================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
---------
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 2002
Commission Exact name of registrant IRS Employer
File Number as specified in its charter Identification No.
1-12577 SITEL CORPORATION 47-0684333
MINNESOTA
----------------
(State or Other Jurisdiction of Incorporation or Organization)
111 S. CALVERT STREET, SUITE 1900 BALTIMORE, MARYLAND 21202
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(410) 246-1505
--------------------------
(Registrant's Telephone Number, Including Area Code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- -------------------
Common Stock, $.001 Par Value The New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Not Applicable
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. YES X NO ____
COMMON STOCK, $.001 PAR VALUE - 74,363,431 SHARES OUTSTANDING AS OF OCTOBER 31,
2002
================================================================================
SITEL CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
PAGE
----
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Condensed Statements of Income (Loss)........... 1
Consolidated Condensed Balance Sheets........................ 2
Consolidated Condensed Statements of Cash Flows.............. 3
Notes to Consolidated Financial Statements................... 4
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations
General..................................................... 15
General Business Risks, Critical Accounting Policies and
Estimates................................................... 15
Results of Operations....................................... 17
Financial Condition and Liquidity........................... 22
Other Matters............................................... 23
Item 3 - Quantitative and Qualitative Disclosures About Market Risk.. 24
Item 4 - Controls and Procedures..................................... 24
PART II - OTHER INFORMATION
Item 5 - Other Information........................................... 25
Item 6 - Exhibits and Reports on Form 8-K............................ 25
Signature.............................................................. 26
Certifications......................................................... 26
Exhibit Index.......................................................... 28
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SITEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME (LOSS) (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- ---------------------------
2002 2001 2002 2001
(in thousands, except per share data)
REVENUES $ 190,670 $ 173,793 $ 580,449 $ 535,584
- -----------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES:
Direct labor and telecommunications expenses 107,360 97,811 330,027 299,977
Subcontracted and other services expenses 15,099 9,197 40,590 27,521
Operating, selling and administrative expenses 64,135 60,652 189,230 199,962
Asset impairment and restructuring expenses 1,444 2,397 1,444 26,185
- -----------------------------------------------------------------------------------------------------------------------
Total operating expenses 188,038 170,057 561,291 553,645
- -----------------------------------------------------------------------------------------------------------------------
OPERATING INCOME (LOSS) 2,632 3,736 19,158 (18,061)
- -----------------------------------------------------------------------------------------------------------------------
OTHER INCOME (EXPENSE):
Interest expense, net (2,781) (2,884) (8,317) (8,650)
Equity in earnings (loss) of subsidiary 1,119 (97) 2,466 (206)
Other expense, net (194) (954) (417) (2,317)
- -----------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES AND MINORITY INTEREST 776 (199) 12,890 (29,234)
Income tax expense (benefit) 303 5,166 5,027 (4,485)
Minority interest 456 524 1,597 751
- -----------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ 17 $ (5,889) $ 6,266 $ (25,500)
=======================================================================================================================
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic 74,224 73,933 74,221 73,268
Diluted 74,255 73,933 74,366 73,268
INCOME (LOSS) PER COMMON SHARE:
Basic $ 0.00 $ (0.08) $ 0.08 $ (0.35)
Diluted $ 0.00 $ (0.08) $ 0.08 $ (0.35)
See Notes to Consolidated Condensed Financial Statements.
1
PART I. FINANCIAL INFORMATION (CONTINUED)
ITEM 1. FINANCIAL STATEMENTS
SITEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------- --------------
(in thousands, except share data)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 26,131 $ 22,156
Trade accounts receivable (net of allowance
for doubtful accounts of
$4,477 and $5,208, respectively) 140,257 129,180
Prepaid expenses 8,360 6,200
Deferred income taxes 5,490 6,358
Other assets 7,953 7,133
- -----------------------------------------------------------------------------------------------
Total current assets 188,191 171,027
- -----------------------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT, NET 89,058 91,293
- -----------------------------------------------------------------------------------------------
OTHER ASSETS:
Goodwill, net 76,335 73,216
Deferred income taxes 10,136 9,398
Other assets 13,130 10,532
- -----------------------------------------------------------------------------------------------
TOTAL ASSETS $ 376,850 $ 355,466
===============================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 3,015 $ --
Current portion of capital lease obligations 1,274 2,366
Trade accounts payable 27,601 25,068
Income taxes payable 2,030 4,087
Deferred income taxes 643 717
Accrued wages, salaries and bonuses 33,456 26,014
Accrued operating expenses 33,375 34,953
Deferred revenue and other 6,459 5,145
- -----------------------------------------------------------------------------------------------
Total current liabilities 107,853 98,350
LONG-TERM DEBT AND OTHER LIABILITIES:
Long-term debt 100,000 100,000
Capital lease obligations, excluding current portion 6,783 7,040
Deferred compensation 1,684 1,755
Deferred income taxes 295 533
- -----------------------------------------------------------------------------------------------
Total liabilities 216,615 207,678
- -----------------------------------------------------------------------------------------------
MINORITY INTERESTS 7,711 7,748
- -----------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY:
Common stock, voting, $.001 par value 200,000,000
shares authorized, 74,357,431 and 74,357,579
shares issued and outstanding, respectively 74 74
Paid-in capital 168,712 168,731
Accumulated other comprehensive loss (19,937) (26,148)
Retained earnings (accumulated deficit) 3,874 (2,369)
Less treasury stock, at cost (199) (248)
- -----------------------------------------------------------------------------------------------
Total stockholders' equity 152,524 140,040
- -----------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 376,850 $ 355,466
===============================================================================================
See Notes to Consolidated Condensed Financial Statements.
2
PART I. FINANCIAL INFORMATION (CONTINUED)
ITEM 1. FINANCIAL STATEMENTS
SITEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------------
2002 2001
------------- -------------
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 6,266 $ (25,500)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Asset impairment and restructuring provision 1,444 26,185
Depreciation and amortization 25,564 30,326
Loss on disposal of assets 70 1,254
Write off of credit acquisition fees -- 837
Provision for deferred income taxes (182) (3,473)
Deferred compensation (350) (1,090)
Changes in operating assets and liabilities:
Trade accounts receivable (11,469) 13,424
Other assets (3,425) 4,976
Trade accounts payable 3,685 (1,364)
Other liabilities 4,686 (5,489)
- ------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 26,289 40,086
- ------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (23,388) (33,176)
Proceeds from sales of property and equipment 2,488 54
Increase in other assets (277) (1,564)
- ------------------------------------------------------------------------------------------------------
Net cash used in investing activities (21,177) (34,686)
- ------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of notes payable -- (302)
Borrowings on debt 36,930 73,372
Repayment of debt (33,915) (64,466)
Repayment of capital lease obligations (1,690) (3,212)
Common stock issued, net of expenses -- 97
Treasury stock (purchases) reissuances, net 49 (190)
Capital contributions from (distributions to)
minority interest (1,501) 537
Other 43 (62)
- ------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (84) 5,774
- ------------------------------------------------------------------------------------------------------
Effect of exchange rates on cash (1,053) 400
- ------------------------------------------------------------------------------------------------------
NET INCREASE IN CASH 3,975 11,574
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 22,156 19,897
- ------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 26,131 $ 31,471
======================================================================================================
See Notes to Consolidated Condensed Financial Statements.
3
SITEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
DESCRIPTION OF OUR BUSINESS
References in the Notes to Consolidated Financial Statements to "we" and "our"
are to SITEL Corporation and its subsidiaries, collectively.
We are a leading global provider of outsourced customer support services. We
specialize in the design, implementation, and operation of complex,
multi-channel contact centers. We support the Customer Relationship Management
(CRM) strategies of large corporations in North America, Europe, Asia Pacific,
and Latin America. We provide customer acquisition, customer care, technical
support and risk management services on an outsourced basis, as well as
operational and information technology professional services for both outsourced
and internal contact centers. We serve clients primarily in the consumer
products, financial services, insurance, telecommunications, technology, and
utilities industries.
USE OF ACCOUNTING ESTIMATES
Management makes estimates and assumptions when preparing financial statements
under accounting principles generally accepted in the United States of America
that affect:
o our reported amounts of assets and liabilities at the dates of the financial
statements,
o our disclosure of contingent assets and liabilities at the dates of the
financial statements, and
o our reported amounts of revenues and expenses during the reporting periods.
These estimates involve judgments with respect to, among other things, future
economic factors that are difficult to predict and are beyond management's
control. As a result, actual amounts could differ from these estimates.
QUARTERLY RESULTS AND SEASONALITY
We have experienced, and expect to continue to experience, quarterly variations
in our results of operations mostly due to:
o the timing of our clients' customer relationship management initiatives and
customer acquisition and loyalty campaigns,
o the commencement and terms of new contracts,
o revenue mix,
o the timing of additional operating, selling, and administrative expenses to
support new business, and
o the timing of recognition of incentive fees.
We experience periodic fluctuations in our results of operations related to both
the start-up costs associated with expansion and the implementation of clients'
CRM activities. In addition, our business generally tends to be slower in the
third quarter due to summer holidays in Europe, and in the first quarter due to
the changeover of client marketing strategies that often occurs at the beginning
of the year.
FINANCIAL STATEMENTS
Our Consolidated Condensed Balance Sheet at December 31, 2001 was obtained from
our audited balance sheet as of that date. All other financial statements
contained in this report are unaudited and, in the opinion of management,
contain all adjustments necessary for a fair presentation of the financial
position, operating results, and cash flows for the periods presented. These
adjustments are of a normal recurring nature.
You should read our consolidated condensed financial statements in this report
in conjunction with Management's Discussion and Analysis of Financial Condition
and Results of Operations, the Consolidated Financial Statements, and the Notes
to Consolidated Financial Statements in our Report on Form 10-K for the year
ended December 31, 2001.
GOODWILL, NET
In June 2001, the Financial Accounting Standards Board issued SFAS No. 142,
Goodwill and Other Intangible Assets. This statement:
o replaces the requirement to amortize goodwill and certain other intangible
assets with an annual impairment test, and
o requires an evaluation of the useful lives of intangible assets and an
impairment test for goodwill upon adoption.
We adopted the provisions of SFAS No. 142 as of January 1, 2002. As a result of
the adoption of this standard, we stopped amortizing our goodwill effective
January 1, 2002, which means that we have not recorded any goodwill amortization
expense in our Consolidated Statements of Income for the three and nine months
ended September 30, 2002 and we will not record such amortization in the
remainder of 2002 and in future years.
4
SITEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Total goodwill amortization expense was:
o $0.9 million for the three months ended September 30, 2001, and
o $2.6 million for the nine months ended September 30, 2001.
If we had adopted the provisions of SFAS No. 142 on January 1, 2001, we would
have had:
o a net loss of $5.0 million, or $0.07 per share, for the three months ended
September 30, 2001, and
o a net loss of $22.9 million, or $0.31 per share, for the nine months ended
September 30, 2001.
During 2002, we must perform a transitional goodwill impairment review in two
phases to determine if goodwill that was stated in our Consolidated Balance
Sheet at January 1, 2002 was impaired. During the second quarter of 2002, we
completed the first phase of the required impairment review, and determined that
the goodwill in certain reporting units was impaired at January 1, 2002. As a
result, we expect to record a pre-tax goodwill impairment loss in the range of
$12 million to $16 million as a cumulative effect of an accounting change in the
2002 financial statements. We will determine the exact amount of the goodwill
impairment loss upon completion of the second phase of the transitional
impairment review, which we must complete by December 31, 2002.
ASSET IMPAIRMENT
In October 2001, the Financial Accounting Standards Board issued SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets. We adopted the
provisions of SFAS No. 144 effective January 1, 2002. Under this standard, we
monitor events and changes in circumstances that may require us to review the
carrying value of our long-lived assets. We assess the recoverability of our
long-lived assets based on estimated undiscounted future operating cash flows.
Our assessment of the recoverability of our long-lived assets will be impacted
if estimated future operating cash flows are not achieved.
RECLASSIFICATIONS
We have reclassified certain prior-period amounts for comparative purposes.
These reclassifications did not affect consolidated net income for the periods
presented.
NOTE 2. COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) was:
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30 SEPTEMBER 30
- -----------------------------------------------------
(in millions)
2002 $ (1.2) $ 12.5
2001 $ (2.3) $ (31.2)
The difference between our reported net income (loss) and comprehensive income
(loss) for each period presented is the change in our foreign currency
translation adjustment. Accumulated other comprehensive income included in our
Consolidated Balance Sheets represents the accumulated foreign currency
translation adjustment.
NOTE 3. ASSET IMPAIRMENT AND RESTRUCTURING EXPENSES
In June 2001, we announced a restructuring plan designed to intensify our focus
on core competencies, accelerate revenue growth, and improve profitability. The
key components of the restructuring plan include several major organizational
changes and the streamlining of contact center operations and corporate support
services to improve effectiveness and drive revenue growth. As part of our
restructuring plan, we reduced fixed overhead to improve profitability by
substantially completing the following by December 31, 2001:
o eliminating approximately 350 operating, selling, and administrative
positions globally, and
o reducing excess capacity by closing nine contact centers plus three
administrative offices, and downsizing another five contact centers plus two
administrative offices, resulting in the elimination of approximately 2,100
workstations.
In connection with the restructuring, we recorded:
o $23.8 million of asset impairment and restructuring charges in the second
quarter of 2001, or $22.1 million after tax,
o $2.4 million of additional charges related to the plan in the third quarter of
2001, and
o $1.4 million of additional charges related to the plan in the third quarter of
2002, or $0.9 million after tax.
5
SITEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Approximately $18.3 million of these charges are liabilities that we have paid
or will pay in cash. At September 30, 2002, we had paid approximately $10.3
million of the liabilities of which $3.5 million was paid during the nine months
ended September 30, 2002. We have classified the remaining $8.0 million of
unpaid liabilities as accrued operating expenses in our September 30, 2002
Consolidated Balance Sheet. The charges also included $9.3 million of asset
write-downs that we recorded as a reduction of fixed assets.
We summarize the components of the restructuring charges that we recorded as
asset impairment and restructuring expenses in 2001 in the following table:
SECOND THIRD THIRD
QUARTER QUARTER QUARTER ADJUST- TOTAL
2001 2001 2002 MENTS EXPENSE
- -------------------------------------------------------------
(in millions)
Severance $ 5.3 $ 0.1 $ 0.1 $(0.4) $ 5.1
Facility closure
or reduction 9.1 1.3 1.3 0.6 12.3
Other 0.7 0.1 -- 0.1 0.9
- -------------------------------------------------------------
Subtotal 15.1 1.5 1.4 0.3 18.3
Asset
write-downs 8.7 0.9 -- (0.3) 9.3
- -------------------------------------------------------------
Total $23.8 $ 2.4 $ 1.4 $ -- $27.6
=============================================================
We summarize the components of the accrued operating expenses in our
Consolidated Balance Sheets in the following table:
ACCRUAL ACCRUAL
BALANCE EXPENSED PAID BALANCE
DECEMBER 31, IN IN ADJUST- SEPTEMBER 30,
2001 2002 2002 MENTS 2002
- -----------------------------------------------------------------------
(in millions)
Severance $ 0.9 $ 0.1 $(0.8) $ 0.1 $ 0.3
Facility closure
or reduction 8.5 1.3 (2.6) -- 7.2
Other 0.7 -- (0.1) (0.1) 0.5
- -----------------------------------------------------------------------
Total $10.1 $ 1.4 $(3.5) $ -- $ 8.0
=======================================================================
In July 2002, the Financial Accounting Standards Board issued SFAS No. 146,
Accounting for Costs Associated with Exit or Disposal Activities, which will
change the reporting for expenses related to restructurings initiated after
December 31, 2002.
NOTE 4. SUBSEQUENT EVENT
As a result of certain revisions in the governance of a joint venture, we will
report our investment in Mexico and Colombia using the equity method of
accounting, rather than the consolidation method, effective October 1, 2002.
Under the consolidation method, we combined the accounts of the joint venture
with our accounts, and we eliminated intercompany balances and transactions.
Under the equity method, we will report:
o our interest in the joint venture as an investment in our Consolidated Balance
Sheets, and
o our percentage share of the earnings from the joint venture in our
Consolidated Statements of Income.
As a result of this change, our consolidated revenues will no longer include the
revenues associated with the joint venture, but our earnings per share will not
be affected. The revenues from the joint venture are approximately $40 million
per year. Therefore, our fourth quarter of 2002 revenues will be impacted by
approximately $10 million.
NOTE 5. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION
Our 9.25% Senior Subordinated Notes are guaranteed, on a full, unconditional and
joint and several basis, by substantially all of our wholly owned domestic
subsidiaries. Separate financial statements for each of the guarantor
subsidiaries are not presented because they would not be material to investors.
However, on the following pages we have presented the following statements of
(a) SITEL Corporation, the parent, (b) the guarantor subsidiaries, (c) the
nonguarantor subsidiaries, and (d) SITEL Corporation on a consolidated basis:
o Condensed Consolidating Statements of Income (Loss) and Comprehensive Income
(Loss) for the three and nine month periods ended September 30, 2002 and
2001,
o Condensed Consolidating Balance Sheets at September 30, 2002 and December 31,
2001, and
o Condensed Consolidating Statements of Cash Flows for the nine months ended
September 30, 2002 and 2001.
6
SITEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NOTE 5. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF INCOME (LOSS)
AND COMPREHENSIVE INCOME (LOSS)
GUARANTOR NONGUARANTOR
Three Months Ended September 30, 2002 PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
- -----------------------------------------------------------------------------------------------------------------------
(in thousands)
REVENUES $ 90,645 $ 14,609 $ 86,771 $ (1,355) $ 190,670
- -----------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES:
Direct labor and telecommunications expenses 48,078 7,729 51,553 -- 107,360
Subcontracted and other services expenses 12,156 752 2,191 -- 15,099
Operating, selling and administrative expenses 30,276 3,468 31,746 (1,355) 64,135
Asset impairment and restructuring expenses 1,347 -- 97 -- 1,444
- -----------------------------------------------------------------------------------------------------------------------
Total operating expenses 91,857 11,949 85,587 (1,355) 188,038
- -----------------------------------------------------------------------------------------------------------------------
OPERATING INCOME (1,212) 2,660 1,184 -- 2,632
- -----------------------------------------------------------------------------------------------------------------------
OTHER INCOME (EXPENSE):
Interest expense, net (2,646) (24) (111) -- (2,781)
Equity in earnings (losses) of subsidiaries 1,549 (59) 1,119 (1,490) 1,119
Other income (expense), net (76) -- (118) -- (194)
- -----------------------------------------------------------------------------------------------------------------------
Total other income (expense) (1,173) (83) 890 (1,490) (1,856)
- -----------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES
AND MINORITY INTEREST (2,385) 2,577 2,074 (1,490) 776
Income tax expense (benefit) (2,402) 1,028 1,677 -- 303
Minority interest -- -- 456 -- 456
- -----------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ 17 $ 1,549 $ (59) $ (1,490) $ 17
=======================================================================================================================
Currency translation adjustment (1,242) (1,486) (1,373) 2,859 (1,242)
- -----------------------------------------------------------------------------------------------------------------------
COMPREHENSIVE INCOME (LOSS) $ (1,225) $ 63 $ (1,432) $ 1,369 $ (1,225)
=======================================================================================================================
7
SITEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NOTE 5. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF INCOME (LOSS)
AND COMPREHENSIVE INCOME (LOSS)
GUARANTOR NONGUARANTOR
Three Months Ended September 30, 2001 PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
- -----------------------------------------------------------------------------------------------------------------------
(in thousands)
REVENUES $ 92,617 $ 8,389 $ 73,453 $ (666) $ 173,793
- -----------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES:
Direct labor and telecommunications expenses 52,677 4,958 40,176 -- 97,811
Subcontracted and other services expenses 7,520 529 1,148 -- 9,197
Operating, selling and administrative expenses 29,844 2,621 28,853 (666) 60,652
Asset impairment and restructuring expenses (1,260) 25 3,632 -- 2,397
- ------------------------------------------------------------------------------------------------------------------------
Total operating expenses 88,781 8,133 73,809 (666) 170,057
- ------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME (LOSS) 3,836 256 (356) -- 3,736
- ------------------------------------------------------------------------------------------------------------------------
OTHER INCOME (EXPENSE):
Interest income (expense), net (2,668) 10 (226) -- (2,884)
Equity in earnings (losses) of subsidiaries (4,976) (5,138) (97) 10,114 (97)
Other income (expense), net (764) -- (190) -- (954)
- ------------------------------------------------------------------------------------------------------------------------
Total other income (expense) (8,408) (5,128) (513) 10,114 (3,935)
- ------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES
AND MINORITY INTEREST (4,572) (4,872) (869) 10,114 (199)
Income tax expense (benefit) 1,317 104 3,745 -- 5,166
Minority interest -- -- 524 -- 524
- ------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ (5,889) $ (4,976) $ (5,138) $ 10,114 $ (5,889)
========================================================================================================================
Currency translation adjustment 3,611 5,040 4,223 (9,263) 3,611
- ------------------------------------------------------------------------------------------------------------------------
COMPREHENSIVE INCOME (LOSS) $ (2,278) $ 64 $ (915) $ 851 $ (2,278)
========================================================================================================================
8
SITEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NOTE 5. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF INCOME (LOSS)
AND COMPREHENSIVE INCOME (LOSS)
GUARANTOR NONGUARANTOR
Nine Months Ended September 30, 2002 PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
- ------------------------------------------------------------------------------------------------------------------------
(in thousands)
REVENUES $ 290,149 $ 38,584 $255,004 $ (3,288) $ 580,449
- ------------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES:
Direct labor and telecommunications expenses 156,733 20,751 152,543 -- 330,027
Subcontracted and other services expenses 33,058 2,082 5,450 -- 40,590
Operating, selling and administrative expenses 91,524 9,616 91,378 (3,288) 189,230
Asset impairment and restructuring expenses 1,347 -- 97 -- 1,444
- ------------------------------------------------------------------------------------------------------------------------
Total operating expenses 282,662 32,449 249,468 (3,288) 561,291
- ------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME 7,487 6,135 5,536 -- 19,158
- ------------------------------------------------------------------------------------------------------------------------
OTHER INCOME (EXPENSE):
Interest expense, net (7,850) (163) (304) -- (8,317)
Equity in earnings (losses) of subsidiaries 4,989 1,346 2,466 (6,335) 2,466
Other income (expense), net (387) -- (30) -- (417)
- ------------------------------------------------------------------------------------------------------------------------
Total other income (expense) (3,248) 1,183 2,132 (6,335) (6,268)
- ------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES
AND MINORITY INTEREST 4,239 7,318 7,668 (6,335) 12,890
Income tax expense (benefit) (2,027) 2,329 4,725 -- 5,027
Minority interest -- -- 1,597 -- 1,597
- ------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ 6,266 $ 4,989 $ 1,346 $ (6,335) $ 6,266
========================================================================================================================
Currency translation adjustment 6,211 3,828 4,874 (8,702) 6,211
- ------------------------------------------------------------------------------------------------------------------------
COMPREHENSIVE INCOME (LOSS) $ 12,477 $ 8,817 $ 6,220 $(15,037) $ 12,477
========================================================================================================================
9
SITEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NOTE 5. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF INCOME (LOSS)
AND COMPREHENSIVE INCOME (LOSS)
GUARANTOR NONGUARANTOR
Nine Months Ended September 30, 2001 PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
- ------------------------------------------------------------------------------------------------------------------------
(in thousands)
REVENUES $ 291,619 $ 28,656 $216,769 $ (1,460) $ 535,584
- ------------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES:
Direct labor and telecommunications expenses 164,000 16,211 119,766 -- 299,977
Subcontracted and other services expenses 22,284 1,653 3,584 -- 27,521
Operating, selling and administrative expenses 96,747 8,673 96,002 (1,460) 199,962
Asset impairment and restructuring expenses 12,058 25 14,102 -- 26,185
- ------------------------------------------------------------------------------------------------------------------------
Total operating expenses 295,089 26,562 233,454 (1,460) 553,645
- ------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME (LOSS) (3,470) 2,094 (16,685) -- (18,061)
- ------------------------------------------------------------------------------------------------------------------------
OTHER INCOME (EXPENSE):
Interest expense, net (8,088) (89) (473) -- (8,650)
Equity in earnings (losses) of subsidiaries (23,162) (24,385) (206) 47,547 (206)
Other income (expense), net (737) -- (1,580) -- (2,317)
- ------------------------------------------------------------------------------------------------------------------------
Total other income (expense) (31,987) (24,474) (2,259) 47,547 (11,173)
- ------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES
AND MINORITY INTEREST (35,457) (22,380) (18,944) 47,547 (29,234)
Income tax expense (benefit) (9,957) 782 4,690 -- (4,485)
Minority interest -- -- 751 -- 751
- ------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ (25,500) $ (23,162) $(24,385) $ 47,547 $ (25,500)
========================================================================================================================
Currency translation adjustment (5,707) (4,209) (5,286) 9,495 (5,707)
- ------------------------------------------------------------------------------------------------------------------------
COMPREHENSIVE INCOME (LOSS) $ (31,207) $ (27,371) $(29,671) $ 57,042 $ (31,207)
========================================================================================================================
10
SITEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NOTE 5. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEET
GUARANTOR NONGUARANTOR
At September 30, 2002 PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
- ------------------------------------------------------------------------------------------------------------------------
(in thousands)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 14,717 $ 3,328 $ 8,086 $ -- $ 26,131
Trade accounts receivable, net 95,162 5,785 63,872 (24,562) 140,257
Prepaid expenses and other
current assets 6,173 46 15,584 -- 21,803
- ------------------------------------------------------------------------------------------------------------------------
Total current assets 116,052 9,159 87,542 (24,562) 188,191
- ------------------------------------------------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT, NET 28,211 4,651 56,196 -- 89,058
- ------------------------------------------------------------------------------------------------------------------------
OTHER ASSETS:
Goodwill, net 19,577 -- 56,758 -- 76,335
Deferred income taxes 6,100 -- 4,036 -- 10,136
Other assets 7,133 72 5,925 -- 13,130
Investments in subsidiaries 131,009 107,777 -- (238,786) --
Notes receivable, intercompany -- 14,019 11,992 (26,011) --
- ------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 308,082 $ 135,678 $222,449 $ (289,359) $ 376,850
========================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ -- $ -- $ 3,015 $ -- $ 3,015
Current portion of capital
lease obligations 920 -- 354 -- 1,274
Trade accounts payable 12,196 2,056 37,911 (24,562) 27,601
Accrued expenses and other
current liabilities 28,028 2,613 45,322 -- 75,963
- ------------------------------------------------------------------------------------------------------------------------
Total current liabilities 41,144 4,669 86,602 (24,562) 107,853
LONG-TERM DEBT AND OTHER LIABILITIES:
Long-term debt 100,000 -- -- -- 100,000
Capital lease obligations,
excluding current portion 738 -- 6,045 -- 6,783
Notes payable, intercompany 11,992 -- 14,019 (26,011) --
Deferred compensation 1,684 -- -- -- 1,684
Deferred income taxes -- -- 295 -- 295
- ------------------------------------------------------------------------------------------------------------------------
Total liabilities 155,558 4,669 106,961 (50,573) 216,615
- ------------------------------------------------------------------------------------------------------------------------
MINORITY INTERESTS -- -- 7,711 -- 7,711
- ------------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY 152,524 131,009 107,777 (238,786) 152,524
- ------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 308,082 $ 135,678 $222,449 $ (289,359) $ 376,850
========================================================================================================================
11
SITEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NOTE 5. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEET
GUARANTOR NONGUARANTOR
At December 31, 2001 PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
- ------------------------------------------------------------------------------------------------------------------------
(in thousands)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 6,814 $ 2,202 $ 13,140 $ -- $ 22,156
Trade accounts receivable, net 90,744 4,061 54,466 (20,091) 129,180
Prepaid expenses and other
current assets 8,237 13 11,441 -- 19,691
- ------------------------------------------------------------------------------------------------------------------------
Total current assets 105,795 6,276 79,047 (20,091) 171,027
- ------------------------------------------------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT, NET 31,729 2,266 57,298 -- 91,293
- ------------------------------------------------------------------------------------------------------------------------
OTHER ASSETS:
Goodwill, net 19,576 -- 53,640 -- 73,216
Deferred income taxes 6,099 -- 3,299 -- 9,398
Other assets 7,771 72 2,689 -- 10,532
Investments in subsidiaries 120,230 102,763 -- (222,993) --
Notes receivable, intercompany -- 14,086 10,804 (24,890) --
- ------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 291,200 $ 125,463 $206,777 $ (267,974) $ 355,466
========================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of capital
lease obligations $ 1,668 $ -- $ 698 $ -- $ 2,366
Trade accounts payable 5,176 3,745 36,238 (20,091) 25,068
Accrued expenses and other
current liabilities 30,345 1,488 39,083 -- 70,916
- ------------------------------------------------------------------------------------------------------------------------
Total current liabilities 37,189 5,233 76,019 (20,091) 98,350
LONG-TERM DEBT AND OTHER LIABILITIES:
Long-term debt 100,000 -- -- -- 100,000
Capital lease obligations,
excluding current portion 1,412 -- 5,628 -- 7,040
Notes payable, intercompany 10,804 -- 14,086 (24,890) --
Deferred compensation 1,755 -- -- -- 1,755
Deferred income taxes -- -- 533 -- 533
- ------------------------------------------------------------------------------------------------------------------------
Total liabilities 151,160 5,233 96,266 (44,981) 207,678
- ------------------------------------------------------------------------------------------------------------------------
MINORITY INTERESTS -- -- 7,748 -- 7,748
- ------------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY 140,040 120,230 102,763 (222,993) 140,040
- ------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 291,200 $ 125,463 $206,777 $ (267,974) $ 355,466
========================================================================================================================
12
SITEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NOTE 5. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
GUARANTOR NONGUARANTOR
Nine Months Ended September 30, 2002 PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
- ------------------------------------------------------------------------------------------------------------------------
(in thousands)
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES $ 17,285 $ (7,232) $ 16,236 $ -- $ 26,289
- ------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments in subsidiaries 29 8,387 -- (8,416) --
Purchases of property and equipment (8,909) -- (14,479) -- (23,388)
Proceeds from sales of property and equipment -- -- 2,488 -- 2,488
Increase in other assets (281) -- 4 -- (277)
- ------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in)
investing activities (9,161) 8,387 (11,987) (8,416) (21,177)
- ------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on debt 31,750 -- 5,180 -- 36,930
Repayment of debt (31,750) -- (2,165) -- (33,915)
Repayment of capital lease obligations (1,419) -- (271) -- (1,690)
Net capital contribution from parent -- (29) (8,387) 8,416 --
Net borrowings and payments on
intercompany balances 2,193 -- (2,193) -- --
Treasury stock (purchases) reissuances, net 49 -- -- -- 49
Capital distributions to minority interest -- -- (1,501) -- (1,501)
Other -- -- 43 -- 43
- ------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 823 (29) (9,294) 8,416 (84)
- ------------------------------------------------------------------------------------------------------------------------
Effect of exchange rates on cash (1,044) -- (9) -- (1,053)
- ------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH 7,903 1,126 (5,054) -- 3,975
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 6,814 2,202 13,140 -- 22,156
- ------------------------------------------------------------------------------------------------------------------------
CASH AND EQUIVALENTS, END OF PERIOD $ 14,717 $ 3,328 $ 8,086 $ -- $ 26,131
========================================================================================================================
13
SITEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NOTE 5. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
GUARANTOR NONGUARANTOR
Nine Months Ended September 30, 2001 PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
- ------------------------------------------------------------------------------------------------------------------------
(in thousands)
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 18,447 $ 10,461 $ 11,178 $ -- $ 40,086
- ------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments in subsidiaries 3,025 (6,663) -- 3,638 --
Purchases of property and equipment (5,853) (245) (27,078) -- (33,176)
Proceeds from sales of property and equipment 14 -- 40 -- 54
Increase in other assets (141) -- (1,423) -- (1,564)
- ------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in)
investing activities (2,955) (6,908) (28,461) 3,638 (34,686)
- ------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of notes payable -- -- (302) -- (302)
Borrowings on debt 52,500 -- 20,872 -- 73,372
Repayment of debt (52,500) -- (11,966) -- (64,466)
Repayment of capital lease obligations (1,919) -- (1,293) -- (3,212)
Net capital contribution from parent -- (3,025) 6,663 (3,638) --
Net borrowings and payments on
intercompany balances (3,497) -- 3,497 -- --
Common stock issued, net of expenses 97 -- -- -- 97
Treasury stock (purchases) reissuances, net (190) -- -- -- (190)
Capital contributions from minority interest -- -- 537 -- 537
Other 2 -- (64) -- (62)
- ------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in)
financing activities (5,507) (3,025) 17,944 (3,638) 5,774
- ------------------------------------------------------------------------------------------------------------------------
Effect of exchange rates on cash -- -- 400 -- 400
- ------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH 9,985 528 1,061 -- 11,574
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 3,932 1,730 14,235 -- 19,897
- ------------------------------------------------------------------------------------------------------------------------
CASH AND EQUIVALENTS, END OF PERIOD $ 13,917 $ 2,258 $ 15,296 $ -- $ 31,471
========================================================================================================================
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
References in this report to "we" and "our" are to SITEL Corporation and its
subsidiaries, collectively.
We are a leading global provider of outsourced customer support services. We
specialize in the design, implementation, and operation of complex,
multi-channel contact centers. We support the Customer Relationship Management
(CRM) strategies of large corporations in North America, Europe, Asia Pacific,
and Latin America. We provide customer acquisition, customer care, technical
support and risk management services on an outsourced basis, as well as
professional services for both outsourced and internal contact centers. We serve
clients primarily in the consumer products, financial services, insurance,
telecommunications, technology, and utilities industries.
In Management's Discussion and Analysis, we provide information about our
general business risks, critical accounting policies and estimates, results of
operations, financial condition and liquidity, and certain other matters
affecting our operating results for the periods covered by this report.
As you read this discussion and analysis, refer to our Consolidated Statements
of Income (Loss), which present the results of our operations for the three and
nine months ended September 30, 2002 and 2001, and are summarized on the
following pages. We analyze and explain the differences between periods for the
components of net income (loss) in the following sections. Our analysis is
important in making decisions about your investment in SITEL Corporation.
- --------------------------------------------------------------------------------
GENERAL BUSINESS RISKS, CRITICAL ACCOUNTING POLICIES AND ESTIMATES
GENERAL BUSINESS RISKS
- ----------------------
Our business success depends on our ability to efficiently deploy our human and
capital resources in the delivery of services to our clients. Consequently, the
needs of our clients may significantly impact our results of operations,
financial condition, and liquidity.
Our results of operations and operating cash flows may vary with periodic wins
and losses of client contracts and with changes in the scope of client
requirements. Our top 20 clients accounted for 67.9% of our revenues for the
nine months ended September 30, 2002, and include three independently managed
business units of General Motors Corporation. These General Motors business
units were responsible for 23.3% of our total revenues for the nine months ended
September 30, 2002. We did not have any other clients under common control that
generated more than 10% of our revenues. The financial failure of any of our
significant clients or the loss of any or all of their business could have an
adverse impact on our operating results.
Our liquidity, including our ability to comply with restrictive debt covenants,
may be adversely affected if we were to lose a significant client or as a result
of significant changes in client demand if we are unable to efficiently
re-deploy our human and capital resources.
In the following sections, we also discuss the importance of our critical
accounting policies and the use of accounting estimates, and their potential
impacts on our results of operations.
CRITICAL ACCOUNTING POLICIES
- ----------------------------
Our significant accounting policies and practices are described in Note 1 to the
Consolidated Financial Statements, which are included in our Form 10-K for the
year ended December 31, 2001. Of those policies, we have identified the
following to be critical accounting policies because they are the most important
to the portrayal of our results of operations and financial condition, and they
require management's most difficult, subjective, or complex judgments:
o estimates of uncollectible trade accounts receivable to determine an allowance
for doubtful accounts,
o estimates of the useful lives for property and equipment,
o estimates of the fair values of our reporting units to determine goodwill
impairment, and
o estimates of future taxable income that is required to support the carrying
value of deferred tax assets and estimates of the related valuation allowance.
15
TRADE ACCOUNTS RECEIVABLE
We report our trade accounts receivable net of an allowance for doubtful
accounts, which represents management's estimates of the amount of our
receivables that may not be collectible, net of recoveries of amounts previously
written off. These estimates are based on a detailed aging analysis of accounts
receivable, historical bad debts, client credit-worthiness, and changes in our
client payment terms.
The financial condition of our clients may deteriorate, which may require us to
increase our allowance for doubtful accounts. We would record an increase in the
allowance for doubtful accounts as operating, selling and administrative expense
in our Consolidated Statements of Income (Loss), which would reduce our results
of operations. Our accounts receivable balance at September 30, 2002 was $140.3
million, net of an allowance for doubtful accounts of $4.5 million.
PROPERTY AND EQUIPMENT
We record property and equipment at cost, and calculate depreciation using the
straight-line method over the estimated useful lives of the assets, which range
from 3 to 20 years. We amortize leasehold improvements and assets under capital
leases on a straight-line basis over the shorter of the lease term or the
estimated useful life of the asset.
In October 2001, the Financial Accounting Standards Board issued SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets. We adopted the
provisions of SFAS No. 144 effective January 1, 2002. Under this standard, we
monitor events and changes in circumstances that may require us to review the
carrying value of our long-lived assets. We assess the recoverability of our
long-lived assets based on estimated undiscounted future operating cash flows.
Our assessment of the recoverability of our long-lived assets will be impacted
if estimated future operating cash flows are not achieved.
GOODWILL
Goodwill represents the difference between the purchase price we paid in
acquisitions, using the purchase method of accounting, and the fair value of the
net assets we acquired. Goodwill as of September 30, 2002 was $76.3 million, net
of accumulated amortization of $19.9 million.
In June 2001, the Financial Accounting Standards Board issued SFAS No. 142,
Goodwill and Other Intangible Assets. This statement:
o replaces the requirement to amortize goodwill and certain other intangible
assets with an annual impairment test, and
o requires an evaluation of the useful lives of intangible assets and an
impairment test for goodwill upon adoption.
We adopted the provisions of SFAS No. 142 as of January 1, 2002. As a result of
the adoption of this standard, we stopped amortizing our goodwill effective
January 1, 2002, which means that we have not recorded any goodwill amortization
expense in our Consolidated Statements of Income for the three and nine months
ended September 30, 2002 and we will not record such amortization in the
remainder of 2002 and in future years.
Total goodwill amortization expense was:
o $0.9 million for the three months ended September 30, 2001, and
o $2.6 million for the nine months ended September 30, 2001.
If we had adopted the provisions of SFAS No. 142 on January 1, 2001, we would
have had:
o a net loss of $5.0 million, or $0.07 per share, for the three months ended
September 30, 2001, and
o a net loss of $22.9 million, or $0.31 per share, for the nine months ended
September 30, 2001.
During 2002, we must perform a transitional goodwill impairment review in two
phases to determine if goodwill that was stated in our Consolidated Balance
Sheet at January 1, 2002 was impaired. During the second quarter of 2002, we
completed the first phase of the required impairment review, and determined that
the goodwill in certain reporting units was impaired at January 1, 2002. As a
result, we expect to record a pre-tax goodwill impairment loss in the range of
$12 million to $16 million as a cumulative effect of an accounting change in the
2002 financial statements. We will determine the exact amount of the goodwill
impairment loss upon completion of the second phase of the transitional
impairment review, which we must complete by December 31, 2002.
DEFERRED INCOME TAXES
We must report some of our revenues and expenses differently for our financial
statements than we do for income tax purposes. The future tax effects of the
differences in these items, as well as operating loss and tax credit
carryforwards, are reported as deferred tax assets or liabilities in our
Consolidated Balance Sheets.
We assess the likelihood that our deferred tax assets will be recovered from
future estimated taxable income. To the extent we believe that recovery is not
likely, we establish valuation allowances to reduce the deferred tax assets to
the amount that is more likely than not to be realized. The net deferred tax
asset as of September 30, 2002 was $14.7 million, net of a valuation allowance
of $41.2 million.
16
Significant management judgment is required in determining any valuation
allowance recorded against our deferred tax assets. We have recorded a valuation
allowance of $41.2 million as of September 30, 2002, due to uncertainties
related to our ability to utilize some of our deferred tax assets before they
expire. These assets consist of tax amortization in excess of book amortization
related to the acquisition of a business and certain net operating losses and
foreign tax credits carried forward. The valuation allowance is based on our
estimates of future taxable income by jurisdiction in which we operate and the
period over which our deferred tax assets can be recovered. In the event that
actual results differ from these estimates or we revise these estimates in
future periods, we may need to adjust the valuation allowance which could
materially impact our financial position and results of operations.
USE OF ACCOUNTING ESTIMATES
- ---------------------------
Management makes estimates and assumptions when preparing financial statements
under accounting principles generally accepted in the United States of America
that affect:
o our reported amounts of assets and liabilities at the dates of the financial
statements,
o our disclosure of contingent assets and liabilities at the dates of the
financial statements, and
o our reported amounts of revenues and expenses during the reporting periods.
These estimates involve judgments with respect to, among other things, future
economic factors that are difficult to predict and are beyond management's
control. As a result, actual amounts could differ from these estimates.
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30,
2002 COMPARED WITH THE SAME PERIODS OF 2001
In this section, we discuss our operating results and the factors affecting
them. We begin with a general overview, then separately discuss the components
of net income (loss) in more detail. We describe our general business risks,
critical accounting policies, and estimates that are important to our operating
results on the previous pages. Please refer to that discussion as you read this
section.
OVERVIEW
- --------
We summarize our net income (loss) and net income (loss) per common share -
diluted, and the impacts of special items, in the following tables:
NET INCOME (LOSS) NET INCOME (LOSS) PER COMMON SHARE-DILUTED
THREE MONTHS NINE MONTHS THREE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
------------- ------------- ------------- ----------------
2002 2001 2002 2001 2002 2001 2002 2001
- -------------------------------------------------------- ---------------------------------------------------------
(in millions)
Net income, Net income per share,
before special items $ 0.9 $ 2.0 $ 7.2 $ 0.6 before special items $ 0.01 $ 0.03 $ 0.09 $ 0.01
Asset impairment and Asset impairment and
restructuring expenses, restructuring expenses,
net of tax (0.9) (2.4) (0.9) (24.6) net of tax (0.01) (0.04) (0.01) (0.33)
Losses on disposals Losses on disposals
of fixed assets, of fixed assets,
net of tax -- -- -- (0.8) net of tax -- -- -- (0.01)
Write-off of credit Write-off of credit
acquisition costs -- (0.8) -- (0.8) acquisition costs -- (0.01) -- (0.01)
Valuation allowance Valuation allowance on
on deferred tax assets -- -- -- (3.3) deferred tax assets -- -- -- (0.05)
Goodwill amortization Goodwill amortization
expense, net of tax -- (0.9) -- (2.6) expense, net of tax -- (0.01) -- (0.04)
Tax benefit expected to Tax benefit expected
to be realized in to be realized in
future years -- (3.8) -- 6.0 future years -- (0.05) -- 0.08
- -------------------------------------------------------- ---------------------------------------------------------
Net income (loss)
Net income (loss) $ 0.0 $ (5.9) $ 6.3 $ (25.5) per share $0.00 $(0.08) $ 0.08 $ (0.35)
======================================================== =========================================================
17
THREE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO THE SAME PERIOD OF 2001
We broke even in the third quarter of 2002, compared to a net loss of $5.9
million, or ($0.08) per share, in the third quarter of 2001.
Excluding the special items noted in the tables on the previous page from both
years, we had net income of $0.9 million, or $0.01 per share, in the third
quarter of 2002 compared to net income of $2.0 million, or $0.03 per share, in
the third quarter of 2001. Net income decreased mostly due to increases in
direct labor and subcontracted and other services expenses as a percentage of
revenues.
We describe the factors affecting our third quarter operating results in more
detail in the following section.
NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO THE SAME PERIOD OF 2001
We had net income of $6.3 million, or $0.08 per share, in the nine months ended
September 30, 2002, compared to a net loss of $25.5 million, or ($0.35) per
share, in the same period of 2001.
Excluding the special items noted in the tables on the previous page from both
years, we had net income of $7.2 million, or $0.09 per share, in the first nine
months of 2002 compared to net income of $0.6 million, or $0.01 per share, in
the first nine months of 2001. Net income increased mostly due to an 8.4%
increase in revenues and lower operating, selling and administrative expenses,
offset partially by increases in direct labor and telecommunications expenses
and subcontracted and other services expenses as a percentage of revenues.
We describe the factors affecting our nine-month operating results in more
detail in the following section.
- --------------------------------------------------------------------------------
COMPONENTS OF NET INCOME (LOSS)
- -------------------------------
The following table summarizes our income statement data on a
percentage-of-revenue basis.
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------------- ---------------------------------------
2002 2001 2002 2001
----------------- ----------------- ----------------- ------------------
$ % $ % $ % $ %
-------- ------ -------- ------ -------- ------- --------- -------
(in thousands)
REVENUES $190,670 100.0% $173,793 100.0% $580,449 100.0% $ 535,584 100.0%
- ----------------------------------------------------------------------------------------------------------------------------
Direct labor and
telecommunications expenses 107,360 56.3% 97,811 56.3% 330,027 56.9% 299,977 56.0%
Subcontracted and
other services expenses 15,099 7.9% 9,197 5.3% 40,590 7.0% 27,521 5.2%
Operating, selling and
administrative expenses 64,135 33.6% 60,652 34.9% 189,230 32.6% 199,962 37.3%
Asset impairment and
restructuring expenses 1,444 0.8% 2,397 1.4% 1,444 0.2% 26,185 4.9%
- ----------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME (LOSS) 2,632 1.4% 3,736 2.1% 19,158 3.3% (18,061) (3.4%)
Interest expense, net (2,781) (1.5%) (2,884) (1.6%) (8,317) (1.4%) (8,650) (1.6%)
Equity in earnings (loss)
of subsidiary 1,119 0.6% (97) -- 2,466 0.4% (206) --
Other expense, net (194) (0.1%) (954) (0.6%) (417) (0.1%) (2,317) (0.5%)
- ----------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME
TAXES AND MINORITY INTEREST 776 0.4% (199) (0.1%) 12,890 2.2% (29,234) (5.5%)
Income tax expense (benefit) 303 0.2% 5,166 3.0% 5,027 0.8% (4,485) (0.8%)
Minority interest 456 0.2% 524 0.3% 1,597 0.3% 751 0.1%
- ----------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 17 0.0% $ (5,889) (3.4%) $ 6,266 1.1% $ (25,500) (4.8%)
============================================================================================================================
18
THREE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO THE SAME PERIOD OF 2001
REVENUES
Revenues increased $16.9 million, or 9.7%, in the third quarter of 2002 compared
to the same period of 2001. The changes in revenues by geographic region are
shown in the following table:
Three Months
Ended $ %
September 30, 2002 2001 Change Change
- -----------------------------------------------------------
(in millions)
North America $ 118.0 $ 113.3 $ 4.7 4.1%
Europe 52.7 44.9 7.8 17.4%
Asia Pacific 6.9 4.4 2.5 56.8%
Latin America 13.1 11.2 1.9 17.0%
- -----------------------------------------------------------
Totals $ 190.7 $ 173.8 $ 16.9 9.7%
- -----------------------------------------------------------
The increase in Europe revenues was due mostly to the strength of the Euro and
British pound versus the U.S. dollar, which accounted for about $4.5 million, or
58%, of this increase and to new work we performed for existing and new clients
in the United Kingdom. The increase in North America revenues was mostly due to
new work performed by our risk management business.
As a result of certain revisions in the governance of a joint venture, we will
report our investment in Mexico and Colombia using the equity method of
accounting, rather than the consolidation method, effective October 1, 2002. As
a result of this change, our Latin America revenues will no longer include the
revenues associated with the joint venture, which amount to approximately $40
million per year. Therefore, our fourth quarter of 2002 revenues will be
impacted by approximately $10 million.
DIRECT LABOR AND TELECOMMUNICATIONS EXPENSES
Direct labor and telecommunications expenses include the compensation of our
customer service professionals and their first line supervisors and telephone
usage expenses directly related to the production of revenues.
Direct labor and telecommunications expenses as a percentage of revenues can
vary based on the nature of the contract, the nature of the work, and the market
in which the services are provided. Accordingly, direct labor and
telecommunications expenses as a percentage of revenues can vary, sometimes
significantly, from period to period.
Direct labor and telecommunications expenses increased $9.5 million, or 9.8%, in
the third quarter of 2002 compared to the same period of 2001. This increase is
attributable to the increase in revenues. As a percentage of revenues, direct
labor and telecommunications expenses were the same in the third quarter of 2002
as they were in the same period of 2001. However, as we discuss in the following
section, we subcontract certain client services to our India joint venture. We
do not incur direct labor and telecommunication expenses for these subcontracted
services, as such costs are incurred by the joint venture. Excluding the
revenues we have recorded from clients where we have subcontracted the services
to our India joint venture, direct labor and telecommunications expenses as a
percentage of revenues increased from 56.3% in the third quarter of 2001 to
57.9% in the third quarter of 2002, primarily due to lower unit prices from our
clients.
SUBCONTRACTED AND OTHER SERVICES EXPENSES
Subcontracted and other services expenses include services provided to clients
through subcontractors and through our India joint venture, and other
out-of-pocket expenses. Subcontracted and other services expenses increased $5.9
million, or 64.2%, in the third quarter of 2002 compared to the same period of
2001. The increase in these expenses was mostly due to subcontracted expenses
paid to our India joint venture as we began serving clients from that facility
during the third quarter of 2001.
OPERATING, SELLING AND ADMINISTRATIVE EXPENSES
Operating, selling and administrative expenses represent expenses incurred to
directly support and manage the business, including costs of management,
administration, technology, facilities, depreciation and amortization,
maintenance, sales and marketing, and client support services.
Operating, selling and administrative expenses increased $3.5 million, or 5.7%,
in the third quarter of 2002 compared to the same period of 2001. Excluding
goodwill amortization expense of $0.9 million from the third quarter of 2001,
operating, selling and administrative expenses increased $4.4 million, or 7.4%.
The increases in these expenses were mostly due to growth in our risk management
and Asia Pacific business units in addition to a stronger Euro and British
pound. As a percentage of revenues, operating, selling and administrative
expenses decreased from 34.4% in the third quarter of 2001, excluding goodwill
amortization expense, to 33.6% in the third quarter of 2002.
ASSET IMPAIRMENT AND RESTRUCTURING EXPENSES
In June 2001, we announced a restructuring plan designed to intensify our focus
on core competencies, accelerate revenue growth, and improve profitability. The
key components of the restructuring plan include several major organizational
changes and the streamlining of contact center operations and corporate support
services to improve effectiveness and drive revenue growth.
19
As part of our restructuring plan, we reduced fixed overhead to improve
profitability by substantially completing the following by December 31, 2001:
o eliminating approximately 350 operating, selling, and administrative positions
globally, and
o reducing excess capacity by closing nine contact centers plus three
administrative offices, and downsizing another five contact centers plus two
administrative offices, resulting in the elimination of approximately 2,100
workstations.
In connection with this restructuring, we recorded:
o $23.8 million of asset impairment and restructuring charges in the second
quarter of 2001, or $22.1 million after tax,
o $2.4 million of additional charges related to the plan in the third quarter of
2001, and
o $1.4 million of additional charges related to the plan in the third quarter of
2002, or $0.9 million after tax.
OPERATING INCOME (LOSS)
We had operating income of $2.6 million in the third quarter of 2002, compared
to operating income of $3.7 million in the same period of 2001. Excluding asset
impairment and restructuring expenses from both years and goodwill amortization
expense from the third quarter of 2001, operating income decreased $3.0 million
from $7.1 million in the third quarter of 2001 to $4.1 million in the third
quarter of 2002. As a percentage of revenues, we had operating income of 4.1% in
the third quarter of 2001, excluding asset impairment and restructuring expenses
and goodwill amortization expense, compared to operating income of 2.1% in the
third quarter of 2002. This change resulted from all of the factors affecting
revenues and expenses discussed above.
INTEREST EXPENSE, NET
Interest expense, net of interest income, was about the same in the third
quarter of 2002 as it was in the same period of 2001.
EQUITY IN EARNINGS (LOSS) OF SUBSIDIARY
Equity in earnings (loss) of subsidiary represents our percentage share of the
earnings (loss) from our investment in a joint venture in India. Equity in
earnings (loss) of subsidiary increased $1.2 million in the third quarter of
2002 compared to the same period of 2001 as we began serving clients from the
India facility in the third quarter of 2001.
OTHER EXPENSE, NET
Other expense, net of other income, decreased $0.8 million in the third quarter
of 2002 compared to the same period of 2001 because we wrote off $0.8 million of
credit acquisition costs in the third quarter of 2001 in connection with the
amendment of our credit facility in August 2001.
INCOME TAX EXPENSE (BENEFIT)
We recorded income tax expense of $0.3 million in the third quarter of 2002
compared to income tax expense of $5.2 million in the third quarter of 2001. The
third quarter 2001 reflects a $3.8 million deferred income tax expense we
recorded to increase the valuation allowance on the deferred tax asset we
recorded in the first quarter that resulted from an election to treat certain of
our foreign operations as branches of our U.S. company for U.S. income tax
purposes. We increased the valuation allowance to reflect Management's best
estimate of the likely recovery of our deferred tax assets.
Our third quarter 2002 income tax expense as a percentage of income before
income taxes and minority interest was 39%. The difference between this rate and
the statutory U.S. Federal rate of 34% was primarily due to net operating losses
in certain non-U.S. subsidiaries for which no tax benefit was recognized, and
U.S. state and local income taxes.
NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO THE SAME PERIOD OF 2001
REVENUES
Revenues increased $44.9 million, or 8.4%, in the nine months ended September
30, 2002 compared to the same period of 2001. The changes in revenues by
geographic region are shown in the following table:
Nine Months
Ended $ %
September 30, 2002 2001 Change Change
- --------------------------------------------------------
(in millions)
North America $ 366.2 $ 343.9 $ 22.3 6.5%
Europe 150.4 146.2 4.2 2.9%
Asia Pacific 20.8 16.8 4.0 23.8%
Latin America 43.1 28.7 14.4 49.8%
- --------------------------------------------------------
Totals $ 580.5 $ 535.6 $ 44.9 8.4%
========================================================
The increase in North America revenues was mostly due to additional customer
care services we provided to a number of our large global clients, which was
partially offset by a reduction in technical support services, and to new work
performed by our risk management business. The increase in Latin America
revenues was due mostly to new work we performed for clients in Mexico and to
revenues from our Panama site, as we began serving clients from that facility
during the fourth quarter of 2001.
As a result of certain revisions in the governance of a joint venture, we will
report our investment in Mexico and Colombia using the equity method of
accounting,
20
rather than the consolidation method, effective October 1, 2002. As a result of
this change, our Latin America revenues will no longer include the revenues
associated with the joint venture, which amount to approximately $40 million per
year. Therefore, our fourth quarter of 2002 revenues will be impacted by
approximately $10 million.
DIRECT LABOR AND TELECOMMUNICATIONS EXPENSES
Direct labor and telecommunications expenses increased $30.1 million, or 10.0%,
in the nine months ended September 30, 2002 compared to the same period of 2001.
As a percentage of revenues, direct labor and telecommunications expenses
increased from 56.0% in the nine months ended September 30, 2001 to 56.9% in the
nine months ended September 30, 2002.
However, as discussed earlier, we subcontract certain client services to our
India joint venture. We do not incur direct labor and telecommunication expenses
for these subcontracted services, as such costs are incurred by the joint
venture. Excluding the revenues we have recorded from clients where we have
subcontracted the services to our India joint venture, direct labor and
telecommunications expenses as a percentage of revenues increased from 56.0% in
the nine months ended September 30, 2001 to 58.0% in the nine months ended
September 30, 2002, primarily due to lower unit prices from our clients.
SUBCONTRACTED AND OTHER SERVICES EXPENSES
Subcontracted and other services expenses increased $13.1 million, or 47.5%, in
the nine months ended September 30, 2002 compared to the same period of 2001.
The increase in these expenses was mostly due to subcontracted expenses paid to
our India joint venture as we began serving clients from that facility during
the third quarter of 2001.
OPERATING, SELLING AND ADMINISTRATIVE EXPENSES
Operating, selling and administrative expenses decreased $10.7 million, or 5.4%,
in the nine months ended September 30, 2002 compared to the same period of 2001.
Excluding goodwill amortization expense of $2.8 million from the nine months
ended September 30, 2001, operating, selling and administrative expenses
decreased $8.0 million, or 4.0%. The decline in these expenses was mostly due to
our restructuring plan that began at the end of the third quarter of 2001,
partially offset by the ramp up of new customer programs in Europe in the third
quarter of 2002. As a percentage of revenues, operating, selling and
administrative expenses decreased from 36.8% in the nine months ended September
30, 2001, excluding goodwill amortization expense, to 32.6% in the nine months
ended September 30, 2002.
ASSET IMPAIRMENT AND RESTRUCTURING EXPENSES
In the second quarter of 2001, we recorded $23.8 million of asset impairment and
restructuring charges, or $22.1 million net of tax, related to the restructuring
plan we announced in June 2001 as described above. In the third quarter of 2001,
we recorded $2.4 million of additional charges related to the plan. In the third
quarter of 2002, we recorded $1.4 million of additional charges related to the
plan, or $0.9 million net of tax.
OPERATING INCOME (LOSS)
We had operating income of $19.2 million in the nine months ended September 30,
2002, compared to an operating loss of $18.1 million in the same period of 2001.
Excluding asset impairment and restructuring expenses in both years and goodwill
amortization expense from the nine months ended September 30, 2001, operating
income increased $9.7 million from $10.9 million in the nine months ended
September 30, 2001 to $20.6 million in the nine months ended September 30, 2002.
As a percentage of revenues, operating income increased from 2.0% in the nine
months ended September 30, 2001, excluding asset impairment and restructuring
expenses and goodwill amortization expense, to 3.5% in the nine months ended
September 30, 2002 excluding asset impairment and restructuring expenses. This
change resulted from all of the factors affecting revenues and expenses
discussed above.
INTEREST EXPENSE, NET
Interest expense, net of interest income, was about the same in the nine months
ended September 30, 2002 as it was in the same period of 2001.
EQUITY IN EARNINGS (LOSS) OF SUBSIDIARY
Equity in earnings (loss) of subsidiary represents our percentage share of the
earnings (loss) from our investment in a joint venture in India. Equity in
earnings (loss) of subsidiary increased $2.7 million in the nine months ended
September 30, 2002 compared to the same period of 2001 as we began serving
clients from the India facility in the third quarter of 2001.
OTHER EXPENSE, NET
Other expense, net of other income, decreased $1.9 million in the nine months
ended September 30, 2002 compared to the same period of 2001 mostly because we
recorded $1.3 million of losses on disposals of certain assets during the second
quarter of 2001, and we wrote off $0.8 million of credit acquisition costs in
the third quarter of 2001.
INCOME TAX EXPENSE (BENEFIT)
We recorded income tax expense of $5.0 million in the nine months ended
September 30, 2002 compared to an income tax benefit of $4.5 million in the same
period of 2001. The 2001 benefit reflects:
o a $6.0 million net deferred income tax benefit we recorded in the first
quarter that resulted from an election to treat certain of our foreign
operations as branches of our U.S. company for U.S. income tax purposes, and
21
o the $2.2 million tax benefit we recorded on the asset impairment and
restructuring charges and the losses on disposals of assets in the second
quarter.
These benefits were offset by a $3.3 million deferred income tax expense we
recorded in the second quarter to establish a valuation allowance on deferred
tax assets that were recorded in prior years related to our United Kingdom
operations.
Our income tax expense for the nine months ended September 30, 2002 as a
percentage of income before income taxes and minority interest was 39%. The
difference between this rate and the statutory U.S. Federal rate of 34% was
primarily due to net operating losses in certain non-U.S. subsidiaries for which
no tax benefit was recognized, and U.S. state and local income taxes.
FINANCIAL CONDITION AND LIQUIDITY
In this section, we discuss our financial condition and liquidity and the
factors affecting them. We separately discuss cash flows, capital resources, and
contractual obligations and commitments. We describe our general business risks,
critical accounting policies, and estimates that are important to our financial
condition and liquidity earlier in this report. Please refer to that discussion
as you read this section.
CASH FLOWS
- ----------
The following table sets forth summary cash flow data for the periods indicated.
Please refer to this summary as you read our discussion of the sources and uses
of cash in each year.
Nine Months Ended September 30, 2002 2001
- ----------------------------------------------------------
(in millions)
NET CASH PROVIDED BY (USED IN):
Operating activities $ 26.3 $ 40.1
Investing activities (21.2) (34.7)
Financing activities (0.1) 5.8
2002
In the nine months ended September 30, 2002, cash provided by operating
activities came from income before non-cash expenses of $33.3 million, and $8.4
million of increases in trade payables and other liabilities, which were
partially offset by $14.9 million of increases in trade receivables and other
assets.
In the nine months ended September 30, 2002, we used cash for investing
activities mostly to purchase $23.4 million of property and equipment.
In the nine months ended September 30, 2002, we used cash for financing
activities to repay $1.7 million of capital lease obligations and to make a $1.5
million capital distribution to the minority interest in our Jamaica joint
venture. These payments were partially offset by additional borrowings, net of
repayments, of $3.0 million.
2001
In the nine months ended September 30, 2001, cash provided by operating
activities came from income before non-cash expenses of $33.1 million and a
$13.4 million decrease in trade receivables, which were partially offset by a
$5.5 million decrease in other liabilities.
In the nine months ended September 30, 2001, we used cash for investing
activities mostly to purchase $33.2 million of property and equipment, and we
invested $1.2 million in a joint venture in India.
In the nine months ended September 30, 2001, cash provided by financing
activities came from additional borrowings, net of repayments, of $8.9 million
under our revolving credit facility, which were partially offset by $3.2 million
of repayments on capital lease obligations.
CAPITAL RESOURCES
- -----------------
We have historically used funds generated from operations, leases of property
and equipment, equity capital, senior subordinated notes, and borrowings under
credit facilities with banks to finance business acquisitions, capital
expenditures, and working capital requirements.
We have a $50 million senior secured credit facility that expires in April 2003,
under which we may borrow in U.S. dollars, British pounds sterling, and Euros.
We have a commitment letter for a new $50 million line of credit with a
three-year term, which will replace this facility. We expect this new facility
to be effective in November 2002.
Our obligations under our current facility have been guaranteed by our domestic
subsidiaries and certain foreign subsidiaries and are secured by liens on
substantially all of the assets of SITEL Corporation and such subsidiaries,
including a pledge of our shares in such subsidiaries and certain other foreign
subsidiaries. The facility contains certain financial covenants and certain
restrictions on, among other things, our ability to:
o incur additional indebtedness,
o pay dividends, repurchase stock, or make other restricted payments,
o purchase property and equipment,
o make certain investments,
o sell assets, or
o merge with another company.
The facility becomes due and payable upon a change of control of the Company as
defined in the credit agreement.
22
At September 30, 2002, we had $47.7 million of available borrowings under this
facility.
We expect to finance our current operations, planned capital expenditures, and
internal growth for the foreseeable future using funds generated from
operations, existing cash, leases of property and equipment, and the funds
available under our credit facility. We generally estimate our capital
expenditures will be $5 to $8 million per quarter excluding any significant
expansion of contact center capacity. We estimate that our capital expenditures
for the fourth quarter of 2002 will range from $6 million to $10 million. Future
acquisitions, if any, may require additional debt or equity financing.
Under a stock repurchase program that was authorized by our Board of Directors
in February 2001, we may repurchase up to $10 million of our shares from time to
time in the open market or in privately negotiated transactions, depending on
general business and market conditions. Through December 31, 2001, we had
repurchased a total of 171,800 shares at a total cost of $0.3 million. No shares
have been purchased in 2002. Our credit facility limits the amount of aggregate
restricted payments, including stock repurchases, to $1.0 million plus certain
equity transaction proceeds not currently applicable.
CONTRACTUAL OBLIGATIONS AND COMMITMENTS
- ---------------------------------------
We summarize various contractual obligations and commitments in the Notes to our
Consolidated Financial Statements in our Report on Form 10-K for the year ended
December 31, 2001. These contractual obligations and commitments include:
o $100.0 million of long-term debt as shown in our Consolidated Balance Sheet at
September 30, 2002,
o $8.1 million of capital lease obligations as shown in our Consolidated Balance
Sheet at September 30, 2002, and
o operating lease obligations for property and certain equipment under
noncancelable operating lease arrangements, which expire at various dates
through 2015.
OTHER MATTERS
QUARTERLY RESULTS AND SEASONALITY
We have experienced, and expect to continue to experience, quarterly variations
in our results of operations mostly due to:
o the timing of our clients' customer relationship management initiatives and
customer acquisition and loyalty campaigns,
o the commencement and terms of new contracts,
o revenue mix,
o the timing of additional operating, selling, and administrative expenses to
support new business, and
o the timing of recognition of incentive fees.
We experience periodic fluctuations in our results of operations related to both
the start-up costs associated with expansion and the implementation of clients'
CRM activities. In addition, our business generally tends to be slower in the
third quarter due to summer holidays in Europe, and in the first quarter due to
the changeover of client marketing strategies that often occurs at the beginning
of the year.
EFFECTS OF INFLATION
Inflation has not had a significant effect on our operations. However, there can
be no assurance that inflation will not have a material effect on our operations
in the future.
ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued SFAS No. 142,
Goodwill and Other Intangible Assets. This statement:
o replaces the requirement to amortize goodwill and certain other intangible
assets with an annual impairment test, and
o requires an evaluation of the useful lives of intangible assets and an
impairment test for goodwill upon adoption.
We adopted the provisions of SFAS No. 142 as of January 1, 2002. As a result of
the adoption of this standard, we stopped amortizing our goodwill effective
January 1, 2002, which means that we have not recorded any goodwill amortization
expense in our Consolidated Statements of Income for the three and nine months
ended September 30, 2002 and we will not record such amortization in the
remainder of 2002 and in future years.
Total goodwill amortization expense was:
o $0.9 million for the three months ended September 30, 2001, and
o $2.6 million for the nine months ended September 30, 2001.
If we had adopted the provisions of SFAS No. 142 on January 1, 2001, we would
have had:
o a net loss of $5.0 million, or $0.07 per share, for the three months ended
September 30, 2001, and
o a net loss of $22.9 million, or $0.31 per share, for the nine months ended
September 30, 2001.
During 2002, we must perform a transitional goodwill impairment review in two
phases to determine if goodwill that was stated in our Consolidated Balance
Sheet at January 1, 2002 was impaired. During the second quarter of 2002, we
completed the first phase of the required impairment review, and determined that
the goodwill in
23
certain reporting units was impaired at January 1, 2002. As a result, we expect
to record a pre-tax goodwill impairment loss in the range of $12 million to $16
million as a cumulative effect of an accounting change in the 2002 financial
statements. We will determine the exact amount of the goodwill impairment loss
upon completion of the second phase of the transitional impairment review, which
we must complete by December 31, 2002.
In October 2001, the Financial Accounting Standards Board issued SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets. We adopted the
provisions of SFAS No. 144 effective January 1, 2002. The adoption of this
standard did not impact our consolidated financial statements.
In July 2002, the Financial Accounting Standards Board issued SFAS No. 146,
Accounting for Costs Associated with Exit or Disposal Activities, which will
change the reporting for expenses related to restructurings initiated after
December 31, 2002.
In October 2002, the Emerging Issues Task Force of the Financial Accounting
Standards Board reached a tentative conclusion on the accounting for revenues in
transactions that involve multiple deliverables. The guidance governs how to
identify whether goods or services or both, that are to be delivered separately
in a bundled sales arrangement, should be accounted for separately. This
guidance is expected to be effective for fiscal years beginning after December
15, 2002, so we expect to adopt the guidance in our financial statements for the
quarter ended March 31, 2003. We have not yet determined the impact of this
tentative conclusion on our consolidated financial statements.
- --------------------------------------------------------------------------------
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risks associated primarily with changes in foreign
currency exchange rates. We have operations in many parts of the world; however,
both revenues and expenses of those operations are typically denominated in the
currency of the country of operations, providing a natural hedge. From time to
time, we enter into certain hedging transactions designed to hedge foreign
currency exchange risk related to short-term intercompany loans and specific
foreign currency transactions, however the amounts involved have not been
material.
We are also exposed to changes in interest rates on our variable rate
borrowings. Interest rates on our Senior Subordinated Notes and capital lease
obligations are fixed, but rates on borrowings under our bank credit facility
are variable. During the nine months ended September 30, 2002, our average
borrowings under our bank credit facility were $1.5 million. Based on our
projected cash needs for the foreseeable future, we do not expect that our
exposure to changes in interest rates will have a material impact on our
interest expense.
- --------------------------------------------------------------------------------
ITEM 4. CONTROLS AND PROCEDURES
Our Chief Executive Officer and Chief Financial Officer have evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures (as defined under Rules 13a-14 and 15d-14 of the Securities Exchange
Act of 1934, as amended) as of a date within ninety days of the filing date of
this report. Based upon that evaluation, our Chief Executive Officer and Chief
Financial Officer have concluded that our disclosure controls and procedures are
adequate and effective.
There were no significant changes in our internal controls or in other factors
that could significantly affect our internal controls subsequent to the date of
such evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
24
PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION
Forward-Looking Statements
We make statements in this report that are considered forward-looking statements
within the meaning of the Securities Exchange Act of 1934. Sometimes these
statements will contain words such as "believes," "expects," "intends,"
"should," "will," "plans," and other similar words. These statements are not
guarantees of our future performance and are subject to risks, uncertainties,
and other important factors that could cause our actual performance or
achievements to be materially different from those we project. These risks,
uncertainties, and factors include, but are not limited to:
o reliance on major clients,
o conditions affecting clients' industries,
o clients' budgets and plans,
o unanticipated labor, contract or technical difficulties,
o delays in ramp up of services under contracts,
o reliance on major subcontractors and strategic partners,
o risks associated with managing a global business,
o fluctuations in operating results,
o reliance on telecommunications and computer technology,
o dependence on labor force,
o industry regulation,
o general and local economic conditions,
o competitive pressures in our industry,
o foreign currency risks,
o the effects of leverage,
o dependency on credit availability,
o restrictions imposed by the terms of indebtedness, and
o dependence on key personnel and control by management.
Given these uncertainties, you should not place undue reliance on these
forward-looking statements. Please see the other sections of this report and our
other periodic reports filed with the Securities and Exchange Commission for
more information on these factors.
- --------------------------------------------------------------------------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit No.
-----------
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K: None.
25
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
SITEL Corporation
(REGISTRANT)
Date: November 13, 2002 By /s/ James E. Stevenson, Jr.
-------------------------------
JAMES E. STEVENSON, JR.
Chief Financial Officer
(Duly Authorized Officer and
Principal Financial Officer)
CERTIFICATIONS
I, James F. Lynch, certify that:
1. I have reviewed this quarterly report on Form 10-Q of SITEL
Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls
26
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 13, 2002 By /s/ James F. Lynch
------------------------------
JAMES F. LYNCH
Chief Executive Officer
I, James E. Stevenson, Jr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of SITEL
Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 13, 2002 By /s/ James E. Stevenson, Jr.
------------------------------
JAMES E. STEVENSON, JR.
Chief Financial Officer
27
EXHIBIT INDEX
Exhibit No.
- -----------
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
28