10-Q 1 a2012q310q.htm 10-Q 2012 Q3 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
September 30, 2012
 
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 1000
 
 
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 þ    NO o
    
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
October 31, 2012
Class A, $0.01 par value
29,785,866
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, except share and per share data)



 
September 30, 2012
 
December 31, 2011
Assets
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
19,022

 
$
19,337

Accounts receivable (net of allowance for doubtful accounts of $2,752 and $3,129, respectively)
253,112

 
247,292

Prepaids and other current assets
65,212

 
61,364

Total current assets
337,346

 
327,993

Property and equipment, net
95,077

 
100,468

Goodwill
117,717

 
117,710

Other intangible assets, net
44,543

 
49,965

Deferred income taxes
13,912

 
17,156

Other noncurrent assets
39,291

 
35,912

Total assets
$
647,886

 
$
649,204

Liabilities and Stockholders’ Deficit
 
 
 
Current liabilities
 
 
 
Accounts payable
$
23,098

 
$
24,556

Accrued payroll and benefits
85,746

 
73,437

Accrued liabilities and other
84,392

 
99,974

Income taxes payable
2,687

 
2,921

Current portion of capital lease obligations
3,078

 
3,571

Total current liabilities
199,001

 
204,459

Long-term debt
711,885

 
692,840

Capital lease obligations
2,423

 
4,373

Deferred income taxes
9,950

 
10,283

Other noncurrent liabilities
60,722

 
61,931

Total liabilities
983,981

 
973,886


3

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

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

 
September 30, 2012
 
December 31, 2011
Commitments and contingencies (see Note 9)

 

Redeemable preferred stock, 20,000,000 convertible shares authorized, issuable in series:
 
 
 
Series B, $0.01 par value; 48,244 shares issued and outstanding at September 30, 2012 and December 31, 2011
70,082

 
64,292

Series C, $0.01 par value; 30,983 shares issued and outstanding at September 30, 2012 and December 31, 2011
50,759

 
44,641

Stockholders’ deficit
 
 
 
Subsidiary exchangeable preferred stock, no par value; 1,713,321 shares authorized, issued, and outstanding at September 30, 2012 and December 31, 2011
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; 32,094,720 shares (including 1,773,975 restricted shares) and 31,977,536 shares (including 1,810,475 restricted shares) issued at September 30, 2012 and December 31, 2011, respectively; 29,629,613 shares and 29,512,429 shares outstanding at September 30, 2012 and December 31, 2011, respectively
303

 
302

Class B, $0.01 par value; convertible into Class A common stock on 1:1 basis; 88,281,647 shares issued and outstanding at September 30, 2012 and December 31, 2011
882

 
882

Class C, $0.01 par value; 6,751,263 shares issued and outstanding at September 30, 2012 and December 31, 2011
68

 
68

Additional paid-in capital
364,907

 
376,629

Accumulated deficit
(783,645
)
 
(765,508
)
Accumulated other comprehensive loss
(31,789
)
 
(38,326
)
Stock subscriptions receivable
(1,852
)
 
(1,852
)
Treasury shares, at cost
(8,475
)
 
(8,475
)
Total stockholders’ deficit
(456,936
)
 
(433,615
)
Total liabilities and stockholders’ deficit
$
647,886

 
$
649,204

See accompanying Notes to Condensed Consolidated Financial Statements.


4

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

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

 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2012
 
2011
 
2012
 
2011
Revenues
$
348,118

 
$
359,117

 
$
1,059,009

 
$
1,051,843

Operating expenses
 
 
 
 

 

Costs of services*
224,523

 
231,351

 
690,647

 
683,185

Selling, general, and administrative expenses*
89,530

 
96,314

 
275,497

 
275,496

Depreciation and amortization of property and equipment
8,658

 
9,294

 
25,119

 
26,769

Amortization of intangible assets
1,628

 
3,205

 
5,422

 
10,064

Restructuring and exit charges
4,147

 
5,647

 
9,559

 
14,932

(Gain) loss on foreign currency transactions
(1,115
)
 
3,127

 
3,703

 
279

Impairment and loss (gain) on disposal of assets
519

 
(470
)
 
1,510

 
(95
)
Other expense, net
415

 
59

 
335

 
829

Operating income
19,813

 
10,590

 
47,217

 
40,384

Interest and other financing costs, net
22,108

 
16,733

 
63,735

 
49,465

Loss before income taxes
(2,295
)
 
(6,143
)
 
(16,518
)
 
(9,081
)
Income tax (benefit) provision
(2,538
)
 
8,917

 
1,619

 
9,354

Net income (loss)
243

 
(15,060
)
 
(18,137
)
 
(18,435
)
Other comprehensive income (loss)
 
 
 
 
 
 
 
Foreign currency translation adjustments
2,648

 
(6,139
)
 
2,561

 
(4,489
)
Unrealized (loss) gain on derivative valuation, net of tax of $3,237, $0, $3,237, and $0, respectively
(474
)
 
(3,828
)
 
4,318

 
(7,978
)
Unrecognized pension (loss) gain, net of tax of $0
(117
)
 
30

 
(342
)
 
65

Total other comprehensive income (loss)
2,057

 
(9,937
)
 
6,537

 
(12,402
)
Comprehensive income (loss)
$
2,300

 
$
(24,997
)
 
$
(11,600
)
 
$
(30,837
)
* 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 - Schedule 1
(Unaudited)

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

 
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, 2011
31,965,438

 
88,281,647

 
6,751,263

 
$
302

 
$
882

 
$
68

 
$
376,629

 
$
(765,508
)
 
$
(387,627
)
Restricted shares forfeited
(36,500
)
 

 

 

 

 

 

 

 

Non-cash stock granted
165,782

 

 

 
1

 

 

 
186

 

 
187

Preferred B and C stock accretion and BCF

 

 

 

 

 

 
(11,908
)
 

 
(11,908
)
Unrecognized pension loss, net of tax

 

 

 

 

 

 

 

 

Unrealized gain on derivative, net of tax of $3,237

 

 

 

 

 

 

 

 

Net loss

 

 

 

 

 

 

 
(18,137
)
 
(18,137
)
Foreign currency translation adjustment

 

 

 

 

 

 

 

 

Balances at September 30, 2012
32,094,720

 
88,281,647

 
6,751,263

 
$
303

 
$
882

 
$
68

 
$
364,907

 
$
(783,645
)
 
$
(417,485
)
See accompanying Notes to Condensed Consolidated Financial Statements.

6

SITEL Worldwide Corporation
Condensed Consolidated Statements of Changes in Stockholders' Deficit - Schedule 2
(Unaudited)

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

 
 
 
Accumulated Other Comprehensive (Loss) Income
 
 
 
 
 
 
 
 
 
 
 
Totals
from
Schedule 1
 
Foreign
Currency
Translation
 
Defined
Benefit
Pension/
Other
 
Unrealized
(Loss)
Gain on
Derivatives
Valuation
 
Subsidiary
Exchangeable
Stock
 
Stock
Subscriptions
Receivable
 
Treasury
Stock
Shares
 
Treasury
Stock
Capital
 
Total
Balances at December 31, 2011
$
(387,627
)
 
$
(29,091
)
 
$
1,518

 
$
(10,753
)
 
$
2,665

 
$
(1,852
)
 
2,465,107

 
$
(8,475
)
 
$
(433,615
)
Restricted shares forfeited

 

 

 

 

 

 

 

 

Non-cash stock granted
187

 

 

 

 

 

 

 

 
187

Preferred B and C stock accretion and BCF
(11,908
)
 

 

 

 

 

 

 

 
(11,908
)
Unrecognized pension loss, net of tax

 

 
(342
)
 

 

 

 

 

 
(342
)
Unrealized gain on derivative, net of tax of $3,237

 

 

 
4,318

 

 

 

 

 
4,318

Net loss
(18,137
)
 

 

 

 

 

 

 

 
(18,137
)
Foreign currency translation adjustment

 
2,561

 

 

 

 

 

 

 
2,561

Balances at September 30, 2012
$
(417,485
)
 
$
(26,530
)
 
$
1,176

 
$
(6,435
)
 
$
2,665

 
$
(1,852
)
 
2,465,107

 
$
(8,475
)
 
$
(456,936
)
See accompanying Notes to Condensed Consolidated Financial Statements.

7

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

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

 
Nine Months Ended September 30,
 
2012
 
2011
Cash flows from operating activities
 
 
 
Net loss
$
(18,137
)
 
$
(18,435
)
Adjustments to reconcile Net loss to net cash flows relating to operating activities:
 
 
 
Depreciation and amortization (including intangible assets)
30,541

 
36,833

Deferred income taxes
218

 
1,290

Non-cash derivative activity
1,417

 
4,371

Amortization of debt issue costs and OID
2,740

 
1,835

Impairment of long-term assets
1,633

 

Non-cash interest expense
10,927

 
9,398

Other non-cash items, net
(3,173
)
 
(1,139
)
Change in book overdrafts
(3,391
)
 
(1,640
)
Changes in working capital, net
(4,688
)
 
(31,560
)
Net cash provided by operating activities
18,087

 
953

Cash flows from investing activities
 
 
 
Purchases of property and equipment
(20,992
)
 
(30,150
)
Proceeds from disposition of property and equipment
265

 
645

Net cash used in investing activities
(20,727
)
 
(29,505
)
Cash flows from financing activities
 
 
 
Payments on long-term debt and capital lease obligations
(567,048
)
 
(387,889
)
Proceeds from long-term debt
387,851

 
412,378

Proceeds from issuance of Senior Secured Notes
192,000

 

Payment of interest rate swap
(3,172
)
 

Payments of debt issue costs
(6,874
)
 
(1,896
)
Net cash provided by financing activities
2,757

 
22,593

Effect of exchange rate on cash and cash equivalents
(432
)
 
(344
)
Net change in cash and cash equivalents
(315
)
 
(6,303
)
Cash and cash equivalents:
 
 
 
Beginning of period
19,337

 
29,894

End of period
$
19,022

 
$
23,591

See accompanying Notes to Condensed Consolidated Financial Statements.



8

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, ("Sitel," "we," "our," 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 telephonic services, however we believe we are an industry leader in providing services through other expanding communication channels, such as social media, online chat, e-mail, and interactive voice response. We serve a broad range of industry end-markets, including technology, financial services, wireless, retail and consumer products, telecommunications, media and entertainment, energy and utilities, internet service providers, travel and transportation, insurance, healthcare, and government.
Our worldwide operations are organized geographically and are grouped into two reporting segments: (1) North America, Latin America, and Asia Pacific (“Americas”) and (2) Europe, the Middle East, and Africa (“EMEA”). 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 presentation 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, 2011 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 22, 2012. 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, 2011.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates and judgments that affect the amounts reported in the Condensed Consolidated Financial Statements and the Notes thereto. Certain of our accounting policies are considered critical, due to the level of subjectivity and judgment necessary in applying these policies and because the impact of these estimates and assumptions on our financial condition and operating performance may be material. On an ongoing basis, we evaluate our estimates and judgments in these areas based on historic experience and other relevant factors. The estimates as of the date of the financial statements reflect our best judgment giving consideration to all currently available facts and circumstances. We believe our estimates and judgments are reasonable, however, actual results and the timing of the recognition of such amounts could differ from those estimates.
We have used methodologies that are consistent from year to year in all material respects. For details concerning these critical accounting policies and estimates, please refer to the audited Consolidated Financial Statements and the Notes thereto included in the Company’s Annual Report on Form 10-K filed with the SEC on February 22, 2012. Any deviation from these policies or estimates could have a material impact on our Condensed Consolidated Financial Statements.

9

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

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

Newly Issued Accounting Pronouncements
In December 2011, the Financial Accounting Standards Board issued ASU 2011-11, "Disclosures about Offsetting Assets and Liabilities," which mandates that entities disclose both gross and net information about instruments and transactions eligible for offset in the statement of financial position as well as instruments and transactions subject to an agreement similar to a master netting arrangement. The standard is effective for annual reporting periods beginning on or after January 1, 2013. We are currently assessing the impact of ASU 2011-11 on our financial statements and related disclosures.
In July 2012, the Financial Accounting Standards Board issued ASU 2012-02, "Intangibles - Goodwill and Other (Topic 350) - Testing Indefinite-Lived Intangible Assets for Impairment," to establish an optional two-step analysis for impairment testing of indefinite-lived intangible assets other than goodwill. Under the two-step analysis, an entity would perform a qualitative analysis first, whereby evaluating the totality of qualitative factors that impact whether an indefinite-lived intangible asset has a carrying amount that is more likely than not to exceed its fair value. The entity would then proceed to conducting the quantitative assessment. The standard is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, with early adoption permitted. We are currently assessing the impact of ASU 2012-02 on our financial statements and related disclosures.
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 nine months ended September 30, 2012, we identified prior period accounting errors related to the ineffective portion of certain foreign currency hedging instruments and the overstatement of an other receivable. These errors were not material to prior years' financial statements and are not expected to be material to the 2012 results. Therefore, we recorded the error corrections in the same quarters they were identified, which decreased income before taxes and increased net loss by approximately $517 for the first quarter of 2012 and $390 for the third quarter of 2012. The aggregate impact of the corrections for the nine months ended September 30, 2012 was a $907 decrease in income before taxes and an increase in net loss.
2.
Property and Equipment
The composition of property and equipment is as follows:
 
September 30, 2012
 
December 31, 2011
Land
$
3,554

 
$
3,554

Buildings and improvements
29,570

 
28,770

Leasehold improvements
58,649

 
63,042

Computer software
42,277

 
40,681

Equipment
158,538

 
151,389

Furniture and fixtures
29,068

 
28,107

Total original cost
321,656

 
315,543

Less: Accumulated depreciation and amortization
(233,038
)
 
(225,964
)
Net, excluding construction in progress
88,618

 
89,579

Construction in progress
6,459

 
10,889

Property and equipment, net
$
95,077

 
$
100,468

Depreciation expense was $8,658 for the third quarter of 2012 and $25,119 for the first nine months of 2012, compared to $9,294 and $26,769 for the same periods in 2011, respectively.
3.
Goodwill and Other Intangible Assets
The carrying amount of Goodwill increased $7 during the nine month period ended September 30, 2012, solely due to foreign currency translation.

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 following table presents our Other intangible assets as of September 30, 2012:
 
Gross
Intangibles
 
Accumulated Amortization and Impairment Charges
 
Net
Intangibles
Customer relationships
$
89,686

 
$
(81,163
)
 
$
8,523

Trademark and trade name
40,200

 
(4,180
)
 
36,020

 
$
129,886

 
$
(85,343
)
 
$
44,543

The following table presents our Other intangible assets as of December 31, 2011:
 
Gross
Intangibles
 
Accumulated Amortization and Impairment Charges
 
Net
Intangibles
Customer relationships
$
89,686

 
$
(75,741
)
 
$
13,945

Trademark and trade name
40,200

 
(4,180
)
 
36,020

 
$
129,886

 
$
(79,921
)
 
$
49,965

We amortize intangible assets with definite lives over their estimated useful lives, using the straight-line method. Intangible asset amortization expense was $1,628 for the third quarter of 2012 and $5,422 for the first nine months of 2012. Amortization expense for the same periods of 2011 was $3,205 and $10,064, respectively. Amortization is estimated to be approximately $7,039 for the year ended December 31, 2012.
4.
Restructuring and Exit Activities
We continue to 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. The total costs of such restructuring activities that were initiated during 2012 are expected to be $11,417. These activities are expected to be completed in the fourth quarter of 2012. For these activities, the remaining severance-related accrual of $4,019 and facility exit costs accrual of $1 are expected to be paid during the remainder of 2012. For restructuring activities initiated in 2011, the remaining severance-related accrual of $539 is expected to be paid by the end of 2012, and the remaining accrual for facility exit costs of $3,925 is expected to be paid during the remainder of 2012 through the year 2016 as the related leases expire.

11

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 2012 consisted of the following:
 
 
 
Facility
 
 
 
 
 
Exit and
 
 
 
Severance
 
Other
 
Total
December 31, 2011
$

 
$

 
$

Costs accrued (offset was to expense)
7,027

 
132

 
7,159

Cash payments
(3,006
)
 
(131
)
 
(3,137
)
Foreign exchange and other
(2
)
 

 
(2
)
September 30, 2012
$
4,019

 
$
1

 
$
4,020

Current portion of restructuring included in Accrued liabilities and other
$
4,019

 
$
1

 
$
4,020

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

 
$

 
$

 
 
 
 
 
 
Activity not reflected within the restructuring liability:
 
 
 
 
 
Costs expensed
$
245

 
$
11

 
$
256

Cash payments
$
(223
)
 
$
(11
)
 
$
(234
)
Restructuring expense during the three and nine months ended September 30, 2012 for activities initiated in 2012 was $1,863 and $4,937, respectively, for EMEA and $1,639 and $2,478, respectively, for the Americas.
The liability for restructuring activities initiated in 2011 consisted of the following:
 
 
 
Facility
 
 
 
 
 
Exit and
 
 
 
Severance
 
Other
 
Total
December 31, 2011
$
7,178

 
$
5,282

 
$
12,460

Costs accrued (offset was to expense)
850

 
1,278

 
2,128

Cash payments
(7,554
)
 
(2,960
)
 
(10,514
)
Foreign exchange and other
65

 
325

 
390

September 30, 2012
$
539

 
$
3,925

 
$
4,464

Current portion of restructuring included in Accrued liabilities and other
$
539

 
$
1,181

 
$
1,720

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

 
$
2,744

 
$
2,744

 
 
 
 
 
 
Activity not reflected within the restructuring liability:
 
 
 
 
 
Costs expensed
$
1

 
$
15

 
$
16

Cash payments
$
(332
)
 
$
(15
)
 
$
(347
)
Restructuring expense during the three and nine months ended September 30, 2012 for activities initiated in 2011 was $186 and $1,275, respectively, for EMEA and was $459 and $869, respectively, for the Americas. Cumulative restructuring costs related to such activities are $16,865 as of September 30, 2012, of which $10,815 relates to EMEA and $6,050 relates to the Americas. No significant additional costs are expected to be incurred.

12

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

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

In January 2007, we approved a 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. This activity is detailed below.
 
 
 
Facility
 
 
 
 
 
Exit and
 
 
 
Severance
 
Other
 
Total
December 31, 2011
$
187

 
$
206

 
$
393

Costs accrued (offset was to expense)

 

 

Cash payments
(87
)
 

 
(87
)
Foreign exchange
(32
)
 
(1
)
 
(33
)
September 30, 2012
$
68

 
$
205

 
$
273

The remaining accrual for all restructuring and exit activities related to the purchase price allocation is recorded as $273 in Accrued liabilities and other.
5.
Long-Term Debt
The composition of Long-term debt is as follows:
 
September 30, 2012
 
December 31, 2011
Senior Notes
$
294,040

 
$
293,489

Senior Secured Notes
192,499

 

Senior Secured Credit Facility:
 
 
 
Revolvers:
 
 
 
U.S. revolver

 
20,100

Canadian revolver

 
5,668

U.K. revolver

 
20,828

Term Loans:

 

U.S. dollar term loan
177,973

 
286,740

Euro term loan
28,364

 
38,932

British pound sterling term loan
19,009

 
27,083

Total debt
711,885

 
692,840

Less: Debt maturing within one year

 

Total long-term debt
$
711,885

 
$
692,840

Senior Secured Notes
On April 20, 2012, SITEL, LLC and Sitel Finance Corp. (the “Issuers”) issued in a private placement, 11% senior secured notes ("Senior Secured Notes") due 2017 having an aggregate principal amount of $200,000 with an original discount of $8,000. The Senior Secured Notes are guaranteed by the Company and its domestic subsidiaries and will mature on April 1, 2017. Interest accrues on the Senior Secured Notes at a rate of 11% annually and is payable semi-annually on February 1 and August 1. The Senior Secured Notes are secured by interests granted on a substantial portion of our worldwide assets. The Company is not required to make mandatory redemptions or sinking fund payments with respect to the Senior Secured Notes.
Senior Notes
On March 18, 2010, the Issuers issued in a private placement, 11.50% 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

13

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

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

expressly subordinated to the Senior Notes. The Senior Notes are guaranteed by the Company and its domestic subsidiaries and will mature on April 1, 2018. Interest accrues on the Senior Notes at a rate of 11.50% annually and is payable semi-annually in arrears on April 1 and October 1. The Company is not required to make mandatory redemptions or sinking fund payments with respect to the Senior Notes.
Both the Senior Secured Notes and the Senior 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 (the “Senior Secured Credit Facility”) provides 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.
During the second quarter of 2012, the Senior Secured Credit Facility was amended to, among other things, allow for the issuance and sale of the Senior Secured Notes; to allow for the flexibility to prepay the amounts outstanding under the non-extended term loans and to refinance, extend or replace the Revolvers; and to modify our leverage covenant and interest coverage covenant ratios. As part of this amendment, we also modified the currency mix on the revolver commitments to consist only of U.S. Dollar and Canadian Dollar amounts and terminated the British Pound Sterling revolver commitment. Additionally during the second quarter of 2012, extension of certain remaining tranches of our Revolvers in exchange for paying an increased interest rate resulted in the following tranches of our Senior Secured Credit Facility:
 
 
Tranche
 
Rate
 
Maturity Date
Revolvers:
 
 
 
 
 
 
 
 
  U.S. revolver:
 
 
 
 
 
 
 
 
Extended
 
$
51,250

 
LIBOR
+
6.75%
 
January 30, 2016
Non-extended
 
$
23,750

 
LIBOR
+
5.50%
 
January 30, 2013
  Canadian revolver
 
$
10,000

 
BA Rate
+
6.75%
 
January 30, 2016
Term Loans:
 
 
 
 
 
 
 
 
  U.S. dollar term loan
 
$
177,973

 
LIBOR
+
6.75%
 
January 30, 2017
  Euro term loan
 
21,928

 
EURIBOR
+
6.75%
 
January 30, 2017
  British pound sterling term loan
 
£
11,723

 
LIBOR
+
6.75%
 
January 30, 2017
The Term Loans mature in January 2017. All Term Loans 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%.
The non-extended Revolvers mature in January 2013. A commitment fee is payable quarterly at 0.50% per annum of the undrawn portion of the Revolvers. Interest on the non-extended U.S. revolver is based, at our option, on LIBOR plus the applicable margin of 5.50%, or the higher of the federal funds rate plus 0.50% or the prime rate plus the applicable margin of 4.50%. Interest on the extended portion of 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 September 30, 2012 and December 31, 2011, we had $83,844 and $37,460 available under the Revolvers.

14

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

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

Borrowings under the Senior Secured Credit Facility are collateralized by interests granted in 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 second quarter of 2012, a portion of the proceeds received from the issuance of the Senior Secured Notes were used to prepay the outstanding balances on the non-extended term loans, which were due in January 2014.
Future maturities of the Company's outstanding long-term debt as of September 30, 2012 are summarized as follows:
2012
$

2013

2014

2015

2016

2017 and thereafter 
725,346

Total debt payments
725,346

Less amount representing unamortized debt discount
(13,461
)
Total debt balance at September 30, 2012
$
711,885

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 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 September 30, 2012 and December 31, 2011, 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 September 30, 2012 and December 31, 2011, the number of shares of Series C Preferred Stock issued and outstanding was 30,983.
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.

15

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

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

The liquidation value of the Series C Preferred Stock, including accrued dividends payable, at September 30, 2012 of $50,759 is net of deferred financing costs of $238 and the BCF of $3,479. The liquidation value of the Series C Preferred Stock, including accrued dividends payable, at December 31, 2011 of $44,641 is net of deferred financing costs of $269 and the BCF of $3,720. 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 September 30, 2012 and December 31, 2011, the number of shares of Series B Preferred Stock issued and outstanding was 48,244.
The liquidation value of the Series B Preferred Stock, including accrued dividends payable, at September 30, 2012 of $70,082 and at December 31, 2011 of $64,292, is net of deferred financing costs of $409 and $462, 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.
Income Taxes
The effective tax rate of (9.80)% for the nine months ended September 30, 2012 differs from the effective tax rate of (103.01)% for the same period of 2011 as the third quarter of 2011 includes the impact of the release of a valuation allowance on the deferred tax assets of our Australian subsidiary, resulting in a benefit of $6,132, which was offset by the valuation allowance established on our German subsidiary, resulting in expense of $8,836; while the third quarter of 2012 includes a benefit for intra-period allocations to continuing operations of $3,237, a greater benefit resulting from the release of tax reserves related to certain foreign income tax matters of $1,065 and the favorable impact of foreign tax treaties of $1,548 over a larger pre-tax book loss when compared to the nine months ended September 30, 2011. For the nine months ended September 30, 2012, we recognized tax expense on a consolidated book loss because tax expense in certain profitable jurisdictions cannot be offset by tax benefit in loss jurisdictions due to the existence of valuation allowance in these jurisdictions.
We consider all income sources, including other comprehensive income, in determining the amount of tax benefit allocated to continuing operations (the "Income Tax Allocation"). During the third quarter of 2012, as a result of the Income Tax Allocation, we recorded a non-cash deferred income tax expense of $3,237 against other comprehensive income as a result of year-to-date gains from mark-to-market fluctuations on foreign currency hedges which are designated as accounting hedges and an offsetting non-cash income tax benefit of $3,237 in continuing operations.
Our gross unrecognized tax benefits (excluding interest and penalties) increased to $38,563 from $37,921 at September 30, 2012 and December 31, 2011, respectively, primarily resulting from currency translations exceeding the release of certain foreign tax reserves. 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 $37,507. 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 $3,553 as a result of statute expirations or final resolution.
8.
Employee Benefits and Compensation
We have defined benefit pension plans covering certain employees outside of the U.S. These plans are administered by a third party and include limited activity. The components of the net pension liability of $3,812 at September 30, 2012 and $3,357 at December 31, 2011 are included in Other noncurrent liabilities and Other noncurrent assets. Net periodic pension cost consisted of the following:

16

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

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

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2012
 
2011
 
2012
 
2011
Service cost
130

 
152

 
385

 
486

Interest cost
81

 
64

 
245

 
142

Expected return on plan assets
(71
)
 

 
(210
)
 

Past service costs
40

 
40

 
118

 
117

Amortization of actuarial gains and losses
(154
)
 
2

 
(458
)
 
(39
)
Net periodic pension cost
26

 
258

 
80

 
706

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 $135 in the third quarter of 2012 and $313 in the nine months ended September 30, 2012. Expenses related to these plans in the same periods of 2011 were $44 and $234, respectively.
9.
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.
On July 21, 2009, one of our former clients filed an action against us in United States District Court for the Southern District of New York alleging breach of contract and negligence. The complaint alleges that we failed to maintain certain call recordings on behalf of such client and seeks actual damages or, in the alternative, “liquidated” damages in the amount of $33,500. On August 11, 2009, we answered the complaint denying liability and asserting a counterclaim for $1,202 in unpaid service fees. Discovery has now been completed and on October 15, 2012, the parties each filed separate motions for summary judgment on various issues including the enforceability of the alleged “liquidated damages” provision as well as the validity of our counterclaim of $1,202 in unpaid fees. No trial date has been set by the court. Due to the fact that the resolution of this matter depends in large part on a determination of whether the alleged “liquidated damages” provision asserted by the plaintiff is enforceable and the resolution of coverage issues with our insurer, we are unable to predict the probable outcome of this matter and are not able to reasonably estimate the amount of loss, if any. Our insurance carrier has indicated that actual damages likely would be covered, but has thus far denied coverage of the claimed "liquidated damages.” In March 2012, we filed a declaratory judgment action against our insurance company in the United States District Court for the Middle District of Tennessee seeking a declaration of our rights under the applicable policy of insurance. That matter remains pending. No reserve has been recorded as of September 30, 2012 and December 31, 2011.
In July 2010, our wholly owned subsidiary, National Action Financial Services, Inc., now known as NA Liquidating Company, Inc. ("NA"), was served with a purported class action lawsuit in United States District Court for the Northern District of Illinois. The complaint alleged NA placed automated calls to plaintiff's cell phone without his consent, allegedly in violation of the federal Telephone Consumer Protection Act (“TCPA”). NA made a demand upon its insurance carrier for coverage under its errors and omissions insurance policy. The insurance carrier denied the existence of a duty to defend or indemnify NA for the claims at issue relying on certain exclusions in the policy. The parties have now settled this matter with court approval on a non-recourse basis to NA by requiring us to assign certain rights to insurance recoveries for the benefit of the class plaintiffs in exchange for a release of all class claims and a covenant not to execute the agreed judgment against NA. The plaintiffs initiated a declaratory judgment action against our insurance carrier in an attempt to recover their judgment. NA is not a party to that action.
In April 2011, NA was served with a purported class action filed in United States District Court for the Eastern District of Michigan. The complaint alleged violations of the federal Fair Debt Collection Practices Act (“FDCPA”) and the TCPA for calls to plaintiff's cell phone in an attempt to collect a debt not owed by the plaintiff. The complaint also allege pre-recorded message calls to debtors on their cell phones by means of an automated dialing device, without having received permission from the recipients of the calls in violation of the TCPA. NA filed a motion to dismiss, which was granted in part and denied in part, with the TCPA claim surviving as well as certain of the FDCPA claims. As of September 30, 2012, discovery was ongoing, and a

17

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

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

reserve of $84 was recorded related to this matter. Subsequent to September 30, 2012, the parties have engaged in settlement discussions. No reserve was recorded as of December 31, 2011.
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 3,500 Brazilian Reais (equivalent to approximately $1,700 as of September 30, 2012) for a period extending from 2004 to October 2008. We currently estimate that the amount of the assessment is now approximately 7,700 Brazilian Reais (equivalent to approximately $3,800 as of September 30, 2012), due to increases in interest and penalties. 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 7,700 Brazilian Reais assessment. SITEL Brazil deposited 7,700 Brazilian Reais 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 September 30, 2012 and December 31, 2011.
10.
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 September 30, 2012, we had forward contracts maturing within the next seventeen 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 $2,923 and $1,961 and as Other noncurrent liabilities of $9,499 and $7,845 as of September 30, 2012 and December 31, 2011, respectively.
For the three and nine months ended September 30, 2012, we recorded losses of $820 and $3,172, respectively, for settled interest payments, compared to $4,173 and $12,280 for the three and nine months ended September 30, 2011. Additionally, there was a mark-to-market valuation increase in the liability of $1,401 and $2,616 for the three and nine months ended September 30, 2012, compared to a reduction of $4,356 and $11,632 for the same periods in 2011. These amounts are reflected in Interest and other financing costs, net.

18

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
 
 
 
 
September 30,
2012
 
December 31,
2011
 
 
 
September 30,
2012
 
December 31,
2011
 
 
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
 
$
2,158

 
$
1,112

 
Accrued liabilities and other
 
$
(2,003
)
 
$
(7,222
)
Foreign exchange contracts
 
Other noncurrent assets
 
334

 

 
Other noncurrent liabilities
 
(356
)
 
(878
)
Total
 
 
 
$
2,492

 
$
1,112

 
 
 
$
(2,359
)
 
$
(8,100
)
Derivatives not designated as hedging instruments
 
 
 
 
 
 
 
 
 
 
Interest rate contract - ST
 
Prepaids and other current assets
 
$

 
$

 
Accrued liabilities and other
 
$
(2,923
)
 
$
(1,961
)
Interest rate contract - LT
 
Other noncurrent assets
 

 

 
Other noncurrent liabilities
 
(9,499
)
 
(7,845
)
Foreign exchange contracts
 
Prepaids and other current assets
 
352

 
95

 
Accrued liabilities and other
 
(1,048
)
 
(2,216
)
Foreign exchange contracts
 
Other noncurrent assets
 
11

 
7

 
Other noncurrent liabilities
 
(31
)
 
(264
)
Total
 
 
 
$
363

 
$
102

 
 
 
$
(13,501
)
 
$
(12,286
)
Total derivatives
 
 
 
$
2,855

 
$
1,214

 
 
 
$
(15,860
)
 
$
(20,386
)

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 Effect of Derivative Instruments on the Condensed Consolidated Statements of Comprehensive Income (Loss)
Derivatives in
Cash Flow
Hedging
Relationships
 
Amount of Gain or (Loss) Recognized in OCI on Derivative
(Effective Portion)
 
Location of Gain or
(Loss) Reclassified
from Accumulated
OCI into Income
(Effective Portion)
 
Amount of Gain or (Loss)
Reclassified from
Accumulated OCI
into Income
 
Three Months Ended September 30,
 
Three Months Ended September 30,
 
2012
 
2011
 
2012
 
2011
Foreign exchange contracts
 
$
2,300

 
$
(2,273
)
 
COS and SG&A
 
$
(463
)
 
$
1,555

Total
 
$
2,300

 
$
(2,273
)
 
 
 
$
(463
)
 
$
1,555

 
 
 
 
 
 
 
 
 
 
 
Derivatives in
Cash Flow
Hedging
Relationships
 
Amount of Gain or (Loss) Recognized in OCI on Derivative
(Effective Portion)
 
Location of Gain or
(Loss) Reclassified
from Accumulated
OCI into Income
(Effective Portion)
 
Amount of Gain or (Loss)
Reclassified from
Accumulated OCI
into Income
 
Nine Months Ended September 30,
 
Nine Months Ended September 30,
 
2012
 
2011
 
2012
 
2011
Foreign exchange contracts
 
$
5,549

 
$
(2,961
)
 
COS and SG&A
 
$
(2,006
)
 
$
5,017

Total
 
$
5,549

 
$
(2,961
)
 
 
 
$
(2,006
)
 
$
5,017

For the three and nine months ended September 30, 2012 we recorded (losses) gains of $(299) and $(1,278), respectively, compared to $946 and $3,061, respectively, for the same periods in 2011 to Cost of services. For the three and nine months ended September 30, 2012, we recorded (losses) gains of $(164) and $(728), respectively, compared to $609 and $1,956, respectively, for the same periods in 2011 to Selling, general, and administrative expenses for the effective portion of settled hedge contracts. We expect unrealized losses of $493 will be reclassified from Accumulated other comprehensive loss (“AOCL”) to Cost of services and Selling, general and administrative expenses over the next twelve months. However, this amount and other future reclassifications from AOCL 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 September 30, 2012
For the three and nine months ended September 30, 2012 we recognized a (loss) gain on foreign currency transactions related to the ineffective portion of the derivative instruments of $(28) and $202, respectively, compared to $220 and $(162), respectively, for the same periods in 2011.
Derivatives Not
Designated as Hedging Instruments        
 
Location of Gain or (Loss)
Recognized in Income on Derivative
 
Amount of Gain or
(Loss) Recognized in
Income on Derivative
 
Amount of Gain or
(Loss) Recognized in
Income on Derivative
Three Months Ended September 30,
 
Nine Months Ended September 30,
2012
 
2011
 
2012
 
2011
Foreign exchange contracts
 
COS and SG&A
 
$
897

 
$
15

 
$
1,155

 
$
26

Foreign exchange contracts
 
Foreign currency transactions
 
(497
)
 
1,061

 
461

 
895

Total
 
 
 
$
400

 
$
1,076

 
$
1,616

 
$
921

For the three and nine months ended September 30, 2012, we recorded gains of $538 and $693, respectively, compared to gains of $9 and $16, respectively, for the same periods in 2011 to Cost of services. For the three and nine months ended September 30, 2012, we recorded gains of $359 and $462, respectively, compared to gains of $6 and $10, respectively for the

20

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

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

same periods in 2011 to Selling, general, and administrative expenses (“SG&A”) for derivatives not designated as hedging contracts.
Current Contracts
At September 30, 2012, 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
179,173

Total
$
354,173

11.
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 $711,885 and $692,840 at September 30, 2012 and December 31, 2011, respectively. The estimated fair value of such debt was $692,000 and $610,000 at September 30, 2012 and December 31, 2011, 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 approximates carrying value and is measured using Level 2 inputs.
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.
The following tables summarize the value of financial instruments by the pricing levels defined above as of September 30, 2012 and December 31, 2011. There were no transfers between pricing levels for the nine month period ended September 30, 2012.
 
Fair Value Measurements at September 30, 2012
 
Total
 
Level 1
 
Level 2
 
Level 3
Assets
 
 
 
 
 
 
 
Foreign currency forward contracts
$
2,855

 
$

 
$
2,855

 
$

Total
$
2,855

 
$

 
$
2,855

 
$

Liabilities
 
 
 
 
 
 
 
Foreign currency forward contracts
$
3,438

 
$

 
$
3,438

 
$

Interest rate derivative instrument
12,422

 

 
12,422

 

Total
$
15,860

 
$

 
$
15,860

 
$


21

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

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

 
Fair Value Measurements at December 31, 2011
 
Total
 
Level 1
 
Level 2
 
Level 3
Assets
 
 
 
 
 
 
 
Foreign currency forward contracts
$
1,214

 
$

 
$
1,214

 
$

Total
$
1,214

 
$

 
$
1,214

 
$

Liabilities
 
 
 
 
 
 
 
Foreign currency forward contracts
$
10,580

 
$

 
$
10,580

 
$

Interest rate derivative instrument
9,806

 

 
9,806

 

Total
$
20,386

 
$

 
$
20,386

 
$

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. 
We evaluate the remaining useful lives of definite-lived intangible assets (customer relationships) whenever events or circumstances warrant a revision to the remaining amortization period. The fair value of definite-lived intangible assets is based on estimated cash flows from the future use of the asset, discounted at a market derived weighted average cost of capital.
No impairment charges related to goodwill and other intangible assets were recorded during the three and nine months ended September 30, 2012 and 2011.
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. Long-lived assets are tested for impairment on a quarterly basis. No impairment charges related to long-lived assets were recorded during the three and nine months ended September 30, 2012 and 2011.
We have certain annuity contracts included within Other noncurrent assets. These assets are measured at fair value on a non-recurring basis and are classified in Level 3 of the fair value hierarchy. Third-party recoverability information was used to assess the fair value of these annuity contracts. Based on our assessment, we determined that impairment charges should be recorded for the three and nine months ended September 30, 2012 of $498 and $1,633, respectively. The charges were primarily related to the impairment of the full value of certain annuity contracts in the Americas. No such charges were recorded during the three and nine months ended September 30, 2011.

22

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

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

12.
Operating Segment and Geographical Information
Our two reportable segments, EMEA and the Americas, 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.
We have modified the previously reported segment disclosure to present the single measure, segment profitability, used by the CODM. We have also updated the financial information previously reported for our segments to exclude the items that are not used by our CODM to evaluate segment performance, as discussed above. These disclosure changes were made in order to reflect the segment information in our internal management reporting that is provided to and used by the CODM.
 
 
September 30, 2012
 
September 30, 2011
 
 
Three Months Ended
 
Nine Months Ended
 
Three Months Ended
 
Nine Months Ended
EMEA
 
 
Revenues
 
$
130,085

 
$
413,055

 
$
147,143

 
$
450,351

Gross margin
 
39,243

 
122,694

 
43,391

 
130,187

SG&A
 
30,733

 
96,552

 
36,375

 
108,231

Segment operating results
 
$
8,510

 
$
26,142

 
$
7,016

 
$
21,956

GM%
 
30.2
%
 
29.7
%
 
29.5
%
 
28.9
%
SG&A%
 
23.6
%
 
23.4
%
 
24.7
%
 
24.0
%
Op Results%
 
6.5
%
 
6.3
%
 
4.8
%
 
4.9
%
Americas
 
 
Revenues
 
$
218,135

 
$
646,455

 
$
211,065

 
$
594,549

Gross margin
 
83,969

 
245,612

 
84,371

 
237,128

SG&A
 
51,549

 
152,668

 
49,294

 
136,741

Segment operating results
 
$
32,420

 
$
92,944

 
$
35,077

 
$
100,387

GM%
 
38.5
%
 
38.0
%
 
40.0
%
 
39.9
%
SG&A%
 
23.6
%
 
23.6
%
 
23.4
%
 
23.0
%
Op Results%
 
14.9
%
 
14.4
%
 
16.6
%
 
16.9
%



23

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:
 
 
 
 
 
 
 
 
 
 
 
September 30, 2012
 
September 30, 2011
 
 
Three Months Ended
 
Nine Months Ended
 
Three Months Ended
 
Nine Months Ended
Segment operating results:
 
 
 
 
 
 
 
 
EMEA
 
$
8,510

 
$
26,142

 
$
7,016

 
$
21,956

Americas
 
32,420

 
92,944

 
35,077

 
100,387

Total
 
40,930

 
119,086

 
42,093

 
122,343

 
 
 
 
 
 
 
 
 
Corporate and other(1)
 
6,865

 
26,221

 
10,641

 
29,181

Depreciation and amortization
 
10,286

 
30,541

 
12,499

 
36,833

Restructuring and exit charges
 
4,147

 
9,559

 
5,647

 
14,932

Other operating (income) expense(2)
 
(181
)
 
5,548

 
2,716

 
1,013

Operating income
 
19,813

 
47,217

 
10,590

 
40,384

Interest and other financing costs, net
 
22,108

 
63,735

 
16,733

 
49,465

Loss before income taxes
 
$
(2,295
)
 
$
(16,518
)
 
$
(6,143
)
 
$
(9,081
)
(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 results of a de-consolidated subsidiary. These amounts were included within the Americas and EMEA segments in our previously reported segment information. The breakout of Corporate and other by Revenues was $(102) and $(501) for the three and nine months ended September 30, 2012, respectively, and $909 and $6,943 for the same periods in 2011, respectively. SG&A amounts included in Corporate and other were $7,248 and $26,277 for the three and nine months ended September 30, 2012, respectively, and $10,645 and $30,524 for the same periods in 2011, respectively.
(2) Includes amounts from the Condensed Consolidated Statements of Comprehensive Income (Loss) for (Gain) loss on foreign currency transactions, Impairment and loss (gain) on disposal of assets, and Other expense, net.
13.
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 and 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 Income and 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.

24

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
September 30, 2012
(in thousands of U.S. dollars)
 
Parent
 
Issuers
 
Guarantors
 
Non-
Guarantors
 
Eliminations
 
Total
Consolidated
Assets
 
 
 
 
 
 
 
 
 
 
 
Current assets
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$

 
$

 
$
5,084

 
$
13,938

 
$

 
$
19,022

Accounts receivable (net of allowance for doubtful accounts)

 

 
97,513

 
155,599

 

 
253,112

Prepaids and other current assets
160,487

 
114

 
141,488

 
259,615

 
(496,492
)
 
65,212

Total current assets
160,487

 
114

 
244,085

 
429,152

 
(496,492
)
 
337,346

Property and equipment, net
544

 

 
32,010

 
62,523

 

 
95,077

Goodwill

 

 
16,690

 
101,027

 

 
117,717

Other intangible assets, net

 

 
16,104

 
28,439

 

 
44,543

Deferred income taxes

 

 
4,182

 
9,730

 

 
13,912

Investments in affiliates
(361,455
)
 
380,706

 
42,763

 

 
(62,014
)
 

Other noncurrent assets
2,905

 
90,704

 
43,578

 
23,746

 
(121,642
)
 
39,291

Total assets
$
(197,519
)
 
$
471,524

 
$
399,412

 
$
654,617

 
$
(680,148
)
 
$
647,886

Liabilities and Stockholders' (Deficit) Equity
 
 
 
 
 
 
 
 
 
 
 
Current liabilities
 
 
 
 
 
 
 
 
 
 
 
Accounts payable
$
847

 
$
48

 
$
7,578

 
$
14,625

 
$

 
$
23,098

Accrued payroll and benefits
124

 

 
12,750

 
72,872

 

 
85,746

Accrued liabilities and other
137,513

 
258,322

 
8,843

 
176,206

 
(496,492
)
 
84,392

Income taxes payable
92

 
1

 

 
2,594

 

 
2,687

Current portion of capital lease obligations

 

 
1,497

 
1,581

 

 
3,078

Total current liabilities
138,576

 
258,371

 
30,668

 
267,878

 
(496,492
)
 
199,001

Long-term debt

 
664,511

 

 
47,374

 

 
711,885

Capital lease obligations

 

 
684

 
1,739

 

 
2,423

Deferred income taxes

 

 
6,506

 
3,444

 

 
9,950

Other noncurrent liabilities

 
9,500

 
9,946

 
162,918

 
(121,642
)
 
60,722

Total liabilities
138,576

 
932,382

 
47,804

 
483,353

 
(618,134
)
 
983,981

Series B PIK preferred stock
70,082

 

 

 

 

 
70,082

Series C PIK preferred stock, net of beneficial conversion feature
50,759

 

 

 

 

 
50,759