** **

**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

** **

**FORM 10-Q**

** **

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

** **

**For the quarterly period ended MARCH31, 2003**

** **

| 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 Other  Jurisdiction of Incorporation or Organization)                                     |
|                                                                                                |   |                                                 |   |                             |
| **111 S. CALVERT STREET, SUITE 1900       BALTIMORE,  MARYLAND** |   | **21202**                                            |
| (Address of  Principal Executive Offices)                                                           |   | (Zip Code)                                           |
|                                                                                                |   |                                                 |   |                             |
| **(410) 246-1505**                                                                                  |
| (Registrant’s  Telephone Number, Including Area Code)                                          |
|                                                                                                     |        |                                                      |        |                                  |  |  |  |  |

 

**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 bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports) and (2) has been subject to such filing requirements for the past90 days.  YES  ý     NO  o

 

Indicate by check markwhether the registrant is an accelerated filer (as defined in Rule 12b-2 of theAct).  YES  ý     NO  o

 

### **COMMON STOCK, $.001 PAR VALUE – 74,363,431 SHARES OUTSTANDING AS OF APRIL30, 2003**

 

 

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**SITELCORPORATION AND SUBSIDIARIES**

**TABLEOF CONTENTS**

** **
| **PART I  – Financial Information** |
|------------------------------------------|
|                                     |
| Item  1  –                     | Financial Statements |
|                                     |   |
|                                     | Consolidated  Condensed Statements of Income (Loss) |
|                                     | Consolidated  Condensed Balance Sheets |
|                                     | Consolidated  Condensed Statements of Cash Flows |
|                                     | Notes to  Consolidated Condensed Financial Statements |
|                                     |   |
|                                     |   |
| Item 2  –                      | 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 3  –                      | Quantitative and Qualitative Disclosures About  Market Risk |
|                                     |   |
| Item 4  –                      | Controls and Procedures |
|                                     |
| **PART II –Other Information**      |
|                                     |
| Item  1  –                     | Legal  Proceedings |
|                                     |   |
| Item  5  –                     | Other  Information |
|                                     |   |
| Item 6  –                      | Exhibits and  Reports on Form 8-K |
|                                     |
| Signature                                |
|                                     |
| Certifications                           |
|                                     |
| Exhibit Index                            |

 

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### **SITEL CORPORATION ANDSUBSIDIARIES**

**CONSOLIDATED CONDENSED STATEMENTS OFINCOME (LOSS)**

**(UNAUDITED)**

(in thousands, except per share data)

 
|                                                                               |   | **Three Months Ended  March 31,** |       |
|------------------------------------------------------------------------------------|--------|-----------------------------------|------------|
|                                                                               |   | **2003**                          |       | **2002** |   |
|                                                                               |   |                              | * *   |   | * * |
| **Revenues**                                                                       |   | $                                 | 194,095    |   | $ | 193,032 |   |
|                                                                               |   |                              |       |   |   |
| **Operating expenses:**                                                            |   |                              |       |   |   |
| Direct  labor and telecommunications expenses                                      |   | 110,772                           |       | 112,016 |   |
| Subcontracted  and other services expenses                                         |   | 13,649                            |       | 11,593 |   |
| Operating,  selling and administrative expenses                                    |   | 65,676                            |       | 61,760 |   |
| Asset  impairment and restructuring expenses                                       |   | 796                               |       | — |   |
| Total  operating expenses                                                          |   | 190,893                           |       | 185,369 |   |
|                                                                               |   |                              |       |   |   |
| **Operating income**                                                               |   | 3,202                             |       | 7,663 |   |
|                                                                               |   |                              |       |   |   |
| **Other income (expense):**                                                        |   |                              |       |   |   |
| Interest  expense, net                                                             |   | (2,724                            | )          | (2,731 | ) |
| Equity  in earnings of affiliates                                                  |   | 618                               |       | 335 |   |
| Other  expense, net                                                                |   | (659                              | )          | (188 | ) |
| Total  other expense, net                                                          |   | (2,765                            | )          | (2,584 | ) |
|                                                                               |   |                              |       |   |   |
| **Income before income taxes, minority interest and change in  accounting method** |   | 437                               |       | 5,079 |   |
|                                                                               |   |                              |       |   |   |
| Income  tax expense                                                                |   | 170                               |       | 1,981 |   |
| Minority  interest                                                                 |   | 206                               |       | 360 |   |
| **Income before change in accounting method**                                      |   | 61                                |       | 2,738 |   |
|                                                                               |   |                              |       |   |   |
| Cumulative  effect of a change in accounting for goodwill                          |   | —                            |       | (18,399 | ) |
| **Net income (loss)**                                                              |   | $                                 | 61         |   | $ | (15,661 | ) |
|                                                                               |   |                              |       |   |   |
| **Weighted average common shares outstanding:**                                    |   |                              |       |   |   |
| Basic                                                                              |   | 74,258                            |       | 74,218 |   |
| Diluted                                                                            |   | 74,258                            |       | 74,313 |   |
|                                                                               |   |                              |       |   |   |
| **Earnings per share:**                                                            |   |                              |       |   |   |
|                                                                               |   |                              |       |   |   |
| **Basic:**                                                                         |   |                              |       |   |   |
| Income  before change in accounting method                                         |   | $                                 | 0.00       |   | $ | 0.04 |   |
| Cumulative  effect of change in accounting for goodwill                            |   | 0.00                              |       | (0.25 | ) |
| **Net income (loss)**                                                              |   | $                                 | 0.00       |   | $ | (0.21 | ) |
|                                                                               |   |                              |       |   |   |
| **Diluted:**                                                                       |   |                              | ** ** |   | ** ** |
| Income  before change in accounting method                                         |   | $                                 | 0.00       |   | $ | 0.04 |   |
| Cumulative  effect of change in accounting for goodwill                            |   | 0.00                              |       | (0.25 | ) |
| **Net income (loss)**                                                              |   | $                                 | 0.00       |   | $ | (0.21 | ) |

 

*See Notes to Consolidated Condensed Financial Statements*

 

1

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### **SITEL CORPORATION ANDSUBSIDIARIES**

### **CONSOLIDATED CONDENSED BALANCE SHEETS**

(in thousands, except per share data)

 
|                                                                                                                                         |   | **March 31,  2003** |    | **December 31,  2002** |   |
|----------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------|---------|------------------------|--------|
|                                                                                                                                         |   | **(Unaudited)**     |    |                   |   |
| **Assets**                                                                                                                                   |   |                |    |                   |   |
| **Current assets:**                                                                                                                          |   |                |    |                   |   |
| Cash and cash equivalents                                                                                                                    |   | $                   | 36,249  |                   | $      | 34,142 |   |
| Trade accounts receivable (net of allowance for  doubtful accounts of $3,625 and $4,011, respectively)                                       |   | 125,623             |    | 128,643                |   |
| Prepaid expenses                                                                                                                             |   | 10,125              |    | 7,173                  |   |
| Deferred income taxes                                                                                                                        |   | 5,156               |    | 5,141                  |   |
| Other assets                                                                                                                                 |   | 5,947               |    | 8,557                  |   |
| Total current assets                                                                                                                         |   | 183,100             |    | 183,656                |   |
|                                                                                                                                         |   |                |    |                   |   |
| **Property and equipment, net**                                                                                                              |   | 85,302              |    | 86,883                 |   |
|                                                                                                                                         |   |                |    |                   |   |
| **Other assets:**                                                                                                                            |   |                |    |                   |   |
| Goodwill, net                                                                                                                                |   | 50,689              |    | 49,724                 |   |
| Deferred income taxes                                                                                                                        |   | 6,188               |    | 6,191                  |   |
| Investment in affiliates                                                                                                                     |   | 19,814              |    | 18,461                 |   |
| Other assets                                                                                                                                 |   | 6,815               |    | 7,062                  |   |
| **Total assets**                                                                                                                             |   | $                   | 351,908 |                   | $      | 351,977 |   |
|                                                                                                                                         |   |                |    |                   |   |
| **Liabilities and Stockholders’  Equity**                                                                                               |   |                |    |                   |   |
| **Current liabilities:**                                                                                                                     |   |                |    |                   |   |
| Current portion of long-term debt                                                                                                            |   | $                   | 2,458   |                   | $      | 5,404 |   |
| Current portion of capital lease obligations                                                                                                 |   | 2,106               |    | 1,951                  |   |
| Trade accounts payable                                                                                                                       |   | 27,471              |    | 28,612                 |   |
| Income taxes payable                                                                                                                         |   | —              |    | 1,788                  |   |
| Accrued wages, salaries and bonuses                                                                                                          |   | 32,042              |    | 28,283                 |   |
| Accrued operating expenses                                                                                                                   |   | 28,413              |    | 30,129                 |   |
| Deferred revenue and other                                                                                                                   |   | 6,507               |    | 6,871                  |   |
| Total current liabilities                                                                                                                    |   | 98,997              |    | 103,038                |   |
| **Long-term debt and other  liabilities:**                                                                                                   |   |                |    |                   |   |
| Long-term debt                                                                                                                               |   | 100,000             |    | 100,000                |   |
| Capital lease obligations, excluding current  portion                                                                                        |   | 7,966               |    | 7,307                  |   |
| Deferred compensation                                                                                                                        |   | 1,503               |    | 1,394                  |   |
| Deferred income taxes                                                                                                                        |   | 311                 |    | 296                    |   |
| Total liabilities                                                                                                                            |   | 208,777             |    | 212,035                |   |
|                                                                                                                                         |   |                |    |                   |   |
| **Minority interests**                                                                                                                       |   | 986                 |    | 780                    |   |
| **Stockholders’ equity:**                                                                                                               |   |                |    |                   |   |
| Common stock, voting, $.001 par value 200,000,000  shares authorized, 74,363,431 and 74,363,431 shares issued and outstanding,  respectively |   | 74                  |    | 74                     |   |
| Additional paid-in capital                                                                                                                   |   | 168,712             |    | 168,706                |   |
| Accumulated other comprehensive loss                                                                                                         |   | (14,364             | )       | (17,262                | )      |
| Accumulated deficit                                                                                                                          |   | (12,171             | )       | (12,193                | )      |
| Less treasury stock, at cost, 99,567 and 120,663  common shares, respectively                                                                |   | (106                | )       | (163                   | )      |
|                                                                                                                                         |   |                |    |                   |   |
| Total stockholders’ equity                                                                                                              |   | 142,145             |    | 139,162                |   |
| **Total liabilities and  stockholders’ equity**                                                                                         |   | $                   | 351,908 |                   | $      | 351,977 |   |

 

*See Notes to Consolidated Condensed Financial Statements.*

 

2

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**SITEL CORPORATION AND SUBSIDIARIES**

**CONSOLIDATED CONDENSED STATEMENTS OF CASHFLOWS**

** (UNAUDITED)**

(in thousands)

 
|                                                                                     |   | **Three Months Ended  March 31,** |     |
|------------------------------------------------------------------------------------------|--------|-----------------------------------|----------|
|                                                                                     |   | **2003**                          |     | **2002** |   |
|                                                                                     |   |                              | * * |   | * * |
| **Cash flows from operating activities:**                                                |   |                              |     |   |   |
| Net  income (loss)                                                                       |   | $                                 | 61       |   | $ | (15,661 | ) |
| Adjustments  to reconcile net income (loss) to net cash flows from operating activities: |   |                              |     |   |   |
| Cumulative  effect of change in accounting method                                        |   | —                            |     | 18,399 |   |
| Asset  impairment and restructuring provision                                            |   | 796                               |     | — |   |
| Depreciation  and amortization                                                           |   | 8,809                             |     | 8,420 |   |
| Loss  on disposal of assets                                                              |   | —                            |     | 36 |   |
| Provision  for deferred income taxes                                                     |   | (3                                | )        | 1,363 |   |
| Equity  in earnings of affiliates                                                        |   | (618                              | )        | (335 | ) |
| Impairment  of equity investments                                                        |   | 500                               |     | — |   |
| Changes  in operating assets and liabilities:                                            |   |                              |     |   |   |
| Trade  accounts receivable                                                               |   | 3,268                             |     | (14,918 | ) |
| Other  assets                                                                            |   | 1,311                             |     | (468 | ) |
| Trade  accounts payable                                                                  |   | 831                               |     | 1,857 |   |
| Other  liabilities                                                                       |   | (2,900                            | )        | 3,360 |   |
| Net  cash flows from operating activities                                                |   | 12,055                            |     | 2,053 |   |
|                                                                                     |   |                              |     |   |   |
| **Cash flows from investing activities:**                                                |   |                              |     |   |   |
| Purchases  of property and equipment                                                     |   | (5,272                            | )        | (8,546 | ) |
| Investment  in affiliates                                                                |   | (1,000                            | )        | — |   |
| Net  cash flows from investing activities                                                |   | (6,272                            | )        | (8,546 | ) |
|                                                                                     |   |                              |     |   |   |
| **Cash flows from financing activities:**                                                |   |                              |     |   |   |
| Borrowings  on debt                                                                      |   | 2,458                             |     | 13,500 |   |
| Repayments  of debt                                                                      |   | (5,404                            | )        | (13,500 | ) |
| Repayments  of capital lease obligations                                                 |   | (219                              | )        | (639 | ) |
| Treasury  stock reissuances                                                              |   | 57                                |     | 30 |   |
| Net  cash flows from financing activities                                                |   | (3,108                            | )        | (609 | ) |
| Effect  of exchange rates on cash                                                        |   | (568                              | )        | (624 | ) |
| **Net increase (decrease) in cash**                                                      |   | 2,107                             |     | (7,726 | ) |
| **Cash and cash equivalents, beginning of period**                                       |   | 34,142                            |     | 22,156 |   |
| **Cash and cash equivalents, end of period**                                             |   | $                                 | 36,249   |   | $ | 14,430 |   |

** **

*See Notes to Consolidated Condensed Financial Statements*

 

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**SITEL CORPORATION AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**Note 1.Basis of Consolidation and Presentation**

 

***General***

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

 

We are a leading globalprovider of outsourced customer support services. We specialize in the design,implementation, and operation of complex, multi-channel contact centers. Wesupport the Customer Relationship Management (CRM) strategies of largecorporations 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 internalcontact centers. We serve clients primarily in the automotive, consumerproducts, financial services, insurance, telecommunications, ISP and cable, andutilities sectors.

 

The accompanyingunaudited condensed consolidated financial statements reflect all normal andrecurring adjustments which are, in the opinion of management, necessary for afair presentation of the results of operations, financial position, and cashflows for the interim periods presented. The condensed consolidated financialstatements should be read in conjunction with the consolidated financialstatements and notes thereto, together with management’s discussion andanalysis of financial condition and results of operations, contained in ourAnnual Report on Form 10-K for the year ended December 31, 2002. Allsignificant intercompany balances and transactions have been eliminated.Certain amounts in prior fiscal periods have been reclassified for comparativepurposes.

 

***Use of Accounting Estimates***

Management makesestimates and assumptions when preparing financial statements under accountingprinciples generally accepted in the United States of America that affect:

 

•        our reported amounts of assets andliabilities at the dates of the financial statements,

•        our disclosure of contingent assets andliabilities at the dates of the financial statements, and

•        our reported amounts of revenues andexpenses during the reporting periods.

 

These estimates involvejudgments with respect to, among other things, future economic factors that aredifficult to predict and are beyond management’s control. As a result, actualamounts could differ from these estimates.

*** ***

***Recently Issued Accounting Pronouncements***

In June 2001, theFinancial Accounting Standards Board (FASB) issued Statement of FinancialAccounting Standard (SFAS) No. 143, “Accounting for Asset RetirementObligations” (SFAS 143). SFAS 143 requires that we record the fair value of anasset retirement obligation as a liability in the period in which we incur alegal obligation associated with the retirement of tangible long-lived assetsthat result from the acquisition, construction, development and/or normal useof assets. We recorded a corresponding asset that is depreciated over the lifeof the asset. Subsequent to the initial measurement of the asset retirement obligation,the obligation will be adjusted at the end of each period to reflect thepassage of time and changes in the estimated future cash flows underlying theobligation. We adopted SFAS 143 on January 1, 2003. The adoption of SFAS143 did not have a material effect on our consolidated financial statements.

 

In June 2002, the FASBissued SFAS No. 146, “Accounting for Costs Associated with Exit orDisposal Activities” (SFAS 146), which is effective for fiscal years beginningafter December 31, 2002. SFAS 146 supercedes Emerging Issues Task Force(EITF) Issue No. 94-3, “Liabilities Recognized for Certain EmployeeTermination Benefits and Other Costs to Exit an Activity (including CertainCosts Incurred in a Restructuring).” We adopted SFAS 146 on January 1, 2003.See Note 4 to the consolidated condensed financial statements for disclosure ofasset impairment and restructuring expenses recorded during the three monthsended March 31, 2003.

 

In November 2002, theEITF reached a consensus on Issue No. 00-21, “Revenue Arrangements withMultiple Deliverables’’ (EITF 00-21). EITF 00-21 addresses certain aspects ofthe accounting by a vendor for arrangements under which the vendor will performmultiple revenue generating activities. EITF 00-21 will be effective for periodsbeginning after June 15, 2003. We do not expect the adoption of EITF 00-21to have a material impact on our financial position or results of operations.

 

In November 2002, theFASB issued Interpretation No. 45 “Guarantor’s Accounting and Disclosure Requirementsfor Guarantees, Including Indirect Guarantees of Indebtedness to Others, aninterpretation of FASB Statements No. 5, 57, and 107 and a rescission of FASBInterpretation No. 34” (FIN 45). FIN 45 elaborates on the disclosures tobe made by a guarantor in its interim and annual

 

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financial statementsabout its obligations under guarantees issued. FIN 45 also clarifies that aguarantor is required to recognize, at inception of a guarantee, a liabilityfor the fair value of the obligation undertaken. The initial recognition andmeasurement provisions of FIN 45 are applicable to guarantees issued ormodified after December 31, 2002 and have not had a material effect on ourconsolidated financial statements.

 

In December 2002, theFASB issued SFAS No. 148, “Accounting for Stock-Based Compensation - Transitionand Disclosure, an amendment of FASB No. 123 (SFAS 148). This Statement amendsSFAS 123 to provide alternative methods of transition for a voluntary change tothe fair value method of accounting for stock-based employee compensation. Inaddition, this Statement amends the disclosure requirements of SFAS 123 torequire prominent disclosures in both annual and interim financial statements.The required disclosures under SFAS 148 are included in  Note 6 to these condensed consolidatedfinancial statements.

 

In January 2003, the FASBissued Interpretation No. 46, “Consolidation of Variable InterestEntities, an Interpretation of ARB No. 51” (FIN 46). FIN 46 addresses theconsolidation by business enterprises of variable interest entities as definedin FIN 46. FIN 46 applies immediately to variable interests in variableinterest entities created after January 31, 2003, and to variableinterests in variable interest entities obtained after January 31, 2003.For public enterprises with a variable interest in a variable interest entitycreated before February 1, 2003, FIN 46 applies July 1, 2003 for existingarrangements. The application of FIN 46 is not expected to have a materialeffect on our consolidated financial statements.

 

In April 2003, the FASBissued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments andHedging Activities” (SFAS 149). SFAS 149 amends and clarifies financial accounting and reporting forderivative instruments, including certain derivative instruments embedded inother contracts and for hedging activities under SFAS No. 133, *Accounting for Derivative Instruments and HedgingActivities*(SFAS 133). Except for the provisions of SFAS 149 that relate to SFAS 133Implementation Issues that have been effective for fiscal quarters that beganprior to June 15, 2003, SFAS 149 is effective for contracts entered into ormodified after June 30, 2003 and for hedging relationships designated afterJune 30, 2003. The application of SFAS 149 is not expected to have a materialeffect on our consolidated financial statements.

 

**Note 2.Comprehensive Income (Loss)**

*** ***

Comprehensive income(loss) for the three months ended March 31, 2003 and 2002 is as follows (inthousands):

 
|                               |   | **Three Months Ended  March 31,** |   |
|------------------------------------|--------|-----------------------------------|--------|
|                               |   | **2003**                          |   | **2002** |   |
| Net income (loss)                  |   | $                                 | 61     |   | $ | (15,661 | ) |
| Other comprehensive income (loss): |   |                              |   |   |   |
| Currency translation adjustment    |   | 2,898                             |   | (2,939 | ) |
| Comprehensive income (loss)        |   | $                                 | 2,959  |   | $ | (18,600 | ) |

 

**Note 3.Goodwill**

* *

As of January 1, 2002, weadopted the provisions of SFAS No. 142, *Goodwilland Other Intangible Assets*, and we ceased amortizing goodwill,including equity method goodwill, beginning January 1, 2002.  SFAS No. 142 also required the Company tocomplete a transitional impairment analysis of the Company’s goodwill basedupon the estimated fair values of the Company’s goodwill as of January 1,2002.  The Company completed thetransitional impairment analysis prior to the issuance of the annual 2002consolidated financial statements and, as a result, recorded a goodwillimpairment loss of $18.4 million (net of tax). The transitional impairment loss was recorded as a cumulative effect ofan accounting change as of January 1, 2002, in the annual 2002 consolidatedfinancial statements.  The accompanyingconsolidated condensed March 31, 2002 statements of income (loss) and cashflows have been restated to include the January 1, 2002 impairment charge.

** **

At least annually or morefrequently as changes in circumstances indicate, we will evaluate the estimatedfair value of our goodwill. On these evaluation dates, to the extent that thecarrying value of the net assets of any of our reporting units having goodwillis greater than their estimated fair value, we will be required to takeadditional goodwill impairment charges. We are required to make certain

 

5

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assumptions and estimatesregarding the fair value of goodwill when assessing for impairment. Changes inthe fact patterns underlying such assumptions and estimates could ultimatelyresult in the recognition of impairment losses.

 

**Note4.  Asset Impairment and RestructuringExpenses**

 

As a result of certainclient contract negotiations that concluded during the three months ended March31, 2003, we have re-assessed our facilities requirements and determined that acertain facility subject to an operating lease is no longer needed. As aresult, we have recorded asset impairment and restructuring expenses of $0.8million during the three months ended March 31, 2003 related to the write-offof abandoned leasehold improvements of $0.4 million and $0.4 million forscheduled payments of operating leases for which we will receive no futureeconomic benefit. Our estimates are based upon many factors includingprojections of sublease rates and the time period required to locate tenants.The facility was abandoned prior to March 31, 2003.

 

The additional remainingasset impairment and restructuring accruals relate to previous restructuringsin conjunction with our plan designed to intensify our focus on corecompetencies, accelerate revenue growth, and improve profitability, which wasannounced in June 2001.

 

We summarize thecomponents of the accrued restructuring expenses recorded in our condensed consolidated balance sheet in thefollowing table:

 
|                           |   | **Accrual  Balance  December 31,  2002** |   | **Expensed  in  2003** |   | **Paid  in  2003** |   | **Accrual  Balance  March 31,  2003** |   |
|--------------------------------|--------|------------------------------------------|--------|------------------------|--------|--------------------|--------|---------------------------------------|--------|
|                           |   | **(in  millions)**                       |   |
|                           |   |                                     |   |                   |   |               |   |                                  |   |
| Severance                      |   | $                                        | 0.3    |                   | $      | —             |   | $                                     | — |   | $ | 0.3 |   |
| Facility  closure or reduction |   | 6.4                                      |   | 0.4                    |   | (0.8               | )      | 6.0                                   |   |
| Other                          |   | 0.3                                      |   | —                 |   | (0.1               | )      | 0.2                                   |   |
| Total                          |   | $                                        | 7.0    |                   | $      | 0.4                |   | $                                     | (0.9   | ) | $ | 6.5 |   |
|                                |        |                                          |        |                        |        |                    |        |                                       |        |  |  |  |  |  |

 

**Note 5.Investments 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 condensed balancesheet. We periodically 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 duringthe quarter ended March 31, 2003, we determined that another-than-temporary impairment existed for one of our investments. Impairmentcharges of $0.5 million have been recorded in other income (expense), netin the condensed consolidated statement of income (loss) to record thisinvestment at fair value.

 

Subcontracted expensesfor services provided by our India joint venture for the three months endedMarch 31, 2003 were $3.4 million of which $2.3 million was payable at March 31,2003 and is included in trade accounts payable in the accompanying consolidatedcondensed balance sheet.

 

**Note 6. Stock-Based Compensation**

 

We provide stock optionawards to our employees and directors as an integral component of ourcompensation plan.  Vesting terms mayvary by grant and by plan, and the maximum term of stock options is limited bygoverning plan documents.  Option pricesare set at

 

6

----

 

the fair value of ourcommon stock on the date of grant. Consequently, under the intrinsic value method of accounting, we do notrecord any compensation expense for the grants of stock options to employees ordirectors.

 

Generally acceptedaccounting principles provide an alternative method of measuring andrecognizing employee compensation expense for stock options to the intrinsic valuemethod.  The alternative method (“fairvalue”) requires an estimate of the fair value of the stock options granted toemployees and directors at the date of grant using a valuation model, with therecognition of expense occurring over the vesting period of the options.  Had the fair value method of accounting beenused in the preparation of the accompanying consolidated condensed financialstatements, the effects on net income (loss) and earnings per share as reportedwould be as follows:

 
| **Three Months Ended March 31,**                                                                                          |   | **2003**           |   | **2002** |   |
|---------------------------------------------------------------------------------------------------------------------------|--------|--------------------|--------|----------|--------|
|                                                                                                                      |   | **(in thousands)** |   |
| Net income (loss):                                                                                                        |   |               |   |     |   |
| As reported                                                                                                               |   | $                  | 61     |     | $      | (15,661 | ) |
| Less: total stock based  employee compensation expense determined under the fair value method for all  awards, net of tax |   | (348               | )      | (599     | )      |
| Pro forma                                                                                                                 |   | $                  | (287   | )        | $      | (16,260 | ) |
|                                                                                                                      |   |               |   |     |   |
| Income (loss) per  common share:                                                                                          |   |               |   |     |   |
| As reported:                                                                                                              |   |               |   |     |   |
| Basic                                                                                                                     |   | $                  | 0.00   |     | $      | (0.21 | ) |
| Diluted                                                                                                                   |   | 0.00               |   | (0.21    | )      |
| Pro forma:                                                                                                                |   |               |   |     |   |
| Basic                                                                                                                     |   | 0.00               |   | (0.22    | )      |
| Diluted                                                                                                                   |   | 0.00               |   | (0.22    | )      |

 

The per shareweighted-average fair value of stock options granted was determined on the dateof grant using the Black-Scholes option-pricing model with an expected dividendyield of 0.0%, and the following weighted-average assumptions:

 
| •      Volatility factor       |   | 69.2%   |
|--------------------------------------------------------------|--------|---------|
| •      Risk-Free interest rate |   | 2%      |
| •      Expected life           |   | 5 years |

 

**Note 7. Contingencies**

 

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, that the resolution of such matters will not have a material adverseeffect on our consolidated financial position or results of operations.

 

One of our clients has received letters from time totime containing an offer to license and suggesting that the client might beinfringing certain patents related to computerized telephonic voice responsesystems without the license. The client has

indicated that if any infringement occurred the clientwould seek contractual indemnity from us. In such an event, we would expect toseek contractual indemnity from certain of our vendors. Any such contractualindemnity we might obtain likely would not be sufficient to cover all of thecosts of investigating and resolving such matter. We might also seek a licenseunder the patents.

 

Any such license may not be available undercommercially reasonable terms. Any license costs would increase the cost ofdoing business in the future and may or may not be fully reflected in ourpricing. To our knowledge, no litigation has been initiated against our clientor us concerning this matter. At this stage, due to the inherent uncertainties,we are unable to predict whether this matter may have a material adverse effecton our business or on our financial condition or results of operation.

 

7

----

 

**Note 8.Supplemental Guarantor 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 statements of (a) SITEL Corporation,the parent, (b) the guarantor subsidiaries, (c) the nonguarantor subsidiaries,and (d) SITEL Corporation on a consolidated basis:

 
| • |   | Condensed Consolidating Statements of Income (Loss)  and Comprehensive Income (Loss) for the three months ended March 31, 2003 and  2002, |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------|
| • |   | Condensed Consolidating Balance Sheets at March 31,  2003 and December 31, 2002, and                                                      |
| • |   | Condensed Consolidating Statements of Cash Flows for  the three months ended March 31, 2003 and 2002.                                     |

** **

**CondensedConsolidating Statement of Income (Loss) and Comprehensive Income (Loss)**

** **
| **Three Months Ended March 31, 2003**                                              |   | **Parent**          |       | **Guarantor  Subsidiaries** |       | **Nonguarantor  Subsidiaries** |       | **Eliminations** |       | **Consolidated** |       |
|------------------------------------------------------------------------------------|--------|---------------------|------------|-----------------------------|------------|--------------------------------|------------|------------------|------------|------------------|------------|
|                                                                               |   | **(in  thousands)** |       |
|                                                                               |   |                | ** ** |                        | ** ** |                           | ** ** |             | ** ** |             | ** ** |
| **Revenues**                                                                       |   | $                   | 87,530     |                        | $          | 11,782                         |       | $                | 96,331     |             | $          | (1,548 | ) | $ | 194,095 |   |
|                                                                               |   |                |       |                        |       |                           |       |             |       |             |       |
| **Operating expenses:**                                                            |   |                |       |                        |       |                           |       |             |       |             |       |
| Direct labor and telecommunications expenses                                       |   | 46,876              |       | 5,902                       |       | 57,994                         |       | —           |       | 110,772          |       |
| Subcontracted and other services expenses                                          |   | 11,610              |       | 672                         |       | 1,367                          |       | —           |       | 13,649           |       |
| Operating, selling and administrative expenses                                     |   | 29,283              |       | 2,787                       |       | 35,154                         |       | (1,548           | )          | 65,676           |       |
| Asset impairment and restructuring expenses                                        |   | —              |       | —                      |       | 796                            |       | —           |       | 796              |       |
| Total operating expenses                                                           |   | 87,769              |       | 9,361                       |       | 95,311                         |       | (1,548           | )          | 190,893          |       |
|                                                                               |   |                |       |                        |       |                           |       |             |       |             |       |
| **Operating income (loss)**                                                        |   | (239                | )          | 2,421                       |       | 1,020                          |       | —           |       | 3,202            |       |
|                                                                               |   |                |       |                        |       |                           |       |             |       |             |       |
| **Other income (expense):**                                                        |   |                |       |                        |       |                           |       |             |       |             |       |
| Interest expense, net                                                              |   | (2,538              | )          | (5                          | )          | (181                           | )          | —           |       | (2,724           | )          |
| Equity in earnings of affiliates                                                   |   | 2,233               |       | (17                         | )          | 618                            |       | (2,216           | )          | 618              |       |
| Other expense, net                                                                 |   | 605                 |       | (166                        | )          | (1,098                         | )          | —           |       | (659             | )          |
| Total other expense, net                                                           |   | 300                 |       | (188                        | )          | (661                           | )          | (2,216           | )          | (2,765           | )          |
|                                                                               |   |                |       |                        |       |                           |       |             |       |             |       |
| **Income before income taxes,  minority interest and change in accounting method** |   | 61                  |       | 2,233                       |       | 359                            |       | (2,216           | )          | 437              |       |
|                                                                               |   |                |       |                        |       |                           |       |             |       |             |       |
| Income tax expense                                                                 |   | —              |       | —                      |       | 170                            |       | —           |       | 170              |       |
| Minority interest                                                                  |   | —              |       | —                      |       | 206                            |       | —           |       | 206              |       |
| **Income before change in accounting  method**                                     |   | 61                  |       | 2,233                       |       | (17                            | )          | (2,216           | )          | 61               |       |
|                                                                               |   |                |       |                        |       |                           |       |             |       |             |       |
| Cumulative effect of a change in accounting                                        |   | —              |       | —                      |       | —                         |       | —           |       | —           |       |
| **Net income (loss)**                                                              |   | $                   | 61         |                        | $          | 2,233                          |       | $                | (17        | )                | $          | (2,216 | ) | $ | 61 |   |
|                                                                               |   |                |       |                        |       |                           |       |             |       |             |       |
| Currency translation adjustment                                                    |   | 2,898               |       | 48                          |       | 3,028                          |       | (3,076           | )          | 2,898            |       |
| **Comprehensive income (loss)**                                                    |   | $                   | 2,959      |                        | $          | 2,281                          |       | $                | 3,011      |             | $          | (5,292 | ) | $ | 2,959 |   |

 

8

----

 

**CondensedConsolidating Statement of Income (Loss) and Comprehensive Income (Loss)**

** **
| **Three Months Ended March 31, 2002**                                              |   | **Parent**         |       | **Guarantor****Subsidiaries** |       | **Nonguarantor****Subsidiaries** |       | **Eliminations** |       | **Consolidated** |       |
|------------------------------------------------------------------------------------|--------|--------------------|------------|-------------------------------|------------|----------------------------------|------------|------------------|------------|------------------|------------|
|                                                                               |   | **(in thousands)** |       |
|                                                                               |   |               | ** ** |                          | ** ** |                             | ** ** |             | ** ** |             | ** ** |
| **Revenues**                                                                       |   | $                  | 99,515     |                          | $          | 12,036                           |       | $                | 82,136     |             | $          | (655 | ) | $ | 193,032 |   |
|                                                                               |   |               |       |                          |       |                             |       |             |       |             |       |
| **Operating expenses:**                                                            |   |               |       |                          |       |                             |       |             |       |             |       |
| Direct  labor and telecommunications expenses                                      |   | 57,016             |       | 6,136                         |       | 48,864                           |       | —           |       | 112,016          |       |
| Subcontracted  and other services expenses                                         |   | 9,466              |       | 654                           |       | 1,473                            |       | —           |       | 11,593           |       |
| Operating,  selling and administrative expenses                                    |   | 30,257             |       | 3,081                         |       | 29,077                           |       | (655             | )          | 61,760           |       |
| Asset  impairment and restructuring expenses                                       |   | —             |       | —                        |       | —                           |       | —           |       | —           |       |
| Total  operating expenses                                                          |   | 96,739             |       | 9,871                         |       | 79,414                           |       | (655             | )          | 185,369          |       |
|                                                                               |   |               |       |                          |       |                             |       |             |       |             |       |
| **Operating income**                                                               |   | 2,776              |       | 2,165                         |       | 2,722                            |       | —           |       | 7,663            |       |
|                                                                               |   |               |       |                          |       |                             |       |             |       |             |       |
| **Other income (expense):**                                                        |   |               |       |                          |       |                             |       |             |       |             |       |
| Interest  expense, net                                                             |   | (2,737             | )          | 87                            |       | (55                              | )          | (26              | )          | (2,731           | )          |
| Equity  in earnings of affiliates                                                  |   | (15,163            | )          | (16,604                       | )          | 335                              |       | 31,767           |       | 335              |       |
| Other  expense, net                                                                |   | 5                  |       | —                        |       | (219                             | )          | 26               |       | (188             | )          |
| Total  other expense, net                                                          |   | (17,895            | )          | (16,517                       | )          | 61                               |       | 31,767           |       | (2,584           | )          |
|                                                                               |   |               |       |                          |       |                             |       |             |       |             |       |
| **Income before income taxes, minority interest and change in  accounting method** |   | (15,119            | )          | (14,352                       | )          | 2,783                            |       | 31,767           |       | 5,079            |       |
|                                                                               |   |               |       |                          |       |                             |       |             |       |             |       |
| Income  tax expense                                                                |   | 445                |       | 811                           |       | 725                              |       | —           |       | 1,981            |       |
| Minority  interest                                                                 |   | 97                 |       | —                        |       | 263                              |       | —           |       | 360              |       |
| **Income before change in accounting method**                                      |   | (15,661            | )          | (15,163                       | )     | 1,795                            |       | 31,767           |       | 2,738            |       |
|                                                                               |   |               |       |                          |       |                             |       |             |       |             |       |
| Cumulative  effect of a change in accounting                                       |   | —             |       | —                        |       | (18,399                          | )          | —           |       | (18,399          | )          |
| **Net income (loss)**                                                              |   | $                  | (15,661    | )                             | $          | (15,163                          | )          | $                | (16,604    | )                | $          | 31,767 |   | $ | (15,661 | ) |
|                                                                               |   |               |       |                          |       |                             |       |             |       |             |       |
| Currency  translation adjustment                                                   |   | (2,939             | )          | (5,130                        | )          | (8,020                           | )          | 13,150           |       | (2,939           | )          |
| **Comprehensive income (loss)**                                                    |   | $                  | (18,600    | )                             | $          | (20,293                          | )          | $                | (24,624    | )                | $          | 44,917 |   | $ | (18,600 | ) |

 

9

----

 

**CondensedConsolidating Balance Sheet**

 
| **At March 31, 2003**                                 |   | **Parent**         |    | **Guarantor  Subsidiaries** |   | **Nonguarantor  Subsidiaries** |   | **Eliminations** |    | **Consolidated** |   |
|-------------------------------------------------------|--------|--------------------|---------|-----------------------------|--------|--------------------------------|--------|------------------|---------|------------------|--------|
|                                                  |   | **(in thousands)** |    |
| **Assets**                                            |   |               |    |                        |   |                           |   |             |    |             |   |
| **Current assets:**                                   |   |               |    |                        |   |                           |   |             |    |             |   |
| Cash  and cash equivalents                            |   | $                  | 17,202  |                        | $      | 3,266                          |   | $                | 15,781  |             | $      | — |   | $ | 36,249 |   |
| Trade  accounts receivable, net                       |   | 81,167             |    | 24,626                      |   | 72,601                         |   | (52,771          | )       | 125,623          |   |
| Prepaid  expenses and other current assets            |   | 6,259              |    | 54                          |   | 14,915                         |   | —           |    | 21,228           |   |
| Total  current assets                                 |   | 104,628            |    | 27,946                      |   | 103,297                        |   | (52,771          | )       | 183,100          |   |
|                                                  |   |               |    |                        |   |                           |   |             |    |             |   |
| **Property and equipment, net**                       |   | 23,768             |    | 2,016                       |   | 59,518                         |   | —           |    | 85,302           |   |
|                                                  |   |               |    |                        |   |                           |   |             |    |             |   |
| **Other assets:**                                     |   |               |    |                        |   |                           |   |             |    |             |   |
| Goodwill,  net                                        |   | 19,577             |    | —                      |   | 31,112                         |   | —           |    | 50,689           |   |
| Deferred  income taxes                                |   | 6,100              |    | —                      |   | 88                             |   | —           |    | 6,188            |   |
| Investments  in affiliates                            |   | 1,500              |    | —                      |   | 18,314                         |   | —           |    | 19,814           |   |
| Other  assets                                         |   | 6,084              |    | 70                          |   | 661                            |   | —           |    | 6,815            |   |
| Investments  in subsidiaries                          |   | 122,348            |    | 96,311                      |   | —                         |   | (218,659         | )       | —           |   |
| **Total assets**                                      |   | $                  | 284,005 |                        | $      | 126,343                        |   | $                | 212,990 |             | $      | (271,430 | ) | $ | 351,908 |   |
|                                                  |   |               |    |                        |   |                           |   |             |    |             |   |
| **Liabilities and Stockholders’ Equity**         |   |               |    |                        |   |                           |   |             |    |             |   |
| **Current liabilities:**                              |   |               |    |                        |   |                           |   |             |    |             |   |
| Current  portion of long-term debt                    |   | $                  | —  |                        | $      | —                         |   | $                | 2,458   |             | $      | — |   | $ | 2,458 |   |
| Current  portion of capital lease obligations         |   | 967                |    | 115                         |   | 1,024                          |   | —           |    | 2,106            |   |
| Trade  accounts payable                               |   | 11,950             |    | 1,098                       |   | 67,232                         |   | (52,809          | )       | 27,471           |   |
| Accrued  expenses and other current liabilities       |   | 26,186             |    | 2,593                       |   | 38,223                         |   | (40              | )       | 66,962           |   |
| Total  current liabilities                            |   | 39,103             |    | 3,806                       |   | 108,937                        |   | (52,849          | )       | 98,997           |   |
| **Long-term debt and other liabilities:**             |   |               |    |                        |   |                           |   |             |    |             |   |
| Long-term  debt                                       |   | 100,000            |    | —                      |   | —                         |   | —           |    | 100,000          |   |
| Capital  lease obligations, excluding current portion |   | 346                |    | 189                         |   | 7,431                          |   | —           |    | 7,966            |   |
| Deferred  compensation                                |   | 1,503              |    | —                      |   | —                         |   | —           |    | 1,503            |   |
| Deferred  income taxes                                |   | —             |    | —                      |   | 311                            |   | —           |    | 311              |   |
| Total  liabilities                                    |   | 140,952            |    | 3,995                       |   | 116,679                        |   | (52,849          | )       | 208,777          |   |
|                                                  |   |               |    |                        |   |                           |   |             |    |             |   |
| **Minority interests**                                |   | —             |    | —                      |   | 986                            |   | —           |    | 986              |   |
|                                                  |   |               |    |                        |   |                           |   |             |    |             |   |
| **Stockholders’ equity**                         |   | 143,053            |    | 122,348                     |   | 95,325                         |   | (218,581         | )       | 142,145          |   |
| **Total liabilities and stockholders’ equity**   |   | $                  | 284,005 |                        | $      | 126,343                        |   | $                | 212,990 |             | $      | (271,430 | ) | $ | 351,908 |   |

 

10

----

 

**CondensedConsolidating Balance Sheet**

 
| **At December 31, 2002**                              |   | **Parent**         |    | **Guarantor****Subsidiaries** |   | **Nonguarantor****Subsidiaries** |   | **Eliminations** |    | **Consolidated** |   |
|-------------------------------------------------------|--------|--------------------|---------|-------------------------------|--------|----------------------------------|--------|------------------|---------|------------------|--------|
|                                                  |   | **(in thousands)** |    |
| **Assets**                                            |   |               |    |                          |   |                             |   |             |    |             |   |
| **Current assets:**                                   |   |               |    |                          |   |                             |   |             |    |             |   |
| Cash  and cash equivalents                            |   | $                  | 16,615  |                          | $      | 2,855                            |   | $                | 14,672  |             | $      | — |   | $ | 34,142 |   |
| Trade  accounts receivable, net                       |   | 90,679             |    | 21,512                        |   | 69,062                           |   | (52,610          | )       | 128,643          |   |
| Prepaid  expenses and other current assets            |   | 6,954              |    | 138                           |   | 13,779                           |   | —           |    | 20,871           |   |
| Total  current assets                                 |   | 114,248            |    | 24,505                        |   | 97,513                           |   | (52,610          | )       | 183,656          |   |
|                                                  |   |               |    |                          |   |                             |   |             |    |             |   |
| **Property and equipment, net**                       |   | 25,768             |    | 1,875                         |   | 59,240                           |   | —           |    | 86,883           |   |
|                                                  |   |               |    |                          |   |                             |   |             |    |             |   |
| **Other assets:**                                     |   |               |    |                          |   |                             |   |             |    |             |   |
| Goodwill,  net                                        |   | 19,576             |    | —                        |   | 30,148                           |   | —           |    | 49,724           |   |
| Deferred  income taxes                                |   | 6,100              |    | —                        |   | 91                               |   | —           |    | 6,191            |   |
| Investments  in affiliates                            |   | 1,000              |    | —                        |   | 17,461                           |   | —           |    | 18,461           |   |
| Other  assets                                         |   | 6,205              |    | 70                            |   | 787                              |   | —           |    | 7,062            |   |
| Investments  in subsidiaries                          |   | 123,826            |    | 100,588                       |   | —                           |   | (224,414         | )       | —           |   |
| **Total assets**                                      |   | $                  | 296,723 |                          | $      | 127,038                          |   | $                | 205,240 |             | $      | (277,024 | ) | $ | 351,977 |   |
|                                                  |   |               |    |                          |   |                             |   |             |    |             |   |
| **Liabilities and Stockholders’ Equity**         |   |               |    |                          |   |                             |   |             |    |             |   |
| **Current liabilities:**                              |   |               |    |                          |   |                             |   |             |    |             |   |
| Current  portion of long-term debt                    |   | $                  | 5,404   |                          | $      | —                           |   | $                | —  |             | $      | — |   | $ | 5,404 |   |
| Current  portion of capital lease obligations         |   | 1,065              |    | —                        |   | 886                              |   | —           |    | 1,951            |   |
| Trade  accounts payable                               |   | 11,835             |    | 890                           |   | 68,118                           |   | (52,231          | )       | 28,612           |   |
| Accrued  expenses and other current liabilities       |   | 29,271             |    | 2,322                         |   | 35,936                           |   | (458             | )       | 67,071           |   |
| Total  current liabilities                            |   | 47,575             |    | 3,212                         |   | 104,940                          |   | (52,689          | )       | 103,038          |   |
| **Long-term debt and other liabilities:**             |   |               |    |                          |   |                             |   |             |    |             |   |
| Long-term  debt                                       |   | 100,000            |    | —                        |   | —                           |   | —           |    | 100,000          |   |
| Capital  lease obligations, excluding current portion |   | 520                |    | —                        |   | 6,787                            |   | —           |    | 7,307            |   |
| Deferred  compensation                                |   | 1,394              |    | —                        |   | —                           |   | —           |    | 1,394            |   |
| Deferred  income taxes                                |   | —             |    | —                        |   | 296                              |   | —           |    | 296              |   |
| Total  liabilities                                    |   | 149,489            |    | 3,212                         |   | 112,023                          |   | (52,689          | )       | 212,035          |   |
|                                                  |   |               |    |                          |   |                             |   |             |    |             |   |
| **Minority interests**                                |   | —             |    | —                        |   | 780                              |   | —           |    | 780              |   |
|                                                  |   |               |    |                          |   |                             |   |             |    |             |   |
| **Stockholders’ equity**                         |   | 147,234            |    | 123,826                       |   | 92,437                           |   | (224,335         | )       | 139,162          |   |
| **Total liabilities and stockholders’ equity**   |   | $                  | 296,723 |                          | $      | 127,038                          |   | $                | 205,240 |             | $      | (277,024 | ) | $ | 351,977 |   |

 

11

----

 

**CondensedConsolidating Statement of Cash Flows**

** **
| **Three Months Ended March 31, 2003**                 |   | **Parent**         |   | **Guarantor  Subsidiaries** |   | **Nonguarantor  Subsidiaries** |   | **Eliminations** |   | **Consolidated** |   |
|-------------------------------------------------------|--------|--------------------|--------|-----------------------------|--------|--------------------------------|--------|------------------|--------|------------------|--------|
|                                                  |   | **(in thousands)** |   |
|                                                  |   |               |   |                        |   |                           |   |             |   |             |   |
| **Net cash flows from operating activities**          |   | $                  | 9,113  |                        | $      | 4,580                          |   | $                | (1,638 | )                | $      | — |   | $ | 12,055 |   |
|                                                  |   |               |   |                        |   |                           |   |             |   |             |   |
| **Cash flows from investing activities:**             |   |               |   |                        |   |                           |   |             |   |             |   |
| Investment  in subsidiaries                           |   | 2,662              |   | (1,110                      | )      | —                         |   | (1,552           | )      | —           |   |
| Purchases  of property and equipment                  |   | (1,337             | )      | (397                        | )      | (3,538                         | )      | —           |   | (5,272           | )      |
| Investment  in affiliates                             |   | (1,000             | )      | —                      |   | —                         |   | —           |   | (1,000           | )      |
| Net  cash flows from investing activities             |   | 325                |   | (1,507                      | )      | (3,538                         | )      | (1,552           | )      | (6,272           | )      |
|                                                  |   |               |   |                        |   |                           |   |             |   |             |   |
| **Cash flows from financing activities:**             |   |               |   |                        |   |                           |   |             |   |             |   |
| Borrowings  on debt                                   |   | —             |   | —                      |   | 2,458                          |   | —           |   | 2,458            |   |
| Repayments  of debt and capital lease obligations     |   | (5,372             | )      | —                      |   | (251                           | )      | —           |   | (5,623           | )      |
| Net  capital contribution from parent                 |   | —             |   | (2,662                      | )      | 1,110                          |   | 1,552            |   | —           |   |
| Net  borrowings and payments in intercompany balances |   | (3,681             | )      | —                      |   | 3,681                          |   | —           |   | —           |   |
| Treasury  stock reissuances                           |   | 57                 |   | —                      |   | —                         |   | —           |   | 57               |   |
| Net  cash flows from financing activities             |   | (8,996             | )      | (2,662                      | )      | 6,998                          |   | 1,552            |   | (3,108           | )      |
| Effect  of exchange rates on cash                     |   | 144                |   | —                      |   | (712                           | )      | —           |   | (568             | )      |
| **Net increase (decrease) in cash**                   |   | 586                |   | 411                         |   | 1,110                          |   | —           |   | 2,107            |   |
| **Cash and cash equivalents, beginning of period**    |   | 16,616             |   | 2,855                       |   | 14,671                         |   | —           |   | 34,142           |   |
| **Cash and cash equivalents, end of period**          |   | $                  | 17,202 |                        | $      | 3,266                          |   | $                | 15,781 |             | $      | — |   | $ | 36,249 |   |

 

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**CondensedConsolidating Statement of Cash Flows**

** **
| **Three Months Ended March 31, 2002**                 |   | **Parent**         |   | **Guarantor  Subsidiaries** |   | **Nonguarantor  Subsidiaries** |   | **Eliminations** |   | **Consolidated** |   |
|-------------------------------------------------------|--------|--------------------|--------|-----------------------------|--------|--------------------------------|--------|------------------|--------|------------------|--------|
|                                                  |   | **(in thousands)** |   |
|                                                  |   |               |   |                        |   |                           |   |             |   |             |   |
| **Net cash flows from operating activities**          |   | $                  | (4,692 | )                           | $      | (115                           | )      | $                | 6,860  |             | $      | — |   | $ | 2,053 |   |
|                                                  |   |               |   |                        |   |                           |   |             |   |             |   |
| **Cash flows from investing activities:**             |   |               |   |                        |   |                           |   |             |   |             |   |
| Purchases  of property and equipment                  |   | (3,858             | )      | —                      |   | (4,688                         | )      | —           |   | (8,546           | )      |
| Investment  in affiliates                             |   | 840                |   | 2,188                       |   | —                         |   | (3,028           | )      | —           |   |
| Net  cash flows from investing activities             |   | (3,018             | )      | 2,188                       |   | (4,688                         | )      | (3,028           | )      | (8,546           | )      |
|                                                  |   |               |   |                        |   |                           |   |             |   |             |   |
| **Cash flows from financing activities:**             |   |               |   |                        |   |                           |   |             |   |             |   |
| Borrowings  on debt                                   |   | 13,500             |   | —                      |   | —                         |   | —           |   | 13,500           |   |
| Repayments  of debt                                   |   | (13,500            | )      | —                      |   | —                         |   | —           |   | (13,500          | )      |
| Repayments  of capital lease obligations              |   | (517               | )      | —                      |   | (122                           | )      | —           |   | (639             | )      |
| Net  capital contribution from parent                 |   | —             |   | (840                        | )      | (2,188                         | )      | 3,028            |   | —           |   |
| Net  borrowings and payments in intercompany balances |   | 1,409              |   | —                      |   | (1,409                         | )      | —           |   | —           |   |
| Treasury  stock reissuances                           |   | 30                 |   | —                      |   | —                         |   | —           |   | 30               |   |
| Net  cash flows from financing activities             |   | 922                |   | (840                        | )      | (3,719                         | )      | 3,028            |   | (609             | )      |
| Effect  of exchange rates on cash                     |   | —             |   | —                      |   | (624                           | )      | —           |   | (624             | )      |
| **Net increase (decrease) in cash**                   |   | (6,788             | )      | 1,233                       |   | (2,171                         | )      | —           |   | (7,726           | )      |
| **Cash and cash equivalents, beginning of period**    |   | 6,814              |   | 2,202                       |   | 13,140                         |   | —           |   | 22,156           |   |
| **Cash and cash equivalents, end of period**          |   | $                  | 26     |                        | $      | 3,435                          |   | $                | 10,969 |             | $      | — |   | $ | 14,430 |   |

 

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**Item 2****.Management’s Discussion and Analysis of Financial Condition and Results ofOperations**

 

##### **General**

 

References in this reportto “we” and “our” 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 complex, multi-channel contact centers. Wesupport the Customer Relationship Management (CRM) strategies of largecorporations 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 professional servicesfor both outsourced and internal contact centers. We serve clients primarily inthe automotive, consumer products, financial services, insurance,telecommunications, ISP and cable, 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 this discussionand analysis, refer to our Consolidated Statements of Income (Loss), whichpresent the results of our operations for the three months ended March 31, 2003and 2002, and are summarized on the following pages. We analyze and explain thedifferences between periods for the components of net income (loss) in thefollowing sections. Our analysis is important in making decisions about yourinvestment in SITEL Corporation.

##### ** **

##### **General Business** Risks and Critical Accounting Policies and Estimates

 

**General Business Risks**

Our business successdepends on our ability to efficiently deploy our human and capital resources inthe delivery of services to our clients. Consequently, the needs of our clientsmay significantly 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 for 67.2% of our revenues inthe first quarter of 2003, and include multiple independently managed businessunits of General Motors Corporation. These General Motors business units wereresponsible for 20.3% of our total revenues for the first quarter of 2003. Twoof the primary General Motors contracts expire in January 2004. We arecurrently in negotiations regarding the continuation of services for theseclients beyond the expiration date. We did not have any other clients undercommon control that generated more than 10% of our revenues. The financialfailure of any of these clients or the loss of any or all of their businesscould have an adverse impact on our operating results.

 

Our liquidity, includingour ability to comply with restrictive debt covenants, may be adverselyaffected if we were to lose a significant client or as a result of significantchanges in client demand if we are unable to efficiently re-deploy our humanand capital resources.

 

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, which are included in our Form 10-K for the year endedDecember 31, 2002. Of those policies, we have identified the following to be

 

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critical 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:

 

***Trade Accounts Receivable***

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 Income (Loss), whichwould reduce our results of operations.

 

***Property and Equipmen****t*

We record property andequipment at cost, and calculate depreciation using the straight-line methodover the estimated useful lives of the assets, which range from 3 to20 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 Impairmen****t*

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 significant change in the extent ormanner in which long-lived assets are being used or in its physical condition,in legal factors, or in the business climate that could affect 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 carrying amount.  The recoverable amount is the estimated netfuture cash flows that we expect to recover from the future use of the asset,undiscounted and without interest, plus the asset’s residual value on disposal.Where the recoverable amount of the long-lived asset is less than the carryingvalue, an impairment loss would be recognized to write down the asset to itsfair value, which is based on discounted estimated cash flows from the futureuse 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***

We adopted the provisionsof SFAS No. 142, *Goodwill and OtherIntangible Assets,* as of January 1, 2002. As a result of theadoption of this standard, we stopped amortizing our goodwill, including equitymethod goodwill, and completed the required impairment review. As a result ofthe impairment review, we determined that the goodwill in certain reportingunits was impaired and we recorded a goodwill impairment loss of$18.4 million as a cumulative effect of an accounting change as of January1, 2002.

 

At least annually or morefrequently as changes in circumstances indicate, we will evaluate the estimatedfair value of our goodwill. On these evaluation dates, to the extent that thecarrying value of the net assets of any of our reporting units having goodwillis greater than their estimated fair value, we will be required to takeadditional 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 impairment losses.

 

***Deferred Income Taxes***

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. If enacted tax rates change, we would

 

15

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adjust the deferred tax assets and liabilities, through the provisionfor income taxes in the period of change, to reflect the enacted tax rateexpected to be in effect when the deferred tax items reverse. To the extentthat we believe that recovery is not likely, we establish a valuation allowanceto reduce the deferred tax assets to the amount that is more likely than not tobe realized. The valuation allowance is based on our estimates of futuretaxable income by jurisdiction in which we operate, the period over which thedeferred tax assets can be recovered and available tax planning strategies. Iffuture taxable income is lower than expected or if expected tax planningstrategies are not available as anticipated, we may record additional valuationallowance through income tax expense in the period such determination is made.

 

***Contingencies***

We consider thelikelihood of various loss contingencies, including tax and legal arising inthe ordinary course of business and our ability to reasonably estimate theamount of loss in determining loss contingencies. An estimated loss contingencyis accrued when it is probable that a liability has been incurred and theamount of loss can be reasonably estimated. We regularly evaluate currentinformation available to us to determine whether such accruals should beadjusted.

 

##### **Results of Operations** for the Three Months Ended March 31, 2003 Compared to the Same Period of2002

 

In this section, wediscuss our operating results and the factors affecting them. We describe ourgeneral business risks, critical accounting policies, and estimates that areimportant to our operating results on the previous pages.  Please refer to that discussion as you readthis section.

 

**Componentsof Net Income**

The following tablesummarizes our income statement data on a percentage-of-revenue basis.

 

 
|                                                                               |   | **Three Months Ended March 31,** |        |
|------------------------------------------------------------------------------------|--------|----------------------------------|-------------|
|                                                                               |   | **2003**                         |        | **2002** |   |
|                                                                               |   | **$**                            |        | **%** |   | **$** |   | **%** |   |
|                                                                               |   | **(in thousands)**               |        |
| **Revenues**                                                                       |   | **$**                            | **194,095** | ** ** | *100.0* | *%* | $ | 193,032 | ** ** | *100.0* | *%* |
|                                                                               |   |                             |        |   | * * |   |   |   | * * |
| Direct  labor and telecommunications expenses                                      |   | **110,772**                      | ** **  | *57.1* | *%* | 112,016 | ** ** | *58.0* | *%* |
| Subcontracted and other services  expenses                                         |   | **13,649**                       | ** **  | *7.0* | *%* | 11,593 | ** ** | *6.0* | *%* |
| Operating,  selling and administrative expenses                                    |   | **65,676**                       | ** **  | *33.8* | *%* | 61,760 | ** ** | *32.0* | *%* |
| Asset  impairment and restructuring expenses                                       |   | **796**                          | ** **  | *0.4* | *%* | **—** | ** ** | *0.0* | *%* |
| **Operating income**                                                               |   | **3,202**                        | ** **  | *1.7* | *%* | 7,663 | ** ** | *4.0* | *%* |
|                                                                               |   |                             |        |   | * * |   |   |   | * * |
| Interest  expense, net                                                             |   | **(2,724**                       | **)**       | *(1.4* | *)%* | (2,731 | ) | *(1.4* | *)%* |
| Equity in earnings of affiliates                                                   |   | **618**                          | ** **  | *0.3* | *%* | 335 |   | *0.1* | *%* |
| Other  expense, net                                                                |   | **(659**                         | **)**       | *(0.4* | *)%* | (188 | ) | *(0.1* | *)%* |
| **Income before income taxes, minority interest and change in  accounting method** |   | **437**                          | ** **  | *0.2* | *%* | 5,079 | ** ** | *2.6* | *%* |
|                                                                               |   |                             |        |   | * * |   |   |   | * * |
| Income  tax expense                                                                |   | **170**                          | ** **  | *0.1* | *%* | 1,981 | ** ** | *1.0* | *%* |
| Minority  interest                                                                 |   | **206**                          | ** **  | *0.1* | *%* | 360 | ** ** | *0.2* | *%* |
|                                                                               |   |                             |        |   | * * |   |   |   | * * |
| **Income before change in accounting method**                                      |   | **61**                           | ** **  | *0.0* | *%* | 2,738 |   | *1.4* | *%* |
| Cumulative effect of change in  accounting for goodwill                            |   | —                           | ** **  | *0.0* | *%* | (18,399 | ) | *(9.5* | *)%* |
|                                                                               |   |                             |        |   | * * |   |   |   | * * |
| **Net income (loss)**                                                              |   | **$**                            | **61**      | ** ** | *0.0* | *%* | $ | (15,661 | ) | *(8.1* | *)%* |

 

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***Revenues***

Revenues increased $1.1million, or 0.6%, in the first quarter of 2003 compared to the same period of2002. The changes in revenues by geographic region are shown in the followingtable:

 
| **Three Months  Ended March 31,** |   | **2003** |      | **2002**           |   | **$   Change** |   | **%  Change** |   |
|-----------------------------------|--------|----------|-----------|--------------------|--------|----------------|--------|---------------|--------|
|                              |   |     |      | **(in  millions)** |   |           |   |          |   |
| North  America                    |   | **$**    | **114.4** |               | $      | 123.3          |   | $             | (8.9   | ) | (7.2 | )% |
| Europe                            |   | **69.9** |      | 48.5               |   | 21.4           |   | 44.1          | %      |
| Asia  Pacific                     |   | **7.5**  |      | 6.3                |   | 1.2            |   | 19.0          | %      |
| Latin  America                    |   | **2.3**  |      | 14.9               |   | (12.6          | )      | (84.6         | )%     |
| Totals                            |   | **$**    | **194.1** |               | $      | 193.0          |   | $             | 1.1    |   | 0.6 | % |

 

The decrease in NorthAmerica revenues was primarily due to a $12.5 million decline in customer careand customer acquisition services we provided to a number of our large globalclients offset by a $4.0 million increase in revenues by our risk managementbusiness.

 

The weakening of the U.S.dollar versus the British pound and Euro accounted for $11.2 million, or 52%,of the increase in European revenues. The remaining increase was the result ofhigher sales volumes from existing clients and the implementation of multiplepan European client accounts.

 

The weakening of the U.S.dollar versus the New Zealand dollar accounted for nearly all of the increasein Asia Pacific revenues.

 

The decrease in LatinAmerican revenues was primarily due to the change in how we reported ourinvestment in certain Latin America affiliates. 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 of thischange, our Latin America revenues will no longer include the revenuesassociated with the joint venture. As a result of this change in accounting,first quarter of 2003 revenues for Latin America declined $12.5 millioncompared to the first quarter of 2002. 

 

***Direct Labor and TelecommunicationsExpenses***

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 revenues.

 

Direct labor andtelecommunications expenses as a percentage of revenues can vary based on thenature of the contract, the nature of the work, and the market in which the servicesare provided. Accordingly, direct labor and telecommunications expenses as apercentage of revenues can vary, sometimes significantly, from period toperiod.

 

Direct labor andtelecommunications expenses decreased $1.2 million, or 1.1%, in the firstquarter of 2003 compared to the same period of 2002. As a percentage ofrevenues, direct labor and telecommunications expenses decreased from 58.0% inthe first quarter of 2002 to 57.1% in the first quarter of 2003. However, as wediscuss in the following section, we subcontract certain client services to ourIndia joint venture. We do not incur direct labor and telecommunicationexpenses for these subcontracted services, as such costs are incurred by thejoint venture. Excluding the revenues we have recorded from clients where wehave subcontracted the services to our India joint venture, direct labor andtelecommunications expenses as a percentage of revenues decreased from 58.7% in2002 to 58.2% in 2003.

 

***Subcontracted and Other Services Expenses***

Subcontracted and otherservices expenses include services provided to clients through subcontractorsand through our joint ventures, and other out-of-pocket expenses. Subcontractedand other services expenses increased $2.1 million, or 17.7%, in the first quarterof 2003 compared to the same period of 2002. The increase in these expenses wasprimarily due to subcontracted expenses for services provided by our Indiajoint venture as a result of higher subcontracted service volume from thatfacility during the first quarter of 2003 compared to 2002.  Subcontracted expenses for services providedby our India joint venture for the three months ended March 31, 2003 were $3.4million of which $2.3 million was payable at March 31, 2003.

 

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***Operating, Selling and AdministrativeExpenses***

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 $3.9 million, or 6.3%, in the first quarterof 2003 compared to the same period of 2002. The weakening of the U.S. dollar compared to the primary currency in thejurisdictions that we operate accounted for an increase of $4.0 million inoperating, selling and administrative expenses compared to the same period in2002. This unfavorable increase was offset by a decrease of $2.7 million inthese expenses as a result of the change in accounting of certain LatinAmerican affiliates as described previously. As a percentage of revenues,operating, selling and administrative expenses increased from 32.0% in the firstquarter of 2002, to 33.8% in the first quarter of 2003. The remaining increasewas the result of costs incurred during the first quarter of 2003 related tothe complex implementation of large new client accounts and additional salesand administrative costs.

 

***Asset Impairment and Restructuring Expenses***

As a result of certainclient contract negotiations that concluded during the first quarter of 2003,we have re-assessed our facilities requirements and determined that a certainfacility subject to an operating lease is no longer needed. As a result, wehave recorded asset impairment and restructuring expenses of $0.8 millionduring the three months ended March 31, 2003 related to the write-off ofabandoned leasehold improvements of $0.4 million and $0.4 million for scheduledpayments of  operating leases for whichwe will receive no future economic benefit.

 

***Operating Income***

Operatingincome decreased $4.5 million, or 58.2%, in the first quarter of 2003 comparedto the same period of 2002. As a percentage of revenues, operating incomedecreased from 4.0% in the first quarter of 2002, to 1.7% in the first quarterof 2003 due to the factors discussed above.

 

***Interest Expense, Net***

Interest expense, net ofinterest income, in the first quarter of 2003 remained consistent with thefirst quarter of 2002.

 

***Equity in Earnings of Affiliates***

As discussed previously,effective October 1, 2002, we revised our joint venture agreement and theresults of our operations in certain Latin America affiliates are now being accountedfor under the equity method. Equity in earnings of affiliates increased by $0.3million or 84.4% in the first quarter of 2003 as compared to the first quarterof 2002 primarily due to the inclusion of equity in earnings in certain LatinAmerica affiliates which were recorded on a consolidated basis in the firstquarter of 2002.

 

***Other Expense, Net***

Other expense, net ofother income, increased $0.5 million in the first quarter of 2003 as comparedto 2002 primarily due to an impairment charge of $0.5 million to reduceour basis in an investment to fair value. Based upon our review of theinvestee’s financial condition, results of operations and operating trends andthe implied value from recent rounds of financing completed by the investee, wedetermined that an other-than-temporary impairment existed for one of ourinvestments.

 

***Income Tax Expense***

Our first quarter of 2003income tax expense as a percentage of income before income taxes and minorityinterest was 39%, which is consistent with the same period in 2002. Thedifference between this rate and the statutory U.S. Federal rate of 34% wasprimarily due to net operating losses in certain non-U.S. subsidiaries forwhich no tax benefit was recognized, and U.S. state and local income taxes.

 

**FinancialCondition and Liquidity**

 

In this section, wediscuss our financial condition and liquidity and the factors affecting them.We separately discuss cash flows, capital resources, and contractualobligations and commitments. We describe our general business risks, criticalaccounting policies, and estimates that are important to our financialcondition and liquidity earlier in this report. Please refer to that discussionas you read this section.

 

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# ***Cash Flows***

The following table sets forth summary cash flow data for the periodsindicated. Please refer to this summary as you read our discussion of thesources and uses of cash in each year.

 
| **Three Months Ended March 31,** |   | **2003**            |       | **2002** |   |
|----------------------------------|--------|---------------------|------------|----------|--------|
|                             |   | **(in  thousands)** |       |
| **Net  cash flows from:**        |   |                |       |     |   |
| Operating activities             |   | **$**               | **12,055** |     | $      | 2,053 |   |
| Investing activities             |   | **(6,272**          | )          | (8,546   | )      |
| Financing activities             |   | **(3,108**          | )          | (609     | )      |
|                                  |        |                     |            |          |        |  |  |

 

**2003**

In the first quarter of2003, cash provided by operating activities resulted primarily from incomebefore asset impairment and restructuring expenses, depreciation andamortization, and other charges of $10.2 million and a $4.6 million decrease intrade accounts receivable and other assets partially offset by a $2.1 milliondecrease in trade accounts payable and other liabilities.

 

In the first quarter of2003, we used cash for investing activities to purchase $5.3 million ofproperty and equipment and used $1.0 million to increase investments inaffiliates.

 

In the first quarter of2003, we used cash for financing activities to repay $5.4 million of the lineof credit, net of additional borrowings of $1.3 million. In addition, wereceived $1.2 million from additional borrowings to finance expansion in aLatin American subsidiary.

 

**2002**

In the first quarter of 2002,cash provided by operating activities resulted primarily from income beforedepreciation and amortization and cumulative effect of change in accounting forgoodwill of $11.2 million, a $3.5 million increase in other liabilities, and a$1.9 million increase in trade accounts payable, which were partially offset bya $14.9 million increase in trade receivables.

 

In the first quarter of2002, we used cash for investing activities to purchase $8.5 million ofproperty and equipment.

 

In the first quarter of2002, we used cash for financing activities to repay $0.6 million of capitallease obligations.

# * *

 

***Capital Resources***

We have historically usedfunds generated from operations, leases of property and equipment, equitycapital, senior subordinated notes, and borrowings under credit facilities withbanks 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, asneeded, for ongoing working capital requirements and general corporatepurposes. At March 31, 2003, we had $48.6 million of available borrowings underthe new credit facility, and we were in compliance with all financial covenantsof the facility.

 

We expect to finance ourcurrent operations, planned capital expenditures, and internal growth for theforeseeable future using funds generated from operations, existing cash, leasesof property and equipment, and the funds available under our credit facility.We estimate that our second quarter of 2003 capital expenditures will rangefrom $5 million to $8 million. Future acquisitions, if any, may requireadditional debt or equity financing.

 

Under a stock repurchaseprogram that was authorized by our Board of Directors in February 2001, we mayrepurchase up to $10 million of our shares from time to time in the open marketor in privately negotiated transactions, depending on general business andmarket conditions. Through the date of this report, we had repurchased a totalof 171,800 shares at a total cost of $0.3 million.

 

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# ***Contractual Obligations and Commitments***

We summarize variouscontractual obligations and commitments in the Notes to our ConsolidatedFinancial Statements in our Report on Form 10-K for the year ended December 31,2002.  These contractual obligations andcommitments include:

 

•            $100.0 million of long-term debt as shownin our Consolidated Balance Sheet at March 31, 2003,

•            $10.1 million of capital lease obligationsas shown in our Consolidated Balance Sheet at March 31, 2003, and

•            operating lease obligations for propertyand certain equipment under noncancelable operating lease arrangements, whichexpire at various dates through 2016.

** **

**OtherMatters**

 

***Quarterly Results and Seasonality***

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

 

•                  the timing of our clients’ customerrelationship management initiatives and customer acquisition and loyaltycampaigns,

•                  the commencement and terms of newcontracts,

•                  revenue mix,

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

•                  the timing of recognition ofincentive fees.

 

We experience periodicfluctuations in our results of operations related to both the start-up costsassociated with expansion and the implementation of clients’ CRM activities. Inaddition, our business generally tends to be slower in the third quarter due tosummer holidays in Europe.

 

***Effects of Inflation***

Inflation has not had asignificant effect on our operations. However, there can be no assurance thatinflation will not have a material effect on our operations in the future.

 

***Recently IssuedAccounting Pronouncements***

 

In June 2001, the FASBissued SFAS No. 143, “Accounting for Asset Retirement Obligations” (SFAS143). SFAS 143 requires that we record the fair value of an asset retirementobligation as a liability in the period in which we incur a legal obligationassociated with the retirement of tangible long-lived assets that result fromthe acquisition, construction, development and/or normal use of assets. Werecorded a corresponding asset that is depreciated over the life of the asset.Subsequent to the initial measurement of the asset retirement obligation, theobligation will be adjusted at the end of each period to reflect the passage oftime and changes in the estimated future cash flows underlying the obligation.We adopted SFAS 143 on January 1, 2003. The adoption of SFAS 143 did nothave a material effect on our consolidated financial statements.

 

In June 2002, the FASBissued SFAS No. 146, “Accounting for Costs Associated with Exit orDisposal Activities” (SFAS 146), which is effective for fiscal years beginningafter December 31, 2002. SFAS 146 supercedes Emerging Issues Task Force(EITF) Issue No. 94-3, “Liabilities Recognized for Certain EmployeeTermination Benefits and Other Costs to Exit an Activity (including CertainCosts Incurred in a Restructuring).” We adopted SFAS 146 on January 1,2003. See Note 4 to consolidated condensed financial statements for disclosureof asset impairment and restructuring expense recorded during the three monthsended March 31, 2003.

 

In November 2002, theEITF reached a consensus on Issue No. 00-21, “Revenue Arrangements withMultiple Deliverables’’ (EITF 00-21). EITF 00-21 addresses certain aspects ofthe accounting by a vendor for arrangements under which the vendor will performmultiple revenue generating activities. EITF 00-21 will be effective forperiods beginning after June 15, 2003. We do not expect the adoption ofEITF 00-21 to have a material impact on our financial position or results ofoperations.

 

In November 2002, theFASB issued Interpretation No. 45 “Guarantor’s Accounting and DisclosureRequirements for Guarantees, Including Indirect Guarantees of Indebtedness toOthers, an interpretation of FASB Statements No. 5, 57, and 107 and arescission of FASB Interpretation No. 34” (FIN 45). FIN 45 elaborates onthe disclosures to be made by a

 

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guarantor in its interim and annual financial statements about itsobligations under guarantees issued. FIN 45 also clarifies that a guarantor isrequired to recognize, at inception of a guarantee, a liability for the fairvalue of the obligation undertaken. The initial recognition and measurement provisionsof FIN 45 are applicable to guarantees issued or modified afterDecember 31, 2002 and have not had a material effect on our consolidatedfinancial statements.

 

In December 2002, theFASB issued SFAS No. 148, “Accounting for Stock-Based Compensation - Transitionand Disclosure, an amendment of FASB No. 123 (SFAS 148). This Statement amendsSFAS 123 to provide alternative methods of transition for a voluntary change tothe fair value method of accounting for stock-based employee compensation. Inaddition, this Statement amends the disclosure requirements of SFAS 123 torequire prominent disclosures in both annual and interim financial statements.The required disclosures under SFAS 148 are included in Note 6 to thesecondensed consolidated financial statements.

 

In January 2003, the FASBissued Interpretation No. 46, “Consolidation of Variable InterestEntities, an Interpretation of ARB No. 51” (FIN 46). FIN 46 addresses theconsolidation by business enterprises of variable interest entities as definedin FIN 46. FIN 46 applies immediately to variable interests in variableinterest entities created after January 31, 2003, and to variableinterests in variable interest entities obtained after January 31, 2003.For public enterprises with a variable interest in a variable interest entitycreated before February 1, 2003, FIN 46 applies July 1, 2003 for existingarrangements. The application of FIN 46 is not expected to have a materialeffect on our consolidated financial statements.

 

In April 2003, the FASB issuedSFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and HedgingActivities” (SFAS 149). SFAS149 amends and clarifies financial accounting and reporting for derivativeinstruments, including certain derivative instruments embedded in othercontracts and for hedging activities under SFAS No. 133, *Accounting for Derivative Instruments and HedgingActivities*(SFAS 133). Except for the provisions of SFAS 149 that relate to SFAS 133Implementation Issues that have been effective for fiscal quarters that beganprior to June 15, 2003, SFAS 149 is effective for contracts entered into ormodified after June 30, 2003 and for hedging relationships designated afterJune 30, 2003. The application of SFAS 149 is not expected to have a materialeffect on our consolidated financial statements.

 

**Item 3****.Quantitative and Qualitative Disclosures about Market Risk**

 

We are exposed to marketrisks associated primarily with changes in foreign currency exchange rates. Wehave operations in many parts of the world; however, both revenues and expensesof those operations are typically denominated in the currency of the country ofoperations, providing a natural hedge. From time to time, we enter into certainhedging transactions designed to hedge foreign currency exchange risk relatedto short-term intercompany loans and specific foreign currency transactions,however the amounts involved have not been material.

 

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 facility are variable. During thethree months ended March 31, 2003, our average borrowings under our bank creditfacility were $4.4 million. Based on our projected cash needs for theforeseeable future, we do not expect that our exposure to changes in interestrates will have a material impact on our interest expense.

 

**Item 4****.Controls and Procedures**

 

Our Chief ExecutiveOfficer and Chief Financial Officer have evaluated the effectiveness of thedesign and operation of our disclosure controls and procedures (as definedunder Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934, asamended) as of a date within ninety days of the filing date of this report.Based upon that evaluation, our Chief Executive Officer and Chief FinancialOfficer have concluded that our disclosure controls and procedures are adequateand effective. There were no significant changes in our internal controls or inother factors that could significantly affect our internal controls subsequentto the date of such evaluation, including any corrective actions with regard tosignificant deficiencies and material weaknesses.

 

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**PARTII – OTHER INFORMATION**

 

**Item 1. Legal Proceedings**

 

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, that the resolution of such matters will nothave a material adverse effect on our consolidated financial position orresults of operations.

 

One of our clients hasreceived letters from time to time containing an offer to license and suggestingthat the client might be infringing certain patents related to computerizedtelephonic voice response systems without the license. The client has indicatedthat if any infringement occurred the client would seek contractual indemnityfrom us. In such an event, we would expect to seek contractual indemnity fromcertain of our vendors. Any such contractual indemnity we might obtain likelywould 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 client 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 5. Other Information**

 

**Forward-LookingStatements**

We make statementsin this report that are considered forward-looking statements within themeaning of the Securities Exchange Act of 1934. Sometimes these statements willcontain words such as “believes,” “expects,” “intends,” “should,” “will,”“plans,” “estimate” and other similar words. These statements are notguarantees of our future performance and are subject to risks, uncertainties,and other important factors that could cause our actual performance orachievements to be materially different from those we project. These risks,uncertainties, and factors include, but are not limited to: reliance on majorclients, conditions affecting clients’ industries, clients’ budgets and plans,unanticipated labor, contract or technical difficulties, delays in ramp up ofservices under contracts, reliance on major subcontractors and strategicpartners, risks associated with managing a global business, fluctuations inoperating results, reliance on telecommunications and computer technology,dependence on labor force, industry regulation, general and local economicconditions, competitive pressures in our industry, foreign currency risks, theeffects of leverage, dependency on credit availability, restrictions imposed bythe terms of indebtedness, and dependence on key personnel and control bymanagement.

 

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.

 

**Item 6. Exhibits and Reports on Form8-K**

 
| (a)    | Exhibits:            |
|--------|----------------------|
|   |                 |
|   | Exhibit No           |
|   | 99.1                 | Certification Pursuant  to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002 |
|   | 99.2                 | Certification Pursuant  to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002 |
|   |                 |
| (b)    | Reports on Form 8-K: |
|   | None.                |

 

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### **SIGNATURE**

 

 

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, theregistrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

 
|   |         | SITEL Corporation |
|--------|--------------|-------------------|
|   |         | **(Registrant)**  |
|   |         |              |
| Date:  | May 15, 2003 | By /s/            |       *James E. Stevenson,  Jr.     * |
|   |         |              | **James  E. Stevenson, Jr.** |
|   |         |              | *Chief  Financial Officer* |
|   |         |              | (Duly Authorized  Officer and |
|   |         |              |   Principal Financial Officer) |
|        |              |                   |  |  |  |

 

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### **CERTIFICATIONS**

### ** **

 

I, James F. Lynch,certify that:

 

1.             Ihave reviewed this quarterly report on Form 10-Q of SITEL Corporation;

 

2.             Basedon my knowledge, this quarterly report does not contain any untrue statement ofa material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements weremade, not misleading with respect to the period covered by this quarterlyreport;

 

3.             Basedon my knowledge, the financial statements, and other financial informationincluded in this quarterly report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this quarterly report;

 

4.             Theregistrant’s other certifying officer and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

 

a)              designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period inwhich this quarterly report is being prepared;

 

b)             evaluatedthe effectiveness of the registrant’s disclosure controls and procedures as ofa date within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

 

c)            presented in thisquarterly report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5.             The registrant’s othercertifying officer and I have disclosed, based on our most recent evaluation,to the registrant’s auditors and the audit committee of registrant’s board ofdirectors (or persons performing the equivalent function):

 

a)              allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)           any fraud, whether ornot material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

 

6.             The registrant’s othercertifying officer and I have indicated in this quarterly report whether therewere significant changes in internal controls or in other factors that couldsignificantly affect internal controls subsequent to the date of our mostrecent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 

 
| Date:  | May 15, 2003 | By /s/ |         *James F. Lynch* |
|--------|--------------|--------|------------------------------------------------------------------|
|   |         |   | **James  F. Lynch**                                              |
|   |         |   | *Chief  Executive Officer*                                       |
|        |              |        |                                                                  |  |  |

 

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**CERTIFICATIONS**

 

I, James E. Stevenson,Jr., certify that:

 

1.             Ihave reviewed this quarterly report on Form 10-Q of SITEL Corporation;

 

2.             Basedon my knowledge, this quarterly report does not contain any untrue statement ofa material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements weremade, not misleading with respect to the period covered by this quarterlyreport;

 

3.             Basedon my knowledge, the financial statements, and other financial informationincluded in this quarterly report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this quarterly report;

 

4.             Theregistrant’s other certifying officer and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

 

a)              designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period inwhich this quarterly report is being prepared;

 

b)             evaluatedthe effectiveness of the registrant’s disclosure controls and procedures as ofa date within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

 

c)            presented in thisquarterly report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5.             The registrant’s othercertifying officer and I have disclosed, based on our most recent evaluation,to the registrant’s auditors and the audit committee of registrant’s board ofdirectors (or persons performing the equivalent function):

 

a)              allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)           any fraud, whether ornot material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

 

6.             The registrant’s othercertifying officer and I have indicated in this quarterly report whether therewere significant changes in internal controls or in other factors that couldsignificantly affect internal controls subsequent to the date of our mostrecent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 

 
| Date:  | May 15, 2003 | By /s/ |         *James E. Stevenson, Jr.* |
|--------|--------------|--------|---------------------------------------------------------------------------|
|   |         |   | **James  E. Stevenson, Jr.**                                              |
|   |         |   | *Chief  Financial Officer*                                                |
|        |              |        |                                                                           |  |  |

 

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** **

**EXHIBITINDEX**

 
| Exhibit No. |
|-------------|
|        |
| 99.1        | Certification Pursuant  to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002 |
|        |   |
| 99.2        | Certification Pursuant  to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002 |

 

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