**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

** **

**FORM 10-Q**

 

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

### ** **

For the quarterlyperiod ended **SEPTEMBER 30, 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 OtherJurisdiction of Incorporation or Organization)

 

| **7277 WORLD COMMUNICATIONS DRIVE**                        |   |       |
|------------------------------------------------------------|--------|------------|
| **OMAHA, NEBRASKA**                                        |   | **68122**  |
| (Address of  Principal Executive Offices)                  |   | (Zip Code) |
| **(402) 963-6810**                                         |
| (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 thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports) and (2) has been subject to such filingrequirements for the past 90 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

 

**COMMONSTOCK, $.001 PAR VALUE – 74,363,431 SHARES OUTSTANDING AS OF OCTOBER 31,2003**

 

 

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| **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 |
|                                     |   |
|                                     | Exhibit Index |

 

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### **SITEL CORPORATION AND SUBSIDIARIES**

**CONSOLIDATED CONDENSED STATEMENTS OFINCOME (LOSS)**

**(UNAUDITED)**

(in thousands, except per share data)

** **
|                                                                                      |   | **Three Months Ended  September 30,** |       | **Nine Months Ended  September 30,** |       |
|-------------------------------------------------------------------------------------------|--------|--------------------------------------------|------------|-------------------------------------------|------------|
|                                                                                      |   | **2003**                                   |       | **2002**                                  |       | **2003** |   | **2002** |   |
|                                                                                      |   |                                       | * *   |                                      | * *   |   | * * |   | * * |
| **Revenues**                                                                              |   | $                                          | 208,755    |                                      | $          | 190,670 |   | $ | 607,415 |   | $ | 580,449 |   |
|                                                                                      |   |                                       |       |                                      |       |   |   |   |   |
| **Operating expenses:**                                                                   |   |                                       |       |                                      |       |   |   |   |   |
| Direct labor and telecommunications expenses                                              |   | 124,899                                    |       | 107,360                                   |       | 357,335 |   | 330,027 |   |
| Subcontracted and other services expenses                                                 |   | 13,799                                     |       | 15,099                                    |       | 40,352 |   | 40,590 |   |
| Operating, selling and administrative expenses                                            |   | 70,453                                     |       | 64,135                                    |       | 206,840 |   | 189,230 |   |
| Asset impairment and restructuring expenses                                               |   | —                                     |       | 1,444                                     |       | 796 |   | 1,444 |   |
| Total operating expenses                                                                  |   | 209,151                                    |       | 188,038                                   |       | 605,323 |   | 561,291 |   |
|                                                                                      |   |                                       |       |                                      |       |   |   |   |   |
| **Operating income (loss)**                                                               |   | (396                                       | )          | 2,632                                     |       | 2,092 |   | 19,158 |   |
|                                                                                      |   |                                       |       |                                      |       |   |   |   |   |
| **Other income (expense):**                                                               |   |                                       |       |                                      |       |   |   |   |   |
| Interest expense, net                                                                     |   | (2,993                                     | )          | (2,781                                    | )          | (8,591 | ) | (8,317 | ) |
| Equity in earnings of affiliates                                                          |   | 518                                        |       | 1,119                                     |       | 1,458 |   | 2,466 |   |
| Other income (expense), net                                                               |   | (317                                       | )          | (194                                      | )          | 418 |   | (417 | ) |
| Total other expense, net                                                                  |   | (2,792                                     | )          | (1,856                                    | )          | (6,715 | ) | (6,268 | ) |
|                                                                                      |   |                                       |       |                                      |       |   |   |   |   |
| **Income (loss) before income taxes,  minority interest and change in accounting method** |   | (3,188                                     | )          | 776                                       |       | (4,623 | ) | 12,890 |   |
|                                                                                      |   |                                       |       |                                      |       |   |   |   |   |
| Income tax expense                                                                        |   | 651                                        |       | 303                                       |       | 2,090 |   | 5,027 |   |
| Minority interest                                                                         |   | 107                                        |       | 456                                       |       | 415 |   | 1,597 |   |
| **Income (loss) before change in  accounting method**                                     |   | (3,946                                     | )          | 17                                        |       | (7,128 | ) | 6,266 |   |
|                                                                                      |   |                                       |       |                                      |       |   |   |   |   |
| Cumulative effect of a change in accounting for  goodwill                                 |   | —                                     |       | —                                    |       | — |   | (18,399 | ) |
| **Net income (loss)**                                                                     |   | $                                          | (3,946     | )                                         | $          | 17 |   | $ | (7,128 | ) | $ | (12,133 | ) |
|                                                                                      |   |                                       |       |                                      |       |   |   |   |   |
| **Weighted average common shares  outstanding:**                                          |   |                                       |       |                                      |       |   |   |   |   |
| Basic                                                                                     |   | 73,584                                     |       | 74,224                                    |       | 73,969 |   | 74,221 |   |
| Diluted                                                                                   |   | 73,584                                     |       | 74,255                                    |       | 73,969 |   | 74,366 |   |
|                                                                                      |   |                                       |       |                                      |       |   |   |   |   |
| **Earnings per share:**                                                                   |   |                                       |       |                                      |       |   |   |   |   |
|                                                                                      |   |                                       |       |                                      |       |   |   |   |   |
| **Basic:**                                                                                |   |                                       |       |                                      |       |   |   |   |   |
| Income (loss) before change in accounting method                                          |   | $                                          | (0.05      | )                                         | $          | 0.00 |   | $ | (0.10 | ) | $ | 0.08 |   |
| Cumulative effect of change in accounting for  goodwill                                   |   | —                                     |       | —                                    |       | — |   | (0.25 | ) |
| **Net income (loss)**                                                                     |   | $                                          | (0.05      | )                                         | $          | 0.00 |   | $ | (0.10 | ) | $ | (0.16 | ) |
|                                                                                      |   |                                       |       |                                      |       |   |   |   |   |
| **Diluted:**                                                                              |   |                                       | ** ** |                                      | ** ** |   | ** ** |   | ** ** |
| Income (loss) before change in accounting method                                          |   | $                                          | (0.05      | )                                         | $          | 0.00 |   | $ | (0.10 | ) | $ | 0.08 |   |
| Cumulative effect of change in accounting for  goodwill                                   |   | —                                     |       | —                                    |       | — |   | (0.25 | ) |
| **Net income (loss)**                                                                     |   | $                                          | (0.05      | )                                         | $          | 0.00 |   | $ | (0.10 | ) | $ | (0.16 | ) |

 

*See Notes to Consolidated Condensed Financial Statements.*

 

 

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### **SITEL CORPORATION AND SUBSIDIARIES**

### **CONSOLIDATEDCONDENSED BALANCE SHEETS**

(in thousands, except per share data)

 
|                                                                                                                                         |   | **September 30,  2003** |    | **December 31,  2002** |   |
|----------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------|---------|-----------------------------|--------|
|                                                                                                                                         |   | **(Unaudited)**              |    |                        |   |
| **Assets**                                                                                                                                   |   |                         |    |                        |   |
| **Current assets:**                                                                                                                          |   |                         |    |                        |   |
| Cash and cash equivalents                                                                                                                    |   | $                            | 27,567  |                        | $      | 34,142 |   |
| Trade accounts receivable (net of allowance for  doubtful accounts of $2,765 and $4,011, respectively)                                       |   | 151,083                      |    | 128,643                     |   |
| Prepaid expenses                                                                                                                             |   | 8,846                        |    | 7,173                       |   |
| Deferred income taxes                                                                                                                        |   | 5,180                        |    | 5,141                       |   |
| Other assets                                                                                                                                 |   | 9,966                        |    | 8,557                       |   |
| Total current assets                                                                                                                         |   | 202,642                      |    | 183,656                     |   |
|                                                                                                                                         |   |                         |    |                        |   |
| **Property and equipment, net**                                                                                                              |   | 87,528                       |    | 86,883                      |   |
|                                                                                                                                         |   |                         |    |                        |   |
| **Other assets:**                                                                                                                            |   |                         |    |                        |   |
| Goodwill                                                                                                                                     |   | 51,666                       |    | 49,724                      |   |
| Deferred income taxes                                                                                                                        |   | 6,201                        |    | 6,191                       |   |
| Investment in affiliates                                                                                                                     |   | 18,862                       |    | 18,461                      |   |
| Other assets                                                                                                                                 |   | 7,562                        |    | 7,062                       |   |
| **Total assets**                                                                                                                             |   | $                            | 374,461 |                        | $      | 351,977 |   |
|                                                                                                                                         |   |                         |    |                        |   |
| **Liabilities and Stockholders’ Equity**                                                                                                |   |                         |    |                        |   |
| **Current liabilities:**                                                                                                                     |   |                         |    |                        |   |
| Current portion of long-term debt                                                                                                            |   | $                            | 7,824   |                        | $      | 5,404 |   |
| Current portion of capital lease obligations                                                                                                 |   | 2,508                        |    | 1,951                       |   |
| Trade accounts payable                                                                                                                       |   | 28,202                       |    | 28,612                      |   |
| Income taxes payable                                                                                                                         |   | 2,921                        |    | 1,788                       |   |
| Accrued wages, salaries and bonuses                                                                                                          |   | 40,502                       |    | 28,283                      |   |
| Accrued operating expenses                                                                                                                   |   | 36,302                       |    | 30,129                      |   |
| Deferred revenue and other                                                                                                                   |   | 5,855                        |    | 6,871                       |   |
| Total current liabilities                                                                                                                    |   | 124,114                      |    | 103,038                     |   |
| **Long-term debt and other  liabilities:**                                                                                                   |   |                         |    |                        |   |
| Long-term debt, excluding current portion                                                                                                    |   | 100,000                      |    | 100,000                     |   |
| Capital lease obligations, excluding current  portion                                                                                        |   | 8,852                        |    | 7,307                       |   |
| Deferred compensation                                                                                                                        |   | 1,408                        |    | 1,394                       |   |
| Deferred income taxes                                                                                                                        |   | 346                          |    | 296                         |   |
| Total liabilities                                                                                                                            |   | 234,720                      |    | 212,035                     |   |
|                                                                                                                                         |   |                         |    |                        |   |
| **Minority interests**                                                                                                                       |   | 1,195                        |    | 780                         |   |
| **Stockholders’ equity:**                                                                                                               |   |                         |    |                        |   |
| Common stock, voting, $.001 par value 200,000,000  shares authorized, 73,590,989 and 74,363,431 shares issued and outstanding,  respectively |   | 74                           |    | 74                          |   |
| Additional paid-in capital                                                                                                                   |   | 168,703                      |    | 168,706                     |   |
| Accumulated other comprehensive loss                                                                                                         |   | (9,706                       | )       | (17,262                     | )      |
| Accumulated deficit                                                                                                                          |   | (19,360                      | )       | (12,193                     | )      |
| Less treasury stock, at cost, 772,442 and 120,663  common shares, respectively                                                               |   | (1,165                       | )       | (163                        | )      |
|                                                                                                                                         |   |                         |    |                        |   |
| Total stockholders’ equity                                                                                                              |   | 138,546                      |    | 139,162                     |   |
| **Total liabilities and  stockholders’ equity**                                                                                         |   | $                            | 374,461 |                        | $      | 351,977 |   |

 

*See Notesto Consolidated Condensed Financial Statements.*

 

2

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### **SITEL CORPORATION AND SUBSIDIARIES**

**CONSOLIDATED CONDENSED STATEMENTS OF CASHFLOWS**

**(UNAUDITED)**

(in thousands)

** **
|                                                                            |   | **Nine Months Ended  September 30,** |     |
|---------------------------------------------------------------------------------|--------|-------------------------------------------|----------|
|                                                                            |   | **2003**                                  |     | **2002** |   |
|                                                                            |   |                                      | * * |   | * * |
| **Cash flows from operating  activities:**                                      |   |                                      |     |   |   |
| Net loss                                                                        |   | $                                         | (7,128   | ) | $ | (12,133 | ) |
| Adjustments to reconcile net loss to net cash flows  from operating activities: |   |                                      |     |   |   |
| Cumulative effect of change in accounting method                                |   | —                                    |     | 18,399 |   |
| Asset impairment and restructuring provision                                    |   | 796                                       |     | 1,444 |   |
| Depreciation and amortization                                                   |   | 27,702                                    |     | 25,564 |   |
| Loss on disposal of assets                                                      |   | 20                                        |     | 70 |   |
| Provision for deferred income taxes                                             |   | 1                                         |     | (182 | ) |
| Equity in earnings of affiliates                                                |   | (1,458                                    | )        | (2,466 | ) |
| Impairment of equity investments                                                |   | 500                                       |     | — |   |
| Changes in operating assets and liabilities:                                    |   |                                      |     |   |   |
| Trade accounts receivable                                                       |   | (19,814                                   | )        | (11,469 | ) |
| Other assets                                                                    |   | 197                                       |     | (959 | ) |
| Trade accounts payable                                                          |   | 1,414                                     |     | 3,685 |   |
| Other liabilities                                                               |   | 11,853                                    |     | 4,336 |   |
| Net cash flows from operating activities                                        |   | 14,083                                    |     | 26,289 |   |
|                                                                            |   |                                      |     |   |   |
| **Cash flows from investing  activities:**                                      |   |                                      |     |   |   |
| Purchases of property and equipment                                             |   | (19,057                                   | )        | (23,388 | ) |
| Dividends received from affiliates                                              |   | 1,085                                     |     | — |   |
| Proceeds from sales of property and equipment                                   |   | —                                    |     | 2,488 |   |
| Increase in other assets                                                        |   | —                                    |     | (277 | ) |
| Investment in affiliates                                                        |   | (1,000                                    | )        | — |   |
| Net cash flows from investing activities                                        |   | (18,972                                   | )        | (21,177 | ) |
|                                                                            |   |                                      |     |   |   |
| **Cash flows from financing activities:**                                       |   |                                      |     |   |   |
| Borrowings on debt                                                              |   | 8,537                                     |     | 36,930 |   |
| Repayments of debt                                                              |   | (6,614                                    | )        | (33,915 | ) |
| Repayments of capital lease obligations                                         |   | (1,887                                    | )        | (1,690 | ) |
| Treasury stock reissuances (repurchases), net                                   |   | (1,120                                    | )        | 49 |   |
| Capital distributions to minority interest                                      |   | —                                    |     | (1,501 | ) |
| Other                                                                           |   | 59                                        |     | 43 |   |
| Net cash flows from financing activities                                        |   | (1,025                                    | )        | (84 | ) |
| Effect of exchange rates on cash                                                |   | (661                                      | )        | (1,053 | ) |
| **Net increase (decrease) in cash**                                             |   | (6,575                                    | )        | 3,975 |   |
| **Cash and cash equivalents,  beginning of period**                             |   | 34,142                                    |     | 22,156 |   |
| **Cash and cash equivalents, end of  period**                                   |   | $                                         | 27,567   |   | $ | 26,131 |   |

 

*See Notesto Consolidated Condensed Financial Statements.*

 

3

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**SITEL CORPORATION AND SUBSIDIARIESNOTES TO CONSOLIDATED CONDENSEDFINANCIAL STATEMENTS**

 

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

 

***General***

References in the Notesto Consolidated Condensed Financial Statements to “we” and “our” are to SITELCorporation 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 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 consolidated condensed 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 consolidated condensed 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 ourreported amounts of assets and liabilities at the dates of the financialstatements, our disclosure of contingent assets and liabilities at the dates ofthe financial statements, and our reported amounts of revenues and expensesduring the reporting periods. These estimates involve judgments with respectto, among other things, future economic factors that are difficult to predictand are beyond management’s control. As a result, actual amounts could differfrom 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 are also required to record a corresponding asset that isdepreciated over the life of the asset. Subsequent to the initial measurementof the asset retirement obligation, the obligation will be adjusted at the endof each period to reflect the passage of time and changes in the estimatedfuture cash flows underlying the obligation. We adopted SFAS 143 onJanuary 1, 2003. The adoption of SFAS 143 did not have a material effecton our consolidated financial statements.

 

In June 2002, theFASB issued 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 fordisclosure of asset impairment and restructuring expenses recorded during thefirst quarter of 2003.

 

In November 2002,the EITF 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 was effective prospectivelyfor new or modified contracts beginning July 1, 2003. The adoption of EITF00-21 did not have a material impact on our consolidated financial statements.

 

In May 2003, theEITF reached a consensus on Issue 01-8, *DeterminingWhether an Arrangement Contains a Lease*(“EITF 01-8”). Under theprovisions of EITF 01-8, arrangements conveying the right to control the use ofspecific property, plant or

 

4

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equipment must beevaluated to determine whether they contain a lease. The new rules will beapplied prospectively to such contracts entered into or modified afterJuly 1, 2003. The adoption of EITF 01-8 did not have a material impact onour consolidated financial statements.

 

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 guarantor in its interim and annual financialstatements about its obligations under guarantees issued. FIN 45 also clarifiesthat a guarantor is required to recognize, at inception of a guarantee, aliability for the fair value of the obligation undertaken. The initialrecognition and measurement provisions of FIN 45 are applicable to guaranteesissued or modified after December 31, 2002 and have not had a materialeffect on our consolidated financial statements.

 

In January 2003, theFASB issued 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.FIN 46 applies in the first fiscal year or interim period ending afterDecember 15, 2003. We have not completed our assessment of the impact ofFIN 46, but do not anticipate a material impact on our consolidated financialstatements.

 

In April 2003, theFASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instrumentsand Hedging 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 forDerivative Instruments and Hedging Activities”(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 intoor modified after June 30, 2003 and for hedging relationships designatedafter June 30, 2003. The application of SFAS 149 did not have a materialeffect on our consolidated financial statements.

 

In May 2003, theFASB issued SFAS No. 150, “Accounting for Certain Financial Instruments withCharacteristics of both Liabilities and Equity” (SFAS 150). The provisions ofSFAS 150, which also include a number of new disclosure requirements, areeffective for instruments entered into or modified after May 31, 2003 andfor pre-existing instruments as of July 1, 2003. The adoption of SFAS 150did not have a material effect on our consolidated financial statements.

 

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

 

Comprehensive income(loss) for the three and nine-month periods ended September 30, 2003 and2002 are as follows (in thousands):

** **
|                               |   | **Three Months Ended  September 30,** |   | **Nine Months Ended  September 30,** |   |
|------------------------------------|--------|--------------------------------------------|--------|-------------------------------------------|--------|
|                               |   | **2003**                                   |   | **2002**                                  |   | **2003** |   | **2002** |   |
| Net income (loss)                  |   | $                                          | (3,946 | )                                         | $      | 17 |   | $ | (7,128 | ) | $ | (12,133 | ) |
| Other comprehensive income (loss): |   |                                       |   |                                      |   |   |   |   |   |
| Currency translation adjustment    |   | 472                                        |   | (1,242                                    | )      | 7,556 |   | 6,211 |   |
| Comprehensive income (loss)        |   | $                                          | (3,474 | )                                         | $      | (1,225 | ) | $ | 428 |   | $ | (5,922 | ) |

 

Accumulated othercomprehensive income included in our consolidated condensed balance sheetsrepresents the accumulated foreign currency translation adjustment.

 

**Note 3. Goodwill**

 

As of January 1,2002, we adopted the provisions of SFAS No. 142, “Goodwill and Other IntangibleAssets” (SFAS 142), and we ceased amortizing goodwill, including equity methodgoodwill, beginning January 1, 2002. SFAS 142 also required the Company to complete a transitional impairmentanalysis of the Company’s goodwill based upon the estimated fair values of theCompany’s goodwill as of January 1, 2002. The Company completed the transitional impairment analysis prior to theissuance of the annual 2002 consolidated financial statements and, as a result,recorded a goodwill impairment loss of $18.4 million (net of tax).  The transitional impairment loss wasrecorded as a cumulative effect of an accounting change as of 

 

5

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January 1, 2002, inthe annual 2002 consolidated financial statements.  The accompanying consolidated condensed statements of income(loss) and cash flows for the nine-months ended September 30, 2002 havebeen restated to include the January 1, 2002 impairment charge as acumulative effect of a change in accounting.

 

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

 

**Note 4.  AssetImpairment and Restructuring Expenses**

 

As a result of certainclient contract negotiations that concluded during the first quarter of 2003, were-assessed our facilities requirements and determined that a certain facilitysubject to an operating lease was no longer needed. As a result, we recordedasset impairment and restructuring expenses of $0.8 million during thenine-months ended September 30, 2003 related to the write-off of abandonedleasehold improvements of $0.4 million and for $0.4 million of scheduledpayments of operating leases for which we will receive no future economicbenefit. Our estimates are based upon many factors including projections ofsublease rates and the time period required to locate tenants.

 

The additional remainingasset impairment and restructuring accruals relate to previous restructuringsin conjunction with our plan designed to intensify our focus on core competencies,accelerate revenue growth, and improve profitability, which was announced inJune 2001.

 

The components of theaccrued restructuring expenses recorded in our consolidated condensed balancesheet are summarized in the following table (in millions): 

 
|                           |   | **Accrual  Balance  December 31,  2002** |   | **Expensed  in  2003** |   | **Paid  in  2003** |   | **Other** |   | **Accrual  Balance  September 30,  2003** |   |
|--------------------------------|--------|-----------------------------------------------|--------|------------------------|--------|--------------------|--------|-----------|--------|------------------------------------------------|--------|
|                           |   |                                          |   |                   |   |               |   |      |   |                                           |   |
| Severance                      |   | $                                             | 0.3    |                   | $      | —             |   | $         | — |                                           | $      | — |   | $ | 0.3 |   |
| Facility  closure or reduction |   | 6.4                                           |   | 0.4                    |   | (2.4               | )      | 0.1       |   | 4.5                                            |   |
| Other                          |   | 0.3                                           |   | —                 |   | (0.3               | )      | —    |   | —                                         |   |
| Total                          |   | $                                             | 7.0    |                   | $      | 0.4                |   | $         | (2.7   | )                                              | $      | 0.1 |   | $ | 4.8 |   |

 

Other changes in theaccrued restructuring expenses represent the impact of foreign currencyfluctuations.

 

**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 balancesheets. 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 first quarter of 2003, we determined that an other-than-temporaryimpairment existed for one of our investments. An impairment charge of$0.5 million has been recorded in other income (expense), net in theconsolidated condensed statement of income (loss) for the nine-months endedSeptember 30, 2003.

 

Subcontracted and otherservices expenses include services provided by our India joint venture for thethree-month periods ended September 30, 2003 and 2002 were $2.8 millionand $4.7 million, respectively. Subcontracted expenses for services provided byour India joint venture for the nine-month periods ended September 30,2003 and 2002 were $9.5 million and $10.3 million, respectively. 

 

6

----

 

The Company had payablesof $1.8 million and $2.5 million at September 30, 2003 andDecember 31, 2002, respectively, which are included in trade accountspayable in the accompanying consolidated condensed balance sheets.

 

**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 the fair value of our common stock on the date of grant.  Consequently, under the intrinsic valuemethod of accounting, we do not record any compensation expense for the grantsof stock options to employees or directors.

 

Accounting principlesgenerally accepted in the United States of America provide an alternativemethod of measuring and recognizing employee compensation expense for stockoptions to the intrinsic value method. The alternative method (“fair value”) requires an estimate of the fairvalue of the stock options granted to employees and directors at the date ofgrant using a valuation model, with the recognition of expense occurring overthe vesting period of the options.  Hadthe fair value method of accounting been used in the preparation of theaccompanying consolidated condensed financial statements, the effects on netincome (loss) and earnings per share as reported would be as follows (inthousands, except per share data):

 
|                                                                                                                      |   | **Three Months Ended  September 30,** |   | **Nine Months Ended  September 30,** |   |
|---------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------|--------|-------------------------------------------|--------|
|                                                                                                                      |   | **2003**                                   |   | **2002**                                  |   | **2003** |   | **2002** |   |
|                                                                                                                      |   |                                       |   |                                      |   |   |   |   |   |
| Net  income (loss):                                                                                                       |   |                                       |   |                                      |   |   |   |   |   |
| As  reported                                                                                                              |   | $                                          | (3,946 | )                                         | $      | 17 |   | $ | (7,128 | ) | $ | (12,133 | ) |
| Less:  total stock based employee compensation expense determined under the fair  value method for all awards, net of tax |   | (267                                       | )      | (599                                      | )      | (975 | ) | (1,797 | ) |
| Pro  forma net loss                                                                                                       |   | $                                          | (4,213 | )                                         | $      | (582 | ) | $ | (8,103 | ) | $ | (13,930 | ) |
|                                                                                                                      |   |                                       |   |                                      |   |   |   |   |   |
| Income  (loss) per common share:                                                                                          |   |                                       |   |                                      |   |   |   |   |   |
| As  reported:                                                                                                             |   |                                       |   |                                      |   |   |   |   |   |
| Basic                                                                                                                     |   | $                                          | (0.05  | )                                         | $      | 0.00 |   | $ | (0.10 | ) | $ | (0.16 | ) |
| Diluted                                                                                                                   |   | (0.05                                      | )      | 0.00                                      |   | (0.10 | ) | (0.16 | ) |
| Pro  forma:                                                                                                               |   |                                       |   |                                      |   |   |   |   |   |
| Basic                                                                                                                     |   | (0.06                                      | )      | (0.01                                     | )      | (0.11 | ) | (0.19 | ) |
| Diluted                                                                                                                   |   | (0.06                                      | )      | (0.01                                     | )      | (0.11 | ) | (0.19 | ) |

 

The per shareweighted-average fair value of stock options granted for the nine months endedSeptember 30, 2003 and 2002 was $0.76 and $1.61, respectively. The pershare weighted-average fair value of stock options granted was determined onthe date of grant using the Black-Scholes option-pricing model with an expecteddividend yield of 0.0%, and the following weighted-average assumptions for thenine months ended September 30:

 
| **Year** |   | **Volatility Factor** |   | **Risk-Free  Interest Rate** |   | **Expected  Life (Years)** |   |
|----------|--------|-----------------------|--------|------------------------------|--------|----------------------------|--------|
|     |   |                  |   |                         |   |                       |   |
| 2003     |   | 64.5                  | %      | 2.9                          | %      | 5.0                        |   |
| 2002     |   | 69.2                  | %      | 2.0                          | %      | 5.0                        |   |

 

7

----

 

Prior to the adoption ofthe 1999 Plan, we granted options under several different plans. As ofSeptember 30, 2003, options granted under these plans aggregating2,781,074 remained outstanding with strike prices ranging from $2.41 to $12.65.The last of these options will expire on February 1, 2009. We will notgrant additional options under these plans. The following table sets forthshares subject to options:

 
| **Year**                         |   | **Number  of Options** |   | **Weighted-  Average  Exercise  Price per Share** |   |
|----------------------------------|--------|------------------------|--------|---------------------------------------------------|--------|
|                             |   |                   |   |                                              |   |
| Balance January 1, 2003     |   | 8,805,281              |   | $                                                 | 3.83   |   |
|                             |   |                   |   |                                              |   |
| Granted                          |   | 386,129                |   | 1.37                                              |   |
| Exercised                        |   | —                 |   | —                                            |   |
| Canceled                         |   | (1,500,753             | )      | 3.56                                              |   |
| Balance, September 30, 2003 |   | 7,690,657              |   | $                                                 | 3.77   |   |

 

Theoptions exercisable at the end of each period were:

 
| **Year**                |   | **Number  of Options** |   | **Weighted-  Average  Exercise  Price per Share** |   |
|-------------------------|--------|------------------------|--------|---------------------------------------------------|--------|
|                    |   |                   |   |                                              |   |
| December 31, 2002  |   | 2,611,204              |   | $                                                 | 4.77   |   |
| September 30, 2003 |   | 3,206,553              |   | $                                                 | 4.63   |   |

 

 

 

The following tablesummarizes stock options outstanding at September 30, 2003:

 
| **Range of  Exercise Prices** |   | **Number  Outstanding** |   | **Weighted-  Average  Remaining  Life** |   | **Weighted-  Average  Exercise  Price** |   |
|-------------------------------|--------|-------------------------|--------|-----------------------------------------|--------|-----------------------------------------|--------|
|                          |   |                    |   |                                    |   |                                    |   |
| $1.24 to  $1.75               |   | 524,029                 |   | 8.8                                     |   | $                                       | 1.51   |   |
| $1.76 to  $4.00               |   | 5,200,608               |   | 6.5                                     |   | $                                       | 3.07   |   |
| $4.01 to  $6.33               |   | 1,132,615               |   | 5.5                                     |   | $                                       | 4.82   |   |
| $6.34 to  $7.22               |   | 572,195                 |   | 6.2                                     |   | $                                       | 6.69   |   |
| $7.23 to  $12.66              |   | 201,210                 |   | 4.4                                     |   | $                                       | 9.77   |   |
| $12.67 to  $20.00             |   | 60,000                  |   | 3.5                                     |   | $                                       | 17.35  |   |

 

The following tablesummarizes stock options exercisable at September 30, 2003:

 
| **Range of  Exercise Prices** |   | **Number  Exercisable** |   | **Weighted-  Average  Exercise  Price** |   |
|-------------------------------|--------|-------------------------|--------|-----------------------------------------|--------|
|                          |   |                    |   |                                    |   |
| $1.24 to  $1.75               |   | 75,240                  |   | $                                       | 1.75   |   |
| $1.76 to  $4.00               |   | 1,695,891               |   | $                                       | 3.16   |   |
| $4.01 to  $6.33               |   | 808,645                 |   | $                                       | 4.82   |   |
| $6.34 to  $7.22               |   | 366,777                 |   | $                                       | 6.70   |   |
| $7.23 to  $12.66              |   | 200,000                 |   | $                                       | 9.75   |   |
| $12.67 to  $20.00             |   | 60,000                  |   | $                                       | 17.35  |   |

 

8

----

 

**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 infringementoccurred the client would seek contractual indemnity from us. In such an event,we would expect to seek contractual indemnity from certain of our vendors. Anysuch contractual indemnity we might obtain may not be sufficient to cover allof the costs of investigating and resolving such matter. We might also seek alicense under the patents. Any such license may not be available under commerciallyreasonable terms. Any license costs would increase the cost of doing businessin the future and may or may not be fully reflected in our pricing. To ourknowledge, no litigation has been initiated against our client or us concerningthis matter. At this stage, due to the inherent uncertainties, we are unable topredict whether this matter may have a material adverse effect on our businessor on our financial condition or results of operation.

 

**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) SITELCorporation, the parent, (b) the guarantor subsidiaries, (c) the nonguarantorsubsidiaries, and (d) SITEL Corporation on a consolidated basis:

 

•                                            ConsolidatingCondensed Statements of Income (Loss) and Comprehensive Income (Loss) for thethree and nine- month periods ended September 30, 2003 and 2002,

•                                            ConsolidatingCondensed Balance Sheets at September 30, 2003 and December 31, 2002,and

•                                            ConsolidatingCondensed Statements of Cash Flows for the nine months ended September 30,2003 and 2002.

 

9

----

 

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

** **
| **Three Months Ended  September 30, 2003**                                           |   | **Parent** |   | **Guarantor  Subsidiaries** |   | **Nonguarantor  Subsidiaries** |   | **Eliminations** |    | **Consolidated** |   |
|-------------------------------------------------------------------------------------------|--------|------------|--------|-----------------------------|--------|--------------------------------|--------|------------------|---------|------------------|--------|
|                                                                                      |   |       |   |                        |   | **(in  thousands)**            |   |             |    |             |   |
|                                                                                      |   |       |   |                        |   |                           |   |             |    |             |   |
| **Revenues**                                                                              |   | $          | 94,386 |                        | $      | 9,392                          |   | $                | 106,418 |             | $      | (1,441 | ) | $ | 208,755 |   |
|                                                                                      |   |       |   |                        |   |                           |   |             |    |             |   |
| **Operating expenses:**                                                                   |   |       |   |                        |   |                           |   |             |    |             |   |
| Direct labor and telecommunications expenses                                              |   | 53,218     |   | 5,283                       |   | 66,398                         |   | —           |    | 124,899          |   |
| Subcontracted and other services expenses                                                 |   | 12,391     |   | 831                         |   | 1,851                          |   | (1,274           | )       | 13,799           |   |
| Operating, selling and administrative expenses                                            |   | 27,891     |   | 2,733                       |   | 39,996                         |   | (167             | )       | 70,453           |   |
| Asset impairment and restructuring expenses                                               |   | —     |   | —                      |   | —                         |   | —           |    | —           |   |
| Total operating expenses                                                                  |   | 93,500     |   | 8,847                       |   | 108,245                        |   | (1,441           | )       | 209,151          |   |
|                                                                                      |   |       |   |                        |   |                           |   |             |    |             |   |
| **Operating income (loss)**                                                               |   | 886        |   | 545                         |   | (1,827                         | )      | —           |    | (396             | )      |
|                                                                                      |   |       |   |                        |   |                           |   |             |    |             |   |
| **Other income (expense):**                                                               |   |       |   |                        |   |                           |   |             |    |             |   |
| Interest expense, net                                                                     |   | (2,588     | )      | (3                          | )      | (402                           | )      | —           |    | (2,993           | )      |
| Equity in earnings (losses) of affiliates                                                 |   | (3,009     | )      | (3,771                      | )      | 518                            |   | 6,780            |    | 518              |   |
| Other income (expense), net                                                               |   | 765        |   | 220                         |   | (1,302                         | )      | —           |    | (317             | )      |
| Total other income (expense), net                                                         |   | (4,832     | )      | (3,554                      | )      | (1,186                         | )      | 6,780            |    | (2,792           | )      |
|                                                                                      |   |       |   |                        |   |                           |   |             |    |             |   |
| **Income (loss) before income taxes,  minority interest and change in accounting method** |   | (3,946     | )      | (3,009                      | )      | (3,013                         | )      | 6,780            |    | (3,188           | )      |
|                                                                                      |   |       |   |                        |   |                           |   |             |    |             |   |
| Income tax expense                                                                        |   | —     |   | —                      |   | 651                            |   | —           |    | 651              |   |
| Minority interest                                                                         |   | —     |   | —                      |   | 107                            |   | —           |    | 107              |   |
| **Income (loss) before change in  accounting method**                                     |   | (3,946     | )      | (3,009                      | )      | (3,771                         | )      | 6,780            |    | (3,946           | )      |
|                                                                                      |   |       |   |                        |   |                           |   |             |    |             |   |
| Cumulative effect of a change in accounting method                                        |   | —     |   | —                      |   | —                         |   | —           |    | —           |   |
| **Net income (loss)**                                                                     |   | $          | (3,946 | )                           | $      | (3,009                         | )      | $                | (3,771  | )                | $      | 6,780 |   | $ | (3,946 | ) |
|                                                                                      |   |       |   |                        |   |                           |   |             |    |             |   |
| Currency translation adjustment                                                           |   | 472        |   | 6                           |   | 684                            |   | (690             | )       | 472              |   |
| **Comprehensive income (loss)**                                                           |   | $          | (3,474 | )                           | $      | (3,003                         | )      | $                | (3,087  | )                | $      | 6,090 |   | $ | (3,474 | ) |

 

10

----

 
| **Three Months Ended  September 30, 2002**                                           |   | **Parent** |   | **Guarantor  Subsidiaries** |   | **Nonguarantor  Subsidiaries** |   | **Eliminations** |   | **Consolidated** |   |
|-------------------------------------------------------------------------------------------|--------|------------|--------|-----------------------------|--------|--------------------------------|--------|------------------|--------|------------------|--------|
|                                                                                      |   |       |   |                        |   | **(in  thousands)**            |   |             |   |             |   |
|                                                                                      |   |       |   |                        |   |                           |   |             |   |             |   |
| **Revenues**                                                                              |   | $          | 90,645 |                        | $      | 14,609                         |   | $                | 86,771 |             | $      | (1,355 | ) | $ | 190,670 |   |
|                                                                                      |   |       |   |                        |   |                           |   |             |   |             |   |
| **Operating expenses:**                                                                   |   |       |   |                        |   |                           |   |             |   |             |   |
| Direct labor and telecommunications expenses                                              |   | 48,078     |   | 7,729                       |   | 51,553                         |   | —           |   | 107,360          |   |
| Subcontracted and other services expenses                                                 |   | 12,156     |   | 752                         |   | 2,191                          |   | —           |   | 15,099           |   |
| Operating, selling and administrative expenses                                            |   | 30,276     |   | 3,468                       |   | 31,746                         |   | (1,355           | )      | 64,135           |   |
| Asset impairment and restructuring expenses                                               |   | 1,347      |   | —                      |   | 97                             |   | —           |   | 1,444            |   |
| Total operating expenses                                                                  |   | 91,857     |   | 11,949                      |   | 85,587                         |   | (1,355           | )      | 188,038          |   |
|                                                                                      |   |       |   |                        |   |                           |   |             |   |             |   |
| **Operating income (loss)**                                                               |   | (1,212     | )      | 2,660                       |   | 1,184                          |   | —           |   | 2,632            |   |
|                                                                                      |   |       |   |                        |   |                           |   |             |   |             |   |
| **Other income (expense):**                                                               |   |       |   |                        |   |                           |   |             |   |             |   |
| Interest expense, net                                                                     |   | (2,646     | )      | (24                         | )      | (111                           | )      | —           |   | (2,781           | )      |
| Equity in earnings (losses) of affiliates                                                 |   | 1,549      |   | (59                         | )      | 1,119                          |   | (1,490           | )      | 1,119            |   |
| Other income (expense), net                                                               |   | (76        | )      | —                      |   | (118                           | )      | —           |   | (194             | )      |
| Total other income (expense), net                                                         |   | (1,173     | )      | (83                         | )      | 890                            |   | (1,490           | )      | (1,856           | )      |
|                                                                                      |   |       |   |                        |   |                           |   |             |   |             |   |
| **Income (loss) before income taxes,  minority interest and change in accounting method** |   | (2,385     | )      | 2,577                       |   | 2,074                          |   | (1,490           | )      | 776              |   |
|                                                                                      |   |       |   |                        |   |                           |   |             |   |             |   |
| Income tax expense (benefit)                                                              |   | (2,402     | )      | 1,028                       |   | 1,677                          |   | —           |   | 303              |   |
| Minority interest                                                                         |   | —     |   | —                      |   | 456                            |   | —           |   | 456              |   |
| **Income (loss) before change in  accounting method**                                     |   | 17         |   | 1,549                       |   | (59                            | )      | (1,490           | )      | 17               |   |
|                                                                                      |   |       |   |                        |   |                           |   |             |   |             |   |
| Cumulative effect of a change in accounting method                                        |   | —     |   | —                      |   | —                         |   | —           |   | —           |   |
| **Net income (loss)**                                                                     |   | $          | 17     |                        | $      | 1,549                          |   | $                | (59    | )                | $      | (1,490 | ) | $ | 17 |   |
|                                                                                      |   |       |   |                        |   |                           |   |             |   |             |   |
| Currency translation adjustment                                                           |   | (1,242     | )      | (1,486                      | )      | (1,373                         | )      | 2,859            |   | (1,242           | )      |
| **Comprehensive income (loss)**                                                           |   | $          | (1,225 | )                           | $      | 63                             |   | $                | (1,432 | )                | $      | 1,369 |   | $ | (1,225 | ) |

 

11

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| **Nine Months Ended  September 30, 2003**                                            |   | **Parent** |       | **Guarantor  Subsidiaries** |       | **Nonguarantor  Subsidiaries** |       | **Eliminations** |       | **Consolidated** |       |
|-------------------------------------------------------------------------------------------|--------|------------|------------|-----------------------------|------------|--------------------------------|------------|------------------|------------|------------------|------------|
|                                                                                      |   |       |       |                        |       | **(in  thousands)**            |       |             |       |             |       |
|                                                                                      |   |       | ** ** |                        | ** ** |                           | ** ** |             | ** ** |             | ** ** |
| **Revenues**                                                                              |   | $          | 270,355    |                        | $          | 30,833                         |       | $                | 310,642    |             | $          | (4,415 | ) | $ | 607,415 |   |
|                                                                                      |   |       |       |                        |       |                           |       |             |       |             |       |
| **Operating expenses:**                                                                   |   |       |       |                        |       |                           |       |             |       |             |       |
| Direct labor and telecommunications expenses                                              |   | 148,837    |       | 17,025                      |       | 191,473                        |       | —           |       | 357,335          |       |
| Subcontracted and other services expenses                                                 |   | 36,197     |       | 2,142                       |       | 4,558                          |       | (2,545           | )          | 40,352           |       |
| Operating, selling and administrative expenses                                            |   | 85,985     |       | 8,383                       |       | 114,342                        |       | (1,870           | )          | 206,840          |       |
| Asset impairment and restructuring expenses                                               |   | —     |       | —                      |       | 796                            |       | —           |       | 796              |       |
| Total operating expenses                                                                  |   | 271,019    |       | 27,550                      |       | 311,169                        |       | (4,415           | )          | 605,323          |       |
|                                                                                      |   |       |       |                        |       |                           |       |             |       |             |       |
| **Operating income (loss)**                                                               |   | (664       | )          | 3,283                       |       | (527                           | )          | —           |       | 2,092            |       |
|                                                                                      |   |       |       |                        |       |                           |       |             |       |             |       |
| **Other income (expense):**                                                               |   |       |       |                        |       |                           |       |             |       |             |       |
| Interest expense, net                                                                     |   | (7,654     | )          | (11                         | )          | (926                           | )          | —           |       | (8,591           | )          |
| Equity in earnings (losses) of affiliates                                                 |   | (910       | )          | (4,487                      | )          | 1,458                          |       | 5,397            |       | 1,458            |       |
| Other income (expense), net                                                               |   | 2,100      |       | 305                         |       | (1,987                         | )          | —           |       | 418              |       |
| Total other expense, net                                                                  |   | (6,464     | )          | (4,193                      | )          | (1,455                         | )          | 5,397            |       | (6,715           | )          |
|                                                                                      |   |       |       |                        |       |                           |       |             |       |             |       |
| **Income (loss) before income taxes,  minority interest and change in accounting method** |   | (7,128     | )          | (910                        | )          | (1,982                         | )          | 5,397            |       | (4,623           | )          |
|                                                                                      |   |       |       |                        |       |                           |       |             |       |             |       |
| Income tax expense                                                                        |   | —     |       | —                      |       | 2,090                          |       | —           |       | 2,090            |       |
| Minority interest                                                                         |   | —     |       | —                      |       | 415                            |       | —           |       | 415              |       |
| **Income (loss) before change in  accounting method**                                     |   | (7,128     | )          | (910                        | )          | (4,487                         | )          | 5,397            |       | (7,128           | )          |
|                                                                                      |   |       |       |                        |       |                           |       |             |       |             |       |
| Cumulative effect of a change in accounting method                                        |   | —     |       | —                      |       | —                         |       | —           |       | —           |       |
| **Net income (loss)**                                                                     |   | $          | (7,128     | )                           | $          | (910                           | )          | $                | (4,487     | )                | $          | 5,397 |   | $ | (7,128 | ) |
|                                                                                      |   |       |       |                        |       |                           |       |             |       |             |       |
| Currency translation adjustment                                                           |   | 7,556      |       | 124                         |       | 4,439                          |       | (4,563           | )          | 7,556            |       |
| **Comprehensive income (loss)**                                                           |   | $          | 428        |                        | $          | (786                           | )          | $                | (48        | )                | $          | 834 |   | $ | 428 |   |

 

12

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| **Nine Months Ended  September 30, 2002**                                            |   | **Parent** |       | **Guarantor  Subsidiaries** |       | **Nonguarantor  Subsidiaries** |       | **Eliminations** |       | **Consolidated** |       |
|-------------------------------------------------------------------------------------------|--------|------------|------------|-----------------------------|------------|--------------------------------|------------|------------------|------------|------------------|------------|
|                                                                                      |   |       |       |                        |       | **(in  thousands)**            |       |             |       |             |       |
|                                                                                      |   |       | ** ** |                        | ** ** |                           | ** ** |             | ** ** |             | ** ** |
| **Revenues**                                                                              |   | $          | 290,149    |                        | $          | 38,584                         |       | $                | 255,004    |             | $          | (3,288 | ) | $ | 580,449 |   |
|                                                                                      |   |       |       |                        |       |                           |       |             |       |             |       |
| **Operating expenses:**                                                                   |   |       |       |                        |       |                           |       |             |       |             |       |
| Direct labor and telecommunications expenses                                              |   | 156,733    |       | 20,751                      |       | 152,543                        |       | —           |       | 330,027          |       |
| Subcontracted and other services expenses                                                 |   | 33,058     |       | 2,082                       |       | 5,450                          |       | —           |       | 40,590           |       |
| Operating, selling and administrative expenses                                            |   | 91,524     |       | 9,616                       |       | 91,378                         |       | (3,288           | )          | 189,230          |       |
| Asset impairment and restructuring expenses                                               |   | 1,347      |       | —                      |       | 97                             |       | —           |       | 1,444            |       |
| Total operating expenses                                                                  |   | 282,662    |       | 32,449                      |       | 249,468                        |       | (3,288           | )          | 561,291          |       |
|                                                                                      |   |       |       |                        |       |                           |       |             |       |             |       |
| **Operating income (loss)**                                                               |   | 7,487      |       | 6,135                       |       | 5,536                          |       | —           |       | 19,158           |       |
|                                                                                      |   |       |       |                        |       |                           |       |             |       |             |       |
| **Other income (expense):**                                                               |   |       |       |                        |       |                           |       |             |       |             |       |
| Interest expense, net                                                                     |   | (7,850     | )          | (163                        | )          | (304                           | )          | —           |       | (8,317           | )          |
| Equity in earnings (losses) of affiliates                                                 |   | (13,410    | )          | (17,053                     | )          | 2,466                          |       | 30,463           |       | 2,466            |       |
| Other income (expense), net                                                               |   | (387       | )          | —                      |       | (30                            | )          | —           |       | (417             | )          |
| Total other expense, net                                                                  |   | (21,647    | )          | (17,216                     | )          | 2,132                          |       | 30,463           |       | (6,268           | )          |
|                                                                                      |   |       |       |                        |       |                           |       |             |       |             |       |
| **Income (loss) before income taxes,  minority interest and change in accounting method** |   | (14,160    | )          | (11,081                     | )          | 7,668                          |       | 30,463           |       | 12,890           |       |
|                                                                                      |   |       |       |                        |       |                           |       |             |       |             |       |
| Income tax expense                                                                        |   | (2,027     | )          | 2,329                       |       | 4,725                          |       | —           |       | 5,027            |       |
| Minority interest                                                                         |   | —     |       | —                      |       | 1,597                          |       | —           |       | 1,597            |       |
| **Income (loss) before change in  accounting method**                                     |   | (12,133    | )          | (13,410                     | )          | 1,346                          |       | 30,463           |       | 6,266            |       |
|                                                                                      |   |       |       |                        |       |                           |       |             |       |             |       |
| Cumulative effect of a change in accounting method                                        |   | —     |       | —                      |       | (18,399                        | )          | —           |       | (18,399          | )          |
| **Net income (loss)**                                                                     |   | $          | (12,133    | )                           | $          | (13,410                        | )          | $                | (17,053    | )                | $          | 30,463 |   | $ | (12,133 | ) |
|                                                                                      |   |       |       |                        |       |                           |       |             |       |             |       |
| Currency translation adjustment                                                           |   | 6,211      |       | 3,828                       |       | 4,874                          |       | (8,702           | )          | 6,211            |       |
| **Comprehensive income (loss)**                                                           |   | $          | (5,922     | )                           | $          | (9,582                         | )          | $                | (12,179    | )                | $          | 21,761 |   | $ | (5,922 | ) |

 

13

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**ConsolidatingCondensed Balance Sheet**

 
| **At September 30, 2003**                        |   | **Parent** |    | **Guarantor  Subsidiaries** |   | **Nonguarantor  Subsidiaries** |   | **Eliminations** |    | **Consolidated** |   |
|-------------------------------------------------------|--------|------------|---------|-----------------------------|--------|--------------------------------|--------|------------------|---------|------------------|--------|
|                                                  |   |       |    |                        |   | **(in  thousands)**            |   |             |    |             |   |
| **Assets**                                            |   |       |    |                        |   |                           |   |             |    |             |   |
| **Current assets:**                                   |   |       |    |                        |   |                           |   |             |    |             |   |
| Cash and cash equivalents                             |   | $          | 13,965  |                        | $      | 3,784                          |   | $                | 9,818   |             | $      | — |   | $ | 27,567 |   |
| Trade accounts receivable, net                        |   | 85,907     |    | 59,739                      |   | 91,114                         |   | (85,677          | )       | 151,083          |   |
| Prepaid expenses and other current assets             |   | 8,019      |    | 38                          |   | 15,935                         |   | —           |    | 23,992           |   |
| Total current assets                                  |   | 107,891    |    | 63,561                      |   | 116,867                        |   | (85,677          | )       | 202,642          |   |
|                                                  |   |       |    |                        |   |                           |   |             |    |             |   |
| **Property and equipment, net**                       |   | 21,196     |    | 2,457                       |   | 63,875                         |   | —           |    | 87,528           |   |
|                                                  |   |       |    |                        |   |                           |   |             |    |             |   |
| **Other assets:**                                     |   |       |    |                        |   |                           |   |             |    |             |   |
| Goodwill                                              |   | 19,577     |    | 14                          |   | 32,075                         |   | —           |    | 51,666           |   |
| Deferred income taxes                                 |   | 6,100      |    | —                      |   | 101                            |   | —           |    | 6,201            |   |
| Investments in affiliates                             |   | 1,191      |    | —                      |   | 16,422                         |   | 1,249            |    | 18,862           |   |
| Other assets                                          |   | 6,281      |    | 56                          |   | 1,225                          |   | —           |    | 7,562            |   |
| Investments in subsidiaries                           |   | 123,419    |    | 95,979                      |   | —                         |   | (219,398         | )       | —           |   |
| **Total assets**                                      |   | $          | 285,655 |                        | $      | 162,067                        |   | $                | 230,565 |             | $      | (303,826 | ) | $ | 374,461 |   |
|                                                  |   |       |    |                        |   |                           |   |             |    |             |   |
| **Liabilities and Stockholders’  Equity**        |   |       |    |                        |   |                           |   |             |    |             |   |
| **Current liabilities:**                              |   |       |    |                        |   |                           |   |             |    |             |   |
| Current portion of long-term debt                     |   | $          | —  |                        | $      | —                         |   | $                | 7,824   |             | $      | — |   | $ | 7,824 |   |
| Current portion of capital lease obligations          |   | 728        |    | 117                         |   | 1,663                          |   | —           |    | 2,508            |   |
| Trade accounts payable                                |   | 13,548     |    | 36,194                      |   | 64,137                         |   | (85,677          | )       | 28,202           |   |
| Accrued expenses and other current liabilities        |   | 31,491     |    | 2,207                       |   | 51,960                         |   | (78              | )       | 85,580           |   |
| Total current liabilities                             |   | 45,767     |    | 38,518                      |   | 125,584                        |   | (85,755          | )       | 124,114          |   |
| **Long-term debt and other  liabilities:**            |   |       |    |                        |   |                           |   |             |    |             |   |
| Long-term debt, excluding current portion             |   | 100,000    |    | —                      |   | —                         |   | —           |    | 100,000          |   |
| Capital lease obligations, excluding current  portion |   | 66         |    | 130                         |   | 8,656                          |   | —           |    | 8,852            |   |
| Deferred compensation                                 |   | 1,408      |    | —                      |   | —                         |   | —           |    | 1,408            |   |
| Deferred income taxes                                 |   | —     |    | —                      |   | 346                            |   | —           |    | 346              |   |
| Total liabilities                                     |   | 147,241    |    | 38,648                      |   | 134,586                        |   | (85,755          | )       | 234,720          |   |
|                                                  |   |       |    |                        |   |                           |   |             |    |             |   |
| **Minority interests**                                |   | —     |    | —                      |   | 1,195                          |   | —           |    | 1,195            |   |
|                                                  |   |       |    |                        |   |                           |   |             |    |             |   |
| **Stockholders’ equity**                         |   | 138,414    |    | 123,419                     |   | 94,784                         |   | (218,071         | )       | 138,546          |   |
| **Total liabilities and  stockholders’ equity**  |   | $          | 285,655 |                        | $      | 162,067                        |   | $                | 230,565 |             | $      | (303,826 | ) | $ | 374,461 |   |

 

14

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| **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                                              |   | 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, excluding current portion             |   | 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 |   |

 

15

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**ConsolidatingCondensed Statement of Cash Flows**

 
| **Nine Months Ended  September 30, 2003**        |   | **Parent** |   | **Guarantor  Subsidiaries** |   | **Nonguarantor  Subsidiaries** |   | **Eliminations** |   | **Consolidated** |   |
|-------------------------------------------------------|--------|------------|--------|-----------------------------|--------|--------------------------------|--------|------------------|--------|------------------|--------|
|                                                  |   |       |   |                        |   | **(in  thousands)**            |   |             |   |             |   |
|                                                  |   |       |   |                        |   |                           |   |             |   |             |   |
| **Net cash flows from operating  activities**         |   | $          | 13,313 |                        | $      | 4,131                          |   | $                | (3,361 | )                | $      | — |   | $ | 14,083 |   |
|                                                  |   |       |   |                        |   |                           |   |             |   |             |   |
| **Cash flows from investing  activities:**            |   |       |   |                        |   |                           |   |             |   |             |   |
| Investment in subsidiaries                            |   | —     |   | —                      |   | —                         |   | —           |   | —           |   |
| Purchases of property and equipment                   |   | (3,750     | )      | (671                        | )      | (14,636                        | )      | —           |   | (19,057          | )      |
| Proceeds from sales of property and equipment         |   | —     |   | —                      |   | —                         |   | —           |   | —           |   |
| Dividends received from affiliates                    |   | —     |   | —                      |   | 1,085                          |   | —           |   | 1,085            |   |
| Investment in affiliates                              |   | (1,000     | )      | —                      |   | —                         |   | —           |   | (1,000           | )      |
| Net cash flows from investing activities              |   | (4,750     | )      | (671                        | )      | (13,551                        | )      | —           |   | (18,972          | )      |
|                                                  |   |       |   |                        |   |                           |   |             |   |             |   |
| **Cash flows from financing  activities:**            |   |       |   |                        |   |                           |   |             |   |             |   |
| Borrowings on debt                                    |   | 441        |   | —                      |   | 8,096                          |   | —           |   | 8,537            |   |
| Repayments of debt and capital lease obligations      |   | (7,214     | )      | —                      |   | (1,287                         | )      | —           |   | (8,501           | )      |
| Net capital contribution from parent                  |   | —     |   | —                      |   | —                         |   | —           |   | —           |   |
| Net borrowings and payments in intercompany  balances |   | (682       | )      | (2,531                      | )      | 3,213                          |   | —           |   | —           |   |
| Treasury stock reissuances (repurchases), net         |   | (1,120     | )      | —                      |   | —                         |   | —           |   | (1,120           | )      |
| Other                                                 |   | 59         |   | —                      |   | —                         |   | —           |   | 59               |   |
| Net cash flows from financing activities              |   | (8,516     | )      | (2,531                      | )      | 10,022                         |   | —           |   | (1,025           | )      |
| Effect of exchange rates on cash                      |   | (2,697     | )      | —                      |   | 2,036                          |   | —           |   | (661             | )      |
| **Net increase (decrease) in cash**                   |   | (2,650     | )      | 929                         |   | (4,854                         | )      | —           |   | (6,575           | )      |
| **Cash and cash equivalents,  beginning of period**   |   | 16,615     |   | 2,855                       |   | 14,672                         |   | —           |   | 34,142           |   |
| **Cash and cash equivalents, end of  period**         |   | $          | 13,965 |                        | $      | 3,784                          |   | $                | 9,818  |             | $      | — |   | $ | 27,567 |   |

 

16

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| **Nine Months Ended  September 30, 2002**        |   | **Parent** |   | **Guarantor  Subsidiaries** |   | **Nonguarantor  Subsidiaries** |   | **Eliminations** |   | **Consolidated** |   |
|-------------------------------------------------------|--------|------------|--------|-----------------------------|--------|--------------------------------|--------|------------------|--------|------------------|--------|
|                                                  |   |       |   |                        |   | **(in  thousands)**            |   |             |   |             |   |
|                                                  |   |       |   |                        |   |                           |   |             |   |             |   |
| **Net cash flows from operating  activities**         |   | $          | 17,285 |                        | $      | (7,232                         | )      | $                | 16,236 |             | $      | — |   | $ | 26,289 |   |
|                                                  |   |       |   |                        |   |                           |   |             |   |             |   |
| **Cash flows from investing  activities:**            |   |       |   |                        |   |                           |   |             |   |             |   |
| Investment in subsidiaries                            |   | 29         |   | 8,387                       |   | —                         |   | (8,416           | )      | —           |   |
| Purchases of property and equipment                   |   | (8,909     | )      | —                      |   | (14,479                        | )      | —           |   | (23,388          | )      |
| Proceeds from sales of property and equipment         |   | —     |   | —                      |   | 2,488                          |   | —           |   | 2,488            |   |
| Increase in other assets                              |   | (281       | )      | —                      |   | 4                              |   | —           |   | (277             | )      |
| Investment in affiliates                              |   | —     |   | —                      |   | —                         |   | —           |   | —           |   |
| Net cash flows from investing activities              |   | (9,161     | )      | 8,387                       |   | (11,987                        | )      | (8,416           | )      | (21,177          | )      |
|                                                  |   |       |   |                        |   |                           |   |             |   |             |   |
| **Cash flows from financing  activities:**            |   |       |   |                        |   |                           |   |             |   |             |   |
| Borrowings on debt                                    |   | 31,750     |   | —                      |   | 5,180                          |   | —           |   | 36,930           |   |
| Repayments of debt and capital lease obligations      |   | (33,169    | )      | —                      |   | (2,436                         | )      | —           |   | (35,605          | )      |
| Net capital contribution from parent                  |   | —     |   | (29                         | )      | (8,387                         | )      | 8,416            |   | —           |   |
| Net borrowings and payments in intercompany  balances |   | 2,193      |   | —                      |   | (2,193                         | )      | —           |   | —           |   |
| Treasury stock reissuances                            |   | 49         |   | —                      |   | —                         |   | —           |   | 49               |   |
| Capital distributions to minority interest            |   | —     |   | —                      |   | (1,501                         | )      | —           |   | (1,501           | )      |
| Other                                                 |   | —     |   | —                      |   | 43                             |   | —           |   | 43               |   |
| Net cash flows from financing activities              |   | 823        |   | (29                         | )      | (9,294                         | )      | 8,416            |   | (84              | )      |
| Effect of exchange rates on cash                      |   | (1,044     | )      | —                      |   | (9                             | )      | —           |   | (1,053           | )      |
| **Net increase (decrease) in cash**                   |   | 7,903      |   | 1,126                       |   | (5,054                         | )      | —           |   | 3,975            |   |
| **Cash and cash equivalents,  beginning of period**   |   | 6,814      |   | 2,202                       |   | 13,140                         |   | —           |   | 22,156           |   |
| **Cash and cash equivalents, end of  period**         |   | $          | 14,717 |                        | $      | 3,328                          |   | $                | 8,086  |             | $      | — |   | $ | 26,131 |   |

 

17

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**Item 2. Management’s Discussion andAnalysis of Financial Condition and Results of Operations**

 

##### **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 discussion and analysis, refer to our consolidatedcondensed statements of income (loss), which present the results of ouroperations for the three and nine-month periods ended September 30, 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****, CriticalAccounting Policies and Estimates**

** **

**GeneralBusiness 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 70.8% and 66.9% of ourrevenues for the three-month periods ended September 30, 2003 and 2002,respectively, and 69.6% and 67.3% for the nine-month periods endedSeptember 30, 2003 and 2002, respectively, and includemultiple independently managed business units of General Motors Corporation.These General Motors business units were responsible for 22.3% and 22.5%of our revenues for the three-month periods ended September 30, 2003 and2002, respectively, and 21.6% and 23.3% for the nine-month periods endedSeptember 30, 2003 and 2002, respectively. We signed agreements toextend until January 2005, two of our primary contracts with GeneralMotors. We did not have any other clients under common control that generatedmore than 10% of our revenues. The financial failure of any of theseclients or the loss of any or all of their business could have an adverseimpact 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 Annual Report on Form 10-K forthe year ended December 31, 2002. Of those policies, we have identifiedthe

 

18

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following to be criticalaccounting policies because they are the most important to the portrayal of ourresults of operations and financial condition, and they require management’smost 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 condensed statements of income(loss), which would reduce our results of operations.

 

***Property and Equipment***

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 Impairment***

We evaluate long-livedassets for impairment whenever events or changes in circumstances indicate thecarrying amount of an asset may not be recoverable.  Triggering events include a 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 carryingamount.  The recoverable amount is theestimated net future cash flows that we expect to recover from the future useof the asset, undiscounted and without interest, plus the asset’s residualvalue on disposal. Where the recoverable amount of the long-lived asset is lessthan the carrying value, an impairment loss would be recognized to write downthe asset to its fair value, which is based on discounted estimated cash flowsfrom the future use of the asset.

 

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

 

***Goodwill***

We adopted the provisionsof SFAS No. 142, “Goodwill and Other Intangible Assets” (SFAS 142)*,* as of January 1, 2002. As a resultof the adoption of this standard, we stopped amortizing our goodwill, includingequity method goodwill, and completed the required impairment review. As aresult of the impairment review, we determined that the goodwill in certainreporting units was impaired and we recorded a goodwill impairment loss of$18.4 million as a cumulative effect of an accounting change as of January 1,2002.

 

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

 

***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 adjust thedeferred tax assets and liabilities, through the provision for income taxes inthe period of change, to reflect the enacted tax rate 

 

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expected to be in effectwhen the deferred tax items reverse. To the extent that we believe thatrecovery is not likely, we establish a valuation allowance to reduce thedeferred tax assets to the amount that is more likely than not to be realized.The valuation allowance is based on our estimates of future taxable income byjurisdiction in which we operate, the period over which the deferred tax assetscan be recovered and available tax planning strategies. A review of allavailable positive and negative evidence needs to be considered, including ourcurrent and past performance, the market environment in which we operate, theutilization of past tax credits, length of carryback and carryforward periods,and existing or prospective contracts that will result in future profits.

 

Forming a conclusion thata valuation allowance is not needed is difficult when there is negativeevidence such as cumulative losses in recent years in certain taxjurisdictions. Cumulative losses weigh heavily in the overall assessment. Wehave established valuation allowances for future tax benefits related to netoperating losses incurred in certain federal, state and foreign taxjurisdictions for the three and nine-month periods ended September 30,2003. We expect to continue to record a valuation allowance on future taxbenefits in certain tax jurisdictions until an appropriate level ofprofitability is sustained. Until an appropriate level of profitability isreached, we do not expect to recognize any significant tax benefits in futureresults of operations. If future taxable income is lower than expected or ifexpected tax planning strategies are not available as anticipated, we mayrecord additional valuation allowance through income tax expense in the periodsuch determination is made.

 

***Contingencies***

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

 

**Results of Operations****for theThree and Nine Month Periods Ended September 30, 2003 Compared with theSame Periods of 2002**

 

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.

 

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**Componentsof Net Income**

 

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

 
|                                                                                      |   | **Three  Months Ended September 30,** |    | **Nine  Months Ended September 30,** |         |
|-------------------------------------------------------------------------------------------|--------|--------------------------------------------|---------|-------------------------------------------|--------------|
|                                                                                      |   | **2003**                                   |    | **2002**                                  |         | **2003** |   | **2002** |   |
|                                                                                      |   | **$**                                      |    | **%**                                     |         | **$** |   | **%** |   | **$** |   | **%** |   | **$** |   | **%** |   |
|                                                                                      |   | **(in  thousands)**                        |    | **(in  thousands)**                       |         |
| **Revenues**                                                                              |   | $                                          | 208,755 |                                      | ***100.0***  | ***%*** | $ | 190,670 |   | ***100.0*** | ***%*** | $ | 607,415 |   | ***100.0*** | ***%*** | $ | 580,449 | * * | ***100.0*** | ***%*** |
|                                                                                      |   |                                       |    |                                      | *** *** |   |   |   | *** *** |   |   |   | *** *** |   | * * |   | *** *** |
| Direct  labor and telecommunications expenses                                             |   | 124,899                                    |    | ***59.8***                                | ***%***      | 107,360 |   | ***56.3*** | ***%*** | 357,335 |   | ***58.8*** | ***%*** | 330,027 | * * | ***56.9*** | ***%*** |
| Subcontracted  and other services expenses                                                |   | 13,799                                     |    | ***6.6***                                 | ***%***      | 15,099 |   | ***7.9*** | ***%*** | 40,352 |   | ***6.6*** | ***%*** | 40,590 | * * | ***7.0*** | ***%*** |
| Operating,  selling and administrative expenses                                           |   | 70,453                                     |    | ***33.8***                                | ***%***      | 64,135 |   | ***33.6*** | ***%*** | 206,840 |   | ***34.1*** | ***%*** | 189,230 | * * | ***32.6*** | ***%*** |
| Asset  impairment and restructuring expenses                                              |   | —                                     |    | ***0.0***                                 | ***%***      | 1,444 |   | ***0.8*** | ***%*** | 796 |   | ***0.1*** | ***%*** | 1,444 | * * | ***0.2*** | ***%*** |
| **Operating income (loss)**                                                               |   | (396                                       | )       | ***-0.2***                                | ***%***      | 2,632 |   | ***1.4*** | ***%*** | 2,092 |   | ***0.3*** | ***%*** | 19,158 | * * | ***3.3*** | ***%*** |
|                                                                                      |   |                                       |    |                                      | *** *** |   |   |   | *** *** |   |   |   | *** *** |   | * * |   | *** *** |
| Interest  expense, net                                                                    |   | (2,993                                     | )       | ***-1.4***                                | ***%***      | (2,781 | ) | ***-1.5*** | ***%*** | (8,591 | ) | ***-1.4*** | ***%*** | (8,317 | *)* | ***-1.4*** | ***%*** |
| Equity  in earnings of affiliates                                                         |   | 518                                        |    | ***0.3***                                 | ***%***      | 1,119 |   | ***0.6*** | ***%*** | 1,458 |   | ***0.2*** | ***%*** | 2,466 | * * | ***0.4*** | ***%*** |
| Other  expense, net                                                                       |   | (317                                       | )       | ***-0.2***                                | ***%***      | (194 | ) | ***-0.1*** | ***%*** | 418 |   | ***0.1*** | ***%*** | (417 | *)* | ***-0.1*** | ***%*** |
| **Income (loss) before income taxes, minority interest and  change in accounting method** |   | (3,188                                     | )       | ***-1.5***                                | ***%***      | 776 |   | ***0.4*** | ***%*** | (4,623 | ) | ***-0.8*** | ***%*** | 12,890 | * * | ***2.2*** | ***%*** |
|                                                                                      |   |                                       |    |                                      | *** *** |   |   |   | *** *** |   |   |   | *** *** |   | * * |   | *** *** |
| Income  tax expense                                                                       |   | 651                                        |    | ***0.3***                                 | ***%***      | 303 |   | ***0.2*** | ***%*** | 2,090 |   | ***0.3*** | ***%*** | 5,027 | * * | ***0.8*** | ***%*** |
| Minority  interest                                                                        |   | 107                                        |    | ***0.1***                                 | ***%***      | 456 |   | ***0.2*** | ***%*** | 415 |   | ***0.1*** | ***%*** | 1,597 | * * | ***0.3*** | ***%*** |
| **Income (loss) before change in accounting method**                                      |   | (3,946                                     | )       | ***-1.9***                                | ***%***      | 17 |   | ***0.0*** | ***%*** | (7,128 | ) | ***-1.2*** | ***%*** | 6,266 | * * | ***1.1*** | ***%*** |
|                                                                                      |   |                                       |    |                                      | *** *** |   |   |   | *** *** |   |   |   | *** *** |   | * * |   | *** *** |
| Cumulative  effect of change in accounting                                                |   | —                                     |    | ***0.0***                                 | ***%***      | — |   | ***0.0*** | ***%*** | — |   | ***0.0*** | ***%*** | (18,399 | *)* | ***-3.2*** | ***%*** |
| **Net income (loss)**                                                                     |   | $                                          | (3,946  | )                                         | ***-1.9***   | ***%*** | $ | 17 |   | ***0.0*** | ***%*** | $ | (7,128 | ) | ***-1.2*** | ***%*** | $ | (12,133 | *)* | ***-2.1*** | ***%*** |

# * *

# ***Three Months EndedSeptember 30, 2003 Compared to the Same Period of 2002***

# * *

***Revenues***

Revenues increased $18.1million, or 9.5%, in the three months endedSeptember 30, 2003 compared to the same period of 2002. The changes inrevenues by geographic region are shown in the following table:

 
| **Three Months Ended  September 30,** |   | **2003**           | ** ** | **2002** | ** ** | **$  Change** | ** ** | **%  Change** | ** ** |
|--------------------------------------------|--------|--------------------|------------|----------|------------|---------------|------------|---------------|------------|
|                                       |   | **(in  millions)** | ** ** |
| North  America                             |   | **$**              | **122.6**  |     | $          | 118.0         |       | $             | 4.6        |   | 3.9 | % |
| Europe                                     |   | **74.4**           |       | 52.7     |       | 21.7          |       | 41.2          | %          |
| Asia  Pacific                              |   | **8.4**            |       | 6.9      |       | 1.5           |       | 21.3          | %          |
| Latin  America                             |   | **3.4**            |       | 13.1     |       | (9.7          | )          | (74.0         | )%         |
| Totals                                     |   | **$**              | **208.8**  |     | $          | 190.7         |       | $             | 18.1       |   | 9.5 | % |

 

The increase in North America revenues for the three months endedSeptember 30, 2003 compared to the same period in 2002 was primarily dueto a $5.8 million increase in customer care, customer acquisition, andtechnical support services we provided to a number of our large global clientspartially offset by a $1.3 million decrease in revenues by our risk managementbusiness, North Americarevenues in the three months ended September 30, 2003 compared to the sameperiod in 2002 were also impacted by a decline in outbound customer acquisitionprograms and pricing pressure resulting from continuing excess capacity createdprimarily by movement of business offshore.

 

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European revenues for the three months ended September 30, 2003increased $21.7 million compared to the same period in 2002. The increase wasdue in part to a $14.0 million, or 26.5%, increase from higher sales volumesfrom new and existing clients and the implementation of multiple pan-Europeanclient accounts that commenced in early 2003. The weakening of the U.S. dollarversus the British pound and Euro accounted for $7.7 million, or 41%, of theincrease.

 

Asia Pacific revenues increased $1.5 million in the three months endedSeptember 30, 2003 compared to the same period in 2002 primarily theresult of the weakening of the U.S. dollar.

 

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 ofthis change, our Latin America revenues no longer include the revenuesassociated with the joint venture resulting in a $10.9 million decline inrevenues in the three months ended September 30, 2003 compared to the sameperiod in 2002. The strengthening of the U.S. dollar accounted for a $0.2million increase in Latin American revenues in the three months endedSeptember 30, 2003 compared to the same period in 2002. Excluding theimpact of the change in accounting and the impact of changes in foreigncurrency, Latin American revenues in the three months ended September 30,2003 increased $1.0 million compared to the same period in 2002 as a result ofhigher sale volumes.

 

***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.

 

As a percentage ofrevenues, direct labor and telecommunications expenses increased to 59.8%during the three months ended September 30, 2003 compared to 56.3% in thesame period of 2002. Pricing pressure resulting from continuing excess capacitycreated primarily by movement of business offshore and the ramp costs of new programs in North Americaand Europe were the primary reason for the increase in the three monthsended September 30, 2003 compared to the same period in 2002.

 

***Subcontracted and Other Services Expenses***

Subcontracted and otherservices expenses include services provided to clients through subcontractorsand through our India joint venture, and other out-of-pocket expenses.Subcontracted and other services expenses decreased $1.3 million, or 8.6%, inthe three months ended September 30, 2003 compared to the same period of 2002primarily due to lower subcontracted service volume provided by our India jointventure. Subcontracted expenses for services provided by our India jointventure for the three months ended September 30, 2003 and 2002 were $2.8million and $4.6 million, respectively. Amounts payable to our India joint venture were $1.8 million and $2.4million as of September 30, 2003 and December 31, 2002, respectively,and are included in trade accounts payable in the consolidated condensedbalance sheets.

 

***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 $6.3 million, or 9.9%, in the three monthsended September 30, 2003 compared to the same period of 2002.  The change in accounting of certain LatinAmerican affiliates as described previously, reduced operating, selling andadministrative expenses $2.4 million in the three months endedSeptember 30, 2003 compared to the same period of 2002. The weakening ofthe U.S. dollar compared to the primary currency in the jurisdictions in whichwe operate accounted for a $3.1 million increase in the three months endedSeptember 30, 2003 compared to the same period in 2002.  Excluding the impact of the change inaccounting and the impact of changes in foreign currency, operating, sellingand administrative expenses in the three months ended September 30, 2003increased $5.6 million compared to the same period in 2002. As a percentage ofrevenues, operating, selling and administrative expenses increased to 33.7% inthe three months ended September 30, 2003 compared to 33.6% in the sameperiod of 2002 primarily as a result of increased investments in infrastructureto support European expansions and increased costs associated with expandedsales programs.

 

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***Operating Income (Loss)***

Operatingincome (loss) decreased $3.0 million in the three months endedSeptember 30, 2003 compared to the same period of 2002 due to the factorsdiscussed above.

 

***Interest Expense, Net***

Interest expense, net ofinterest income, increased $0.2 million in the three months endedSeptember 30, 2003 compared to the same period in 2002 as a result ofhigher average borrowings.

 

***Equity in Earnings of Affiliates***

The decrease in equity inearnings of affiliates in the three months ended September 30, 2003compared to the same period in 2002 primarily relates to reduced earnings fromour India joint venture.

 

***Other Income (Expense), Net***

Other income (expense) inthe three months ended September 30, 2003 was consistent compared to thesame period in 2002.

 

***Income Tax Expense***

As discussed in moredetail under “Critical Accounting Policies and Estimates,” the effective taxrate for the three months ended September 30, 2003 was significantly morethan the U.S. statutory rate which was primarily the result of not reflectingany significant tax benefits for the current net operating losses in certainfederal, state and foreign tax jurisdictions.

 

The effective tax rate onincome before income taxesand minority interest for the three months ended September 30, 2002 as a percentage of income before incometaxes and minority interest was 39%. The difference between this rate and thestatutory U.S. Federal rate of 34% was primarily due to net operating losses incertain non-U.S. subsidiaries for which no tax benefit was recognized, and U.S.state and local income taxes.

 

**NineMonths Ended September 30, 2003 Compared to the Same Period of 2002**

 

***Revenues***

Revenues increased $27.0million, or 4.6 %, in the nine months ended September 30, 2003 compared tothe same period of 2002. The changes in revenues by geographic region are shownin the following table:

 
| **Nine  Months Ended  September 30,** |   | **2003**          |      | **2002** |   | **$  Change** |   | **%  Change** |   |
|--------------------------------------------|--------|-------------------|-----------|----------|--------|---------------|--------|---------------|--------|
|                                       |   | **(in millions)** |      |
| North  America                             |   | **$**             | **349.1** |     | $      | 366.2         |   | $             | (17.1  | ) | (4.7 | )% |
| Europe                                     |   | **226.0**         |      | 150.4    |   | 75.6          |   | 50.3          | %      |
| Asia  Pacific                              |   | **23.4**          |      | 20.8     |   | 2.5           |   | 12.2          | %      |
| Latin  America                             |   | **9.0**           |      | 43.1     |   | (34.0         | )      | (79.1         | )%     |
| Totals                                     |   | **$**             | **607.4** |     | $      | 580.5         |   | $             | 27.0   |   | 4.6 | % |

 

The decrease in North America revenues for the nine months endedSeptember 30, 2003 compared to the same period in 2002 was due primarilyto a $22.4 million decline in customer care, customer acquisition, andtechnical support services we provided to a number of our large global clientspartially offset by a $4.5 million increase in revenues by our risk managementbusiness.  The primary reason for thedecrease in revenues is due to pricing pressure resulting from excess capacity in North America,created primarily by the movement of business offshore. The transfer of certainbusiness to lower cost labor markets offshore results in lower revenues for thesame volume of business. In addition, revenues were lower in the nine monthsended September 30, 2003 compared to the same period in 2002 due to a declinein outbound acquisition programs.

 

European revenues for the nine months ended September 30, 2003increased $75.6 million compared to the same period in 2002. Higher salesvolumes from new and existing clients and the implementation of multiplepan-European client accounts that commenced in early 2003 resulted in anincrease in revenues of $43.4 million during the nine months endedSeptember 30, 2003 compared to the same period in 2002. The weakening ofthe U.S. dollar versus the British pound and Euro accounted for the remaining$32.2 million of the increase.

 

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Asia Pacific revenuesincreased $2.5 million or 12.2% in the nine months ended September 30,2003 compared to the same period in 2002. Excluding the impact of changes inforeign currency, revenues in the nine months ended September 30, 2003decreased $1.7 million compared to the same period in 2002 as a result of lowerAsia Pacific sale volumes.

 

As a result of the changein accounting as previously discussed, Latin America revenues declined $35.8million in the nine months ended September 30, 2003 compared to the sameperiod in 2002. The strengthening of the U.S. dollar accounted for a $1.4million decrease in Latin American revenues in the nine months endedSeptember 30, 2003 compared to the same period in 2002. Excluding theimpact of the change in accounting and the impact of changes in foreigncurrency, Latin American revenues in the nine months ended September 30,2003 increased $3.2 million compared to the same period in 2002 as a result ofhigher sale volumes.

 

***Direct Labor and TelecommunicationsExpenses***

As a percentage ofrevenues, direct labor and telecommunications expenses increased to 58.8%during the nine months ended September 30, 2003 compared to 56.9% in thesame period of 2002. Pricing pressure resulting from continuing excess capacitycreated primarily by movement of business offshore and the ramp costs of new programs in North Americaand Europe were the primary reason for the increase in the nine monthsended September 2003 compared to the same period in 2002.

 

***Subcontracted and Other Services Expenses***

Subcontracted and otherservices expenses in the nine months ended September 30, 2003 remainedconsistent compared to the same period of 2002.

 

***Operating, Selling and AdministrativeExpenses***

Operating, selling andadministrative expenses increased $17.6 million, or 9.3%, in the nine monthsended September 30, 2003 compared to the same period of 2002.  The change in accounting of certain LatinAmerican affiliates as described previously, reduced operating, selling andadministrative expenses $7.7 million in the nine months endedSeptember 30, 2003 compared to the same period of 2002. The weakening ofthe U.S. dollar compared to the primary currency in the jurisdictions in whichwe operate accounted for an $11.5 million increase in the nine months endedSeptember 30, 2003 compared to the same period in 2002.  Excluding the impact of the change in accountingand the impact of changes in foreign currency, operating, selling andadministrative expenses in the nine months ended September 30, 2003increased $13.8 million compared to the same period in 2002. As a percentage ofrevenues, operating, selling and administrative expenses increased to 34.1% inthe nine months ended September 30, 2003 compared to 33.3% in the sameperiod of 2002 primarily as a result of increased investments in infrastructureto support European expansions and increased costs associated with expandedsales programs.

 

***Asset Impairment and Restructuring Expenses***

As a result of certainclient contract negotiations that concluded during the first quarter of 2003,we re-assessed our facilities requirements and determined that a certainfacility subject to an operating lease was no longer needed. As a result, werecorded asset impairment and restructuring expenses of $0.8 million during thefirst quarter of 2003 related to the write-off of abandoned leaseholdimprovements of $0.4 million and for $0.4 million of scheduled payments ofoperating leases for which we will receive no future economic benefit.

 

***Operating Income (Loss)***

Operatingincome decreased $17.1 million in the nine months ended September 30, 2003compared to the same period of 2002 due to the factors discussed above.

 

***Interest Expense, Net***

Interest expense, net ofinterest income, increased $0.3 million in the nine months endedSeptember 30, 2003 compared to the same period in 2002 as a result ofhigher average borrowings.

 

***Equity in Earnings of Affiliates***

The decrease in equity inearnings of affiliates in the nine months ended September 30, 2003compared to the same period in 2002 primarily relates to reduced earnings fromour India joint venture.

 

***Other Income (Expense), Net***

Other income (expense),net, increased $0.8 million of other income in the nine months endedSeptember 30, 2003 compared to the same period in 2002. The increase wasprimarily a result of foreign currency remeasurement gains arising frommonetary assets and liabilities denominated in currencies other than a businessunit’s functional currency

 

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offset by an impairmentcharge of $0.5 million to reduce our basis in an investment to fair value.Based upon our review of an investee’s financial condition, results ofoperations and operating trends and the implied value from recent rounds offinancing completed by the investee, we determined that an other-than-temporaryimpairment existed for one of our investments.

 

***Income Tax Expense***

As discussed in moredetail under “Critical Accounting Policies and Estimates,” the effective taxrate for the nine months ended September 30, 2003 was significantly morethan the U.S. statutory rate which was primarily the result of not reflectingany significant tax benefits for the current net operating losses in certainfederal, state and foreign tax jurisdictions.

 

The effective tax rate onincome before income taxesand minority interest for the nine months ended September 30, 2002 as a percentage of income before incometaxes and minority interest was 39%. The difference between this rate and thestatutory U.S. Federal rate of 34% was primarily due to net operating losses incertain non-U.S. subsidiaries for which no tax benefit was recognized, and U.S.state and local income taxes.

 

**Financial Condition 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.

 

# ***Cash Flows***

Thefollowing table sets forth summary cash flow data for the periods indicated.Please refer to this summary as you read our discussion of the sources and usesof cash in each year.

 
| **Nine  Months Ended September 30,** |   | **2003**          |     | **2002** |   |
|-------------------------------------------|--------|-------------------|----------|----------|--------|
|                                      |   | **(in millions)** |     |
| **Net  cash provided by (used in):**      |   |              |     |     |   |
| Operating activities                      |   | **$**             | **14.1** |     | $      | 26.3 |   |
| Investing activities                      |   | **(19.0**         | **)**    | (21.2    | )      |
| Financing activities                      |   | **(1.0**          | **)**    | (0.1     | )      |
|                                           |        |                   |          |          |        |  |  |

 

**2003**

In the nine months endedSeptember 30, 2003, cash provided by operating activities resultedprimarily from income before asset impairment and restructuring expenses,depreciation and amortization, and other charges of $20.4 million and $13.3million of increases in trade accounts payable and other liabilities offset byincreases in trade accounts receivable and other assets of $19.6 million.

 

In the nine months endedSeptember 30, 2003, we used cash for investing activities to purchase$19.1 million of property and equipment and used $1.0 million to increaseinvestments in affiliates. This was partially offset by $1.1 million of proceedsfrom dividends received from an equity method investee.

 

In the nine months endedSeptember 30, 2003, we used cash for financing activities to repay $1.9million of capital lease obligations. In addition, we used cash to purchase atotal of $1.1 million of common stock under our existing stock purchaseprogram. These payments were partially offset by additional borrowings net ofrepayments of $1.9 million.

 

**2002**

In the nine months endedSeptember 30, 2002, cash provided by operating activities came from incomebefore non-cash expenses of $33.3 million, and $8.4 million of increases intrade payables and other liabilities, which were partially offset by $14.9million of increases in trade receivables and other assets.

 

In the nine months endedSeptember 30, 2002, we used cash for investing activities to purchase$23.4 million of property and equipment.

 

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In the nine months endedSeptember 30, 2002, we used cash for financing activities to repay $1.7million of capital lease obligations and to make a $1.5 million capitaldistribution to the minority interest in our Jamaica joint venture. Thesepayments were partially offset by additional borrowings, net of repayments, of$3.0 million.

 

**CapitalResources**

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 working capitalrequirements.

 

We have a three-year $50million revolving credit facility which expires in December 2005.  The credit facility is secured by accountsreceivable in the United States, Canada and the United Kingdom.  We intend to utilize the facility, as needed,for ongoing working capital requirements and general corporate purposes. AtSeptember 30, 2003, we had $43.8 million of available borrowings under thecredit facility, and we were in compliance with all financial covenants of thefacility.

 

We expect to finance ourcurrent operations, planned capital expenditures, and internal growth for theforeseeable future using funds generated from operations, existing cash andavailable funds under our credit facility in addition to lease financing forproperty and equipment. We estimate that our fourth quarter of 2003 capitalexpenditures will range from $5 million to $8 million to cover technology upgrades, assetreplacement and new business initiatives. Future acquisitions, if any, may require additional debt orequity financing.

 

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

 

# ***ContractualObligations and Commitments***

We summarize variouscontractual obligations and commitments in the Notes to our ConsolidatedFinancial Statements in our Annual Report on Form 10-K for the year endedDecember 31, 2002.  Thesecontractual obligations and commitments include:

 

•                                          $100.0million of long-term debt as shown in our consolidated condensed balance sheetat September 30, 2003,

•                                          $11.4million of capital lease obligations as shown in our consolidated condensedbalance sheet at September 30, 2003, and

•                                          operatinglease obligations for property and certain equipment under noncancelable operatinglease arrangements, which expire 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:

 

•                  thetiming of our clients’ customer relationship management initiatives andcustomer acquisition and loyalty campaigns,

•                  thecommencement and terms of new contracts,

•                  revenuemix,

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

•                  thetiming of recognition of incentive fees.

 

We experience periodic fluctuations in our results of operationsrelated to both the start-up costs associated with expansion and theimplementation of clients’ CRM activities. In addition, our business generallytends to be slower in the third quarter due to summer 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.

 

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***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 are also required to record a corresponding asset that isdepreciated over the life of the asset. Subsequent to the initial measurementof the asset retirement obligation, the obligation will be adjusted at the endof each period to reflect the passage of time and changes in the estimatedfuture cash flows underlying the obligation. We adopted SFAS 143 onJanuary 1, 2003. The adoption of SFAS 143 did not have a material effecton our consolidated financial statements.

 

In June 2002, theFASB issued 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 fordisclosure of asset impairment and restructuring expenses recorded during thefirst quarter of 2003.

 

In November 2002,the EITF 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 was effective prospectivelyfor new or modified contracts beginning July 1, 2003. The adoption of EITF00-21 did not have a material impact on our consolidated financial statements.

 

In May 2003, theEITF reached a consensus on Issue 01-8, *DeterminingWhether an Arrangement Contains a Lease*(“EITF 01-8”). Under theprovisions of EITF 01-8, arrangements conveying the right to control the use ofspecific property, plant or equipment must be evaluated to determine whetherthey contain a lease. The new rules will be applied prospectively to suchcontracts entered into or modified after July 1, 2003. The adoption ofEITF 01-8 did not have a material impact on our consolidated financialstatements.

 

In November 2002,the FASB issued Interpretation No. 45, “Guarantor’s Accounting andDisclosure Requirements for Guarantees, Including Indirect Guarantees ofIndebtedness to Others, an interpretation of FASB Statements No. 5, 57, and 107and a rescission of FASB Interpretation No. 34” (FIN 45). FIN 45elaborates on the disclosures to be made by a guarantor in its interim andannual financial statements about its obligations under guarantees issued. FIN45 also clarifies that a guarantor is required to recognize, at inception of aguarantee, a liability for the fair value of the obligation undertaken. Theinitial recognition and measurement provisions of FIN 45 are applicable toguarantees issued or modified after December 31, 2002 and have not had amaterial effect on our consolidated financial statements.

 

In January 2003, theFASB issued 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.FIN 46 applies in the first fiscal year or interim period ending after December 15,2003. We have not completed our assessment of the impact of FIN 46, but do notanticipate a material impact on our consolidated financial statements.

 

In April 2003, theFASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instrumentsand Hedging 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 forDerivative Instruments and Hedging Activities”(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 intoor modified after June 30, 2003 and for hedging relationships designatedafter June 30, 2003. The application of SFAS 149 did not have a materialeffect on our consolidated financial statements.

 

In May 2003, theFASB issued SFAS No. 150, “Accounting for Certain Financial Instruments withCharacteristics of both Liabilities and Equity” (SFAS 150). The provisions ofSFAS 150, which also include a number of new disclosure requirements, areeffective for instruments entered into or modified after May 31, 2003 andfor pre-existing instruments as of July 1, 2003. The adoption of SFAS 150did not have a material effect on our consolidated financial statements.

 

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**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 and nine-month periods ended September 30, 2003, our averageborrowings under our bank credit facility were $4.3 million and $3.9 millionrespectively. Based on our projected cash needs for the foreseeable future, wedo not expect that our exposure to changes in interest rates will have amaterial impact on our interest expense.

 

**Item 4. Controls and Procedures**

 

Under the supervision andwith the participation of the Company’s management, including its principalexecutive officer and principal financial officer, the Company performed anevaluation of the effectiveness of the design and operation of the Company’sdisclosure controls and procedures (as defined in Rule 13a-15(e) promulgatedunder the Securities and Exchange Act of 1934, as amended) as ofSeptember 30, 2003. Based on that evaluation, the Company’s management,including the principal executive officer and principal financial officer,concluded that the Company’s disclosure controls and procedures wereeffective.  There were no significantchanges in the Company’s internal controls over financial reporting during thequarter covered by this report that have materially affected, or are reasonablylikely to materially affect, such internal controls.

 

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**PART II– OTHER INFORMAT****ION**

 

**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 andsuggesting that the client might be infringing certain patents related tocomputerized telephonic voice response systems without the license. The clienthas indicated that if any infringement occurred the client would seekcontractual indemnity from us. In such an event, we would expect to seekcontractual indemnity from certain of our vendors. Any such contractualindemnity we might obtain may not be sufficient to cover all of the costs of investigatingand resolving such matter. We might also seek a license under the patents. Anysuch license may not be available under commercially reasonable terms. Anylicense costs would increase the cost of doing business in the future and mayor may not be fully reflected in our pricing. To our knowledge, no litigationhas been initiated against our client or us concerning this matter. At thisstage, due to the inherent uncertainties, we are unable to predict whether thismatter may have a material adverse effect on our business or on our financialcondition or results of operation.

 

**Item 5. Other Information**

 

**Forward-Looking Statements**

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

 

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

 

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

 

(a)          Exhibits:

 

ExhibitNo.

 

31.1                           CertificationPursuant to 18 U.S.C. Section 1350, as Adopted Pursuant toSection 302 of the Sarbanes-Oxley Act of 2002

31.2                           CertificationPursuant to 18 U.S.C. Section 1350, as Adopted Pursuant toSection 302 of the Sarbanes-Oxley Act of 2002

32.1                           CertificationPursuant to 18 U.S.C. Section 1350, as Adopted Pursuant toSection 906 of the Sarbanes-Oxley Act of 2002

32.2                           CertificationPursuant to 18 U.S.C. Section 1350, as Adopted Pursuant toSection 906 of the Sarbanes-Oxley Act of 2002

 

(b)         Reports on Form 8-K:

The Company filed aCurrent Report on Form 8-K dated July 30, 2003, which reported under Items7 and 12 the issuance of a press release. The press release was filed as anexhibit to the Form 8-K.

 

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### **SIGNATURE**

 

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

 
|                                                 |   | SITEL  Corporation                                                                                                                                            |
|------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                 |   | **(Registrant)**                                                                                                                                              |
|                                                 |   |                                                                                                                                                          |
|                                                 |   |                                                                                                                                                          |   |
| Date:    November 14,  2003 | By     | /s/                       *James F. Lynch* |
|                                                 |   | **James  F. Lynch**                                                                                                                                           |
|                                                 |   | *Chief  Executive Officer*                                                                                                                                    |
|                                                 |   | (Duly Authorized  Officer and                                                                                                                                 |
|                                                 |   | Principal  Executive Officer)                                                                                                                                 |

 

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### **SIGNATURE**

 

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

 
|                                                 |   | SITEL  Corporation                                                                                                                                             |
|------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                 |   | **(Registrant)**                                                                                                                                               |
|                                                 |   |                                                                                                                                                           |
|                                                 |   |                                                                                                                                                           |   |
| Date:    November 14,  2003 | By     | /s/                       *Donald J. Vrana* |
|                                                 |   | **Donald  J. Vrana**                                                                                                                                           |
|                                                 |   | *Senior  Vice President,*                                                                                                                                      |
|                                                 |   | *Controller  and Treasurer*                                                                                                                                    |
|                                                 |   | (Chief  Accounting Officer)                                                                                                                                    |

 

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**EXHIBIT INDEX**

 
| **Exhibit No.** |   |                                                                                                                               |
|-----------------|--------|------------------------------------------------------------------------------------------------------------------------------------|
|            |   |                                                                                                                               |
| 31.1            |   | Certification Pursuant  to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of  the Sarbanes-Oxley Act of 2002 |
|            |   |                                                                                                                               |
| 31.2            |   | Certification Pursuant  to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of  the Sarbanes-Oxley Act of 2002 |
|            |   |                                                                                                                               |
| 32.1            |   | Certification Pursuant  to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of  the Sarbanes-Oxley Act of 2002 |
|            |   |                                                                                                                               |
| 32.2            |   | Certification Pursuant  to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of  the Sarbanes-Oxley Act of 2002 |

 

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