company has made significant
investments in divisional management personnel, systems and facilities. While
the Company was first implementing this structure in fiscal 1994, operating
income as a percentage of revenues declined as a result of these additional
expenses. Having fully implemented its divisional reorganization during fiscal
1994, the Company increased its operating margin for fiscal 1995 to 7.6% of
revenues (excluding the non-recurring, non-cash special compensation expense and
the one-time forgiveness of amounts owed by two stockholders incurred in
February 1995) from 3.5% of revenues in fiscal 1994. Operating margins in fiscal
1996 increased to 9.7% of revenues from 7.6% of revenues (excluding the
non-recurring non-cash special compensation expense and the one-time forgiveness
of amounts owed by two stockholders incurred in February 1995) in fiscal 1995.
The increase in operating margins is primarily due to the Company's ability to
increase revenues without a commensurate percentage increase in divisional or
corporate overhead.
Remote operation sites ("ROPS") are third-party operated facilities that
service a portion of SITEL's outbound teleservicing activities. The Company has
used ROPS as a method of temporarily expanding capacity without increasing fixed
costs. In fiscal 1993, SITEL decided to focus on expanding its workstation
capacity through Company-operated facilities. As a result, the percentage of
revenues from teleservicing conducted by ROPS has steadily declined since fiscal
1993. This decline has been a factor in decreasing SITEL's cost of services as a
percentage of revenues from fiscal 1993 levels since ROPS typically provide
services at a higher cost than the Company would incur through its own
facilities.
The Company has experienced and expects to continue to experience quarterly
variations in revenues from its largest clients. These variations relate
primarily to the timing and duration of clients' telephone-based customer
service programs and to the addition of new clients.
In fiscal 1995, the Company incurred a non-recurring, non-cash special
compensation expense of $34.6 million resulting from the grant of stock options
with an exercise price of $.005 per share to 265 employees of the Company to
replace stock appreciation rights previously granted under the Company's
Employee Equity Benefit Plan and previously granted stock options. This
compensation expense also resulted in a deferred tax benefit of $11.8 million to
the Company which will be available to reduce future income taxes.
Through fiscal 1994, the Company's effective income tax rate was less than
the 34% statutory US rate primarily as the result of state income tax credits
earned in Nebraska under a job creation and investment incentive
17
program. In fiscal 1995 and 1996, the effective tax rate was 35%. As the Company
has opened new facilities in states or countries without job or investment tax
credits or in states or countries with corporate income taxes, its effective tax
rate will continue to increase.
The Company expects to account for the Mitre and NAFS Acquisitions as a
pooling of interests and the Teleaction Acquisition as a purchase for financial
reporting purposes. The resulting goodwill arising from the acquisition of
Teleaction, estimated to be $23.5 million, will be amortized on a straightline
basis over 25 years. However, goodwill will be increased by the amount of any
future contingent payment made if certain profitability targets are achieved by
Teleaction during the two years following the closing. The Company consummated
the acquisition of Teleaction on June 12, 1996.
RESULTS OF OPERATIONS
The following table sets forth statement of operations data as a percentage
of revenues for the periods indicated.
FISCAL YEARS ENDED MAY 31,
--------------------------
1994 1995 1996
---- ---- ----
Revenues................................... 100.0% 100.0% 100.0%
Operating expenses:
Cost of services......................... 53.8 54.3 53.1
Division selling, general and
administrative expenses............... 34.6 32.5 31.8
Corporate general and administrative
expenses.............................. 8.1 6.1 5.4
Special compensation expense............. -- 34.1 --
----- ------- -----
Operating income (loss)................ 3.5 (27.0) 9.7
----- ------- -----
Interest expense, net...................... (0.8) (0.7) (0.7)
Other income............................... 2.0 0.4 -
----- ------- -----
Income (loss) before income taxes...... 4.7 (27.3) 10.4
Income tax expense (benefit)............... 0.5 (9.5) 3.7
----- ------- -----
Net income (loss)...................... 4.2% (17.8)% 6.7%
----- ------- -----
----- ------- -----
FISCAL 1996 COMPARED TO FISCAL 1995
REVENUES. Revenues increased $38.9 million, or 38.4%, to $140.3 million in
fiscal 1996. Of this increase, $7.6 million was attributable to services
initiated for new clients and $31.3 million to higher revenues from existing
clients. Revenues from existing clients increased 30.9% in fiscal 1996 over
fiscal 1995 primarily as a result of higher calling volumes rather than higher
rates.
COST OF SERVICES. Cost of services represents labor and telephone expenses
directly related to teleservicing activities. As a percentage of revenues, cost
of services decreased from 54.3% in fiscal 1995 to 53.1% in fiscal 1996. The
majority of this decrease related to lower direct labor costs for service
representatives hired for new operations outside of the Omaha labor market with
lower prevailing hourly wage rates.
DIVISION SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Division selling,
general and administrative expenses include all expenses which directly support
divisional operations such as each division's management, facilities expenses
including rent, utilities and taxes, equipment depreciation and maintenance
expenses, sales and marketing activities and client support services. These
expenses increased $11.6 million, or 35.2%, to $44.6 million in fiscal 1996 from
$33.0 million in fiscal 1995. This increase was primarily a result of
administrative staff, system and facilities expenses for new operations opened
during fiscal 1996 to support the Company's higher calling volumes. As a
percentage of revenues, these expenses decreased to 31.8% in fiscal 1996 from
32.5% in fiscal 1995. The Company did not require a commensurate level of
additional overhead to support its increased volume of business.
18
CORPORATE GENERAL AND ADMINISTRATIVE EXPENSES. Corporate general and
administrative expenses represent the cost of central services the Company
provides to support and manage its divisional activities. These expenses
include senior corporate management, accounting and payroll, general
administration, human resources management and legal services. Corporate
general and administrative expenses increased $1.4 million, or 22.6%, to $7.6
million in fiscal 1996 from $6.2 million in fiscal 1995. As a percentage of
revenues, however, these expenses decreased to 5.4% in fiscal 1996 from 6.1% in
fiscal 1995 because the Company did not require a commensurate level of
corporate overhead to support its increased volume of business.
SPECIAL COMPENSATION EXPENSE. In February 1995, the Company incurred a
non-recurring, non-cash compensation expense of $34.6 million. This resulted
from the grant of stock options with an exercise price of $.005 per share to 265
employees of the Company to replace stock appreciation rights previously granted
under the Company's Employee Equity Benefit Plan and previously granted stock
options.
OPERATING INCOME. Excluding the non-recurring, special compensation
expense and the one-time forgiveness of $528,040 owed by two stockholders,
operating income would have increased $6.0 million, or 78.9%, to $13.6 million
in fiscal 1996 from $7.6 million in fiscal 1995. As a percentage of revenues,
operating income (excluding the non-recurring special compensation expense and
the amount forgiven) would have increased to 9.7% in fiscal 1996 from 7.6% in
fiscal 1995 primarily due to an increase in revenues without a commensurate
increase in divisional or corporate overhead. Primarily as a result of the
non-recurring, special compensation expense, the Company reported an operating
loss of $27.4 million in fiscal 1995.
INTEREST EXPENSE, NET. Fiscal year 1996 reflected net interest income of
$1.0 million as compared to net interest expense of $.7 million in fiscal year
1995. From the proceeds of the public offerings, debt was paid and the
remaining proceeds invested; thus, interest expense has been reduced and
interest income has increased.
OTHER INCOME (EXPENSE). Other income includes income that cannot be
attributed to a particular division, including volume rebates from telephone
service providers and various job training incentives paid to the Company by
local and state economic development agencies and may include other items.
Other income decreased to ($4,879), in fiscal 1996 from $399,349 in fiscal 1995.
NET INCOME. The Company reported net income of $9.4 million in fiscal
1996. Primarily as a result of the non-cash non-recurring, special compensation
expense and the one-time forgiveness of $528,040 owed by two stockholders, the
Company reported a net loss of $18.1 million in fiscal 1995. Excluding the
special compensation expense and the amount forgiven, net income would have
increased $4.2 million, or 81%, to $9.4 million in fiscal 1996 from $5.2 million
in fiscal 1995 and would have increased to 6.7% of revenues from 5.1% of
revenues.
FISCAL 1995 COMPARED TO FISCAL 1994
REVENUES. Revenues increased $32.5 million, or 47.2%, to $101.4 million in
fiscal 1995 from $68.9 million in fiscal 1994. Of this increase, $20.2 million
was attributable to services initiated for new clients and $12.3 million to
higher revenues from existing clients. Revenues from existing clients increased
17.9% in fiscal 1995 over fiscal 1994 primarily as a result of higher calling
volumes rather than higher rates.
COST OF SERVICES. Cost of services represents labor and telephone expenses
directly related to teleservicing activities. As a percentage of revenues, cost
of services increased to 54.3% in fiscal 1995 from 53.8% in fiscal 1994. This
increase was primarily attributable to certain higher margin programs that
represented a higher percentage of total revenues in fiscal 1994 than in fiscal
1995 and, to a lesser extent, higher direct labor costs for service
representatives in Omaha hired for the Company's overall increased calling
volumes. As the Company expands its calling volumes, it expects to continue to
locate new operations outside of Omaha in order to take advantage of lower
prevailing hourly wage rates for service representatives.
19
DIVISION SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Division selling,
general and administrative expenses include all expenses which directly support
divisional operations such as each division's management, facilities expenses
including rent, utilities and taxes, equipment depreciation and maintenance
expenses, sales and marketing activities and client support services. These
expenses increased $9.2 million, or 38.5%, to $33.0 million in fiscal 1995 from
$23.8 million in fiscal 1994 primarily as a result of increased expenses
attributable to new Company-operated facilities as well as additional staff to
support the Company's higher calling volumes in fiscal 1995. As a percentage of
revenues, however, these expenses decreased to 32.5% in fiscal 1995 from 34.6%
in fiscal 1994. This percentage decrease was directly attributable to increased
revenues in all divisions without a commensurate increase in divisional
expenses.
CORPORATE GENERAL AND ADMINISTRATIVE EXPENSES. Corporate general and
administrative expenses represent the cost of central services the Company
provides to support and manage its divisional activities. These expenses
include senior corporate management, accounting and payroll, general
administration, human resources management and legal services. Corporate
general and administrative expenses increased $591,992, or 10.6%, to $6.2
million in fiscal 1995 from $5.6 million in fiscal 1994. Of this increase,
$528,040 was due to a one-time forgiveness of amounts due by two stockholders.
As a percentage of revenues, however, these expenses decreased to 6.1% in fiscal
1995 from 8.1% in fiscal 1994 because the Company did not require a commensurate
level of corporate overhead to support its increased volume of business.
SPECIAL COMPENSATION EXPENSE. In February 1995, the Company incurred a
non-recurring, non-cash compensation expense of $34.6 million. This resulted
from the grant of stock options with an exercise price of $.005 per share to 265
employees of the Company to replace stock appreciation rights previously granted
under the Company's Employee Equity Benefit Plan and previously granted stock
options.
OPERATING INCOME. Excluding the non-recurring, special compensation
expense and the one-time forgiveness of $528,040 owed by two stockholders,
operating income would have increased $5.2 million, or 216.7%, to $7.6 million
in fiscal 1995 from $2.4 million in fiscal 1994. As a percentage of revenues,
operating income (excluding the non-recurring special compensation expense and
the amount forgiven) would have increased to 7.6% in fiscal 1995 from 3.5% in
fiscal 1994 primarily due to an increase in revenues without a commensurate
increase in divisional or corporate overhead. Primarily as a result of the non-
recurring, special compensation expense, the Company reported an operating loss
of $27.4 million in fiscal 1995.
INTEREST EXPENSE, NET. Net interest expense increased slightly to
$702,476, or 0.7% of revenues, in fiscal 1995 from $538,070, or 0.8% of
revenues, in fiscal 1994.
OTHER INCOME. Other income includes income that cannot be attributed to a
particular division, including volume rebates from telephone service providers
and various job training incentives paid to the company by local and state
economic development agencies and may include other items. Other income
decreased to $399,349, or 0.4% of revenues, in fiscal 1995 from $1.4 million, or
2.0% of revenues, in fiscal 1994. This decrease was primarily attributable to a
one-time $985,000 payment in fiscal 1994 from a client in connection with the
client's decision to perform its teleservices internally.
NET INCOME. Primarily as a result of the non-cash non-recurring, special
compensation expense and the one-time forgiveness of $528,040 owed by two
stockholders, the Company reported a net loss of $18.1 million in fiscal 1995
compared to net income of $2.9 million in fiscal 1994. Excluding the special
compensation expense and the amount forgiven, net income would have increased
$2.3 million, or 80%, to $5.2 million in fiscal 1995 from $2.9 million in fiscal
1994 and would have increased to 5.1% of revenues from 4.2% of revenues.
QUARTERLY RESULTS AND SEASONALITY
The Company has experienced and expects to continue to experience quarterly
variations in operating and net income principally as a result of the timing of
clients' teleservicing campaigns and the commencement of new
20
contracts, revenue mix and the timing of additional selling, general and
administrative expenses to support new business. While the effects of
seasonality on SITEL's business often are obscured by the addition of new
clients or new programs for existing clients, the Company's business tends to be
slower in the fiscal quarters ending in February and August. The
February quarter often is affected by reduced teleservicing activities during
the December holidays and by client transitions to new marketing programs at the
beginning of the calendar year. These transitions may be accompanied by delays
in introducing the new programs. The August quarter is affected by reduced
marketing activities during the summer. As a result, SITEL may experience lower
operating margins during these fiscal quarters than during the other fiscal
quarters.
LIQUIDITY AND CAPITAL RESOURCES
Historically, SITEL's primary source of liquidity has been cash flow from
operations, supplemented by borrowings under its revolving bank line of credit.
In June, 1995, the Company used a portion of the net proceeds related to the
initial public offering to repay the revolving bank line of credit and the term
debt.
SITEL's credit facility consists of a $6.0 million revolving bank line of
credit, that expires in November, 1996. At May 31, 1996, there were no
outstanding borrowings against the line of credit. Advances under the revolving
bank line of credit bear interest at 1/2% under the bank's national prime
lending rate.
The agreement provides that the Bank will review the revolving line of
credit on an annual basis and will consider renewal based on the Company's
audited financial statements. In the event the Bank chooses not to review the
agreement, the Company will be allowed to extend the term of the note for sixty
days from the date of maturity, provided the Company is in compliance with all
covenants.
Cash provided by operating activities was $9.1 million during fiscal 1996.
This was the result of $19.1 million of net income before depreciation and
amortization and other non-cash charges offset by $10 million of changes in
operating assets and liabilities. Cash used by investing activities for fiscal
1996 was $61.8 million, primarily related to the purchase of marketable
securities and property and equipment. Cash provided by financing activities
for fiscal 1996 of $56.2 million resulted primarily from common stock offerings,
the proceeds of which were used in part to retire the Company's notes payable
and long-term debt.
The deferred tax assets are 11% and 13% of total assets and stockholders'
equity, respectively, at May 31, 1996. The Company will be required to
generate approximately $63 million of taxable income to fully utilize the net
deferred tax assets. Based on the current level of taxable income, before the
tax benefit of options exercised, management believes it is more likely than
not that future taxable income will be sufficient to fully utilize all the
net deferred tax assets recorded.
Cash provided by operating activities was $4.4 million in fiscal 1995.
This was the result of $9.3 million of net income before depreciation and
amortization and other non-cash charges offset by $4.9 million of changes in
operating assets and liabilities. Cash used by investing activities for fiscal
1995 was $7.3 million, primarily related to the purchase of call and data
management equipment. Cash provided by financing activities for fiscal 1995 of
$3.4 million resulted primarily from net borrowings from a bank line of credit
and term debt. The $34.6 million non-recurring, non-cash compensation expense
incurred in February 1995 resulted in a deferred tax benefit of $11.8 million
which will be available to reduce future income taxes.
Cash provided by operating activities was $5.3 million in fiscal 1994.
This was the result of $6.5 million of net income before depreciation and
amortization and other non-cash charges offset by $1.2 million of changes in
operating assets and liabilities. Cash used by investing activities for fiscal
1994 was $3.0 million, primarily related to the purchase of call and data
management equipment. Cash used in financing activities of $2.3 million
resulted primarily from principal repayments on the Company's term debt and bank
line of credit.
Capital expenditures were $14.6 million, $6.8 million and $3.5 million in
fiscal 1996, 1995 and 1994, respectively. The Company expects to spend
approximately $14.4 million on capital expenditures in fiscal 1997.
21
Historically, capital expenditures have been, and future expenditures are
anticipated to be, primarily for facilities and equipment to support expansion
of the Company's operations, additions to the Company's call and data management
systems and management information systems. In addition to capital
expenditures, the Company will expend approximately $24.0 million during fiscal
year 1997 to acquire Teleaction, S.A., a Spanish teleservices company.
The Company believes that funds generated from operations, together with
existing cash and available credit under its revolving bank facility, will be
sufficient to finance its current operations and planned capital expenditure
requirements and internal growth at least through fiscal 1997.
INFLATION
The Company does not believe that inflation has had a material effect on
its results of operations in recent years. However, there can be no assurance
that the Company's business will not be affected by inflation in the future.
22
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information called for by this item (other than selected quarterly
information, which is set forth below) is incorporated by reference from the
Company's Consolidated Financial Statements set forth on pages F-1 through F-17
and S-1 through S-2 hereof.
The following table sets forth statement of operations data for each of the
four quarters of fiscal 1996 and fiscal 1995. This quarterly information is
unaudited but has been prepared on a basis consistent with the Company's audited
financial statements presented elsewhere herein and, in the Company's opinion,
includes all adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of the information for the quarters presented.
The operating results for any quarter are not necessarily indicative of results
for any future period.
(IN THOUSANDS, EXCEPT PER SHARE DATA)
-------------------------------------
QUARTER ENDED
AUG. 31, NOV. 30, FEB. 29, MAY 31,
1995 1995 1996 1996
---- ---- ---- ----
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . $30,745 $33,016 35,100 41,399
Operating expenses:
Cost of services . . . . . . . . . . . . . . . . . . . . 16,491 17,983 18,476 21,578
Division selling, general and administrative expenses. . 9,822 10,503 11,160 13,071
Corporate general and administrative expenses. . . . . . 1,639 1,659 1,872 2,436
-------- -------- --------- --------
Operating income. . . . . . . . . . . . . . . . . . 2,793 2,871 3,592 4,314
Interest income, net . . . . . . . . . . . . . . . . . . . . 86 171 215 518
Other income (expense), net. . . . . . . . . . . . . . . . . 51 (50) 59 (65)
-------- -------- --------- --------
Income before income taxes. . . . . . . . . . . . . 2,930 2,992 3,866 4,767
Income tax expense . . . . . . . . . . . . . . . . . . . . . 1,024 1,038 1,403 1,723
-------- -------- --------- --------
Net income. . . . . . . . . . . . . . . . . . . . . $1,906 $1,954 $2,463 $3,044
-------- -------- --------- --------
-------- -------- --------- --------
Net income per share . . . . . . . . . . . . . . . . . . . . $0.09 $0.09 $0.12 $0.13
-------- -------- --------- --------
-------- -------- --------- --------
Weighted average common and common equivalent
shares outstanding . . . . . . . . . . . . . . . . . . . 20,516 21,008 21,812 24,174
-------- -------- --------- --------
-------- -------- --------- --------
QUARTER ENDED
AUG. 31, NOV. 30, FEB. 28 MAY 31,
1994 1994 1995 1995
---- ---- ---- ----
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . $22,995 $24,203 $24,987 $29,192
Operating expenses:
Cost of services . . . . . . . . . . . . . . . . . . . . 12,326 13,402 13,902 15,423
Division selling, general and administrative expenses. . 6,996 7,777 8,513 9,692
Corporate general and administrative expenses. . . . . . 1,819 1,326 1,518 1,497
Special compensation expense . . . . . . . . . . . . . . - - 34,585 -
-------- -------- --------- --------
Operating income (loss) . . . . . . . . . . . . . . 1,854 1,698 (33,531) 2,580
Interest expense, net. . . . . . . . . . . . . . . . . . . . (185) (221) (99) (198)
Other income, net. . . . . . . . . . . . . . . . . . . . . . 105 154 33 107
-------- -------- --------- --------
Income (loss) before income taxes . . . . . . . . . 1,774 1,631 (33,597) 2,489
Income tax expense . . . . . . . . . . . . . . . . . . . . . 625 575 (11,685) 881
-------- -------- --------- --------
Net income (loss) . . . . . . . . . . . . . . . . . $1,149 $1,056 $(21,912) $1,608
-------- -------- --------- --------
-------- -------- --------- --------
Net income per share . . . . . . . . . . . . . . . . . . . . $0.07 $0.06 $(1.27) $0.09
-------- -------- --------- --------
-------- -------- --------- --------
Weighted average common and common equivalent
shares outstanding . . . . . . . . . . . . . . . . . . . 17,206 17,206 17,206 17,206
-------- -------- --------- --------
-------- -------- --------- --------
23
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
None.
PART III
The information required by this Part III is incorporated by reference from
the registrant's definitive proxy statement for the 1996 annual meeting of the
registrant's stockholders to be held on October 29, 1996, which involves the
election of directors. The definitive proxy statement will be filed with the
Securities and Exchange Commission not later than 120 days after the end of the
fiscal year covered by this Form 10-K.
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. The following Consolidated Financial Statements
of SITEL Corporation and Report of Independent Accountants are included at pages
F-1 through F-17 of this Form 10-K:
- Report of Independent Accountants
- Consolidated Balance Sheets at May 31, 1995 and 1996
- Consolidated Statements of Income (Loss) for the years ended May
31, 1994, 1995 and 1996
- Consolidated Statements of Changes in Stockholders' Equity for
the years ended May 31, 1994, 1995 and 1996
- Consolidated Statements of Cash Flows for the years ended May 31,
1994, 1995 and 1996
- Notes to Consolidated Financial Statements for the years ended
May 31, 1994, 1995 and 1996
2. FINANCIAL STATEMENT SCHEDULES. The following consolidated
financial statement schedules of SITEL Corporation for the years ended May 31,
1994, 1995 and 1996 are included at pages S-1 through S-2 of this Form 10-K and
should be read in conjunction with the Consolidated Financial Statements:
- Report of Independent Accountants
- Schedule II - Valuation and Qualifying Accounts
All other schedules of the Company for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions, are inapplicable or have been disclosed
in the Notes to Consolidated Financial Statements and, therefore, have been
omitted.
24
3. EXHIBITS. The following Exhibits are filed as part of, or are
incorporated by reference into, this Form 10-K:
Exhibit
No.
----
(1) 3.1 Amended and Restated Articles of Incorporation of SITEL
Corporation.
(1) 3.4 Amended and Restated Bylaws of SITEL Corporation.
(1) 4.2 Specimen Common Stock Certificate.
(1) 9.1 Form of General Voting Agreement.
(1) 9.2 Form of Voting Agreement with World Investments, Inc.
(1) 10.1 SITEL Corporation Stock Option Plan for Replacement of Existing
Options.
(1) 10.2 SITEL Corporation Stock Option Plan for Replacement of EEBs.
(1) 10.3 SITEL Corporation 1995 Employee Stock Option Plan.
(1) 10.4 SITEL Corporation 1995 Non-Employee Directors Stock Option Plan.
(1) 10.5 SITEL Corporation Executive Wealth Accumulation Plan.
(1) 10.6 Employment Agreement with James F. Lynch.
(1) 10.7 Employment Agreement with Michael P. May.
(1) 10.8 Form of Right of First Refusal.
(2) 10.9 Form of Indemnification Agreement with Outside Directors.
(3) 10.10 Form of Indemnification Agreement with Executive Officers.
21 Subsidiaries
23.1 Consent of Coopers & Lybrand L.L.P.
24.1 Power of Attorney (included on signature page).
- --------------------------
(1) Previously filed as an exhibit to Registration Statement of SITEL
Corporation on Form S-1 (Registration No. 33-91092) and
incorporated herein by this reference.
(2) Previously filed as an exhibit under the same exhibit number to
the Company's Form 10-Q for the quarter ended August 31, 1995.
(3) Previously filed as an exhibit under the same exhibit number to
the Company's Registration Statement on S-8 (33-99434).
(b) REPORTS ON FORM 8-K. The Company filed two reports on Form 8-K or
Form 8-K(A) during the last quarter of the period covered by this report. A
Form 8-K(A) was filed on April 24, 1996 to amend Item 7 of the Form 8-K which
was filed on February 23, 1996 to provide the required pro forma financial
information relating to the acquisition of C.T.C. Canadian Telephone
Corporation. A Form 8-K was filed on April 26, 1996 to report Item 5 which was
the Company's announcement of a two-for-one stock split.
25
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.
Date: August 28, 1996 SITEL Corporation
By: /s/ James F. Lynch
-------------------------------
James F. Lynch, Chairman of the
Board and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I do hereby constitute and appoint
James F. Lynch and Michael P. May, and each of them individually, as my true and
lawful attorneys-in-fact and agents, with full power of substitution and
resubstitution, for me and in my name, place, and stead in my capacity as a
director of SITEL Corporation to sign any amendments to this Annual Report on
Form 10-K of SITEL Corporation for the fiscal year ended May 31, 1996, and to
file such amendments with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto such
attorneys-in-fact and agents, and each of them individually and their
substitutes, full power and authority to do and perform each and every act and
thing requisite and necessary to be done in and about the premises in connection
with such Annual Report as fully to all intents and purposes as I might or could
do in person, hereby ratifying and confirming all that such attorneys-in-fact
and agents or any of them, or their or his substitutes or substitute, lawfully
may do or cause to be done by virtue hereof.
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.
/s/ James F. Lynch Chairman of the Board, August 28, 1996
- ------------------------------- Chief Executive
James F. Lynch Officer and Director
/s/ Barry S. Major Executive Vice President- August 28, 1996
- ------------------------------- Finance
Barry S. Major (Principal Financial Officer)
/s/ Nancy C. Noack Senior Vice President- August 28, 1996
- ------------------------------- Accounting and Administration
Nancy C. Noack (Principal Accounting Officer)
/s/ Kelvin C. Berens Director August 28, 1996
- -------------------------------
Kelvin C. Berens
/s/ Bill L. Fairfield Director August 28, 1996
- -------------------------------
Bill L. Fairfield
/s/ Vinod Gupta Director August 28, 1996
- -------------------------------
Vinod Gupta
/s/ George J. Kubat Director August 28, 1996
- -------------------------------
George J. Kubat
26
EXHIBIT INDEX
Page Number
In Sequential
Numbering
EXHIBIT System
------- -------------
(1) 3.1 Amended and Restated Articles of Incorporation of
SITEL Corporation. N/A
(1) 3.4 Amended and Restated Bylaws of SITEL Corporation. N/A
(1) 4.2 Specimen Common Stock Certificate. N/A
(1) 9.1 Form of General Voting Agreement. N/A
(1) 9.2 Form of Voting Agreement with World Investments, Inc. N/A
(1) 10.1 SITEL Corporation Stock Option Plan for Replacement of
Existing Options. N/A
(1) 10.2 SITEL Corporation Stock Option Plan for
Replacement of EEBs. N/A
(1) 10.3 SITEL Corporation 1995 Employee Stock Option Plan. N/A
(1) 10.4 SITEL Corporation 1995 Non-Employee Directors Stock
Option Plan. N/A
(1) 10.5 SITEL Corporation Executive Wealth Accumulation Plan. N/A
(1) 10.6 Employment Agreement with James F. Lynch. N/A
(1) 10.7 Employment Agreement with Michael P. May. N/A
(1) 10.8 Form of Right of First Refusal. N/A
(2) 10.9 Form of Indemnification Agreement with Outside Directors. N/A
(3) 10.10 Form of Indemnification Agreement with
Executive Officers. N/A
21 Subsidiaries 47
23.1 Consent of Coopers & Lybrand L.L.P. 49
24.1 Power of Attorney (included on signature page).
- -------------------------
(1) Previously filed as an exhibit to Registration Statement of SITEL
Corporation on Form S-1 (Registration No. 33-91092) and
incorporated herein by this reference.
(2) Previously filed as an exhibit under the same exhibit number to
the Company's Form 10-Q for the quarter ended August 31, 1995.
(3) Previously filed as an exhibit under the same exhibit number to
the Company's Registration Statement on S-8 (33-99434).
27
SITEL CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
FINANCIAL STATEMENTS
Report of Independent
Accountants........................................................... F-2
Consolidated Balance Sheets at May 31, 1995 and 1996.................. F-3
Consolidated Statements of Income (Loss) for the years ended
May 31, 1994, 1995 and 1996...................................... F-4
Consolidated Statements of Changes in Stockholders' Equity
for the years ended May 31, 1994, 1995 and 1996.................. F-5
Consolidated Statements of Cash Flows for the years ended
May 31, 1994, 1995 and 1996...................................... F-6
Notes to Consolidated Financial Statements............................ F-7
FINANCIAL STATEMENT SCHEDULE
Report of Independent Accountants..................................... S-1
Schedule II - Valuation and Qualifying Accounts....................... S-2
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
SITEL Corporation and Subsidiaries
We have audited the consolidated balance sheets of SITEL Corporation and
Subsidiaries (the Company) as of May 31, 1995 and 1996 and the related
consolidated statements of income (loss), changes in stockholders' equity and
cash flows for each of the three years ended May 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of SITEL Corporation
and Subsidiaries as of May 31, 1995 and 1996 and the consolidated results of
their operations and their cash flows for each of the three years ended May 31,
1996 in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Omaha, Nebraska
August 2, 1996
F-2
SITEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
May 31, 1995 and 1996
ASSETS
May 31,
---------------------------
1995 1996
------------ -------------
Current assets:
Cash and cash equivalents.......................................................... $ 1,191,577 $ 4,713,994
Trade accounts receivable (net of allowance for doubtful
accounts of $390,624 and $673,241, respectively)................................. 15,898,239 28,071,756
Marketable securities.............................................................. -- 42,569,744
Prepaid expenses................................................................... 1,371,791 649,866
Recoverable income taxes .......................................................... 21,435 117,905
Other.............................................................................. 628,557 1,465,654
Deferred income taxes ............................................................. 386,848 557,700
------------ -------------
Total current assets...................................................... 19,498,447 78,146,619
------------ -------------
Property and equipment, net.......................................................... 9,305,043 18,048,692
Deposits ............................................................................ 125,998 314,585
Other assets......................................................................... 589,789 899,030
Loans receivable from related parties................................................ 231,520 339,963
Goodwill............................................................................. 1,860,487 5,908,133
Deferred income taxes ............................................................... 14,356,540 12,839,305
------------ -------------
Total assets.............................................................. $ 45,967,824 $ 116,496,327
------------ -------------
------------ -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable - bank................................................................ $ 3,126,000 $ --
Current portion of long-term debt.................................................. 4,045,531 14,736
Current portion of capitalized lease obligations................................... 83,884 --
Trade accounts payable............................................................. 3,393,659 2,810,876
Accrued wages, salaries and bonuses................................................ 3,816,118 5,955,235
Other accrued expenses............................................................. 342,510 1,299,950
Customer deposits and other........................................................ 46,294 86,510
------------ -------------
Total current liabilities................................................. 14,853,996 10,167,307
------------ -------------
Long-term debt, net of current portion............................................... 2,392,456 124,749
Note payable to related party........................................................ 492,388 --
Deferred revenue..................................................................... -- 500,000
Deferred compensation................................................................ 586,660 970,753
Common stock, subject to put option - 1,535,296 and 0 shares, respectively.......... 2,799,708 --
Commitments and contingencies (Note 13)
Stockholders' equity:
Common stock, $.001 par value, 50,000,000 shares authorized,
9,709,826 and 18,647,206 shares issued and outstanding, respectively........ 9,710 18,647
Paid-in capital.................................................................... 36,581,874 107,108,093
Currency exchange adjustment....................................................... -- (10,277)
Accumulated deficit................................................................ (11,748,968) (2,382,945)
------------ -------------
Total stockholders' equity................................................ 24,842,616 104,733,518
------------ -------------
Total liabilities and stockholders' equity................................ $ 45,967,824 $ 116,496,327
------------ -------------
------------ -------------
The accompanying notes are an integral part of
the consolidated financial statements.
F-3
SITEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
for the years ended May 31, 1994, 1995 and 1996
For the Years Ended May 31,
------------ ------------- -------------
1994 1995 1996
------------ ------------- -------------
Revenues............................................... $ 68,855,377 $ 101,377,450 $ 140,258,707
------------ ------------- -------------
Operating expenses:
Cost of services..................................... 37,051,508 55,053,712 74,527,559
Division selling, general and administrative
expenses.......................................... 23,809,893 32,978,848 44,555,062
Corporate general and administrative
expenses.......................................... 5,568,077 6,160,069 7,606,447
Special compensation expense......................... -- 34,585,062 --
------------ ------------- -------------
Total operating expenses.................... 66,429,478 128,777,691 126,689,068
------------ ------------- -------------
Operating income (loss).................... 2,425,899 (27,400,241) 13,569,639
------------ ------------- -------------
Other income (expense):
Interest income...................................... 11,301 115,892 1,081,015
Interest expense..................................... (549,371) (818,368) (91,369)
Other................................................ 1,371,365 399,349 (4,879)
------------ ------------- -------------
Total other income (expense)................ 833,295 (303,127) 984,767
------------ ------------- -------------
Income (loss) before income taxes........... 3,259,194 (27,703,368) 14,554,406
------------ ------------- -------------
Income tax expense (benefit)
Current.............................................. 1,184,150 2,462,569 1,525,433
Deferred............................................. (793,000) (12,066,182) 3,662,950
------------ ------------- -------------
Total income tax expense (benefit).......... 391,150 (9,603,613) 5,188,383
------------ ------------- -------------
Net income (loss) ..................................... $ 2,868,044 $ (18,099,755) $ 9,366,023
------------ ------------- -------------
------------ ------------- -------------
Per share amounts:
Earnings (loss) per common and common
equivalent share.................................. $ 0.17 $ (1.05) $ 0.43
------------ ------------- -------------
------------ ------------- -------------
Weighted average common and common
equivalent shares outstanding........................ 17,206,906 17,206,906 21,876,432
------------ ------------- -------------
------------ ------------- -------------
The accompanying notes are an integral part of
the consolidated financial statements.
F-4
SITEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
for the years ended May 31, 1994, 1995 and 1996
Options Less Currency Retained Total
Class A Class B Class C Common Deferred Paid-In Exchange Earnings Stockholders'
Common Common Common Stock Compensation Capital Adjustment (Deficit) Equity
------- ------- ------- ------- ------------ ------------ ---------- ------------ -------------
Balance, May 31, 1993 $ 4,010 $ 5,330 $ 360 $ -- $ 27,114 $ 1,816,718 $ -- $ 4,005,694 $ 5,859,226
Common stock options
less deferred
compensation -- -- -- -- 55,226 -- -- -- 55,226
Accretion of put
option -- -- -- -- -- -- -- (272,908) (272,908)
Net income -- -- -- -- -- -- -- 2,868,044 2,868,044
------- ------- ------- ------- ------------ ------------ ---------- ------------ -------------
Balance, May 31, 1994 4,010 5,330 360 -- 82,340 1,816,718 -- 6,600,830 8,509,588
Issuance of 50,296
shares of Class C
common stock less
40,236 shares
subject to put
option -- -- 10 -- -- 58,539 -- -- 58,549
Special compensation -
options issued -- -- -- -- (82,340) 34,706,617 -- -- 34,624,277
Accretion of put
option -- -- -- -- -- -- -- (250,043) (250,043)
Conversion of
4,010,000 shares of
Class A, 5,330,000
shares of Class B,
and 369,826 shares
of Class C common
into a single class
of common stock due
to reincorporation (4,010) (5,330) (370) 9,710 -- -- -- -- --
Net loss -- -- -- -- -- -- -- (18,099,755) (18,099,755)
------- ------- ------- ------- ------------ ------------ ---------- ------------ -------------
Balance, May 31, 1995 -- -- -- 9,710 -- 36,581,874 -- (11,748,968) 24,842,616
Issuance of 3,800,000
shares of common
stock, net of
offering expenses -- -- -- 3,800 -- 23,167,230 -- -- 23,171,030
Cancellation of the
put option -- -- -- 1,536 -- 2,798,172 -- -- 2,799,708
Issuance of 2,991,110
shares of common
stock, net of
offering expenses -- -- -- 2,992 -- 42,241,806 -- -- 42,244,798
Issuance of 610,976
shares of common
stock for options
exercised -- -- -- 609 -- 2,444 -- -- 3,053
Tax benefit of stock
options exercised -- -- -- -- -- 2,316,567 -- -- 2,316,567
Currency exchange
adjustment -- -- -- -- -- -- (10,277) -- (10,277)
Net income -- -- -- -- -- -- -- 9,366,023 9,366,023
------- ------- ------- ------- ------------ ------------ ---------- ------------ -------------
Balance, May 31, 1996 $ -- $ -- $ -- $18,647 $ -- $107,108,093 $ (10,277) $ (2,382,945) $ 104,733,518
------- ------- ------- ------- ------------ ------------ ---------- ------------ -------------
------- ------- ------- ------- ------------ ------------ ---------- ------------ -------------
The accompanying notes are an integral part of
the consolidated financial statements.
F-5
SITEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended May 31, 1994, 1995 and 1996
1994 1995 1996
----------- ------------- -----------
Cash flow from operating activities:
Net income (loss) $ 2,868,044 $ (18,099,755) $ 9,366,023
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Special compensation expense..................................... -- 34,585,062 --
Depreciation and amortization.................................... 3,762,850 4,404,976 5,625,054
Provision for deferred income taxes.............................. (793,000) (12,066,182) 3,662,950
Deferred compensation............................................ 606,567 56,648 384,093
Loss on sale of property and equipment .......................... 65,180 56,441 57,102
Forgiveness of loans receivable from related parties ............ -- 449,396 --
Currency exchange adjustment .................................... -- -- (10,277)
Change in assets and liabilities:
Trade accounts receivable...................................... (1,263,279) (5,457,830) (12,173,517)
Refundable income taxes........................................ (457,276) (106,435) (96,470)
Prepaid expenses............................................... 125,760 (1,181,945) 721,925
Other current assets........................................... 685,981 (201,808) (837,097)
Deposits....................................................... (355,765) 463,864 (188,587)
Trade accounts payable......................................... (503,235) 505,840 (582,783)
Accrued wages, salaries, bonuses, customer deposits and other.. 1,045,603 1,532,776 2,179,333
Other accrued expenses......................................... 9,166 (447,332) 957,440
Deferred revenue............................................... (488,096) (70,802) --
----------- ------------- -----------
Net cash provided by operating activities ..................... 5,308,500 4,422,914 9,065,189
----------- ------------- -----------
Cash flow from investing activities:
Purchases of property and equipment................................ (3,549,721) (6,779,302) (14,579,817)
Proceeds from sales of property and equipment...................... 602,420 -- --
Acquisition of Canadian subsidiary................................. -- -- (4,193,634)
Investments in marketable securities............................... -- -- (83,919,744)
Sale of marketable securities...................................... -- -- 41,350,000
Advances on loans receivable from related parties.................. (111,697) (119,823) (108,443)
Payments received on loans receivable from related parties......... 21,862 -- --
Changes in other assets............................................ 62,546 (362,314) (309,241)
----------- ------------- -----------
Net cash used in investing activities................. (2,974,590) (7,261,439) (61,760,879)
----------- ------------- -----------
Cash flows from financing activities:
Borrowings on note payable - bank....................................... 44,339,210 47,147,500 11,550,000
Repayments of note payable - bank....................................... (47,006,200) (44,941,500) (14,676,000)
Borrowing of long-term debt.... ....................................... 4,995,000 4,157,500 --
Repayment of long-term debt ............................................ (4,288,120) (2,630,614) (6,298,502)
Borrowings of note payable to related party............................. 247,388 -- --
Repayment of note payable to related party.............................. -- -- (492,388)
State incentive credits received........................................ -- -- 800,000
Common stock issued, net of expenses.................................... -- -- 65,418,881
Payments on capital lease obligations .................................. (541,750) (318,643) (83,884)
----------- ------------- -----------
Net cash provided by (used in) financing activities........ (2,254,472) 3,414,243 56,218,107
----------- ------------- -----------
Net increase in cash....................................... 79,438 575,718 3,522,417
----------- ------------- -----------
Cash and cash equivalents, beginning of year............................... 536,421 615,859 1,191,577
Cash and cash equivalents, end of year .................................... $ 615,859 $ 1,191,577 $ 4,713,994
----------- ------------- -----------
----------- ------------- -----------
Supplemental disclosure of cash flow information
Interest paid............................................................ $ 511,217 $ 807,298 $ 122,300
Income taxes............................................................. 1,639,357 2,569,004 1,874,500
Supplemental schedule of Noncash Investing and Financing Activities:
In 1995, 50,296 shares of Class C stock were issued to maintain the ownership
percentage of certain stockholders.
In 1996, upon completion of the IPO, the put option on common stock was
eliminated causing a reclassification of $2,799,708 to stockholders' equity.
In 1996, the tax benefit of stock options exercised was $2,316,567.
The accompanying notes are an integral part of
the consolidated financial statements.
F-6
SITEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----
1. ACCOUNTING POLICIES:
The following is a summary of significant accounting policies followed in
the preparation of these financial statements.
(a) PRINCIPLES OF CONSOLIDATION. The consolidated financial statements
include the accounts of SITEL Corporation and its subsidiaries ("the Company").
All significant intercompany accounts and transactions have been eliminated.
(b) INDUSTRY INFORMATION. The Company is engaged in inbound, outbound and
interactive teleservicing activities, servicing the insurance, financial
services, telecommunications and publishing industries. Operations are
primarily located in North America.
Increasingly, large corporations are outsourcing their teleservicing
activities as part of an overall effort to focus internal resources on their
core competencies while improving operating efficiencies and reducing costs.
The Company believes that the trend towards increased government regulation of
teleservicing is another important reason corporations are seeking outsourcing
relationships. The teleservicing industry in general and the specific
industries served by the Company (particularly the insurance and financial
services industries) have become subject to an increasing amount of federal and
state regulation in recent years. The Company believes that only large,
professional independent teleservicing companies such as itself, can provide the
expertise and sophisticated technological resources necessary to effectively
serve the sustained teleservicing needs of large corporations.
The teleservicing industry is extremely competitive and highly fragmented.
The Company competes with numerous independent teleservicing firms, as well as
the in-house operations of many of its clients and potential clients. Also, the
Company competes with direct mail, television, radio and other advertising
media. There can be no assurance that additional competitors with greater
resources than the Company will not enter the industry or that the Company's
clients will not choose to conduct internally more of their teleservicing
activities.
Teleservicing is very labor intensive and characterized by high personnel
turnover. The Company competes for qualified personnel with other firms,
particularly in the Omaha area where many teleservicing firms are headquartered,
and periodically is required to pay premium hourly wages to attract and retain
personnel.
(c) REVENUE RECOGNITION. The Company recognizes revenues as services are
performed for its customers. Deferred revenue represents a state cash incentive
received which will be forgiven as the Company meets certain criteria.
(d) CASH EQUIVALENTS. Cash equivalents generally consist of highly liquid
debt instruments purchased with an original maturity of three months or less.
(e) PROPERTY AND EQUIPMENT. Property and equipment are stated at cost
less accumulated depreciation. Major renewals and improvements are capitalized
and charged to expense through depreciation. Repairs and maintenance are
charged to expense as incurred. Depreciation is determined using the straight-
line method over the estimated useful lives of the respective assets. Equipment
recorded under capital leases is amortized on a straight-line basis over the
shorter of the estimated useful life of the assets or the lease term. Estimated
useful lives are as follows:
Years
-----
Telecommunications equipment 3-5
Furniture and equipment 5-7
Leasehold improvements 3-14
Buildings 20
Automobiles 3
F-7
SITEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----
1. ACCOUNTING POLICIES: (CONTINUED)
Upon sale or retirement, the related cost and accumulated depreciation are
removed from the accounts, and any gain or loss is recognized in the statement
of income.
(f ) INCOME TAXES. Deferred tax assets and liabilities are determined
based on the differences between the financial statement and tax bases of assets
and liabilities using enacted tax rates and laws applicable to the years in
which the differences are expected to reverse. Valuation allowances, if any,
are established when necessary to reduce deferred tax assets to the amount that
is more likely than not to be realized. Income tax expense is the tax payable
for the period and the change during the period in deferred tax assets and
liabilities.
(g) GOODWILL. Goodwill consists of the difference between the fair value
of net assets acquired and the fair value of common shares issued, and is being
amortized using the straight-line method over 25 years. Accumulated
amortization of goodwill at May 31, 1994 , 1995 and 1996 was $277,481,
$367,802, and $513,790, respectively. The Company monitors events and changes
in circumstances which may require a review of the carrying value of goodwill at
each balance sheet date to assess recoverability based on estimated undiscounted
future operating cash flows. Impairments would be recognized in operating
results if a permanent diminution in value were to occur based on discounted
cash flows.
(h) EARNINGS PER SHARE. Earnings per share attributable to common
shareholders has been computed using the weighted average number of common and
common equivalent shares outstanding (see Note 12) and after giving retroactive
effect to the stock split (see Note 14).
1994 1995 1996
---------- ---------- ----------
Common stock..................... 11,245,122 11,245,122 16,478,946
Common stock equivalents-stock
options ......................... 5,961,784 5,961,784 5,397,486
---------- ---------- ----------
17,206,906 17,206,906 21,876,432
---------- ---------- ----------
---------- ---------- ----------
Pursuant to Securities and Exchange Commission Staff Accounting Bulletin
No. 83, options to purchase common stock granted with exercise prices below the
assumed initial public offering price per share during the 12 months preceding
the date of the initial filing of the Registration Statement are included in the
calculation of common equivalent shares, using the treasury stock method, as if
they were outstanding for all periods presented.
(i) RECLASSIFICATION. Certain amounts in the prior year financial
statements have been reclassified to conform with the current year presentation.
(j) USE OF ESTIMATES. The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
F-8
SITEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----
2. ACQUISITIONS:
On February 9, 1996, the Company acquired substantially all the net assets
of C.T.C. Canadian Telephone Corporation and 2965496 Canada Inc., which were
privately held teleservicing service agencies operating four teleservicing call
centers in Canada. The purchase price, including acquisition expenses, was
approximately $4.2 million. Results of operations prior to acquisition were not
significant. The acquisition was accounted for using the purchase method of
accounting and, accordingly, the purchase price was allocated based on estimated
fair values at the date of acquistion. The excess of the purchase price over
the fair value of the net assets acquired was $4,193,634.
3. PUBLIC OFFERINGS:
The Company completed an initial public offering (IPO) of common stock in
June 1995. The Company sold 3,800,000 shares of common stock at an initial
public offering price of $6.75 per share resulting in net proceeds to the
Company of $23,171,030, after deducting the underwriting discount and offering
expenses.
Upon completion of the IPO, the put option on common stock was cancelled,
causing a reclassification of the related amount to stockholders' equity.
The Company completed an additional public offering of Common Stock in
February, 1996. The Company sold 2,991,110 shares of Common Stock at a public
offering price of $15.00 per share resulting in net proceeds to the Company of
$42,244,798 after deducting the underwriting discount and offering expenses.
A portion of the Company's net proceeds from the offerings were used to
retire all bank notes payable and the note payable to a related party. The
remaining net proceeds are being used for general working capital purposes and
to support the Company's growth, which may include purchases of capital
equipment and acquisition of companies engaged in teleservicing or related
businesses.
4. MARKETABLE SECURITIES:
The Company has classified all marketable securities as available for sale
and the amortized cost basis approximates fair value. At May 31, 1996, the
maturities of the securities are as follows:
Carrying Value
--------------
Mutual Muni Funds:
no single maturity date $ 20,675,000
U.S. debt securities:
less than 1 year 1,013,232
Municipal debt securities:
over 10 years 13,395,237
5 to 10 years 3,244,761
less than 1 year 3,241,962
Foreign debt securities:
less than 1 year 999,551
--------------
Total $ 42,569,744
--------------
--------------
F-9
SITEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----
5. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following:
May 31,
-----------------------------
1995 1996
---- ----
Telecommunications equipment................ $17,239,426 $25,464,974
Furniture and equipment..................... 4,667,408 7,802,290
Leasehold improvements...................... 1,348,750 2,266,174
Buildings................................... -- 1,731,974
Automobiles................................. 50,513 77,208
----------- -----------
23,306,097 37,342,620
Less accumulated depreciation............. 14,001,054 19,293,928
----------- -----------
$9,305,043 $18,048,692
----------- -----------
----------- -----------
6. NOTE PAYABLE - BANK:
The Company has a revolving line of credit with a bank which provides for
maximum borrowings of $6,000,000, through November, 1996. At May 31, 1996,
there were no outstanding borrowings against the line of credit. Interest,
payable monthly, accrues on borrowings under the revolving line of credit at
1/2% under the bank's national prime lending rate.
The agreement provides that the Bank will review the revolving line of
credit on an annual basis and will consider renewal based on the Company's
audited financial statements. In the event the Bank chooses not to review the
agreement, the Company will be allowed to extend the term of the note for sixty
days from the date of maturity, provided the Company is in compliance with all
covenants.
F-10
SITEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----
7. LONG-TERM DEBT:
Long-term debt consists of the following:
May 31,
----------------------
1995 1996
----------- ---------
Bank note payable, interest at 7.75%.
Due in monthly installments of $85,250
with final principal due September 1,
1995. This note is collateralized by
accounts receivable, equipment and
other assets of the Company.................... $ 1,243,061 $ --
Bank note payable, interest at 7%. Due in
monthly installments of $55,656 including
interest through September 1995. The
note is collateralized by certain
equipment...................................... 142,614 --
Bank note payable, interest at 8%. Due in
monthly installments of $62,680 including
interest through April 1996. A final
balloon payment is due May 1996. This
note is collateralized by accounts
receivable, equipment and other assets
of the Company................................. 1,387,319 --
Bank note payable interest at 9.5%. Due in
monthly installments of $128,158 including
Interest through November 1996. A final
balloon payment is due December 1996.
This note is collateralized by accounts
receivable, equipment and other assets
of the Company. 3,511,060 --
Note payable to a state's department of
economic development, interest at 2%.
Due in monthly installments of $1,449
including interest, with final principal due
February 2000. This note is
collateralized by an irrevocable letter
of credit issued by a regional bank............ 153,933 139,485
----------- ---------
6,437,987 139,485
Less current portion.................. 4,045,531 14,736
----------- ---------
$ 2,392,456 $ 124,749
----------- ---------
----------- ---------
F-11
SITEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----
7. LONG-TERM DEBT: (CONTINUED)
Future principal payments at May 31, 1996 are as follows:
Fiscal Year End May 31,
----------------------
1997 .......................... $14,736
1998 .......................... 15,033
1999 .......................... 15,330
2000 .......................... 94,386
----------
$139,485
----------
----------
As described in Note 3, all bank notes payable were retired using a portion
of the Company's net proceeds from the initial public offering.
8. NOTE PAYABLE TO RELATED PARTY:
Note payable to related party bears interest at a variable rate of 1% over
a national prime lending rate. Interest expense related to this note was
$12,700, $47,178 and $0 in the years ended May 31, 1994, 1995 and 1996,
respectively.
As described in Note 3, the note payable to related party was retired using
a portion of the Company's net proceeds from the initial public offering.
9. INCOME TAXES:
The components of the net deferred tax assets as of May 31, 1995 and 1996
were as follows:
May 31,
----------- ------------
1995 1996
----------- ------------
Deferred tax assets:
Current:
Allowance for doubtful accounts................. $ 132,812 $ 228,902
Accrued vacation................................ 254,036 328,798
----------- ------------
386,848 557,700
----------- ------------
Noncurrent:
Net operating loss carry forwards............... 652,943 577,115
State income tax credit carry forwards.......... 1,446,490 3,001,490
Special compensation............................ 11,758,921 10,555,187
Deferred compensation........................... 80,605 88,197
Excess book over tax depreciation............... 417,581 172,316
Valuation allowance............................. -- (1,555,000)
----------- ------------
14,356,540 12,839,305
----------- ------------
Total deferred tax............................ $14,743,388 $13,397,005
----------- ------------
----------- ------------
F-12
SITEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----
9. INCOME TAXES: (CONTINUED)
At May 31, 1996, the Company had net operating loss carry forwards of
approximately $1,697,000 which will expire in 2004. Current tax expense was
reduced from the use of net operating loss carry forwards for the years ended
May 31, 1994, 1995 and 1996, by $75,000 in each year. The Company has qualified
for state income tax credits and sales tax credits under Nebraska statute LB
775. These credits were used to offset state taxable income for the years ended
May 31, 1994, 1995 and 1996 and approximately $4,565,000 of tax credits can be
carried forward through 2005. The Company has established a valuation allowance
for the portion of these credits that is believes it will not be able to realize
based upon expected levels of taxable income in Nebraska. The Company can
continue to earn additional credits through May 31, 1997 under Nebraska statute
LB 775.
The Company will need to generate approximately $63 million of taxable
income through future operations to fully utilize the net deferred tax assets.
Based on the current level of taxable income, before the tax benefit of stock
options exercised, management believes it is more likely than not that future
taxable income will be sufficient to fully utilize the net deferred tax assets
recorded.
The difference between the Company's income tax expense as reported in the
accompanying financial statements and that which would be calculated using the
statutory income tax rate of 34% on income is as follows:
Fiscal Year Ended May 31,
--------------------------------------
1994 1995 1996
---- ---- ----
Tax at statutory rate................. $1,108,126 $(9,419,145) $4,948,498
Amortization of goodwill.............. 57,202 30,761 30,763
Officers' life insurance.............. 8,560 28,016 38,482
State taxes, net of state tax
credits and federal tax benefits... (428,775) (261,882) 125,719
Jobs credits.......................... (101,337) (184,517) (2,310)
Nondeductible expenses................ 185,000 52,534 60,719
Prior year tax adjustments............ (185,000) 106,197 --
Other................................. (84,235) 44,423 (13,488)
---------- ----------- ----------
$ 391,150 $(9,603,613) $5,188,383
---------- ----------- ----------
---------- ----------- ----------
10. OPERATING LEASE OBLIGATIONS:
The Company leases property and certain equipment under noncancellable
arrangements which are defined as operating leases. These lease obligations
expire at various dates through 2001. Rent expense was $1,515,993, $1,868,302,
$3,116,373 for the years ended May 31, 1994, 1995 and 1996, respectively.
Certain leases of real property provide options to extend the lease term. These
commitments are included in the following future minimum rental commitments
under noncancellable operating leases.
FISCAL YEAR END MAY 31
----------------------
1997............................... $3,298,108
1998............................... 3,033,087
1999............................... 2,563,752
2000............................... 1,394,812
2001............................... 338,223
Thereafter......................... 91,190
F-13
SITEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----
10. OPERATING LEASE OBLIGATIONS: (CONTINUED)
The Company leases certain property from related parties. Total rent
payments to related parties were $641,433, $605,534 and $667,999 in the years
ended May 31, 1994, 1995 and 1996, respectively.
11. CLASS C COMMON STOCK, SUBJECT TO PUT OPTION:
A stockholder with 1,535,292 shares of Class C common stock had the right
to exercise a put option from July 1, 1997 to November 30, 1997. If the put
option was exercised, the Company would have issued a note equal to the
difference between $4,500,000 and the amount of certain expenditures made by the
stockholder relating to obligations not assumed by the Company in a previous
acquisition.
The value of the put option was being accreted by charges to retained
earnings over the life of the put option.
As described in Note 3, the put option was cancelled upon completion of the
initial public offering.
12. STOCK OPTIONS AND OTHER STOCK AND COMPENSATION ARRANGEMENTS:
In the three years ended May 31, 1995, the Company granted stock options to
key employees for the purchase of up to 1,737,500 shares of Class B common stock
at prices ranging from $.20 to $2.31 per share. For the shares of stock issued
under this plan, the Company has the option to repurchase the shares when the
employees cease employment. During the year ended May 31, 1993, 97,500 options
were exercised at $.20 per share. During the year ended May 31, 1995, 85,000
options were terminated. The 1,555,000 options remaining under the plan were
replaced with new options in February 1995, as discussed below.
In February 1987, the Company granted an option to a key employee of
1,000,000 shares of Class B common stock at par value ($.001). These options
were replaced with new options in February 1995, as discussed below.
In February 1995, the Board of Directors and stockholders of the Company
adopted the SITEL Corporation Stock Plan for Replacement of Existing Options
(the "Replacement Plan"). Pursuant to this plan, the Company granted new
options for an aggregate of 2,270,926 shares of the Company's common stock as
replacement for existing options described above. No further options will be
granted under this plan. New options were granted based upon the amount by
which estimated fair value per share ($5.82) exceeded the exercise price of
options being exchanged.
Options granted pursuant to the Replacement Plan have exercise prices equal
to $.005 per share. The options are exercisable in five equal annual
installments, beginning January 1, 1996, and expire in May 2000. The Company
recorded these options at the estimated fair value of the stock on the date of
the grant ($5.82 a share), with a corresponding charge to special compensation
expense.
The Company had an employee equity benefit plan (EEB Plan) whereby all
qualified exempt personnel would receive the increase in the value of the
employee's units from the date the employee was awarded the units to the date of
certain events, including the employee's death or retirement or the sale of the
Company.
The employee forfeited such benefits upon termination of employment. The
value per unit was determined annually by the Board of Directors.
The EEB Plan was terminated in February 1995, concurrent with adoption of
the SITEL Corporation Stock Option Plan (EEB Replacement Plan), and the
6,327,750 units outstanding at May 31, 1995, with base values per unit ranging
from $1.70 to $3.42, were replaced as described below. Each unit was exchanged
for the appropriate number of new options based upon the amount by which
estimated fair value per share ($5.82) exceeded the base value of each unit.
F-14
SITEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
-----
12. STOCK OPTIONS AND OTHER STOCK AND COMPENSATION ARRANGEMENTS: (CONTINUED)
The EEB Replacement Plan was adopted in February 1995, pursuant to which
the Company granted nonqualified options to personnel who owned units under the
EEB Plan, to purchase up to 3,690,860 shares of the Company's common stock.
Options granted pursuant to the EEB Replacement Plan have an exercise price
equal to $.005 per share. The options are exercisable in five equal
installments, beginning January 1, 1996 and expire in May 2000. The Company
recorded these options at the estimated fair value of the stock on the date of
the grant ($5.82 per share), with a corresponding charge to special compensation
expense. No further options will be granted under the EEB Replacement Plan.
Outstanding options at May 31, 1995 and 1996 were 5,961,786 and 5,350,810,
respectively. The exercise price is $.005 per share. During 1995 and 1996, 0
and 610,976 options were exercised.
In April 1995, the Board of Directors and the stockholders of the Company
adopted the SITEL Corporation 1995 Employee Stock Option Plan and the 1995 Non-
Employee Directors Stock Option Plan (the "New Stock Option Plans"). The New
Stock Option Plans provide for the granting of options to purchase up to an
aggregate of 1,460,000 shares of Common Stock to employees and directors.
Options granted under the New Stock Option Plan may be either "Incentive
Options" or "Non-qualified Options." During 1996, the Company granted 375,500
options to officers and employees at an average exercise price of $13.24 per
share, the fair market value of the common stock as of the date of grant. The
options vest ratably over five years. None of the options are currently
exercisable.
Incentive Options may not be granted at exercise prices less than the fair
market value of the Common Stock on the date of grant (or, for an option granted
to a person holding more than 10% of the Company's voting stock, at less than
110% of fair market value) and Non-qualified Options may not be granted at an
exercise price less than 85% of fair market value on the date of grant.
The New Stock Option Plans also provide for automatic grants of Non-
qualified Options to each independent director of the Company. Each independent
director will be granted Non-qualified Options to purchase 2,000 shares of
Common Stock upon first being elected to the Board of Directors and on each
anniversary thereof. The exercise price for all Non-qualified Options will
equal the fair market value of the Common Stock on the date of grant. In July
1995, the Company granted an aggregate of 8,000 options to four independent
directors at the exercise price of $8.78 per share, the fair market value of the
common stock as of the date of grant. The options vest one year after the date
of grant.
Effective May 15, 1994, the Company adopted a benefit plan for certain
executive employees, who elect to contribute to the Plan. The Company may
voluntarily match all or a portion of the participants' contribution.
Participants are 100% vested in their contributions and the Company's
contributions vest over a 15-year period. The Company made contributions to the
plan of $257,666, $0, and $0 for the years ended May 31, 1994, 1995, and 1996,
respectively. The Company's contributions are recognized as expense as the
benefits vest.
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation." SFAS No. 123 established a fair value based method of accounting
for stock-based compensation plans. It encourages, but does not require,
entities to adopt that method in place of current practice. The Company has not
yet determined whether it will adopt the non-mandatory provisions of SFAS No.
123, or, if it does, what impact adoption will have on financial position,
results of operations or cash flows.
13. REINCORPORATION:
In May, 1995 the Company was reincorporated in the State of Minnesota. As
part of the reincorporation, each outstanding share of Class A, Class B and
Class C common stock was converted automatically to one share of new $.001 par
value common stock.
F-15
SITEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
-----
14. STOCK SPLIT:
On May 13, 1996, the Company effected a two for-one stock split of its
common stock to stockholders of record on May 3, 1996. All share and per share
information has been restated to reflect this split.
15. CONTINGENCIES:
Various lawsuits have arisen in the ordinary course of the Company's
business. The Company believes its defenses are meritorious and the eventual
outcome of those lawsuits will not have a material effect on the Company's
financial position, future results of operations or future cash flows.
16. SIGNIFICANT CLIENTS:
During the years ended May 31, 1994, 1995 and 1996, the following clients
individually accounted for more than 10% of the Company's revenue:
YEAR ENDED MAY 31,
--------------------------
CLIENT 1994 1995 1996
------ ---- ---- ----
(% OF TOTAL REVENUE)
Philip Morris, U.S.A. 10.9% * *
J.C. Penney Life Insurance Co. 10.0% 10.1% 11.6%
Allstate MCFD 11.4% 12.2% 11.0%
---------------------------
*Accounted for less than 10% of total revenues for the period
indicated.
In addition, a substantial portion of the Company's revenue is from clients
in the insurance and financial services industries. As of May 31, 1996,
approximately 42% of the Company's accounts receivable were from three clients.
The Company's policy does not require significant collateral or other security
to support such receivables.
17. OTHER INCOME:
Included in other income for the period ending May 31, 1994 is a
gain of approximately $985,000 relating to a service contract with a customer
which was terminated by mutual agreement.
18. RELATED PARTY TRANSACTIONS:
In addition to rent paid to related parties in Note 10, the Company pays
premiums on certain life insurance policies on behalf of three employees. These
premium payments will be reimbursed upon the death or termination of such
employees. The Company is not the beneficiary however, it has a security
interest in the policies. Approximately $231,520 and $339,963 of such payments
are included in non-interest bearing loans receivable from related parties at
May 31, 1995 and 1996, respectively.
In February 1995, the Company forgave $528,040 of loans receivable and
accrued interest from two stockholders. This charge has been included in
corporate, general and administrative expenses.
For the period ending May, 1996, the Company purchased approximately
$200,000 of computer equipment from a company of which a Director is the Chief
Executive Officer and President. In addition, the Company utilized
approximately $104,000 of legal services from a firm of which a Director is the
managing partner.
F-16
SITEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
-----
19. BENEFIT PLAN
The Company's 401(k) plan, formed in January, 1994, covers substantially all
employees who are 18 years of age with 60 days or more of service. Participants
may elect to contribute 1% to 15% of compensation. The Company may elect to
make a year end contribution to the 401(k) plan. Company contributions to the
plan were $0 in 1995 and $50,000 in 1996.
20. SUBSEQUENT EVENTS:
On June 12, 1996, the Company completed the acquisition of a 69.2% interest
in Teleaction, S.A. ("Teleaction") a Spanish teleservicing company. The Company
paid approximately $24 million in cash for the 69.2% interest and will acquire
the remaining 30.8% of Teleaction in 1998 for a minimum purchase price of $11
million and a contingent purchase amount based upon Teleaction's profitability
in 1996 and 1997. The Company will account for the acquisition as a purchase.
The excess purchase price over the fair values of the net assets acquired was
approximately $23.5 million.
On June 28, 1996, the Company completed the acquisition of National Action
Financial Services, Inc. ("NAFS"), a credit collections and accounts receivable
management company. The Company issued approximately 1.4 million common shares
in exchange for all of the outstanding NAFS common stock. The transaction will
be accounted for as a pooling of interests.
The following unaudited pro forma information shows the results of the
Company as though the acquisitions occurred at the beginning of 1994. These
results include certain adjustments, and do not necessarily indicate future
results, nor the results of historical operations had the acquisitions actually
occurred on the assumed date.
1995 1996
---- ----
Revenues $129,518,638 $184,300,271
Net income (loss) ($17,016,280) $11,564,460
Earnings (loss) per share ($0.92) $0.50
In addition, the Company signed a share purchase agreement between the
Company and Mitre plc ("Mitre") an English teleservicing company, on June 6,
1996. Under this agreement the Company will issue 9.2 million shares of common
stock in exchange for all the outstanding Mitre common stock. This transaction
is subject to approval of shareholders at an August 28, 1996 shareholder
meeting. The Company will account for this transaction as a pooling of
interests.
F-17
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
SITEL Corporation and Subsidiaries
Our report on the consolidated financial statements of SITEL Corporation and
Subsidiaries is included on page F-2 of this Form 10-K. In connection with our
audits of such financial statements, we have also audited the related financial
statement schedule listed in the Index to Financial Statement Schedules on
page F-1 of this Form 10-K.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
COOPERS & LYBRAND L.L.P.
Omaha, Nebraska
August 2, 1996
S-1
SITEL CORPORATION
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
- ------------------------------------------------------------------------------------------------
ACCOUNTS
BEGINNING BAD DEBT CHARGED TO ENDING
DESCRIPTION BALANCE EXPENSE ALLOWANCE BALANCE
- ------------------------------------------------------------------------------------------------
Allowance for doubtful accounts
for trade receivables
Year ended May 31, 1994 $113,362 $332,185 $185,204 $260,343
Allowance for doubtful accounts
for trade receivables
Year ended May 31, 1995 260,343 223,048 92,767 390,624
Allowance for doubtful accounts
for trade receivables
Year ended May 31, 1996 390,624 325,453 42,836 673,241
S-2