Back to GetFilings.com
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark one)
[ X ] Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the year ended December 31, 1998
[ ] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from _________ to _________
Commission File Number 1-12577
SITEL CORPORATION
(Exact name of registrant as specified in its charter)
MINNESOTA 47-0684333
(State or jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
111 SOUTH CALVERT, STE. 1900 BALTIMORE, MD 21202
(410) 246-1505
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
--------------------------------------------
Securities Registered Pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange On Which Registered
COMMON STOCK, $.001 PAR VALUE THE NEW YORK STOCK EXCHANGE
Securities Registered Pursuant to Section 12(g) of the Act:
NONE
--------------------------------------------
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 ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ____
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of February 26, 1999 was $121,085,897 based upon the closing
price of $2.9375 for such stock as reported by the New York Stock Exchange on
such date. Solely for purposes of this calculation, persons holding of record
more than 5% of the Company's stock have been included as "affiliates".
As of February 26, 1999 the Company had 64,944,294 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: Portions of the registrant's
definitive proxy statement for the annual meeting of stockholders to be held May
6, 1999 are incorporated into Part III.
This 10-K consists of 69 pages. The Exhibit index is on page 26.
PART I
ITEM 1. BUSINESS
GENERAL
SITEL Corporation provides outsourced Customer Relationship Management
("CRM") services on a global scale. The Company was organized in 1985 as a
Minnesota corporation and has grown both internally and through acquisitions to
include operations in North America, Europe, Asia Pacific and Latin America.
Over 19,000 SITEL employees worldwide represent many of the world's leading
brand names. On behalf of these leading companies, the Company finds, acquires
and retains customers and helps these organizations enhance and grow these
relationships through a variety of value-added services working with several
e-Media ranging from the telephone, to e-mail and the Internet. The Company
operates from over 14,000 workstations in over 70 call centers located around
the globe in 18 countries and offers services in more than 25 languages and
dialects.
INDUSTRY OVERVIEW
Over the last 10 years the Company's industry has transformed from
primarily executing telemarketing campaigns, to performing outsourced
teleservices and customer care applications, and more recently, to increasingly
executing integrated customer relationship management programs, performed
primarily via e-Media (i.e., telephone, facsimile, Internet and e-mail). The
industry is increasingly working at the heart of its clients' key business
processes. Fueling this trend is the growth in consumer telephone, worldwide web
and e-mail usage, combined with the business imperative for consistent levels of
quality customer service, the continuing reduction in the cost of computer
databases, and the arrival of sophisticated computer telephony integration
(CTI).
SITEL'S BUSINESS
Today, the world's leading companies increasingly want their CRM partners
to provide value-added services at every stage of the customer lifecycle:
customer acquisition, customer care, technical support, receivables management
and consulting.
Industry sources and the Company estimate that worldwide expenditures to
operate call centers now exceed $200 billion annually. The Company sees even
more rapid growth fueled by the Internet revolution, multi-trillion e-mail
volumes and service-expectant consumers. The Company's activities include: (a)
customer service programs such as billing inquiry response, consumer product
information response, and fraud protection; (b) sales programs such as
cross-selling new products to existing customers, taking product orders,
generating leads for direct sales forces and account activation and order
solicitation; (c) technical support programs for Internet Service Providers,
technology hardware and software providers; and (d) accounts receivable
management programs. The Company also provides consulting services to help its
clients design and improve their internal and outsourced call center processes.
The outsourced portion of the overall call center market has grown
significantly since 1984, as a result of corporations shifting their activities
from internal operations to outsourced partners. Although outsourced
applications are increasing their share of overall call center expenditures, the
vast majority of call center activity is still performed in-house. The Company
believes that as its clients increasingly seek to implement integrated customer
relationship management solutions, they will increasingly outsource the
management of the call center processes associated with these programs due to
the complexity and cost of implementing such programs internally.
2
The Company expects to see outsourcing increase as:
* companies increasingly focus on their core competencies,
* service and competency levels within our industry continue their rapid
improvement, and
* companies like SITEL gain the scale of operations necessary to engender
trust within large corporate clients in order to take over complete
business processes on their behalf.
Competition for this outsourced call center business is fragmented. Most
independent providers of telephone-based services are small, single facility
operations that do not have the scale, expertise, or technological resources
necessary to serve effectively the sustained, and increasingly complex, call
center needs of large corporations. Moreover, the cost of entry to the top end
of this market is continually increasing. The Company's investments in building
its global footprint and in creating the resources to service major national and
multi-national contracts on behalf of many of the world's leading brands has
been significant.
Traditional advantages of call center activity include low cost per call,
direct interaction with customers and on-line access to detailed customer or
product information, which enables immediate response to customer inquiries. A
customer conversation with a customer relations agent often permits the client
to learn more about the customer's decision-making process and to update
customer information in the client's database. Additionally, this interaction
with our clients' customers positions the Company to deliver real-time reports
to clients regarding their products, brands, distribution channels, effects of
pricing changes, cross-market comparisons and consumer reactions to change. As a
result of these advantages, call center-based customer relationship management
activity is becoming central to the way leading organizations choose to build
and maintain customer relationships.
SITEL'S PROPOSITION
The Company's proposition is to acquire and service long-term repeat
customers for its clients. At every stage of the customer lifecycle, the Company
endeavors to give its clients' customers an experience that will reinforce their
trust in the brand; compel them to stay loyal; and encourage their advocacy and
support however they communicate with the Company's clients and their brands.
Whether that is an individual customer or a business customer, whether they
phone, e-mail or surf their website, the Company's mission is to create customer
loyalty, to increase sales and to differentiate the clients' brand in a positive
manner.
The Company is positioned to provide world-class customer relationship
management services. With over 70 facilities in more than 18 countries
throughout the four major regions of the globe, SITEL has the capability to
provide service in more than 25 languages and dialects. The Company brings
industry focus and expertise in the financial services, insurance,
telecommunications, technology, utilities, consumer, media, government and
travel sectors.
SITEL'S SOLUTIONS
Providing services at every stage of the customer lifecycle requires
various programs. The Company provides the following solutions:
CUSTOMER ACQUISITION -- SITEL contacts, whether inbound or outbound, that relate
to finding customers or acquiring customers. Typical applications include list
building, outbound sales, inbound sales or order taking, lead generation, Direct
Response Television/bureau, product information requests related to potential
sales, subscription renewals and database cleaning and updating.
CUSTOMER CARE -- SITEL contacts, whether inbound or outbound, that relate to
handling customer service issues. Typical applications include complaint
handling; billing information; thank-you or other client-initiated information
calls; reservations; loyalty (frequent flyer) clubs; investor account inquiries;
government information; dealer location calls; insurance claims processing;
fraud detection/prevention calls; back office
3
requests, such as connecting a new line, disconnecting service and requesting
maintenance support; warranty call handling; and administrative support
regarding a customer's policy, lease or account.
TECHNICAL SUPPORT/HELP DESK -- Distinguished from customer service calls, these
are troubleshooting calls where the agent must diagnose and resolve problems
causing a software, Internet or computer hardware product or service not to
function properly.
RECEIVABLES MANAGEMENT -- Pre-charge-off and post-charge-off calls to customers
to collect overdue balances.
CONSULTING -- Provision of advice and operational expertise.
INDUSTRIES SERVED
SITEL provides integrated and professional solutions across the following
industry categories:
FINANCIAL SERVICES. The Company works with financial services companies
including major banks, leasing companies, credit card issuers, mutual fund
companies, auto finance companies/subsidiaries, retail financing companies,
brokerage firms, service providers, mortgage companies and other financial
institutions. SITEL provides personal care service activities such as answering
questions regarding lease terms, handling service requests, arranging credit
card balance transfers, taking and processing loan applications, and making
accounts receivable management and fraud prevention calls. The Company also
conducts integrated sales activities on behalf of clients such as merchant and
customer acquisition, account retention and renewal, lead generation and
appointment scheduling.
INSURANCE. SITEL provides a broad range of teleservices to the insurance
industry including direct marketing of non-underwritten insurance products such
as hospital accident protection, hospital indemnity protection, health care
discount plans, mechanical breakdown and credit protection. The Company also
provides personal care services such as sales support, after-hours agent
support, emergency roadside assistance, claims processing and full back-office
support. SITEL also offers sales and service activities for fully underwritten
products such as term life, automobile and homeowner's insurance, as well as
tax-deferred annuities.
TELECOMMUNICATIONS. The Company provides a full range of sales and customer
services activities primarily to domestic and international long distance
providers, local exchange carriers, and cellular and PCS providers including
account management, fulfilment, facilities management, new product launch and
database management. The Company provides these services for product lines such
as access lines, vertical services, Internet access, long distance, cellular PCS
and ISDN data services.
TECHNOLOGY. SITEL works with Internet Service Providers, computer hardware
manufacturers and software publishers. The Company provides technical sales,
technical support and customer support services including product launches,
complete sales and account management programs, strategic product support,
corporate help desk, warranty or post-warranty support, and sunset product
support. The Company provides these support services through traditional call
handling as well as alternative electronic methods such as e-mail, advanced
integrated voice response, automated self-help tools and computer telephony
integration.
UTILITIES. SITEL provides telephone and Internet-based services to public and
private energy companies, including electric power, natural gas, water and
integrated energy providers. The services include customer acquisition, customer
service, direct sale and cross-sale activities, brand development, loyalty
campaigns, database management, and development and call center consulting
services.
4
CONSUMER. The Company services leading consumer products companies and mass
marketing manufacturers, including automotive companies, in responding to
customer inquiries, developing and launching new product and sales campaigns,
managing product recalls, and performing quality surveys and market analyses.
MEDIA. SITEL's clients include traditional media, such as newspaper publishers,
major magazine publishers, book clubs and music clubs with services including
subscription renewal, customer acquisition, subscription reactivation and
customer service. The Company also provides sales and customer service to "new
media" markets, such as satellite television service providers, and CD-ROM and
video providers.
GOVERNMENT. The Company provides a broad range of customer service applications
including handling general inquiries, providing help desk responses and
delivering fulfillment services. These applications are performed for local,
state, and regional bodies and agencies.
TRAVEL AND HOSPITALITY. The Company provides teleservices and personal care
services to major airline and hotel companies in handling reservations and
customer service calls.
INFORMATION TECHNOLOGY
SITEL uses industry-standard software from Microsoft and Oracle across its
business units. Within industry sectors, SITEL uses industry-specific call
processing application systems. SITEL has designed and implemented client (or
industry) specific applications to provide highly customized solutions to
clients' specific requirements. SITEL also utilizes a state-of-the-art
technology platform (UNIX and NT architecture) with Windows 95 and NT-based
Compaq, Dell and IBM workstations, predictive dialers and automated call
distributors. SITEL representatives have the tools to initiate and receive
effectively and efficiently millions of service transactions per month. SITEL
plans to migrate to a common set of operating platforms so that the Company can
better perform global work for its clients and more cost-effectively replicate
its processes throughout its network of call centers.
PERSONNEL AND TRAINING
Management believes one of its core competencies is managing its diverse,
worldwide workforce. SITEL places great emphasis on recruiting, training and
retaining its employees. The Company seeks to locate call centers in communities
and cities with favorable workforce demographics and populations with necessary
language skills.
The Company offers in-house classroom and on-the-job training programs for
its personnel, including instruction on the industries that SITEL serves and on
proper call center management techniques. For example in the United States, the
Insurance Division offers on-site, state approved insurance licensing and
continuing education classes for SITEL insurance agents. The amount of classroom
and on-the-job training before an employee can qualify to take the insurance
agent licensing examination is approximately 150 hours. The Company encourages
employee self-development and usually promotes individuals from within the
organization.
As of December 31, 1998, SITEL had over 19,000 employees. None of SITEL's
employees in the North American, Asia-Pacific or Latin American regions is
represented by a labor union. In the Company's European region, employees in
Belgium, Sweden and Spain are within the scope of government sponsored
collective bargaining agreements. In addition, employees in Belgium, Sweden and
Spain are represented by either a labor union or a statutory work council
arrangement. In those countries where there are labor unions or work councils,
the Company's ability to reduce its workforce or its wage rates is subject to
agreement by, and/or consultation with, the appropriate labor union or work
council. SITEL considers its relations with its employees to be good.
5
COMPETITION
SITEL is one of the largest companies providing customer relationship
management services via e-Media in the world. SITEL's largest direct competitors
include APAC Teleservices, Inc., Sykes Enterprises Inc., Teleperformance
International Group, West Teleservices Corporation, Teletech Holdings, Inc.,
Electronic Data Systems Corporation and Convergys Corporation. The customer
relationship management industry is extremely competitive and fragmented, and
most independent competitors are small, single facility operations. The Company
also competes with in-house teleservices departments throughout the world.
In-house departments continue to comprise by far the largest segment of call
center expenditures. Additional competitors with greater resources than the
Company may enter the customer relationship management industry.
GOVERNMENT REGULATION
In the United States, the Federal Trade Commission (the "FTC") and many
states regulate teleservices. The European Union (the "EU") has yet to enact a
detailed regulatory framework for this industry although many EU countries have
data protection laws which regulate the use of consumer data.
In the United States, the federal Telephone Consumer Protection Act of 1991
(the "TCPA") prohibits teleservices firms from initiating telephone
solicitations to residential telephone subscribers during certain times, and
prohibits the use of automated telephone dialing equipment to call certain
telephone numbers. In addition, the TCPA requires telemarketing firms to
maintain a "do not call" list of residential customers. The federal
Telemarketing and Consumer Fraud and Abuse Prevention Act of 1994 broadly
authorized the FTC to issue regulations prohibiting misrepresentation in
telemarketing sales. The telemarketing sales rules issued by the FTC generally
prohibit misrepresentation regarding the cost, terms, restrictions, performance
or duration of products or services offered by telephone solicitation and
specifically address other perceived telemarketing abuses in the offering of
prizes and the sale of business opportunities or investments. The Company
believes that it is in compliance with the TCPA and the FTC's rules. The Company
trains its telephone service representatives to comply with the TCPA and
programs its call management system to avoid telephone calls during restricted
hours or to individuals maintained on SITEL's "do-not-call" list.
The industries served by the Company's divisions are also subject to
varying degrees of government regulation. Generally, the Company relies on its
clients and their advisors to develop the scripts to be used by SITEL in making
consumer solicitations. The Company generally requires its clients to indemnify
SITEL against claims and expenses arising with respect to the Company's services
performed on its clients' behalf. The Company has never been held responsible
for regulatory noncompliance by a client. SITEL employees who complete the sale
of certain U.S. insurance products are required to be licensed by various state
insurance commissions and participate in regular continuing education programs,
which are currently provided in-house by the Company.
The teleservices industry, consumer groups and regulatory and legislative
bodies are increasingly concerned about "right of privacy" issues as
technological advances have dramatically increased the availability of
information about consumers. It is possible that data protection laws may be
enacted in additional countries. It is also possible that other laws or
regulations may be enacted which would, among other things, limit the amount of
consumer data that may be obtained or how this data may be used in other
teleservice activities. The Company is unable to predict whether or when any
such laws or regulations will be enacted or, if they are, in what countries they
will be enacted. It is possible that laws or regulations would require the
teleservices industry, including the Company, to modify its methods of consumer
data collection and use.
6
QUARTERLY RESULTS AND SEASONALITY
The Company has experienced and expects to continue to experience quarterly
variations in its results of operations principally due to the timing of
clients' teleservicing campaigns and the commencement and terms of new
contracts, revenue mix, and the timing of additional selling, general and
administrative expenses to support new business. The Company experiences
periodic fluctuations related to both the start-up costs associated with
expansion into a new region and the implementation of clients' teleservicing
activities. In addition, the Company's business tends to be slower in the third
quarter due to summer holidays in Europe and, to a lesser degree, in the first
quarter due to the changeover of client marketing strategies which often occurs
at the beginning of the year.
ITEM 2. PROPERTIES
The Company's executive offices are located in Baltimore, Maryland.
As of December 31, 1998, the Company operated call centers in various
leased facilities and on client premises and utilized the services of remote
operations sites in various locations as follows:
NUMBER OF NUMBER OF
FACILITY LOCATION FACILITIES WORKSTATIONS
------------------- ------------------ -------------------
Australia............................ 2 367
Belgium.............................. 2 370
Brazil............................... 1 11
Canada............................... 3 288
Colombia............................. 1 260
France............................... 3 205
Germany.............................. 1 455
Ireland.............................. 1 57
Japan................................ 2 216
Mexico............................... 2 530
Netherlands.......................... 1 76
New Zealand.......................... 1 54
Portugal............................. 1 50
Singapore............................ 1 54
Spain................................ 12 2,183
Sweden............................... 2 124
United Kingdom....................... 6 1,850
United States........................ 34 6,511
United States-ROPS................... 11 451
-------------------- -------------------
Totals: 87 14,112
==================== ===================
SITEL contracts with a number of remote operations sites ("ROPS") which are
owned and operated by independent third parties and are used by SITEL to meet a
portion of its teleservicing needs.
The Company believes its current facilities are suitable and adequate for
its current operations, but additional facilities will be required to support
growth. SITEL believes suitable additional or alternative space will be
available as needed on commercially reasonable terms. The Company's policy is to
rent call center space although it has from time to time built or purchased
facilities and subsequently sold them in sale-leaseback transactions.
7
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company is involved in litigation incidental to its
business. Management believes that any resulting liability beyond that provided,
should not materially affect the Company's financial position, future results of
operations or future cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders of the
Company during the fourth quarter of 1998.
8
**************************
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company are:
NAME AGE POSITION
---- --- --------
James F. Lynch......... 49 Chairman of the Board and Director
Henk P. Kruithof....... 62 Executive Vice Chairman and Director
Phillip A. Clough...... 37 Chief Executive Officer, President and Director
W. Gar Richlin......... 53 Executive Vice President, Chief Operating Officer
and Chief Financial Officer
Antoon Vanparys........ 41 Executive Vice President, Global Business
Development
Timothy P. Keyser...... 52 Executive Vice President, Corporate Development
Mr. Lynch founded SITEL in 1985 and has served as Chairman and a director
since its inception. From SITEL's inception to January 1997, Mr. Lynch served as
Chief Executive Officer.
Mr. Kruithof has served as Executive Vice Chairman and a director since
October 1996. Mr. Kruithof is also the Chairman of SITEL Europe plc (formerly
Mitre plc, which merged with SITEL in September 1996). Mr. Kruithof co-founded
Mitre plc in 1992 and its predecessor Merit Direct Limited in 1985, and served
as their Chairman since inception.
Mr. Clough has served as Chief Executive Officer since May 1998 and
President since January 1997. From 1990 until January 1997, he served as an
investment banker with Alex. Brown & Sons Incorporated, most recently as
Principal, focusing on a variety of consumer and business services companies,
including teleservices companies.
Mr. Richlin has served as Chief Operating Officer since December 1998 and
as Executive Vice President and Chief Financial Officer since March 1998. From
September 1997 until joining SITEL, he served as Managing Director and Co-Head
of Corporate Finance for BT Alex. Brown Incorporated. From 1991 until September
1997, Mr. Richlin served as Managing Director and Head of Investment Banking of
BT Alex. Brown Incorporated.
Mr. Vanparys has served as Executive Vice President--Global Business
Development since December 1998. From September 1996 until December 1998, he
served as Senior Vice President--Global Business Development and as a director
and a member of the Executive Review Committee of SITEL Europe plc. Before
joining the Company in September 1996 with the merger of the Company and Mitre
plc, Mr. Vanparys served as a Managing Partner and Managing Director of Mitre
plc since 1992 and co-founded Merit Direct Limited, Mitre's predecessor, in
1985.
Mr. Keyser has served as Executive Vice President--Corporate Development
since December 1998, as President of SITEL Latin America since November 1997 and
as Senior Vice President - Mergers and Acquisitions since the Company's initial
public offering in 1995. Mr. Keyser joined the Company in 1992, with the
Company's acquisition of May Telemarketing, Inc., and served as Group President
responsible for the publishing and motorclub divisions until the Company's
initial public offering in 1995.
9
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on the New York Stock Exchange under
the symbol SWW. The following table sets forth, for the quarter indicated, the
high and low closing sale prices of the common stock as reported by the New York
Stock Exchange.
HIGH LOW
1997
--------------------------------------------------------------------
First Quarter $ 20.50 $ 13.00
Second Quarter $ 20.63 $ 9.88
Third Quarter $ 19.00 $ 10.06
Fourth Quarter $ 10.44 $ 8.19
1998
--------------------------------------------------------------------
First Quarter $ 13.44 $ 9.00
Second Quarter $ 13.06 $ 5.94
Third Quarter $ 6.50 $ 3.06
Fourth Quarter $ 3.88 $ 1.88
As of February 26, 1999, SITEL had 64,944,294 shares of common stock
outstanding and 575 record holders of the Company's common stock.
The Company has not declared or paid any cash dividends on its common stock
since its inception, and the Board of Directors currently intends to retain all
earnings for use in the business for the foreseeable future.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
The following table presents selected historical financial data for the
Company. The selected income statement data for the years ended December 31,
1994, 1995, 1996, 1997 and 1998 and the balance sheet data at December 31, 1995,
1996, 1997 and 1998 are derived from the consolidated financial statements of
the Company, which consolidated financial statements have been audited by KPMG
Peat Marwick LLP, independent certified public accountants. The selected balance
sheet data at December 31, 1994, is derived from the unaudited consolidated
financial statements of the Company although such information has been prepared
on the same basis as the Company's audited financial statements and, in the
opinion of management, contain all adjustments, consisting of only normal
recurring adjustments, necessary for a fair presentation of the financial
position and results of operations of the Company. The following information
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Consolidated Financial
Statements and related notes thereto, included elsewhere herein.
10
YEARS ENDED DECEMBER 31,
------------------------------------------------------------------------
1994 1995 1996 1997 1998
------------ ------------- ------------ ------------- ------------
(in thousands, except per share data)
INCOME STATEMENT DATA:
Revenues ............................................. $ 116,757 $ 187,215 $ 312,750 $ 491,474 $ 586,318
Cost of services ..................................... 63,268 101,617 163,717 270,942 331,586
Selling, general and administrative expenses ......... 48,254 69,213 120,695 185,589 235,900
Special compensation expense (1) ..................... -- 34,585 -- -- --
Restructuring expenses (2) ........................... -- -- -- 15,681 6,607
--------- --------- --------- --------- ---------
Operating income (loss) .............................. 5,235 (18,200) 28,338 19,262 12,225
Transaction related expense (3) ...................... -- -- 6,988 -- --
Interest expense, net ................................ 834 702 227 5,096 12,747
Other income, net .................................... 1,443 118 32 126 263
--------- --------- --------- --------- ---------
Income (loss) before taxes and minority
interest .......................................... 5,844 (18,784) 21,155 14,292 (259)
Income tax expense (benefit) ......................... 1,526 (6,593) 10,221 11,306 966
Minority interest .................................... 383 1,262 77 174 (651)
--------- --------- --------- --------- ---------
Net income (loss) from continuing
operations ...................................... 3,935 (13,453) 10,857 2,812 (574)
Extraordinary loss on refinancing of debt,
net of taxes ...................................... -- -- -- -- (514)
--------- --------- --------- --------- ---------
Net income (loss) .................................... $ 3,935 $ (13,453) $ 10,857 $ 2,812 $ (1,088)
========= ========= ========= ========= =========
Income (loss) from continuing operations
per common share:
Basic .............................................. $ 0.12 $ (0.33) $ 0.19 $ 0.05 $ (0.01)
Diluted ............................................ $ 0.09 $ (0.29) $ 0.16 $ 0.04 $ (0.01)
Weighted average common shares outstanding (4):
Basic .............................................. 33,906 40,565 57,793 61,764 63,888
Diluted ............................................ 45,829 46,477 65,929 68,811 63,888
BALANCE SHEET AND OTHER DATA:
Working capital ..................................... $ 5,110 $ 24,182 $ 36,836 $ 39,545 $ 41,660
Total assets ........................................ 48,177 100,960 211,684 385,880 405,610
Long-term debt, net of current portion ............. 8,183 4,305 4,861 115,488 116,237
Stockholders' equity ................................ 12,702 65,380 126,725 158,388 161,854
- ---------
(1) Represents a non-cash compensation expense incurred in February 1995
resulting from the grant of stock options with an exercise price of
$.0025 per share to 265 employees of the Company to replace stock
appreciation rights previously granted under the Company's Employee
Equity Benefit Plan and previously granted stock options. Excluding
the special compensation expense and a one-time forgiveness of debt of
$0.5 million owed by two stockholders, operating income, net income,
basic income per share and diluted income per share would have been
$16.9 million, $9.7 million, and $0.24 and $0.21, respectively, for
1995.
(2) Represents a restructuring expense and a writedown of the Company's
investment in its Telebusiness business unit of $5.2 million and $10.5
million, respectively, for the year ended December 31, 1997 and a
restructuring expense of $6.6 million for the year ended December 31,
1998. Excluding those operating expenses, operating income, net income,
basic income per share and diluted income per share would have been
$34.9 million, $18.5 million, $0.30 and $0.27, respectively for 1997
and $18.8 million, $3.5 million, $0.05 and $0.05, respectively for
1998.
11
(3) Represents expenses resulting from the acquisitions of Mitre plc and
National Action Financial Services, Inc. accounted for as pooling of
interests transactions. Excluding certain one-time operating expenses
and the transaction related expenses, operating income, net income,
basic income per share and diluted income per share would have been
$30.5 million, $19.5 million, $0.34 and $0.30, respectively, for 1996.
(4) See Note 1 of Notes to Consolidated Financial Statements for an
explanation of the determination of weighted average common shares used
in computing net income (loss) per share.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
SITEL Corporation ("SITEL") and subsidiaries (collectively, the "Company")
provide customer relationship management services on behalf of clients in North
America, Europe, Asia Pacific and Latin America. The Company finds, acquires and
retains customers and helps organizations enhance and grow these relationships
through a variety of value-added services working with several types of
electronic media ranging from the telephone, to e-mail and the Internet. The
Company provides services to clients principally in the financial services,
insurance, telecommunications, technology, utilities, consumer, media,
government and travel sectors.
SITEL was founded in 1985 by its current chairman, James F. Lynch, in
Omaha, Nebraska. SITEL completed its initial public offering of common stock in
1995, and was the first major independent publicly-held company in the
teleservices industry. In 1996, the Company began its international expansion
with acquisitions in Canada and Spain (which also included operations in
Portugal) and, in particular, with the merger with Mitre plc ("Mitre" or the
"Mitre Merger") which was completed in September 1996. At the time of the Mitre
Merger, Mitre had operations in the United Kingdom, Belgium and Japan and was in
the final stages of completing plans to enter Singapore, Hong Kong and Germany.
In 1997, SITEL entered Australia, New Zealand, Sweden and Ireland through
acquisitions; entered Mexico and Colombia through the joint venture with
Corporacion Interamericana de Entretenimiento, S.A. de C.V. ("CIE"); and entered
France on the basis of a client contract. In 1996 and 1997, the Company also
completed acquisitions that gave it the capability to offer receivables
management, consulting and technical support services.
The Mitre Merger was accounted for as a pooling of interests, and
accordingly the financial results of the Company for 1996 have been restated as
if SITEL and Mitre were operated as a single company for this period. The
results for this period have also been restated to reflect the 1996 acquisition
of National Action Financial Services, Inc. ("NAFS"), which was also accounted
for as a pooling of interests.
12
RESULTS OF OPERATIONS
The following table sets forth statement of operations data as a percentage
of revenues for the periods indicated.
1996 1997 1998
----------- ---------- ----------
Revenues............................................... 100.0 % 100.0 % 100.0 %
Operating expenses:
Cost of services.................................... 52.3 55.1 56.6
Selling, general and administrative 38.6 37.8 40.2
expenses.........................................
Restructuring expenses.............................. -- 3.2 (b) 1.1 (b)
----------- ---------- ----------
Operating income................................. 9.1 (a) 3.9 (c) 2.1 (c)
Transaction related expenses........................... 2.2 -- --
Interest expense, net.................................. 0.1 1.0 2.1
Other income........................................... -- -- --
----------- ---------- ----------
Income (loss) before income taxes and minority
interest....................................... 6.8 2.9 --
Income tax expense..................................... 3.3 2.3 0.2
Minority interest...................................... -- -- (0.1)
----------- ---------- ----------
Net income (loss) from continuing operations........... 3.5 0.6 (0.1)
Extraordinary loss on refinancing of debt, net of
taxes.......................................... -- -- (0.1)
----------- ---------- ----------
Net income (loss)................................ 3.5 % (a) 0.6 % (c) (0.2) % (c)
=========== ========== ==========
- -----------
(a) Includes operating expenses in connection with the acquisitions of
Mitre and NAFS. Excluding those one-time operating expenses and the
transaction related expenses, operating income and net income would
have been 9.8% and 6.2%, respectively, for 1996.
(b) Represents restructuring expenses of 1.1% ($5.2 million) and a write
down of the Company's investment in its Telebusiness business unit of
2.1% ($10.5 million) in 1997 and restructuring expenses of 1.1% ($6.6
million) in 1998.
(c) Excluding the restructuring expenses of 3.2% in 1997 and 1.1% in 1998,
and the related tax effects, operating income and net income would have
been 7.1% and 3.8%, respectively, for 1997 and 3.2% and 0.6%,
respectively, for 1998.
1998 Compared to 1997
Revenues. Revenues increased $94.8 million, or 19.3%, to $586.3 million in
1998 from $491.5 million in 1997. Of this increase, $76.3 million was
attributable to services initiated for new clients, $13.0 million was
attributable to increased revenues from existing clients and $5.5 million was
attributable to revenues from businesses acquired after the start of 1998 under
the purchase method of accounting. The increase in revenues from existing
clients was primarily the result of higher calling volumes rather than higher
rates.
Cost of Services. Cost of services represents primarily labor and telephone
expenses directly related to customer relationship management activities. Cost
of services increased $60.6 million, or 22.4%, to $331.6 million in 1998 from
$270.9 million in 1997. As a percentage of revenues, cost of services increased
to 56.6% in 1998 from 55.1% in 1997. This increase was primarily attributable to
increases in European and North American expenses. The increase in Europe was
primarily due to higher labor expenses incurred in anticipation of additional
teleservicing campaign business which did not materialize. The increase in cost
of services in North America reflects lower labor utilization in the
telecommunications group and ramp-up and training expenses in the technology
group.
13
Selling, General and Administrative Expenses. Selling, general and
administrative expenses represent expenses incurred to directly support and
manage the operations, including costs of management, administration, facilities
expenses, depreciation and maintenance, amortization, sales and marketing
activities and client support services. Selling, general and administrative
expenses increased $50.3 million, or 27.1%, to $235.9 million in 1998 from
$185.6 million in 1997. This increase was primarily a result of the Company's
continued growth both internally and through acquisitions and includes an
increase of $11.7 million, or 40.7%, in depreciation and amortization in 1998
compared to 1997. As a percentage of revenues, selling, general and
administrative expenses increased to 40.2% in 1998 from 37.8% in 1997. This
increase relates primarily to lower than expected revenues during most of the
year from European operations and higher expenses associated with the startup
operations in Latin America and Asia Pacific.
Restructuring Expenses. The Company recorded restructuring expenses of $6.6
million in 1998. The restructuring expenses primarily represent expenses
associated with statutory or contractual severance arrangements and related
costs. The charge was driven by two principal factors; a lower level of campaign
business, which historically has represented a large portion of the Company's
business in Europe, and the need to reposition the Company's infrastructure for
increasing amounts of outsourcing business.
Operating Income. Operating income decreased $7.1 million, or 36.5%, to
$12.2 million in 1998 from $19.3 million in 1997. Excluding the restructuring
expenses of $5.2 million and $6.6 million in 1997 and 1998, respectively, and
the write down of the investment in the Telebusiness business unit of $10.5
million in 1997, operating income decreased $16.1 million to $18.8 million in
1998 from $34.9 million in 1997. The decrease in operating income was primarily
attributable to the Company's European operations as described earlier.
Interest Expense, Net. Net interest expense increased to $12.7 million in
1998 from $5.1 million in 1997. This increase was primarily due to increased
borrowings, including the Company's high yield bonds that were issued in 1998.
The increased borrowings were utilized to support the Company's growth,
including acquisitions.
Income Tax Expense. Income tax expense decreased to $1.0 million in 1998
from $11.3 million in 1997 primarily due to a decrease in income before income
taxes and minority interest in 1998 compared to 1997. Excluding the
restructuring expenses in 1998 and 1997 and the write down of the Telebusiness
business unit in 1997, income tax expense was $3.0 million and $11.3 million for
1998 and 1997, respectively, or 47.5% and 37.8% of income before income taxes
and minority interest. The difference between the Company's income tax expense
and that which would be calculated using the statutory Federal income tax rate
of 34% on income is primarily due to non-deductible business acquisition
expenses and international, state and local income taxes. The increase in income
tax expense as a percentage of income before income taxes and minority interest
in 1998 compared to 1997 was due to the impact of the non-deductible business
acquisition expenses which do not change materially from period to period,
combined with lower income before income taxes and minority interest.
Net Income (Loss) From Continuing Operations and Net Income (Loss). Net
income (loss) from continuing operations decreased to a $(0.6) million loss in
1998 from $2.8 million of income in 1997. Excluding the restructuring expenses
in 1998 and 1997 and the write down of the Telebusiness business unit in 1997,
net of tax, net income from continuing operations was $4.0 million in 1998 and
$18.5 million in 1997. The decrease in 1998 compared to 1997 was primarily
attributable to the Company's European operations as described earlier and
additional interest expense. Net income (loss) was a $(1.1) million loss in 1998
compared to $2.8 million of income in 1997. The difference between net income
(loss) from continuing operations and net income (loss) in 1998 was an
extraordinary loss that the Company recognized to write off the deferred costs
of its original Credit Agreement which was amended during 1998.
14
1997 Compared to 1996
Revenues. Revenues increased $178.7 million, or 57.1%, to $491.5 million in
1997 from $312.8 million in 1996. Of this increase, $36.0 million was
attributable to services initiated for new clients, $101.5 million was
attributable to increased revenues from existing clients and $41.2 million was
attributable to revenues from businesses acquired after the start of 1997 under
the purchase method of accounting. The increase in revenues from existing
clients was primarily the result of higher calling volumes rather than higher
rates.
Cost of Services. Cost of services increased $107.2 million, or 65.5%, to
$270.9 million in 1997 from $163.7 million in 1996. As a percentage of revenues,
cost of services increased to 55.1% in 1997 from 52.3% in 1996. This increase
was primarily due to the start up operations in the Asia Pacific region and to
the Company's Spanish operations which implemented a new compensation plan in
1997. This plan had the corresponding effect of decreasing selling, general and
administrative expenses in Spain.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $64.9 million, or 53.8%, to $185.6 million in
1997 from $120.7 million in 1996. This increase was primarily a result of the
Company's continued growth both internally and through acquisition, including
additional goodwill amortization expense of $1.8 million related to purchase
acquisitions in 1997, and also includes the Company's efforts to establish the
matrix organizational structure needed to manage a global business. As a
percentage of revenues, selling, general and administrative expenses decreased
to 37.8% in 1997 from 38.6% in 1996. Excluding certain non-recurring operating
expenses incurred in 1996 related to an acquisition, these expenses decreased
slightly as a percentage of revenue in 1997 from 37.9% of revenues in 1996.
Restructuring Expenses. The Company recorded restructuring expenses and a
write down of its investment in its Telebusiness business unit of $5.2 million
and $10.5 million, respectively, in 1997. The restructuring expenses related to
the closing of underperforming call centers and redundant administrative
buildings as well as severance and other costs associated with reorganizations
of business units primarily in Europe and North America. The write down of the
investment in the Telebusiness business unit, which was predominantly a non-cash
charge, related to the Company's decision to pursue a new joint-venture equity
partner in the Asia Pacific region. The joint-venture agreement with Lend Lease
Corporation Limited of Sydney, Australia excluded the Telebusiness business
unit.
Operating Income. Operating income decreased $9.0 million, or 32.0%, to
$19.3 million in 1997 from $28.3 million in 1996. Excluding the restructuring
expenses in 1997 and the non-recurring operating expenses in 1996, operating
income increased $4.4 million, or 14.5%, to $34.9 million in 1997 from $30.5
million in 1996. The increase was primarily attributable to the increase in
revenues noted earlier, partially offset by the increased expenses attributable
to those revenues and the efforts to establish the matrix organization noted
above. As a percentage of revenue, operating income decreased to 7.1% in 1997
from 9.8% in 1996 excluding the restructuring expenses in 1997 and the
non-recurring operating expenses in 1996. This decrease was primarily due to the
higher cost of services as a percentage of revenues in 1997 compared to 1996, as
described above.
Interest Expense, Net. Net interest expense increased to $5.1 million in
1997 from $0.2 million in 1996. This increase was primarily due to increased
borrowings utilized to support the Company's growth, including acquisitions.
15
Income Tax Expense. Income tax expense increased to $11.3 million in 1997
from $10.2 million in 1996. The income tax expense as a percentage of income
before taxes and minority interest was 79.1% in 1997 and 48.3% in 1996 primarily
due to non-deductible restructuring expenses (primarily impairment losses on
goodwill) and write downs of state incentive tax credits in 1997 and
non-deductible transaction related expenses in 1996.
Net Income. Net income decreased $8.0 million, to $2.8 million in 1997 from
$10.9 million in 1996. Excluding the restructuring expenses and related tax
effects in 1997 and the non-recurring operating expenses in 1996, net income
decreased $1.0 million to $18.5 million in 1997 from $19.5 million in 1996. The
decrease was primarily due to increased interest and tax expense offset
partially by an increase in operating income.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $17.7 million in 1998.
Included in the net cash provided from operations was a net loss of $1.1
million, however that loss included non-cash depreciation and amortization
expenses of $40.4 million. Also included in cash flows from operating activities
was $21.5 million of cash used primarily as a result of an increase in accounts
receivable needed to support growth. The Company anticipates that accounts
receivable balances will continue to grow as the Company grows. Net cash used in
investing activities was $43.1 million for 1998. Included in this total was
$52.0 million used for capital expenditures (primarily call and data management
equipment) and $2.2 million used for acquisitions. These uses of cash were
partially offset by $9.4 million of cash received from sale-leasebacks of
facilities. Net cash provided by financing activities during 1998 was $16.1
million, primarily attributable to additional borrowings on notes payable.
During 1998, the Company also completed the private placement of $100 million of
9.25% Senior Subordinated Notes due 2006. The proceeds from the offering were
used to repay borrowings outstanding under the Company's long term revolving
credit facility.
Net cash provided by operating activities was $19.0 million in 1997. The
Company recorded net income of $2.8 million (including a non-cash tax charge of
$5.6 million), depreciation and amortization of $28.7 million and primarily
non-cash restructuring expenses of $15.5 million. This cash flow was offset by
$33.6 million of cash used in operating activities primarily as a result of an
increase in accounts receivable needed to support growth. Net cash used in
investing activities was $131.4 million for 1997. Of this total, $69.4 million
was used for capital expenditures (primarily call and data management equipment
and facilities) and $61.0 million was used for acquisitions. Net cash provided
by financing activities during 1997 was $113.7 million, primarily attributable
to borrowings on the Company's available credit lines and other notes payable.
Net cash provided by operating activities was $35.8 million during 1996.
This was the result of $26.4 million of net income before depreciation and
amortization and other non-cash charges and $9.4 million of changes in operating
assets and liabilities. Cash used by investing activities for 1996 was $55.0
million. Of this total, $40.0 million was used for capital expenditures
(primarily call and data management equipment) and $23.7 million was used for
acquisitions, offset partially by sales of marketable securities. Cash provided
by financing activities for 1996 of $39.6 million resulted primarily from a
public equity offering, net borrowings from a bank line of credit, and term
debt.
At December 31, 1998, the Company had unused lines of credit totaling
approximately $36.6 million. During 1998 the Company sought and obtained certain
modifications to its existing long-term credit facility to permit continued
availability of borrowing under such facility. The Company believes that funds
generated from operations, existing cash and the funds available under its
credit facilities, as modified, will be sufficient to finance its current
operations, planned capital expenditures and internal growth for the next
several years. Future acquisitions, if any, may require additional debt or
equity financing.
16
YEAR 2000 ISSUE
The Year 2000 statement which follows is a Year 2000 Readiness Disclosure,
pursuant to the Year 2000 Information and Readiness Disclosure Act, Public Law
No. 105-271. Please note that for purposes of any action brought under the
securities laws, as that term is defined in section 3(a)(47) of the Securities
Exchange Act of 1934 (15 U.S.C. 78c(a)(47)), the Year 2000 Information and
Readiness Disclosure Act does not apply to any statements contained in any
documents or materials filed with the Securities and Exchange Commission, or
with Federal banking regulators, pursuant to section 12(I) of the Securities
Exchange Act of 1934 (15 U.S.C. 78l), or disclosures or writing that when made
accompanied the solicitation of an offer or sale of securities.
The Company recognizes the need to ensure its operations will not be
adversely impacted by Year 2000 software and embedded system failures.
Specifically, computational errors and system failures are a known risk with
respect to dates after December 31, 1999. The Company has established a central
Y2K compliance office that reports directly to the Chief Information Officer.
Each of the Company's operating units have also designated information
technology ("IT") personnel to address the issues that the unit faces and to
report to the central Y2K compliance office. The Company has implemented a
system which allows it to track all IT and non-IT systems and facility functions
for compliance with industry Y2K standards. This tracking system allows the
Company to monitor and track each functional point as a single item grouped by
how critical the item is in the Company's ability to perform its daily
functions. Based on the output from this data and an analysis of the system
reports, the Company believes that all functional points which are critical to
the Company's functions have been identified and assessed. Further, the Company
has developed a remediation plan for each item in this critical list. Part of
the Company's remediation strategy is in concert with its efforts to acquire or
develop new and innovative systems for its internal operations.
IT issues - The Company is moving all of its IT systems into a state of
readiness for the year 2000. The Company believes that it is making satisfactory
progress to ensure that it will be ready with all critical IT systems by the end
of June 1999. The functional points that are defined as critical IT issues
include internal and external computer systems for revenue generating
applications. The Company has developed a strategy for its mission critical
internal systems designed to have every functional point year 2000 compliant by
the end of June 1999. These internal systems represent approximately 28% of the
overall effort in the IT applications area. The remaining 72% of the overall
effort in the IT area is in the interface and integration of external client and
vendor application systems. The Company has implemented a three-step process of
contacting significant vendors and clients to request information about the
status of their Y2K compliance efforts. In addition to communicating with
significant vendors, the Company is testing certain critical vendor application
systems for Y2K compliance. The Company has started an initiative that will
identify mitigation and contingency plans at both the business and technical IT
levels. This initiative is scheduled to be completed by July 31, 1999. In
addition to communicating with significant clients, the Company's strategy to
deal with non-compliant external client customer data is a windowing technique
that will enable such data to be used by the Company's systems.
Non IT issues (facilities) - Non-IT issues, with few exceptions, have been
classified into a non-critical category. The few exceptions include dial tone
for the Company's telephony and power from the Company's energy providers. The
Company has included these functional points in the critical category for
purposes of scheduling. Based on communications with providers of these
services, the Company believes that these services will not be interrupted by
Year 2000 failures. The Company's contingency plan for the loss of power
includes generator systems in the Company's major facilities. The Company's
contingency plan for loss of dial tone includes the distribution of network
services across several providers. This will allow the Company to minimally
maintain its service levels in the event of a failure. The Company believes that
it is making satisfactory progress to ensure that all facility related issues
that are material to operations will be compliant by the end of June 1999.
17
Phases - The Company is employing a four-phase, nine-process step Project
Methodology that covers each aspect of Y2K compliance. The four phases are:
* Phase 1 Assessment
* Phase 2 Remediation
* Phase 3 Verification and Testing
* Phase 4 Implementation
Each process step is necessary within the framework and provides clear
management checkpoints for gauging the progress of activity during execution of
the project plan. The following table outlines the phases and process steps:
Phase1 Phase 2 Phase 3 Phase 4
Verification/
Process Steps Assessment Remediation Testing Implementation
- ------------------------------------------------------------------------------------------------------
1. Recognition/Awareness X X X X
2. Inventory X
3. Evaluation X
4. Determination X
5. Remediation X
6. Re-engineering X
7. Multi-level testing X X X X
8. Implementation X
9. Post-implementation X
The Company has clearly defined each of the process steps in the Project
Methodology. The Recognition/Awareness step included communication of the Y2K
issues and their importance throughout the Company. The Inventory step included
the identification and cataloging of each item that must be verified for
compliance with Y2K processing. The Evaluation step involves the evaluation and
categorization of the critical nature of each item based on established
criteria. The Determination step includes making informed management decisions
regarding the strategy to be taken for each individual item. The Remediation
step involves repair of all components of a process that could improperly
process dates. The Re-engineering step consists of rewriting and/or replacing
whole units of software code. The Multi-level testing step involves the
development of detailed testing criteria and the implementation of those testing
plans. The Implementation step involves the coordination of the release of
applications/systems into the live systems environment. The Post-implementation
step will include the on-going monitoring of applications/systems that have been
repaired and placed into the live systems environment.
The Company has completed the Recognition /Awareness and Inventory process steps
and nearly completed the Evaluation process steps for all items. The Company
estimates that approximately 49% of all items are completed. Completed items are
either compliant, will be retired prior to 2000, or are low priority items that
do not affect business and will be addressed at a later time (work around
processes will be implemented). In addition, the Company estimates that another
37% of all items that the Company believes it needs to complete to be Y2K
compliant are in process steps within Phase 2 - Remediation, and a small number
of items are in Phases 3 and 4.
Costs of Y2K Compliance - The Company currently estimates that the costs to
become Y2K compliant will approximate $16-20 million. The Company currently
anticipates that approximately 50% of these costs will be for hardware and
software and the remainder will be primarily internal personnel costs. The
Company estimates that it has incurred less than $6 million of these costs
through December 31, 1998. The estimated hardware and software costs are
included in the Company's definition of Y2K costs in cases where such
expenditures have been accelerated in order to address Y2K issues. These are the
Company's current cost estimates and they may change, perhaps materially.
18
Risks - There are many risks associated with the Year 2000 issue, including
without limitation the possibility that the Company will be unable to receive
client phone calls or that the Company will be unable to initiate phone calls on
behalf of its clients. Such possibilities could have a material adverse effect
on the Company depending on the nature of the cause and the speed with which it
could be corrected or an alternative implemented. If the Company's service
providers are unable to provide network switching capability, the Company will
be unable to perform its revenue-producing activities. If the Company's client
customer data does not have Year 2000 compliant dates, additional processing
will be required before revenue-producing activities using these data can be
performed. If internal systems or vendor application systems fail, the Company
will be unable to perform revenue-producing activities until such time as the
problem can be isolated and repaired.
The Company believes that its critical internal systems and procedures will be
ready and tested before the year 2000. The Company believes that its reasonably
likely worst case scenarios will revolve around external factors including
vendors and clients. Although the Company expects to focus approximately 72% of
its efforts in the IT area on this external exposure, the Company has far less
control over these issues. It is reasonably likely that not all of the Company's
clients will have all of their internal systems year 2000 compliant before
January 1, 2000.
As additional verification of readiness, the Company has contracted for an
external follow-up review of all work that has been done to date. This work,
which has already begun, will include an independent third party review of all
phases in every region of the Company. This project is being undertaken to
verify readiness as well as identify areas of additional need. The costs of the
project and the dates on which the Company plans to complete the Y2K
modifications are based on management's best estimates, which were derived using
numerous assumptions of future events, including the continued availability of
certain resources, third party modification plans, the Company's ability to
implement compliance in certain critical areas and other factors. However, there
can be no assurance that these estimates will be achieved, and actual results
could differ materially from those plans. The severity of problems to be
confronted by the Company for partial or complete non-compliance will depend on
a variety of factors (such as the nature of the resulting problem and the speed
with which it could be corrected or an alternative implemented) which are
currently unknown. Due to the general uncertainty inherent in the Year 2000
problem, resulting in part from the uncertainty of the Year 2000 readiness of
vendors and clients, the Company is unable to determine at this time whether the
consequences of Year 2000 failures will have a material impact on the Company's
results of operations, liquidity or financial condition.
QUARTERLY RESULTS AND SEASONALITY
The Company has experienced and expects to continue to experience quarterly
variations in its results of operations principally due to the timing of
clients' teleservicing campaigns and the commencement and terms of new
contracts, revenue mix, and the timing of additional selling, general and
administrative expenses to support new business. The Company experiences
periodic fluctuations related to both the start-up costs associated with
expansion into a new region and the implementation of clients' teleservicing
activities. In addition, the Company's business tends to be slower in the third
quarter due to summer holidays in Europe and, to a lesser degree, in the first
quarter due to the changeover of client marketing strategies which often occurs
at the beginning of the year.
EFFECTS OF INFLATION
Inflation has not had a significant effect on the Company's operations. However,
there can be no assurance that inflation will not have a material effect on the
Company's operations in the future.
19
ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards ("SFAS") 133, Accounting for
Derivative Investments and Hedging Activities, was issued in June 1998. SFAS 133
establishes accounting standards for derivative instruments and for hedging
activities. The standard is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. The Company anticipates adopting this accounting
pronouncement in the third quarter of 1999; however, management believes that it
will not have a significant impact on the Company's consolidated financial
statements.
FORWARD-LOOKING STATEMENTS
This Form 10-K contains forward-looking statements within the meaning of Section
27A of the Securities Act and Section 21E of the Exchange Act. Such statements
are identified by the use of forward-looking words or phrases which may include
but are not limited to, "intended," "will be positioned," "expects," "expected,"
"anticipates," "anticipated," "believes" and similar expressions. The
forward-looking statements are based on the Company's current expectations. All
statements other than statements of historical facts included in this Form 10-K,
including those regarding the Company's financial position, business strategy,
projected costs and plans and objectives of management for future operations,
are forward-looking statements. Although the Company believes that the
expectations reflected in such forward-looking statements are reasonable, there
can be no assurance that such expectations will prove to be correct. Because
forward-looking statements involve risks and uncertainties, the Company's actual
results could differ materially. Important factors that could cause actual
results to differ materially from the Company's expectations may include, but
are not limited to, the effects of leverage, restrictions imposed by the terms
of indebtedness, reliance on major clients, risks associated with managing a
global business, fluctuations in operating results, reliance on
telecommunications and computer technology, risks associated with the Company's
acquisition strategy, the dependence on telephone service, the competitive
industry, dependence on labor force, foreign currency risks, the effects of
business regulation, dependence on key personnel and control by management, and
risks associated with Year 2000 failures (see discussion above under the caption
"Year 2000 Issue"). All subsequent written and oral forward-looking statements
attributable to the Company or persons acting on behalf of the Company are
expressly qualified in their entirety by this paragraph. The Company disclaims,
however, any intent or obligation to update its forward-looking statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company is exposed to market risks associated primarily with changes in
foreign currency exchange rates. The Company has operations in many parts of the
world however, both revenues and expenses of those operations are typically
denominated in the currency of the country of operations, providing a natural
hedge. The Company entered into certain hedging transactions during 1998
designed to hedge foreign currency exchange risk related to short term
intercompany loans, however the amounts involved were not material.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information called for by this item (other than selected quarterly
information, which is set forth as follows) is incorporated by reference from
the Company's Consolidated Financial Statements set forth on pages F-3 through
F-30 hereof.
The following table sets forth statement of operations data for each of the
four quarters of 1998 and 1997. This quarterly information is unaudited but has
been prepared on a basis consistent with the Company's audited financial
statements presented elsewhere herein and, in the Company's opinion, includes
all adjustments (consisting only of normal recurring adjustments) necessary for
a fair presentation of the information for the quarters presented. The operating
results for any quarter are not necessarily indicative of results for any future
period.
20
(in thousands, except per share data)
THREE MONTHS ENDED
----------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1998 1998 1998 1998
-------------- ----------- --------------- -----------------
Revenues.............................. $ 137,748 $ 147,307 $ 146,755 $ 154,508
Operating expenses:
Cost of services................. 77,820 82,585 82,636 88,545
Selling, general and administrative
expenses......................... 54,672 61,096 59,045 61,087
Restructuring expenses........... -- 6,607 -- --
-------------- ----------- ---------- -------------
Operating income (loss).......... 5,256 (2,981) (a) 5,074 4,876
Interest expense, net................. (2,590) (3,375) (3,457) (3,325)
Other income, net..................... 135 34 19 75
-------------- ----------- ---------- -------------
Income (loss) before income taxes
and minority interest.......... 2,801 (6,322) 1,636 1,626
Income tax expense (income)........... 1,117 (1,878) 836 891
Minority interest..................... (294) 31 13 (401)
-------------- ----------- ---------- -------------
Net income (loss) from continuing
operations....................... 1,978 (4,475) 787 1,136
Extraordinary loss on refinancing, net
of tax........................... 514 -- -- --
-------------- ----------- ---------- -------------
Net income (loss)..................... $ 1,464 $ (4,475) (a) $ 787 $ 1,136
============== =========== ========== =============
Income (loss) from continuing operations
per common share:
Basic......................... $ 0.03 $ (0.07) $ 0.01 $ 0.02
Diluted....................... 0.03 (0.07) 0.01 0.02
Income (loss) per common share:
Basic............................ $ 0.02 $ (0.07) (a) $ 0.01 $ 0.02
Diluted.......................... 0.02 (0.07) (a) 0.01 0.02
Weighted average common shares outstanding:
Basic............................ 63,295 63,871 64,081 64,291
Diluted.......................... 69,611 63,871 70,640 71,364
a) Includes restructuring expenses of $6.6 million. Excluding those
restructuring expenses, operating income, net income, basic income per share and
diluted income per share would have been $3.6 million, $0.1 million, $0.00 and
$0.00, respectively, for the three months ended June 30, 1998.
THREE MONTHS ENDED
---------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1997 1997 1997 1997
-------------- ------------ ---------------- ---------------
Revenues.............................. $ 104,260 $ 125,267 $ 120,248 $ 141,699
Operating expenses:
Cost of services................. 56,357 67,105 67,913 79,566
Selling, general and administrative
expenses....................... 37,242 46,301 49,471 52,576
Restructuring expenses........... -- -- -- 15,681
----------- ----------- ------------ -----------
Operating income (loss).......... 10,661 11,861 2,864 (6,124) (a)
Interest expense, net................. (534) (1,153) (1,512) (1,897)
Other income (expense), net........... -- (61) 123 64
----------- ----------- ------------ -----------
Income (loss) before income taxes
and minority interest......... 10,127 10,647 1,475 (7,957)
Income tax expense.................... 3,643 3,995 739 2,929
Minority interest..................... 30 46 10 88
----------- ----------- ------------ -----------
Net income (loss)..................... $ 6,454 $ 6,606 $ 726 $ (10,974) (a)
=========== =========== ============ ===========
Net income (loss) per share:.
Basic............................ $ 0.11 $ 0.11 $ 0.01 $ (0.17) (a)
Diluted.......................... 0.10 0.10 0.01 (0.17) (a)
Weighted average common shares outstanding:
Basic............................ 59,875 61,622 62,484 63,031
Diluted.......................... 67,509 68,800 69,327 63,031
a) Includes restructuring expenses and a write down of the Company's investment
in its Telebusiness business unit of $5.2 million and $10.5 million,
respectively. Excluding those operating expenses, operating income, net income,
basic income per share and diluted income per share would have been $9.6
million, $4.7 million, $0.07 and $0.07, respectively, for the three months ended
December 31, 1997.
21
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
None.
PART III
The information required by this Part III is incorporated by reference from
the registrant's definitive proxy statement for the 1999 annual meeting of the
registrant's stockholders to be held on May 6, 1999, which involves the election
of directors. The definitive proxy statement will be filed with the Securities
and Exchange Commission not later than 120 days after the end of the year
covered by this Form 10-K.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as a part of this report:
1. FINANCIAL STATEMENTS. The following Consolidated Financial Statements of
SITEL Corporation and Independent Auditors' Report are included at pages F-1
through F-30 of this Form 10-K:
- Independent Auditors' Report.
- Consolidated Balance Sheets at December 31, 1997 and 1998.
- Consolidated Statements of Income (Loss) For The Years Ended December 31,
1996, 1997, and 1998.
- Consolidated Statements of Stockholders' Equity For The Years Ended
December 31, 1996, 1997 and 1998.
- Consolidated Statements of Cash Flows For The Years Ended December 31,
1996, 1997 and 1998.
- Notes to Consolidated Financial Statements.
2. FINANCIAL STATEMENT SCHEDULES. The following consolidated financial
statement schedules of SITEL Corporation for the years ended December 31, 1996,
1997 and 1998 are included at pages S-1 through S-2 of this Form 10-K and should
be read in conjunction with the Consolidated Financial Statements:
- Independent Auditors' Report.
- Schedule II - Valuation and Qualifying Accounts.
All other schedules of the Company for which provision is made in the
applicable accounting regulations of the Securities and Exchange Commission are
not required under the related instructions, are inapplicable or have been
disclosed in the Notes to Consolidated Financial Statements and, therefore, have
been omitted.
22
3. EXHIBITS. The following Exhibits are filed as part of, or are
incorporated by reference into, this Form 10-K:
Exhibit No.
-----------
(1) 3.1 Amended and Restated Articles of Incorporation
(5) 3.1(a) Articles of Amendment filed September 10, 1996 to the Amended and Restated Articles of Incorporation
(1) 3.4 Amended and Restated Bylaws.
(10) 3.4(a) Amended and Restated Bylaws (conformed copy including Amendment No. 1)
(21) 3.4(b) Amendment No. 2 to Amended and Restated Bylaws
(18) 3.5 Certificate of Designation of Series A Participating Preferred Stock.
(7) 4.2 Specimen Common Stock Certificate.
(19) 4.3 Rights Agreement.
(1) 9.1 Form of General Voting Agreement.
(1) 10.1 SITEL Corporation Stock Option Plan for Replacement of Existing Options.
(7) 10.1(a) Amendment No. 1 to SITEL Corporation Stock Option Plan for Replacement of Existing Options
(1) 10.2 SITEL Corporation Stock Option Plan for Replacement of EEBs.
(7) 10.2(a) Amendment No. 1 to SITEL Corporation Stock Option Plan for Replacement of EEBs.
(4) 10.3 Amended and Restated SITEL Corporation 1995 Employee Stock Option Plan.
(7) 10.3(a) Amendment No. 1 to Amended and Restated SITEL Corporation 1995 Employee Stock Option Plan.
(9) 10.3(b) Amendment No. 2 to Amended and Restated SITEL Corporation 1995 Employee Stock Option Plan
(13) 10.3(c) Amendment No. 3 to the Amended and Restated SITEL Corporation 1995 Employee Stock Option Plan.
(8) 10.4 Amended and Restated SITEL Corporation 1995 Non-Employee Directors Stock Option Plan.
(1) 10.5 SITEL Corporation Executive Wealth Accumulation Plan.
(14) 10.5(a) Second Amendment to SITEL Corporation Executive Wealth Accumulation Plan.
(1) 10.6 Employment Agreement with James F. Lynch.
(1) 10.7 Employment Agreement with Michael P. May.
(1) 10.8 Form of Right of First Refusal.
(2) 10.9 Form of Indemnification Agreement with Outside Directors.
(3) 10.10 Form of Indemnification Agreement with Executive Officers.
(15) 10.11 Amended and Restated SITEL Corporation Employee Stock Purchase Plan.
(17) 10.12 Separation Agreement dated May 12, 1998 with Michael P. May.
(11) 10.13 Amended Credit Agreement with Bankers Trust Company.
(16) 10.13(a) First Amendment dated as of June 19, 1998 to Amended Credit Agreement.
(20) 10.13(b) Second Amendment dated September 30, 1998 to Amended Credit Agreement.
(12) 10.14 Indenture governing $100,000,000 9 1/4% Senior Subordinated Notes due 2006.
10.15 Separation Agreement dated October 14, 1998 with Barry S. Major.
(6) 16.1 Letter from Coopers & Lybrand L.L.P. dated February 6, 1997.
21 Subsidiaries.
23.1 Consent of KPMG Peat Marwick LLP
27 Financial Data Schedule.
- -------------------------------------
(1) Previously filed as an exhibit under the same exhibit number to
the Company's Registration Statement on Form S-1 (Registration
No. 33-91092).
(2) Previously filed as an exhibit under the same exhibit number to
the Company's Form 10-Q for the quarter ended August 31, 1995.
(3) Previously filed as an exhibit under the same exhibit number to
the Company's Registration Statement on Form S-8 (Registration
No. 33-99434).
(4) Previously filed as Appendix B to the Company's definitive Proxy
Statement for the Annual Meeting of Stockholders, filed on
September 27, 1996.
23
(5) Previously filed as Exhibit 4.1(a) to the Company's Registration
Statement on Form S-3 (Registration No. 333-13403).
(6) Previously filed as an exhibit under the same exhibit number to
the Company's Form 8-K filed on February 6, 1997.
(7) Previously filed as an exhibit under the same exhibit number to
the Company's Annual Report on Form 10-K for the year ended
December 31, 1996.
(8) Previously filed as Appendix B to the Company's definitive Proxy
Statement for the Annual Meeting of Stockholders, filed on April
30, 1997.
(9) Previously filed as Appendix C to the Company's definitive Proxy
Statement for the Annual Meeting of Stockholders, filed on April
30, 1997.
(10) Previously filed as Exhibit 4.2 to the Company's Registration
Statement on Form S-3 (Registration No. 333-28131).
(11) Previously filed as Exhibit 10.1 to the Company's Form 8-K filed
on March 16, 1998.
(12) Previously filed as Exhibit 10.2 to the Company's Form 8-K filed
on March 16, 1998.
(13) Previously filed as Exhibit 10.3(c) to the Company's Form 10-Q
for the quarter ended March 31, 1998.
(14) Previously filed as an exhibit under the same exhibit number to
the Company's Form 10-Q for the quarter ended March 31, 1998.
(15) Previously filed as Exhibit 10.12 to the Company's Form 10-Q for
the quarter ended March 31, 1998.
(16) Previously filed as Exhibit 10.1 to the Company's Form 8-K filed
on July 1, 1998.
(17) Previously filed as Exhibit 10.1 to the Company's Form 10-Q for
the quarter ended June 30, 1998.
(18) Previously filed as Exhibit A to the Rights Agreement included as
Exhibit 1 to the Company's Registration Statement on Form 8-A
filed on August 24, 1998.
(19) Previously filed as Exhibit 1 to the Company's Registration
Statement on Form 8-A filed on August 24, 1998.
(20) Previously filed as Exhibit 10.1 to the Company's Form 10-Q for
the quarter ended September 30, 1998.
(21) Previously filed as Exhibit 3.2 to the Company's Form 10-Q for
the quarter ended September 30, 1998.
(b) There were no reports on Form 8-K filed by the Registrant during the fourth
quarter of the fiscal year ended December 31, 1998.
24
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: March 19, 1999 SITEL Corporation
By: /s/Phillip A. Clough
------------------------------------------
Chief Executive Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
/s/James F. Lynch Chairman of the Board March 19, 1999
- ------------------------- and Director
James F. Lynch
/s/Phillip A. Clough Chief Executive Officer and March 19, 1999
- ------------------------- Director
Phillip A. Clough
/s/W. Gar Richlin Executive Vice President and March 19, 1999
- ------------------------- Chief Financial Officer
W. Gar Richlin (Principal Financial Officer)
/s/Alan G. Siemek Corporate Controller March 19, 1999
- ------------------------- (Principal Accounting Officer)
Alan G. Siemek
/s/Henk P. Kruithof Executive Vice Chairman and March 19, 1999
- ------------------------- Director
Henk P. Kruithof
/s/Bill L. Fairfield Director March 19, 1999
- -------------------------
Bill L. Fairfield
/s/Kelvin C. Berens Director March 19, 1999
- -------------------------
Kelvin C. Berens
/s/George J. Kubat Director March 19, 1999
- -------------------------
George J. Kubat
25
EXHIBIT INDEX
Exhibit No.
-----------
(1) 3.1 Amended and Restated Articles of Incorporation
(5) 3.1(a) Articles of Amendment filed September 10, 1996 to the Amended and Restated Articles of Incorporation
(1) 3.4 Amended and Restated Bylaws.
(10) 3.4(a) Amended and Restated Bylaws (conformed copy including Amendment No. 1)
(21) 3.4(b) Amendment No. 2 to Amended and Restated Bylaws
(18) 3.5 Certificate of Designation of Series A Participating Preferred Stock.
(7) 4.2 Specimen Common Stock Certificate.
(19) 4.3 Rights Agreement.
(1) 9.1 Form of General Voting Agreement.
(1) 10.1 SITEL Corporation Stock Option Plan for Replacement of Existing Options.
(7) 10.1(a) Amendment No. 1 to SITEL Corporation Stock Option Plan for Replacement of Existing Options
(1) 10.2 SITEL Corporation Stock Option Plan for Replacement of EEBs.
(7) 10.2(a) Amendment No. 1 to SITEL Corporation Stock Option Plan for Replacement of EEBs.
(4) 10.3 Amended and Restated SITEL Corporation 1995 Employee Stock Option Plan.
(7) 10.3(a) Amendment No. 1 to Amended and Restated SITEL Corporation 1995 Employee Stock Option Plan.
(9) 10.3(b) Amendment No. 2 to Amended and Restated SITEL Corporation 1995 Employee Stock Option Plan
(13) 10.3(c) Amendment No. 3 to the Amended and Restated SITEL Corporation 1995 Employee Stock Option Plan.
(8) 10.4 Amended and Restated SITEL Corporation 1995 Non-Employee Directors Stock Option Plan.
(1) 10.5 SITEL Corporation Executive Wealth Accumulation Plan.
(14) 10.5(a) Second Amendment to SITEL Corporation Executive Wealth Accumulation Plan.
(1) 10.6 Employment Agreement with James F. Lynch.
(1) 10.7 Employment Agreement with Michael P. May.
(1) 10.8 Form of Right of First Refusal.
(2) 10.9 Form of Indemnification Agreement with Outside Directors.
(3) 10.10 Form of Indemnification Agreement with Executive Officers.
(15) 10.11 Amended and Restated SITEL Corporation Employee Stock Purchase Plan.
(17) 10.12 Separation Agreement dated May 12, 1998 with Michael P. May.
(11) 10.13 Amended Credit Agreement with Bankers Trust Company.
(16) 10.13(a) First Amendment dated as of June 19, 1998 to Amended Credit Agreement.
(20) 10.13(b) Second Amendment dated September 30, 1998 to Amended Credit Agreement.
(12) 10.14 Indenture governing $100,000,000 9 1/4% Senior Subordinated Notes due 2006.
10.15 Separation Agreement dated October 14, 1998 with Barry S. Major.
(6) 16.1 Letter from Coopers & Lybrand L.L.P. dated February 6, 1997.
21 Subsidiaries.
23.1 Consent of KPMG Peat Marwick LLP
27 Financial Data Schedule.
- -------------------------------------
(1) Previously filed as an exhibit under the same exhibit number to
the Company's Registration Statement on Form S-1 (Registration
No. 33-91092).
(2) Previously filed as an exhibit under the same exhibit number to
the Company's Form 10-Q for the quarter ended August 31, 1995.
(3) Previously filed as an exhibit under the same exhibit number to
the Company's Registration Statement on Form S-8 (Registration
No. 33-99434).
(4) Previously filed as Appendix B to the Company's definitive Proxy
Statement for the Annual Meeting of Stockholders, filed on
September 27, 1996.
(5) Previously filed as Exhibit 4.1(a) to the Company's Registration
Statement on Form S-3 (Registration No. 333-13403).
26
(6) Previously filed as an exhibit under the same exhibit number to
the Company's Form 8-K filed on February 6, 1997.
(7) Previously filed as an exhibit under the same exhibit number to
the Company's Annual Report on Form 10-K for the year ended
December 31, 1996.
(8) Previously filed as Appendix B to the Company's definitive Proxy
Statement for the Annual Meeting of Stockholders, filed on April
30, 1997.
(9) Previously filed as Appendix C to the Company's definitive Proxy
Statement for the Annual Meeting of Stockholders, filed on April
30, 1997.
(10) Previously filed as Exhibit 4.2 to the Company's Registration
Statement on Form S-3 (Registration No. 333-28131).
(11) Previously filed as Exhibit 10.1 to the Company's Form 8-K filed
on March 16, 1998.
(12) Previously filed as Exhibit 10.2 to the Company's Form 8-K filed
on March 16, 1998.
(13) Previously filed as Exhibit 10.3(c) to the Company's Form 10-Q
for the quarter ended March 31, 1998.
(14) Previously filed as an exhibit under the same exhibit number to
the Company's Form 10-Q for the quarter ended March 31, 1998.
(15) Previously filed as Exhibit 10.12 to the Company's Form 10-Q for
the quarter ended March 31, 1998.
(16) Previously filed as Exhibit 10.1 to the Company's Form 8-K filed
on July 1, 1998.
(17) Previously filed as Exhibit 10.1 to the Company's Form 10-Q for
the quarter ended June 30, 1998.
(18) Previously filed as Exhibit A to the Rights Agreement included as
Exhibit 1 to the Company's Registration Statement on Form 8-A
filed on August 24, 1998.
(19) Previously filed as Exhibit 1 to the Company's Registration
Statement on Form 8-A filed on August 24, 1998.
(20) Previously filed as Exhibit 10.1 to the Company's Form 10-Q for
the quarter ended September 30, 1998.
(21) Previously filed as Exhibit 3.2 to the Company's Form 10-Q for
the quarter ended September 30, 1998.
27