10-Q 1 a2014q110q.htm FORM 10-Q 2014 Q1 10Q


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
FORM 10-Q
 (Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    
For the quarterly period ended
March 31, 2014
 
OR
o
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 333-172952
 
SITEL WORLDWIDE CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
    
Delaware
 
16-1556476
(State or Other Jurisdiction of
 
(I.R.S. Employer Identification No.)
Incorporation or Organization)
 
 
 
 
 
3102 West End Avenue
 
 
Two American Center, Suite 900
 
 
Nashville, Tennessee
 
37203
(Address of Principal Executive Offices)
 
(Zip Code)
 
 
 
Registrant's Telephone Number, Including Area Code:
 
(615) 301-7100
    
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 o    NO þ

The Registrant is a voluntary filer of reports required of companies with public securities under Section 13 or 15(d) of the Securities Exchange Act of 1934 and has filed all reports which would have been required of the Registrant during the preceding 12 months had it been subject to such provisions.

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).
YES þ    NO o
    
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:
 
Large accelerated filer
o
 
Accelerated filer
o
 
Non-accelerated filer
þ
(Do not check if a smaller reporting company)
Smaller reporting company
o
    

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act.)
YES o    NO þ
    
Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date.
 
Outstanding
Class
April 30, 2014
Class A, $0.01 par value
39,261,291
Class B, $0.01 par value
88,281,647
Class C, $0.01 par value
23,990




TABLE OF CONTENTS
 
 
 
Item
 
Page No.
PART I
1.
 
 
 
 
 
2.
3.
4.
 
 
 
PART II
1.
1A.
2.
5.
6.
 



PART I. FINANCIAL INFORMATION

ITEM I. FINANCIAL STATEMENTS (UNAUDITED)

SITEL Worldwide Corporation
Condensed Consolidated Balance Sheets
(Unaudited)

(in thousands of U.S. dollars)



 
March 31, 2014
 
December 31, 2013
Assets
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
10,505

 
$
7,366

Accounts receivable (net of allowance for doubtful accounts of $1,989 and $2,081, respectively)
257,352

 
242,472

Prepaids and other current assets
61,695

 
53,832

Total current assets
329,552

 
303,670

Property and equipment, net
89,417

 
89,662

Goodwill
117,707

 
117,709

Other intangible assets, net
36,024

 
36,547

Deferred income taxes
30,792

 
35,975

Other noncurrent assets
36,345

 
36,658

Total assets
$
639,837

 
$
620,221

Liabilities and Stockholders’ Deficit
 
 
 
Current liabilities
 
 
 
Accounts payable
$
26,496

 
$
20,161

Accrued payroll and benefits
79,652

 
76,646

Accrued liabilities and other
90,304

 
85,235

Income taxes payable
7,913

 
7,510

Current portion of capital lease obligations
1,988

 
2,005

Total current liabilities
206,353

 
191,557

Long-term debt
759,047

 
734,614

Capital lease obligations
2,730

 
3,125

Deferred income taxes
3,817

 
3,828

Other noncurrent liabilities
45,639

 
51,202

Total liabilities
1,017,586

 
984,326


3

SITEL Worldwide Corporation
Condensed Consolidated Balance Sheets (Continued)
(Unaudited)

(in thousands of U.S. dollars, except share and per share data)

 
March 31, 2014
 
December 31, 2013
Commitments and contingencies (see Note 10)

 

Redeemable preferred stock, 20,000,000 convertible shares authorized, issuable in series:
 
 
 
Series B, $0.01 par value; 39,947 shares issued and outstanding at March 31, 2014 and December 31, 2013
68,884

 
66,982

Series C, $0.01 par value; 28,881 shares issued and outstanding at March 31, 2014 and December 31, 2013
61,619

 
59,056

Stockholders’ deficit
 
 
 
Subsidiary exchangeable preferred stock, no par value; 1,713,321 shares authorized, issued, and outstanding at March 31, 2014 and December 31, 2013
2,665

 
2,665

Common stock, 361,000,000 shares authorized; 225,000,000 Class A shares, 128,500,000 Class B convertible shares, and 7,500,000 Class C shares
 
 
 
Class A, $0.01 par value; 41,516,750 shares (including 8,975,858 restricted shares) and 40,699,602 shares (including 8,268,358 restricted shares) issued at March 31, 2014 and December 31, 2013, respectively; 39,051,643 shares and 38,234,495 shares outstanding at March 31, 2014 and December 31, 2013, respectively
326

 
325

Class B, $0.01 par value; convertible into Class A common stock on 1:1 basis; 88,281,647 shares issued and outstanding at March 31, 2014 and December 31, 2013
882

 
882

Class C, $0.01 par value; 6,751,263 shares issued and 23,990 shares outstanding at March 31, 2014 and December 31, 2013
68

 
68

Additional paid-in capital
353,111

 
357,518

Accumulated deficit
(807,206
)
 
(788,390
)
Accumulated other comprehensive loss
(48,851
)
 
(53,964
)
Treasury shares, at cost
(9,247
)
 
(9,247
)
Total stockholders’ deficit
(508,252
)
 
(490,143
)
Total liabilities and stockholders’ deficit
$
639,837

 
$
620,221

See accompanying Notes to Condensed Consolidated Financial Statements.


4

SITEL Worldwide Corporation
Condensed Consolidated Statements of Comprehensive Loss
(Unaudited)

(in thousands of U.S. dollars)

 
Three Months Ended
 
March 31,
 
2014
 
2013
Revenues
$
350,479

 
$
365,062

Operating expenses
 
 
 
Costs of services*
236,930

 
238,946

Selling, general, and administrative expenses*
91,930

 
93,116

Depreciation and amortization of property and equipment
8,412

 
9,048

Amortization of intangible assets
523

 
1,617

Restructuring and exit charges
3,272

 
3,316

(Gain) loss on foreign currency transactions
(410
)
 
1,862

Loss on sale of subsidiary

 
4,558

Impairment and loss (gain) on disposal of assets
113

 
(239
)
Other expense (income), net
21

 
(23
)
Operating income
9,688

 
12,861

Interest and other financing costs, net
21,566

 
20,401

Loss before income taxes
(11,878
)
 
(7,540
)
Income tax provision
6,938

 
1,535

Net loss
(18,816
)
 
(9,075
)
Other comprehensive income:
 
 
 
Foreign currency translation adjustments, net of tax of $0
652

 
1,131

Unrealized gain on derivative valuation, net of tax (benefit) expense of $(3,418) and $598, respectively
4,426

 
1,425

Reclassification of pension amounts realized in net loss, net of tax of $0
35

 
(37
)
Total other comprehensive income
5,113

 
2,519

Comprehensive loss
$
(13,703
)
 
$
(6,556
)
* Exclusive of Depreciation and amortization of property and equipment
See accompanying Notes to Condensed Consolidated Financial Statements.





5

SITEL Worldwide Corporation
Condensed Consolidated Statements of Changes in Stockholders' Deficit
(Unaudited)

(in thousands of U.S. dollars, except share and per share data)

-- Schedule 1 --
 
Shares Issued
 
Par Value
 
 
 
 
 
 
 
Class A
Common
Stock
 
Class B
Common
Stock
 
Class C
Common
Stock
 
Class A
Common
Stock
 
Class B
Common
Stock
 
Class C
Common
Stock
 
Additional
Paid-in
Capital
 
Accumulated
Deficit
 
Subtotal
Balances at December 31, 2013
40,699,602

 
88,281,647

 
6,751,263

 
$
325

 
$
882

 
$
68

 
$
357,518

 
$
(788,390
)
 
$
(429,597
)
Restricted shares granted
710,000

 

 

 

 

 

 

 

 

Restricted shares forfeited
(2,500
)
 

 

 

 

 

 

 

 

Non-cash stock granted
109,648

 

 

 
1

 

 

 
58

 

 
59

Preferred B and C stock accretion and BCF

 

 

 

 

 

 
(4,465
)
 

 
(4,465
)
Net loss

 

 

 

 

 

 

 
(18,816
)
 
(18,816
)
Balances at March 31, 2014
41,516,750

 
88,281,647

 
6,751,263

 
$
326

 
$
882

 
$
68

 
$
353,111

 
$
(807,206
)
 
$
(452,819
)
-- Schedule 2 --
 
 
 
Accumulated Other Comprehensive Loss
 
 
 
 
 
 
 
 
 
Totals
from
Schedule 1
 
Foreign
Currency
Translation
 
Defined
Benefit
Pension/
Other
 
Unrealized
Gain (loss) on
Derivatives
Valuation
 
Subsidiary
Exchangeable
Stock
 
Treasury
Stock
Shares
 
Treasury
Stock
Capital
 
Total
Balances at December 31, 2013
$
(429,597
)
 
$
(40,007
)
 
$
(1,632
)
 
$
(12,325
)
 
$
2,665

 
9,192,380

 
$
(9,247
)
 
$
(490,143
)
Non-cash stock granted
59

 

 

 

 

 

 

 
59

Preferred B and C stock accretion and BCF
(4,465
)
 

 

 

 

 

 

 
(4,465
)
Reclassification of pension amounts realized in net loss, net of tax of $0

 

 
35

 

 

 

 

 
35

Unrealized gain on derivative, net of tax expense (benefit) of $(3,418)

 

 

 
4,426

 

 

 

 
4,426

Net loss
(18,816
)
 

 

 

 

 

 

 
(18,816
)
Foreign currency translation adjustment, net of tax of $0

 
652

 

 

 

 

 

 
652

Balances at March 31, 2014
$
(452,819
)
 
$
(39,355
)
 
$
(1,597
)
 
$
(7,899
)
 
$
2,665

 
9,192,380

 
$
(9,247
)
 
$
(508,252
)
See accompanying Notes to Condensed Consolidated Financial Statements.

6

SITEL Worldwide Corporation
Condensed Consolidated Statements of Cash Flows
(Unaudited)

(in thousands of U.S. dollars)

 
Three Months Ended March 31,
 
2014
 
2013
Cash flows from operating activities
 
 
 
Net loss
$
(18,816
)
 
$
(9,075
)
Adjustments to reconcile Net loss to net cash flows relating to operating activities:
 
 
 
Depreciation and amortization (including intangible assets)
8,935

 
10,665

Deferred income taxes
6,048

 
1,221

Non-cash derivative activity
1,491

 
(1,445
)
Amortization of debt issue costs and original issue discount
1,266

 
1,196

Amortization of deferred training revenue, net of costs
(59
)
 
(1,811
)
Loss on sale of subsidiary

 
4,558

Other non-cash items, net
167

 
43

Change in book overdrafts
(101
)
 
1,458

Changes in operating assets and liabilities, net
(9,737
)
 
8,025

Net cash (used in) provided by operating activities
(10,806
)
 
14,835

Cash flows from investing activities
 
 
 
Purchases of property and equipment
(8,911
)
 
(5,544
)
Proceeds from disposition of property and equipment
1,108

 
268

Net cash used in investing activities
(7,803
)
 
(5,276
)
Cash flows from financing activities
 
 
 
Payments on long-term debt and capital lease obligations
(109,991
)
 
(191,868
)
Proceeds from long-term debt
133,395

 
186,254

Payment of interest rate swap, net
(905
)
 
(848
)
Payments of debt issue costs
(719
)
 
(4
)
Net cash provided by (used in) financing activities
21,780

 
(6,466
)
Effect of exchange rate on cash and cash equivalents
(32
)
 
(130
)
Net change in cash and cash equivalents
3,139

 
2,963

Cash and cash equivalents:
 
 
 
Beginning of period
7,366

 
12,245

End of period
$
10,505

 
$
15,208

See accompanying Notes to Condensed Consolidated Financial Statements.



7

SITEL Worldwide Corporation
Notes to Condensed Consolidated Financial Statements
(Unaudited)

(in thousands of U.S. dollars, except share and per share data)


1.
Overview and Basis of Presentation
Overview
SITEL Worldwide Corporation, including consolidated subsidiaries ("we", "our", “Sitel", or “the Company”), is a majority-owned subsidiary of Onex Corporation ("Onex") and is one of the world's largest and most diversified providers of customer care outsourcing services. We offer our clients a wide array of services, including customer service, technical support, customer acquisition, retention and revenue generation services, and back office support. The majority of our customer care services are inbound and delivered telephonically, but we are increasingly asked to provide services through other communication channels, including email, online chat, interactive voice response ("IVR"), and social media channels. We serve a broad range of industry end–markets, including financial services, technology, wireless, retail and consumer products, telecommunications, media and entertainment, energy and utilities, travel and transportation, internet service providers, insurance, public sector, and healthcare.
We are organized geographically and have two reporting segments: (1) "Americas," which refers to North America, Latin America, and Asia Pacific; and (2) "EMEA," which refers to Europe, the Middle East, and Africa. Each reporting segment performs substantially the same services for clients.
Basis of Presentation
The accompanying unaudited Condensed Consolidated Financial Statements of the Company are presented in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and, in the opinion of management, include all adjustments necessary for a fair statement of the financial position, results of operations, and cash flows for each period shown. Certain items have been reclassified from their prior period classifications to conform to the current year presentations. These reclassifications had no effect on net income or stockholders' equity as previously reported. All adjustments are of a normal and recurring nature. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. The December 31, 2013 Condensed Consolidated Balance Sheet data was derived from the Company’s year-end audited Consolidated Financial Statements as presented in the Company’s Annual Report on Form 10-K filed with the United States Securities and Exchange Commission (“SEC”) on February 19, 2014. The Company’s interim Condensed Consolidated Financial Statements are not necessarily indicative of the financial position or operating results for an entire year. The accompanying interim Condensed Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and Notes thereto included in Item 8 of Part II of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013.
Recent Accounting Pronouncements
In March 2013, the FASB issued ASU No. 2013-05, "Foreign Currency Matters (Topic 830): Parent's Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity (a consensus of the FASB Emerging Issues Task Force) ", which applies to the release of the cumulative translation adjustment into net income when a parent either sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets that is a business (other than a sale of in substance real estate or conveyance of oil and gas mineral rights) within a foreign entity. ASU No. 2013-05 is effective prospectively for fiscal years (and interim reporting periods within those years) beginning after December 15, 2013. The adoption of this guidance did not have a material effect on our financial statements and related disclosures.
In July 2013, the FASB issued ASU No. 2013-11, "Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (Topic 740)", which provides explicit guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. An unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except as follows. To the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should

8

SITEL Worldwide Corporation
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)

(in thousands of U.S. dollars, except share and per share data)

be presented in the financial statements as a liability and should not be combined with deferred tax assets. The assessment of whether a deferred tax asset is available is based on the unrecognized tax benefit and deferred tax asset that exist at the reporting date and should be made presuming disallowance of the tax position at the reporting date. The amendments in ASU 2013-11 do not require new recurring disclosures. The amendments in ASU 2013-11 are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. Early adoption is permitted. The amendments should be applied prospectively to all unrecognized tax benefits that exist at the effective date. Retrospective application is permitted. Adoption of ASU 2013-11 during the first quarter of 2014 resulted in a decrease in both Deferred tax assets and Other noncurrent liabilities of $2,786.
There are no other recently issued accounting pronouncements that are expected to have a material impact on our financial condition, results of operations or cash flows.
Out of Period Adjustments
During the three months ended March 31, 2014, we identified prior period accounting errors related to an understated accrued liability and the overstatement of certain deposits. The errors were not material to prior years' financial statements and are not expected to be material to the 2014 results. Therefore, we recorded the error corrections in the same quarters they were identified, which increased Loss before income taxes and Net loss by approximately $961 and $625 respectively for the three months ended March 31, 2014.
2.
Property and Equipment
The composition of Property and equipment is as follows:
 
March 31, 2014
 
December 31, 2013
Land
$
3,554

 
$
3,554

Buildings and improvements
26,288

 
26,219

Leasehold improvements
66,806

 
64,506

Computer software
47,246

 
46,850

Equipment
173,542

 
171,259

Furniture and fixtures
31,078

 
29,834

Total original cost
348,514

 
342,222

Less: Accumulated depreciation
(268,955
)
 
(261,635
)
Net, excluding construction in progress
79,559

 
80,587

Construction in progress
9,858

 
9,075

Property and equipment, net
$
89,417

 
$
89,662

Depreciation expense was $8,412 for the three months ended March 31, 2014, compared to $9,048 for the same period in 2013.

9

SITEL Worldwide Corporation
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)

(in thousands of U.S. dollars, except share and per share data)

3.
Goodwill and Other Intangible Assets
The carrying amount of Goodwill decreased $2 during the three months ended March 31, 2014, due to foreign currency translation.
The following table presents our Other intangible assets as of March 31, 2014:
 
Gross
Intangibles
 
Accumulated Amortization and Impairment Charges
 
Net
Intangibles
Customer relationships
$
89,686

 
$
(89,686
)
 
$

Trademark and trade name (indefinite lived)
40,200

 
(4,176
)
 
36,024

 
$
129,886

 
$
(93,862
)
 
$
36,024

The following table presents our Other intangible assets as of December 31, 2013:
 
Gross
Intangibles
 
Accumulated Amortization and Impairment Charges
 
Net
Intangibles
Customer relationships
$
89,686

 
$
(89,163
)
 
$
523

Trademark and trade name (indefinite lived)
40,200

 
(4,176
)
 
36,024

 
$
129,886

 
$
(93,339
)
 
$
36,547

We amortize intangible assets with definite lives over their estimated useful lives, using the straight-line method. Intangible asset amortization expense was $523 for the three months ended March 31, 2014. Amortization expense for the same period of 2013 was $1,617. We do not expect additional amortization expense to be recognized during the remainder of the year ended December 31, 2014.
4.
Restructuring and Exit Activities
From time to time we evaluate and assess our worldwide operations in an effort to rationalize facility and labor costs, further streamline our operations in order to align resources to support growth, and appropriately shift the geographic mix of Company resources. Restructuring expense during the three months ended March 31, 2014 for activities initiated in 2014 was $2,383, of which $1,396 related to severance costs and $987 related to facility exit costs. For these activities, the remaining severance-related accrual of $10 is expected to be paid during the remainder of 2014 and the remaining facility exit costs accrual of $739 is expected to be paid during the remainder of 2014 through the year 2017 as the related leases expire.
Restructuring expense during the three months ended March 31, 2014 for activities initiated prior to 2014 was $889, of which $623 related to severance costs and $266 related to facility exit costs. For these activities, the remaining severance-related accrual of $1,253 is expected to be paid by the end of 2014, and the remaining accrual for facility exit costs of $2,508 is expected to be paid during the remainder of 2014 through the year 2017 as the related leases expire. Total expected expenses during the remainder of 2014 relating to all restructuring activities are $1,026.

10

SITEL Worldwide Corporation
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)

(in thousands of U.S. dollars, except share and per share data)

The liability for restructuring activities initiated in 2014 consisted of the following:
 
 
 
Facility
 
 
 
 
 
Exit and
 
 
 
Severance
 
Other
 
Total
December 31, 2013
$

 
$

 
$

Costs accrued (offset was to expense)
1,396

 
987

 
2,383

Cash payments
(1,386
)
 
(248
)
 
(1,634
)
Foreign exchange and other

 

 

March 31, 2014
$
10

 
$
739

 
$
749

Current portion of restructuring included in Accrued liabilities and other
$
10

 
$
739

 
$
749

 
 
 
 
 
 
Activity not reflected within the restructuring liability:
 
 
 
 
 
Costs expensed
$

 
$

 
$

Cash payments
$

 
$

 
$

Restructuring expense during the three months ended March 31, 2014 for activities initiated in 2014 was $1,926 for EMEA and $457 for the Americas, respectively.
The liability for restructuring activities initiated in 2013 and prior years consisted of the following:
 
 
 
Facility
 
 
 
 
 
Exit and
 
 
 
Severance
 
Other
 
Total
December 31, 2013
$
1,382

 
$
2,831

 
$
4,213

Costs accrued (offset was to expense)
623

 
266

 
889

Cash payments
(711
)
 
(617
)
 
(1,328
)
Foreign exchange and other
(41
)
 
28

 
(13
)
March 31, 2014
$
1,253

 
$
2,508

 
$
3,761

Current portion of restructuring included in Accrued liabilities and other
$
1,253

 
$
994

 
$
2,247

Long-term portion of restructuring included in Other noncurrent liabilities
$

 
$
1,514

 
$
1,514

 
 
 
 
 
 
Activity not reflected within the restructuring liability:
 
 
 
 
 
Costs expensed
$

 
$

 
$

Cash payments
$
(10
)
 
$

 
$
(10
)
Restructuring expense during the three months ended March 31, 2014 for activities initiated in 2013 and prior years was $455 for EMEA and $434 for the Americas. As of March 31, 2014, cumulative restructuring costs related to such activities are $13,351, of which $7,075 relates to EMEA and $6,276 relates to the Americas.
In January 2007, we approved a plan (“Plan”) to restructure certain operations during 2007 related to the acquisition of Legacy SITEL (which refers to SITEL Corporation, a Minnesota corporation, prior to its acquisition by SITEL Worldwide on January 30, 2007). The Plan included downsizing space in certain customer care centers and eliminating certain administrative and operational positions. Restructuring expense during the three months ended March 31, 2014 related to the Plan was $0. Cash payments during the three months ended March 31, 2014 related to the Plan were $34. The remaining accrual for all restructuring and exit activities related to the Plan was $179 and $315 at March 31, 2014 and December 31, 2013, respectively, and is recorded in Accrued liabilities and other.

11

SITEL Worldwide Corporation
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)

(in thousands of U.S. dollars, except share and per share data)

5.
Long-Term Debt
The composition of Long-term debt is as follows:
 
March 31, 2014
 
December 31, 2013
Senior Notes
$
295,299

 
$
295,073

Senior Secured Notes
194,382

 
194,045

Senior Secured Credit Facility:
 
 
 
Revolvers:
 
 
 
U.S. revolver
34,400

 
18,000

Canadian revolver
7,330

 

Term Loans:
 
 
 
U.S. dollar term loan
177,974

 
177,973

Euro term loan
30,311

 
30,191

British pound sterling term loan
19,351

 
19,332

Total debt
759,047

 
734,614

Less: Debt maturing within one year

 

Total long-term debt
$
759,047

 
$
734,614

Senior Notes
On March 18, 2010, SITEL, LLC and Sitel Finance Corp. (the "Issuers") issued in a private placement, 11.5% senior notes due 2018 (the “Senior Notes”) having an aggregate principal amount of $300,000 with an original issue discount of $7,638. The Senior Notes are general unsecured obligations of the Company and are senior in right of payment to all existing and future indebtedness, if any, that is by its terms expressly subordinated to the Senior Notes. The Senior Notes are guaranteed by the Company’s domestic subsidiaries and will mature on April 1, 2018. Interest accrues on the Senior Notes at a rate of 11.5% annually, and is payable semi-annually in arrears on April 1 and October 1.
Senior Secured Notes
On April 20, 2012, the Issuers issued in a private placement, 11.0% senior secured notes ("Senior Secured Notes") due 2017 having an aggregate principal amount of $200,000 with an original issue discount of $8,000. The Senior Secured Notes are guaranteed by the Company and its domestic subsidiaries, are secured on an equal and ratable basis with all obligations of the Issuers and the guarantors under the Company's senior secured credit facility (the “Senior Secured Credit Facility”), and will mature on April 1, 2017. Interest accrues on the Senior Secured Notes at a rate of 11.0% annually and is payable semi-annually in arrears on February 1 and August 1.
Both the Senior Notes and the Senior Secured Notes contain customary covenants and restrictions on the activities of SITEL, LLC, Sitel Finance Corp. and SITEL, LLC's restricted subsidiaries, including, but not limited to, the incurrence of additional indebtedness; dividends or distributions in respect of capital stock or certain other restricted payments or investments; entering into agreements that restrict distributions from restricted subsidiaries; the sale or disposal of assets, including capital stock of restricted subsidiaries; transactions with affiliates; the incurrence of liens; and mergers, consolidations or the sale of substantially all of SITEL, LLC's assets.
Senior Secured Credit Facility
The Company's Senior Secured Credit Facility initially provided for available borrowings in an aggregate amount of $760,000. Components of the Senior Secured Credit Facility are (1) the $675,000 aggregate principal amount Term Loans, including a $550,000 U.S. dollar loan, a €51,447 Euro loan, and a £30,000 British pound sterling loan, and (2) the $85,000 aggregate principal amount Revolvers. In January 2013, the non-extended portion of our U.S. revolver expired, reducing the borrowing capacity under the Revolvers to $61,250 from $85,000.


12

SITEL Worldwide Corporation
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)

(in thousands of U.S. dollars, except share and per share data)

All Term Loans mature on January 30, 2017 and amortize in equal quarterly installments in an aggregate annual amount equal to 0.25% of the original principal amount with the balance payable at maturity. Payments on the principal amount have exceeded the cumulative amortization schedule, thus no amount is due until maturity. Interest on the U.S. term loan is based, at our option, on LIBOR plus the applicable margin of 6.75%, or the higher of the federal funds rate plus 0.50% or the prime rate plus the applicable margin of 5.75%. Interest on the Euro term loan is based on EURIBOR plus the applicable margin of 6.75%. Interest on the British pound sterling term loan is based on LIBOR plus the applicable margin of 6.75%. We have an interest rate swap agreement for the notional amount of $175,000 against our Term Loans that is based on a rate of 2.315% versus three month LIBOR.
The Revolvers mature on January 30, 2016. A commitment fee is payable quarterly at 0.50% per annum of the undrawn portion of the Revolvers. Interest on the U.S. revolver is based, at our option, on LIBOR plus the applicable margin of 6.75%, or the higher of the federal funds rate plus 0.50% or the prime rate plus the applicable margin of 5.75%. Interest on the Canadian revolver is based, at our option, on the Canadian banker's acceptance rate (the "BA Rate") plus the applicable margin of 6.75%, or the higher of the one month BA Rate plus 0.75% or the Canadian prime rate plus the applicable margin of 5.75%. At March 31, 2014 and December 31, 2013, we had $17,479 and $42,242 available under the Revolvers after utilizing $2,041 and $1,008 for letters of credit outstanding.
Borrowings under the Senior Secured Credit Facility are collateralized by interests granted on a substantial portion of our worldwide assets and are guaranteed by certain subsidiary guarantors.
The Senior Secured Credit Facility also contains customary affirmative and negative covenants such as restricting certain corporate actions, including asset dispositions, acquisitions, the payment of dividends, changes of control, the incurrence of indebtedness, providing financing and investments and transactions with affiliates. Under the Senior Secured Credit Facility, we are required to comply with certain financial covenants on a quarterly and annual basis. During the first quarter of 2014, we executed the sixth amendment to our Senior Secured Credit Facility (the "Sixth Amendment"), which decreased the Minimum Interest Coverage Ratio and increased the maximum permitted Senior Secured Leverage Ratio, effective the first quarter of 2014. We paid debt issuance and other financing costs of $1,492 during the quarter related to the Sixth Amendment, of which $719 were deferred and recorded in Other noncurrent assets to be amortized over the remaining term of the facility.
Future maturities of the Company's outstanding Long-term debt as of March 31, 2014 are summarized as follows:
2014
$

2015

2016
41,730

2017
427,636

2018
300,000

2019 and thereafter 

Total debt payments
769,366

Less amount representing unamortized debt discount
(10,319
)
Total debt balance at March 31, 2014
$
759,047

6.
Redeemable Preferred Stock
We are authorized to issue in series up to 20,000,000 shares of preferred stock with a par value of $0.01. Our Board of Directors determines the voting rights, dividend policy, and conversion rights of each series of these preferred shares. To date, we have authorized the issuance of two series of preferred shares—Series B and Series C. The majority of each series of these preferred shares are held by Onex and other related parties. Each series has a mandatory redemption date of July 2, 2018 for cash and the right to be converted, at any time through the redemption date at the option of the holder, into the Company's Class A Voting Common Stock (initially at $1.50 per share for Series C and $4.85 per share for Series B), in settlement of these obligations (including all accumulated and unpaid dividends through the redemption date). The net value of the preferred shares is recorded as Redeemable preferred stock (outside of permanent equity).
The Series B and C Preferred Stock contain an optional cash redemption call option that is only exercisable by the Company. Since Onex controls the majority of our Board of Directors, accounting guidance requires that we account for this as

13

SITEL Worldwide Corporation
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)

(in thousands of U.S. dollars, except share and per share data)

an in-substance put option, since it assumes that Onex could force the execution of the call option. The in-substance put option meets the qualifications of a derivative, requiring it to be separated from the host instrument and recorded as a liability at fair value, with subsequent changes in the fair value recorded to the income statement. We have determined that the value is immaterial as of March 31, 2014 and December 31, 2013, thus no adjustment to the carrying value of the stock has been recorded in relation to the in-substance put option.
Series C Preferred Stock
On December 10, 2008, we authorized the issuance of 125,000 shares of Series C Preferred Stock. At March 31, 2014 and December 31, 2013, the number of shares of Series C Preferred Stock issued and outstanding was 28,881.
When the conversion option of the Series C Preferred Stock into Class A Voting Common Stock at $1.50 per share is less than the fair value of the common stock on issuance date, there is a Beneficial Conversion Feature (“BCF”) associated with the preferred stock. The value of the BCF is recognized separately at issuance by allocating a portion of the proceeds equal to the intrinsic value to Additional paid-in capital. For the Series C Preferred Stock owned by certain other related parties, this discount is accreted from the date of issuance to the stated redemption date of July 2, 2018. For the Series C Preferred Stock owned by Onex, the BCF is immediately amortized to the date of issuance due to existence of the in-substance put option on the stock discussed above.
The liquidation value of the Series C Preferred Stock, including accrued dividends payable, at March 31, 2014 of $61,619 is net of deferred financing costs of $164 and the BCF of $1,694. The liquidation value of the Series C Preferred Stock, including accrued dividends payable, at December 31, 2013 of $59,056 is net of deferred financing costs of $174 and the BCF of $1,793. The Series C Preferred Stock ranks senior to each other class of the Company's stock in liquidation rights. Holders of the Series C Preferred Stock are entitled to receive cumulative dividends at the rate of 16% of the liquidation preference per share per annum, which accrue from inception and are payable at the mandatory redemption date or upon declaration by our Board of Directors.
Series B Preferred Stock
On April 3, 2008, we authorized the issuance of 125,000 shares of Series B Preferred Stock. At March 31, 2014 and December 31, 2013, the number of shares of Series B Preferred Stock issued and outstanding was 39,947.
The liquidation value of the Series B Preferred Stock, including accrued dividends payable, at March 31, 2014 of $68,884 and at December 31, 2013 of $66,982, is net of deferred financing costs of $250 and $265, respectively. Holders of the Series B Preferred Stock are entitled to receive cumulative dividends at the rate of 12% of the liquidation preference per share per annum, which accrue from inception and are payable at the mandatory redemption date or upon declaration by our Board of Directors.
7.
Stock-Based Compensation
The Company’s operating results for the three months ended March 31, 2014 included stock-based compensation expense for issued stock grants of $59, compared to $63 for the same period in 2013. These grants were primarily related to director and executive compensation. A summary of restricted stock and restricted stock unit activity is set forth below:
Restricted Stock Activity
 
 
Weighted
 
 
 
Average
 
 
 
Grant Date
 
Shares
 
Fair Value
Unvested at December 31, 2013
8,268,358

 
$
7,611

Granted
710,000

 
405

Vested

 

Converted

 

Forfeited
(2,500
)
 
(6
)
Unvested at March 31, 2014
8,975,858

 
$
8,010


14

SITEL Worldwide Corporation
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)

(in thousands of U.S. dollars, except share and per share data)

Restricted Stock Unit Activity
 
 
Weighted
 
 
 
Average
 
 
 
Grant Date
 
Shares
 
Fair Value
Unvested at December 31, 2013
1,616,500

 
$
3,954

Granted
20,000

 
11

Vested

 

Forfeited
(130,000
)
 
(433
)
Unvested at March 31, 2014
1,506,500

 
$
3,532


During the three months ended March 31, 2014, we issued 710,000 shares of Class A Common Stock to various executives pursuant to the terms of a Restricted Stock Grant Plan and Agreement with each executive. The restricted shares will generally be earned based on the attainment of specified goals achieved over a performance period.
As of March 31, 2014, there was approximately $9,035 of total unrecognized compensation cost (including the effect of expected forfeitures) related to unvested restricted stock and restricted stock units that the Company had not recorded. We will recognize the cost for restricted stock units over a period of three years following the occurrence of a change in control, initial public offering, or liquidity event, as defined in our Restricted Plans. We will recognize the cost for restricted shares either immediately, over a two-year period, or over a three-year period, depending on the terms of the restricted share agreement, commencing upon a change in control, initial public offering, or liquidity event.
8.
Income Taxes
The effective tax rate of (58.4)% for the three months ended March 31, 2014 differs from the effective tax rate of (20.4)% for the same period of 2013, as the Company generated tax expense for the three months ended March 31, 2014 in jurisdictions that were not taxable in the first quarter of 2013 due to valuation allowances in place at that time. We also recognized additional tax expense primarily resulting from changes in the intra-period allocation to continuing operations of $3,418 recorded for the three months ended March 31, 2014 compared to a tax benefit of $598 recorded in the same period of 2013 and a non-cash tax expense of $1,354 related to an audit settlement in a foreign jurisdiction recorded in the three months ended March 31, 2014.
We consider all income sources, including other comprehensive income, in determining the amount of tax benefit allocated to continuing operations (the "Income Tax Allocation"). Through the first quarter of 2014, as a result of the Income Tax Allocation, we recorded a non-cash deferred income tax expense of $381 against Other comprehensive income as a result of year-to-date gains from mark-to-market fluctuations on foreign currency hedges that are designated as accounting hedges and an offsetting non-cash income tax benefit of $381 in continuing operations. Also during the first quarter of 2014, the 2013 hedge portfolio was fully settled resulting in the reversal of previously recorded tax benefits resulting in non-cash income tax expense of $3,799.
Our gross unrecognized tax benefits (excluding interest and penalties) decreased from $30,717 at December 31, 2013 to $30,059 at March 31, 2014, primarily resulting from audit settlements in certain foreign jurisdictions. There was a cash payment of $320 associated with an audit settlement in a foreign jurisdiction. The total amount of unrecognized tax benefits (including interest and penalties) that would affect income tax expense, if ever recognized in the financial statements is $32,465. We believe that it is reasonably possible that within the next 12-month period, the amount of unrecognized tax benefits for certain foreign tax positions might be reduced by $1,025 as a result of statute expirations or final resolution.

15

SITEL Worldwide Corporation
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)

(in thousands of U.S. dollars, except share and per share data)

9.
Employee Benefits and Compensation
We have defined benefit pension plans covering certain employees outside of the United States. These plans are administered by a third party and include limited activity. The components of the net pension liability of $6,036 at March 31, 2014 and $5,988 at December 31, 2013 are included in Other noncurrent liabilities. Net periodic pension cost consisted of the following:
 
Three Months Ended March 31,
 
2014
 
2013
Service cost
$
171

 
$
166

Interest cost
121

 
64

Expected return on plan assets
(83
)
 
(75
)
Past service costs
37

 
41

Amortization of actuarial gains and losses
(2
)
 
(78
)
Net periodic pension cost
$
244

 
$
118

We also sponsor various employee retirement plans. In the United States, the Company sponsors a 401(k) savings plan that covers substantially all U.S. employees. In both Canada and Europe, the Company sponsors similar defined contribution plans. Expenses related to the defined contribution plans were $368 in the three months ended March 31, 2014. Expenses related to these plans in the same period of 2013 were $219.
10.
Commitments and Contingencies
The Company and its subsidiaries from time to time are subject to legal claims arising in the ordinary course of business. While the Company is unable to predict the outcome of these matters, it believes, based upon currently available facts, that adequate provision for such claims has been made. However, adverse developments could negatively impact earnings in particular future fiscal periods.
During 2011, the French tax authorities assessed SITEL France approximately €7,900 (equivalent to approximately $10,920 as of March 31, 2014) for the periods from 2007 to July 2010 for input value added taxes related to its performance of intermediary insurance services for the sale of insurance products on behalf of its insurance clients. During December 2013, the French tax authorities reduced the assessment to approximately €1,247 (equivalent to approximately $1,720 as of March 31, 2014). On January 6, 2014, the Company paid the assessment to perfect its rights in the event litigation is necessary to resolve the matter. We are currently unable to predict the probable outcome of this matter and are not able to reasonably estimate the amount of loss, if any. As of March 31, 2014 and December 31, 2013, no reserve has been recorded in the financial statements.

In April 2008, the local Sao Paulo, Brazil tax authorities assessed our Brazilian subsidiary (“SITEL Brazil”) for the alleged non-payment of local sales taxes in the original amount of approximately R$3,500 (equivalent to approximately $1,510 as of March 31, 2014) for a period extending from 2004 to October 2008. The assessment relates to billings made to a domestic Brazilian client for which SITEL Brazil provided on site agent support at the client’s site located in Barueri City, Brazil. Local sales taxes on services provided in Brazil are assessed based on the actual location where services are rendered. SITEL Brazil paid local sales taxes to Barueri City, however the Sao Paulo tax authorities contend erroneously that the services were performed in Sao Paolo where SITEL Brazil maintains an office. SITEL Brazil appealed the original assessment and in March 2010, the tax authorities ruled against SITEL Brazil. In October 2010, SITEL Brazil received a formal demand to pay the assessment, which at the time totaled R$7,700 due to increases in interest and penalties. SITEL Brazil deposited R$7,700 with the tax authorities in December 2010 and filed its defense with the courts in January 2011. We are currently unable to predict the probable outcome of this matter and are not able to reasonably estimate the amount of loss, if any. No reserve has been recorded as of March 31, 2014 and December 31, 2013.

16

SITEL Worldwide Corporation
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)

(in thousands of U.S. dollars, except share and per share data)

11.
Derivative Financial Instruments
We are exposed to a variety of market risks, including the effects of changes in foreign currency exchange rates and interest rates. Our policies allow for the use of derivative financial instruments to prudently manage foreign currency exchange rate and interest rate exposure, but do not allow derivatives to be used for speculative purposes. Derivatives that we use are primarily foreign currency forward contracts and interest rate swaps. Our derivative activities are subject to the management, direction, and control of our senior financial officers. Risk management practices, including the use of financial derivative instruments, are presented to our Board of Directors at least annually.
Foreign Currency Exchange Rate Risk
We conduct a significant portion of our business in currencies other than the U.S. dollar. Our subsidiaries generally use the local currency as their functional currency for paying labor and other operating costs. Conversely, revenues for some of these foreign subsidiaries are derived from client contracts that are invoiced and collected in a different currency, principally in U.S. dollars, as well as other currencies such as Euro, British pound sterling, or Australian dollars. To hedge against the risk of fluctuations in our subsidiaries' functional currency, we have contracted with financial institutions to acquire (utilizing forward contracts) the functional currency of the foreign subsidiary at a fixed counterparty exchange rate at specific dates in the future. As of March 31, 2014, our forward contracts mature within the next twenty-one months.
Interest Rate Risk
Interest rate movements create a degree of risk by affecting the amount of our interest payments. Our practice is to use interest rate swap agreements to manage our exposure to interest rate changes.
In connection with the Senior Secured Credit Facility dated January 30, 2007, we entered into an interest rate swap to convert $400,000 (reduced to $350,000 on March 31, 2009) of our floating rate debt into fixed rate debt. We elected not to designate this swap for hedge accounting treatment. On November 28, 2011 we amended the interest rate swap agreement to extend the term through December 31, 2016 and decreased the notional amount to $175,000 as of March 31, 2012. The fair value of this interest rate swap is classified as part of Accrued liabilities and other of $3,584 and $3,526 and as Other noncurrent liabilities of $3,279 and $4,061 as of March 31, 2014 and December 31, 2013, respectively.
For the three months ended March 31, 2014, we recorded losses of $905 for settled interest payments, compared to losses of $848 for the three months ended March 31, 2013. Additionally, there was a non-cash mark-to-market valuation increase in the liability of $181 for the three months ended March 31, 2014, compared to a reduction of $37 for the same period in 2013. These amounts are reflected in Interest and other financing costs, net.

17

SITEL Worldwide Corporation
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)

(in thousands of U.S. dollars, except share and per share data)

Fair Values in the Condensed Consolidated Balance Sheets
 
 
Derivative Assets
 
Derivative Liabilities
 
 
 
 
March 31,
2014
 
December 31,
2013
 
 
 
March 31,
2014
 
December 31,
2013
 
 
Balance
Sheet
Classification
 
Fair
Value
 
Fair
Value
 
Balance
Sheet
Classification
 
Fair
Value
 
Fair
Value
Derivatives designated as hedging instruments
 
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
 
Prepaids and other current assets
 
$
192

 
$
62

 
Accrued liabilities and other
 
$
4,102

 
$
4,996

Foreign exchange contracts
 
Other noncurrent assets
 

 

 
Other noncurrent liabilities
 
30

 

Total
 
 
 
$
192

 
$
62

 
 
 
$
4,132

 
$
4,996

Derivatives not designated as hedging instruments
 
 
 
 
 
 
 
 
 
 
Interest rate contract - ST
 
Prepaids and other current assets
 
$

 
$

 
Accrued liabilities and other
 
$
3,584

 
$
3,526

Interest rate contract - LT
 
Other noncurrent assets
 

 

 
Other noncurrent liabilities
 
3,279

 
4,061

Foreign exchange contracts
 
Prepaids and other current assets
 
691

 
341

 
Accrued liabilities and other
 
1,872

 
3,264

Foreign exchange contracts
 
Other noncurrent assets
 

 

 
Other noncurrent liabilities
 
9

 

Total
 
 
 
$
691

 
$
341

 
 
 
$
8,744

 
$
10,851

Total derivatives
 
 
 
$
883

 
$
403

 
 
 
$
12,876

 
$
15,847

The Effect of Derivative Instruments on the Condensed Consolidated Statements of Comprehensive Loss
Derivatives in
Cash Flow
Hedging
Relationships
 
Amount of (Loss) or Gain Recognized in OCI on Derivative
(Effective Portion)
 
Location of Loss
Reclassified from
Accumulated OCI into Income
(Effective Portion)
 
Amount of (Loss) or Gain
Reclassified from
Accumulated OCI
into Income
 
Three Months Ended March 31,
 
Three Months Ended March 31,
 
2014
 
2013
 
2014
 
2013
Foreign exchange contracts
 
$
(991
)
 
$
2,784

 
COS and SG&A
 
$
(1,999
)
 
$
761

Total
 
$
(991
)
 
$
2,784

 
 
 
$
(1,999
)
 
$
761

For the three months ended March 31, 2014 we recorded losses of $1,199, compared to gains of $553 for the same period in 2013 to Cost of services. For the three months ended March 31, 2014, we recorded losses of $800, compared to gains of $208 for the same period in 2013 to Selling, general, and administrative expenses (“SG&A”) for the effective portion of settled hedge contracts. We expect unrealized losses of $4,295 will be reclassified from Accumulated other comprehensive loss (“AOCL”) to Cost of services and SG&A over the next twelve months. However, this amount and other future reclassifications from AOCL

18

SITEL Worldwide Corporation
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)

(in thousands of U.S. dollars, except share and per share data)

will fluctuate with movements in the underlying market price of the forward contracts. The estimates of fair value are based on applicable and commonly used pricing models and prevailing financial market information as of March 31, 2014
For the three months ended March 31, 2014 we recognized gains on foreign currency transactions related to the ineffective portion of the derivative instruments of $3, compared to a loss of $28 for the same period in 2013.
Derivatives Not
Designated as Hedging Instruments        
 
Location of (Loss) or Gain
Recognized in Income on Derivative
 
Amount of (Loss) or
Gain Recognized in
Income on Derivative
Three Months Ended March 31,
2014
 
2013
Foreign exchange contracts
 
COS and SG&A
 
$
23

 
$
1,231

Foreign exchange contracts
 
Foreign currency transactions
 
238

 
243

Total
 
 
 
$
261

 
$
1,474

For the three months ended March 31, 2014, we recorded gains of $14, compared to gains of $738 for the same period in 2013 to Cost of services for derivatives not designated as hedging contracts. For the three months ended March 31, 2014, we recorded gains of $9, compared to gains of $493 for the same period in 2013 to SG&A for derivatives not designated as hedging contracts.
Current Contracts
At March 31, 2014, the Company had the following outstanding financial contracts that were entered to hedge foreign exchange and interest rate risk:
Derivatives in Cash Flow Relationship
Notional Amount 
Interest rate contract
$
175,000

Foreign exchange contracts
115,545

12.
Fair Value Measurements
The fair values of Cash and cash equivalents, short-term investments, trade receivables, and trade payables are valued as Level 1 items. The carrying value of these assets and liabilities approximates their fair value due to the short-term maturities. The terms of the Senior Secured Credit Facility, Senior Secured Notes, and Senior Notes include debt with variable and fixed interest rates, totaling $759,047 and $734,614 at March 31, 2014 and December 31, 2013, respectively. The estimated fair value of such debt was $769,000 and $754,000 at March 31, 2014 and December 31, 2013, respectively. The fair value of debt with fixed interest rates was determined using the quoted market prices of debt instruments with similar terms and maturities which are considered Level 2 inputs. The fair value of debt with variable interest rates was also measured using Level 2 inputs. These inputs included good faith estimates of the market value for the particular debt instrument, which represent the amount an independent market participant would provide, based upon market observations and other factors relevant under the circumstances.
U.S. GAAP defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements are classified into a hierarchy by the inputs used to perform the fair value calculation as follows:
Level 1 – Fair value based on unadjusted quoted prices for identical assets or liabilities in active markets.
Level 2 – Modeled fair value with model inputs that are all observable market values.
Level 3 – Modeled fair value with at least one model input that is not an observable market value.

19

SITEL Worldwide Corporation
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)

(in thousands of U.S. dollars, except share and per share data)

The following tables summarize the value of financial instruments by the pricing levels defined above as of March 31, 2014 and December 31, 2013. There were no transfers between pricing levels for the three month period ended March 31, 2014.
 
Fair Value Measurements at March 31, 2014
 
Total
 
Level 1
 
Level 2
 
Level 3
Assets
 
 
 
 
 
 
 
Foreign currency forward contracts
$
883

 
$

 
$
883

 
$

Total
$
883

 
$

 
$
883

 
$

Liabilities
 
 
 
 
 
 
 
Foreign currency forward contracts
$
6,013

 
$

 
$
6,013

 
$

Interest rate derivative instrument
6,863

 

 
6,863

 

Total
$
12,876

 
$

 
$
12,876

 
$

 
Fair Value Measurements at December 31, 2013
 
Total
 
Level 1
 
Level 2
 
Level 3
Assets
 
 
 
 
 
 
 
Foreign currency forward contracts
$
403

 
$

 
$
403

 
$

Total
$
403

 
$

 
$
403

 
$

Liabilities
 
 
 
 
 
 
 
Foreign currency forward contracts
$
8,260

 
$

 
$
8,260

 
$

Interest rate derivative instrument
7,587

 

 
7,587

 

Total
$
15,847

 
$

 
$
15,847

 
$

We value derivatives based on current market prices of comparable instruments or, if none are available, on pricing models or formulas using current market and model assumptions. Our interest rate derivative instrument is a pay-fixed, receive-variable, interest rate swap based on LIBOR swap rate. The LIBOR swap rate is observable at commonly quoted intervals for the full term of the swap and therefore is considered a Level 2 item. Our foreign currency forward contracts are contracts to buy foreign currency at a fixed rate for delivery on a specified future date or period. The foreign exchange rate is observable for the full term of the swap and is therefore also considered a Level 2 item. The fair value measurement of a liability must reflect the nonperformance risk of the entity and the counterparty. Therefore, the impact of the Company's and counterparty's creditworthiness have also been factored into the fair value measurement of these derivative instruments.
We measure our intangible assets at fair value on a nonrecurring basis. These assets are classified in Level 3 of the fair value hierarchy. We test all existing Goodwill and other indefinite-lived intangibles (trademark and trade name) for impairment at least annually and more frequently if circumstances indicate that the carrying amount exceeds fair value. We conduct annual impairment tests as of December 31.
We estimate the fair values of Goodwill and other indefinite-lived intangibles utilizing multiple measurement techniques performed. The estimation is primarily determined based on an estimate of future cash flows (income approach) discounted at a market derived weighted average cost of capital. The income approach has been determined to be the most representative because our equity does not have an active trading market. Other unobservable inputs used in these valuations include managements' cash flow projections and estimated terminal growth rates. The valuation of Indefinite-lived intangible assets also includes an unobservable input for royalty rate, which is based on rates used by comparable industries. We then use a public company model (which uses peer group valuation metrics) to confirm the measurement. 
No impairment charges related to Goodwill and Other intangible assets were recorded during the three months ended March 31, 2014 and 2013.
Long-lived assets are measured at fair value on a non-recurring basis and are classified in Level 3 of the fair value hierarchy. The fair value is estimated utilizing unobservable inputs, including appraisals on real estate as well as evaluations of the marketability and potential relocation of other assets in similar condition and similar market areas. We analyze our long-lived assets on a quarterly basis for any triggering events that would cause us to perform an impairment test. No impairment charges related to long-lived assets were recorded during the three months ended March 31, 2014 and 2013.

20

SITEL Worldwide Corporation
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)

(in thousands of U.S. dollars, except share and per share data)

13.
Accumulated Other Comprehensive Loss
Changes in Accumulated Other Comprehensive Loss by Component (a) 
 
 
For the Three Months Ended March 31, 2014
 
 
Gains and Losses on Cash Flow Hedges
 
Defined Benefit Pension Items
 
Foreign Currency Items
 
Total
Beginning balance
 
$
(12,325
)
 
$
(1,632
)
 
$
(40,007
)
 
$
(53,964
)
Other comprehensive (loss) income before reclassifications, net of tax of $381
 
(1,372
)
 

 
652

 
(720
)
Amounts reclassified from accumulated other comprehensive loss, net of tax of $3,799
 
5,798

 
35

 

 
5,833

Net current-period other comprehensive income
 
4,426

 
35

 
652

 
5,113

Ending balance
 
$
(7,899
)
 
$
(1,597
)
 
$
(39,355
)
 
$
(48,851
)
 
 
For the Three Months Ended March 31, 2013
 
 
Gains and Losses on Cash Flow Hedges
 
Defined Benefit Pension Items
 
Foreign Currency Items
 
Total
Beginning balance
 
$
(5,428
)
 
$
(84
)
 
$
(27,888
)
 
$
(33,400
)
Other comprehensive income (loss) before reclassifications, net of tax of $598
 
2,186

 

 
1,131

 
3,317

Amounts reclassified from accumulated other comprehensive loss (b)
 
(761
)
 
(37
)
 

 
(798
)
Net current-period other comprehensive income (loss)
 
1,425

 
(37
)
 
1,131

 
2,519

Ending balance
 
$
(4,003
)
 
$
(121
)
 
$
(26,757
)
 
$
(30,881
)
(a)  
Amounts are net-of-tax. Amounts in parentheses indicate debits to Accumulated other comprehensive loss.


21

SITEL Worldwide Corporation
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)

(in thousands of U.S. dollars, except share and per share data)

Reclassifications out of Accumulated Other Comprehensive Loss (a) 
For the Three Months Ended March 31, 2014
Details about Accumulated Other Comprehensive Loss Components
 
Amount Reclassified from Accumulated Other Comprehensive Loss
 
Affected Line Item in the Statement Where Net Income is Presented
Gains and losses on cash flow hedges
 
 
 
 
Foreign exchange contracts
 
$
(1,199
)
 
COS
 
 
(800
)
 
SG&A
 
 
(1,999
)
 
Total before tax
 
 
(3,799
)
 
Tax (expense) or benefit
 
 
(5,798
)
 
Net of tax
 
 
 
 
 
Amortization of defined benefit pension items
 
 
 
 
Prior service costs
 
$
(37
)
 
SG&A
Actuarial gains
 
2

 
SG&A
 
 
(35
)
 
Total before tax
 
 

 
Tax (expense) or benefit
 
 
$
(35
)
 
Net of tax
 
 
 
 
 
Total reclassifications for the period
 
$
(5,833
)
 
Net of tax
For the Three Months Ended March 31, 2013
Details about Accumulated Other Comprehensive Loss Components
 
Amount Reclassified from Accumulated Other Comprehensive Loss
 
Affected Line Item in the Statement Where Net Income is Presented
Gains and losses on cash flow hedges
 
 
 
 
Foreign exchange contracts
 
$
553

 
COS
 
 
208

 
SG&A
 
 
761

 
Total before tax
 
 

 
Tax (expense) or benefit
 
 
761

 
Net of Tax
 
 
 
 
 
Amortization of defined benefit pension items
 
 
 
 
Prior service costs
 
$
(41
)
 
SG&A
Actuarial gains
 
78

 
SG&A
 
 
37

 
Total before tax
 
 

 
Tax (expense) or benefit
 
 
$
37

 
Net of Tax
 
 
 
 
 
Total reclassifications for the period
 
$
798

 
Net of Tax
(a)  
Amounts in parentheses indicate debits to profit/loss.

22

SITEL Worldwide Corporation
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)

(in thousands of U.S. dollars, except share and per share data)

14.
Related Party Transactions
Sale of Subsidiary
On March 29, 2013, the Company sold all of its common stock, totaling 1,287,000 shares, in its Sitel Belgium NV (“Belgium”) subsidiary to HV Management Consulting BVBA (“HVMC”), a company of which the controlling shareholder and chief executive officer is the former Belgium country manager and director, for a nominal price. During the first quarter of 2013, the Company recorded a Loss on sale of subsidiary of $4,558 related to the Belgium sale in the accompanying Condensed Consolidated Statements of Comprehensive Loss.
In addition to the sale of stock, the Company also agreed to provide support services and certain sub-contract services to HVMC and Belgium following the date of closing in order to assist in the transition. Certain information technology assets and employees were transitioned to another Company affiliate concurrently with the sale.
NAFS Purchase
On August 31, 2011, our wholly owned subsidiary, NAFS, now known as NA Liquidating Company, Inc., executed a Membership Interest Purchase Agreement with David Garner, our former Chief Executive Officer and Non-Executive Chairman of the Company’s Board of Directors, and current Board member. Pursuant to the agreement, Mr. Garner agreed to purchase directly or indirectly through an affiliate, Emory Enterprises, LLC ("Emory"), certain assets and obligations comprising NAFS's third party collections business based in Buffalo, New York (the "NAFS Business"). To facilitate this transaction, NAFS agreed to transfer the assets and obligations of the NAFS Business to a newly formed limited liability company ("NAFS Buffalo").
A portion of the purchase price for the NAFS Business was paid at closing on August 31, 2011, with the remainder to be paid in equal monthly installments over a thirty-six month period commencing March 2012. The NAFS Business was deconsolidated effective August 1, 2011. In addition, commencing August 31, 2011 and ending January 30, 2014, we provided certain outsourced information technology services to NAFS Buffalo and Emory. These services were provided to NAFS Buffalo and Emory to support continuing information technology requirements. The parties also entered an additional service agreement in August 2011 pursuant to which NAFS Buffalo and/or is affiliates agreed to continue to service one of the Company’s clients.
On February 13, 2013, we entered into an agreement with Mr. Garner and Emory pursuant to which we deferred payment of certain information technology service fees charged from February 1, 2012 through January 31, 2013 and amended such service agreements to reduce certain 2013 fees and provide for their ultimate termination. On January 30, 2014, we entered into a new agreement to defer payment of additional past due amounts of $46 and the remaining purchase price receivable of $398 owed to the Company by Emory and Mr. Garner related to the 2011 purchase of the NAFS Business. The Company also agreed to defer payment of the information technology service fees of $176 charged during 2013. These deferred payment amounts were added to the principal and accrued interest owed under the original note, which amounted to $193 as of December 31, 2013. The original note was amended and restated in the principal amount of $813 and is recorded in Other noncurrent assets at March 31, 2014 and December 31, 2013. The note is guaranteed by Mr. Garner on a recourse basis, and is due December 15, 2017. Mr. Garner’s guarantee is secured by a security interest in all of Mr. Garner’s preferred and common stock in the Company granted pursuant to a stock pledge agreement.
15.
Operating Segment and Geographical Information
Our two reportable segments, Americas and EMEA, are organized by geographic operating units that portray similar economic characteristics. The segment information presented below reflects the internal management reporting that the chief operating decision maker ("CODM") uses to evaluate segment performance and allocate resources, which is solely based on segment revenues, gross margin (segment revenues less segment cost of sales), segment selling, general, and administrative (“SG&A”) expense, and the segment operating results as calculated below.
Certain Revenues, Costs of services, and SG&A amounts are excluded from the CODM evaluation of our segments, as the CODM believes they are not representative of segment performance. In addition, the CODM does not review assets or the associated depreciation and amortization at the reportable segment level. Therefore, we do not allocate these items to our reportable segments or present these items at the segment level in our internal management reporting. These unallocated amounts, as well as other income and expenses that are managed at the corporate level, are presented below in the reconciliation of segment operating results to our consolidated Loss before income taxes.

23

SITEL Worldwide Corporation
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)

(in thousands of U.S. dollars, except share and per share data)

We have modified previously reported SG&A to exclude certain foreign exchange transactions that are no longer presented at the segment level in our internal management reporting that is provided to and used by the CODM.
Information about the Company’s reportable segments is as follows:
 
 
Three Months Ended March 31,
 
 
2014
 
2013
Americas
 
 
Revenues
 
$
210,827

 
$
222,484

Gross margin
 
76,152

 
85,175

SG&A
 
48,056

 
50,019

Segment operating results
 
$
28,096

 
$
35,156

GM%
 
36.1
%
 
38.3
%
SG&A%
 
22.8
%
 
22.5
%
Op Results%
 
13.3
%
 
15.8
%

 
 
Three Months Ended March 31,
 
 
2014
 
2013
EMEA
 
 
Revenues
 
$
139,630

 
$
142,582

Gross margin
 
37,024

 
40,241

SG&A
 
31,321

 
30,425

Segment operating results
 
$
5,703

 
$
9,816

GM%
 
26.5
%
 
28.2
%
SG&A%
 
22.4
%
 
21.3
%
Op Results%
 
4.1
%
 
6.9
%

24

SITEL Worldwide Corporation
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)

(in thousands of U.S. dollars, except share and per share data)

Reconciliation of Segment operating results to consolidated Loss before income taxes:
 
 
 
 
 
 
 
Three Months Ended March 31,
 
 
2014
 
2013
Segment operating results:
 
 
 
 
Americas
 
$
28,096

 
$
35,156

EMEA
 
5,703

 
9,816

Total
 
33,799

 
44,972

 
 
 
 
 
Corporate and other(1)
 
12,180

 
11,972

Depreciation and amortization
 
8,935

 
10,665

Restructuring and exit charges
 
3,272

 
3,316

Loss on sale of subsidiary
 

 
4,558

Other operating (income) expense(2)
 
(276
)
 
1,600

Operating income
 
9,688

 
12,861

Interest and other financing costs, net
 
21,566

 
20,401

Loss before income taxes
 
$
(11,878
)
 
$
(7,540
)
(1) Represents other operating income and expenses not allocated to segments for internal management reporting purposes, including certain corporate employee compensation, corporate overhead, stock-based compensation, and the net operating results of disposed subsidiaries, which are not material to segment operating results.
(2) Includes amounts from the Condensed Consolidated Statements of Comprehensive Loss for (Gain) loss on foreign currency transactions, Impairment and loss (gain) on disposal of assets, and Other expense (income), net.

25

SITEL Worldwide Corporation
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)

(in thousands of U.S. dollars, except share and per share data)

16.
Supplemental Condensed Consolidated Financial Information
The following guarantor financial information is presented to comply with U.S. SEC disclosure requirements, specifically Rule 3-10 of Regulation S-X.
The Senior Secured Notes and Senior Notes are guaranteed jointly and severally, and in the case of the Senior Secured Notes, on a senior secured basis, by the Issuers' parent company, SITEL Worldwide, and by each of SITEL Worldwide's existing and future direct and indirect domestic subsidiaries that are 100% owned by SITEL Worldwide that are guarantors under the Senior Secured Credit Facility (the “Subsidiary Guarantors”). The guarantees are not full and unconditional because Subsidiary Guarantors can be released and relieved of their obligations under certain customary circumstances contained in the indenture governing the Senior Notes and Senior Secured Notes. These circumstances include the following, so long as other applicable provisions of the indentures are adhered to: any sale or other disposition of all or substantially all of the assets of any Subsidiary Guarantors, any sale or other disposition of capital stock of any Subsidiary Guarantors, or designation of any restricted subsidiary that is a Subsidiary Guarantor as an unrestricted subsidiary.
The Condensed Consolidating Statements of Comprehensive Loss are presented net of intercompany activity. The following supplemental financial information sets forth, on a consolidating basis based on the equity method of accounting, balance sheets, statements of comprehensive income and loss, and statements of cash flows for the Company, the Subsidiary Guarantors, and the Company's non-guarantor subsidiaries.

26

SITEL Worldwide Corporation
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)

(in thousands of U.S. dollars, except share and per share data)

SITEL Worldwide Corporation
Condensed Consolidating Balance Sheet
March 31, 2014
(in thousands of U.S. dollars)
 
Parent
 
Issuers
 
Guarantors
 
Non-
Guarantors
 
Eliminations
 
Total
Consolidated
Assets
 
 
 
 
 
 
 
 
 
 
 
Current assets
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$

 
$
4,768

 
$

 
$
5,737

 
$

 
$
10,505

Accounts receivable (net of allowance for doubtful accounts)

 

 
114,913

 
142,439

 

 
257,352

Prepaids and other current assets
232,416

 
780

 
185,467

 
329,623

 
(686,591
)
 
61,695

Total current assets
232,416

 
5,548

 
300,380

 
477,799

 
(686,591
)
 
329,552

Property and equipment, net
123

 

 
36,872

 
52,422

 

 
89,417

Goodwill

 

 
16,690

 
101,017

 

 
117,707

Other intangible assets, net

 

 
16,104

 
19,920

 

 
36,024

Deferred income taxes

 

 
4,558

 
26,234

 

 
30,792

Investments in affiliates
(473,809
)
 
498,957

 
190,998

 

 
(216,146
)
 

Other noncurrent assets
2,975

 
87,185

 
47,678

 
24,180

 
(125,673
)
 
36,345

Total assets
$
(238,295
)
 
$
591,690

 
$
613,280

 
$
701,572

 
$
(1,028,410
)
 
$
639,837

Liabilities and Stockholders' (Deficit) Equity
 
 
 
 
 
 
 
 
 
 
 
Current liabilities
 
 
 
 
 
 
 
 
 
 
 
Accounts payable
$
136

 
$

 
$
6,440

 
$
19,920

 
$

 
$
26,496

Accrued payroll and benefits
8

 

 
16,379

 
63,265

 

 
79,652

Accrued liabilities and other
138,977

 
375,610

 
73,410

 
188,898

 
(686,591
)
 
90,304

Income taxes payable
333

 
21

 
354

 
7,205

 

 
7,913

Current portion of capital lease obligations

 

 
1,697

 
291

 

 
1,988

Total current liabilities
139,454

 
375,631

 
98,280

 
279,579

 
(686,591
)
 
206,353

Long-term debt

 
702,054

 

 
56,993

 

 
759,047

Capital lease obligations

 

 
2,680

 
50

 

 
2,730

Deferred income taxes

 

 
3,817

 

 

 
3,817

Other noncurrent liabilities

 
3,279

 
9,546

 
158,487

 
(125,673
)
 
45,639

Total liabilities
139,454

 
1,080,964

 
114,323

 
495,109

 
(812,264
)
 
1,017,586

Series B PIK preferred stock
68,884

 

 

 

 

 
68,884

Series C PIK preferred stock, net of beneficial conversion feature
61,619

 

 

 

 

 
61,619

Stockholders' (deficit) equity
 
 
 
 
 
 
 
 
 
 
 
Subsidiary exchangeable preferred stock
2,665

 

 

 

 

 
2,665

Common stock
1,276

 

 
536

 
168,965

 
(169,501
)
 
1,276

Additional paid-in capital
353,111

 
105,786

 
668,880

 
309,794

 
(1,084,460
)
 
353,111

Accumulated deficit
(807,206
)
 
(545,461
)
 
(120,860
)
 
(276,089
)
 
942,410

 
(807,206
)
Accumulated other comprehensive (loss) income, net of tax
(48,851
)
 
(49,599
)
 
(49,599
)
 
3,793

 
95,405

 
(48,851
)
Treasury shares, at cost
(9,247
)
 

 

 

 

 
(9,247
)
Total stockholders' (deficit) equity
(508,252
)
 
(489,274
)
 
498,957

 
206,463

 
(216,146
)
 
(508,252
)
Total liabilities and stockholders' (deficit) equity
$
(238,295
)
 
$
591,690

 
$
613,280

 
$
701,572

 
$
(1,028,410
)
 
$
639,837


27

SITEL Worldwide Corporation
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)

(in thousands of U.S. dollars, except share and per share data)

SITEL Worldwide Corporation
Condensed Consolidating Balance Sheet
December 31, 2013
(in thousands of U.S. dollars)
 
Parent
 
Issuers
 
Guarantors
 
Non-
Guarantors
 
Eliminations
 
Total
Consolidated
Assets
 
 
 
 
 
 
 
 
 
 
 
Current assets
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$

 
$

 
$
136

 
$
7,230

 
$

 
$
7,366

Accounts receivable (net of allowance for doubtful accounts)

 

 
112,222

 
130,250

 

 
242,472

Prepaids and other current assets
245,718

 
322