**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

### **Washington, D.C. 20549**

### ** **

**FORM 10-K**

 

**ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)OF THE SECURITIES EXCHANGE ACT OF 1934**

 

For the fiscalyear ended **DECEMBER 31, 2004**

 
| Commission  File Number |       | Exact name of registrant as specified in its charter |       | IRS Employer  Identification No. |
|-------------------------|------------|------------------------------------------------------|------------|----------------------------------|
| **1-12577**             | ** ** | **SITEL  CORPORATION**                               | ** ** | **47-0684333**                   |

 

### **MINNESOTA**

(State or OtherJurisdiction of Incorporation or Organization)

 
| **7277  WORLD COMMUNICATIONS DRIVE OMAHA, NEBRASKA** | ** ** | **68122**  |
|------------------------------------------------------|------------|------------|
| (Address of Principal  Executive Offices)            |       | (Zip Code) |

 

**(402)963-6810**

(Registrant’sTelephone Number, Including Area Code)

 

**SECURITIESREGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:**

 
| **Title  of Each Class**      |   | **Name  of Each Exchange  On Which Registered** |
|-------------------------------|--------|-------------------------------------------------|
| Common Stock, $.001 Par Value |   | The New York Stock Exchange                     |

** **

**SECURITIESREGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:**

Not Applicable

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports) and (2) has been subject to such filing requirements for thepast 90 days.  YES ý NO o

 

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to this Form 10-K.         

 

Indicate by check mark whether theregistrant is an accelerated filer (as defined in Rule 12b-2 of the Act).

 YES ý  NO o

 

The aggregate market value of thevoting stock held by non-affiliates of the registrant as of June 30, 2004was $174,216,902 based upon the closing price of $4.22 for such stock asreported by the New York Stock Exchange on such date. Solely for purposes ofthis calculation, persons holding of record more than 5% of the Company’s stockhave been included as “affiliates.”

 

**COMMONSTOCK, $.001 PAR VALUE —73,739,490 SHARES OUTSTANDING AS OF FEBRUARY 28,2005**

 

**DOCUMENTSINCORPORATED BY REFERENCE**

 
| **Part of  Form 10-K** | ** ** | **Document  Incorporated by Reference**                                                                       |
|----------------------------------|------------|---------------------------------------------------------------------------------------------------------------|
| III                              |       | Certain sections of the  Proxy Statement for the Annual Meeting of Stockholders to be held  May 12, 2005 |

 

 

----

** **

**SITEL CORPORATION AND SUBSIDIARIES**

 

**TABLE OF CONTENTS**

 
| Forward-Looking Statements                         |       |   |
|----------------------------------------------------|------------|--------|
|                                               |       |   |   |   |   |
| **PART I**                                    |       |   |
|                                               | Item 1     | – | Business |   |
|                                               |       |   | General |   |
|                                               |       |   | Industry  Overview |   |
|                                               |       |   | Our Business |   |
|                                               |       |   | Organizational Structure |   |
|                                               |       |   | The  Services We Offer |   |
|                                               |       |   | Markets  and Clients |   |
|                                               |       |   | The Industries We Serve |   |
|                                               |       |   | Information Technology |   |
|                                               |       |   | Human Resource Management |   |
|                                               |       |   | Multi-shore  Distribution Strategy |   |
|                                               |       |   | Competition |   |
|                                               |       |   | Reporting  Segments and Geographical Information |   |
|                                               |       |   | Available Information |   |
|                                               |       |   | Government Regulation |   |
|                                               |       |   | Quarterly Results and  Seasonality |   |
|                                               |       |   | Risk Factors |   |
|                                               | Item  2    | – | Properties |   |
|                                               | Item 3     | – | Legal Proceedings |   |
|                                               | Item  4    | – | Submission  of Matters to a Vote of Security Holders |   |
|                                               |       |   | Executive Officers  of the Registrant (Instruction 3 to Item 401(b) of Regulation S-K) |   |
|                                               |       |   |   |   |
| **PART II**                                   |       |
|                                               | Item  5    | – | Market  for Registrant’s Common Equity and Related Stockholder Matters |   |
|                                               | Item 6     | – | Selected Financial Data |   |
|                                               | Item  7    | – | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |   |
|                                               |       |   | General |   |
|                                               |       |   | General Business Risks |   |
|                                               |       |   | Critical  Accounting Policies and Estimates |   |
|                                               |       |   | Results of Operations |   |
|                                               |       |   | Financial Condition  and Liquidity |   |
|                                               |       |   | Other Matters |   |
|                                               | Item  7A   | – | Quantitative  and Qualitative Disclosures about Market Risk |   |
|                                               | Item  8    | – | Financial  Statements and Supplementary Data |   |
|                                               | Item  9    | – | Changes  in and Disagreements with Accountants on Accounting and Financial Disclosure |   |
|                                               | Item 9A    | – | Controls and  Procedures |   |
|                                               |       |   |   |   |
| **PART III**                                  |       |
|                                               | Item  10   | – | Directors  and Executive Officers of the Registrant |   |
|                                               | Item 11    | – | Executive Compensation |   |
|                                               | Item  12   | – | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters |   |
|                                               | Item  13   | – | Certain  Relationships and Related Transactions |   |
|                                               | Item 14    | – | Principal  Accountant Fees and Services |   |
|                                               |       |   |   |   |
| **PART IV**                                   |       |
|                                               | Item  15   | – | Exhibits,  Financial Statement Schedules and Reports on Form 8-K |   |
|                                               | Signatures |   |
|                                               |       |   |   |   |
| **TABLE OF CONTENTS – Financial  Statements** |       |
|                                                    |            |        |  |  |  |  |  |  |

 

----

 

**Forward-Looking Statements**

 

We make statements inthis report that are considered forward-looking statements within the meaningof the Securities Exchange Act of 1934. Sometimes these statements will containwords such as “believes,” “expects,” “intends,” “should,” “will,” “plans,” andother similar words. These statements are not guarantees of our futureperformance and are subject to risks, uncertainties, and other importantfactors that could cause our actual performance or achievements to bematerially different from those we project. These risks, uncertainties, andfactors include, but are not limited to: reliance on major clients, conditionsaffecting clients’ industries, clients’ budgets and plans, unanticipated labor,contract or technical difficulties, delays in ramp up of services undercontracts, reliance on major subcontractors and strategic partners, risksassociated with managing a global business, fluctuations in operating results,reliance on telecommunications and computer technology, dependence on laborforce, industry regulation, general and local economic conditions, competitivepressures in our industry, foreign currency risks, the effects of leverage,dependency on credit availability, restrictions imposed by the terms ofindebtedness, and dependence on key personnel and control by management.

 

Given theseuncertainties, you should not place undue reliance on these forward-lookingstatements. Please see the other sections of this report and our other periodicreports filed with the Securities and Exchange Commission for more informationon these factors.

 

**PART I**

 

**Item 1. Business**

** **

**General**

** **

References in this reportto “we”, “our”, “SITEL”, and the “Company” are to SITEL Corporation and itssubsidiaries, collectively.

 

We are a leading globalprovider of outsourced customer support services.

 

•                  Wespecialize in the design, implementation, and operation of multi-channelcontact center solutions, which enable our clients to acquire, serve, grow, andincrease the value of their customers.

•                  Wesupport the customer management strategies of many of the world’s leadingbrands, primarily in the automotive,consumer, financial services, insurance, technology, telecommunications andISP, and utilities sectors.

•                  We leverage world-class operations across ourglobal platform of people, processes, and technology.

•                  We provide customer acquisition,customer care, technical support, and risk management services on an outsourcedbasis to help our clients serve theircustomers and build greater brand loyalty.

•                  Weserve both outsourced and in-house contact centers focused on deliveringimproved service quality, productivity and efficiency.

 

Our global footprintcurrently supports over 250 clients and includes operations in North America,Europe, North Africa, Asia Pacific, and Latin America. SITEL’s business modelis comprised of 32 business units, which deliver in-country market support forlocal clients and leverage our global platform to provide single-point,multi-country solutions on behalf of multinational clients.  We represent many of the world’s leadingbrand names from our current delivery platform, which includes:

 

•                  Approximately34,000 employees,

•                  Over24,500 workstations,

•                  87contact centers located in 25 countries,

•                  Serviceto clients in 55 countries,

•                  Communicationin more than 25 languages and dialects.

 

From our founding in1985, our philosophy regarding the business we provide remains unchanged.  We operate our contact centers based on thecore belief that people do business with people, even in an age of onlinecommunications and e-mail transactions. Our services are designed to enhancethe quality of customer interactions, at every stage in the customer lifecycle.

 

1

----

 

**Industry Overview**

** **

Since SITEL’s founding,the contact center industry has evolved dramatically.  Twenty years ago the service mix wasprimarily comprised of phone-based services for outbound customer acquisitionand level-one customer service.  Now, inaddition to these traditional outsourced services, the industry supportsmulti-tiered inbound customer support and technical help-desk services,business process solutions, professional services, and receivables management.

 

The industry has evolvedfrom supporting primarily low technology, single-facility environments to onethat provides leading edge technology solutions for multi-national corporationsin multi-center environments.  Today,companies are increasingly focused on optimizing their brands throughdifferentiated customer service, and on increasing the value of their customerrelationships through cross-sell and up-sell programs. Fueling this trend isthe continued growth in consumer use of the Internet and e-mail, and theincreasingly remote nature of customer interactions. Companies now face abusiness imperative to deliver consistent levels of quality customer serviceregardless of the channel of communication chosen.

 

Contact center-basedcustomer management activity is becoming central to the way leadingorganizations choose to enhance customer loyalty and retention. IDC, arespected industry analysis group, estimates that the worldwide contactoutsource business will grow from $45 billion in the year 2004 to $83 billionby the year 2009 or an average increase of 13% per year. Corporations areincreasingly shifting key business processes from internal operations tooutsourced partners.  This businessprocess outsourcing momentum is creating opportunities for the contact centeroutsourcing market.

 

There are now severalcase studies published by leading research analysts that illustrate how theoutsourced contact center industry has provided corporations’ improvedfinancial returns and higher end-customer satisfaction. As the outsourcedindustry continues to evolve, it is anticipated that growth will be furtherfueled by an improved ability of outsourcers to deliver integrated technologyand communication solutions.  Companieswill continue to realize the benefits associated with a focus on their corecompetencies and will rely on service providers like SITEL to delivercomprehensive contact center solutions. The contact center outsourcing industry continues to establish offshoreand nearshore locations, now often referred to as best-shore or multi-shorestrategies, to serve clients seeking diversified labor markets. Likewise,industry analysts such as IDC, Datamonitor, and Forrester are beginning touniquely identify and segment the few contact center companies, such as SITEL,that are positioned and differentiated in this global realm.

 

**Our Business**

 

SITELdesigns, builds, and operates contact centers to deliver integrated customerinteraction solutions. Our strategy for aligning with our clients involvesmature methodologies centered on these three key phases of program developmentand operation. Because some clients require different levels ofsupport during each of these phases, we are able to leverage ourglobal experience and expertise in local markets to tailor a solutionand delivery model as needed.  Ourmulti-tiered approach to client engagement for both business-to-customer (B2C)and business-to-business (B2B) programs enables us to align our solution asclosely as possible with our clients’ unique business goals.

 

Each of our solutions showcase our abilityto add value to our clients’ primary business objectives by:

 

•                  offeringcustomers a consistent method of contact, through the communication channels oftheir choice,

•                  improvingbrand image through consistent and accurate handling of customer contacts,

•                  providingcustomer service professionals with access to accurate, up-to-date information,driving timely customer issue resolution,

•                  capturingcustomer service information for analysis and conversion into marketopportunities,

•                  providing a flexible and scalablestate-of-the-art operating environment that can accommodate dynamic shifts involume, workload, and associated staffing requirements,

•                  integrating operations platforms,enabling work inter-flow between outsourced customer contact centers, otherthird party vendors, and internal centers as necessary, and

•                  implementing self-servicestrategies and tools to further improve performance and reduce costs throughincreased efficiency.

 

2

----

 

**Organizational Structure**

** **

Our organizationalstructure is unique within the industry.  We align and empower our 32 business units to provide client-centriccustomer support services using best practices gained from our globalexperience.  By leveraging our globalexpertise and the local knowledge gained from serving clients in specificmarkets, we are able to deliver a client-centric model that creates positiveresults for our clients in each world region. Individual business units know their markets, their geographies, thelocal rules and regulations and have specialized industry expertise toperform and relate to companies in their market.

 

More and more companiesare consolidating the number of outsource customer contact center vendors andcontracting with a company that can serve them across geographies.  Our Global Management Services team develops,implements, and manages customized industry-specific management solutions for ourglobal clients.  This structure, incombination with local business unit delivery, ensures best practice processesare delivered with the necessary local customization, improving outcomes forour global clients.

 

**The Services We Offer**

 

SITEL provides innovative and efficient customer supportservices and solutions. We view every customercontact as an opportunity to build our clients’ brand equity and strengthenrelationships with our clients’ customers. We offer a suite of servicesaddressing every stage of the customer or product lifecycle, as well asoperational and technology professional services that are designed to optimizeevery aspect of the day-to-day operation of both outsourced and in-housecontact centers. A partial list of services we offer for various phases ofcustomer contact management are included in the table below**:**

 
| **Customer  Acquisition**                                                                                                                                                                                                                                                                                                                                                                                                                                | ** ** | **Customer  Care**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | ** ** | **Technical  Support**                                                                                                                                                                                                                                                                                                                                                               | ** ** | **Risk  Management**                                                                                                                                                                                                                                                                                                       | ** ** | **Back Office**                                                                                                                                                                                                                                                                                                                                             |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                     |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |       |                                                                                                                                                                                                                                                                                                                                                                                 |       |                                                                                                                                                                                                                                                                                                                       |       |                                                                                                                                                                                                                                                                                                                                                        |
| •    Inbound sales

•    Outbound sales

•    Order taking and fulfillment

•    Lead generation

•    DRTV/bureau

•    Product information requests

•    Subscription renewals

•    Database cleaning and updating

•    Up-sell and cross-sell programs

  |       | •    Repeat purchases

•    Change of personal details

•    Complaint and issue resolution

•    Billing information

•    Thank-you or other client  initiated information calls

•    Reservations

•    Loyalty clubs

•    Investor inquiries

•    Government information

•    Dealer location

•    Insurance claim processing

  |       | •    Troubleshooting calls

•    Software problems

•    Internet service problems

•    Computer hardware problems

•    Up-sell/cross-sell programs

•    Corporate help desk support

•    Warranty or post-warranty  support

  |       | •    Pre- and post-charge-off  collections

•    Early fraud identification

•    Credit card activation

•    Property recovery

•    Skip tracing

•    Disaster prevention and recovery

  |       | •    Data entry

•    Insurance claim processing

•    Order processing and  fulfillment

•    Payroll and personnel record  keeping

•    Record scanning, storage, and  archiving

•    Shipping tracking and  management

  |

 

In addition, a new global SITEL business unit,SITEL Global Services was launched in 2005. The new business providesspecialized contact center professional services to corporations who wish todeliver world-class customer services and product support or manage customeracquisition in the global marketplace. The business is targeting companieslooking to realize their full potential by improving their in-house contactcenter operations. SITEL Global Services will also target those firms averse tothe outsourcing of key business processes to outside providers.  It has built and is marketing and promotingcontact center products and services for sale to both SITEL clients and thein-house contact center market.

 

3

----

 

**Markets andClients**

** **

Ourbusiness units implement and operate customized industry-specific customersupport solutions by geography and by specific vertical markets.  They have primary responsibility foroperations, sales and marketing efforts in their defined area. Within thisframework, we focus on all sized corporations in the automotive, consumer,financial services, insurance, technology, telecommunications and ISP, andutilities sectors. Theseindustries accounted for approximately 12%, 10%, 16%, 7%, 27%, 15%, and 8%,respectively, of our 2004 revenue. Sales in other industries, including travel,healthcare, government and various others, accounted for 5% of 2004 revenue. We serve over250 clients in 25 countries.  Note 9 tothe Consolidated Financial Statements provides information about our revenue bygeographic region. Our top 20 clients accounted for 67.0% of our revenuein 2004, and may include multiple independently managed business units within the clients’affiliated group.  General MotorsCorporation business units were responsible for 14.9% of our total revenue in2004.  Hewlett-Packard Company businessunits were responsible for 11.3% of our total revenue in 2004.  We did not have any other clients undercommon control that generated more than 10% of our total revenue for the yearended December 31, 2004.

 

**The Industries We Serve**

 

SITEL leverages a globalsuite of best practices in operations, technological and human resources todeliver peerless customer interaction across multiple touch points. We providespecialized systems, solutions, and services tailored to the specific businesschallenges of a broad range of vertical industries, including: Automotive;Consumer; Financial Services; Insurance; Technology; Telecommunications andISP, and Utilities.

 

**Automotive**

** **

We support end-to-endservice capability: customer care for the entire customer lifecycle, includingpre-sales support, new purchase assistance, customer service andtroubleshooting, warranty support, and remote roadside assistance; andafter-sales solutions that leverage customer data to identify new marketingopportunities and generate increased customer loyalty and demand. We provideservice for complete dealer networks and all associated dealer supportactivities. All of our solutions operate on a flexible technology platform withthe ability to integrate multiple legacy data centers, product knowledge bases,and third-party systems.  We support bothdealers and customers.

 

**Consumer**

** **

Global competition in theconsumer goods and services sector is relentless. Technologies are constantlyupgrading; customers know far more than they ever did, and every day theoptions available to them increase. New markets, new products, and new channelslead to new business challenges – and opportunities – for providers.

 

For consumer goodscompanies, the keys to leveraging a contact center to stay competitive are:effective management of the customer relationship; identifying the mostvaluable prospects and customers; converting this knowledge into improvedmarketing and sales performance; and providing high quality care that increasescustomer loyalty and demand. We provide a comprehensive suite of solutionsenabling manufacturers, resellers, e-commerce, and catalog companies to managerelationships across the entire customer lifecycle.

 

**Financial Services**

** **

The financial servicesmarketplace is more competitive than ever. Growing valuable long-term customerrelationships is increasingly important. Business challenges brought on byglobalization, consolidation through mergers and acquisitions, and newer,complex service offerings are forcing leading companies to differentiatethemselves through innovative and cost-effective marketing and services to newand existing customers.

 

We design, build, andoperate innovative and cost-effective marketing, sales, and customer caresolutions for banks, credit grantors, mortgage companies, and diversifiedfinancial institutions that enable these companies to stay competitive. Makingthe contact center the strategic point of channel management, our account teamsare able to

 

4

----

 

leverage sophisticatedcustomer databases (i.e. account information, demographics, preferences,purchase/contact history) to refine sales, marketing and service offerings forindividuals or target groups.

 

**Insurance**

** **

Today, insurancecompanies face a multitude of business challenges. Competition fromnon-traditional insurers (including banks, mutual fund administrators, andvirtual insurers), market convergence, regulatory constraints, moresophisticated and informed customers, and the high cost of service all signifya need for insurance providers to take advantage of opportunities to reach newmarkets while keeping costs in check.

 

Insurance companies havelong relied on outsourcers for basic sales and customer service support.  We continue to provide these traditionalindustry services while also expanding into broader, end-to-end, solutions.Globally, SITEL provides outsourced contact center solutions for many types ofinsurance providers, including general, property & casualty, and life &health.  Our capabilities extend to salesand service across a full range of insurance products from non-underwritten,guaranteed issue products such as hospital accident protection, hospitalindemnity protection, health care discount plans, mechanical breakdown and creditprotection, to fully underwritten property & casualty and lifeproducts.

 

In North America ourInsurance business unit operates a fully functional licensing and developmentdepartment, as well as state certified training centers, leveraging over 270 licensedin-house agents to provide services for insurance companies throughout theUnited States and Canada.  SITEL alsoowns and operates a small independent insurance agency.  The insurance agency sells personal lines ofinsurance products direct to U.S. consumers through a variety of directresponse marketing channels.  Theinsurance products sold are underwritten through numerous insurance companiesand include, among other types of insurance, homeowners, renters, automobile,life, health, and annuity products.

 

**Technology**

** **

To stay competitive andgrow their business, technology companies are under pressure to rollout new andbetter products on an extremely aggressive timeline, while dealing with costconcerns brought on by increased competition at local and global levels, lowermargins, and increasingly high user expectations for service and support.

 

The key to stayingcompetitive in this constantly changing environment is effective management ofcustomer relationships; identifying the most valuable prospects and customers,converting this knowledge into improved marketing and sales performance, andproviding high quality care that increases brand loyalty.

 

SITEL supports a widerange of customer contact solutions for the entire lifecycle of technology customers,across a wide array of high tech products and services (including support forPC/OEM, peripheral, software products, PDAs, wireless devices and otherpersonal technology). We provide sales, customer service, cross-sell/up-sell,and tier 1-4 technical support for these clients.

 

**Telecommunications andISP**

** **

In order to meet marketdemand and seize opportunities, leading telecommunications and Internet ServiceProviders (ISPs) are reevaluating their customer management strategies.  The winning companies are those that, amongother things, leverage experience, technology, and best-practice processes todeliver a cost-efficient customer experience that increases customer loyalty.

 

We enable local, longdistance, and wireless providers, telecommunications equipment manufacturersand ISP companies worldwide to meet business challenges and grow their customerbase through a broad range of cost-effective customer-focused programs.  In addition to traditional product and service support solutions, wedeliver advanced order management, provisioning, and B2B support, and have developed specific end-to-endsolutions for ISP and wireless service providers.

 

5

----

 

**Utilities**

** **

Customer interactionsolutions from SITEL help electric, gas, and water utilities worldwide remaincompetitive and build stronger customer relationships through improved customercare, integrated billing and payment, and crisis management programs. Utilitiesbenefit from increased customer retention and lower cost-of-service, whilecustomers benefit from more convenient billing and payment options, betterintegration between the contact center and field representatives, and improvedcustomer service and responsiveness.  In addition totraditional customer support services, we have developed processes to supportthe industry including:  lead generation,loyalty campaign programs, appointment setting and scheduling, databasemanagement programs, and end-to-end solutions for supporting the customer fromconnection to payment.

 

**Information Technology**

 

While ourglobal system solutions and experience is vast, there are some keydifferentiated components that our clients find compelling.  Our latest on-demand, global technicalinfrastructure, called SystemOneä, allows our clients to utilize enterprise-class technology on aglobal basis based upon real-time needs and demand.  We currently have over 3,000 seats in fourcontinents utilizing our SystemOne technical solution.  Furthermore, we have designed and implementedclient (or industry) specific applications to provide highly customizedsolutions to clients’ specific requirements.

 

 Our end-to-end technical solutions includebest in class components and processes for:

 

**•**                  **Customer Facing Enablements**, such as IVR, E-mail, Web, and Fax;

•                  **Voice of the Customer**, such as Custom Application Development, Speech Recognition, Textto Speech, Customer, Surveys, and Quality Assurance Tools;

•                  **Contact Management,**such as Auto Dialing, CTI, Scheduling and Forecasting (WFM), andData Mining;

•                  **Key Design Considerations,**such as Customer Education Protocols, Customer SegmentationStrategies, Contact Valuation, and Knowledge Management.

 

In addition tothe customer facing technology enablements, we have robust technical tools andprocesses to administrate our technical solutions, including:

 

•                  **Technical Delivery Considerations,**such as Private Connectivity, Network Isolation, Encryption, and VPNConnection;

•                  **Monitoring/Visibility,**such as Intrusion Detection, Virus Detection, Network AnomalyMonitoring, and Event Monitoring;

•                  **Physical Security**, such as****ControlledAccess, Disaster Recovery/Continuity, Power Protection, and Hardened DataCenters;

•                  **Policy and Procedure**, such as Information Security, Change Control, Audit Procedures,and Project Methodology.

 

**Human Resource Management**

 

Efficientmanagement and operation of large-scale contact center solutions is a highlypeople intensive business. One of our core competencies is managing a diverse,worldwide workforce. We place great emphasis on our integrated human resourcemanagement strategies, including the recruitment, training, development, andretention of our employees at all levels of the organization.

 

Weseek to locate customer contact centers in communities and cities withfavorable workforce demographics and populations with necessary languageskills. We are committed to equal employment opportunity in every market weserve.

 

Tobuild rewarding careers for our employees and enable effective planning forfuture growth:

 

•                  we provide a learning environment that deliversinstructor led and on the job training as well as e-learning opportunitiesthrough SITEL University;

 

6

----

 

•                  we focus on developing employee skills andpromoting from within so that employees can take on challenges that help thecompany group both domestically and globally; and

 

•                  we employ a global reward and recognition programthat is instrumental in keeping employees motivated and focused on goals andobjectives.

 

Asof December 31, 2004, we had approximately 34,000 employees.  In our European region, employees in Belgium,Germany, Sweden, and Spain are within the scope of government sponsoredcollective bargaining agreements and are represented by either a labor union ora statutory work council arrangement. In countries with labor unions or workcouncils, our ability to reduce our workforce or wage rates is subject toagreement or consultation with the appropriate labor union or works council. Weconsider relations with our employees to be good.

 

**Multi-shore Distribution Strategy**

 

Theuse of multi-shore facilities to serve clients’ customers from variouslocations offers a reliable, cost efficient, and flexible management strategyfor our clients.  Our English-speakinglocations include the United States, Jamaica, India, Panama, and Canada.  The Spanish-speaking market is primarilyserved by Spain, Mexico, Colombia, and Panama. French-speaking customers are primarily served via France, Morocco, andCanada.  In designing a multi-shorestrategy, SITEL has developed an evaluation tool called, PIMä, whichis our Process Identification Model for identifying a client’s readiness tooutsource, as well as defining a site support strategy.

 

**Competition**

 

We are one of thelargest independent companies executing contact center solutions. Our largest U.S.based direct competitors include:

 

•            APAC CustomerService, Inc.,

•            SykesEnterprises, Incorporated,

•            TeleTechHoldings, Inc., and

•            WestCorporation.

 

The industry in which wecompete is competitive and segmented.  Inaddition to the companies listed above, we compete with a variety of companiesthat include niche providers, large conglomerates, regional players,single-country providers, and consulting companies. We also compete within-house customer service departments throughout the world.  In-house departments continue to comprise thelargest segment of contact center expenditures.

 

Datamonitor’s industryresearch practice has recently defined global contact center outsourceproviders as those that operate on more than one continent.  SITEL is a dominant example of a globalcontact center outsource provider with one of the largest geographic footprintsin the industry.

 

**Reporting Segments and Geographical Information**

 

Informationregarding reporting segment and geographical information is set forthin Note 9 to the Consolidated Financial Statements.

 

# ***AvailableInformation***

# * *

We make available,free of charge through our Internet website athttp://www.sitel.com, our annual report on Form 10-K, quarterlyreports on Form 10-Q, current reports on Form 8-K, and amendments tothose reports filed or furnished pursuant to Section 13(a) or 15(d) ofthe Securities Exchange Act of 1934, as soon as reasonably practicable aftersuch material is electronically filed with or furnished to the Securities andExchange Commission.

 

7

----

 

**Government Regulation**

 

The nature of ourbusiness makes us subject to various laws and regulations that primarilyconcern teleservices, web-services, insurance agencies, collection agencies,and the collection and use of private consumer data.

 

In the United States,various federal and state statutes and regulation impact each of these areas.

 

Outbound and inbound telephonesales practices in the U.S. are subject to the Federal Telephone ConsumerProtection Act of 1991 and the Federal Telemarketing Consumer Fraud and AbuseProtection Act of 1994.  The FederalTrade Commission (FTC) and the Federal Communications Commission (FCC) haveeach promulgated regulations affecting outbound telephone sales practices and,to a lesser extent, the upselling portion of inbound calls.

 

In 2003, the FTC and FCCexpanded their respective regulations governing telephone sales practices.  The expanded regulations established theFTC-FCC’s national “do not call” registry for consumers not wanting unsolicitedtelephone sales calls (with exceptions for pre-existing business relationshipsor prior express consent and a conditional safe harbor for human error).  Also, the FTC enacted a strict 3% per day percalling campaign restriction on outbound call abandonment.

 

 Many states have enacted or are consideringenacting similar or more restrictive provisions affecting telephone salespractices.  The FTC, FCC and stateattorney generals are permitted to file enforcement actions against sellers andtelemarketers for violations of various teleservices regulations.  Consumers may also file civil actions forviolations adversely affecting them.

 

There are also manyfederal and state laws and regulations in the U.S. that govern web-services,collection agency licensing and practices, and the collection and use ofprivate consumer data.  Some key federallaws affecting our business include the Gramm-Leach-Bliley Act, HealthInsurance Portability and Accountability Act of 1996, Fair Debt CollectionPractices Act and Fair Credit Reporting Act. Concerns about “right of privacy” issues have increasingly been at theforefront of regulatory developments due to the dramatic increase in theavailability of information about consumers as a result of technologicaladvances.

 

Outside the UnitedStates, the other countries where we have substantial operations generally havenot yet enacted detailed regulatory frameworks for teleservices, although anumber of countries are considering doing so. The Canadian Radio-Television and Telecommunications Commission (CRTC)enacted new telemarketing regulations in May 2004 mirroring in part theU.S. regulations.  The CRTC howeverstayed the new regulations in September 2004 pending its determination ofapplications to review and modify its decision.   The European Union (EU) has adopted variousdirectives impacting the teleservices industry. EU member countries are in various stages of implementing thesedirectives.

 

Many countries, includingthose in the EU, have enacted or proposed laws that regulate consumer privacyand the collection and use of consumer data. Many of these laws are based on the privacy principles established bythe Organization for Economic Co-operation and Development (OCED) in itsGuidelines on the Protection of Privacy and Transborder Flows of PersonalData.  These laws typically limit the useand disclosure of personally identifiable information to specified, lawfulpurposes; impose rules on the transfer and processing of personal data;and provide individuals with a right to access and correct inaccurate personalinformation.  It is illegal to transferpersonal data outside the EU to a country not approved by the EU as havingadequate data protection measures unless the national data protectioncommissioner has given permission or the exporter and importer have entered acontract containing certain model clauses protecting the data.

 

Also, the various industrieswe serve within the U.S. or internationally are subject to different types anddegrees of government regulations. Compliance with these industry-specific regulations is generally thelegal or contractual responsibility of our clients, but we are sometimesdirectly affected too.  For example, ouremployees who sell certain U.S. insurance products are typically required to belicensed by state insurance commissions and may also be required to participatein regular continuing education programs. Another example is our UK subsidiary, which has obtained regulatedstatus from the U.K. Financial Services Authority to handle outsourcedmortgages and general insurances sales and services pursuant to regulationsthat became effective January 14, 2005 under the Financial Services andMarkets Act 2000.

 

8

----

 

We generally rely on ourclients and their advisors to develop the scripts and client information we usein making or receiving customer contacts. We typically require our clients bycontract to indemnify us against claims and expenses that may arise from theirproducts or services, scripts and directives.

 

Overall, compliance withapplicable laws, regulations and industry guidelines to date has not had amaterial adverse effect on our global business. In the U.S., compliance with the expanded FTC and FCC regulations andthe increasing regulation of teleservices at the state level has imposedsignificant additional costs and burdens, especially upon our outbound customeracquisition business.  However, our NorthAmerican outbound customer acquisition business represents only a relativelysmall percentage of our overall worldwide business, about 4.5% of our 2004global revenue, down from 6.7% in 2003 and 9.9% in 2002.

 

Other proposed laws andregulations are in early stages of consideration, and we cannot yet determinethe impact those might have on our business. Governments, trade associations, and industry self-regulatory groups mayenact even more burdensome laws, regulations and guidelines, which mightdirectly affect our business, or affect our clients’ businesses and thusindirectly our business, in material and adverse ways.  Existing and future laws and regulations mayalso require our clients to change their products or services in ways thatcould diminish the commercial viability of those products or services orrequire us to modify our contact center solutions to continue effectivelymeeting our clients’ needs.

 

**Quarterly Results and Seasonality**

 

We have experienced, andexpect to continue to experience, quarterly variations in our results ofoperations mostly due to:

 

•                  thetiming of our clients’ customer management initiatives and customer acquisitionand loyalty campaigns,

•                  thecommencement of new contracts and the discontinuance or termination of existingcontracts,

•                  revenuemix,

•                  thetiming of additional operating, selling, and administrative expenses to supportnew business, and

•                  thetiming of recognition of incentive fees.

 

**We experience periodicfluctuations in our results of operations related to both the start-up costsassociated with expansion and the implementation of clients’ customermanagement activities. In addition, our business generally tends to be slowerin the third quarter due to summer holidays in Europe.**

** **

**Risk Factors**

 

**Our revenue is generated from alimited number of clients, and the loss of one or more of our significantclients or the reduction in margin due to a renegotiation or a substantialreduction of the amount of services performed by us for a significant client,could have a material adverse effect on our business.**

 

A significant portion of our revenue is derived fromrelatively few clients. Our top 20 clients accounted for 67.0%, 71.2%, and68.4% of our revenue for the years ended December 31, 2004, 2003, and2002, respectively.  Some of our top 20clients include multiple independently managed business units within theclients’ affiliated group. General Motors Corporation (General Motors) businessunits were responsible for 14.9%, 21.2%, and 23.5% of our total revenue for theyears ended December 31, 2004, 2003 and 2002, respectively.  On April 21, 2004, we announced thesigning of a new contract with General Motors to continue to provide customersupport services for their North American Vehicle Sales, Service, and MarketingGroup through December 31, 2005.  Anexisting agreement under which we supported OnStar operations terminatedeffective June 22, 2004.  Inaddition, Hewlett-Packard Company business units were responsible for 11.3% ofour revenue for the year ended December 31, 2004.  We did not have any other clients undercommon control that generated more than 10% of our revenue for the yearspresented.

 

We provide services to our clients pursuant tocontracts, many of which may be terminated for convenience and most of which donot have minimum volume requirements. There can be no assurance that ourclients will not terminate their contracts before their scheduled expirationdate or that the volumes of their programs will not be reduced. In any of theseevents, there can be no assurance that we would be able to replace a client orprogram with any other client or program that would generate a comparableamount of revenue or profits. Consequently, the loss of one or more of oursignificant clients, or the substantial reduction of the amount of servicesperformed by us for a significant client, could have a material adverse effecton our business, results of operations and financial condition.

 

9

----

 

**Consolidation among our major clientscould materially adversely affect our business.**

 

We serve clients in industries that have experienced asignificant level of consolidation in recent years. We cannot assure thatadditional consolidations will not occur in which our clients acquireadditional businesses or are acquired. Such consolidations may result in thetermination of an existing client contract that would result in a decrease ofour revenue.

 

**If our clients are not successful,the amount of business that they outsource and the prices that they are willingto pay for such services may be diminished and could result in reduced revenuefor us.**

 

Our revenue is dependent on the success of ourclients. If our clients are not successful, the amount of business that theyoutsource may be diminished. Thus, although we have signed contracts with ourclients, particularly if there are no minimum volume requirements, there can beno assurance that the level of revenue to be received from such contracts willmeet expectations. In addition, several clients, particularly in thecommunications and technology industries, have experienced substantial pricecompetition. As a result, we may face increasing price pressure from suchclients, which could negatively affect our operating performance. Furthermore,a general economic downturn can produce a slowdown in the growth rate at whichcertain billing and customer management services are outsourced, and such aslowdown can have an adverse effect on the growth of our business and ourrevenue.

 

**Our growth and financial results arelargely dependent on continued demand for our services from clients in theindustries we serve.**

 

We generate a majority of our revenue from clients inthe automotive, consumer, financial services, insurance, media services,technology, telecoms, and utilities industries. These industries accounted forapproximately 12%, 10%, 16%, 7%, 27%, 15%, and 8%, respectively, of our 2004revenue.  Sales in other industries,including travel, healthcare, government and various others, accounted for 5%of 2004 revenue.  Our growth andfinancial results are largely dependent on continued demand for our servicesfrom clients in these industries and current trends in such industries to outsourcecertain customer management services. A general economic downturn in any ofthese industries or a slowdown or reversal of the trend in any of theseindustries to outsource certain customer management services could have amaterial adverse effect on our business, results of operations and financialcondition.

 

**We are susceptible to business andpolitical risks from international operations that could result in reducedrevenue or earnings.**

 

We operate businesses in many countries outside theUnited States, which are located throughout North America, Europe, AsiaPacific, Latin America, and North Africa. Expansion of our existinginternational operations and entry into additional countries would requiremanagement attention and financial resources. In addition, there are certainrisks inherent in conducting business internationally including: exposure tocurrency fluctuations, longer payment cycles, greater difficulties in accountsreceivable collection, difficulties in complying with a variety of foreign laws,unexpected changes in regulatory requirements, difficulties in staffing andmanaging foreign operations, political instability and potentially adverse taxconsequences. To the extent that we do not manage our international operationssuccessfully, our business could be adversely affected and our revenue andearnings could be reduced.

 

**Our operating results fluctuatequarterly depending, among other things, the timing of clients’ marketingcampaigns and customer service initiatives and commencement of new contracts.**

 

We have experienced and expect to continue toexperience quarterly variations in our results of operations, principally dueto the timing of clients’ marketing campaigns and customer service initiativesand the commencement of new contracts, revenue mix and the timing of additionalselling, general and administrative expenses to support new business. Wetypically incur significant start-up costs when we expand into a new region orobtain a significant new customer support services contract. Since we cannotcontrol the implementation date of our clients’ programs, there can be noassurance that the initial revenue derived from a new call center will besufficient to cover that center’s costs of start-up and initial operation. Inaddition, our business tends to be slower in the third quarter due to summerholidays in Europe. Our planned operating expenditures are based upon revenueforecasts, and if revenue is below expectations in any given quarter, operatingresults would likely be materially affected.

 

**Our failure to keep ourtelecommunications and computer technology up-to-date may prevent us fromremaining competitive.**

 

Our continued success will depend on our continuinginvestment in sophisticated telecommunications and computer technology. Therecan be no assurance that we will be successful in anticipating technologicalchanges or in selecting and developing new and enhanced technology (includingintegration of a common set of service and reporting standards across ourbusiness units) in time to remain competitive on a global basis. Our businessis highly dependent on our

 

10

----

 

computer and telecommunications equipment and softwaresystems. The temporary or permanent loss of these systems, through casualty oroperating malfunction, could have a material adverse effect on our business,results of operations and financial condition. See “Business - Information Technology” in this Form 10-K.

 

**Any interruptions in service or theinability of telephone companies to provide additional capacity to meet ourneeds would adversely affect our growth and could adversely affect our existingbusiness.**

 

Our business is materially dependent upon serviceprovided worldwide by various local and long distance telephone companies. Anyinterruptions in service or the inability of telephone companies to provideadditional capacity to meet our needs would adversely affect our growth andcould adversely affect our existing business. Further, we continue to expand toless developed areas of the world where telephone service may be considerablyless reliable than it is in developed areas. Also, rate increases imposed bytelephone companies will increase our operating expenses and could adverselyaffect our operating margins if we were unable to pass the increases through toour clients.

 

**The markets for our services arehighly competitive, subject to rapid change, and highly fragmented.**

 

The worldwide-outsourced customer support serviceindustry is extremely competitive and fragmented, with low barriers to entry.Although we are a leading global provider of these services, there can be noassurance that additional competitors with greater resources than us will notenter the industry or that our clients will not choose to conduct internallymore of these activities.  See “Business- Competition” in this Form 10-K. While many companies provide outsourced customer support services, webelieve no one company is dominant in the industry. There are numerous andvaried providers of our services, including firms specializing in call centeroperations, temporary staffing and personnel placement companies, generalmanagement consulting firms, divisions of large hardware and software companiesand niche providers of outsourced customer contact management services, many ofwhom compete in only certain markets. Our competitors include many companieswho may possess substantially greater resources, greater name recognition and amore established customer base than we do. In addition to our competitors, manycompanies who might utilize our services or the services of one of ourcompetitors may utilize in-house personnel to perform such services. Increasedcompetition, our failure to compete successfully, pricing pressures, loss ofmarket share and loss of clients could have a material adverse effect on ourbusiness, results of operations and financial condition.

 

Many of our large clients purchase outsourced customersupport services primarily from a limited number of preferred vendors. We haveexperienced and continue to anticipate significant pricing pressure from theseclients in order to remain a preferred vendor. These companies also requirevendors to be able to provide services in multiple locations. Although webelieve we can effectively meet our clients’ demands, there can be no assurancethat we will be able to compete effectively with other outsourced customersupport services companies. We believe that the most significant competitivefactors in the sale of our services include quality, advanced technologycapabilities, global coverage, reliability, scalability, security, industryexperience, price and tailored service offerings.

 

**Management and operation oflarge-scale contact center solutions is a highly people intensive business.**

 

Outsourced customer support services are very laborintensive. There can be no assurance that our labor costs will not increase orthat we will be able to employ a sufficient number of people to sustain ourcurrent volume of business or support our planned growth.  Some of our customer support servicesactivities, particularly insurance product sales and technical supportactivities, require highly trained employees. Our worldwide presence alsonecessitates retaining personnel fluent in languages and dialects spoken andwritten by customers of our clients. We must maintain separate human resourcedepartments in each region of the world we operate. As we expand our operationsinto new countries, we must become familiar with local laws and customs, whichvary significantly around the world. There can be no assurance that we willgain the expertise necessary to effectively manage our human resources programsas we expand our business into new countries. See “Business - Human ResourceManagement” in this Form 10-K.

 

**We have operations in many parts ofthe world and therefore our results of operations can be impacted by foreignexchange fluctuations.**

 

We are exposed to market risks associated primarilywith changes in foreign currency exchange rates. We have operations in manyparts of the world.  Revenue and expensesof those operations are typically denominated in the currency of the country ofoperations. Because our financial statements are presented in U.S. dollars, anysignificant fluctuations in the currency exchange rates between the U.S. dollarand the currencies of countries in which we operate will affect our results ofoperations and our financial statements. Our largest exposure to currency risksis related to the British pound and the Euro.

 

11

----

 

**The nature of our business makes ussubject to various laws and regulations.**

 

Our business is subject to various governmental laws,regulations and codes of practice. There can be no assurance that additionalgovernmental regulation in the United States or Europe, or new governmentalregulations in other areas of the world in which we conduct operations, wouldnot limit the activities of our clients, or us or significantly increase thecost of regulatory compliance.

 

Several of the industries in which our clients operateare subject to varying degrees of government regulation; particularly theinsurance and financial services industries. Generally, compliance with theseregulations is the responsibility of our clients. However, we could be subjectto a variety of enforcement or private actions for our failure or the failureof our clients to comply with such regulations. For example, in the UnitedStates, customer service representatives who sell certain insurance productsare required to be licensed by various state insurance commissions andparticipate in regular continuing education programs, thus requiring us tocomply with the extensive regulations of these state commissions. As a result,changes in these regulations or their interpretations could materially increaseour operating costs.

 

In addition, there is increasing concern amongconsumers, legislators and regulators about “right of privacy” issuesassociated with data on consumers that is obtained by, and used in, customersupport services and other industries. During 2003, both the FTC and FCCsubstantially broadened their respective regulations governing telephone salespractices. See “Business - Government Regulation” in this Form 10-K.

 

**We are highly dependent on theefforts of our senior management team.**

 

We are highly dependent on the efforts of our seniormanagement team. The loss of the services of several members of seniormanagement could have a material adverse effect on us. As we continue to grow,we will need to recruit and retain additional qualified management personnel,particularly at the business unit level.

 

**A decline in the trend towardoutsourcing or in the trend toward migration offshore or difficulties in ouroffshore operations could materially adversely impact our business.**

 

Our business and growth depend in large part on theindustry trend toward outsourced customer support management services.Outsourcing means that an entity contracts with a third party, such as us, toprovide customer support services rather than perform such services in-house.There has been an increasing amount of political discussion and debate relatedto worldwide outsourcing, particularly from the United States to offshorelocations. There is federal and state legislation currently pending related tothis issue.  A change in the politicalenvironment in the United States or the adoption and enforcement of legislationand regulations curbing the use of offshore customer contact managementsolutions and services could effectively have a material adverse effect on ourbusiness, results of operations, and financial condition.  There can be no assurance that theoutsourcing trend will continue, as organizations may elect to perform suchservices themselves. A significant change in this trend could have a materialadverse effect on our business, results of operations, and financialcondition.  Furthermore, while we nowhave operated in offshore markets for several years, there can be no assurancethat we will be able to successfully conduct and expand such operations, and afailure to do so could also have a material adverse effect.   The continued expansion offshore to meet thedemand of new clients and the needs of certain of our clients that aremigrating call volumes to offshore operations could result in additional excesscapacity in the countries that they are migrating from (particularly the U.S.and U.K.).  As a result of this migrationoffshore, we have experienced and expect that we will continue to experienceduplicative operating costs and site closure costs related to the ramp-down ofcertain contact centers, particularly in the U.S. and U.K. To date we haveclosed several centers and expect to close additional centers as a result ofthis shift offshore. The success of our offshore operations will be subject tonumerous contingencies, some of which are beyond our control, including generaland regional economic conditions, prices for our services, competition, changesin regulation and other risks.   Inaddition, as with all of our operations outside of the United States, we aresubject to various additional political, economic, and market uncertainties inoffshore locations.

 

12

----

 

**Continued war and terrorist attacks orother civil disturbances could lead to economic weakness and could disrupt ouroperations resulting in a decrease of our revenue and earnings.**

 

In March 2003, the United States went to waragainst Iraq and, in September 2001, the United States was a target ofunprecedented terrorist attacks. In March 2004, Spain, the location of oneof our largest business units, was a target of a terrorist attack.  These attacks have caused uncertainty in theglobal financial markets and in the United States economy. The war and anyadditional terrorists attacks may lead to continued armed hostilities orfurther acts of terrorism and civil disturbances in the United States orelsewhere, which may contribute to economic instability in the United Statesand disrupt our operations. Such disruptions could cause service interruptionsor reduce the quality level of the services that we provide, resulting in areduction of our revenue. In addition, these activities may cause our clientsto delay or defer decisions regarding their use of our services and, thus,delay our receipt of additional revenue.

 

**Service fees we charge may not coverour costs.**

 

Some of our contracts allow us to increase our servicefees if and to the extent certain cost or price indices increase; however, manyof our significant contracts do not contain such provisions and some contractsrequire us to decrease our service fees if, among other things, we do notachieve certain performance objectives. Increases in our service fees that arebased upon increases in cost or price indices may not fully compensate us forincreases in labor and other costs incurred in providing services.

 

**If we do not effectively manage ourcapacity, our results of operations could be adversely affected.**

 

Our profitability is influenced significantly by thecapacity use of our contact centers. We attempt to maximize their use; however,because most of our business is inbound, we have significantly higher useduring peak (weekday) periods than during off-peak (night and weekend) periods.We have experienced periods of excess capacity, particularly in our sharedcontact centers, and occasionally have accepted short-term assignments to usethe excess capacity. In addition, we have experienced, and in the future mayexperience, at least short-term, excess peak period capacity when we open a newcontact center or terminate or complete a large client program. There can be noassurance that we will be able to achieve or maintain optimal contact centercapacity use. We generally incur the same operating costs regardless of thelevel of use of our contact centers.

 

**A significant uninsured loss or aloss in excess of our insurance coverage could materially adversely affect ourfinancial condition.**

 

Our operations are dependent upon our ability to protectour contact centers, computer and telecommunications equipment and software******systems againstdamage from fire, power loss, telecommunications interruption or******failure, naturaldisaster and other similar events. In the event we******experience a temporary or permanentinterruption at one or more of our contact******centers, through casualty, operatingmalfunction or otherwise, our business could be materially adversely affectedand we may be required to pay contractual damages to some clients or allow someclients to terminate or renegotiate their contracts with us. We maintainproperty and business interruption insurance; however, such insurance may notadequately compensate us for any losses we may incur.

 

**The trading price of our common stockis subject to significant fluctuations.**

 

The trading price of our common stock fluctuates.Factors such as fluctuations in our financial performance and that of ourcompetitors, as well as general market conditions, could have a significantimpact on the future trading prices of our common stock. The trading pricesalso may be affected by changes in interest rates and other factors beyond ourcontrol.

 

**We have the ability to issueadditional equity securities, which would lead to dilution of our issued andoutstanding common stock.**

 

The issuance of additional equity securities orsecurities convertible into equity securities would result in dilution ofthen-existing stockholders’ equity interests in us. Our board of directors hasthe authority to issue, without shareholder approval, up to 200,000,000 sharesof common stock, of which approximately 73,739,490 shares were outstanding asof February 28, 2005.

 

**We have the ability to issuepreferred shares without shareholder approval.**

 

Our common stock may be subordinate to classes ofpreferred shares issued in the future in the payment of dividends and otherdistributions made with respect to the common stock, including distributionsupon liquidation or dissolution. Our board of directors is authorized to issuepreferred shares without first obtaining shareholder approval. We havepreviously designated for use in connection with our rights plan a series of200,000 shares of preferred stock. If we issue

 

13

----

 

preferred shares, it will create additional securitiesthat may have dividend or liquidation preferences senior to the common stock.If we issue convertible preferred shares, a subsequent conversion may dilutethe current common shareholders’ interest.

 

**Certain provisions of our charter andMinnesota law may make it difficult for a third party to acquire us, even insituations that may be viewed as desirable by our shareholders.**

 

The Business Corporation Act of the State of Minnesotacontains provisions that may delay or prevent an attempt by a third party toacquire control of our company. Our charter and bylaws contain provisions thatauthorize the issuance of preferred shares, and establish advance noticerequirements for director nominations and actions to be taken at shareholder meetings.These provisions could also discourage or impede a tender offer, proxy contestor other similar transaction involving control of us, even if viewed favorablyby shareholders.

 

**Our rights and the rights of ourshareholders to take action against our directors and officers are limited,which could limit shareholder recourse in the event of actions not inshareholder best interests.**

 

Minnesota law provides that a director has noliability in that capacity if he or she performs his or her duties in goodfaith, in a manner he or she reasonably believes to be in our best interestsand with the care that an ordinarily prudent person in a like position woulduse under similar circumstances. Our charter authorizes us to indemnify ourdirectors and officers for actions taken by them in those capacities to theextent permitted by Minnesota law. In addition, our charter limits theliability of our directors and officers for money damages, except for:

 

•                  liability basedon a breach of the duty of loyalty to the corporation or the stockholders;

 

•                  liability foracts or omissions not in good faith or that involved intentional misconduct ora knowing violation of law;

 

•                  liability basedon an improper distribution under Minnesota Statutes Section 302A.559 oron violations of state securities laws under Minnesota Statutes Section 80A.23;

 

•                  liability forany transaction from which the director derived an improper personal benefit;or

 

•                  liability forany act or omission occurring prior to the date Article VI of our charterbecame effective.

 

As a result, our shareholders and we may have morelimited rights against our directors and officers than might otherwise exist.

 

**Minnesota law may discourage a thirdparty from acquiring us.**

 

The Minnesota Business Corporation Act containsprovisions that may delay or prevent an attempt by a third party to acquirecontrol of our company. These provisions include (i) prohibiting us fromengaging in a “business combination” with an “interested shareholder” for aperiod of four years after the date of the transaction in which the personbecame an interested shareholder unless certain requirements are met and (ii) requiringdisinterested shareholder approval for certain “control share acquisitions.”These provisions could also discourage or impede a tender offer, proxy contestor other similar transaction involving control of us, even if viewed favorablyby shareholders.

 

14

----

 

**I**tem 2. Properties

** **

Our executive offices arelocated in Omaha, Nebraska.

 

As of December 31,2004, we operated company centers in various facilities that we lease andclient centers that are on client premises as shown in the table below.

 
| **Facility  Location** | ** ** | **Company  Centers** | ** ** | **Client  Centers** | ** ** | **Total  Facilities** | ** ** | **Number of  Workstations** | ** ** |
|------------------------|------------|----------------------|------------|---------------------|------------|-----------------------|------------|-----------------------------|------------|
|                   |       |                 |       |                |       |                  |       |                        |       |
| Australia              |       | 2                    |       | 1                   |       | 3                     |       | 264                         |       |
| Belgium                |       | 1                    |       | —              |       | 1                     |       | 656                         |       |
| Brazil                 |       | 1                    |       | 2                   |       | 3                     |       | 940                         |       |
| Canada                 |       | 7                    |       | 1                   |       | 8                     |       | 2,225                       |       |
| Colombia  *            |       | 1                    |       | 1                   |       | 2                     |       | 554                         |       |
| Denmark                |       | —               |       | 1                   |       | 1                     |       | 50                          |       |
| France                 |       | 2                    |       | 2                   |       | 4                     |       | 804                         |       |
| Germany                |       | 3                    |       | —              |       | 3                     |       | 1,343                       |       |
| India  *               |       | 1                    |       | —              |       | 1                     |       | 1,045                       |       |
| Ireland                |       | 1                    |       | —              |       | 1                     |       | 325                         |       |
| Italy                  |       | 1                    |       | —              |       | 1                     |       | 212                         |       |
| Jamaica  *             |       | 1                    |       | —              |       | 1                     |       | 187                         |       |
| Mexico  *              |       | 3                    |       | 1                   |       | 4                     |       | 1,479                       |       |
| Morocco                |       | 1                    |       | —              |       | 1                     |       | 218                         |       |
| Netherlands            |       | 1                    |       | —              |       | 1                     |       | 374                         |       |
| New  Zealand           |       | 1                    |       | 2                   |       | 3                     |       | 421                         |       |
| Panama  *              |       | 1                    |       | 2                   |       | 3                     |       | 525                         |       |
| Philippines            |       | 1                    |       | —              |       | 1                     |       | 598                         |       |
| Poland                 |       | 1                    |       | —              |       | 1                     |       | 80                          |       |
| Portugal               |       | 1                    |       | —              |       | 1                     |       | 113                         |       |
| Singapore              |       | 1                    |       | —              |       | 1                     |       | 143                         |       |
| Spain                  |       | 5                    |       | 5                   |       | 10                    |       | 3,651                       |       |
| Sweden                 |       | 2                    |       | 3                   |       | 5                     |       | 269                         |       |
| United  Kingdom        |       | 5                    |       | —              |       | 5                     |       | 1,895                       |       |
| Unites  States         |       | 17                   |       | 5                   |       | 22                    |       | 6,273                       |       |
| Totals:                |       | 61                   |       | 26                  |       | 87                    |       | 24,644                      |       |

 

----

*centers in ourjoint ventures

 

We contract and operateout of several client centers to support specific client initiatives. Webelieve our current facilities are adequate for our current operations, butadditional facilities will be required to support growth. We believe suitableadditional or alternative space will be available as needed on commerciallyreasonable terms.

 

**Item 3. Legal Proceedings**

 

From time to time, during the normal course ofbusiness, we may make certain indemnities, commitments and guarantees underwhich we may be required to make payments in relation to certaintransactions.  These include, forexample:  (i) indemnities to clientspertaining to claims based on our negligence or willful misconduct, and (ii) indemnitiesinvolving the accuracy of representations and warranties in certain contracts.

 

From time to time, we areinvolved in litigation incidental to our business. We cannot predict theultimate outcome of such litigation with certainty, but management believes,after consultation with counsel, except for the items discussed below for thereasons mentioned therein, that the resolution of such matters will not have amaterial adverse effect on our consolidated financial position or results ofoperations.

 

15

----

 

*Bankruptcy OP Computers SPA vs. SITEL Kingston Limited* (now known as Mitre Telesales Limited) wasfiled in April 2004 in the Court of Ivrea in Milan, Italy.  The receivers assert that Mitre, as a formersupplier to Olivetti, is required under Italian bankruptcy law to return€5,349,025 (approximately $6.9 million) in payments Olivetti had allegedly paidMitre during a one-year “clawback” period, which allegedly runs from March 9,1998 until March 9, 1999, the alleged date Olivetti filed forreceivership.  Mitre filed its Defencewith the court in November 2004. The Defence outlined the facts and reasons why Mitre did not and shouldnot reasonably have known of Olivetti’s insolvent state during the time thatMitre was performing services for Olivetti. The first substantive hearing is scheduled for May 2005, followingthe filing of the receivers’ brief due in March and Mitre’s brief due inApril.  The Company and its subsidiaryMitre Telesales Limited are currently unable to predict the outcome orreasonably estimate the possible loss, if any, or range of losses associatedwith this claim.

 

Two of our clients havereceived letters from time to time containing an offer to license andsuggesting that the client might be infringing certain patents related tocomputerized telephonic voice response systems without the license. The clientshave indicated that if any infringement occurred the client would seekcontractual indemnity from us. In such an event, we would expect to seek contractualindemnity from certain of our vendors. Any such contractual indemnity we mightobtain may not be sufficient to cover all of the costs of investigating andresolving such matter. We might also seek a license under the patents. Any suchlicense may not be available under commercially reasonable terms. Any licensecosts would increase the cost of doing business in the future and may or maynot be fully reflected in our pricing. To our knowledge, no litigation has beeninitiated against our clients or us concerning this matter. At this stage, dueto the inherent uncertainties, we are unable to predict whether this matter mayhave a material adverse effect on our business or on our financial condition orresults of operation.

 

**Item 4.Submission of Matters to a Vote of Security Holders**

 

Not applicable.

 

**Executive Officers of theRegistrant**

 

Executive officers ofSITEL Corporation are as follows:

 
| **Name**               | ** ** | **Age**    | ** ** | **Present  Office**                                                                   |       | **Other  Offices or Positions Held****During  Past Five Years**                                                                                                                                                                                      |
|------------------------|------------|------------|------------|---------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **             | ** ** | ** ** | ** ** | ** **                                                                            | ** ** | ** **                                                                                                                                                                                                                                           |
| James F. Lynch         |       | 55         |       | Chairman of the Board (since 1985),  Chief Executive Officer (since April 2001)  |       |                                                                                                                                                                                                                                                 |
|                   |       |       |       |                                                                                  |       |                                                                                                                                                                                                                                                 |
| Jorge A. Celaya        |       | 39         |       | Executive  Vice President and  Chief Financial Officer (since October 2003)      |       | Chief  Financial Officer, NPTest, Inc.;  Vice President Finance, Schlumberger Network Solutions                                                                                                                                                 |
|                   |       |       |       |                                                                                  |       |                                                                                                                                                                                                                                                 |
| Robert Scott Moncrieff |       | 48         |       | Executive Vice President,  Marketing and Account Development (since August 2003) |       | Senior Vice President – Global Strategic  Clients, Senior Vice President - Marketing SITEL Corporation                                                                                                                                          |
|                   |       |       |       |                                                                                  |       |                                                                                                                                                                                                                                                 |
| Dale W. Saville        |       | 60         |       | Executive  Vice President,  Corporate Operations (since October 2000)            |       | Senior  Vice President and Chief Technology  Officer, Vice President – Product Development, Vice President – EMEA Customer  Support Operations, and Vice President – US Customer Support Operations,  Sykes Enterprises, Incorporated |

 

16

----

 

 

**PART II**

 

**Item 5. Market for Registrant’s Common Equity andRelated Stockholder Matters**

** **

Our common stock istraded on the New York Stock Exchange under the symbol SWW. The following tablesets forth the high and low sale prices of our common stock for the quartersindicated, as reported by the New York Stock Exchange. 

 
| ** **      | ** ** | **2004** | ** ** | **2003** | ** ** |
|-----------------|------------|----------|------------|----------|------------|
| ** **      | ** ** | **High** | ** ** | **Low**  | ** ** | **High** | ** ** | **Low** | ** ** |
| First  Quarter  |       | $        | 3.31       |     | $          | 2.31 |   | $ | 1.37 |   | $ | 0.96 |   |
| Second  Quarter |       | $        | 4.46       |     | $          | 2.52 |   | $ | 1.86 |   | $ | 1.02 |   |
| Third  Quarter  |       | $        | 4.43       |     | $          | 1.56 |   | $ | 1.59 |   | $ | 1.18 |   |
| Fourth  Quarter |       | $        | 2.54       |     | $          | 1.86 |   | $ | 2.81 |   | $ | 1.63 |   |

 

***Shares Outstanding and Holders of Common Stock***

 

As of February 28,2005, we had 73,739,490 shares of common stock outstanding and 497 recordholders of our common stock.

 

***Dividend Policy***

 

We have not declared orpaid any cash dividends on our common stock since our inception. The Board ofDirectors currently intends to retain all earnings for use in the business forthe foreseeable future. Furthermore, our revolving credit facility and SeniorSubordinated Notes contain restrictions on the payment of cash dividends.

 

17

----

 

**Item 6.Selected Financial Data**

 

The following SelectedFinancial Data should be read in conjunction with Management’s Discussion andAnalysis of Financial Condition and Results of Operations beginning on thefollowing page, the Consolidated Financial Statements beginning on page F-3,and the Notes to Consolidated Financial Statements beginning on page F-7. 

 
| **Years  Ended December 31*,***                                                      | ** **   | **2004**                                  |         | **2003**     | ** **   | **2002**     | ** **   | **2001**     | ** **   | **2000**     | ** **   |
|-------------------------------------------------------------------------------------------|--------------|-------------------------------------------|--------------|--------------|--------------|--------------|--------------|--------------|--------------|--------------|--------------|
| *** ***                                                                              | *** *** | **(in thousands, except per share data)** | *** *** |
| **Consolidated Statement of  Operations Data:**                                           | *** *** | *** ***                              | * *     | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** |
| **Revenue**                                                                               | ** **   | **956,443**                               |         | 846,513      |         | 770,211      |         | 725,048      |         | 764,447      |         |
|                                                                                      | ** **   | ** **                                |         |         |         |         |         |         |         |         |         |
| Operating  expenses                                                                       | ** **   | **938,487**                               |         | 832,255      |         | 739,457      |         | 708,565      |         | 722,151      |         |
| Asset  impairment and restructuring expenses (a)                                          | ** **   | **16,993**                                |         | 3,004        |         | 1,444        |         | 26,185       |         | 3,520        |         |
| **Operating income (loss)**                                                               | ** **   | **963**                                   |         | 11,254       |         | 29,310       |         | (9,702       | )            | 38,776       |         |
|                                                                                      |         |                                      |         |         |         |         |         |         |         |         |         |
| Interest  expense, net                                                                    | ** **   | **(12,144**                               | **)**        | (11,826      | )            | (11,250      | )            | (11,642      | )            | (12,067      | )            |
| Equity  in earnings (loss) of affiliates                                                  | ** **   | **681**                                   |         | 1,417        |         | 3,441        |         | (297         | )            | —       |         |
| Other  income (expense), net                                                              | ** **   | **(654**                                  | **)**        | (193         | )            | (636         | )            | (2,309       | )            | (311         | )            |
| **Income (loss) before income taxes, minority interest  and change in accounting method** | ** **   | **(11,154**                               | **)**        | 652          |         | 20,865       |         | (23,950      | )            | 26,398       |         |
|                                                                                      |         |                                      |         |         |         |         |         |         |         |         |         |
| Income  tax expense (benefit) (e)                                                         | ** **   | **14,679**                                |         | 4,798        |         | 10,437       |         | (2,317       | )            | 12,570       |         |
| Minority  interest                                                                        | ** **   | **734**                                   |         | 666          |         | 1,812        |         | 947          |         | 1,087        |         |
| **Income (loss) before change in accounting method**                                      | ** **   | **(26,567**                               | **)**        | (4,812       | )            | 8,616        |         | (22,580      | )            | 12,741       |         |
|                                                                                      |         |                                      |         |         |         |         |         |         |         |         |         |
| Cumulative  effect of a change in accounting for goodwill (b)                             | ** **   | **—**                                |         | —       |         | (18,399      | )            | —       |         | —       |         |
| **Net income (loss) (c)**                                                                 | ** **   | **(26,567**                               | **)**        | (4,812       | )            | (9,783       | )            | (22,580      | )            | 12,741       |         |
|                                                                                      |         |                                      |         |         |         |         |         |         |         |         |         |
| **Weighted average common shares outstanding:**                                           |         |                                      |         |         |         |         |         |         |         |         |         |
| Basic                                                                                     | ** **   | **73,684**                                |         | 73,877       |         | 74,225       |         | 73,424       |         | 71,052       |         |
| Diluted                                                                                   | ** **   | **73,684**                                |         | 73,877       |         | 74,335       |         | 73,424       |         | 75,201       |         |
|                                                                                      |         |                                      |         |         |         |         |         |         |         |         |         |
| **Income (loss) before change in accounting method  per common share:**                   |         |                                      |         |         |         |         |         |         |         |         |         |
| Basic                                                                                     | ** **   | **$**                                     | **(0.36**    | **)**        | $            | (0.07        | )            | $            | 0.12         |         | $            | (0.31 | ) | $ | 0.18 |   |
| Diluted                                                                                   | ** **   | **$**                                     | **(0.36**    | **)**        | $            | (0.07        | )            | $            | 0.12         |         | $            | (0.31 | ) | $ | 0.17 |   |
|                                                                                      |         |                                      |         |         |         |         |         |         |         |         |         |
| **Net income (loss) per common share:**                                                   |         |                                      |         |         |         |         |         |         |         |         |         |
| Basic                                                                                     | ** **   | **$**                                     | **(0.36**    | **)**        | $            | (0.07        | )            | $            | (0.13        | )            | $            | (0.31 | ) | $ | 0.18 |   |
| Diluted                                                                                   | ** **   | **$**                                     | **(0.36**    | **)**        | $            | (0.07        | )            | $            | (0.13        | )            | $            | (0.31 | ) | $ | 0.17 |   |

 
| **At  December 31,**                   | ** **   | **2004**           | ** **   | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
|---------------------------------------------|--------------|--------------------|--------------|----------|------------|----------|------------|----------|------------|----------|------------|
| *** ***                                | *** *** | **(in thousands)** | *** *** |
| **Balance Sheet Data:**                     | * *     | * *           | * *     | * * | * *   | * * | * *   | * * | * *   | * * | * *   |
| Working  capital                            | ** **   | **82,773**         |         | 88,812   |       | 80,618   |       | 72,677   |       | 93,583   |       |
| Total  assets                               | ** **   | **397,531**        |         | 405,980  |       | 351,977  |       | 355,466  |       | 380,222  |       |
| Long-term  debt, net of current portion (d) | ** **   | **98,393**         |         | 108,684  |       | 107,307  |       | 107,040  |       | 108,341  |       |
| Stockholders’  equity                  | ** **   | **132,659**        |         | 150,949  |       | 139,162  |       | 140,040  |       | 169,582  |       |

 

----

*(a) ** **We discuss asset impairmentand restructuring expenses in Note 11 to the Consolidated Financial Statements.*

*(b) ** **We discuss the cumulativeeffect of a change in accounting for goodwill in Note 1 to the ConsolidatedFinancial Statements.*

*(c) During 2002, we adopted the provisions of SFAS 142, Goodwill and OtherIntangible Assets, and ceased amortizing goodwill.  If we had not amortized our goodwill duringthe two years ended December 31, 2001 our net income (loss) would have been$(19,138) in 2001, and $15,753 in 2000.*

*(d) On December 1, 2004, we redeemed $10 million of our 9.25% SeniorSubordinated Notes, see Note 4 in the Consolidated Financial Statements.*

*(e) We discuss income tax expense in Note 5 to the Consolidated FinancialStatements.*

 

18

----

 

**Item 7.Management’s Discussion and Analysis of Financial Condition and Results ofOperations**

 

##### **General**

##### ** **

References in this reportto “we”, “our”, “SITEL”, and the “Company” are to SITEL Corporation and itssubsidiaries, collectively.

 

We are a leading globalprovider of outsourced customer support services. We specialize in the design,implementation, and operation of multi-channel contact center solutions. Wesupport the customer management strategies of large and medium sizecorporations in North America, Europe, Asia Pacific, and Latin America. Weprovide customer acquisition, customer care, technical support and riskmanagement services on an outsourced basis, as well as operational andinformation technology professional services for both outsourced and in-housecontact centers. We serve clients primarily in the automotive, consumer, financial services,insurance, technology, telecommunications and ISP, and utilities sectors.

 

In Management’sDiscussion and Analysis, we provide information about our general businessrisks, critical accounting policies and estimates, results of operations,financial condition and liquidity, and certain other matters affecting ouroperating results for the periods covered by this report.

 

As you read thisdiscussion and analysis, refer to our Consolidated Statements of Operations,which present the results of our operations for 2004, 2003, and 2002, and aresummarized on the following pages. We analyze and explain the differencesbetween periods for the components of net income (loss) in the followingsections. Our analysis is important in making decisions about your investmentin SITEL Corporation.

 

We previously announced aprofit improvement plan to structure the Company to achieve at least a 4% to 6%operating margin by the end of 2005. This profit improvement plan was comprised of a set of initiatives.  We are planning to rationalize underutilizedfacilities, eliminate losses from business units that are underperforming,right size support functions to better utilize human and physical assets,reduce and further leverage IT and telecommunication costs, and improve theoperating performance of all of our facilities through enhanced efficiency. Wewill continue to focus on our performance-based pricing initiatives, invoiceand contract management, and statement of work change controls. Although thefirst half of 2004 showed operating margins of close to 4% as many businessunits in North America and Europe improved, the previously announced loss of anaccount and the reduced pricing under a large contract temporarily slowed ourimproving trend.

 

On December 3, 2004, we committed to a restructuring plan to reduce ongoing operating expenses, consolidate facilities, and reduce our workforce. The plan included closing certain facilities in North America and Europe and reducing headcount by a total of approximately 170 employees throughout the Company. The plan also included disposing of certain capital equipment. We completed a majority of the restructuring activities in the fourth quarter of 2004 and expect to complete the remainder during 2005.

 

**General Business Risks, CriticalAccounting Policies and Estimates**

** **

**General Business Risks**

 

Our business success dependson our ability to efficiently deploy our human and capital resources in thedelivery of services to our clients. Consequently, the needs of our clients maysignificantly impact our results of operations, financial condition, andliquidity.

 

Our results of operationsand operating cash flows may vary with periodic wins and losses of clientcontracts and with changes in the scope of client requirements. Our******top 20 clients accounted for67.0%, 71.2%, and 68.4% of our revenue in 2004, 2003, and 2002.  Some of these top 20 clients includemultiple independently managed business units within the clients affiliatedgroup. General Motors Corporation (General Motors) business units wereresponsible for 14.9%, 21.2%, and 23.5% of our total revenue for the years endedDecember 31, 2004, 2003 and 2002, respectively.  On April 21, 2004, we announced thesigning of a new contract with General Motors to continue to provide customersupport services for their North American Vehicle Sales, Service, and MarketingGroup through December 31, 2005.  Anexisting agreement under which we supported OnStar operations terminatedeffective June 22, 2004.  Inaddition, Hewlett-Packard Company business units were responsible for 11.3% ofour revenue in 2004.  We did not have anyother clients under common control that generated more

 

19

----

 

than 10% of our total revenue in 2004, 2003 and2002. The financial failure of any of these clients or the loss of anyor all of their business could have an adverse impact on our operating results.

 

Our liquidity, includingour ability to comply with debt covenants, may be adversely affected if we wereto lose a significant client or as a result of significant changes in clientdemand if we are unable to efficiently re-deploy our human and capitalresources.

 

We have operations inmany parts of the world and therefore our financial statements can be impactedby foreign exchange fluctuations. Fluctuations of currencies against the U.S.dollar can be substantial and therefore significantly impact comparisons withprior periods.

 

In the followingsections, we also discuss the importance of our critical accounting policiesand the use of accounting estimates, and their potential impacts on our resultsof operations.

 

**CriticalAccounting Policies and Estimates**

 

The process of preparingfinancial statements requires the use of estimates on the part of management.These estimates involve judgments with respect to, among other things, futureeconomic factors that are difficult to predict and are beyond management’scontrol. As a result, actual results could differ from these estimates.

 

Our significantaccounting policies and practices are described in Note 1 to the ConsolidatedFinancial Statements. Of those policies, we have identified the following to becritical accounting policies because they are the most important to theportrayal of our results of operations and financial condition, and theyrequire management’s most difficult, subjective, or complex judgments:

 

***Revenue Recognition***

 

We recognize revenue inaccordance with applicable accounting standards, including Securities andExchange Commission Staff Accounting Bulletin (SAB) No. 104, *Revenue Recognition*.  We recognize revenue at the time services areperformed based on the rate detailed in the client contract, such as hourly,monthly, per call or per employee.  Aportion of our revenue is often subject to performance standards, such as salesper hour, average handle time, occupancy rate and abandonment rate.  Ourperformance against such standards may result in incentives or penalties, whichare recognized as earned or incurred. In certain circumstances, we receivepayment in advance of providing service. Accordingly, amounts billed but notearned under these contracts are excluded from revenue and included in deferredrevenue and other in the consolidated balance sheet. Revenue for servicesperformed under certain collection service agreements is recognized as therelated consumer debts are collected and is calculated based upon a percentageof cash collected or other agreed upon contractual parameters.

 

***Trade AccountsReceivable***

 

We report our tradeaccounts receivable net of an allowance for doubtful accounts, which representsmanagement’s estimates of the amount of our receivables that may not becollectible, net of recoveries of amounts previously written off. Theseestimates are based on a detailed aging analysis of accounts receivable,historical bad debts, client credit-worthiness, and changes in our clientpayment terms. The financial condition of our clients may deteriorate, whichmay require us to increase our allowance for doubtful accounts. We would recordan increase in the allowance for doubtful accounts as operating, selling, andadministrative expense in our consolidated statements of operations, whichwould reduce our results of operations.

 

***Property andEquipment***

 

We record property andequipment at cost, and calculate depreciation using the straight-line methodover the estimated useful lives of the assets, which generally range from 2 to25 years. We amortize leasehold improvements and assets under capitalleases on a straight-line basis over the shorter of the lease term or theestimated useful life of the asset. If the actual useful lives of these assetsare less than the estimated depreciable lives, we would record additionaldepreciation expense or losses on disposal to the extent the net book value ofsuch asset is not recovered upon sale.

 

***Asset Impairment***

 

We evaluate long-livedassets for impairment whenever events or changes in circumstances indicate thecarrying amount of an asset may not be recoverable.  Triggering events include a significantchange in the extent or manner in which long-lived assets are being used or inits physical condition, in legal factors, or in the business climate that couldaffect

 

20

----

 

the value of thelong-lived assets. The interpretation of such events requires judgment frommanagement as to whether such an event has occurred.

 

Upon the occurrence of atriggering event, the carrying amount of a long-lived asset is reviewed toassess whether the recoverable amount has declined below its carryingamount.  The recoverable amount is theestimated net future cash flows that we expect to recover from the future useof the asset, undiscounted and without interest, plus the asset’s residualvalue on disposal. Where the recoverable amount of the long-lived asset is lessthan the carrying value, an impairment loss would be recognized to write downthe asset to its fair value, which is based on discounted estimated cash flowsfrom the future use of the asset.

 

The estimated cash flowsarising from future use of the asset that are used in the impairment analysisrequires judgment regarding what we would expect to recover from future use ofthe asset.  Any changes in the estimatesof cash flows arising from future use of the asset or the residual value of theasset on disposal based on changes in the market conditions, changes in the useof the assets, management’s plans, and the determination of the useful life ofthe assets could significantly change the recoverable amount of the asset orthe calculation of the fair value and the resulting impairment loss, whichcould significantly affect the results of operations.

 

***Goodwill***

 

At least annually, ormore frequently as changes in circumstances indicate, we will evaluate theestimated fair value of our goodwill. On these evaluation dates, to the extentthat the carrying value of the net assets of any of our reporting units havinggoodwill is greater than their estimated fair value, we will be required totake additional goodwill impairment charges. We are required to make certainassumptions and estimates regarding the fair value of goodwill when assessingfor impairment. Changes in the fact patterns underlying such assumptions andestimates could ultimately result in the recognition of additional impairmentlosses.

 

We performed our annualgoodwill impairment review during the fourth quarter of 2004 and determinedthat a goodwill impairment charge of $7.7 million was required for one of ourreporting units.  The impairment chargeis included in asset impairment and restructuring expense in the accompanyingconsolidated statement of operations for the year ended December 31, 2004.In calculating the goodwill impairment charge, the fair value of the reportingunit was determined with the assistance of an independent third-party valuationspecialist using a discounted cash flow valuation approach. No impairmentcharges resulted from the annual impairment tests for the years ended December 31,2003 and 2002.

 

***Deferred IncomeTaxes***

 

We record deferred taxassets and liabilities using enacted tax rates in the jurisdictions in which weoperate for the effect of temporary differences between the book and tax basisof assets and liabilities in accordance with Statement of Financial AccountingStandards, No. 109, “Accounting for Income Taxes”. If enacted tax rateschange, we would adjust the deferred tax assets and liabilities, through theprovision for income taxes in the period of change, to reflect the enacted taxrate expected to be in effect when the deferred tax items reverse. To theextent that we believe that recovery is not likely, we establish a valuationallowance to reduce the deferred tax assets to the amount that is more likelythan not to be realized. The valuation allowance is based on our estimates offuture taxable income by jurisdiction in which we operate and the period over whichthe deferred tax assets can be recovered. Areview of all available positive and negative evidence needs to be considered,including our current and past performance, the market environment in which weoperate, the utilization of past tax credits, length of carryback andcarryforward periods, and existing or prospective contracts that will result infuture profits.

 

Forming aconclusion that a valuation allowance is not needed is difficult when there isnegative evidence such as cumulative losses in recent years in certain taxjurisdictions. Cumulative losses weigh heavily in the overall assessment. Wehave established valuation allowances for future tax benefits related to netoperating losses incurred in certain federal, state and foreign tax jurisdictions.We expect to continue to record a valuation allowance on future tax benefits incertain tax jurisdictions until an appropriate level of profitability issustained.

 

***Self-InsuranceReserves***

 

We are self-insured inNorth America for workers’ compensation and health care claims for eligibleparticipating employees, subject to certain deductibles and limitations. Thecosts include an estimate of expected settlements on pending claims and aprovision for claims incurred but not reported. These estimates are based onour assessment of potential liability using an analysis of availableinformation with respect to pending claims, historical experience, and currentcost trends. Actual claims results could differ from these estimates.

 

21

----

 

***Contingencies***

 

We consider thelikelihood of various loss contingencies, including tax and legal contingenciesarising in the ordinary course of business, and our ability to reasonablyestimate the amount of loss in determining loss contingencies. An estimatedloss contingency is accrued when it is probable that a liability has beenincurred and the amount of loss can be reasonably estimated. We regularlyevaluate current information available to us to determine whether such accrualsshould be adjusted.

##### ** **

##### **Resultsof Operations**

 

Inthis section, we discuss our operating results and the factors affecting them.We describe our general business risks, critical accounting policies, andestimates that are important to our operating results on the previous pages.  Please refer to that discussion as you readthis section.

# * *

# ***Components of Operations***

 

As youread this section, please refer to the following table that summarizes ourstatements of operations data on a percentage-of-revenue basis. 

 
| ** **                                                                                | ** **   | **2004**           | ** **   | **2003**   | ** **   | **2002** | *** *** |
|-------------------------------------------------------------------------------------------|--------------|--------------------|--------------|------------|--------------|----------|--------------|
| **Years Ended December 31,**                                                         | ** **   | **$**              | ** **   | **%**      | ** **   | **$**    | ** **   | **%** | ** ** | **$** | ** ** | **%** | *** *** |
| *** ***                                                                              | *** *** | **(in thousands)** | *** *** |
| **Revenue**                                                                               | ** **   | **$**              | **956,443**  | ** ** | ***100.0***  | ***%***  | $            | 846,513 |   | ***100.0*** | ***%*** | $ | 770,211 |   | *100.0* | *%* |
|                                                                                      |         |               |         |       | *** *** |     |         |   | *** *** |   |   |   | * * |
| Direct labor and telecommunications expenses                                              | ** **   | **574,910**        | ** **   | ***60.1*** | ***%***      | 497,275  |         | ***58.7*** | ***%*** | 433,456 |   | *56.3* | *%* |
| Subcontracted and other services expenses                                                 | ** **   | **50,726**         | ** **   | ***5.3***  | ***%***      | 54,121   |         | ***6.4*** | ***%*** | 55,027 |   | *7.1* | *%* |
| Operating, selling and administrative expenses                                            | ** **   | **312,851**        | ** **   | ***32.7*** | ***%***      | 280,859  |         | ***33.2*** | ***%*** | 250,974 |   | *32.6* | *%* |
| Asset impairment and restructuring expenses                                               | ** **   | **16,993**         | ** **   | ***1.8***  | ***%***      | 3,004    |         | ***0.4*** | ***%*** | 1,444 |   | *0.2* | *%* |
| **Operating income**                                                                      | ** **   | **963**            | ** **   | ***0.1***  | ***%***      | 11,254   |         | ***1.3*** | ***%*** | 29,310 |   | *3.8* | *%* |
|                                                                                      |         |               |         |       | *** *** |     |         |   | *** *** |   |   |   | * * |
| Interest expense                                                                          | ** **   | **(12,735**        | **)**        | ***-1.3*** | ***%***      | (12,253  | )            | ***-1.4*** | ***%*** | (11,725 | ) | *-1.5* | *%* |
| Interest income                                                                           | ** **   | **591**            | ** **   | ***0.1***  | ***%***      | 427      |         | ***0.1*** | ***%*** | 475 |   | *0.1* | *%* |
| Equity in earnings of affiliates                                                          | ** **   | **681**            | ** **   | ***0.1***  | ***%***      | 1,417    |         | ***0.2*** | ***%*** | 3,441 |   | *0.4* | *%* |
| Other expense, net                                                                        | ** **   | **(654**           | **)**        | ***-0.1*** | ***%***      | (193     | )            | ***0.0*** | ***%*** | (636 | ) | *-0.1* | *%* |
| **Income (loss) before income taxes, minority  interest and change in accounting method** | ** **   | **(11,154**        | **)**        | ***-1.2*** | ***%***      | 652      |         | ***0.1*** | ***%*** | 20,865 |   | *2.7* | *%* |
|                                                                                      |         |               |         |       | *** *** |     |         |   | *** *** |   |   |   | * * |
| Income tax expense                                                                        | ** **   | **14,679**         | ** **   | ***1.5***  | ***%***      | 4,798    |         | ***0.6*** | ***%*** | 10,437 | * * | *1.4* | *%* |
| Minority interest                                                                         | ** **   | **734**            | ** **   | ***0.1***  | ***%***      | 666      |         | ***0.1*** | ***%*** | 1,812 | * * | *0.2* | *%* |
| **Income (loss) before change in accounting method**                                      | ** **   | **(26,567**        | **)**        | ***-2.8*** | ***%***      | (4,812   | )            | ***-0.6*** | ***%*** | 8,616 | * * | *1.1* | *%* |
| * *                                                                                  | * *     | * *           |         | * *   | *** *** | * * |         | * * | *** *** | * * |   | * * | * * |
| Cumulative effect of change in accounting                                                 | ** **   | **—**         |         |       | *** *** | —   |         | ***0.0*** | ***%*** | (18,399 | ) | *-2.4* | *%* |
| **Net loss (a)**                                                                          | ** **   | **$**              | **(26,567**  | **)**      | ***-2.8***   | ***%***  | $            | (4,812 | ) | ***-0.6*** | ***%*** | $ | (9,783 | ) | *-1.3* | *%* |

 

----

(a)During 2002, we adopted the provisions of SFAS 142, “Goodwill and OtherIntangible Assets”, and ceased amortizing goodwill.

 

22

----

 

**2004 Compared to 2003**

 

***Revenue***

 

Revenue increased $109.9 million, or 13.0%, in 2004compared to 2003.  The changes in revenueby geographic region are shown in the following table: 

 
| ** **    | ** **   | **2004**          | ** **   | **2003** | ** ** | **$   Change** | ** ** | **%  Change** | ** ** |
|---------------|--------------|-------------------|--------------|----------|------------|---------------------|------------|---------------|------------|
| *** ***  | *** *** | **(in millions)** | *** *** |
| North America | ** **   | **$**             | **489.0**    |     | $          | 479.6               |       | $             | 9.4        |   | 2.0 | % |
| Europe        | ** **   | **396.1**         |         | 318.7    |       | 77.4                |       | 24.3          | %          |
| Asia Pacific  | ** **   | **43.0**          |         | 32.9     |       | 10.1                |       | 30.7          | %          |
| Latin America | ** **   | **28.3**          |         | 15.3     |       | 13.0                |       | 85.0          | %          |
| Totals        | ** **   | **$**             | **956.4**    |     | $          | 846.5               |       | $             | 109.9      |   | 13.0 | % |

 

Theincrease in North America revenue in 2004 compared to 2003 was due primarily toa $44.1 million increase in customer care and technical support services weprovided to a number of our clients, partially offset by a $34.4 milliondecrease in customer acquisition and risk management business.  The weakening of the U.S. dollar versus theCanadian dollar accounted for $5.3 million of the increase.

 

Europeanrevenue increased $77.4 million in 2004 compared to the same period in2003.  Higher sales volumes from new andexisting clients resulted in $41.3 million of the increase year over year.  The weakening of the U.S. dollar versus theBritish pound and the Euro accounted for the remaining $36.1 million of theincrease.

 

AsiaPacific revenue increased $10.1 million in 2004 compared to 2003.  Higher sales volumes from new and existingclients resulted in $5.3 million of the increase in 2004 compared to 2003.  The weakening of the U.S. dollar versus theNew Zealand and Australian dollars resulted in the remaining $4.8 million ofthe increase.

 

LatinAmerica revenue increased $13.0 million in 2004 compared to the same period in2003.  This increase was primarily due tothe change in how we report our investment in our Panama affiliate.  Effective October 1, 2003, we completedthe previously announced restructuring in the governance of our Latin Americajoint venture that handles services in Panama and other Latin America countriesand offshore services in Mexico and Central America.  As a result of this revision in governance,we reported our investment in our Panama affiliate using the consolidationmethod rather than the equity method of accounting effective October 1,2003.  As a result of this change, ourLatin America revenue includes the revenue associated with our Panamaaffiliate.  Consolidation of our Panamaaffiliate’s revenue resulted in $10.4 million of the increase in 2004 comparedto 2003.  Higher sales volumes resultedin $2.0 million of the increase.  Theremaining $0.6 million of the increase in revenue is a result of the weakeningof the U.S. dollar versus the Brazilian real.

 

***Direct Labor and Telecommunications Expenses***

 

Directlabor and telecommunications expenses include the compensation of our customerservice professionals and their first line supervisors and telephone usageexpenses directly related to the production of revenue.  Direct labor and telecommunications expensesas a percentage of revenue can vary based on the nature of the contract, thenature of the work, and the market in which the services are provided.Accordingly, direct labor and telecommunications expenses as a percentage ofrevenue can vary, sometimes significantly, from year to year.

 

Direct labor andtelecommunications expenses as a percentage of revenue increased to 60.1% in2004 compared to 58.7% in 2003. The increase was primarily the result of higherdirect labor costs, particularly in Europe, and the reduced pricing on a majorclient contract. This increase was partially offset by the impact of the recordingof a benefit from a refund of $1.3 million of payroll tax overpayments paid ina prior year as a reduction of direct labor and telecommunications expense.

 

***Subcontracted and Other Services Expenses***

 

Subcontracted and otherservices expenses include services provided to clients through subcontractorsand other out-of-pocket expenses passed through to our clients.  Subcontracted and other services expensesdecreased $3.4 million, or 6.3%, for the year ended December 31, 2004compared to the same period in 2003.  The decrease was primarily theresult of lower subcontracted IT costs to support client programs.

 

23

----

 

Subcontract expenses forservices provided by our India joint venture for the years ended December 31,2004, 2003 and 2002 were $15.0 million, $11.4 million, and $14.3 million,respectively.

 

***Operating, Selling and Administrative Expenses***

 

Operating, selling andadministrative expenses represent expenses incurred to directly support andmanage the business, including costs of management, administration, technology,facilities, depreciation and amortization, maintenance, sales and marketing,and client support services.

 

Operating, selling and administrative expenses increased$32.0 million, or 11.4% in 2004 compared to 2003.  The weakening of the U.S. dollar compared tothe primary jurisdictions that we operate in accounted for an increase of $15.8million.  As a result of the change inaccounting for our Panama affiliate as previously discussed, operating, sellingand administrative expenses increased $3.0 million in 2004 compared to 2003.The remainder of the increase in these expenses was associated with our revenueincrease. As a percentage of revenue, operating, selling and administrativeexpenses decreased to 32.7% in 2004 compared to 33.2% in 2003.  The decrease is primarily the result ofhigher sales volumes while maintaining the existing cost structure.

 

***Asset Impairment and Restructuring Expenses***

 

During the fourth quarterof 2004, we recorded $17.0 million of asset impairment and restructuringexpenses.  In connection with the costreduction portion of the Company’s profit improvement plan, we recorded assetimpairment and restructuring expenses of $7.8 million.  This amount is comprised of $5.3 million ofseverance costs, $1.4 million of asset impairment costs and $1.1 million ofscheduled payments of operating leases for which we will receive no futureeconomic benefit.  In addition, werecorded asset impairment and restructuring expenses of $1.5 million as aresult of a revision to our estimate for non-cancelable lease paymentsassociated with previously announced facility closures.  We also recorded asset impairment andrestructuring expenses of $7.7 million related to the impairment of goodwillrelated to one of our reporting units that has been performing belowexpectations.  The following tablesummarizes these charges in 2004:

 
| **Description**        | ** **   | **2004**          | ** **   |
|------------------------|--------------|-------------------|--------------|
| *** ***           | *** *** | **(in millions)** | *** *** |
| **Cash charges:**      |         |              |         |
| Employee severance     |         | $                 | 5.3          |   |
| Facilities leases      |         | 2.6               |         |
| Total cash charges     |         | 7.9               |         |
| **Non-cash charges:**  |         |              |         |
| Goodwill impairment    |         | 7.7               |         |
| Fixed asset disposals  |         | 1.4               |         |
| Total non-cash charges |         | 9.1               |         |
| **Total**              |         | $                 | 17.0         |   |

 

During 2003, inconnection with the closure of our former headquarters facility and the closureof a contact center, we recorded asset impairment and restructuring expenses of$1.6 million, which consisted of the write-off of abandoned leaseholdimprovements of $0.4 million and for $1.2 million of scheduled payments ofoperating leases for which we will receive no future economic benefit. Inaddition, we recorded asset impairment and restructuring expenses of $1.4million as a result of a revision to our estimate for non-cancelable leasepayments associated with a previously announced facility closure.

 

***Operating Income***

 

Operatingincome decreased $10.3 million in 2004 compared to 2003 due to the factorsdiscussed above.

 

***Interest Expense***

 

Interest expenseincreased $0.5 million in 2004 compared to 2003.  This is partially a result of the $0.2million premium paid and the write-off of deferred financing costs related tothe redemption of $10 million in Senior Subordinated Notes.  The remaining increase is due to higheraverage borrowings on the revolving credit facility for 2004 compared to thesame period in 2003.

 

24

----

 

***Interest Income***

 

Interest income remainedconsistent in 2004 compared to 2003.

 

***Equity in Earnings of Affiliates***

 

The decrease in equity inearnings of affiliates in 2004 compared to 2003 primarily relates to reducedearnings from our India joint venture due to changes in client mix and higherramp-up costs.

 

***Other Expense, Net***

 

Otherexpense increased $0.5 million in 2004 compared to 2003.  The increase was primarily the result offoreign currency remeasurement losses arising from monetary assets andliabilities denominated in currencies other than a business unit’s functionalcurrency.

 

***Income Tax Expense***

 

The effective tax ratefor 2004 was more than the U.S. statutory rate of 35% partially due to notreflecting any significant tax benefits for the current net operating losses incertain federal, state and foreign tax jurisdictions.  During the fourth quarter of 2004, wedetermined that it was more likely than not that we will not realize the full benefitof deferred tax assets in certain jurisdictions. Consequently, we recorded anincrease to the existing valuation allowance resulting in non-cash tax expenseof approximately $10.9 million. This increase in the income tax expense waspartially offset by the reversal of $0.8 million of valuation allowanceassociated with deferred tax assets in certain of our foreign jurisdictionsreflecting foreign net operating losses and other credit carryforwards that areexpected to be utilized.

 

The effective tax ratefor 2003 was significantly more than the U.S. statutory rate of 35%, which wasprimarily the result of not reflecting any significant tax benefits for thecurrent net operating losses in certain federal, state and foreign taxjurisdictions.

 

**2003Compared to 2002**

 

***Revenue***

 

Revenue increased $76.3million, or 9.9%, in 2003 compared to 2002. The changes in revenue bygeographic region are shown in the following table:

 
| ** **    | ** **   | **2003**            | ** **   | **2002** | ** ** | **$   Change** | ** ** | **%  Change** | ** ** |
|---------------|--------------|---------------------|--------------|----------|------------|---------------------|------------|---------------|------------|
| *** ***  | *** *** | **(in millions*)*** | *** *** |
| North America | ** **   | **$**               | **479.6**    |     | $          | 484.2               |       | $             | (4.6       | ) | (1.0 | )% |
| Europe        | ** **   | **318.7**           |         | 212.6    |       | 106.1               |       | 49.9          | %          |
| Asia Pacific  | ** **   | **32.9**            |         | 28.1     |       | 4.8                 |       | 17.1          | %          |
| Latin America | ** **   | **15.3**            |         | 45.3     |       | (30.0               | )          | (66.2         | )%         |
| Totals        | ** **   | **$**               | **846.5**    |     | $          | 770.2               |       | $             | 76.3       |   | 9.9 | % |

 

The decrease in NorthAmerica revenue in 2003 compared to 2002 was due primarily to a $14.8 milliondecline in customer care and customer acquisition services we provided to anumber of our clients partially offset by a $10.3 million increase in revenueby our technical support services and risk management business.  The primary reason for the decrease inrevenue is due to pricingpressure resulting from excess capacity in North America, created primarily bythe movement of business offshore. The transfer of certain business to lowercost labor markets offshore results in lower revenue for the same volume ofbusiness.

 

European revenueincreased $106.1 million in 2003 compared to the same period in 2002. Highersales volumes from new and existing clients and the implementation of multiplepan-European client accounts that commenced in early 2003 resulted in anincrease in revenue of $61.3 million in 2003 compared to 2002. The weakening ofthe U.S. dollar versus the British pound and Euro accounted for the remaining$44.8 million of the increase.

 

25

----

 

Asia Pacific revenueincreased $4.8 million in 2003 compared to 2002.  Revenue increased $6.2 million due to theimpact of changes in foreign currency, which was offset by a decrease of $1.4million as a result of lower volumes.

 

As a result of certainrevisions in the governance of a joint venture, we reported our investment incertain Latin America affiliates using the equity method of accounting, ratherthan the consolidation method, effective October 1, 2002. As a result ofthe change in accounting, Latin America revenue declined $33.0 million in 2003compared to 2002. The strengthening of the U.S. dollar accounted for a $0.7million decrease in Latin American revenue in 2003 compared to 2002. These werepartially offset by higher sales volumes, which resulted in a $3.7 millionincrease.

 

***Direct Labor and Telecommunications Expenses***

 

Direct labor andtelecommunications expenses include the compensation of our customer serviceprofessionals and their first line supervisors and telephone usage expensesdirectly related to the production of revenue.

 

Direct labor andtelecommunications expenses as a percentage of revenue can vary based on thenature of the contract, the nature of the work, and the market in which theservices are provided. Accordingly, direct labor and telecommunicationsexpenses as a percentage of revenue can vary, sometimes significantly, fromyear to year.

 

As a percentage ofrevenue, direct labor and telecommunications expenses increased to 58.7% in2003 compared to 56.3% in 2002. Pricing pressure resulting from continuingexcess capacity created primarily by movement of business offshore and the ramp costs of new programs in North Americaand Europe were the primary reasons for the increase in 2003 compared to2002.

 

***Subcontracted and Other Services Expenses***

 

Subcontracted and otherservices expenses include services provided to clients through subcontractorsand other out-of-pocket expenses. Subcontracted and other services expenses in2003 remained consistent compared to 2002.

 

***Operating, Selling and Administrative Expenses***

 

Operating, selling andadministrative expenses represent expenses incurred to directly support andmanage the business, including costs of management, administration, technology,facilities, depreciation and amortization, maintenance, sales and marketing,and client support services.

 

Operating, selling andadministrative expenses increased $29.9 million, or 11.9%, in 2003 compared to2002.  The change in accounting ofcertain Latin American affiliates as described previously, reduced operating,selling and administrative expenses $6.9 million in 2003 compared to 2002. Theweakening of the U.S. dollar compared to the primary currency in thejurisdictions in which we operate accounted for a $16.2 million increase in2003 compared to 2002.  The remainder ofthe increase in these expenses was associated with our revenue increase.  As a percentage of revenue, operating,selling and administrative expenses increased to 33.2% in 2003 compared to 32.6%in 2002 primarily as a result of increased investments in infrastructure tosupport European expansions and increased costs associated with expanded salesprograms.

 

***Asset Impairment and Restructuring Expenses***

 

During 2003, inconnection with the closure of our former headquarters facility and the closureof a contact center, we recorded asset impairment and restructuring expenses of$1.6 million, which consisted of the write-off of abandoned leaseholdimprovements of $0.4 million and for $1.2 million of scheduled payments ofoperating leases for which we will receive no future economic benefit. Inaddition, we recorded asset impairment and restructuring expenses of $1.4million as a result of a revision to our estimate for non-cancelable leasepayments associated with a previously announced facility closure.

 

**During 2002, we recorded additional restructuringcharges of $1.4 million primarily associated with**a revision to our estimate for non-cancelable leasepayments associated with a facility closure in connection with the 2001restructuring plan.

 

***Operating Income***

 

Operatingincome decreased $18.1 million in 2003 compared to 2002 due to the factorsdiscussed above.

 

***Interest Expense, Net***

 

Interest expense, net ofinterest income, increased $0.6 million in 2003 compared to 2002 as a result ofhigher average borrowings.

 

26

----

 

***Equity in Earnings of Affiliates***

 

The decrease in equity inearnings of affiliates in 2003 compared to 2002 primarily relates to reducedearnings from our India joint venture due to changes in client mix and higherramp-up costs.

 

***Other Expense, Net***

 

Other expense, net,decreased $0.4 million in 2003 compared to 2002. The decrease was primarily aresult of foreign currency remeasurement gains arising from monetary assets andliabilities denominated in currencies other than a business unit’s functionalcurrency offset by impairment charges of $1.5 million to reduce our basisin investments to fair value. Based upon our review of our investee’s financialcondition, results of operations and operating trends and the implied valuefrom recent rounds of financing completed by the investee, we determined thatan other-than-temporary impairment existed for two of our investments.

 

***Income Tax Expense***

 

The effective tax rate for 2003 wassignificantly more than the U.S. statutory rate which was primarily the resultof not reflecting any significant tax benefits for the current net operatinglosses in certain federal, state and foreign tax jurisdictions.

 

In 2002, income taxexpense as a percentage of income before income taxes, minority interest andchange in accounting method, was 50%. The majority of the difference between this rate and the statutory U.S.Federal rate of 35% was due to a $2.3 million increase in our deferred taxvaluation allowance. The remaining difference was due to net operating lossesin certain European and Asia Pacific subsidiaries for which no tax benefit wasrecognized and U.S. state and local income taxes offset by lower internationaltax rates in certain jurisdictions.

 

**Financial Condition and Liquidity**

 

Inthis section, we discuss our financial condition and liquidity and the factorsaffecting them. We separately discuss cash flows, capital resources, andcontractual obligations and commitments. We describe our general businessrisks, critical accounting policies, and estimates that are important to ourfinancial condition and liquidity earlier in this report. Please refer to thatdiscussion as you read this section.

# * *

# ***Cash Flows***

 

The following table setsforth summary cash flow data for the periods indicated. Please refer to thissummary as you read our discussion of the sources and uses of cash in eachyear.

 
| **Years Ended December 31,**   | ** **   | **2004**          | ** **   | **2003** | ** ** | **2002** | ** ** |
|-------------------------------------|--------------|-------------------|--------------|----------|------------|----------|------------|
| *** ***                        | *** *** | **(in millions)** | *** *** |
| **Net cash provided by (used in):** |         |              |         |     |       |     |       |
| Operating activities                | ** **   | **$**             | **39.5**     |     | $          | 9.1      |       | $ | 38.1 |   |
| Investing activities                | ** **   | **(23.6**         | )            | (24.1    | )          | (28.5    | )          |
| Financing activities                | ** **   | **(18.6**         | )            | 11.9     |       | 3.3      |       |
|                                     |              |                   |              |          |            |          |            |  |  |  |

 

**2004**

** **

**In 2004, cash provided by operating activitiesresulted primarily from income before asset impairment and restructuringexpenses, depreciation and amortization, and other charges of $36.4 million, a$2.7 million decrease in other assets, a $4.7 million increase in tradeaccounts payable, and a $5.3 million increase in other liabilities, partiallyoffset by a $9.6 million increase in trade accounts receivable.**

** **

**In 2004, we used cash for investing activities topurchase $25.0 million of property and equipment and used $0.9 million toincrease investments in affiliates, offset partially by a dividend from anaffiliate of $1.7 million and other receipts of $0.5 million.**

** **

**In 2004, cash used in financing activities resultedin net repayments of debt and other obligations of $18.8 million partiallyoffset by $0.2 million of cash receipts from treasury stock reissuances, net,and other receipts.**

 

27

----

 

**2003**

 

In2003, cash provided by operating activities resulted primarily from incomebefore asset impairment and restructuring expenses, depreciation andamortization, and other charges of $36.4 million and a $6.2 million increase inother liabilities, which were partially offset by a $32.4 million increase intrade accounts receivable and $1.3 million decrease in trade accounts payable.  

 

In 2003, we used cash forinvesting activities mostly to purchase $24.8 million of property and equipmentand used $1.0 million to increase investments in affiliates. This was partiallyoffset by $1.8 million of proceeds from dividends received from an equitymethod investee.

 

In2003, we received cash from financing activities mostly from $3.7 million ofnet borrowings under our credit facility and $11.6 million of net borrowingsunder other local lines of credit. In 2003, we used cash for financing activitiesto repay $2.3 million of capital lease obligations. In addition, we used cashto purchase a total of $1.0 million of common stock under our existing stockpurchase program.

** **

**2002**

 

In2002, cash provided by operating activities came from income before assetimpairment and restructuring expenses, depreciation and amortization, and othercharges of $46.4 million and a $2.9 million decrease in trade accounts payable,which were partially offset by a $9.9 million increase in trade accountsreceivable and other assets and a $1.2 million decrease in other liabilities.  

 

In 2002, we used cash forinvesting activities mostly to purchase $30.4 million of property andequipment. We received $1.5 million from the sale of property and equipmentassociated with our joint ventures.

 

In2002, we received cash from financing activities mostly from borrowings underour credit facility.

# * *

# ***Capital Resources***

 

Wehave historically used funds generated from operations, leases of property andequipment, senior subordinated notes, and borrowings under credit facilitieswith banks to finance business acquisitions, capital expenditures, and workingcapital requirements.

 

We have a three-year $50million revolving credit facility, which expires in December 2005.  The credit facility is secured by accountsreceivable in the United States, Canada and the United Kingdom.  We intend to utilize the facility, as needed,for ongoing working capital requirements and general corporate purposes. At December 31,2004, we had $40.8 million of available borrowings under the credit facility,and we were in compliance with all financial covenants of the facility.  We are currently in the process ofrefinancing the revolving credit facility and our Subordinated Notes.

 

Weexpect to finance our current operations, planned capital expenditures, andinternal growth for the foreseeable future using funds generated fromoperations, existing cash and available funds under our credit facility inaddition to lease financing for property and equipment. We estimate that our2005 capital expenditures will range from $20 million to $40 million to cover technology upgrades, assetreplacement and new business initiatives. Future acquisitions, if any, may require additional debt orequity financing.

 

Under a stock repurchaseprogram that was authorized by our Board of Directors in February 2001, wemay repurchase up to $10 million of our shares from time to time in the openmarket or in privately negotiated transactions, depending on general businessand market conditions. Through the date of this report, we had repurchased atotal of 881,700 shares at a total cost of $1.5 million.

 

28

----

 

# ***Contractual Obligations andCommitments***

 

We have variouscontractual obligations and commitments that are described in the Notes toConsolidated Financial Statements. The following table summarizes ourcontractual obligations and commitments at December 31, 2004:

 
| ** **       | ** **   | **Total**          | ** **   | **Less than  1 year** | ** ** | **1-3 years** | ** ** | **4-5 years** | ** ** | **Over  5 years** | ** ** |
|------------------|--------------|--------------------|--------------|-----------------------|------------|---------------|------------|---------------|------------|-------------------|------------|
| *** ***     | *** *** | **(in thousands)** | *** *** |
| Long-term debt   |         | $                  | 90,000       |                  | $          | —        |       | $             | 90,000     |              | $          | — |   | $ | — |   |
| Capital leases   |         | 14,515             |         | 3,392                 |       | 4,628         |       | 1,951         |       | 4,544             |       |
| Operating leases |         | 132,469            |         | 30,874                |       | 44,058        |       | 24,556        |       | 32,981            |       |
| Other debt       |         | 18,802             |         | 18,802                |       | —        |       | —        |       | —            |       |
| Total            |         | $                  | 255,786      |                  | $          | 53,068        |       | $             | 138,686    |              | $          | 26,507 |   | $ | 37,525 |   |

 

**Off-Balance Sheet Arrangements**

 

We do not have any obligations that meet the definition of an off-balancesheet arrangement and that have or are reasonably likely to have a materialeffect on our consolidated financial statements.

 

**Other Matters**

 

***QuarterlyResults and Seasonality***

 

We have experienced, andexpect to continue to experience, quarterly variations in our results ofoperations mostly due to:

 

•            the timing of our clients’ customermanagement initiatives and customer acquisition and loyalty campaigns,

•            the commencement of new contracts and thediscontinuance and termination of existing contracts,

•            revenue mix,

•            the timing of additional operating,selling, and administrative expenses to support new business, and

•            the timing of recognition of incentivefees.

 

We experience periodicfluctuations in our results of operations related to both the start-up costsassociated with expansion and the implementation of clients’ customermanagement activities. In addition, our business generally tends to be slowerin the third quarter due to summer holidays in Europe.

 

***Effects of Inflation***

 

Inflationhas not had a significant effect on our operations. However, there can be noassurance that inflation will not have a material effect on our operations inthe future.

 

***Related Party Transactions***

 

We have made minority interest investments forbusiness and strategic purposes through the purchase of voting common andpreferred stock of companies.  Theseinvestments are included in investments in affiliates in consolidated financialstatements.  As of December 31, 2004and 2003, the investment in our India joint venture was approximately $4.1million and $4.3 million respectively. Subcontracted services provided by our India joint venture for the yearsended December 31, 2004, 2003 and 2002 were $15.0 million, $11.4 million,and $14.3 million, respectively and are included in subcontracted and otherservices expenses in the accompanying consolidated statements of operations.The Company had payables to our India joint venture of $3.0 million and $1.9million at December 31, 2004 and 2003, respectively, which are included intrade accounts payable in the consolidated financial statements. We received$1.8 million of dividend distributions from our India joint venture during theyear ended December 31, 2003.

 

As of December 31,2004 and 2003, the investment in certain Latin America affiliates wasapproximately $12.4 million and $14.5 million, respectively. Of the $12.4million investment in certain Latin America affiliates, approximately $7.7million is equity method goodwill. This equity method goodwill is notamortized.  Subcontracted servicesprovided by our Latin America joint ventures for the years ended December 31,2004, 2003, and 2002 were not material. We received $1.7 million of dividend distributions from our LatinAmerica affiliates during the year ended December 31, 2004.

 

29

----

 

***Accounting Pronouncements***

 

In December 2004,the Financial Accounting Standards Board (FASB) issued SFAS No. 123 (R), *Share-Based Payment*, (SFAS 123R). Thisstandard will require the cost of employee compensation paid with equityinstruments to be measured based on grant-date fair values with the cost recordedas compensation expense over the period during which the employee is requiredto perform service in exchange for the award (generally over the vesting periodof the award). SFAS 123R is effective July 1, 2005. The proformadisclosures previously permitted under SFAS 123 no longer will be analternative to financial statement recognition. See “Stock-Based Compensation”in Note 1 to the consolidated financial statements for the pro forma net incomeand net income per share amounts, for the three years ended December 31,2004, as if we had used a fair-value-based method similar to the methodsrequired under SFAS 123R to measure compensation expense for employeestock incentive awards. Although we have not yet determined whether theadoption of SFAS 123R will result in amounts that are similar to thecurrent pro forma disclosures under SFAS 123, we are evaluating therequirements under SFAS 123R and expect the adoption to have a significantimpact on our consolidated statements of income (loss) and net income (loss)per share.

 

In October 2004, TheAmerican Jobs Creation Act of 2004 (the Act) was signed into law. The Actcreates a temporary incentive for U.S. multinationals to repatriate accumulatedincome earned outside the U.S. In December 2004, the FASB issued FSP109-2, *Accounting and Disclosure Guidancefor the Foreign Earnings Repatriation Provision within the American JobsCreation Act of 2004. *FSP 109-2 provides additional time tocompanies beyond the financial reporting period of enactment to evaluate theeffects of the AJCA on their plans for repatriation of foreign earnings forpurposes of applying SFAS 109, *Accountingfor Income Taxes*. The Company is currently evaluating therepatriation provisions of AJCA, which if implemented would affect our taxprovision and deferred tax assets and liabilities. Due to the complexity anduncertainty of applying the provisions of the Act, the income tax effects ofsuch repatriation cannot be reasonably estimated at this time.

 

In January 2003, theFASB released Interpretation No. 46, *Consolidationof Variable Interest Entities, an Interpretation of ARB No. 51,*(FIN 46), which required that all primary beneficiaries of Variable InterestEntities (VIE) consolidate that entity. FIN 46 was effective immediately for VIE’screated after January 31, 2003 and to VIE’s in which an enterpriseobtained an interest after that date. It applied in the first fiscal year orinterim period beginning after June 15, 2003 to VIE’s in which anenterprise held a variable interest it acquired before February 1, 2003.In December 2003, the FASB published a revision to FIN 46 (FIN 46R) toclarify some of the provisions of the interpretation and to defer the effectivedate of implementation for certain entities. The remaining provisions of FIN46R were effective January 1, 2004. The adoption of FIN 46R had no impact on our consolidated financialstatements.

 

**Item 7A.Quantitative and Qualitative Disclosures about Market Risk**

 

***Foreign Currency Risk***

 

We areexposed to market risks associated primarily with changes in foreign currencyexchange rates. We have operations in many parts of the world; however, bothrevenue and expenses of those operations are typically denominated in thecurrency of the country of operations, providing a natural hedge.

 

Our financial statementsare presented in U.S. dollars and can be impacted by foreign currency exchangefluctuations through both (i) translation risk, which is the risk that thefinancial statements for a particular period or as of a certain date depend onthe prevailing exchange rates of the various currencies against the U.S.dollar, and (ii) transaction risk, which is the risk that the currencyimpact of transactions denominated in currencies other than the business unit'sfunctional currency may vary according to currency fluctuations.

 

With respect totranslation risk, even though the fluctuations of currencies against the U.S.dollar can be substantial and therefore significantly impact comparisons withprior periods, the translation impact is included in accumulated othercomprehensive income, a component of stockholders’ equity, and does not affectthe underlying results of operations. Gains and losses related to transactionsdenominated in a currency other than the functional currency of the countriesin which we operate including short-term intercompany accounts are included inthe consolidated statements of operations.

 

***Interest Rate Risk***

 

We are also exposed tochanges in interest rates on our variable rate borrowings. Interest rates onour Senior Subordinated Notes and capital lease obligations are fixed, butrates on borrowings under our bank credit 

 

30

----

 

facility are variable.During the years ended December 31, 2004, 2003 and 2002, our averageborrowings under our bank credit facility were $9.7 million, $5.2 million, and$2.1 million, respectively. Based on our projected cash needs for theforeseeable future, we do not expect that our exposure to changes in interestrates for these borrowings will have a material impact on our interest expense.

 

***Investment Risk***

 

We do not use derivativefinancial or commodity instruments.  Ourfinancial instruments included cash and cash equivalents, accounts receivable,accounts payable, current and long-term debt. Our cash and cash equivalents, accounts receivable, accounts payable,and current debt balances are short-term in nature and do not expose us tomaterial investment risk.  Our long-termdebt, which had a book value of $90 million and $100 million at December 31,2004 and 2003, respectively, had a fair value of $90.7 million and $98.0million, respectively.

 

**Item 8.Financial Statements and Supplementary Data**

 

The information calledfor by this item is incorporated by reference from our Consolidated FinancialStatements beginning on page F-3 and the related Notes to ConsolidatedFinancial Statements beginning on page F-7.

 

**Item9. Changes in and Disagreements with Accountants on Accounting and FinancialDisclosure**

 

None.

 

**Item 9A.Controls and Procedures**

 

Our management evaluated,with the participation of our Chief Executive Officer and our Chief FinancialOfficer, the effectiveness of our disclosure controls and procedures as of theend of the period covered by this Annual Report on Form 10-K. Based on thisevaluation, our Chief Executive Officer and our Chief Financial Officer haveconcluded that our disclosure controls and procedures are effective to ensurethat information we are required to disclose in reports that we file or submitunder the Securities Exchange Act of 1934 is recorded, processed, summarizedand reported within the time periods specified in Securities and ExchangeCommission rules and forms.

 

There was no change inour internal control over financial reporting that occurred during the fourthfiscal quarter of the fiscal year covered by this Annual Report on Form 10-Kthat has materially affected, or is reasonably likely to materially affect, ourinternal control over financial reporting.

 

We do not expect that ourdisclosure controls and procedures or our internal controls over financialreporting will prevent all error and all fraud. A control system, no matter howwell conceived and operated, can provide only reasonable, not absolute,assurance that the objectives of the control system are met. Further, thedesign of a control system must reflect the fact that there are resourceconstraints, and the benefits of controls must be considered relative to theircosts. Because of the inherent limitations in all control systems, no evaluationof controls can provide absolute assurance that all control issues andinstances of fraud, if any, within SITEL have been detected.

 

**Management’s Report on InternalControl over Financial Reporting**

 

Our management isresponsible for establishing and maintaining adequate internal control overfinancial reporting (as defined in Rule 13a-15(f) under the SecuritiesExchange Act of 1934, as amended). Our management assessed the effectiveness ofour internal control over financial reporting as of December 31, 2004. Inmaking this assessment, our management used the criteria set forth by theCommittee of Sponsoring Organizations of the Treadway Commission (“COSO”) inInternal Control-Integrated Framework. Our management has concluded that, as ofDecember 31, 2004, our internal control over financial reporting iseffective based on these criteria. Our independent registered public accountingfirm, KPMG LLP, has issued an audit report on our assessment of our internalcontrol over financial reporting, which is included herein.

 

31

----

 

**Report of Independent RegisteredPublic Accounting Firm**

 

 

*Tothe Stockholders and Board of Directorsof SITEL Corporation:*

 

We have auditedmanagement’s assessment, included in the accompanying Management’s Report onInternal Control over Financial Reporting,**thatSITEL Corporation and subsidiaries (the Company) maintained effective internalcontrol over financial reporting as of December 31, 2004, based on**criteria established in*Internal Control—Integrated Framework*issuedby the Committee of Sponsoring Organizations of the Treadway Commission(COSO).  The Company’s management isresponsible for maintaining effective internal control over financial reportingand for its assessment of the effectiveness of internal control over financialreporting. Our responsibility is to express an opinion on management’sassessment and an opinion on the effectiveness of the Company’s internalcontrol over financial reporting based on our audit.

 

We conducted our audit inaccordance with the standards of the Public Company Accounting Oversight Board(United States). Those standards require that we plan and perform the audit toobtain reasonable assurance about whether effective internal control overfinancial reporting was maintained in all material respects. Our audit includedobtaining an understanding of internal control over financial reporting,evaluating management’s assessment, testing and evaluating the design andoperating effectiveness of internal control, and performing such otherprocedures as we considered necessary in the circumstances. We believe that ouraudit provides a reasonable basis for our opinion.

 

A company’s internalcontrol over financial reporting is a process designed to provide reasonableassurance regarding the reliability of financial reporting and the preparationof financial statements for external purposes in accordance with U.S. generallyaccepted accounting principles.  Acompany’s internal control over financial reporting includes those policies andprocedures that (1) pertain to the maintenance of records that, in reasonabledetail, accurately and fairly reflect the transactions and dispositions of theassets of the company; (2) provide reasonable assurance that transactions arerecorded as necessary to permit preparation of financial statements inaccordance with generally accepted accounting principles, and that receipts andexpenditures of the company are being made only in accordance withauthorizations of management and directors of the company; and (3) providereasonable assurance regarding prevention or timely detection of unauthorizedacquisition, use, or disposition of the company’s assets that could have amaterial effect on the financial statements.

 

Because of its inherentlimitations, internal control over financial reporting may not prevent ordetect misstatements.  Also, projectionsof any evaluation of effectiveness to future periods are subject to the riskthat controls may become inadequate because of changes in conditions, or thatthe degree of compliance with the policies or procedures may deteriorate.

 

In our opinion,management’s assessment that the Company maintained effective internal controlover financial reporting as of December 31, 2004, is fairly stated, in allmaterial respects, based on criteria established in*Internal Control—Integrated Framework* issued by COSO.**Also, in our opinion, the Companymaintained, in all material respects, effective internal control over financialreporting as of December 31, 2004, based on criteria established in*Internal Control—Integrated Framework*issuedby COSO.

 

We also have audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the consolidated balance sheets of SITEL Corporation andsubsidiaries as of December 31, 2004 and 2003, and the relatedconsolidated statements of operations, stockholders’ equity and cash flows foreach of the years in the three-year period ended December 31, 2004, andour report dated March 16, 2005, expressed an unqualified opinion on thoseconsolidated financial statements.

 

 
| /s/ KPMG LLP         |   |
|----------------------|--------|
|                 |
| **KPMG LLP**         |
| ** **           |
| Omaha, Nebraska      |
| March 16,  2005 |

 

 

32

----

 

**PART III**

 

**Item 10.Directors and Executive Officers of the Registrant**

 

The information requiredby this item with respect to directors is set forth in the Proxy Statementunder the captions “Proposal: Board of Directors and Election” and “Section 16(a)Beneficial Ownership Reporting Compliance,” and is incorporated herein byreference.

 

The information requiredby this item with respect to executive officers of SITEL Corporation, pursuantto instruction 3 of paragraph (b) of Item 401 of Regulation S-K, is set forthfollowing Item 4 of Part I of this Form 10-K under the caption “ExecutiveOfficers of the Registrant” and in the Proxy Statement under the caption “Section 16(a)Beneficial Ownership Reporting Compliance,” and is incorporated herein byreference.

 

**AuditCommittee and Audit Committee Financial Expert**

 

The Company hasestablished a separate Audit Committee of the Board of Directors, comprised ofdirectors Desai, DeVito, Gourlay, Hanger and Kubat. The Company’s Board ofDirectors has determined that Mr. Kubat qualifies as an audit committeefinancial expert and is independent.

 

**Codeof Ethics**

 

The Company has adopted acode of ethics that applies to its chief executive officer, chief financialofficer and controller. The code of ethics may be accessed through theInvestors section of our Internet website listed under Item 1 of thisAnnual Report on Form 10-K under the caption “Available Information”.

 

**Item 11.Executive Compensation**

 

The information requiredby this item is set forth in the Proxy Statement under the captions “AnnualCompensation,” “Arrangements with Executive Officers,” “Benefit Plans,” “OptionGrants and Holdings,” “Compensation Committee Report on Executive Compensation,”and “Performance Graph,” and is incorporated herein by reference.

 

**Item 12.Security Ownership of Certain Beneficial Owners and Management and RelatedStockholder Matters**

 

The information requiredby this item regarding security ownership of certain beneficial owners andmanagement is set forth in the Proxy Statement under the caption “Common StockOwned by Certain Beneficial Owners and by Executive Officers and Directors,”and is incorporated herein by reference.

 

**Item 13.Certain Relationships and Related Transactions**

 

The information requiredby this item is set forth in the Proxy Statement under the caption “CompensationCommittee Interlocks and Insider Participation; Certain Transactions,” and isincorporated herein by reference.

 

**Item 14.Principal Accountant Fees and Services**

 

The information requiredby this item is set forth in the Proxy Statement under the caption “IndependentRegistered Public Accounting Firm” and is incorporated herein by reference.

 

**PART IV**

 

**Item 15.Exhibits, Financial Statement Schedules and Reports on Form 8-K**

 

(a)   Thefollowing documents are filed as a part of this report:

 

**1.****         FinancialStatements** – beginning on page F-1 of this report.

 

•           Report of Independent Registered PublicAccounting Firm

•           Consolidated Statements of Operations ForThe Years Ended December 31, 2004, 2003, and 2002

•           Consolidated Balance Sheets at December 31,2004 and 2003

•           Consolidated Statements of Stockholders’Equity For The Years Ended December 31, 2004, 2003, and 2002

 

33

----

 

•           Consolidated Statements of Cash Flows ForThe Years Ended December 31, 2004, 2003, and 2002

•           Notes to Consolidated Financial Statements

 

**2.****         FinancialStatement Schedule**

 

Schedules have been omitted because of theabsence of the conditions under which they are required or because theinformation called for is shown in the consolidated financial statements or thenotes thereto.

 

**3.   Exhibits**– required by Item 601 of Regulation S-K:

 

Allexhibits as set forth on the Exhibit Index, which is incorporated herein byreference.

 

(b)         Reportson Form 8-K:

 

TheCompany filed a Current Report on Form 8-K dated October 27, 2004, whichreported under Items 2.02 and 9.01 the issuance of a press release.  The press release was filed as an exhibit tothe Form 8-K.

 

TheCompany filed a Current Report on Form 8-K dated December 3, 2004, whichreported under Items 2.05, 2.06, and 9.01 the announcement of costs associatedwith exit or disposal activities and material impairments expected to berecorded in the fourth quarter of fiscal 2004 and first quarter of fiscal 2005,and the issuance of a press release discussing those items, respectively.  The press release was filed as an exhibit tothe Form 8-K.

 

TheCompany filed a Current Report on Form 8-K dated December 10, 2004, whichreported under Items 1.01, 1.02, 5.02, and 9.01 the entry into a materialdefinitive agreement, termination of a material definitive agreement, departureof a director, and the issuance of a press release discussing the departure,respectively.  The press release wasfiled as an exhibit to the Form 8-K.

 

34

----

 

### **SIGNATURES**

 

 

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of1934, the registrant has duly caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized.

 
|       |                 |   | SITEL Corporation**(Registrant)**                          |
|------------|----------------------|--------|------------------------------------------------------------|
| ** ** |                 |   |                                                       |
|       |                 |   |                                                       |
| Date:      | March 16,  2005 | By     | /s/                                                        | James F. Lynch |
| ** ** | ** **           |   | **James F. Lynch**                                         |
| * *   |                 |   | *Chief Executive Officer*                                  |
|       |                 |   | (Duly Authorized Officer and  Principal Executive Officer) |
|            |                      |        |                                                            |  |

 

 

Pursuant to therequirements of the Securities Exchange Act of 1934, this report has beensigned below by the following persons on behalf of the registrant and in thecapacities and on the dates indicated.

 
| **Signature** | ** **          | **Title**             | ** ** | **Date**                              |
|---------------|---------------------|-----------------------|------------|---------------------------------------|
|          |                |                  |       |                                  |   |
| By            | /s/                 | James F. Lynch        |       | Chairman of the  Board,               |   | March 16, 2005 |
| ** **    | ** **          | **James F. Lynch**    | ** ** | Chief Executive  Officer and Director |   |   |
|          |                |                  |       |                                  |   |   |
| By            | /s/                 | Jorge A. Celaya       |       | Executive Vice  President and Chief   |   | March 16, 2005 |
| ** **    | ** **          | **Jorge A. Celaya**   | ** ** | Financial  Officer                    |   |   |
|          |                |                  |       | (Principal  Financial Officer)        |   |   |
|          |                |                  |       |                                  |   |   |
| By            | /s/                 | Donald J. Vrana       |       | Senior Vice  President and Controller |   | March 16, 2005 |
| ** **    | ** **          | **Donald J. Vrana**   |       | (Principal  Accounting Officer)       |   |   |
|          |                |                  |       |                                  |   |   |
| By            | /s/                 | Kelvin C. Berens      |       | Director                              |   | March 16, 2005 |
| ** **    | ** **          | **Kelvin C. Berens**  |       |                                  |   |   |
|          |                |                  |       |                                  |   |   |
| By            | /s/                 | Rohit M. Desai        |       | Director                              |   | March 16, 2005 |
| ** **    | ** **          | **Rohit M. Desai**    |       |                                  |   |   |
|          |                |                  |       |                                  |   |   |
| By            | /s/                 | Mathias J. DeVito     |       | Director                              |   | March 16, 2005 |
| ** **    | ** **          | **Mathias J. DeVito** |       |                                  |   |   |
|          |                |                  |       |                                  |   |   |
| By            | /s/                 | Nigel T. Gourlay      |       | Director                              |   | March 16, 2005 |
| ** **    | ** **          | **Nigel T. Gourlay**  |       |                                  |   |   |
|          |                |                  |       |                                  |   |   |
| By            | /s/                 | David J. Hanger       |       | Director                              |   | March 16, 2005 |
| ** **    | ** **          | **David J. Hanger**   |       |                                  |   |   |
|          |                |                  |       |                                  |   |   |
| By            | /s/                 | George J. Kubat       |       | Director                              |   | March 16, 2005 |
| ** **    | **George J. Kubat** |                  |       |                                  |   |

 

35

----

 

**EXHIBIT INDEX**

 
| **Exhibit  No.** | ** ** | ** **                                                                                                                                                                                                                        |
|------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1              |       | Amended and  Restated Articles of Incorporation (see Exhibit 3.1 to Registration Statement  on Form S-1 No. 33-91092).                                                                                                       |
|             |       |                                                                                                                                                                                                                              |
| 3.1(a)           |       | Articles of  Amendment filed September 10, 1996 to the Amended and Restated Articles  of Incorporation (see Exhibit 4.1(a) to the Company’s Registration Statement  on Form S-3 No. 333-13403).                         |
|             |       |                                                                                                                                                                                                                              |
| 3.4              |       | Amended and  Restated Bylaws (see Exhibit 3.4 to Registration Statement on Form S-1 No.  33-91092).                                                                                                                               |
|             |       |                                                                                                                                                                                                                              |
| 3.4(a)           |       | Amended and  Restated Bylaws – conformed copy including Amendment No. 1 (see Exhibit 4.2  to the Company’s Registration Statement on Form S-3 No. 333-28131).                                                           |
|             |       |                                                                                                                                                                                                                              |
| 3.4(b)           |       | Amendment No. 2  to Amended and Restated Bylaws (see Exhibit 3.2 to the Company’s Form 10-Q  for the quarter ended September 30, 1998).                                                                                 |
|             |       |                                                                                                                                                                                                                              |
| 3.4(c)           |       | Amendment No. 3  to Amended and Restated Bylaws (see Exhibit 3.1 to the Company’s Form 10-Q  for the quarter ended June 30, 2001).                                                                                      |
|             |       |                                                                                                                                                                                                                              |
| 3.4(d)           |       | Amended and  Restated Bylaws – conformed copy including all amendments through March 2,  2001 (see Exhibit 3.2 to the Company’s Form 10-Q for the quarter ended June 30,  2001).                              |
|             |       |                                                                                                                                                                                                                              |
| 3.5              |       | Certificate of  Designation of Series A Participating Preferred Stock (see Exhibit A to the  Rights Agreement included as Exhibit 1 to the Company’s Registration  Statement on Form 8-A filed August 24, 1998).        |
|             |       |                                                                                                                                                                                                                              |
| 4.2              |       | Specimen Common  Stock Certificate (see Exhibit 4.2 to the Company’s Annual Report on Form 10-K  for the year ended December 31, 1996).                                                                                 |
|             |       |                                                                                                                                                                                                                              |
| 4.3              |       | Rights Agreement  (see Exhibit 1 to the Company’s Registration Statement on Form 8-A filed August 24,  1998).                                                                                                           |
|             |       |                                                                                                                                                                                                                              |
| 9.1              |       | Form of General  Voting Agreement (see Exhibit 9.1 to Registration Statement on Form S-1 No.  33-91092).                                                                                                                          |
|             |       |                                                                                                                                                                                                                              |
| 10.1             |       | SITEL  Corporation Stock Option Plan for Replacement of Existing Options (see  Exhibit 10.1 to Registration Statement on Form S-1 No. 33-91092).                                                                                  |
|             |       |                                                                                                                                                                                                                              |
| 10.1(a)          |       | Amendment No. 1  to SITEL Corporation Stock Option Plan for Replacement of Existing Options  (see Exhibit 10.1(a) to the Company’s Annual Report on Form 10-K for the year  ended December 31, 1996).                   |
|             |       |                                                                                                                                                                                                                              |
| 10.2             |       | SITEL  Corporation Stock Option Plan for Replacement of EEBs (see Exhibit 10.2 to  Registration Statement on Form S-1 No. 33-91092).                                                                                              |
|             |       |                                                                                                                                                                                                                              |
| 10.2(a)          |       | Amendment No. 1  to SITEL Corporation Stock Option Plan for Replacement of EEBs (see Exhibit  10.2(a) to the Company’s Annual Report on Form 10-K for the year ended December 31,  1996).                               |
|             |       |                                                                                                                                                                                                                              |
| 10.3             |       | Amended and  Restated SITEL Corporation 1995 Employee Stock Option Plan (see Appendix B to  the Company’s definitive Proxy Statement for Annual Meeting of Stockholders,  filed September 27, 1996).                    |
|             |       |                                                                                                                                                                                                                              |
| 10.3(a)          |       | Amendment No. 1  to Amended and Restated SITEL Corporation 1995 Employee Stock Option Plan  (see Exhibit 10.3(a) to the Company’s Annual Report on Form 10-K for the year  ended December 31, 1996).                    |
|             |       |                                                                                                                                                                                                                              |
| 10.3(b)          |       | Amendment No. 2  to Amended and Restated SITEL Corporation 1995 Employee Stock Option Plan  (see Appendix C to the Company’s definitive Proxy Statement for the Annual  Meeting of Stockholders, filed April 30, 1997). |
|             |       |                                                                                                                                                                                                                              |
| 10.3(c)          |       | Amendment No. 3  to Amended and Restated SITEL Corporation 1995 Employee Stock Option Plan  (see Exhibit 10.3(c) to the Company’s Form 10-Q for the quarter ended March 31,  1998).                                     |
|             |       |                                                                                                                                                                                                                              |
| 10.4             |       | Amended and  Restated SITEL Corporation 1995 Non-Employee Directors Stock Option Plan (see  Appendix B to the Company’s definitive Proxy Statement for the Annual Meeting  of Stockholders, filed April 30, 1997).      |
|             |       |                                                                                                                                                                                                                              |
| 10.4(a)          |       | Amendment No. 1  to Amended and Restated SITEL Corporation 1995 Non-Employee Directors Stock  Option Plan (see Exhibit 10.1 to the Company’s Form 10-Q for the quarter  ended March 31, 1999).                          |
|             |       |                                                                                                                                                                                                                              |
| 10.5             |       | SITEL  Corporation Executive Wealth Accumulation Plan (see Exhibit 10.5 to  Registration Statement on Form S-1 No. 33-91092).                                                                                                     |
|             |       |                                                                                                                                                                                                                              |
| 10.5(a)          |       | Second Amendment  to SITEL Corporation Executive Wealth Accumulation Plan (see Exhibit 10.5(a)  to the Company’s Form 10-Q for the quarter ended March 31, 1998).                                                       |
|             |       |                                                                                                                                                                                                                              |
| 10.5(b)          |       | Third Amendment  to SITEL Corporation Executive Wealth Accumulation Plan (see Exhibit 10.2 to  the Company’s Form 10-Q for the quarter ended June 30, 1999).                                                            |
|             |       |                                                                                                                                                                                                                              |
| 10.5(c)*         |       | Freezing of  SITEL Corporation Executive Wealth Accumulation Plan effective December 31,  2004                                                                                                                               |

 

36

----

 
| **Exhibit  No.** |   |                                                                                                                                                                                                   |
|------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.5(d)*         |   | Termination of  SITEL Corporation Executive Wealth Accumulation Plan effective January 1,  2005                                                                                                   |
|             |   |                                                                                                                                                                                                   |
| 10.6             |   | SITEL  Corporation 1999 Stock Incentive Plan (see Exhibit 4.1 to the Company’s  Registration Statement on Form S-8 No. 333-78241).                                                                |
|             |   |                                                                                                                                                                                                   |
| 10.6(a)          |   | Amendment No. 1  to SITEL Corporation 1999 Stock Incentive Plan (see Exhibit 4.2 to the  Company’s Registration Statement on Form S-8 No. 333-78241).                                             |
|             |   |                                                                                                                                                                                                   |
| 10.6(b)          |   | Amendment No. 2  to SITEL Corporation 1999 Stock Incentive Plan (see Exhibit 10.2 to the  Company’s Form 10-Q for the quarter ended September 30, 2000).                                     |
|             |   |                                                                                                                                                                                                   |
| 10.6(c)          |   | Amendment No. 3  to SITEL Corporation 1999 Stock Incentive Plan (see Appendix A to the Company’s  definitive Proxy Statement for the Annual Meeting of Stockholders, filed March 31,  2003). |
|             |   |                                                                                                                                                                                                   |
| 10.7             |   | Form of Right of  First Refusal (see Exhibit 10.7 to Registration Statement on Form S-1 No.  33-91092).                                                                                                |
|             |   |                                                                                                                                                                                                   |
| 10.8             |   | Form of  Indemnification Agreement with Outside Directors (see Exhibit 10.8 to the  Company’s Form 10-Q for the quarter ended August 31, 1995).                                              |
|             |   |                                                                                                                                                                                                   |
| 10.9             |   | Form of  Indemnification Agreement with Executive Officers (see Exhibit 10.9 to the  Company’s Registration Statement on Form S-8 No. 33-99434).                                                  |
|             |   |                                                                                                                                                                                                   |
| 10.10            |   | Amended and  Restated SITEL Corporation Employee Stock Purchase Plan (see Exhibit 10.12 to  the Company’s Form 10-Q for the quarter ended March 31, 1998).                                   |
|             |   |                                                                                                                                                                                                   |
| 10.11            |   | Loan and  Security Agreement with Fleet Capital Corporation individually as Agent (see  Exhibit 10.11 to the Company’s Form 10-K for the year ended December 31,  2002)                      |
|             |   |                                                                                                                                                                                                   |
| 10.12            |   | Indenture  governing $100,000,000 9 1/4% Senior Subordinated Notes due 2006 (see Exhibit  10.2 to the Company’s Form 8-K filed March 16, 1998).                                              |
|             |   |                                                                                                                                                                                                   |
| 10.12(a)         |   | First  Supplemental Indenture (see Exhibit 4.2 to the Company’s Amendment No. 1 to  Form S-4 filed August 21, 1998).                                                                         |
|             |   |                                                                                                                                                                                                   |
| 10.12(b)         |   | Registration  Rights Agreement (see Exhibit 4.2 to the Company’s Registration Statement on  Form S-4 filed April 24, 1998).                                                                  |
|             |   |                                                                                                                                                                                                   |
| 10.13            |   | 2001 Nonemployee  Director Compensation Plan (see Exhibit 10.20 to the Company’s Form 10-K for  the year ended December 31, 2001)                                                            |
|             |   |                                                                                                                                                                                                   |
| 10.13(a)*        |   | Amendment No. 1  to SITEL Corporation 2001 Nonemployee Director Compensation Plan                                                                                                                      |
|             |   |                                                                                                                                                                                                   |
| 10.13(b)*        |   | Summary of  compensation arrangements for non-employee directors                                                                                                                                       |
|             |   |                                                                                                                                                                                                   |
| 10.13(c)*        |   | Form of director  stock option agreement                                                                                                                                                               |
|             |   |                                                                                                                                                                                                   |
| 10.14            |   | Jorge A. Celaya  Employment Offer Letter. (see Exhibit 10.14 to the Company's Form 10-K for  the year ended December 31, 2003)                                                                    |
|             |   |                                                                                                                                                                                                   |
| 10.15            |   | Robert Scott Moncrieff  Employment Agreement. (see Exhibit 10.15 to the Company's Form 10-K for the  year ended December 31, 2003)                                                                |
|             |   |                                                                                                                                                                                                   |
| 10.16*           |   | Separation  Agreement and Mutual Release with Bill L. Fairfield dated December 14, 2004.                                                                                                               |
|             |   |                                                                                                                                                                                                   |
| 10.17*           |   | Amendment to  Bill L. Fairfield Option Agreement dated effective December 31, 2004.                                                                                                                    |
|             |   |                                                                                                                                                                                                   |
| 10.18*           |   | Summary of Jorge A.  Celaya Compensation Arrangements                                                                                                                                                  |
|             |   |                                                                                                                                                                                                   |
| 10.19*           |   | Summary of James F.  Lynch Compensation Arrangements                                                                                                                                                   |
|             |   |                                                                                                                                                                                                   |
| 10.20*           |   | Summary of Dale W.  Saville Compensation Arrangements                                                                                                                                                  |
|             |   |                                                                                                                                                                                                   |
| 10.21*           |   | Summary of Robert Scott  Moncrieff Compensation Arrangements                                                                                                                                           |
|             |   |                                                                                                                                                                                                   |
| 10.22*           |   | SITEL Corporation 2005  Management Incentive Plan                                                                                                                                                      |
|             |   |                                                                                                                                                                                                   |
| 10.23*           |   | Form of Stock Option  Agreement for October 16, 1998 Amended and Restated Non-Qualified Stock  Option grant to Robert Scott Moncrieff for 30,000 options                                               |
|             |   |                                                                                                                                                                                                   |

 

 

37

----

 
| **Exhibit  No.** |   |                                                                                                                                                                                                                                                                                                                                                                                             |
|------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.24*           |   | Form of Stock Option  Agreement for January 18, 1999 Non-Qualified Stock Option grant to Robert  Scott Moncrieff for 5,000 options                                                                                                                                                                                                                                                               |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.25*           |   | Form of Stock Option  Agreement for the following Non-Qualified Stock Option grants: Robert Scott  Moncrieff on January 3, 2000 for 10,000 options; Dale W. Saville on October  30, 2000 for 100,000 options; Robert Scott Moncrieff on January 11, 2001 for  10,000 options; James F. Lynch on April 3, 2001 for 100,000 options; Robert  Scott Moncrieff on January 2, 2004 for 45,000 options |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.26*           |   | Form of Stock Option  Agreement for the following March 14, 2002 Incentive Stock Option grants:  James F. Lynch for 12,166 options and Dale W. Saville for 30,166 options                                                                                                                                                                                                                        |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.27*           |   | Form of Stock Option  Agreement for the following March 14, 2002 Non-Qualified Stock Option grants:  James F. Lynch for 267,834 options and Dale W. Saville for 38,834 options                                                                                                                                                                                                                   |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.28*           |   | Form of Stock Option  Agreement for the following March 14, 2002 Incentive Stock Option grants:  James F. Lynch for 120,000 options and Dale W. Saville for 30,000 options                                                                                                                                                                                                                       |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.29*           |   | Form of Stock Option  Agreement for October 27, 2003 Incentive Stock Option grant to Jorge A.  Celaya                                                                                                                                                                                                                                                                                            |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.30*           |   | Form of Stock Option Agreement  for October 27, 2003 Non-Qualified Stock Option grant to Jorge A. Celaya                                                                                                                                                                                                                                                                                         |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                             |
| 14               |   | Code of Ethics  for CEO and Senior Financial Officers. (see Exhibit 14 to the Company's Form  10-K for the year ended December 31, 2003)                                                                                                                                                                                                                                                    |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                             |
| 21*              |   | Subsidiaries                                                                                                                                                                                                                                                                                                                                                                                     |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                             |
| 23*              |   | Independent  Auditors’ Consent                                                                                                                                                                                                                                                                                                                                                              |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                             |
| 31.1*            |   | Certification  Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302  of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                               |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                             |
| 31.2*            |   | Certification  Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302  of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                               |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                             |
| 32.1*            |   | Certification  Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906  of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                               |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                             |
| 32.2*            |   | Certification  Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906  of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                               |

 

----

*              Filedherewith.

 

38

----

 

**SITEL CORPORATION AND SUBSIDIARIES**

**TABLE OF CONTENTS**

**FinancialStatements**

 

**Consolidated Financial Statements**

### ** **

| **Report  of Independent Registered Public Accounting Firm**                                                          | ** ** |
|-----------------------------------------------------------------------------------------------------------------------|------------|
|                                                                                                                  |       |
| **Consolidated  Statements of Operations For The Years Ended December 31, 2004, 2003,  and 2002**                | ** ** |
| ** **                                                                                                            | ** ** |
| **Consolidated Balance Sheets  at December 31, 2004 and 2003**                                                   | ** ** |
| ** **                                                                                                            | ** ** |
| **Consolidated  Statements of Stockholders’ Equity For The Years Ended December 31,  2004, 2003, and 2002** | ** ** |
| ** **                                                                                                            | ** ** |
| **Consolidated  Statements of Cash Flows For The Years Ended December 31, 2004, 2003,  and 2002**                | ** ** |
| ** **                                                                                                            | ** ** |
| **Notes to  Consolidated Financial Statements**                                                                       | ** ** |

 

F-1

----

 

**Report of Independent RegisteredPublic Accounting Firm**

 

 

*Tothe Stockholders and Board of Directors*

*ofSITEL Corporation:*

 

We have audited theaccompanying consolidated balance sheets of SITEL Corporation and subsidiaries(the Company) as of December 31, 2004 and 2003, and the relatedconsolidated statements of operations, stockholders’ equity and cash flows foreach of the years in the three-year period ended December 31, 2004. Theseconsolidated financial statements are the responsibility of the Company’smanagement. Our responsibility is to express an opinion on these consolidatedfinancial statements based on our audits.

 

We conducted our auditsin accordance with the standards of the Public Company Accounting Oversight Board(United States). Those standards require that we plan and perform the audit toobtain reasonable assurance about whether the financial statements are free ofmaterial misstatement. An audit includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements. An auditalso includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financialstatement presentation. We believe that our audits provide a reasonable basisfor our opinion.

 

In our opinion, theconsolidated financial statements referred to above present fairly, in allmaterial respects, the financial position of SITEL Corporation and subsidiariesas of December 31, 2004 and 2003, and the results of their operations andtheir cash flows for each of the years in the three-year period ended December 31,2004, in conformity with U.S. generally accepted accounting principles.

 

As discussed inNote 1 to the consolidated financial statements, the Company adopted theprovisions of SFAS No. 142, *Goodwill andOther Intangible Assets*, as of January 1, 2002.

 

We also have audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the effectiveness of the Company’s internal control overfinancial reporting as of December 31, 2004, based on criteria establishedin*Internal Control—Integrated Framework*issuedby the Committee of Sponsoring Organizations of the Treadway Commission, andour report dated March 16, 2005, expressed an unqualified opinion onmanagement’s assessment of, and the effective operation of, internal controlover financial reporting.

 

 
| /s/ KPMG LLP         |   |
|----------------------|--------|
|                 |
| **KPMG LLP**         |
| ** **           |
| Omaha, Nebraska      |
| March 16,  2005 |

 

F-2

----

 

### **SITEL CORPORATION AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

(in thousands, except per share data)

 
| **Years Ended December 31,**                                                         | ** ** | **2004**   | ** ** | **2003**   | ** ** | **2002**   | ** ** |
|-------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| * *                                                                                  | * *   | * *   | * *   | * *   | * *   | * *   | * *   |
| **Revenue**                                                                               |       | $          | 956,443    |       | $          | 846,513    |       | $ | 770,211 |   |
| ** **                                                                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Operating expenses:**                                                                   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Direct labor and telecommunications expenses                                              |       | 574,910    |       | 497,275    |       | 433,456    |       |
| Subcontracted and other services expenses                                                 |       | 50,726     |       | 54,121     |       | 55,027     |       |
| Operating, selling and administrative expenses                                            |       | 312,851    |       | 280,859    |       | 250,974    |       |
| Asset impairment and restructuring expenses                                               |       | 16,993     |       | 3,004      |       | 1,444      |       |
| Total operating expenses                                                                  |       | 955,480    |       | 835,259    |       | 740,901    |       |
|                                                                                      |       |       |       |       |       |       |       |
| **Operating income**                                                                      |       | 963        |       | 11,254     |       | 29,310     |       |
| ** **                                                                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Other income (expense):**                                                               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest expense                                                                          |       | (12,735    | )          | (12,253    | )          | (11,725    | )          |
| Interest income                                                                           |       | 591        |       | 427        |       | 475        |       |
| Equity in earnings of affiliates                                                          |       | 681        |       | 1,417      |       | 3,441      |       |
| Other expense, net                                                                        |       | (654       | )          | (193       | )          | (636       | )          |
| Total other expense, net                                                                  |       | (12,117    | )          | (10,602    | )          | (8,445     | )          |
|                                                                                      |       |       |       |       |       |       |       |
| **Income (loss) before income taxes, minority  interest and change in accounting method** |       | (11,154    | )          | 652        |       | 20,865     |       |
|                                                                                      |       |       |       |       |       |       |       |
| Income tax expense                                                                        |       | 14,679     |       | 4,798      |       | 10,437     |       |
| Minority interest                                                                         |       | 734        |       | 666        |       | 1,812      |       |
| **Income (loss) before change in accounting method**                                      |       | (26,567    | )          | (4,812     | )          | 8,616      |       |
|                                                                                      |       |       |       |       |       |       |       |
| Cumulative effect of a change in accounting for  goodwill                                 |       | —     |       | —     |       | (18,399    | )          |
| **Net loss**                                                                              |       | $          | (26,567    | )          | $          | (4,812     | )          | $ | (9,783 | ) |
|                                                                                      |       |       |       |       |       |       |       |
| **Weighted average common shares outstanding:**                                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Basic                                                                                     |       | 73,684     |       | 73,877     |       | 74,225     |       |
| Diluted                                                                                   |       | 73,684     |       | 73,877     |       | 74,335     |       |
| ** **                                                                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Earnings per share:**                                                                   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Basic:**                                                                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Income (loss) before change in accounting method                                          |       | $          | (0.36      | )          | $          | (0.07      | )          | $ | 0.12 |   |
| Cumulative effect of change in accounting for  goodwill                                   |       | —     |       | —     |       | (0.25      | )          |
| **Net loss**                                                                              |       | $          | (0.36      | )          | $          | (0.07      | )          | $ | (0.13 | ) |
|                                                                                      |       |       |       |       |       |       |       |
| **Diluted:**                                                                              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Income (loss) before change in accounting method                                          |       | $          | (0.36      | )          | $          | (0.07      | )          | $ | 0.12 |   |
| Cumulative effect of change in accounting for  goodwill                                   |       | —     |       | —     |       | (0.25      | )          |
| **Net loss**                                                                              |       | $          | (0.36      | )          | $          | (0.07      | )          | $ | (0.13 | ) |

 

*See Notes to ConsolidatedFinancial Statements.*

 

F-3

----

 

 **SITELCORPORATION AND SUBSIDIARIES**

**CONSOLIDATED BALANCE SHEETS**

(in thousands, except share data) 

 
| **At December 31,**                                                                                                                     | ** ** | **2004** | ** ** | **2003** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                                                                                                         |       |     |       |     |       |
| **Assets**                                                                                                                                   |       |     |       |     |       |
| **Current assets:**                                                                                                                          |       |     |       |     |       |
| Cash and cash equivalents                                                                                                                    |       | $        | 28,906     |     | $          | 29,850 |   |
| Trade accounts receivable (net of allowance for  doubtful accounts of $2,391 and $3,088, respectively)                                       |       | 191,391  |       | 175,542  |       |
| Prepaid expenses and other assets                                                                                                            |       | 15,859   |       | 17,436   |       |
| Deferred income taxes                                                                                                                        |       | 1,313    |       | 3,109    |       |
| Total current assets                                                                                                                         |       | 237,469  |       | 225,937  |       |
|                                                                                                                                         |       |     |       |     |       |
| **Property and equipment, net**                                                                                                              |       | 86,057   |       | 90,233   |       |
|                                                                                                                                         |       |     |       |     |       |
| **Other assets:**                                                                                                                            |       |     |       |     |       |
| Goodwill                                                                                                                                     |       | 48,276   |       | 53,553   |       |
| Investment in affiliates                                                                                                                     |       | 16,466   |       | 18,911   |       |
| Other assets                                                                                                                                 |       | 8,420    |       | 8,139    |       |
| Deferred income taxes                                                                                                                        |       | 843      |       | 9,207    |       |
| **Total assets**                                                                                                                             |       | $        | 397,531    |     | $          | 405,980 |   |
|                                                                                                                                         |       |     |       |     |       |
| **Liabilities and Stockholders’ Equity**                                                                                                |       |     |       |     |       |
| **Current liabilities:**                                                                                                                     |       |     |       |     |       |
| Revolving credit facility and other current debt                                                                                             |       | $        | 18,802     |     | $          | 22,894 |   |
| Current portion of capital lease obligations                                                                                                 |       | 3,202    |       | 3,181    |       |
| Trade accounts payable                                                                                                                       |       | 32,595   |       | 27,374   |       |
| Accrued wages, salaries and bonuses                                                                                                          |       | 43,641   |       | 38,817   |       |
| Accrued operating expenses                                                                                                                   |       | 46,533   |       | 37,347   |       |
| Deferred revenue and other                                                                                                                   |       | 8,816    |       | 6,884    |       |
| Income taxes payable                                                                                                                         |       | 1,107    |       | 628      |       |
| Total current liabilities                                                                                                                    |       | 154,696  |       | 137,125  |       |
| **Long-term debt and other liabilities:**                                                                                                    |       |     |       |     |       |
| Long-term debt, excluding current portion                                                                                                    |       | 90,000   |       | 100,000  |       |
| Capital lease obligations, excluding current portion                                                                                         |       | 8,393    |       | 8,684    |       |
| Other liabilities                                                                                                                            |       | 8,949    |       | 5,073    |       |
| Deferred income taxes                                                                                                                        |       | 205      |       | 2,280    |       |
| Total liabilities                                                                                                                            |       | 262,243  |       | 253,162  |       |
|                                                                                                                                         |       |     |       |     |       |
| **Minority interests**                                                                                                                       |       | 2,629    |       | 1,869    |       |
| **Stockholders’ equity:**                                                                                                               |       |     |       |     |       |
| Common stock, voting, $.001 par value 200,000,000  shares authorized, 74,433,629 and 74,368,135 shares issued and outstanding,  respectively |       | 74       |       | 74       |       |
| Additional paid-in capital                                                                                                                   |       | 168,871  |       | 168,726  |       |
| Accumulated other comprehensive income                                                                                                       |       | 8,342    |       | 329      |       |
| Accumulated deficit                                                                                                                          |       | (43,611  | )          | (17,044  | )          |
| Less treasury stock, at cost, 707,927 and 755,300  common shares, respectively                                                               |       | (1,017   | )          | (1,136   | )          |
|                                                                                                                                         |       |     |       |     |       |
| Total stockholders’ equity                                                                                                              |       | 132,659  |       | 150,949  |       |
| **Total liabilities and stockholders’ equity**                                                                                          |       | $        | 397,531    |     | $          | 405,980 |   |

 

*See Notes to Consolidated Financial Statements.*

 

F-4

----

 

**SITEL CORPORATION AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF STOCKHOLDERS’ EQUITY**

(in thousands, except share data)

 
| **Years Ended December 31, 2004, 2003, and 2002**                                               | ** ** | **Common  Stock** | ** ** | **Additional  Paid-in  Capital** | ** ** | **Accumulated  Other  Comprehensive  Income (Loss)** | ** ** | **Accumulated  Deficit** | ** ** | **Treasury  Stock** | ** ** | **Total  Stockholders’  Equity** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|-------------------|------------|----------------------------------|------------|------------------------------------------------------|------------|--------------------------|------------|---------------------|------------|---------------------------------------|------------|
|                                                                                                 |       |              |       |                             |       |                                                 |       |                     |       |                |       |                                  |       |
| **Balance, December 31, 2001**                                                                  |       | $                 | 74         |                             | $          | 168,731                                              |       | $                        | (26,148    | )                   | $          | (2,369                                | )          | $ | (248 | ) | $ | 140,040 |   |
|                                                                                                 |       |              |       |                             |       |                                                 |       |                     |       |                |       |                                  |       |
| Issuance of 6,000 shares of common stock for options  exercised, and 24,733 shares of treasury stock |       | —            |       | —                           |       | —                                               |       | (41                      | )          | 85                  |       | 44                                    |       |
| Other                                                                                                |       | —            |       | (25                              | )          | —                                               |       | —                   |       | —              |       | (25                                   | )          |
| Comprehensive income (loss):                                                                         |       |              |       |                             |       |                                                 |       |                     |       |                |       |                                  |       |
| Net loss                                                                                             |       | —            |       | —                           |       | —                                               |       | (9,783                   | )          | —              |       | (9,783                                | )          |
| Currency translation adjustment                                                                      |       | —            |       | —                           |       | 8,886                                                |       | —                   |       | —              |       | 8,886                                 |       |
| Total comprehensive loss                                                                             |       | —            |       | —                           |       | —                                               |       | —                   |       | —              |       | (897                                  | )          |
| **Balance, December 31, 2002**                                                                  |       | $                 | 74         |                             | $          | 168,706                                              |       | $                        | (17,262    | )                   | $          | (12,193                               | )          | $ | (163 | ) | $ | 139,162 |   |
|                                                                                                 |       |              |       |                             |       |                                                 |       |                     |       |                |       |                                  |       |
| Purchase of 709,900 shares of treasury stock                                                         |       | —            |       | —                           |       | —                                               |       | —                   |       | (1,094              | )          | (1,094                                | )          |
| Issuance of 4,704 shares of common stock for options  exercised and 71,023 shares of treasury stock  |       | —            |       | 27                               |       | —                                               |       | (39                      | )          | 121                 |       | 109                                   |       |
| Other                                                                                                |       | —            |       | (7                               | )          | —                                               |       | —                   |       | —              |       | (7                                    | )          |
| Comprehensive income (loss):                                                                         |       |              |       |                             |       |                                                 |       |                     |       |                |       |                                  |       |
| Net loss                                                                                             |       | —            |       | —                           |       | —                                               |       | (4,812                   | )          | —              |       | (4,812                                | )          |
| Currency translation adjustment                                                                      |       | —            |       | —                           |       | 17,591                                               |       | —                   |       | —              |       | 17,591                                |       |
| Total comprehensive income                                                                           |       | —            |       | —                           |       | —                                               |       | —                   |       | —              |       | 12,779                                |       |
| **Balance, December 31, 2003**                                                                  |       | $                 | 74         |                             | $          | 168,726                                              |       | $                        | 329        |                | $          | (17,044                               | )          | $ | (1,136 | ) | $ | 150,949 |   |
|                                                                                                 |       |              |       |                             |       |                                                 |       |                     |       |                |       |                                  |       |
| Issuance of 65,494 shares of common stock for  options exercised and 47,373 shares of treasury stock |       | —            |       | 144                              |       | —                                               |       | —                   |       | 119                 |       | 263                                   |       |
| Other                                                                                                |       | —            |       | 1                                |       | —                                               |       | —                   |       | —              |       | 1                                     |       |
| Comprehensive income (loss):                                                                         |       |              |       |                             |       |                                                 |       |                     |       |                |       |                                  |       |
| Net loss                                                                                             |       | —            |       | —                           |       | —                                               |       | (26,567                  | )          | —              |       | (26,567                               | )          |
| Currency translation adjustment                                                                      |       | —            |       | —                           |       | 8,116                                                |       | —                   |       | —              |       | 8,116                                 |       |
| Other                                                                                                |       | —            |       | —                           |       | (103                                                 | )          | —                   |       | —              |       | (103                                  | )          |
| Total comprehensive loss                                                                             |       | —            |       | —                           |       | —                                               |       | —                   |       | —              |       | (18,554                               | )          |
| **Balance, December 31, 2004**                                                                  |       | $                 | 74         |                             | $          | 168,871                                              |       | $                        | 8,342      |                | $          | (43,611                               | )          | $ | (1,017 | ) | $ | 132,659 |   |

 

*See Notesto Consolidated Financial Statements.*

 

F-5

----

 

**SITEL CORPORATION AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

(inthousands)

 
| **Years Ended December 31,**                                               | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|---------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                                                            |       |     |       |     |       |     |       |
| **Cash flows from operating activities:**                                       |       |     |       |     |       |     |       |
| Net loss                                                                        |       | $        | (26,567    | )        | $          | (4,812   | )          | $ | (9,783 | ) |
| Adjustments to reconcile net loss to net cash flows  from operating activities: |       |     |       |     |       |     |       |
| Cumulative effect of change in accounting method                                |       | —   |       | —   |       | 18,399   |       |
| Asset impairment and restructuring provision                                    |       | 16,993   |       | 3,004    |       | 1,444    |       |
| Depreciation and amortization                                                   |       | 36,167   |       | 35,663   |       | 33,664   |       |
| (Gain)/ loss on disposal of assets                                              |       | 286      |       | (58      | )          | 164      |       |
| Provision for deferred income taxes                                             |       | 9,081    |       | 427      |       | 3,475    |       |
| Provision for losses on accounts receivable                                     |       | 400      |       | 1,488    |       | 622      |       |
| Equity in earnings of affiliates                                                |       | (681     | )          | (1,417   | )          | (3,441   | )          |
| Minority interest in net income of consolidated  subsidiaries                   |       | 734      |       | 666      |       | 1,812    |       |
| Impairment losses on equity investments                                         |       | —   |       | 1,480    |       | —   |       |
| Changes in operating assets and liabilities:                                    |       |     |       |     |       |     |       |
| Trade accounts receivable                                                       |       | (9,638   | )          | (32,350  | )          | (5,961   | )          |
| Other assets                                                                    |       | 2,699    |       | 147      |       | (3,923   | )          |
| Trade accounts payable                                                          |       | 4,694    |       | (1,324   | )          | 2,889    |       |
| Other liabilities                                                               |       | 5,316    |       | 6,192    |       | (1,233   | )          |
| Net cash flows from operating activities                                        |       | 39,484   |       | 9,106    |       | 38,128   |       |
|                                                                            |       |     |       |     |       |     |       |
| **Cash flows from investing activities:**                                       |       |     |       |     |       |     |       |
| Purchases of property and equipment                                             |       | (25,003  | )          | (24,808  | )          | (30,427  | )          |
| Dividends received from affiliates                                              |       | 1,747    |       | 1,815    |       | —   |       |
| Proceeds from sales of property and equipment                                   |       | 10       |       | 211      |       | 2,488    |       |
| Other                                                                           |       | (357     | )          | (1,333   | )          | (523     | )          |
| Net cash flows from investing activities                                        |       | (23,603  | )          | (24,115  | )          | (28,462  | )          |
|                                                                            |       |     |       |     |       |     |       |
| **Cash flows from financing activities:**                                       |       |     |       |     |       |     |       |
| Borrowings on revolving credit facility and other  current debt                 |       | 21,947   |       | 21,302   |       | 38,424   |       |
| Repayments of revolving credit facility and other  current debt                 |       | (27,595  | )          | (6,045   | )          | (33,020  | )          |
| Repayment of long-term debt                                                     |       | (10,000  | )          | —   |       | —   |       |
| Repayments of capital lease obligations                                         |       | (3,174   | )          | (2,299   | )          | (700     | )          |
| Treasury stock reissuances (repurchases), net                                   |       | 85       |       | (1,009   | )          | 85       |       |
| Capital distributions to minority interest                                      |       | —   |       | —   |       | (1,501   | )          |
| Other                                                                           |       | 146      |       | —   |       | 18       |       |
| Net cash flows from financing activities                                        |       | (18,591  | )          | 11,949   |       | 3,306    |       |
| Effect of exchange rates on cash                                                |       | 1,766    |       | (1,232   | )          | (986     | )          |
| **Net increase (decrease) in cash**                                             |       | (944     | )          | (4,292   | )          | 11,986   |       |
| **Cash and cash equivalents, beginning of period**                              |       | 29,850   |       | 34,142   |       | 22,156   |       |
| **Cash and cash equivalents, end of period**                                    |       | $        | 28,906     |     | $          | 29,850   |       | $ | 34,142 |   |
|                                                                            |       |     |       |     |       |     |       |
| **Other cash flows information:**                                               |       |     |       |     |       |     |       |
| Interest paid                                                                   |       | $        | 12,022     |     | $          | 11,263   |       | $ | 10,637 |   |
| Income taxes paid                                                               |       | $        | 3,968      |     | $          | 5,673    |       | $ | 6,448 |   |
|                                                                            |       |     |       |     |       |     |       |
| **Non-cash investing and financing activities:**                                |       |     |       |     |       |     |       |
| Capital leases incurred                                                         |       | $        | 1,767      |     | $          | 3,251    |       | $ | 859 |   |

 

*See Notes to ConsolidatedFinancial Statements.*

 

F-6

----

** **

**SITEL CORPORATION AND SUBSIDIARIES**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

(columnaramounts in thousands, except per share amounts and as otherwise indicated)

** **

**Note 1. Description ofOur Business and Significant Accounting Policies and Practices**

 

***Description of Our Business***

 

References in the Notesto Consolidated Financial Statements to “we”, “our”, “SITEL”, and the “Company”are to SITEL Corporation and its subsidiaries, collectively.

 

We are a leading globalprovider of outsourced customer support services. We specialize in the design,implementation, and operation of multi-channel contact centers. We support thecustomer management strategies of large and medium size corporations in NorthAmerica, Europe, Asia Pacific, and Latin America. We provide customeracquisition, customer care, technical support and risk management services onan outsourced basis, as well as operational and information technologyprofessional services for both outsourced and internal contact centers. Weserve clients primarily in the automotive, consumer, financial services, insurance, technology,telecommunications and ISP, and utilities sectors.

 

***Principles of Consolidation***

 

Our ConsolidatedFinancial Statements include the financial statements of SITEL Corporation andits subsidiaries. We use the consolidation method when we can exercise controlover the operations and policies of a company. We use the equity method to report investments where we can exercisesignificant influence, but cannot exercise control, over the investee’soperations and policies, which is generally in situations where we hold a 20%to 50% voting interest. We use the cost method if we hold less than a 20%voting interest in an investment and cannot exercise significant influence overthe investee’s operations and policies. All intercompany transactions andaccounts have been eliminated and net earnings are reduced by the portion of the net earnings ofsubsidiaries applicable to minority interests.

 

As a result of certainrevisions in the governance of a joint venture, we reported our investment incertain Latin America affiliates using the equity method of accounting, ratherthan the consolidation method, effective October 1, 2002. Our consolidatedstatements of operations no longer include the revenue and costs associatedwith the joint venture after October 1, 2002.  Rather, the results are reflected in equityin earnings of affiliates. Had we accounted for the investments under theequity method effective January 1, 2002, revenue for the year ended December 31,2002 would have been lower by $35.8 million.

 

***Capital Stock***

 

Our outstanding capitalstock consists of a single class of Common Stock.  Each share of Common Stock is entitled to onevote upon each matter subject to a stockholders vote and to dividends if andwhen declared by the Board of Directors. Payment of dividends is currently restricted under the covenants of ourSenior Subordinated Notes (see Note 4).

 

***Translation of Foreign Currencies***

 

Our non-U.S. subsidiariesuse as their functional currency the local currency of the countries in whichthey operate. They translate their assets and liabilities into U.S. dollars atthe exchange rates in effect at the balance sheet date. They translate theirrevenue and expenses at the average exchange rates during the period. Weinclude translation gains and losses in accumulated other comprehensive income(loss), a component of stockholders’ equity. Gains and losses related totransactions denominated in a currency other than the functional currency ofthe countries in which we operate and short-term intercompany accounts areincluded in other income (expense) in the consolidated statements ofoperations.

 

***Revenue Recognition***

 

We recognize revenue inaccordance with applicable accounting standards, including Securities andExchange Commission Staff Accounting Bulletin (SAB) No. 104, *Revenue Recognition*.  We recognize revenue at the time services areperformed based on the rate detailed in the client contract, such as hourly,monthly, per call or per employee.  Aportion of our revenue is often subject to performance standards, such as salesper hour, average handle time, occupancy rate and abandonment rate.  Ourperformance against such standards may result in incentives or penalties, whichare recognized as earned or incurred. In certain circumstances, we receivepayment in advance of providing service. Accordingly, amounts billed but notearned under these contracts are excluded from revenue and included in deferredrevenue and other in the consolidated balance sheet. Revenue for servicesperformed under certain collection service agreements are 

 

 

F-7

----

 

recognized as the relatedconsumer debts are collected and are calculated based upon a percentage of cashcollected or other agreed upon contractual parameters.

 

***C**ash Equivalents***

 

For purposes of reportingour cash flows, we define cash equivalents as highly liquid investments thatmature in three months or less.

 

***Trade Accounts Receivable***

 

Trade accounts receivableincludes unbilled revenue for services performed that we expect to bill,generally within thirty days, and collect in the normal course of business.

 

Wereport our trade accounts receivable net of an allowance for doubtful accounts,which represents management’s estimates of the amount of our receivables thatmay not be collectible, net of recoveries of amounts previously written off.These estimates are based on a detailed aging analysis of accounts receivable,historical bad debts, client credit-worthiness, and changes in our clientpayment terms.  The following tablesummarizes our allowance for doubtful accounts:

 
| ** **                                           | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                                 |       |     |       |     |       |     |       |
| Balance, beginning of year                           |       | $        | 3,088      |     | $          | 4,011    |       | $ | 5,208 |   |
| Provision for bad debts                              |       | 400      |       | 1,488    |       | 622      |       |
| Deductions for uncollectible receivables written-off |       | (1,278   | )          | (2,427   | )          | (1,120   | )          |
| Other                                                |       | 181      |       | 16       |       | (699     | )          |
| Balance, end of year                                 |       | $        | 2,391      |     | $          | 3,088    |       | $ | 4,011 |   |

 

Other includes the impact offoreign currency translation and in 2002, also includes a $0.6 millionreduction in allowance for bad debt related to the Latin America joint venturerestructuring that resulted in the deconsolidation of certain Latin Americaaffiliates.

 

***Property and Equipment, net***

 

We record property andequipment at cost, and we calculate depreciation using the straight-line methodover the estimated useful lives of the assets, which generally range from 2 to25 years.

 

We record equipment undercapital leases at the present value of the minimum lease payments. We amortizeleasehold improvements and assets under capital leases on a straight-line basisover the shorter of the lease term or the estimated useful life of the asset.

 

We review long-livedassets for impairment whenever events or changes in business circumstancesindicate that the carrying amount of the assets may not be fully recoverable.Recoverability of an asset “held-for-use” is determined by comparing thecarrying amount of the asset to the undiscounted net cash flows expected to begenerated from the use of the asset. If the carrying amount is greater than theundiscounted net cash flows expected to be generated by the asset, the asset’scarrying amount is reduced to its fair market value. An asset “held-for-sale”is reported at the lower of the carrying amount or fair market value, less costto sell.

 

***Investment in Affiliates***

 

We have made minorityinterest investments for business and strategic purposes through the purchaseof voting common and preferred stock of companies. These investments areincluded in investments in affiliates in the consolidated balance sheets. Weperiodically evaluate whether declines in fair value, if any, of ourinvestments are other-than-temporary. This evaluation consists of a review ofqualitative and quantitative factors. We also consider other factors todetermine whether declines in fair value are other-than-temporary, such as theinvestee’s financial condition, results of operations and operating trends. Wealso consider the implied value from any recent rounds of financing completedby the investee. Based upon an evaluation of the facts and circumstances, wedetermined that an other-than-temporary impairment existed for two of ourinvestments during the year ended December 31, 2003. An impairment chargeof $1.5 million was recorded in other income (expense), net in theconsolidated statement of operations for the year ended December 31, 2003,to reduce our basis in investments to fair value.

 

We have a 50% ownership interest in a joint venturelocated in India.  As of December 31,2004 and 2003, the investment in our India joint venture was approximately $4.1million and $4.3 million, respectively. Subcontracted 

 

F-8

----

 

services provided by our India joint venture for theyears ended December 31, 2004, 2003 and 2002 were $15.0 million, $11.4million, and $14.3 million, respectively and are included in subcontracted andother services expenses in the accompanying consolidated statements ofoperations. The Company had payables to our India joint venture of $3.0 millionand $1.9 million at December 31, 2004 and 2003, respectively, which areincluded in trade accounts payable in the accompanying consolidated balancesheets. We received $1.8 million of dividend distributions from our India jointventure during the year ended December 31, 2003.

 

We also have a 49%ownership interest in a joint venture located in Mexico and a 46% interest in ajoint venture located in Colombia (collectively, Latin Americaaffiliates).  As of December 31,2004 and 2003, the investment in certain Latin America affiliates wasapproximately $12.4 million and $14.5 million, respectively. Of the $12.4million investment in certain Latin America affiliates, approximately $7.7million is equity method goodwill. This equity method goodwill is notamortized.  We would recognize a losswhen there is other than a temporary decline in value of our equity methodinvestments. Subcontracted services provided by our Latin America jointventures for the years ended December 31, 2004, 2003, and 2002 were notmaterial.  We received $1.7 million ofdividend distributions from our Latin America affiliates during the year ended December 31,2004.

 

Our significant equityinvestments include our Latin America and India joint ventures.  The following is summarized financialinformation for our joint ventures as of and for the years ended December 31:

 
| ** **                         | ** ** | **2004**          | ** ** | **2003** | ** ** | **2002** | ** ** |
|------------------------------------|------------|-------------------|------------|----------|------------|----------|------------|
| * *                           | * *   | **(in millions)** | * *   |
| **Statements of Operations Data:** | * *   | * *          | * *   | * * | * *   | * * | * *   |
| Revenue                            |       | $                 | 52.7       |     | $          | 43.8     |       | $ | 60.1 |   |
| Net income                         |       | 1.4               |       | 2.8      |       | 8.0      |       |
| **Balance Sheet Data:**            |       |              |       |     |       |     |       |
| Current assets                     |       | 18.1              |       | 16.6     |       |     |       |
| Non-current assets                 |       | 7.0               |       | 7.7      |       |     |       |
| Current liabilities                |       | 7.2               |       | 4.6      |       |     |       |
| Non-current liabilities            |       | —            |       | 0.4      |       |     |       |
| Shareholders’ equity          |       | 17.8              |       | 19.3     |       |     |       |
|                                    |            |                   |            |          |            |          |            |  |  |  |

 

***Deferred Income Taxes***

 

The Company recognizesdeferred tax assets and liabilities in our consolidated balance sheets based onthe difference between the financial statement and tax basis of assets andliabilities using estimated tax rates in effect for the year in which thedifferences are expected to reverse.  Werecognize the effect of a change in tax rates on deferred tax assets andliabilities in income in the period that the rate change is effective.

 

We establish valuationallowances when necessary to reduce deferred tax assets to the amount that ismore likely than not to be realized. We also accrue for any income taxcontingencies in accordance with Statement of Financial Accounting StandardsNo. 5 (SFAS 5), *Accounting forContingencies*.  We do notaccrue for income taxes for the unremitted earnings of foreign subsidiaries ofapproximately $42.3 million at December 31, 2004, that have been or areintended to be reinvested indefinitely.

 

***Goodwill***

 

We recorded goodwill forpurchase business combinations to the extent the purchase price of eachacquisition exceeded the identifiable assets, net of liabilities, of theacquired company.  We adopted theprovisions of SFAS No. 142, *Goodwill andOther Intangible Assets*, as of January 1, 2002. As a result ofthe adoption of this standard, we recorded a goodwill impairment loss of $18.4million as a cumulative effect in the 2002 financial statements and ceasedamortizing our goodwill.

 

Goodwill is tested atleast on an annual basis for impairment of value. Impairment occurs when thefair value of the asset is less than its carrying amount. If impaired, theasset’s carrying amount is reduced to its fair market value. The company’sannual impairment testing is performed during the fourth quarter.  See Note 11 for discussion of the impairmentrecorded for the year ended December 31, 2004.  No impairment charges resulted from theannual impairment tests for the years ended December 31, 2003 and 2002.

 

F-9

----

 

***Asset Retirement Obligations***

 

We have contractual obligationswith respect to the retirement of certain leasehold improvements at maturity offacility leases and the restoration of facilities back to their original stateat the end of the lease term. Accruals are made based on management’s estimatesof current market restoration costs, inflation rates and discount rates. At theinception of a lease, the present value of the expected cash payment isrecognized as an asset retirement obligation with a corresponding amountrecognized in property assets. The property asset amount is amortized, and theliability is accreted, over the period from lease inception to the time weexpect to vacate the premises resulting in both depreciation and interestcharges in the consolidated statement of operations. Discount rates used arebased on credit-adjusted risk-free interest rates. Based on our current leasecommitments, obligations are required to be settled commencing during the yearended December 31, 2005 and ending during the year ended December 31,2024. Revisions to these obligations may be required if our estimates ofrestoration costs change.  At December 31,2004 and 2003, we had obligations of $2.0 million and $0.5 million,respectively, recorded in other liabilities in the accompanying consolidatedbalance sheets.

 

***Government Grants***

 

In certain state andforeign jurisdictions, we benefit from incentives offered by local governmentsfor creation of jobs.  These grants areintended to promote employment in certain locations and are conditioned on therecipient maintaining certain prescribed employment levels. The terms of suchgovernment grants generally require that such jobs be maintained for a periodof up to five years from the receipt of the grant.

 

Government grants arerecognized when there is reasonable assurance that we will comply with theconditions attaching to it, and that the grant will be received. Governmentgrants relating to categories of operating expenditures are recorded as areduction of the related expense in the period in which the expenditure towhich they relate is recorded. Government grants received relating to capitalexpenditures are recorded as a reduction of the cost of the related propertyand equipment.

 

If we were no longer ableto maintain the required level of employment in the future, we could berequired to return some grant funds that were previously recorded. The effectof the return of these funds would be to reduce our income in future years.

 

***Income (Loss) Per Common Share***

 

We calculate income(loss) per common share by dividing our reported net income (loss) by theweighted average number of common shares and common equivalent sharesoutstanding during each period. Our reported net income (loss) is used in thecomputation of both basic and diluted income (loss) per share.

 

The difference betweenthe number of shares used to calculate basic and diluted earnings per sharerepresents the number of shares assumed to be issued from the exercise ofdilutive stock options under our stock option plans, less shares assumed to bepurchased with proceeds from the exercise of the stock options and the relatedtax benefits. At December 31, 2004, 2003, and 2002, all 6.8 million, 7.8million and 8.8 million options, respectively, were excluded from the dilutednet income per share computation due to the net loss for those years.

 

***Use of Accounting Estimates***

 

The preparation of theconsolidated financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires management to makeestimates and assumptions that affect the reported amount of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe consolidated financial statements and the reported amounts of revenue andexpenses during the reporting period.  Actual results could differ from thoseestimates.

 

***Stock-BasedCompensation***

 

We apply the intrinsic-value-based method ofaccounting prescribed by Accounting Principles Board Opinion No. 25, *Accounting for Stock Issued to Employees* (APB No. 25)*,* and related interpretations to account for ourfixed-plan stock options. Under this method, compensation expense is recordedon the date of grant only if the current market price of the underlying stockexceeded the exercise price. Statement of Financial AccountingStandard No. 123, *Accounting for Stock-BasedCompensation* (SFAS No. 123)*,* established accounting anddisclosure requirements using a fair-value-based method of accounting for stock-basedemployee compensation plans.

 

F-10

----

 

The following tableillustrates the effect on our net loss if the fair-value-based method had beenapplied to all outstanding and unvested awards for the years ended December 31:

 
| ** **                                                                                                               | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                                                                                                     |       |     |       |     |       |     |       |
| Net loss:                                                                                                                |       |     |       |     |       |     |       |
| As reported                                                                                                              |       | $        | (26,567    | )        | $          | (4,812   | )          | $ | (9,783 | ) |
| Less: total stock based employee compensation  expense determined under the fair value method for all awards, net of tax |       | (984     | )          | (1,224   | )          | (2,394   | )          |
| Pro forma net loss                                                                                                       |       | $        | (27,551    | )        | $          | (6,036   | )          | $ | (12,177 | ) |
|                                                                                                                     |       |     |       |     |       |     |       |
| Loss per common share:                                                                                                   |       |     |       |     |       |     |       |
| As reported:                                                                                                             |       |     |       |     |       |     |       |
| Basic                                                                                                                    |       | $        | (0.36      | )        | $          | (0.07    | )          | $ | (0.13 | ) |
| Diluted                                                                                                                  |       | (0.36    | )          | (0.07    | )          | (0.13    | )          |
| Pro forma:                                                                                                               |       |     |       |     |       |     |       |
| Basic                                                                                                                    |       | $        | (0.37      | )        | $          | (0.08    | )          | $ | (0.16 | ) |
| Diluted                                                                                                                  |       | (0.37    | )          | (0.08    | )          | (0.16    | )          |

 

The fair value of optionswas estimated at the date of the grant using the Black-Scholes option-pricingmodel with the following weighted average assumptions:

 
| ** **               | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|--------------------------|------------|----------|------------|----------|------------|----------|------------|
| Volatility factor        |       | 50.3     | %          | 59.6     | %          | 69.2     | %          |
| Risk-free interest rate  |       | 3.60     | %          | 2.99     | %          | 2.00     | %          |
| Dividend yield           |       | 0        | %          | 0        | %          | 0        | %          |
| Expected life (in years) |       | 5        |       | 5        |       | 5        |       |

 

The weighted average fairvalue of options granted in the years ended December 31, 2004, 2003 and2002 were $1.52, $0.78 and $1.61, respectively.

 

***Fair Value of Financial Instruments***

 

We consider the amountspresented for financial instruments in the consolidated balance sheets, exceptfor the Senior Subordinated Notes due 2006, to be reasonable estimates of fairvalue based on maturity dates or other characteristics. The estimated fairvalue of the Senior Subordinated Notes was approximately $90.7 million and$98.0 million at December 31, 2004 and 2003, respectively.  In December 2004, we redeemed $10million of our 9.25% senior subordinated notes. The Company has determined the estimated fair value of the notes usingavailable market information.

 

***Comprehensive Income (Loss)***

 

Comprehensiveincome (loss) is presented in our consolidated statements of stockholders’equity. The difference between our reported net income (loss) and comprehensiveincome (loss) for each period presented is primarily the change in the foreigncurrency translation adjustment. Accumulated other comprehensive income (loss)included in our consolidated balance sheets at December 31, 2004 and 2003primarily represents the accumulated foreign currency translation adjustment.We deem our unremitted earnings from foreign subsidiaries to be permanent innature and do not provide for taxes on currency translation adjustments arisingfrom converting the investment in a foreign currency to U.S. dollars.

 

# ***Recently Issued AccountingStandards***

 

In December 2004,the Financial Accounting Standards Board (FASB) issued SFAS No. 123 (R), *Share-Based Payment*, (SFAS 123R). Thisstandard will require the cost of employee compensation paid with equity instrumentsto be measured based on grant-date fair values with the cost recorded ascompensation expense over the period during which the employee is required toperform service in exchange for the award (generally over the vesting period ofthe award). SFAS 123R is effective July 1, 2005. The proforma disclosurespreviously permitted under SFAS 123 no longer will be 

 

F-11

----

 

an alternative tofinancial statement recognition. See “Stock-Based Compensation” above for thepro forma net income and net income per share amounts, for the three yearsended December 31, 2004, as if we had used a fair-value-based methodsimilar to the methods required under SFAS 123R to measure compensationexpense for employee stock incentive awards. Although we have not yetdetermined whether the adoption of SFAS 123R will result in amounts thatare similar to the current pro forma disclosures under SFAS 123, we areevaluating the requirements under SFAS 123R and expect the adoption to havea significant impact on our consolidated statements of operations and netincome (loss) per share.

 

In October 2004, TheAmerican Jobs Creation Act of 2004 (AJCA) was signed into law. The Act createsa temporary incentive for U.S. multinationals to repatriate accumulated incomeearned outside the U.S. In December 2004, the FASB issued FSP 109-2, *Accounting and Disclosure Guidance for the ForeignEarnings Repatriation Provision within the American Jobs Creation Act of2004. *FSP 109-2 provides additional time to companies beyondthe financial reporting period of enactment to evaluate the effects of the AJCAon their plans for repatriation of foreign earnings for purposes of applyingSFAS 109, *Accounting for Income Taxes*.The Company is currently evaluating the repatriation provisions of AJCA, whichif implemented would affect our tax provision and deferred tax assets andliabilities. Due to the complexity and uncertainty of applying the provisionsof the Act, the income tax effects of such repatriation cannot be reasonablyestimated at this time.

 

In January 2003, theFASB released Interpretation No. 46, *Consolidationof Variable Interest Entities, an Interpretation of ARB No. 51*,(FIN 46), which required that all primary beneficiaries of Variable Interest Entities(VIE) consolidate that entity. FIN 46 was effective immediately for VIE’screated after January 31, 2003 and to VIE’s in which an enterpriseobtained an interest after that date. It applied in the first fiscal year orinterim period beginning after June 15, 2003 to VIE’s in which anenterprise held a variable interest it acquired before February 1, 2003.In December 2003, the FASB published a revision to FIN 46 (FIN 46R) toclarify some of the provisions of the interpretation and to defer the effectivedate of implementation for certain entities. The remaining provisions of FIN46R were effective January 1, 2004. The adoption of FIN 46R had no impact on our consolidated financialstatements.

 

***Reclassifications***

 

We have reclassifiedcertain prior-period amounts for comparative purposes.  These reclassifications did not affectconsolidated net loss for the periods presented.

** **

**Note 2. Property andEquipment**

** **

Property and equipmentconsists of the following at December 31:

 
| ** **                      | ** ** | **2004** | ** ** | **2003** | ** ** |
|---------------------------------|------------|----------|------------|----------|------------|
|                            |       |     |       |     |       |
| Computer equipment and software |       | $        | 119,981    |     | $          | 142,229 |   |
| Furniture, equipment and other  |       | 69,442   |       | 81,084   |       |
| Leasehold improvements          |       | 47,517   |       | 46,422   |       |
| Buildings                       |       | 15,530   |       | 14,523   |       |
| Other                           |       | 2,945    |       | 1,566    |       |
|                            |       | 255,415  |       | 285,824  |       |
| Accumulated depreciation        |       | (169,358 | )          | (195,591 | )          |
| Property and equipment, net     |       | $        | 86,057     |     | $          | 90,233 |   |

 

F-12

----

 

**Included in the property and equipment balance isthe following property and equipment obtained through capitalized leases as of December 31:**

** **
| ** **                      | ** ** | **2004**   | ** ** | **2003**   | ** ** |
|---------------------------------|------------|------------|------------|------------|------------|
| ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Computer equipment and software |       | $          | 3,436      |       | $          | 2,339 |   |
| Furniture, equipment and other  |       | 8,266      |       | 7,449      |       |
| Buildings                       |       | 10,335     |       | 9,618      |       |
| Other                           |       | 391        |       | 136        |       |
|                            |       | 22,428     |       | 19,542     |       |
| Accumulated depreciation        |       | (11,885    | )          | (9,245     | )          |
|                            |       | $          | 10,543     |       | $          | 10,297 |   |

** **

** **

**Note 3. Goodwill**

 

The following representsa summary of changes in our goodwill for the years ended December 31:

 
| ** **        | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|-------------------|------------|----------|------------|----------|------------|----------|------------|
|              |       |     |       |     |       |     |       |
| Beginning of Year |       | $        | 53,553     |     | $          | 49,724   |       | $ | 73,216 |   |
| Additions         |       | 732      |       | —   |       | —   |       |
| Impairment charge |       | (7,668   | )          | —   |       | (18,399  | )          |
| Other             |       | 1,659    |       | 3,829    |       | (5,093   | )          |
| End of Year       |       | $        | 48,276     |     | $          | 53,553   |       | $ | 49,724 |   |

 

During the second quarterof 2004, we acquired certain net assets of an existing call center operation inMorocco. As a result of this acquisition, we recorded goodwill of approximately$0.7 million. The impact of the acquisition was not material to ourconsolidated results of operations.

 

See Note 11 fordiscussion of the impairment recorded for the year ended December 31,2004.

 

Other includes the impactof foreign currency translation and, in 2002, also includes the impact ofchanging our accounting for our joint venture involving certain Latin Americaaffiliates.

** **

**Note 4. Long-Term Debt**

 

***9.25% Senior Subordinated Notes***

 

In March 1998, we completedthe private placement of $100 million of 9.25% Senior Subordinated Notes due March 2006(the Notes). The proceeds from the offering were used to repay other debtoutstanding at that time.

 

The Notes, which includeinterest payable semiannually, are our general unsecured obligations and aresubordinated in right of payment to all our existing and future senior debt.The Notes are guaranteed by substantially all of our wholly owned domesticsubsidiaries and contain covenants that limit our ability and the ability ofthese subsidiaries to, among other things: incur additional indebtedness, paydividends or make certain other restricted payments, consummate certain assetsales, enter into certain transactions with affiliates, incur liens, merge orconsolidate with another company, and sell or otherwise dispose of all orsubstantially all of our assets.  We werein compliance with all covenants under the Notes for all periods presented inthe consolidated financial statements.

 

The Notes are redeemableat a redemption price of 101.542% plus accrued and unpaid interest, if any, tothe date of redemption through March 15, 2005. After March 15, 2005,the Notes are redeemable at a redemption price of 100%, plus accrued interestthrough the date of repurchase. If we undergo a change in control, as defined,we may be required to repurchase the Notes at a price equal to 101% of theprincipal amount thereof, plus accrued interest through the date of repurchase.

 

F-13

----

 

In December 2004, weredeemed $10 million of our 9.25% Senior Subordinated Notes. The Notes wereredeemed at a redemption price of 101.542% plus accrued and unpaid interestthrough the date of redemption. As a result of the redemption, we have recordeda charge of $0.2 million for the call premium and write-off of previously capitalized debt issuance costswhich is included in interest expense in the consolidated statements ofoperations. Repayment of the $10 million is the initial phase of a planto refinance the entire $100 million of the Notes.

 

As of December 31,2004 and 2003, the Company had $90 million and $100 million of the Notesoutstanding, respectively, which is included in long-term debt in theconsolidated balance sheet.  At December 31,2004, all of our long-term debt was scheduled to mature in 2006.

 

***Revolving Credit Facility***

 

Effective December 27,2002, we closed a three-year $50 million revolving credit facility.  The credit facility is secured by accountsreceivable in the United States, Canada and the United Kingdom.  We intend to utilize the facility, as needed,for ongoing working capital requirements and general corporate purposes.

 

At December 31, 2004and 2003, we had $40.8 million and $41.0 million of available borrowings underthe credit facility, respectively, and we were in compliance with all financialcovenants of the facility. The weighted-average interest rate for this facilitywas 7.0% and 4.8% at December 31, 2004 and 2003, respectively.

 

***Other Current Debt***

* *

Certain of our foreign subsidiaries entered intoagreements with various financial institutions, under which we collateralizedcertain receivables for borrowings. The agreements provide for borrowings of upto $13.3 million, depending upon the level of eligible receivables. As of December 31,2004 and 2003, $5.3 million and $11.1 million, respectively was outstanding andincluded in revolver and other current debt in the consolidated balance sheets.The weighted average interest rate as of December 31, 2004 and 2003 wasapproximately 3.3% and 3.6%, respectively.

 

The remainder of othercurrent debt consists primarily of overdraft coverage and revolving creditlines by certain of our foreign subsidiaries that are payable in thesubsidiaries’ local currency. These lines primarily support short-termborrowing needs of our foreign subsidiaries. Interest rates and other terms ofborrowing under these lines of credit vary from country to country, dependingon local market conditions.  The Company’sforeign subsidiaries have approximately $6.9 million of available unusedoverdraft coverage and revolving credit lines to provide additional liquidityas of December 31, 2004.

 

**Note 5.Income Taxes**

 

***Components of Pretax Income (Loss)***

 

For financial reportingpurposes, income (loss) before income taxes, minority interest and change inaccounting method includes the following components for the years ended December 31:

 
| ** **    | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|---------------|------------|----------|------------|----------|------------|----------|------------|
|          |       |     |       |     |       |     |       |
| United States |       | $        | 9,612      |     | $          | (9,907   | )          | $ | 10,900 |   |
| Foreign       |       | (20,766  | )          | 10,559   |       | 9,965    |       |
| Total         |       | $        | (11,154    | )        | $          | 652      |       | $ | 20,865 |   |

 

F-14

----

 

***Provision for Income Tax Expense***

 

The components of theprovision for income tax expense were comprised of the following for the yearsended December 31:

 
| ** **                       | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|----------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                             |       |     |       |     |       |     |       |
| Current:                         |       |     |       |     |       |     |       |
| Federal                          |       | $        | —     |     | $          | —   |       | $ | — |   |
| Foreign                          |       | 5,391    |       | 3,941    |       | 6,597    |       |
| State                            |       | 207      |       | 430      |       | 365      |       |
|                             |       | 5,598    |       | 4,371    |       | 6,962    |       |
|                             |       |     |       |     |       |     |       |
| Deferred:                        |       |     |       |     |       |     |       |
| Federal                          |       | 10,929   |       | —   |       | 1,175    |       |
| Foreign                          |       | (1,848   | )          | 427      |       | 2,205    |       |
| State                            |       | —   |       | —   |       | 95       |       |
|                             |       | 9,081    |       | 427      |       | 3,475    |       |
|                             |       |     |       |     |       |     |       |
| Provision for income tax expense |       | $        | 14,679     |     | $          | 4,798    |       | $ | 10,437 |   |

 

When applicable, certainof the income tax benefits related to the exercise of stock options reducetaxes currently payable and are credited to additional paid-in capital, aspresented in our consolidated statements of stockholders’ equity.

 

***Deferred Tax Assets and Liabilities***

 

The following table setsforth the tax effects of temporary differences that give rise to significantportions of the deferred tax assets and deferred tax liabilities that arereported in our consolidated balance sheets at December 31:

 
| ** **                                                            | ** ** | **2004** | ** ** | **2003** | ** ** |
|-----------------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                                  |       |     |       |     |       |
| **Deferred tax assets:**                                              |       |     |       |     |       |
| Accrued compensation and other liabilities                            |       | $        | 8,149      |     | $          | 7,555 |   |
| Goodwill                                                              |       | 54,221   |       | 62,586   |       |
| Net operating loss and other credit carryforwards                     |       | 34,594   |       | 29,974   |       |
| Net operating loss carryforwards related to  international operations |       | 24,843   |       | 16,088   |       |
| Depreciation timing differences                                       |       | 12,534   |       | 9,966    |       |
| Total deferred tax assets                                             |       | 134,341  |       | 126,169  |       |
| Valuation allowance                                                   |       | (131,173 | )          | (113,840 | )          |
| Net deferred tax assets                                               |       | 3,168    |       | 12,329   |       |
|                                                                  |       |     |       |     |       |
| **Deferred tax liabilities:**                                         |       |     |       |     |       |
| Leased assets and depreciation                                        |       | 203      |       | 510      |       |
| Other                                                                 |       | 1,014    |       | 1,783    |       |
| Total deferred tax liabilities                                        |       | 1,217    |       | 2,293    |       |
|                                                                  |       |     |       |     |       |
| **Net deferred tax assets**                                           |       | $        | 1,951      |     | $          | 10,036 |   |

 

We revised certain 2003deferred tax assets and liabilties and related valuation allowances.  There was no impact on net deferred taxassets.

 

Based upon our currentand historical earnings, management believes that it is more likely than notthat we will generate sufficient taxable income to fully realize the benefitsof our recorded net deferred tax assets as of December 31, 2004.

 

F-15

----

 

In assessing the value ofthe deferred tax assets, management considers whether it is more likely thannot that all of the deferred tax assets will be realized. The valuationallowance was calculated in accordance with the provisions of SFAS No. 109, *Accounting for Income Taxes* (SFAS 109),which requires an assessment of both negative and positive evidence whenmeasuring the need for a valuation allowance. In accordance with SFAS 109,evidence such as operating results during recent periods is given more weightthan our expectations of future profitability, which are inherently uncertain.

 

During the fourth quarterof 2004, we determined that it is more likely than not that we will not realizethe full benefit of deferred tax assets in certain jurisdictions. Consequently,we recorded an increase to the existing valuation allowance resulting innon-cash tax expense of approximately $10.9 million.  This increase was partially offset by thereversal of $0.8 million of valuation allowance associated with deferred taxassets in certain of our foreign jurisdictions reflecting foreign net operatinglosses and other credit carryforwards that are expected to be utilized.

 

In the future, we will continue to periodically assess therecoverability of the remaining deferred income tax assets, which isprincipally dependent upon our ability to achieve taxable income in certainforeign jurisdictions. In addition, the deferred tax asset, and itspotential realizability, will also be evaluated to determine if a portion ofthe valuation allowance should be reversed. Any reversal of this valuationallowance in the future will result in a reduction of our effective tax rate.

 

***Net Operating Loss and Alternative Minimum Tax CreditCarryforwards***

 

At December 31,2004, we had approximately:

 

•             $110.2 million in U.S. Federal netoperating loss carryforwards, which expire between 2020 and 2024,

•             $78.8 million in foreign net operatingloss carryforwards, of which $18.8 million expire between 2005 and 2016 and$60.0 million can be carried forward indefinitely,

•             $0.5 million of U.S. Federal generalbusiness credit carryforwards, which expire between 2008 and 2012, and

•             $2.2 million of U.S. Federal alternativeminimum tax credit carryforwards, which can be carried forward indefinitely.

 

***Reconciliation of Reported Income Tax Expense (Benefit) toExpected Income Tax Expense (Benefit)***

 

The following table showsthe reconciliation between income tax expense reported in our consolidatedstatements of operations and the income tax expense (benefit) that would haveresulted from applying the U.S. Federal income tax rate of 35% to pretax income(loss) for the years ended December 31:

 
| ** **                                    | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|-----------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                          |       |     |       |     |       |     |       |
| Expected Federal income tax expense (benefit) |       | $        | (3,903     | )        | $          | 73       |       | $ | 7,303 |   |
| State taxes, net of Federal effect            |       | 213      |       | 280      |       | 299      |       |
| Impact of foreign operations                  |       | 1,337    |       | 108      |       | (1,812   | )          |
| Impact of goodwill impairment                 |       | 2,684    |       | —   |       | —   |       |
| Valuation allowance                           |       | 13,932   |       | 4,217    |       | 4,525    |       |
| Other                                         |       | 416      |       | 120      |       | 122      |       |
| Total                                         |       | $        | 14,679     |     | $          | 4,798    |       | $ | 10,437 |   |

 

F-16

----

 

**Note 6. LeaseObligations**

 

***Capital Leases***

 

We are obligated undervarious capital leases for property and certain equipment that expire atvarious dates through 2015.  At December 31,2004, our future minimum payments under capital leases were as follows:

 
| **Year**                     | ** ** | **Minimum  Lease Payments** | ** ** |
|------------------------------|------------|-----------------------------|------------|
| 2005                         |       | $                           | 3,392      |   |
| 2006                         |       | 2,778                       |       |
| 2007                         |       | 1,850                       |       |
| 2008                         |       | 1,099                       |       |
| 2009                         |       | 852                         |       |
| Thereafter                   |       | 4,544                       |       |
|                         |       | 14,515                      |       |
| Amount representing interest |       | (2,920                      | )          |
| Net                          |       | $                           | 11,595     |   |

 

***Operating Leases***

 

We also lease propertyand certain equipment under non-cancelable operating lease arrangements, whichexpire at various dates through 2024. Certain leases of real property provide options to extend the leaseterms.  We recognize rent holidays andrent escalations on a straight-line basis over the lease term; andlandlord/tenant incentives are recorded as deferred rent and amortized over thelife of the related lease.  Rent expensewas approximately $34.0 million, $29.0 million, and $20.0 million for the yearsended December 31, 2004, 2003 and 2002, respectively.*** ***At December 31, 2004, our future minimum paymentsunder operating leases, net of sublease proceeds, were as follows:

 
| **Year**   | ** ** | **Minimum  Lease Payments** | ** ** | **Sublease  Proceeds** | ** ** | **Net Lease  Commitments** | ** ** |
|------------|------------|-----------------------------|------------|------------------------|------------|----------------------------|------------|
| 2005       |       | $                           | 30,874     |                   | $          | (847                       | )          | $ | 30,027 |   |
| 2006       |       | 24,766                      |       | (239                   | )          | 24,527                     |       |
| 2007       |       | 19,292                      |       | (120                   | )          | 19,172                     |       |
| 2008       |       | 14,177                      |       | —                 |       | 14,177                     |       |
| 2009       |       | 10,379                      |       | —                 |       | 10,379                     |       |
| Thereafter |       | 32,981                      |       | —                 |       | 32,981                     |       |
| Total      |       | $                           | 132,469    |                   | $          | (1,206                     | )          | $ | 131,263 |   |

 

 

**Note 7. Stock-BasedCompensation**

 

***Stock Options***

 

The 1999 Stock IncentivePlan (1999 Plan) provides for the granting of various types of incentive awards(including incentive stock options, nonqualified options, stock appreciationrights, restricted shares, and performance shares or units) for the issuance ofup to an aggregate of 10,500,000 shares of common stock to our employees,consultants and non-employee directors.

 

Vesting terms vary witheach grant, and option terms may not exceed ten years. Option prices, set bythe Compensation Committee of the Board of Directors, may not be less than thefair market value at date of grant for incentive stock options or less than parvalue for nonqualified stock options. At December 31, 2004, there wereapproximately 5.7 million shares available for issuance pursuant to futuregrants under the 1999 Plan.

 

Prior to the adoption ofthe 1999 Plan, we granted options under several different plans. As of December 31,2004, options granted under these plans aggregating 2.3 million remainedoutstanding. The last of these options will expire on February 1, 2009. Wegranted these options at prices ranging from $4.25 to $19.50. We will not grantadditional options under these plans.

 

F-17

----

 

 

The following table setsforth shares subject to options:

 
| ** **                      | ** ** | **Number  of Options** | ** ** | **Weighted-Average  Exercise  Price per Share** | ** ** |
|---------------------------------|------------|------------------------|------------|-------------------------------------------------|------------|
|                            |       |                   |       |                                            |       |
| Balance, January 1, 2002   |       | 7,650,885              |       | $                                               | 4.17       |   |
| Granted                         |       | 2,628,932              |       | 2.76                                            |       |
| Exercised                       |       | (6,000                 | )          | 2.66                                            |       |
| Canceled                        |       | (1,468,536             | )          | 3.57                                            |       |
| Balance, December 31, 2002 |       | 8,805,281              |       | 3.83                                            |       |
| Granted                         |       | 809,563                |       | 1.48                                            |       |
| Exercised                       |       | (4,704                 | )          | 2.41                                            |       |
| Canceled                        |       | (1,859,750             | )          | 3.54                                            |       |
| Balance, December 31, 2003 |       | 7,750,390              |       | 3.67                                            |       |
| Granted                         |       | 332,924                |       | 3.21                                            |       |
| Exercised                       |       | (65,494                | )          | 2.22                                            |       |
| Canceled                        |       | (1,209,084             | )          | 3.52                                            |       |
| Balance, December 31, 2004 |       | 6,808,736              |       | $                                               | 3.68       |   |

 

The options exercisable at the end of each period were:

 
| ** **             | ** ** | **Number** | ** ** | **Weighted-Average  Exercise  of Options  Price per Share** | ** ** |
|------------------------|------------|------------|------------|-------------------------------------------------------------|------------|
|                   |       |       |       |                                                        |       |
| December 31, 2002 |       | 2,611,204  |       | $                                                           | 4.77       |   |
| December 31, 2003 |       | 3,175,457  |       | $                                                           | 4.61       |   |
| December 31, 2004 |       | 3,716,345  |       | $                                                           | 4.28       |   |

 

The following tablesummarizes stock options outstanding at December 31, 2004:

 
| **Range of  Exercise Prices** | ** ** | **Number  Outstanding** | ** ** | **Weighted-Average  Remaining  Life** | ** ** | **Weighted-Average  Exercise  Price** | ** ** |
|-------------------------------|------------|-------------------------|------------|---------------------------------------|------------|---------------------------------------|------------|
| ** **                    | ** ** | ** **              | ** ** | ** **                            | ** ** | ** **                            | ** ** |
| $1.24 to $1.75                |       | 777,584                 |       | 8.2                                   |       | $                                     | 1.55       |   |
| $1.76 to $4.00                |       | 4,459,173               |       | 5.4                                   |       | $                                     | 3.06       |   |
| $4.01 to $6.33                |       | 839,344                 |       | 4.3                                   |       | $                                     | 4.83       |   |
| $6.34 to $7.22                |       | 471,425                 |       | 4.8                                   |       | $                                     | 6.69       |   |
| $7.23 to $12.66               |       | 201,210                 |       | 3.1                                   |       | $                                     | 9.77       |   |
| $12.67 to $20.00              |       | 60,000                  |       | 2.2                                   |       | $                                     | 17.35      |   |

 

 

F-18

----

 

 

 

The following tablesummarizes stock options exercisable at December 31, 2004:

 
| **Range of  Exercise Prices** | ** ** | **Number  Exercisable** | ** ** | **Weighted-Average  Exercise  Price** | ** ** |
|-------------------------------|------------|-------------------------|------------|---------------------------------------|------------|
| ** **                    | ** ** | ** **              | ** ** | ** **                            | ** ** |
| $1.24 to $1.75                |       | 300,832                 |       | $                                     | 1.57       |   |
| $1.76 to $4.00                |       | 2,004,732               |       | $                                     | 3.07       |   |
| $4.01 to $6.33                |       | 760,039                 |       | $                                     | 4.83       |   |
| $6.34 to $7.22                |       | 390,742                 |       | $                                     | 6.70       |   |
| $7.23 to $12.66               |       | 200,000                 |       | $                                     | 9.75       |   |
| $12.67 to $20.00              |       | 60,000                  |       | $                                     | 17.35      |   |

 

***Employee Stock Purchase Plan (ESPP)***

 

During 1998, weimplemented an ESPP that enables eligible employees to purchase our stock at85% of the current market value on a quarterly basis. We have not recognizedany compensation expense in connection with this plan. Total purchases andshares purchased under the ESPP were $0.1 million and 44,354 shares for 2004,$0.1 million and 93,858 shares for 2003, and $0.2 million and 77,052 shares for2002.

 

**Note 8.Benefit Plans**

 

We sponsor a 401(k) plan,which covers substantially all domestic employees who are 18 years of age with6 months or more of service. Participants may elect to contribute 1% to 20% ofcompensation. We may elect to make a year-end contribution to the 401(k) plan.We did not contribute to the plan in 2004, 2003, or 2002.

 

We also makecontributions to certain executive and other employee personal retirementprograms, primarily in Europe. We contributed $1.4 million, $1.7 million, and$1.0 million for the years ended December 31, 2004, 2003 and 2002,respectively.

 

We also sponsor adeferred compensation plan for certain executive employees who elect tocontribute to the plan. We may voluntarily match all or a portion of theparticipants’ contributions. Participants are 100% vested in theircontributions and our contributions vest over a 15-year period. We did notcontribute to the plan in 2004, 2003, or 2002.

 

On December 10,2004, we amended the deferred compensation plan in order to address certainrequirements under new U.S. legislation concerning deferred compensationarrangements.  The Executive WealthAccumulation Plan, which permits certain U.S. executive employees to defer partof their salary and part or all of their incentive compensation, was frozen andno further contributions to the plan are permitted after December 31, 2004.  We subsequently terminated the plan effectiveJanuary 1, 2005, primarily because of the new U.S. legislation affectingthe plan and current limited participation in the plan.  Participants’deferred compensation account balances were paid out March 4, 2005.

 

**Note 9.Segment Data**

 

***Business Segments***

 

Our operations areconducted in one reportable segment that includes operating segments that allprovide customer management services via electronic media including telephone,fax, and the Internet, and, to a lesser extent, traditional mail.

 

Our services are providedthrough a number of operating subsidiaries in a variety of locations around theworld. However, the nature of services, the nature of the processes involved inproviding those services, the types of clients, and the expected long-termoperating income from these subsidiaries are similar.

 

F-19

----

 

Revenue is primarilyattributed to countries based upon the location where the services areperformed. The following table summarizes our revenue by geographic area forthe years ended December 31:

 
| ** **              | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|-------------------------|------------|----------|------------|----------|------------|----------|------------|
|                    |       |     |       |     |       |     |       |
| Revenue:                |       |     |       |     |       |     |       |
| United States           |       | $        | 437,399    |     | $          | 407,785  |       | $ | 424,746 |   |
| Spain                   |       | 114,511  |       | 84,409   |       | 43,298   |       |
| United Kingdom          |       | 76,020   |       | 77,471   |       | 74,728   |       |
| Other foreign countries |       | 328,513  |       | 276,848  |       | 227,439  |       |
| Total revenue           |       | $        | 956,443    |     | $          | 846,513  |       | $ | 770,211 |   |

 

The following tablesummarizes our long-lived assets by geographic area as of December 31:

 
| ** **              | ** ** | **2004**   | ** ** | **2003**   | ** ** |
|-------------------------|------------|------------|------------|------------|------------|
| ** **              | ** ** | ** ** | ** ** | ** ** | ** ** |
| Long-lived assets:*     |       |       |       |       |       |
| United States           |       | $          | 57,793     |       | $          | 61,673 |   |
| Spain                   |       | 18,186     |       | 17,991     |       |
| United Kingdom          |       | 13,178     |       | 24,451     |       |
| Other foreign countries |       | 70,062     |       | 66,721     |       |
| Total long-lived assets |       | $          | 159,219    |       | $          | 170,836 |   |

 

----

*Amounts exclude long-term deferred tax assets

 

***Major Clients***

 

The combined totalrevenue of multiple independently managed business units of General MotorsCorporation with operations primarily in the United States was 14.9%, 21.2% and23.5% of our revenue for the years ended December 31, 2004, 2003 and 2002,respectively.  Hewlett-Packard Companybusiness units were responsible for 11.3% of our revenue for the year ended December 31,2004.  We did not have any other clientsunder common control that generated more than 10% of our revenue for the yearspresented.

 

**Note 10.Contingencies**

 

From time to time, during the normal course ofbusiness, we may make certain indemnities, commitments and guarantees underwhich we may be required to make payments in relation to certain transactions.These include for example: (i) indemnities to clients pertaining to claimsbased on our negligence or willful misconduct and (ii) indemnities involvingthe accuracy of representations and warranties in certain contracts.

 

From time to time, we are involved in litigationincidental to our business. We cannot predict the ultimate outcome of suchlitigation with certainty, but management believes, after consultation withcounsel, except for the items discussed below for the reasons mentionedtherein, that the resolution of such matters will not have a material adverseeffect on our consolidated financial position or results of operations.

 

*BankruptcyOP Computers SPA vs. SITEL Kingston Limited* (now known as Mitre Telesales Limited) wasfiled in April 2004 in the Court of Ivrea in Milan, Italy.  The receivers assert that Mitre, as a formersupplier to Olivetti, is required under Italian bankruptcy law to return€5,349,025 (approximately $6.9 million) in payments Olivetti had allegedly paidMitre during a one-year “clawback” period, which allegedly runs from March 9,1998 until March 9, 1999, the alleged date Olivetti filed forreceivership.  Mitre filed its Defencewith the court in November 2004. The Defence outlined the facts and reasons why Mitre did not and shouldnot reasonably have known of Olivetti’s insolvent state during the time thatMitre was performing services for Olivetti. The first substantive hearing is scheduled for May 2005, following thefiling of the receivers’ brief due in March and Mitre’s brief due inApril.  The Company and its subsidiaryMitre Telesales Limited are currently unable to predict the outcome orreasonably estimate the possible loss, if any, or range of losses associatedwith this claim.

 

F-20

----

 

Two of our clients have received letters from time totime containing an offer to license and suggesting that the clients might beinfringing certain patents related to computerized telephonic voice responsesystems without the license. The clients have indicated that if anyinfringement occurred the clients would seek contractual indemnity from us. Insuch an event, we would expect to seek contractual indemnity from certain ofour vendors. Any such contractual indemnity we might obtain may not besufficient to cover all of the costs of investigating and resolving such matter.We might also seek a license under the patents. Any such license may not beavailable under commercially reasonable terms. Any license costs would increasethe cost of doing business in the future and may or may not be fully reflectedin our pricing. To our knowledge, no litigation has been initiated against ourclients or us concerning this matter. At this stage, due to the inherentuncertainties, we are unable to predict whether this matter may have a materialadverse effect on our business or on our financial condition or results ofoperation.

 

During the year ended December 31, 2004, werecorded a benefit from the refund of payroll tax overpayments paid in a prioryear. We recorded the payroll tax refund in the accompanying consolidatedstatement of operations as a $1.3 million reduction of direct labor andtelecommunications expenses and a $0.4 million reduction of operating, sellingand administrative expenses during the year ended December 31, 2004.

 

**Note 11.Asset Impairment and Restructuring Expenses**

 

***2004***

 

We previously announced a profit improvement plan to restructure the Company.  On December 3, 2004, we committed to a restructuring plan to reduce ongoing operating expenses, consolidate facilities, and reduce our workforce. The plan included closing certain facilities in North America and Europe and reducing headcount by a total of approximately 170 employees throughout the Company. The plan also included disposing of certain capital equipment.  We completed a majority of the restructuring activities in the fourth quarter of 2004 and expect to complete the remainder during 2005.

 

During the fourth quarterof 2004, we recorded $17.0 million of asset impairment and restructuringexpenses.  In connection with the costreduction portion of our profit improvement plan, we recorded asset impairmentand restructuring expenses of $7.8 million. This amount is comprised of $5.3 million of severance costs, $1.4 ofasset impairment costs, including asset impairment obligations, and $1.1million of scheduled payments of operating leases for which we will receive nofuture economic benefit.  In addition, werecorded asset impairment and restructuring expenses of $1.5 million as aresult of a revision to our estimate for non-cancelable lease paymentsassociated with previously announced facility closures.

 

We performed our annualgoodwill impairment review during the fourth quarter of 2004 and determinedthat a goodwill impairment charge of $7.7 million was required for one of ourreporting units.  The impairment chargeis included in asset impairment and restructuring expense in the accompanyingconsolidated statement of operations for the year ended December 31, 2004.In calculating the goodwill impairment charge, the fair value of the reportingunit was determined with the assistance of an independent third-party valuationspecialist using a discounted cash flow valuation approach.

 

The following tablesummarizes these charges:

 
| ** **             | ** **   | **2004**          | ** **   |
|------------------------|--------------|-------------------|--------------|
| *** ***           | *** *** | **(in millions)** | *** *** |
| **Cash charges:**      |         |              |         |
| Employee severance     |         | $                 | 5.3          |   |
| Facilities leases      |         | 2.6               |         |
| Total cash charges     |         | 7.9               |         |
| **Non-cash charges:**  |         |              |         |
| Goodwill impairment    |         | 7.7               |         |
| Fixed asset disposals  |         | 1.4               |         |
| Total non-cash charges |         | 9.1               |         |
| **Total**              |         | $                 | 17.0         |   |

 

F-21

----

 

***2003***

 

During 2003, in connectionwith the closure of our former headquarters facility and the closure of acontact center, we recorded asset impairment and restructuring expenses of $1.6million, which consisted of the write-off of abandoned leasehold improvementsof $0.4 million and for $1.2 million of scheduled payments of operating leasesfor which we will receive no future economic benefit. In addition, we recordedasset impairment and restructuring expenses of $1.4 million as a result of arevision to our estimate for non-cancelable lease payments associated with apreviously announced facility closure.

** **

***2002***

** **

**During 2002, we recorded additional restructuringexpense of $1.4 million primarily associated with a revision to our estimatefor non-cancelable lease payments associated with a facility closure inconnection with the 2001 restructuring plan.**

** **

Wesummarize the components of the restructuring charges that we recorded as assetimpairment and restructuring expenses in the following table:

 
| ** **             | ** ** | **Severance** | ** ** | **Facility  Closure or  Reduction** | ** ** | **Other** | ** ** | **Total** | ** ** |
|------------------------|------------|---------------|------------|-------------------------------------|------------|-----------|------------|-----------|------------|
|                   |       |          |       |                                |       |      |       |      |       |
| January 1, 2002   |       | $             | 0.9        |                                | $          | 8.5       |       | $         | 0.7        |   | $ | 10.1 |   |
| Expensed               |       | 0.1           |       | 1.3                                 |       | —    |       | 1.4       |       |
| Paid                   |       | (0.9          | )          | (3.4                                | )          | (0.2      | )          | (4.5      | )          |
| Other                  |       | 0.2           |       | —                              |       | (0.2      | )          | —    |       |
| December 31, 2002 |       | 0.3           |       | 6.4                                 |       | 0.3       |       | 7.0       |       |
| Expensed               |       | —        |       | 2.6                                 |       | —    |       | 2.6       |       |
| Paid                   |       | —        |       | (3.0                                | )          | (0.3      | )          | (3.3      | )          |
| Other                  |       | (0.2          | )          | 0.5                                 |       | —    |       | 0.3       |       |
| December 31, 2003 |       | 0.1           |       | 6.5                                 |       | —    |       | 6.6       |       |
| Expensed               |       | 5.3           |       | 2.6                                 |       | —    |       | 7.9       |       |
| Paid                   |       | (1.2          | )          | (3.5                                | )          | —    |       | (4.7      | )          |
| Other                  |       | —        |       | 0.3                                 |       | —    |       | 0.3       |       |
| December 31, 2004 |       | $             | 4.2        |                                | $          | 5.9       |       | $         | —     |   | $ | 10.1 |   |

 

Other includes the impactof foreign currency translation. Itemscharged to the accrual during 2004, 2003 and 2002 were cash items.

 

Of the $10.1 million ofunpaid liabilities at December 31, 2004, $3.3 million is classified aslong-term in other liabilities and $6.8 million is classified as short-term inaccrued operating expenses in the accompanying consolidated balancesheets.  At December 31, 2003, $3.2million of the $6.6 million was classified in other liabilities, with theremaining $3.4 million included in accrued operating expenses in theaccompanying consolidated balance sheets.

 

**Note 12.Shareholder Rights Plan**

 

We have a ShareholderRights Plan that provides for the issuance of preferred share purchase rightsthat expire in August 2008. The rights generally will be exercisable andtransferable apart from the common stock in the following cases:

 

•             only after the tenth day following publicdisclosure that a person or group of affiliated or associated persons hasacquired 20% or more of the outstanding shares of common stock (therebybecoming an “Acquiring Person”), and

•             on such date as the Board of Directorsdetermines after the commencement or announcement of a tender or exchange offerby a person or group for 20% or more of the outstanding shares of common stock.

 

If any person or group ofaffiliated or associated persons acquires 20% or more of the outstanding sharesof common stock and our redemption right has expired, each holder of a right(except those held by the Acquiring Person) will have the right to 

 

F-22

----

 

purchase shares of ourcommon stock (or in certain circumstances, our shares of preferred stock orsimilar securities) having a value equal to two times the exercise price of theright.

 

Alternatively, if, in atransaction not approved by the Board of Directors, we are acquired in a mergeror other business combination or 50% or more of our assets or earnings powerare sold, and our redemption right has expired, each holder of a right will havethe right to purchase that number of shares of common stock of the acquiringcompany having the market value of two times the exercise price of the right.

 

The rights may not beexercisable while they are redeemable. We can redeem the rights, which have a$30 exercise price, at a price of $.001 per right at any time up to andincluding the tenth day after the time that a person or group has become anAcquiring Person.

 

**Note 13. SupplementalGuarantor Financial Information**

 

Our 9.25% SeniorSubordinated Notes are guaranteed, on a full, unconditional and joint andseveral basis, by substantially all of our wholly owned domestic subsidiaries.Separate financial statements for each of the guarantor subsidiaries are notpresented because they would not be material to investors. However, on thefollowing pages we have presented the following unaudited statements of (a)SITEL Corporation, the parent, (b) the guarantor subsidiaries, (c) thenonguarantor subsidiaries, and (d) SITEL Corporation on a consolidated basis:

 

•            Condensed Consolidating Statements ofOperations and Comprehensive Income (Loss) for the years ended December 31,2004, 2003, and 2002,

•            Condensed Consolidating Balance Sheets at December 31,2004 and 2003, and

•            Condensed Consolidating Statements of CashFlows for the years ended December 31, 2004, 2003, and 2002.

 

F-23

----

 

**Note 13.Supplemental Guarantor Financial Information (continued)**

 

 

**Condensed Consolidating Statement of Operationsand Comprehensive Income (Loss)**

 
| **Year Ended Dcember 31, 2004**                                                           | ** ** | **Parent** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Nonguarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------------------------------------------------------|------------|------------|------------|-----------------------------|------------|--------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                                                                | ** ** | ** ** | ** ** | ** **                  | ** ** | ** **                     | ** ** | ** **       | ** ** | ** **       | ** ** |
| **Revenues**                                                                              |       | $          | 346,175    |                        | $          | 43,889                         |       | $                | 568,145    |             | $          | (1,766 | ) | $ | 956,443 |   |
|                                                                                      |       |       |       |                        |       |                           |       |             |       |             |       |
| **Operating expenses:**                                                                   |       |       |       |                        |       |                           |       |             |       |             |       |
| Direct labor and telecommunications expenses                                              |       | 189,105    |       | 24,180                      |       | 361,625                        |       | —           |       | 574,910          |       |
| Subcontracted and other services expenses                                                 |       | 44,330     |       | 4,041                       |       | 4,163                          |       | (1,808           | )          | 50,726           |       |
| Operating, selling and administrative expenses                                            |       | 100,819    |       | 10,951                      |       | 201,039                        |       | 42               |       | 312,851          |       |
| Asset impairment and restructuring expenses                                               |       | 2,751      |       | 50                          |       | 14,192                         |       | —           |       | 16,993           |       |
| Total operating expenses                                                                  |       | 337,005    |       | 39,222                      |       | 581,019                        |       | (1,766           | )          | 955,480          |       |
|                                                                                      |       |       |       |                        |       |                           |       |             |       |             |       |
| **Operating income**                                                                      |       | 9,170      |       | 4,667                       |       | (12,874                        | )          | —           |       | 963              |       |
|                                                                                      |       |       |       |                        |       |                           |       |             |       |             |       |
| **Other income (expense):**                                                               |       |       |       |                        |       |                           |       |             |       |             |       |
| Interest expense                                                                          |       | (9,727     | )          | (5                          | )          | (3,003                         | )          | —           |       | (12,735          | )          |
| Interest income                                                                           |       | 224        |       | —                      |       | 367                            |       | —           |       | 591              |       |
| Equity in earnings (losses) of affiliates                                                 |       | (23,101    | )          | (26,569                     | )          | 681                            |       | 49,670           |       | 681              |       |
| Other income (expense), net                                                               |       | 7,981      |       | (987                        | )          | (7,648                         | )          | —           |       | (654             | )          |
| Total other income (expense), net                                                         |       | (24,623    | )          | (27,561                     | )          | (9,603                         | )          | 49,670           |       | (12,117          | )          |
|                                                                                      |       |       |       |                        |       |                           |       |             |       |             |       |
| **Income (loss) before income taxes, minority interest  and change in accounting method** |       | (15,453    | )          | (22,894                     | )          | (22,477                        | )          | 49,670           |       | (11,154          | )          |
|                                                                                      |       |       |       |                        |       |                           |       |             |       |             |       |
| Income tax expense                                                                        |       | 11,114     |       | 207                         |       | 3,358                          |       | —           |       | 14,679           |       |
| Minority interest                                                                         |       | —     |       | —                      |       | 734                            |       | —           |       | 734              |       |
| **Income (loss) before change in accounting method**                                      |       | (26,567    | )          | (23,101                     | )          | (26,569                        | )          | 49,670           |       | (26,567          | )          |
|                                                                                      |       |       |       |                        |       |                           |       |             |       |             |       |
| Currency translation adjustment                                                           |       | 8,116      |       | (16                         | )          | 6,977                          |       | (6,961           | )          | 8,116            |       |
| Other                                                                                     |       | —     |       | —                      |       | (103                           | )          | —           |       | (103             | )          |
| **Comprehensive income (loss)**                                                           |       | $          | (18,451    | )                           | $          | (23,117                        | )          | $                | (19,695    | )                | $          | 42,709 |   | $ | (18,554 | ) |

 

F-24

----

 
| **Year Ended Dcember 31, 2003**                                                           | ** ** | **Parent** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Nonguarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------------------------------------------------------|------------|------------|------------|-----------------------------|------------|--------------------------------|------------|------------------|------------|------------------|------------|
|                                                                                      |       |       |       |                        |       |                           |       |             |       |             |       |
| **Revenues**                                                                              |       | $          | 366,501    |                        | $          | 41,284                         |       | $                | 438,728    |             | $          | — |   | $ | 846,513 |   |
|                                                                                      |       |       |       |                        |       |                           |       |             |       |             |       |
| **Operating expenses:**                                                                   |       |       |       |                        |       |                           |       |             |       |             |       |
| Direct labor and telecommunications expenses                                              |       | 199,279    |       | 22,719                      |       | 275,425                        |       | (148             | )          | 497,275          |       |
| Subcontracted and other services expenses                                                 |       | 49,731     |       | 3,156                       |       | 1,234                          |       | —           |       | 54,121           |       |
| Operating, selling and administrative expenses                                            |       | 112,244    |       | 10,950                      |       | 157,526                        |       | 139              |       | 280,859          |       |
| Asset impairment and restructuring expenses                                               |       | 1,407      |       | —                      |       | 1,597                          |       | —           |       | 3,004            |       |
| Total operating expenses                                                                  |       | 362,661    |       | 36,825                      |       | 435,782                        |       | (9               | )          | 835,259          |       |
|                                                                                      |       |       |       |                        |       |                           |       |             |       |             |       |
| **Operating income**                                                                      |       | 3,840      |       | 4,459                       |       | 2,946                          |       | 9                |       | 11,254           |       |
|                                                                                      |       |       |       |                        |       |                           |       |             |       |             |       |
| **Other income (expense):**                                                               |       |       |       |                        |       |                           |       |             |       |             |       |
| Interest expense                                                                          |       | (10,420    | )          | (12                         | )          | (4,448                         | )          | 2,627            |       | (12,253          | )          |
| Interest income                                                                           |       | 1,345      |       | 108                         |       | 1,619                          |       | (2,645           | )          | 427              |       |
| Equity in earnings (losses) of affiliates                                                 |       | (3,485     | )          | (9,023                      | )          | 641                            |       | 13,284           |       | 1,417            |       |
| Other income (expense), net                                                               |       | 2,024      |       | 994                         |       | (3,211                         | )          | —           |       | (193             | )          |
| Total other income (expense), net                                                         |       | (10,536    | )          | (7,933                      | )          | (5,399                         | )          | 13,266           |       | (10,602          | )          |
|                                                                                      |       |       |       |                        |       |                           |       |             |       |             |       |
| **Income (loss) before income taxes, minority interest  and change in accounting method** |       | (6,696     | )          | (3,474                      | )          | (2,453                         | )          | 13,275           |       | 652              |       |
|                                                                                      |       |       |       |                        |       |                           |       |             |       |             |       |
| Income tax expense                                                                        |       | (1,105     | )          | 11                          |       | 5,904                          |       | (12              | )          | 4,798            |       |
| Minority interest                                                                         |       | —     |       | —                      |       | 666                            |       | —           |       | 666              |       |
| **Income (loss) before change in accounting method**                                      |       | (5,591     | )          | (3,485                      | )          | (9,023                         | )          | 13,287           |       | (4,812           | )          |
|                                                                                      |       |       |       |                        |       |                           |       |             |       |             |       |
| Cumulative effect of a change in accounting for  goodwill                                 |       | —     |       | —                      |       | —                         |       | —           |       | —           |       |
| **Net income (loss)**                                                                     |       | $          | (5,591     | )                           | $          | (3,485                         | )          | $                | (9,023     | )                | $          | 13,287 |   | $ | (4,812 | ) |
|                                                                                      |       |       |       |                        |       |                           |       |             |       |             |       |
| Currency translation adjustment                                                           |       | (50        | )          | 237                         |       | 17,404                         |       | —           |       | 17,591           |       |
| **Comprehensive income (loss)**                                                           |       | $          | (5,641     | )                           | $          | (3,248                         | )          | $                | 8,381      |             | $          | 13,287 |   | $ | 12,779 |   |

 

F-25

----

 
| **Year Ended December 31,  2002**                                                    | ** ** | **Parent** | ** ** | **Guarantor****Subsidiaries** | ** ** | **Nonguarantor****Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------------------------------------------------------|------------|------------|------------|-------------------------------|------------|----------------------------------|------------|------------------|------------|------------------|------------|
|                                                                                      |       |       |       |                          |       |                             |       |             |       |             |       |
| **Revenue**                                                                               |       | $          | 382,923    |                          | $          | 41,788                           |       | $                | 350,350    |             | $          | (4,850 | ) | $ | 770,211 |   |
|                                                                                      |       |       |       |                          |       |                             |       |             |       |             |       |
| **Operating expenses:**                                                                   |       |       |       |                          |       |                             |       |             |       |             |       |
| Direct labor and telecommunications expenses                                              |       | 202,625    |       | 23,407                        |       | 207,424                          | ** ** | **—**       |       | 433,456          |       |
| Subcontracted and other services expenses                                                 |       | 49,236     |       | 2,881                         |       | 7,227                            |       | (4,317           | )          | 55,027           |       |
| Operating, selling, and administrative expenses                                           |       | 115,752    |       | 11,118                        |       | 124,637                          |       | (533             | )          | 250,974          |       |
| Asset impairment and restructuring expenses                                               |       | 1,495      | ** ** | **—**                    |       | (51                              | **)**      | **—**       |       | 1,444            |       |
| Total operating expenses                                                                  |       | 369,108    |       | 37,406                        |       | 339,237                          |       | (4,850           | )          | 740,901          |       |
|                                                                                      |       |       |       |                          |       |                             |       |             |       |             |       |
| **Operating income**                                                                      |       | 13,815     |       | 4,382                         |       | 11,113                           | ** ** | **—**       |       | 29,310           |       |
|                                                                                      |       |       |       |                          |       |                             |       |             |       |             |       |
| **Other income (expense):**                                                               |       |       |       |                          |       |                             |       |             |       |             |       |
| Interest expense                                                                          |       | (11,183    | )          | (3                            | )          | (1,252                           | )          | 713              |       | (11,725          | )          |
| Interest income                                                                           |       | 848        |       | 94                            |       | 246                              |       | (713             | )          | 475              |       |
| Equity in earnings (losses) of subsidiaries and  affiliates                               |       | (13,897    | )          | (19,171                       | )          | 3,441                            |       | 33,068           |       | 3,441            |       |
| Other income (expense), net                                                               |       | 3,423      |       | 801                           |       | (4,860                           | **)**      | **—**       |       | (636             | )          |
| Total other income (expense)                                                         |       | (20,809    | )          | (18,279                       | )          | (2,425                           | )          | 33,068           |       | (8,445           | )          |
|                                                                                      |       |       |       |                          |       |                             |       |             |       |             |       |
| **Income (loss) before income taxes, minority interest  and change in accounting method** |       | (6,994     | )          | (13,897                       | )          | 8,688                            |       | 33,068           |       | 20,865           |       |
|                                                                                      |       |       |       |                          |       |                             |       |             |       |             |       |
| Income tax expense                                                                        |       | 2,789      | ** ** | **—**                    |       | 7,648                            | ** ** | **—**       |       | 10,437           |       |
| Minority interest                                                                         | ** ** | **—** | ** ** | **—**                    |       | 1,812                            | ** ** | **—**       |       | 1,812            |       |
| **Income (loss) before change in accounting method**                                      |       | (9,783     | )          | (13,897                       | )          | (772                             | )          | 33,068           |       | 8,616            |       |
|                                                                                      |       |       |       |                          |       |                             |       |             |       |             |       |
| Cumulative effect of a change in accounting for  goodwill                                 |       | —     |       | —                        |       | (18,399                          | )          | —           |       | (18,399          | )          |
| **Net income (loss)**                                                                     |       | $          | (9,783     | )                             | $          | (13,897                          | )          | $                | (19,171    | )                | $          | 33,068 |   | $ | (9,783 | ) |
|                                                                                      |       |       |       |                          |       |                             |       |             |       |             |       |
| Currency translation adjustment                                                           |       | 8,886      |       | 1,860                         |       | 726                              |       | (2,586           | )          | 8,886            |       |
| **Comprehensive income (loss)**                                                           |       | $          | (897       | )                             | $          | (12,037                          | )          | $                | (18,445    | )                | $          | 30,482 |   | $ | (897 | ) |

 

F-26

----

 

**Condensed Consolidating Balance Sheet**

 
| **At December 31, 2004**                        | ** ** | **Parent** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Nonguarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|------------------------------------------------------|------------|------------|------------|-----------------------------|------------|--------------------------------|------------|------------------|------------|------------------|------------|
|                                                 |       |       |       |                        |       |                           |       |             |       |             |       |
| **Assets**                                           |       |       |       |                        |       |                           |       |             |       |             |       |
| **Current assets:**                                  |       |       |       |                        |       |                           |       |             |       |             |       |
| Cash and cash equivalents                            |       | $          | 9,153      |                        | $          | 2,812                          |       | $                | 16,855     |             | $          | 86 |   | $ | 28,906 |   |
| Trade accounts receivable, net                       |       | 117,939    |       | 22,924                      |       | 116,502                        |       | (65,974          | )          | 191,391          |       |
| Prepaid expenses and other current assets            |       | 5,479      |       | 158                         |       | 11,535                         |       | —           |       | 17,172           |       |
| Total current assets                                 |       | 132,571    |       | 25,894                      |       | 144,892                        |       | (65,888          | )          | 237,469          |       |
|                                                 |       |       |       |                        |       |                           |       |             |       |             |       |
| **Property and equipment, net**                      |       | 17,887     |       | 1,850                       |       | 66,320                         |       | —           |       | 86,057           |       |
|                                                 |       |       |       |                        |       |                           |       |             |       |             |       |
| **Other assets:**                                    |       |       |       |                        |       |                           |       |             |       |             |       |
| Goodwill                                             |       | 19,577     |       | 14                          |       | 28,685                         |       | —           |       | 48,276           |       |
| Deferred income taxes                                |       | 141        |       | —                      |       | 702                            |       | —           |       | 843              |       |
| Investments in affiliates                            |       | —     |       | —                      |       | 16,466                         |       | —           |       | 16,466           |       |
| Other assets                                         |       | 6,054      |       | 56                          |       | 2,310                          |       | —           |       | 8,420            |       |
| Investments in subsidiaries                          |       | 106,062    |       | 81,646                      |       | —                         |       | (187,708         | )          | —           |       |
| **Total assets**                                     |       | $          | 282,292    |                        | $          | 109,460                        |       | $                | 259,375    |             | $          | (253,596 | ) | $ | 397,531 |   |
|                                                 |       |       |       |                        |       |                           |       |             |       |             |       |
| **Liabilities and Stockholders’ Equity**        |       |       |       |                        |       |                           |       |             |       |             |       |
| **Current liabilities:**                             |       |       |       |                        |       |                           |       |             |       |             |       |
| Current portion of long-term debt                    |       | $          | 405        |                        | $          | —                         |       | $                | 18,397     |             | $          | — |   | $ | 18,802 |   |
| Current portion of capital lease obligations         |       | 342        |       | 100                         |       | 2,760                          |       | —           |       | 3,202            |       |
| Trade accounts payable                               |       | 19,534     |       | 1,723                       |       | 77,217                         |       | (65,879          | )          | 32,595           |       |
| Accrued expenses and other current liabilities       |       | 29,787     |       | 1,575                       |       | 68,602                         |       | 133              |       | 100,097          |       |
| Total current liabilities                            |       | 50,068     |       | 3,398                       |       | 166,976                        |       | (65,746          | )          | 154,696          |       |
| **Long-term debt and other liabilities:**            |       |       |       |                        |       |                           |       |             |       |             |       |
| Long-term debt, excluding current portion            |       | 90,000     |       | —                      |       | —                         |       | —           |       | 90,000           |       |
| Capital lease obligations, excluding current portion |       | 320        |       | —                      |       | 8,073                          |       | —           |       | 8,393            |       |
| Deferred compensation and other                      |       | 6,554      |       | —                      |       | 2,616                          |       | (221             | )          | 8,949            |       |
| Deferred income taxes                                |       | 141        |       | —                      |       | 64                             |       | —           |       | 205              |       |
| Total liabilities                                    |       | 147,083    |       | 3,398                       |       | 177,729                        |       | (65,967          | )          | 262,243          |       |
|                                                 |       |       |       |                        |       |                           |       |             |       |             |       |
| **Minority interests**                               |       | —     |       | —                      |       | 2,629                          |       | —           |       | 2,629            |       |
|                                                 |       |       |       |                        |       |                           |       |             |       |             |       |
| **Stockholders’ equity**                        |       | 135,209    |       | 106,062                     |       | 79,017                         |       | (187,629         | )          | 132,659          |       |
| **Total liabilities and stockholders’ equity**  |       | $          | 282,292    |                        | $          | 109,460                        |       | $                | 259,375    |             | $          | (253,596 | ) | $ | 397,531 |   |

 

F-27

----

 
| **At December 31, 2003**                        | ** ** | **Parent** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Nonguarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|------------------------------------------------------|------------|------------|------------|-----------------------------|------------|--------------------------------|------------|------------------|------------|------------------|------------|
|                                                 |       |       |       |                        |       |                           |       |             |       |             |       |
| **Assets**                                           |       |       |       |                        |       |                           |       |             |       |             |       |
| **Current assets:**                                  |       |       |       |                        |       |                           |       |             |       |             |       |
| Cash and cash equivalents                            |       | $          | 12,010     |                        | $          | 3,090                          |       | $                | 14,750     |             | $          | — |   | $ | 29,850 |   |
| Trade accounts receivable, net                       |       | 95,899     |       | 60,483                      |       | 113,341                        |       | (94,181          | )          | 175,542          |       |
| Prepaid expenses and other current assets            |       | 7,022      |       | 34                          |       | 13,489                         |       | —           |       | 20,545           |       |
| Total current assets                                 |       | 114,931    |       | 63,607                      |       | 141,580                        |       | (94,181          | )          | 225,937          |       |
|                                                 |       |       |       |                        |       |                           |       |             |       |             |       |
| **Property and equipment, net**                      |       | 20,792     |       | 2,608                       |       | 66,833                         |       | —           |       | 90,233           |       |
|                                                 |       |       |       |                        |       |                           |       |             |       |             |       |
| **Other assets:**                                    |       |       |       |                        |       |                           |       |             |       |             |       |
| Goodwill                                             |       | 19,577     |       | 14                          |       | 33,962                         |       | —           |       | 53,553           |       |
| Investments in affiliates                            |       | —     |       | —                      |       | 18,911                         |       | —           |       | 18,911           |       |
| Other assets                                         |       | 6,196      |       | 56                          |       | 1,887                          |       | —           |       | 8,139            |       |
| Investments in subsidiaries                          |       | 132,961    |       | 104,008                     |       | —                         |       | (236,969         | )          | —           |       |
| Deferred income taxes                                |       | 9,090      |       | —                      |       | 117                            |       | —           |       | 9,207            |       |
| **Total assets**                                     |       | $          | 303,547    |                        | $          | 170,293                        |       | $                | 263,290    |             | $          | (331,150 | ) | $ | 405,980 |   |
|                                                 |       |       |       |                        |       |                           |       |             |       |             |       |
| **Liabilities and Stockholders’ Equity**        |       |       |       |                        |       |                           |       |             |       |             |       |
| **Current liabilities:**                             |       |       |       |                        |       |                           |       |             |       |             |       |
| Revolving credit facility and other current debt     |       | $          | —     |                        | $          | —                         |       | $                | 22,894     |             | $          | — |   | $ | 22,894 |   |
| Current portion of capital lease obligations         |       | 506        |       | 117                         |       | 2,558                          |       | —           |       | 3,181            |       |
| Trade accounts payable                               |       | 14,705     |       | 35,402                      |       | 71,448                         |       | (94,181          | )          | 27,374           |       |
| Accrued expenses and other current liabilities       |       | 30,844     |       | 1,713                       |       | 51,199                         |       | (80              | )          | 83,676           |       |
| Total current liabilities                            |       | 46,055     |       | 37,232                      |       | 148,099                        |       | (94,261          | )          | 137,125          |       |
| **Long-term debt and other liabilities:**            |       |       |       |                        |       |                           |       |             |       |             |       |
| Long-term debt, excluding current portion            |       | 100,000    |       | —                      |       | —                         |       | —           |       | 100,000          |       |
| Capital lease obligations, excluding current portion |       | —     |       | 100                         |       | 8,584                          |       | —           |       | 8,684            |       |
| Other liabilities                                    |       | 3,529      |       | —                      |       | 1,544                          |       | —           |       | 5,073            |       |
| Deferred income taxes                                |       | 1,225      |       | —                      |       | 1,055                          |       | —           |       | 2,280            |       |
| Total liabilities                                    |       | 150,809    |       | 37,332                      |       | 159,282                        |       | (94,261          | )          | 253,162          |       |
|                                                 |       |       |       |                        |       |                           |       |             |       |             |       |
| **Minority interests**                               |       | —     |       | —                      |       | 1,869                          |       | —           |       | 1,869            |       |
|                                                 |       |       |       |                        |       |                           |       |             |       |             |       |
| **Stockholders’ equity**                        |       | 152,738    |       | 132,961                     |       | 102,139                        |       | (236,889         | )          | 150,949          |       |
| **Total liabilities and stockholders’ equity**  |       | $          | 303,547    |                        | $          | 170,293                        |       | $                | 263,290    |             | $          | (331,150 | ) | $ | 405,980 |   |

 

F-28

----

 

### **Condensed Consolidating Statementof Cash Flows**

** **
| **Year Ended December 31, 2004**                                                         | ** ** | **Parent** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Nonguarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|------------|------------|-----------------------------|------------|--------------------------------|------------|------------------|------------|------------------|------------|
|                                                                                          |       |       |       |                        |       |                           |       |             |       |             |       |
| **Net cash flows from operating activities**                                                  |       | $          | 18,686     |                        | $          | (2,538                         | )          | $                | 23,345     |             | $          | (9 | ) | $ | 39,484 |   |
|                                                                                          |       |       |       |                        |       |                           |       |             |       |             |       |
| **Cash flows from investing activities:**                                                     |       |       |       |                        |       |                           |       |             |       |             |       |
| Purchases of property and equipment                                                           |       | (5,293     | )          | (199                        | )          | (19,511                        | )          | —           |       | (25,003          | )          |
| Dividends received from affiliates                                                            |       | —     |       | —                      |       | 1,747                          |       | —           |       | 1,747            |       |
| Proceeds from sales of property and equipment                                                 |       | 10         |       | —                      |       | —                         |       | —           |       | 10               |       |
| Other                                                                                         |       | —     |       | —                      |       | (357                           | )          | —           |       | (357             | )          |
| Net cash flows from investing activities                                                      |       | (5,283     | )          | (199                        | )          | (18,121                        | )          | —           |       | (23,603          | )          |
|                                                                                          |       |       |       |                        |       |                           |       |             |       |             |       |
| **Cash flows from financing activities:**                                                     |       |       |       |                        |       |                           |       |             |       |             |       |
| Borrowings on revolving credit facility and other  current debt                               |       | —     |       | —                      |       | 21,947                         |       | —           |       | 21,947           |       |
| Repayments of revolving credit facility and other  current debt and capital lease obligations |       | (3,135     | )          | —                      |       | (27,634                        | )          | —           |       | (30,769          | )          |
| Repayments of long-term debt                                                                  |       | (10,000    | )          | —                      |       | —                         |       | —           |       | (10,000          | )          |
| Net borrowings and payments in intercompany balances                                          |       | (3,356     | )          | 2,459                       |       | 802                            |       | 95               |       | —           |       |
| Treasury stock reissuances (repurchases), net                                                 |       | 85         |       | —                      |       | —                         |       | —           |       | 85               |       |
| Other                                                                                         |       | 146        |       | —                      |       | —                         |       | —           |       | 146              |       |
| Net cash flows from financing activities                                                      |       | (16,260    | )          | 2,459                       |       | (4,885                         | )          | 95               |       | (18,591          | )          |
| Effect of exchange rates on cash                                                              |       | —     |       | —                      |       | 1,766                          |       | —           |       | 1,766            |       |
| **Net increase (decrease) in cash**                                                           |       | (2,857     | )          | (278                        | )          | 2,105                          |       | 86               |       | (944             | )          |
| **Cash and cash equivalents, beginning of period**                                            |       | 12,010     |       | 3,090                       |       | 14,750                         |       | —           |       | 29,850           |       |
| **Cash and cash equivalents, end of period**                                                  |       | $          | 9,153      |                        | $          | 2,812                          |       | $                | 16,855     |             | $          | 86 |   | $ | 28,906 |   |

 

F-29

----

 
| **Year Ended December 31, 2003**                                                         | ** ** | **Parent** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Nonguarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|------------|------------|-----------------------------|------------|--------------------------------|------------|------------------|------------|------------------|------------|
|                                                                                          |       |       |       |                        |       |                           |       |             |       |             |       |
| **Net cash flows from operating activities**                                                  |       | $          | 17,206     |                        | $          | 6,436                          |       | $                | (14,536    | )                | $          | — |   | $ | 9,106 |   |
|                                                                                          |       |       |       |                        |       |                           |       |             |       |             |       |
| **Cash flows from investing activities:**                                                     |       |       |       |                        |       |                           |       |             |       |             |       |
| Purchases of property and equipment                                                           |       | (8,199     | )          | (1,632                      | )          | (14,977                        | )          | —           |       | (24,808          | )          |
| Dividends received from affiliates                                                            |       | —     |       | —                      |       | 1,815                          |       | —           |       | 1,815            |       |
| Proceeds from sales of property and equipment                                                 |       | —     |       | —                      |       | 211                            |       | —           |       | 211              |       |
| Other                                                                                         |       | (1,000     | )     | —                      |       | (333                           | )          | —           |       | (1,333           | )          |
| Net cash flows from investing activities                                                      |       | (9,199     | )          | (1,632                      | )          | (13,284                        | )          | —           |       | (24,115          | )          |
|                                                                                          |       |       |       |                        |       |                           |       |             |       |             |       |
| **Cash flows from financing activities:**                                                     |       |       |       |                        |       |                           |       |             |       |             |       |
| Borrowings on revolving credit facility and other  current debt                               |       | —     |       | —                      |       | 21,302                         |       | —           |       | 21,302           |       |
| Repayments of revolving credit facility and other  current debt and capital lease obligations |       | (6,129     | )          | —                      |       | (2,215                         | )          | —           |       | (8,344           | )          |
| Net borrowings and payments in intercompany balances                                          |       | (5,474     | )          | (4,569                      | )          | 10,043                         |       | —           |       | —           |       |
| Treasury stock reissuances (repurchases), net                                                 |       | (1,009     | )          | —                      |       | —                         |       | —           |       | (1,009           | )          |
| Net cash flows from financing activities                                                      |       | (12,612    | )          | (4,569                      | )          | 29,130                         |       | —           |       | 11,949           |       |
| Effect of exchange rates on cash                                                              |       | —     |       | —                      |       | (1,232                         | )          | —           |       | (1,232           | )          |
| **Net increase (decrease) in cash**                                                           |       | (4,605     | )          | 235                         |       | 78                             |       | —           |       | (4,292           | )          |
| **Cash and cash equivalents, beginning of period**                                            |       | 16,615     |       | 2,855                       |       | 14,672                         |       | —           |       | 34,142           |       |
| **Cash and cash equivalents, end of period**                                                  |       | $          | 12,010     |                        | $          | 3,090                          |       | $                | 14,750     |             | $          | — |   | $ | 29,850 |   |

 

F-30

----

 
| **Year Ended December 31,  2002**                                                        | ** ** | **Parent** |   | **Guarantor  Subsidiaries** | ** ** | **Nonguarantor****Subsidiaries** |   | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|------------|--------|-----------------------------|------------|----------------------------------|--------|------------------|------------|------------------|------------|
|                                                                                          |       |       |   |                        |       |                             |   |             |       |             |       |
| **Net cash flows from operating activities**                                                  |       | $          | 8,795  |                        | $          | 10,276                           |   | $                | 19,057     |             | $          | — |   | $ | 38,128 |   |
|                                                                                          |       |       |   |                        |       |                             |   |             |       |             |       |
| **Cash flows from investing activities:**                                                     |       |       |   |                        |       |                             |   |             |       |             |       |
|                                                                                          |       |       |   |                        |       |                             |   |             |       |             |       |
| Purchases of property and equipment                                                           |       | (7,330     | )      | (626                        | )          | (22,471                          | )      | **—**       |       | (30,427          | )          |
| Proceeds from sales of property and equipment                                                 | ** ** | **—** |   | **—**                  |       | 2,488                            |   | **—**       |       | 2,488            |       |
| Investments in subsidiaries                                                                   |       | (107       | )      | (9,104                      | )          | —                           |   | 9,211            |       | —           |       |
| Other                                                                                         |       | (527       | )      | **—**                  |       | 4                                |   | **—**       |       | (523             | )          |
| Net cash flows from investing activities                                                      |       | (7,964     | )      | (9,730                      | )          | (19,979                          | )      | 9,211            |       | (28,462          | )          |
|                                                                                          |       |       |   |                        |       |                             |   |             |       |             |       |
| **Cash flows from financing activities:**                                                     |       |       |   |                        |       |                             |   |             |       |             |       |
| Borrowings on revolving credit facility and other current  debt                               |       | 36,259     |   | **—**                  |       | 2,165                            |   | **—**       |       | 38,424           |       |
| Repayments of revolving credit facility and other current  debt and capital lease obligations |       | (31,756    | )      | **—**                  |       | (1,964                           | )      | **—**       |       | (33,720          | )          |
| Net capital contribution from parent                                                          | ** ** | **—** |   | 107                         |       | 9,104                            |   | (9,211           | )          | —           |       |
| Net borrowings and payments on intercompany balances                                          |       | 4,383      |   | **—**                  |       | (4,383                           | )      | **—**       |       | —           |       |
| Purchases of treasury stock, net of reissuances                                               |       | 85         |   | **—**                  | ** ** | **—**                       |   | **—**       |       | 85               |       |
| Capital contribution from (distribution to) minority  interest                                | ** ** | **—** |   | **—**                  |       | (1,501                           | )      | **—**       |       | (1,501           | )          |
| Other                                                                                         | ** ** | **—** |   | **—**                  |       | 18                               |   | **—**       |       | 18               |       |
| Net cash flows from financing activities                                                      |       | 8,971      |   | 107                         |       | 3,439                            |   | (9,211           | )          | 3,306            |       |
|                                                                                          |       |       |   |                        |       |                             |   |             |       |             |       |
| Effect of exchange rates on cash                                                              | ** ** | **—** |   | **—**                  |       | (986                             | )      | **—**       |       | (986             | )          |
| **Net increase in cash**                                                                      |       | 9,802      |   | 653                         |       | 1,531                            |   | **—**       |       | 11,986           |       |
| **Cash and cash equivalents, beginning of period**                                            |       | 6,814      |   | 2,202                       |       | 13,140                           |   | **—**       |       | 22,156           |       |
| **Cash and equivalents, end of period**                                                       |       | $          | 16,616 |                        | $          | 2,855                            |   | $                | 14,671     |             | $          | — |   | $ | 34,142 |   |

 

F-31

----

 

**Note 14.Quarterly Financial Data (Unaudited)**

 

Our quarterly financialinformation has not been audited but, in management’s opinion, includes alladjustments necessary for a fair presentation. We experience periodic fluctuationsin our results of operations related to both the start-up costs associated withexpansion and the implementation of clients’ customer management activities. Inaddition, our business generally tends to be slower in the third quarter due tosummer holidays in Europe. Accordingly, comparisons among quarters of a yearmay not represent overall trends and changes in operations.

 

***2004Quarterly Data***

 
| ** **               | ** **   | **First  Quarter**                            | ** **   | **Second  Quarter** | ** ** | **Third  Quarter** | ** ** | **Fourth  Quarter** | ** ** |
|--------------------------|--------------|-----------------------------------------------|--------------|---------------------|------------|--------------------|------------|---------------------|------------|
| *** ***             | *** *** | **(in thousands, except per share  amounts)** | *** *** |
|                     |         |                                          |         |                |       |               |       |                |       |
| Revenue                  |         | $                                             | 244,068      |                | $          | 240,055            |       | $                   | 229,454    |   | $ | 242,866 |   |
| Operating income (loss)  |         | 10,286                                        |         | 7,079               |       | 1,038              |       | (17,439             | )          |
| Net income (loss)        |         | 4,826                                         |         | 2,519               |       | (1,736             | )          | (32,176             | )          |
|                     |         |                                          |         |                |       |               |       |                |       |
| Income per common share: |         |                                          |         |                |       |               |       |                |       |
| Basic                    |         | $                                             | 0.07         |                | $          | 0.03               |       | $                   | (0.02      | ) | $ | (0.44 | ) |
| Diluted                  |         | $                                             | 0.07         |                | $          | 0.03               |       | $                   | (0.02      | ) | $ | (0.44 | ) |

 

Fourth quarter resultsinclude $17.0 million of asset impairment and restructuring charges, including$7.7 million of goodwill impairment, as discussed in Note 11, and $10.9 millionof charges related to the increase in the deferred tax valuation allowance, asdiscussed in Note 5.

 

***2003 Quarterly Data***

 
| ** **               | ** ** | **First  Quarter**                            | ** ** | **Second  Quarter** | ** ** | **Third  Quarter** | ** ** | **Fourth  Quarter** | ** ** |
|--------------------------|------------|-----------------------------------------------|------------|---------------------|------------|--------------------|------------|---------------------|------------|
| ** **               | ** ** | **(in thousands, except per share  amounts)** | ** ** |
|                     |       |                                          |       |                |       |               |       |                |       |
| Revenue                  |       | $                                             | 194,095    |                | $          | 204,566            |       | $                   | 208,755    |   | $ | 239,097 |   |
| Operating income (loss)  |       | 3,202                                         |       | (713                | )          | (396               | )          | 9,161               |       |
| Net income (loss)        |       | 61                                            |       | (3,243              | )          | (3,946             | )          | 2,316               |       |
|                     |       |                                          |       |                |       |               |       |                |       |
| Income per common share: |       |                                          |       |                |       |               |       |                |       |
| Basic                    |       | $                                             | 0.00       |                | $          | (0.04              | )          | $                   | (0.05      | ) | $ | 0.03 |   |
| Diluted                  |       | $                                             | 0.00       |                | $          | (0.04              | )          | $                   | (0.05      | ) | $ | 0.03 |   |

 

First quarter results include $0.8 million of asset impairment andrestructuring charges, as discussed in Note 11.

 

Fourth quarterresults include $2.2 million of asset impairment and restructuring charges, asdiscussed in Note 11.

 

*The sum of the quarterly amounts may not equal thetotals for the year due to the effects of rounding.*

 

F-32

----