**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-Q/A**

 

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

 

**Forthe quarterly period ended MARCH 31, 2004**

 

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

 

**MINNESOTA**

(State or OtherJurisdiction of Incorporation or Organization)

 

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

 

**(402)963-6810**

(Registrant’sTelephone Number, Including Area Code)

 

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

 

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

 

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

**NotApplicable**

 

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 mark whetherthe registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).

YES  ý     NO  o

 

**COMMONSTOCK, $.001 PAR VALUE – 73,650,822 SHARES OUTSTANDING AS OF APRIL 30,2004**

 

 

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**SITEL CORPORATION AND SUBSIDIARIES**

**TABLE OF CONTENTS**

 
| **PART  I – Financial Information** |          |
|------------------------------------------|---------------|
|                                     |          |   |   |   |
|                                     | Item 1        | – | Financial Statements |   |
|                                     |          |   |   |   |
|                                     |          |   | Consolidated  Condensed Statements of Income |   |
|                                     |          |   | 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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**PART I - FINANCIAL INFORMATION**

 

*This Form 10-Q/A is being filed for the purpose ofamending and restating Item 1 Financial Statements of Part I, containing ourunaudited consolidated condensed financial statements and related notes as ofand for the three-month period ended March 31, 2004. See Note 9 to theunaudited consolidated condensed financial statements for further discussion ofthe restatement and related disclosures. We have updated Item 4 Controls and Procedures of Part I to referencethe deficiency within our internal control framework identified during thesecond quarter as a result of the error, which caused the restatement of theconsolidated condensed financial statements. We have also updated Item 2 Management Discussion and Analysis ofFinancial Condition and Results of Operations of Part I, to give effect to therestatement.  In addition, we have amendedItem 6 Exhibits and Reports on Form 8-K of Part II to reflect the filing ofcurrent certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuantto Section 906 of the Sarbanes-Oxley Act of 2002, and current certificationspursuant to Section 302 of the Sarbanes-Oxley Act of 2002.  Other than the changes regarding therestatement and related disclosures, no other information in this Form 10-Q/A hasbeen updated to reflect any subsequent information or events since the originalfiling of this Form 10-Q on May 10, 2004.*

 

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### **SITEL CORPORATION ANDSUBSIDIARIES**

**CONSOLIDATED CONDENSED STATEMENTS OF INCOME**

**(UNAUDITED)**

(in thousands, except per sharedata)

 
| ** **                                           | ** ** | **Three Months Ended  March 31,** | ** ** |
|------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                           | ** ** | **2004**                               | ** ** | **2003** | ** ** |
| ** **                                           | ** ** | **(As restated,  see Note 9)**         | ** ** | ** ** | ** ** |
|                                                 |       |                                   |       |   |   |
| **Revenue**                                          |       | $                                      | 244,068    |   | $ | 194,095 |   |
|                                                 |       |                                   |       |   |   |
| **Operating expenses:**                              |       |                                   |       |   |   |
| Direct  labor and telecommunications expenses        |       | 144,128                                |       | 110,772 |   |
| Subcontracted  and other services expenses           |       | 12,815                                 |       | 13,649 |   |
| Operating,  selling and administrative expenses      |       | 76,839                                 |       | 65,676 |   |
| Asset  impairment and restructuring expenses         |       | —                                 |       | 796 |   |
| Total  operating expenses                            |       | 233,782                                |       | 190,893 |   |
|                                                 |       |                                   |       |   |   |
| **Operating income**                                 |       | 10,286                                 |       | 3,202 |   |
|                                                 |       |                                   |       |   |   |
| **Other income (expense):**                          |       |                                   |       |   |   |
| Interest  expense, net                               |       | (3,112                                 | )          | (2,724 | ) |
| Equity  in earnings (loss) of affiliates             |       | (7                                     | )          | 618 |   |
| Other  expense, net                                  |       | (274                                   | )          | (659 | ) |
| Total  other expense, net                            |       | (3,393                                 | )          | (2,765 | ) |
|                                                 |       |                                   |       |   |   |
| **Income before income taxes and minority interest** |       | 6,893                                  |       | 437 |   |
|                                                 |       |                                   |       |   |   |
| Income  tax expense                                  |       | 1,853                                  |       | 170 |   |
| Minority  interest                                   |       | 214                                    |       | 206 |   |
| **Net income**                                       |       | $                                      | 4,826      |   | $ | 61 |   |
|                                                 |       |                                   |       |   |   |
| **Weighted average common shares outstanding:**      |       |                                   |       |   |   |
| Basic                                                |       | 73,633                                 |       | 74,258 |   |
| Diluted                                              |       | 73,980                                 |       | 74,258 |   |
|                                                 |       |                                   |       |   |   |
| **Earnings per share:**                              |       |                                   |       |   |   |
| Basic                                                |       | $                                      | 0.07       |   | $ | 0.00 |   |
| Diluted                                              |       | $                                      | 0.07       |   | $ | 0.00 |   |

 

*See Notes to Consolidated CondensedFinancial Statements*

 

1

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### **SITEL CORPORATION ANDSUBSIDIARIES**

### **CONSOLIDATED CONDENSED BALANCE SHEETS**

(in thousands, except per share data)

 
| ** **                                                                                                                                   | ** ** | **March 31,  2004**       | ** ** | **December 31,  2003** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                   | ** ** | **(Unaudited)**                | ** ** | ** **                  | ** ** |
| ** **                                                                                                                                   | ** ** | **(As restated,  see Note 9)** | ** ** | ** **                  | ** ** |
| **Assets**                                                                                                                                   |       |                           |       |                        |       |
| **Current assets:**                                                                                                                          |       |                           |       |                        |       |
| Cash  and cash equivalents                                                                                                                   |       | $                              | 29,066     |                        | $          | 29,850 |   |
| Trade  accounts receivable (net of allowance for doubtful accounts of $2,923 and  $3,088, respectively)                                      |       | 181,702                        |       | 175,542                     |       |
| Prepaid  expenses                                                                                                                            |       | 10,790                         |       | 10,072                      |       |
| Deferred  income taxes                                                                                                                       |       | 2,405                          |       | 2,367                       |       |
| Other  assets                                                                                                                                |       | 6,745                          |       | 7,364                       |       |
| Total  current assets                                                                                                                        |       | 230,708                        |       | 225,195                     |       |
|                                                                                                                                         |       |                           |       |                        |       |
| **Property and equipment, net**                                                                                                              |       | 86,441                         |       | 90,233                      |       |
| **Other assets:**                                                                                                                            |       |                           |       |                        |       |
| Goodwill                                                                                                                                     |       | 53,553                         |       | 53,553                      |       |
| Deferred  income taxes                                                                                                                       |       | 8,792                          |       | 8,724                       |       |
| Investment  in affiliates                                                                                                                    |       | 19,139                         |       | 18,911                      |       |
| Other  assets                                                                                                                                |       | 8,005                          |       | 8,139                       |       |
| **Total assets**                                                                                                                             |       | $                              | 406,638    |                        | $          | 404,755 |   |
|                                                                                                                                         |       |                           |       |                        |       |
| **Liabilities and Stockholders’ Equity**                                                                                                |       |                           |       |                        |       |
| **Current liabilities:**                                                                                                                     |       |                           |       |                        |       |
| Revolving  credit facility and other current debt                                                                                            |       | $                              | 21,499     |                        | $          | 22,894 |   |
| Current  portion of capital lease obligations                                                                                                |       | 2,670                          |       | 3,181                       |       |
| Trade  accounts payable                                                                                                                      |       | 26,261                         |       | 30,582                      |       |
| Income  taxes payable                                                                                                                        |       | 584                            |       | 628                         |       |
| Accrued  wages, salaries and bonuses                                                                                                         |       | 45,017                         |       | 38,817                      |       |
| Accrued  operating expenses                                                                                                                  |       | 34,197                         |       | 37,823                      |       |
| Deferred  revenue and other                                                                                                                  |       | 7,869                          |       | 6,884                       |       |
| Total  current liabilities                                                                                                                   |       | 138,097                        |       | 140,809                     |       |
| **Long-term debt and other liabilities:**                                                                                                    |       |                           |       |                        |       |
| Long-term  debt                                                                                                                              |       | 100,000                        |       | 100,000                     |       |
| Capital  lease obligations, excluding current portion                                                                                        |       | 8,253                          |       | 8,684                       |       |
| Deferred  compensation                                                                                                                       |       | 1,197                          |       | 1,389                       |       |
| Deferred  income taxes                                                                                                                       |       | 1,130                          |       | 1,055                       |       |
| Total  liabilities                                                                                                                           |       | 248,677                        |       | 251,937                     |       |
|                                                                                                                                         |       |                           |       |                        |       |
| **Minority interests**                                                                                                                       |       | 2,083                          |       | 1,869                       |       |
| **Stockholders’ equity:**                                                                                                               |       |                           |       |                        |       |
| Common  stock, voting, $.001 par value 200,000,000 shares authorized, 74,340,635 and  74,368,135 shares issued and outstanding, respectively |       | 74                             |       | 74                          |       |
| Additional  paid-in capital                                                                                                                  |       | 168,785                        |       | 168,726                     |       |
| Accumulated  other comprehensive income                                                                                                      |       | 330                            |       | 329                         |       |
| Accumulated  deficit                                                                                                                         |       | (12,203                        | )          | (17,044                     | )          |
| Less  treasury stock, at cost, 744,813 and 755,300 common shares, respectively                                                               |       | (1,108                         | )          | (1,136                      | )          |
|                                                                                                                                         |       |                           |       |                        |       |
| Total  stockholders’ equity                                                                                                             |       | 155,878                        |       | 150,949                     |       |
| **Total liabilities and stockholders’ equity**                                                                                          |       | $                              | 406,638    |                        | $          | 404,755 |   |

 

*See Notes to Consolidated CondensedFinancial Statements.*

 

2

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### **SITEL CORPORATION ANDSUBSIDIARIES**

**CONSOLIDATED CONDENSED STATEMENTS OF CASHFLOWS**

**(UNAUDITED)**

(in thousands)

 
| ** **                                                                        | ** ** | **Three Months Ended  March 31,** | ** ** |
|-----------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                        | ** ** | **2004**                               | ** ** | **2003** | ** ** |
|                                                                              |       | **(As restated,  see Note 9)**         |       |   |   |
| **Cash flows from operating activities:**                                         |       |                                   |       |   |   |
| Net  income                                                                       |       | $                                      | 4,826      |   | $ | 61 |   |
| Adjustments  to reconcile net income to net cash flows from operating activities: |       |                                   |       |   |   |
| Asset  impairment and restructuring provision                                     |       | —                                 |       | 796 |   |
| Depreciation  and amortization                                                    |       | 9,185                                  |       | 8,809 |   |
| Provision  for deferred income taxes                                              |       | (18                                    | )          | (3 | ) |
| Equity  in (earnings) loss of affiliates                                          |       | 7                                      |       | (618 | ) |
| Impairment  of equity investments                                                 |       | —                                 |       | 500 |   |
| Changes  in operating assets and liabilities:                                     |       |                                   |       |   |   |
| Trade  accounts receivable                                                        |       | (8,772                                 | )          | 467 |   |
| Other  assets                                                                     |       | (502                                   | )          | 1,311 |   |
| Trade  accounts payable                                                           |       | (4,137                                 | )          | 831 |   |
| Other  liabilities                                                                |       | 5,703                                  |       | (2,900 | ) |
| Net  cash flows from operating activities                                         |       | 6,292                                  |       | 9,254 |   |
|                                                                              |       |                                   |       |   |   |
| **Cash flows from investing activities:**                                         |       |                                   |       |   |   |
| Purchases  of property and equipment                                              |       | (5,458                                 | )          | (5,272 | ) |
| Investment  in affiliates                                                         |       | —                                 |       | (1,000 | ) |
| Net  cash flows from investing activities                                         |       | (5,458                                 | )          | (6,272 | ) |
|                                                                              |       |                                   |       |   |   |
| **Cash flows from financing activities:**                                         |       |                                   |       |   |   |
| Borrowings  on debt                                                               |       | 4,092                                  |       | 5,259 |   |
| Repayments  of debt                                                               |       | (5,488                                 | )          | (5,404 | ) |
| Repayments  of capital lease obligations                                          |       | (718                                   | )          | (219 | ) |
| Treasury  stock reissuances                                                       |       | 63                                     |       | 57 |   |
| Net  cash flows from financing activities                                         |       | (2,051                                 | )          | (307 | ) |
| Effect  of exchange rates on cash                                                 |       | 433                                    |       | (568 | ) |
| **Net increase (decrease) in cash**                                               |       | (784                                   | )          | 2,107 |   |
| **Cash and cash equivalents, beginning of period**                                |       | 29,850                                 |       | 34,142 |   |
| **Cash and cash equivalents, end of period**                                      |       | $                                      | 29,066     |   | $ | 36,249 |   |
|                                                                              |       |                                   |       |   |   |
| **Non-cash investing and financing activities:**                                  |       |                                   |       |   |   |
| Capital  leases incurred                                                          |       | $                                      | —     |   | $ | 983 |   |

 

*See Notes to Consolidated CondensedFinancial Statements*

 

3

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### **SITEL CORPORATION ANDSUBSIDIARIES**

**NOTES TO CONSOLIDATED CONDENSED FINANCIAL 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 large andmid-size corporations in North America, Europe, Asia Pacific, and LatinAmerica. We provide customer acquisition, customer care, technical support andrisk management 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, consumer products, financialservices, insurance, telecommunications, Internet service provider, cable,technology and utilities sectors.

 

The accompanying unaudited consolidated condensed financial statements reflect all normal and recurring adjustments that are, in the opinion of management, necessary for a fair presentation of the results of operations, financial position, and cash flows for the interim periods presented. The consolidated condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto, together with management’s discussion and analysis of financial condition and results of operations, contained in our Annual Report on Form 10-K for the year ended December 31, 2003. All significant intercompany balances and transactions have been eliminated. Certain amounts in prior fiscal periods have been reclassified for comparative purposes.

 

***Use ofAccounting 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 revenue 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 IssuedAccounting Pronouncements***

In January 2003, theFASB released Interpretation No. 46, “Consolidation of Variable InterestEntities, an Interpretation of ARB No. 51” (FIN 46) which requires thatall primary beneficiaries of Variable Interest Entities (VIE) consolidate thatentity. FIN 46 is effective immediately for VIE’s created afterJanuary 31, 2003 and to VIE’s in which an enterprise obtains an interestafter that date. It applies in the first fiscal year or interim periodbeginning after June 15, 2003 to VIE’s in which an enterprise holds avariable interest it acquired before February 1, 2003. InDecember 2003, the FASB published a revision to FIN 46 (“FIN 46R”) toclarify some of the provisions of the interpretation and to defer the effectivedate of implementation for certain entities. The remaining provisions of FIN46R were effective January 1, 2004. The adoption of FIN 46R did not have a material impact on ourconsolidated condensed financial statements.

 

***Stock-BasedCompensation***

We apply the intrinsic-value-based method ofaccounting prescribed by Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees”(APB No. 25)*,* and relatedinterpretations to account for our fixed-plan stock options. Under this method,compensation expense is recorded on the date of grant only if the currentmarket price of the underlying stock exceeded the exercise price. Statement ofFinancial Accounting Standard No. 123, “Accounting for Stock-Based Compensation” (SFAS No. 123)*,* established accounting anddisclosure requirements using a fair-value-based method of accounting forstock-based employee compensation plans.

 

4

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The following table illustrates the effect on our netincome if the fair-value-based method had been applied to all outstanding andunvested awards in each period (in thousands):

 
| **Three  Months Ended March 31,**                                                                                    | ** ** | **2004**                       | ** ** | **2003**   | ** ** |
|---------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------|------------|------------|------------|
| ** **                                                                                                                | ** ** | **(As restated,  see Note 9)** | ** ** | ** ** | ** ** |
| Net  income:                                                                                                              |       |                           |       |       |       |
| As  reported                                                                                                              |       | $                              | 4,826      |       | $          | 61 |   |
| Less:  total stock based employee compensation expense determined under the fair  value method for all awards, net of tax |       | (259                           | )          | (348       | )          |
| Pro  forma                                                                                                                |       | $                              | 4,567      |       | $          | (287 | ) |
|                                                                                                                      |       |                           |       |       |       |
| Income  per common share:                                                                                                 |       |                           |       |       |       |
| As  reported:                                                                                                             |       |                           |       |       |       |
| Basic                                                                                                                     |       | $                              | 0.07       |       | $          | 0.00 |   |
| Diluted                                                                                                                   |       | 0.07                           |       | 0.00       |       |
| Pro  forma:                                                                                                               |       |                           |       |       |       |
| Basic                                                                                                                     |       | 0.06                           |       | 0.00       |       |
| Diluted                                                                                                                   |       | 0.06                           |       | 0.00       |       |

 

The fair value of optionswas estimated at the date of the grant using the Black-Scholes option-pricingmodel with an expected dividend yield of 0.0%, and the followingweighted-average assumptions:

 
| ** **                | ** ** | **2004** | ** ** | **2003** | ** ** |
|---------------------------|------------|----------|------------|----------|------------|
|                      |       |     |       |     |       |
| Volatility  factor        |       | 53.0     | %          | 69.2     | %          |
| Risk-free  interest rate  |       | 3.4      | %          | 2.0      | %          |
| Expected  life (in years) |       | 5        |       | 5        |       |

 

***SignificantClients***

Our******top 20 clients accounted for68.3% and 67.2% of our revenue in the three-month periods ended March 31,2004 and 2003, respectively, and include multiple independentlymanaged business units of General Motors Corporation. These General Motorsbusiness units were responsible for 17.3% and 20.3% of our total revenue in thethree-month periods ended March 31, 2004 and 2003.  The primary General Motors contract expiresin December 2005, while a second contract is set to terminate inJune 2004.  In addition, Hewlett-Packard (HP) wasresponsible for 11.6% of our revenue for the three-month period endedMarch 31, 2004.

 

**Note 2. Comprehensive Income**

 

Comprehensive income forthe three months ended March 31, 2004 and 2003 is as follows (inthousands):

 
| ** **                       | ** ** | **Three Months Ended  March 31,** | ** ** |
|----------------------------------|------------|----------------------------------------|------------|
| ** **                       | ** ** | **2004**                               | ** ** | **2003** | ** ** |
| ** **                       | ** ** | **(As restated,  see Note 9)**         | ** ** | ** ** | ** ** |
| Net  income                      |       | $                                      | 4,826      |   | $ | 61 |   |
| Other  comprehensive income:     |       |                                   |       |   |   |
| Currency  translation adjustment |       | 1                                      |       | 2,898 |   |
| Comprehensive  income            |       | $                                      | 4,827      |   | $ | 2,959 |   |

 

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

 

5

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**Note 3.  AssetImpairment and Restructuring Expenses**

 

As a result of certain clientcontract negotiations that concluded during the three months endedMarch 31, 2003, we re-assessed our facilities requirements and determinedthat a certain facility subject to an operating lease was no longer needed. Asa result, we recorded asset impairment and restructuring expenses of $0.8million during the three months ended March 31, 2003 related to thewrite-off of abandoned leasehold improvements of $0.4 million and $0.4 millionfor scheduled payments of operating leases for which we will receive no futureeconomic benefit. Our estimates are based upon many factors includingprojections of sublease rates and the time period required to locate tenants.The facility was abandoned prior to March 31, 2003.

 

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

 

No asset impairment orrestructuring expenses were incurred during the three months endedMarch 31, 2004.  We summarize thecomponents of the accrued restructuring expenses recorded in our condensedconsolidated balance sheet in the following table:

 
| ** **                     | ** ** | **Accrual  Balance  December 31,  2003** | ** ** | **Expensed  in  2004** | ** ** | **Paid  in  2004** | ** ** | **Other  in  2004** | ** ** | **Accrual  Balance  March 31,  2004** | ** ** |
|--------------------------------|------------|-----------------------------------------------|------------|------------------------|------------|--------------------|------------|---------------------|------------|--------------------------------------------|------------|
| ** **                     | ** ** | **(in millions)**                             | ** ** |
|                           |       |                                          |       |                   |       |               |       |                |       |                                       |       |
| Severance                      |       | $                                             | 0.1        |                   | $          | —             |       | $                   | —     |                                       | $          | — |   | $ | 0.1 |   |
| Facility  closure or reduction |       | 6.5                                           |       | —                 |       | (1.0               | )          | 0.1                 |       | $                                          | 5.6        |   |
| Total                          |       | $                                             | 6.6        |                   | $          | —             |       | $                   | (1.0       | )                                          | $          | 0.1 |   | $ | 5.7 |   |

 

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

 

**Note 4. Investments in Affiliates**

 

We have made minorityinterest investments for business and strategic purposes through the purchaseof voting common and preferred stock of companies.  We periodically evaluate whether declines infair value, if any, of our investments are other-than-temporary. Thisevaluation consists of a review of qualitative and quantitative factors. Wealso consider other factors to determine whether declines in fair value areother-than-temporary, such as the investee’s financial condition, results ofoperations and operating trends. We also consider the implied value from anyrecent rounds of financing completed by the investee. Based upon an evaluationof the facts and circumstances during the quarter ended March 31, 2003, wedetermined that an other-than-temporary impairment existed for one of ourinvestments. Impairment charges of $0.5 million were recorded in otherexpense, net in the consolidated condensed statement of income to record thisinvestment at fair value.

 

Subcontracted expensesfor services provided by our India joint venture for the three-month periodsended March 31, 2004 and 2003 were $3.4 million and $3.4 million,respectively.  The Company had payablesto our India joint venture of $1.4 million and $2.3 million at March 31,2004 and December 31, 2003 respectively, which are included in tradeaccounts payable in the accompanying consolidated condensed balance sheets.

 

Subcontracted servicesprovided by our Latin America joint venture for the three-month periods endedMarch 31, 2004 and 2003 were not material.

 

**Note 5. Stock-Based Compensation**

 

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

 

6

----

 

Vesting terms vary witheach grant, and option terms may not exceed ten years. Option prices, set bythe Compensation Committee of the Board of Directors, may not be less than thefair market value at date of grant for incentive stock options or less than parvalue for nonqualified stock options. At March 31, 2004, there wereapproximately 5.5 million shares available for issuance pursuant to futuregrants under the 1999 Plan.

 

Prior to the adoption ofthe 1999 Plan, we granted options under several different plans. As ofMarch 31, 2004, options granted under these plans aggregating 2,725,884remained outstanding with strike prices ranging from $2.41 to $12.50.  The last of these options will expire onFebruary 1, 2009. We will not grant additional options under these plans.The following table sets forth shares subject to options:

 
| ** **                    | ** ** | **Number  of Options** | ** ** | **Weighted-  Average  Exercise  Price per Share** | ** ** |
|-------------------------------|------------|------------------------|------------|---------------------------------------------------|------------|
|                          |       |                   |       |                                              |       |
| Balance  January 1, 2004 |       | 7,750,390              |       | $                                                 | 3.67       |   |
| Granted                       |       | 96,000                 |       | 2.36                                              |       |
| Exercised                     |       | (27,500                | )          | 2.29                                              |       |
| Canceled                      |       | (43,375                | )          | 3.04                                              |       |
| Balance,  March 31, 2004 |       | 7,775,515              |       | $                                                 | 3.66       |   |

 

The optionsexercisable at the end of each period were:

 
| ** **              | ** ** | **Number  of Options** | ** ** | **Weighted-  Average  Exercise  Price per Share** | ** ** |
|-------------------------|------------|------------------------|------------|---------------------------------------------------|------------|
|                    |       |                   |       |                                              |       |
| December 31,  2003 |       | 3,175,457              |       | $                                                 | 4.61       |   |
| March 31,  2004    |       | 3,778,003              |       | $                                                 | 4.47       |   |

 

The followingtable summarizes stock options outstanding at March 31, 2004:

 
| **Range  of  Exercise Prices** | ** ** | **Number  Outstanding** | ** ** | **Weighted-  Average  Remaining  Life** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** |
|--------------------------------|------------|-------------------------|------------|-----------------------------------------|------------|-----------------------------------------|------------|
|                           |       |                    |       |                                    |       |                                    |       |
| $1.24 to $1.75                 |       | 895,823                 |       | 8.9                                     |       | $                                       | 1.54       |   |
| $1.76 to $4.00                 |       | 5,006,409               |       | 6.1                                     |       | $                                       | 3.06       |   |
| $4.01 to $6.33                 |       | 1,090,961               |       | 5.0                                     |       | $                                       | 4.82       |   |
| $6.34 to $7.22                 |       | 521,112                 |       | 5.8                                     |       | $                                       | 6.69       |   |
| $7.23 to $12.66                |       | 201,210                 |       | 3.9                                     |       | $                                       | 9.77       |   |
| $12.67 to $20.00               |       | 60,000                  |       | 3.0                                     |       | $                                       | 17.35      |   |

 

The followingtable summarizes stock options exercisable at March 31, 2004:

 
| **Range  of  Exercise Prices** | ** ** | **Number  Exercisable** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** |
|--------------------------------|------------|-------------------------|------------|-----------------------------------------|------------|
|                           |       |                    |       |                                    |       |
| $1.24 to $1.75                 |       | 107,256                 |       | $                                       | 1.57       |   |
| $1.76 to $4.00                 |       | 2,055,787               |       | $                                       | 3.12       |   |
| $4.01 to $6.33                 |       | 928,468                 |       | $                                       | 4.81       |   |
| $6.34 to $7.22                 |       | 426,492                 |       | $                                       | 6.70       |   |
| $7.23 to $12.66                |       | 200,000                 |       | $                                       | 9.75       |   |
| $12.67 to $20.00               |       | 60,000                  |       | $                                       | 17.35      |   |

 

7

----

 

**Note 6. 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 undercommercially reasonable terms. Any license costs would increase the cost ofdoing business in the future and may or may not be fully reflected in ourpricing. To our knowledge, no litigation has been initiated against our clientor us concerning this matter. At this stage, due to the inherent uncertainties,we are unable to predict whether this matter may have a material adverse effecton our business or on our financial condition or results of operation.

 

**Note 7.Earnings Per Share**

 

We calculate income per common share by dividing our reported netincome by the weighted average number of common shares and common equivalentshares outstanding during each period. Our reported net income is used in thecomputation of both basic and diluted income per share.

 

The difference betweenthe number of shares used to calculate basic and diluted earnings per sharerepresents the number of shares assumed to be issued from the exercise ofdilutive stock options under our stock option plans, less shares assumed to bepurchased with proceeds from the exercise of the stock options and the relatedtax benefits. AtMarch 31, 2004 and 2003, we had 5.8 million and 8.5 million options,respectively, which have been excluded from the diluted net income per sharecomputation because their exercise price exceeds the fair market value.

 

**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:

 

•                  CondensedConsolidating Statements of Income (Loss) and Comprehensive Income (Loss) forthe three months ended March 31, 2004 and 2003,

•                  CondensedConsolidating Balance Sheets at March 31, 2004 and December 31, 2003,and

•                  Condensed Consolidating Statements ofCash Flows for the three months ended March 31, 2004 and 2003.

 

8

----

 

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

 
| **Three  Months Ended March 31, 2004**          | ** ** | **Parent** | ** ** | **Guarantor  Subsidiaries**    | ** ** | **Nonguarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated**               | ** ** |
|------------------------------------------------------|------------|------------|------------|--------------------------------|------------|--------------------------------|------------|------------------|------------|--------------------------------|------------|
| ** **                                           | ** ** | ** ** | ** ** | **(As restated,  see Note 9)** | ** ** | ** **                     | ** ** | ** **       | ** ** | **(As restated,  see Note 9)** | ** ** |
|                                                 |       |       |       |                           |       |                           |       |             |       |                           |       |
| **Revenue**                                          |       | $          | 91,986     |                           | $          | 12,852                         |       | $                | 139,230    |                           | $          | — |   | $ | 244,068 |   |
|                                                 |       |       |       |                           |       |                           |       |             |       |                           |       |
| **Operating expenses:**                              |       |       |       |                           |       |                           |       |             |       |                           |       |
| Direct  labor and telecommunications expenses        |       | 50,019     |       | 6,552                          |       | 87,557                         |       | —           |       | 144,128                        |       |
| Subcontracted  and other services expenses           |       | 11,557     |       | 820                            |       | 438                            |       | —           |       | 12,815                         |       |
| Operating,  selling and administrative expenses      |       | 26,555     |       | 2,779                          |       | 47,505                         |       | —           |       | 76,839                         |       |
| Asset  impairment and restructuring expenses         |       | —     |       | —                         |       | —                         |       | —           |       | —                         |       |
| Total  operating expenses                            |       | 88,131     |       | 10,151                         |       | 135,500                        |       | —           |       | 233,782                        |       |
|                                                 |       |       |       |                           |       |                           |       |             |       |                           |       |
| **Operating income**                                 |       | 3,855      |       | 2,701                          |       | 3,730                          |       | —           |       | 10,286                         |       |
|                                                 |       |       |       |                           |       |                           |       |             |       |                           |       |
| **Other income (expense):**                          |       |       |       |                           |       |                           |       |             |       |                           |       |
| Interest  expense, net                               |       | (2,503     | )          | (1                             | )          | (608                           | )          | —           |       | (3,112                         | )          |
| Equity  in earnings (loss) of affiliates             |       | 2,386      |       | (615                           | )          | (7                             | )          | (1,771           | )          | (7                             | )          |
| Other  expense, net                                  |       | 1,314      |       | 113                            |       | (1,701                         | )          | —           |       | (274                           | )          |
| Total  other expense, net                            |       | 1,197      |       | (503                           | )          | (2,316                         | )          | (1,771           | )          | (3,393                         | )          |
|                                                 |       |       |       |                           |       |                           |       |             |       |                           |       |
| **Income before income taxes and minority interest** |       | 5,052      |       | 2,198                          |       | 1,414                          |       | (1,771           | )          | 6,893                          |       |
|                                                 |       |       |       |                           |       |                           |       |             |       |                           |       |
| Income  tax expense                                  |       | 12         |       | 26                             |       | 1,815                          |       | —           |       | 1,853                          |       |
| Minority  interest                                   |       | —     |       | —                         |       | 214                            |       | —           |       | 214                            |       |
| **Net income (loss)**                                |       | $          | 5,040      |                           | $          | 2,172                          |       | $                | (615       | )                              | $          | (1,771 | ) | $ | 4,826 |   |
|                                                 |       |       |       |                           |       |                           |       |             |       |                           |       |
| Currency  translation adjustment                     |       | —     |       | (12                            | )          | 13                             |       | —           |       | 1                              |       |
| **Comprehensive income (loss)**                      |       | $          | 5,040      |                           | $          | 2,160                          |       | $                | (602       | )                              | $          | (1,771 | ) | $ | 4,827 |   |

 

9

----

 

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

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

 

10

----

 

**CondensedConsolidating Balance Sheet**

**(inthousands)**

 
| **At  March 31, 2004**                           | ** ** | **Parent** | ** ** | **Guarantor  Subsidiaries**    | ** ** | **Nonguarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated**               | ** ** |
|-------------------------------------------------------|------------|------------|------------|--------------------------------|------------|--------------------------------|------------|------------------|------------|--------------------------------|------------|
| ** **                                            | ** ** | ** ** | ** ** | **(As restated,  See Note 9)** | ** ** | ** **                     | ** ** | ** **       | ** ** | **(As restated,  See Note 9)** | ** ** |
| **Assets**                                            |       |       |       |                           |       |                           |       |             |       |                           |       |
| **Current assets:**                                   |       |       |       |                           |       |                           |       |             |       |                           |       |
| Cash and cash equivalents                             |       | $          | 7,984      |                           | $          | 4,637                          |       | $                | 16,445     |                           | $          | — |   | $ | 29,066 |   |
| Trade accounts receivable, net                        |       | 100,327    |       | 61,945                         |       | 110,756                        |       | (91,326          | )          | 181,702                        |       |
| Prepaid expenses and other current assets             |       | 5,943      |       | 62                             |       | 13,935                         |       | —           |       | 19,940                         |       |
| Total current assets                                  |       | 114,254    |       | 66,644                         |       | 141,136                        |       | (91,326          | )          | 230,708                        |       |
|                                                  |       |       |       |                           |       |                           |       |             |       |                           |       |
| **Property and equipment, net**                       |       | 20,029     |       | 2,412                          |       | 64,000                         |       | —           |       | 86,441                         |       |
|                                                  |       |       |       |                           |       |                           |       |             |       |                           |       |
| **Other assets:**                                     |       |       |       |                           |       |                           |       |             |       |                           |       |
| Goodwill                                              |       | 19,577     |       | 14                             |       | 33,962                         |       | —           |       | 53,553                         |       |
| Deferred income taxes                                 |       | 8,607      |       | —                         |       | 185                            |       | —           |       | 8,792                          |       |
| Investments in affiliates                             |       | —     |       | —                         |       | 19,139                         |       | —           |       | 19,139                         |       |
| Other assets                                          |       | 5,980      |       | 56                             |       | 1,969                          |       | —           |       | 8,005                          |       |
| Investments in subsidiaries                           |       | 135,603    |       | 103,684                        |       | —                         |       | (239,287         | )          | —                         |       |
| **Total assets**                                      |       | $          | 304,050    |                           | $          | 172,810                        |       | $                | 260,391    |                           | $          | (330,613 | ) | $ | 406,638 |   |
|                                                  |       |       |       |                           |       |                           |       |             |       |                           |       |
| **Liabilities and Stockholders’  Equity**        |       |       |       |                           |       |                           |       |             |       |                           |       |
| **Current liabilities:**                              |       |       |       |                           |       |                           |       |             |       |                           |       |
| Revolving credit facility and other current debt      |       | $          | 59         |                           | $          | —                         |       | $                | 21,440     |                           | $          | — |   | $ | 21,499 |   |
| Current portion of capital lease obligations          |       | 347        |       | 118                            |       | 2,205                          |       | —           |       | 2,670                          |       |
| Trade accounts payable                                |       | 13,812     |       | 34,337                         |       | 69,431                         |       | (91,319          | )          | 26,261                         |       |
| Accrued expenses and other current liabilities        |       | 30,539     |       | 2,896                          |       | 54,318                         |       | (86              | )          | 87,667                         |       |
| Total current liabilities                             |       | 44,757     |       | 37,351                         |       | 147,394                        |       | (91,405          | )          | 138,097                        |       |
| **Long-term debt and other  liabilities:**            |       |       |       |                           |       |                           |       |             |       |                           |       |
| Long-term debt                                        |       | 100,000    |       | —                         |       | —                         |       | —           |       | 100,000                        |       |
| Capital lease obligations, excluding current  portion |       | —     |       | 70                             |       | 8,183                          |       | —           |       | 8,253                          |       |
| Deferred compensation                                 |       | 1,197      |       | —                         |       | —                         |       | —           |       | 1,197                          |       |
| Deferred income taxes                                 |       | —     |       | —                         |       | 1,130                          |       | —           |       | 1,130                          |       |
| Total liabilities                                     |       | 145,954    |       | 37,421                         |       | 156,707                        |       | (91,405          | )          | 248,677                        |       |
|                                                  |       |       |       |                           |       |                           |       |             |       |                           |       |
| **Minority interests**                                |       | —     |       | —                         |       | 2,083                          |       | —           |       | 2,083                          |       |
|                                                  |       |       |       |                           |       |                           |       |             |       |                           |       |
| **Stockholders’ equity**                         |       | 158,096    |       | 135,389                        |       | 101,601                        |       | (239,208         | )          | 155,878                        |       |
| **Total liabilities and stockholders’  equity**  |       | $          | 304,050    |                           | $          | 172,810                        |       | $                | 260,391    |                           | $          | (330,613 | ) | $ | 406,638 |   |

 

11

----

 

**CondensedConsolidating Balance Sheet**

**(in thousands)**

 
| **At  December 31, 2003**                      | ** ** | **Parent** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Nonguarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-----------------------------------------------------|------------|------------|------------|-----------------------------|------------|--------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                          | ** ** | ** ** | ** ** | ** **                  | ** ** | ** **                     | ** ** | ** **       | ** ** | ** **       | ** ** |
| **Assets**                                          |       |       |       |                        |       |                           |       |             |       |             |       |
| **Current assets:**                                 |       |       |       |                        |       |                           |       |             |       |             |       |
| Cash  and cash equivalents                          |       | $          | 12,010     |                        | $          | 3,090                          |       | $                | 14,750     |             | $          | — |   | $ | 29,850 |   |
| Trade  accounts receivable, net                     |       | 95,899     |       | 60,483                      |       | 113,341                        |       | (94,181          | )          | 175,542          |       |
| Prepaid  expenses and other current assets          |       | 6,280      |       | 34                          |       | 13,489                         |       | —           |       | 19,803           |       |
| Total  current assets                               |       | 114,189    |       | 63,607                      |       | 141,580                        |       | (94,181          | )          | 225,195          |       |
|                                                |       |       |       |                        |       |                           |       |             |       |             |       |
| **Property and equipment, net**                     |       | 20,792     |       | 2,608                       |       | 66,833                         |       | —           |       | 90,233           |       |
|                                                |       |       |       |                        |       |                           |       |             |       |             |       |
| **Other assets:**                                   |       |       |       |                        |       |                           |       |             |       |             |       |
| Goodwill                                            |       | 19,577     |       | 14                          |       | 33,962                         |       | —           |       | 53,553           |       |
| Deferred  income taxes                              |       | 8,607      |       | —                      |       | 117                            |       | —           |       | 8,724            |       |
| Investments  in affiliates                          |       | —     |       | —                      |       | 18,911                         |       | —           |       | 18,911           |       |
| Other  assets                                       |       | 6,196      |       | 56                          |       | 1,887                          |       | —           |       | 8,139            |       |
| Investments  in subsidiaries                        |       | 132,961    |       | 104,008                     |       | —                         |       | (236,969         | )          | —           |       |
| **Total assets**                                    |       | $          | 302,322    |                        | $          | 170,293                        |       | $                | 263,290    |             | $          | (331,150 | ) | $ | 404,755 |   |
|                                                |       |       |       |                        |       |                           |       |             |       |             |       |
| **Liabilities and Stockholders’ Equity**       |       |       |       |                        |       |                           |       |             |       |             |       |
| **Current liabilities:**                            |       |       |       |                        |       |                           |       |             |       |             |       |
| Revolving  credit facility and other current debt   |       | $          | —     |                        | $          | —                         |       | $                | 22,894     |             | $          | — |   | $ | 22,894 |   |
| Current  portion of capital lease obligations       |       | 506        |       | 117                         |       | 2,558                          |       | —           |       | 3,181            |       |
| Trade  accounts payable                             |       | 17,913     |       | 35,402                      |       | 71,448                         |       | (94,181          | )          | 30,582           |       |
| Accrued  expenses and other current liabilities     |       | 29,776     |       | 1,713                       |       | 52,743                         |       | (80              | )          | 84,152           |       |
| Total  current liabilities                          |       | 48,195     |       | 37,232                      |       | 149,643                        |       | (94,261          | )          | 140,809          |       |
| **Long-term debt and other liabilities:**           |       |       |       |                        |       |                           |       |             |       |             |       |
| Long-term  debt                                     |       | 100,000    |       | —                      |       | —                         |       | —           |       | 100,000          |       |
| Capital  lease obligations,                         |       |       |       |                        |       |                           |       |             |       |             |       |
| excluding  current portion                          |       | —     |       | 100                         |       | 8,584                          |       | —           |       | 8,684            |       |
| Deferred  compensation                              |       | 1,389      |       | —                      |       | —                         |       | —           |       | 1,389            |       |
| Deferred  income taxes                              |       | —     |       | —                      |       | 1,055                          |       | —           |       | 1,055            |       |
| Total  liabilities                                  |       | 149,584    |       | 37,332                      |       | 159,282                        |       | (94,261          | )          | 251,937          |       |
|                                                |       |       |       |                        |       |                           |       |             |       |             |       |
| **Minority interests**                              |       | —     |       | —                      |       | 1,869                          |       | —           |       | 1,869            |       |
|                                                |       |       |       |                        |       |                           |       |             |       |             |       |
| **Stockholders’ equity**                       |       | 152,738    |       | 132,961                     |       | 102,139                        |       | (236,889         | )          | 150,949          |       |
| **Total liabilities and stockholders’ equity** |       | $          | 302,322    |                        | $          | 170,293                        |       | $                | 263,290    |             | $          | (331,150 | ) | $ | 404,755 |   |

 

12

----

 

**CondensedConsolidating Statement of Cash Flows**

**(in thousands)**

 
| **Three  Months Ended March 31, 2004**           | ** ** | **Parent** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Nonguarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------------------|------------|------------|------------|-----------------------------|------------|--------------------------------|------------|------------------|------------|------------------|------------|
|                                                  |       |       |       |                        |       |                           |       |             |       |             |       |
| **Net cash flows from operating  activities**         |       | (6,091     | )          | 4,195                       |       | 8,195                          |       | (7               | )          | 6,292            |       |
|                                                  |       |       |       |                        |       |                           |       |             |       |             |       |
| **Cash flows from investing  activities:**            |       |       |       |                        |       |                           |       |             |       |             |       |
| Investment in subsidiaries                            |       | —     |       | —                      |       | —                         |       | —           |       | —           |       |
| Purchases of property and equipment                   |       | (1,528     | )          | (116                        | )          | (3,814                         | )          | —           |       | (5,458           | )          |
| Investment in affiliates                              |       | —     |       | —                      |       | —                         |       | —           |       | —           |       |
| Net cash flows from investing activities              |       | (1,528     | )          | (116                        | )          | (3,814                         | )          | —           |       | (5,458           | )          |
|                                                  |       |       |       |                        |       |                           |       |             |       |             |       |
| **Cash flows from financing  activities:**            |       |       |       |                        |       |                           |       |             |       |             |       |
| Borrowings on debt                                    |       | —     |       | —                      |       | 4,092                          |       | —           |       | 4,092            |       |
| Repayments of debt and capital lease obligations      |       | (1,788     | )          | —                      |       | (4,418                         | )          | —           |       | (6,206           | )          |
| Net capital contribution from parent                  |       | —     |       | —                      |       | —                         |       | —           |       | —           |       |
| Net borrowings and payments in intercompany  balances |       | 5,318      |       | (2,532                      | )          | (2,793                         | )          | 7                |       | —           |       |
| Treasury stock reissuances                            |       | 63         |       | —                      |       | —                         |       | —           |       | 63               |       |
| Net cash flows from financing activities              |       | 3,593      |       | (2,532                      | )          | (3,119                         | )          | 7                |       | (2,051           | )          |
| Effect of exchange rates on cash                      |       | —     |       | —                      |       | 433                            |       | —           |       | 433              |       |
| **Net increase (decrease) in cash**                   |       | (4,026     | )          | 1,547                       |       | 1,695                          |       | —           |       | (784             | )          |
| **Cash and cash equivalents,  beginning of period**   |       | 12,010     |       | 3,090                       |       | 14,750                         |       | —           |       | 29,850           |       |
| **Cash and cash equivalents, end of  period**         |       | $          | 7,984      |                        | $          | 4,637                          |       | $                | 16,445     |             | $          | — |   | $ | 29,066 |   |
|                                                       |            |            |            |                             |            |                                |            |                  |            |                  |            |  |  |  |  |  |

 

13

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**CondensedConsolidating Statement of Cash Flows**

**(inthousands)**

 
| **Three  Months Ended March 31, 2003**         | ** ** | **Parent** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Nonguarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-----------------------------------------------------|------------|------------|------------|-----------------------------|------------|--------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                          | ** ** | ** ** | ** ** | ** **                  | ** ** | ** **                     | ** ** | ** **       | ** ** | ** **       | ** ** |
| **Net cash flows from operating  activities**       |       | 9,113      |       | 4,580                       |       | (4,439                         | )          | —           |       | 9,254            |       |
|                                                |       |       |       |                        |       |                           |       |             |       |             |       |
| **Cash flows from investing  activities:**          |       |       |       |                        |       |                           |       |             |       |             |       |
| Investment in subsidiaries                          |       | 2,662      |       | (1,110                      | )          | —                         |       | (1,552           | )          | —           |       |
| Purchases of property and equipment                 |       | (1,337     | )          | (397                        | )          | (3,538                         | )          | —           |       | (5,272           | )          |
| Investment in affiliates                            |       | (1,000     | )          | —                      |       | —                         |       | —           |       | (1,000           | )          |
| Net cash flows from investing activities            |       | 325        |       | (1,507                      | )          | (3,538                         | )          | (1,552           | )          | (6,272           | )          |
|                                                |       |       |       |                        |       |                           |       |             |       |             |       |
| **Cash flows from financing  activities:**          |       |       |       |                        |       |                           |       |             |       |             |       |
| Borrowings on debt                                  |       | —     |       | —                      |       | 5,259                          |       | —           |       | 5,259            |       |
| Repayments of debt and capital lease obligations    |       | (5,372     | )          | —                      |       | (251                           | )          | —           |       | (5,623           | )          |
| Net capital contribution from parent                |       | —     |       | (2,662                      | )          | 1,110                          |       | 1,552            |       | —           |       |
| Net borrowings and payments in                      |       |       |       |                        |       |                           |       |             |       |             |       |
| intercompany balances                               |       | (3,681     | )          | —                      |       | 3,681                          |       | —           |       | —           |       |
| Treasury stock reissuances                          |       | 57         |       | —                      |       | —                         |       | —           |       | 57               |       |
| Net cash flows from financing activities            |       | (8,996     | )          | (2,662                      | )          | 9,799                          |       | 1,552            |       | (307             | )          |
| Effect of exchange rates on cash                    |       | 144        |       | —                      |       | (712                           | )          | —           |       | (568             | )          |
| **Net increase (decrease) in cash**                 |       | 586        |       | 411                         |       | 1,110                          |       | —           |       | 2,107            |       |
| **Cash and cash equivalents,  beginning of period** |       | 16,616     |       | 2,855                       |       | 14,671                         |       | —           |       | 34,142           |       |
| **Cash and cash equivalents, end of  period**       |       | $          | 17,202     |                        | $          | 3,266                          |       | $                | 15,781     |             | $          | — |   | $ | 36,249 |   |
|                                                     |            |            |            |                             |            |                                |            |                  |            |                  |            |  |  |  |  |  |

 

**Note 9. Restatement of Consolidated Condensed Financial Statements**

 

In July 2004, we determined that our previously reported revenue andnet income for the three months ended March 31, 2004, were overstated by $0.3million and $0.2 million, respectively. The overstatement was the result ofunauthorized intentional improper changes to operational data, which resultedin an incorrect calculation of performance bonus amounts on a single clientprogram at an operating site in one of our business units. The Company hasrestated its unaudited consolidated condensed financial statements as of andfor the three-months ended March 31, 2004 to reflect the reduction of revenue.The error does not affect previously reported basic and diluted earnings pershare of $0.07.

 

The following table presents the impact of the restatement on acondensed basis (in thousands):

 
| ** **                                        | ** ** | **As  Previously  Reported** | ** ** | **As  Restated** | ** ** |
|---------------------------------------------------|------------|------------------------------|------------|------------------|------------|
|                                              |       |                         |       |             |       |
| At March 31,  2004                                |       |                         |       |             |       |
|                                              |       |                         |       |             |       |
| Income taxes  payable                             |       | $                            | 708        |             | $          | 584 |   |
| Accrued  operating expenses                       |       | $                            | 33,859     |             | $          | 34,197 |   |
| Total current  liabilities                        |       | $                            | 137,883    |             | $          | 138,097 |   |
| Total  liabilities                                |       | $                            | 248,463    |             | $          | 248,677 |   |
| Accumulated  deficit                              |       | $                            | (11,989    | )                | $          | (12,203 | ) |
| Total  stockholders’ equity                  |       | $                            | 156,092    |             | $          | 155,878 |   |
|                                              |       |                         |       |             |       |
| For the Three  Months Ended March 31, 2004        |       |                         |       |             |       |
|                                              |       |                         |       |             |       |
| Revenue                                           |       | $                            | 244,406    |             | $          | 244,068 |   |
| Operating income                                  |       | $                            | 10,624     |             | $          | 10,286 |   |
| Income before  income taxes and minority interest |       | $                            | 7,231      |             | $          | 6,893 |   |
| Income tax  expense                               |       | $                            | 1,977      |             | $          | 1,853 |   |
| Net income                                        |       | $                            | 5,040      |             | $          | 4,826 |   |

 

The restatement did not impact the amounts presented in theconsolidated condensed statements of cash flows for net cash flows fromoperating activities, net cash flows from investing activities or net cashflows from financing activities. Certain amounts in Notes 1, 2, and 8 have beenrestated for the impact of the restatement adjustments as of and for thethree-months ended March 31, 2004.

 

14

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

 

As discussed in Note 9 toour consolidated condensed financial statements included herein, we haverestated our unaudited consolidated condensed financial statements as of andfor the three-month period ended March 31, 2004.  All amounts included in this discussion andanalysis reflect the effects of the restatement.

 

##### **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 operational and informationtechnology professional services for both outsourced and in-house contactcenters. We serve clients primarily in the automotive; consumer products; financialservices; insurance; technology; telecommunications, ISP and cable; andutilities sectors.

 

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

 

As you read thisdiscussion and analysis, refer to our Consolidated Condensed Statements ofIncome, which present the results of our operations for the three-month periodsended March 31, 2004 and 2003, and are summarized on the following pages.We analyze and explain the differences between periods for the components ofnet income in the following sections. Our analysis is important in makingdecisions about your investment in SITEL Corporation.

 

##### **General BusinessRisks and Critical Accounting 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 for68.3% and 67.2% of our revenue in the three-month periods ended March 31,2004 and 2003, respectively, and include multipleindependently managed business units of General Motors Corporation. TheseGeneral Motors business units were responsible for 17.3% and 20.3% of our totalrevenue in the three-month periods ended March 31, 2004 and 2003. OnApril 21, 2004, we announced the signing of a new contract with GeneralMotors to continue to provide customer support services for General Motors’North American Vehicle Sales, Service, and Marketing Group throughDecember 31, 2005. An existing agreement under which we supported OnStaroperations will terminate effective June 22, 2004. In addition, Hewlett-Packard(HP) wasresponsible for 11.6% of our revenue for the three-month period endedMarch 31, 2004. The financial failure of any of these clients orthe loss of any or all of their business could have an adverse impact on ouroperating 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.

 

15

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We have identified thefollowing to be critical accounting policies because they are the mostimportant to the portrayal of our results of operations and financial condition,and they require management’s most difficult, subjective, or complex judgments:

 

***Revenue Recognition***

We recognize revenue inaccordance with applicable accounting standards, including Securities andExchange Commission Staff Accounting Bulletin (“SAB”) No. 101 (SAB 101) “RevenueRecognition in Financial Statements” and SAB 104, “Revenue Recognition”. Werecognize revenue at the time services are performed based on an hourly,monthly, per call or per employee rate detailed in the client contract. Aportion of our revenue is often subject to performance standards, such as salesper hour, average handle time, occupancy rate and abandonment rate.  Ourperformance against such standards may result in incentives or penalties, whichare recognized as earned or incurred. In certain circumstances, we receivepayment in advance of providing service. Accordingly, amounts billed but notearned under these contracts are excluded from revenue and included in deferredrevenue and other in the consolidated balance sheet. Revenue for servicesperformed under certain collection service agreements are recognized as therelated consumer debts are collected and are calculated based upon a percentageof cash collected or other agreed upon contractual parameters.

 

***Trade AccountsReceivable***

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

 

***Property andEquipment***

We record property andequipment at cost, and calculate depreciation using the straight-line methodover the estimated useful lives of the assets, which 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 significantchange in the extent or manner in which long-lived assets are being used or inits physical condition, in legal factors, or in the business climate that couldaffect the value of the long-lived assets. The interpretation of such eventsrequires judgment from management as to whether such an event has occurred.

 

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

 

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

 

***Goodwill***

At least annually 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 

 

16

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charges. We are requiredto make certain assumptions and estimates regarding the fair value of goodwillwhen assessing for impairment. Changes in the fact patterns underlying suchassumptions and estimates could ultimately result in the recognition ofadditional impairment losses.  As ofOctober 1, 2003, we completed the annual evaluation of our goodwill anddetermined no impairment charge was required.

 

***Deferred IncomeTaxes***

We record deferred taxassets and liabilities using enacted tax rates in the jurisdictions in which weoperate for the effect of temporary differences between the book and tax basisof assets and liabilities. 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 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 and the period over which the deferred taxassets can be recovered. 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 that a valuation allowance isnot needed is difficult when there is negative evidence such as cumulativelosses in recent years in certain tax jurisdictions. Cumulative losses weighheavily in the overall assessment. We have established valuation allowances forfuture tax benefits related to net operating losses incurred in certainfederal, state and foreign tax jurisdictions. We expect to continue to record avaluation allowance on future tax benefits in certain tax jurisdictions untilan appropriate level of profitability is sustained. Until an appropriate levelof profitability is reached, we do not expect to recognize any significant taxbenefits in future results of operations. If futuretaxable income is lower than expected or if expected we may record additionalvaluation allowance through income tax expense in the period such determinationis made.

 

***Self-InsuranceReserves***

We are self-insured inNorth America for health care claims for eligible participating employees,subject to certain deductibles and limitations. The costs include an estimateof expected settlements on pending claims and a provision for claims incurredbut not reported. These estimates are based on our assessment of potentialliability using an analysis of available information with respect to pendingclaims, historical experience, and current cost trends. Actual claims resultscould differ from these estimates.

 

***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 the ThreeMonths Ended March 31, 2004 Compared to the Same Period of 2003**

 

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.

 

17

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**Componentsof Net Income**

 

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

 
| ** **                                           | ** ** | **Three Months Ended March 31,** | ** **   |
|------------------------------------------------------|------------|---------------------------------------|--------------|
| ** **                                           | ** ** | **2004**                              | ** **   | **2003** | ** ** |
| ** **                                           | ** ** | **$**                                 | ** **   | **%** | ** ** | **$** | ** ** | **%** | ** ** |
| ** **                                           | ** ** | **(As restated)**                     | ** **   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                           | ** ** | **(in thousands)**                    | ** **   |
| **Revenue**                                          |       | **$**                                 | **244,068**  | *** *** | *100.0* | % | $ | 194,095 | * * | *100.0* | *%* |
|                                                 |       | ** **                            | ** **   |   |   |   |   |   |   |
| Direct  labor and telecommunications expenses        |       | **144,128**                           | *** *** | *59.1* | % | 110,772 | * * | *57.1* | *%* |
| Subcontracted and other services  expenses           |       | **12,815**                            | *** *** | *5.3* | % | 13,649 | * * | *7.0* | *%* |
| Operating,  selling and administrative expenses      |       | **76,839**                            | *** *** | *31.5* | % | 65,676 | * * | *33.8* | *%* |
| Asset  impairment and restructuring expenses         |       | **—**                            | *** *** | *0.0* | % | 796 | * * | *0.4* | *%* |
| **Operating income**                                 |       | **10,286**                            | *** *** | *4.2* | % | 3,202 | * * | *1.7* | *%* |
|                                                 |       | ** **                            | ** **   |   |   |   |   |   |   |
| Interest  expense, net                               |       | **(3,112**                            | ***)***      | *(1.3* | )% | (2,724 | *)* | *(1.4* | *)%* |
| Equity in earnings (loss) of  affiliates             |       | **(7**                                | **)**        | (0.0 | )% | 618 | * * | *0.3* | *%* |
| Other  expense, net                                  |       | **(274**                              | ***)***      | *(0.1* | )% | (659 | *)* | *(0.4* | *)%* |
| **Income before income taxes and minority interest** |       | **7,231**                             | *** *** | *3.0* | % | 437 | * * | *0.2* | *%* |
|                                                 |       | ** **                            | ** **   |   |   |   |   |   |   |
| Income  tax expense                                  |       | **1,853**                             | *** *** | *0.8* | % | 170 | * * | *0.1* | *%* |
| Minority  interest                                   |       | **214**                               | *** *** | *0.1* | % | 206 | * * | *0.1* | *%* |
|                                                 |       | ** **                            | ** **   |   |   |   |   |   |   |
| **Net income**                                       |       | **$**                                 | **4,826**    | *** *** | *2.0* | % | $ | 61 | * * | *0.0* | *%* |

 

***Revenue***

Revenue increased $50.3million, or 25.9%, in the first quarter of 2004 compared to the same period of2003.  The changes in revenue bygeographic region are shown in the following table:

 
| **Three  Months  Ended March 31,** | ** ** | **2004**          | ** ** | **2003**   | ** ** | **Change** | ** ** | **Change** | ** ** |
|-----------------------------------------|------------|-------------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                              | ** ** | **(As restated)** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                              | ** ** | **(in millions)** | ** ** |
| North  America                          |       | **$**             | **129.2**  | ** ** | $          | 114.4      |       | $          | 14.8       |   | 12.9 | % |
| Europe                                  | ** ** | **98.5**          | ** ** | 69.9       |       | 28.6       |       | 40.9       | %          |
| Asia  Pacific                           | ** ** | **9.7**           | ** ** | 7.5        |       | 2.2        |       | 29.3       | %          |
| Latin  America                          | ** ** | **6.7**           | ** ** | 2.3        |       | 4.4        |       | 191.3      | %          |
| Totals                                  | ** ** | **$**             | **244.1**  | ** ** | $          | 194.1      |       | $          | 50.0       |   | 25.8 | % |

 

The weakening of the U.S.dollar versus the Canadian dollar accounted for $2.0 million of the increase inNorth American revenue in the first quarter of 2004 compared to the same periodin 2003. Excluding the impact of changes in foreign currency, North Americanrevenue increased $12.8 million due to an increase in customer care, technicalsupport, and risk management services offset by a $2.7 million decrease incustomer acquisition business as a result of a decline in outbound customeracquisition programs and pricing pressure resulting from continuing excesscapacity created primarily by movement of business offshore.

 

European revenueincreased $28.6 million in the first quarter of 2004 compared to the sameperiod in 2003. Higher sales volumes from new and existing clients and theimplementation of multiple pan-European client accounts that commenced in early2003 resulted in an increase in revenue of $16.7 million in the first quarterof 2004 compared to the same period in 2003. The weakening of the U.S. dollarversus the British pound and Euro accounted for the remaining $11.9 million ofthe increase.

 

The weakening of the USdollar versus the New Zealand and Australia dollars account for $1.6 million ofthe increase in Asia Pacific revenue. The remaining increase was the result of higher sales volume fromexisting clients.

 

The increase in LatinAmerican revenue was primarily due to the change in how we report ourinvestment in our Panama affiliate. Effective October 1, 2003, wecompleted the previously announced restructuring in the governance of our LatinAmerica joint venture which handles services in Panama and other Latin Americancountries and offshore services in 

 

18

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Mexico and CentralAmerica. As a result of this revision in governance, we reported our investmentin our Panama affiliate using the consolidation method, rather than the equitymethod of accounting effective October 1, 2003. As a result of thischange, our Latin America revenue includes the revenue associated with ourPanama affiliate resulting in a $3.0 million increase in revenue in the firstquarter of 2004 compared to the same period in 2003. The weakening of the U.S.dollar accounted for a $0.6 million increase in Latin American revenue in thefirst quarter of 2004 compared to the same period in 2003. Excluding the impactof the change in accounting and the impact of changes in foreign currency,Latin American revenue in the first quarter of 2004 increased $0.8 millioncompared to the same period in 2003 as a result of higher sales volume.

 

***Direct Labor andTelecommunications Expenses***

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

 

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

 

Direct labor andtelecommunications expenses increased $33.4 million, or 30.1%, in the firstquarter of 2004 compared to the same period of 2003. As a percentage ofrevenue, direct labor and telecommunications expenses increased to 59.1% in thefirst quarter of 2004 compared to 57.1% in same period in 2003. The increasewas primarily the result of higher direct labor costs, particularly in Europe,and a change in the mix of services provided in the first quarter of 2004compared to the same period in 2003.

 

***Subcontractedand Other Services Expenses***

Subcontracted and otherservices expenses include services provided to clients through subcontractorsand other out-of-pocket expenses. Subcontracted and other services expensesdecreased $0.8 million, or 6.1%, in the first quarter of 2004 compared to thesame period of 2003. The decrease was primarily the result of lowersubcontracted IT costs to support client programs in the first quarter of 2004compared to the same period in 2003.

 

Subcontracted expensesfor services provided by our India joint venture for the three months endedMarch 31, 2004 and 2003 were $3.4 million and $3.4 million, respectively.

 

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

Operating, selling and administrative expenses represent expensesincurred to directly support and manage the business, including costs ofmanagement, administration, technology, facilities, depreciation andamortization, maintenance, sales and marketing, and client support services.

 

Operating, selling andadministrative expenses increased $11.2 million, or 17.0%, in the first quarterof 2004 compared to the same period of 2003. The weakening of the U.S. dollar compared to the primary currency in thejurisdictions that we operate accounted for an increase of $5.1 million inoperating, selling and administrative expenses compared to the same period in2003. As a result of the change in accounting for our Panama affiliate aspreviously discussed, operating, selling and administrative expenses increased$0.8 million in the first quarter of 2004 compared to the same period in2003.  As a percentage of revenue, operating,selling and administrative expenses decreased to 31.4% in the first quarter of2004 compared to 33.8% in the first quarter of 2003. The decrease is primarilythe result of higher sales volumes while utilizing the existing cost structureand also the result of costs incurred during the first quarter of 2003 relatedto the complex implementation of large new client accounts that did not recurin the first quarter of 2004.

 

***Asset Impairmentand Restructuring Expenses***

During the first quarterof 2003, in connection with the closure of a contact center, we recorded assetimpairment and restructuring expenses of $0.8 million, which consisted of thewrite-off of abandoned leasehold improvements of $0.4 million and $0.4 millionof scheduled payments of operating leases for which we will receive no futureeconomic benefit.

 

***Operating Income***

Operatingincome increased $7.1 million in the first quarter of 2004 compared to the sameperiod of 2003. As a percentage of revenue, operating income increased to 4.2%in the first quarter of 2004 compared to 1.7% in the same period of 2003 due tothe factors discussed above.

 

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***InterestExpense, Net***

Interest expense, net ofinterest income, increased $0.4 million or 14.2% in the first quarter of 2004compared to the same period in 2003 primarily as a result of higher averageshort-term borrowings to finance our growth in Europe.

 

***Equity inEarnings (Loss) of Affiliates***

Equity in earnings (loss)of affiliates decreased by $0.6 million in the first quarter of 2004 ascompared to the same period in 2003 primarily due to higher costs related tothe transition of clients served by two of our joint ventures.

 

***Other Expense,Net***

Other expense, net ofother income, decreased $0.4 million in the first quarter of 2004 as comparedto the same period in 2003. The decrease is primarily due to an impairmentcharge of $0.5 million recorded in the first quarter of 2003 which did notrecur in the first quarter of 2004. During the first quarter of 2003, basedupon our review of an investee’s financial condition, results of operations andoperating trends and the implied value from recent rounds of financingcompleted by the investee, we determined that an other-than-temporaryimpairment existed for one of our investments. As a result, we recorded animpairment charge of $0.5 million in the first quarter of 2003 to reduce ourbasis in an investment to fair value.

 

***Income TaxExpense***

In the first quarter of2004, income tax expense as a percentage of income before income taxes and minorityinterest was 27.3%. The difference between this rate and the statutory U.S.Federal rate of 35% was primarily due to the utilization of net operating losscarryforwards in certain subsidiaries for which a full valuation allowance hadpreviously been provided against the net deferred tax asset and due to incometax expense incurred in certain non-US subsidiaries.

 

In the first quarter of2003, income tax expense as a percentage of income before income taxes andminority interest was 38.9%. The difference between this rate and the statutoryU.S. Federal rate of 35% was primarily due to net operating losses in certainsubsidiaries for which no tax benefit was recognized and U.S. state and localincome taxes offset by lower tax rates in certain foreign jurisdictions.

 

**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.

 
| **Three  Months Ended March 31,** | ** ** | **2004**           | ** ** | **2003**   | ** ** |
|----------------------------------------|------------|--------------------|------------|------------|------------|
| ** **                             | ** ** | **(in thousands)** | ** ** |
| **Net cash flows from:**               |       |               |       |       |       |
| Operating  activities                  | ** ** | **$**              | **6,292**  | ** ** | $          | 9,254 |   |
| Investing  activities                  | ** ** | **(5,458**         | **)**      | (6,272     | )          |
| Financing  activities                  | ** ** | **(2,051**         | **)**      | (307       | )          |
|                                        |            |                    |            |            |            |  |  |

 

**2004**

In the first quarter of2004, cash provided by operating activities resulted primarily from incomebefore depreciation and amortization of $14.0 million and a $5.7 millionincrease in other liabilities, which were partially offset by a $8.8 millionincrease in trade accounts receivable and $4.1 million decrease in tradeaccounts payable.

 

In the first quarter of2004, we used cash for investing activities to purchase $5.5 million ofproperty and equipment.

 

In the first quarter of2004, we used cash for financing activities to repay $4.6 million of therevolving credit facility, net of additional borrowings of $4.1 million.Additionally, we used cash to repay borrowings under local lines of credit andcapital lease obligations of $0.9 million and $0.7 million, respectively.

 

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**2003**

In the first quarter of2003, cash provided by operating activities resulted primarily from incomebefore asset impairment and restructuring expenses, depreciation andamortization, and other charges of $10.2 million, a $0.5 million decrease intrade accounts receivable, a $1.3 million decrease in other assets and a $0.8million increase in trade accounts payable partially offset by a $2.9 milliondecrease in other liabilities.

 

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

 

In the first quarter of2003, we used cash for financing activities to repay $5.4 million of therevolving credit facility, net of additional borrowings of $1.3 million. Inaddition, cash provided by financing activities included $4.0 million fromadditional borrowings under local lines of credit.

# * *

***Capital Resources***

We have historically usedfunds generated from operations, leases of property and equipment, equitycapital, senior subordinated notes, and borrowings under credit facilities withbanks to finance business acquisitions, capital expenditures, and workingcapital requirements.

 

We have a three-year $50million revolving credit facility that expires in December 2005.  The credit facility is secured by accounts receivablein 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. AtMarch 31, 2004, we had $41.4 million of available borrowings under the newcredit 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 expect capital expenditures in the second quarter of2004 to be in the range of $10 million to $15 million, as we continue to covermaintenance and technology upgrades, asset replacements, efficiencyinvestments, and investment for continued growth including the build out of ournew Philippines contact center. 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.

 

# ***Contractual Obligations andCommitments***

We summarize variouscontractual obligations and commitments in the Notes to our ConsolidatedFinancial Statements in our Report on Form 10-K for the year endedDecember 31, 2003.  Thesecontractual obligations and commitments include:

 

•                  $100.0million of long-term debt as shown in our consolidated condensed balance sheetat March 31, 2004,

•                  $21.5million of revolving credit facility and other local short-term borrowings debtas shown in our consolidated condensed balance sheet at March 31, 2004,

•                  $10.9million of capital lease obligations as shown in our consolidated condensedbalance sheet at March 31, 2004, and

•                  operatinglease obligations for property and certain equipment under noncancelableoperating lease arrangements, which expire at various dates through 2016.

 

**OtherMatters**

 

***Quarterly Results andSeasonality***

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 of new contracts and the discontinuance and termination ofexisting contracts,

•                  revenue mix,

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

•                  thetiming of recognition of incentive fees.

 

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

 

***Effects ofInflation***

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

 

***Recently IssuedAccounting Pronouncements***

In January 2003, theFASB released Interpretation No. 46, “Consolidation of Variable InterestEntities, an Interpretation of ARB No. 51” (FIN 46) which requires thatall primary beneficiaries of Variable Interest Entities (VIE) consolidate thatentity. FIN 46 is effective immediately for VIE’s created afterJanuary 31, 2003 and to VIE’s in which an enterprise obtains an interestafter that date. It applies in the first fiscal year or interim period beginningafter June 15, 2003 to VIE’s in which an enterprise holds a variableinterest it acquired before February 1, 2003. In December 2003, theFASB published a revision to FIN 46 (“FIN 46R”) to clarify some of theprovisions of the interpretation and to defer the effective date ofimplementation for certain entities. The remaining provisions of FIN 46R wereeffective January 1, 2004.  Theadoption of FIN 46R did not have a material impact on our consolidated financialstatements.

 

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

 

***ForeignCurrency 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 revenue and expensesof those operations are typically denominated in the currency of the country ofoperations, providing a natural hedge.

 

Our financial statements are presented in U.S. dollars and can beimpacted by foreign exchange fluctuations through both (i) translationrisk, which is the risk that the financial statements for a particular periodor as of a certain date depend on the prevailing exchange rates of the variouscurrencies against the U.S. dollar, and (ii) transaction risk, which isthe risk that the functional currency of costs and liabilities fluctuates inrelation to the currency of our revenue and assets, which fluctuation mayadversely affect operating margins.

 

With respect totranslation risk, even though the fluctuations of currencies against the U.S.dollar can be substantial and therefore significantly impact comparisons withprior periods, the translation impact is recorded as a component ofstockholders’ equity and does not affect the underlying results of operations.Gains and losses related to transactions denominated in a currency other thanthe functional currency of the countries in which we operate includingshort-term intercompany accounts are included in the determination of netincome.

 

***InterestRate Risk***

We are also exposed tochanges in interest rates on our variable rate borrowings. Interest rates onour Senior Subordinated Notes and capital lease obligations are fixed, butrates on borrowings under our bank credit facility are variable. During thethree-month period ended March 31, 2004 our average borrowings under ourrevolving credit facility were $7.7 million. Based on our projected cash needs for the foreseeable future, we do notexpect that our exposure to changes in interest rates for these borrowings willhave a material impact on our interest expense.

 

**Item 4. Controls and Procedures**

Our management evaluated,with the participation of our Chief Executive Officer and our Chief FinancialOfficer, the effectiveness of our disclosure controls and procedures as of theend of the period covered by the Quarterly Report on Form 10-Q filed on May 10,2004.  Based on that evaluation, ourChief Executive Officer and our Chief Financial Officer had concluded that ourdisclosure controls and procedures were effective to ensure that information weare required to disclose in reports that we file or submit under the SecuritiesExchange Act of 1934 is recorded, processed, summarized and reported within thetime periods specified in Securities and Exchange Commission rules and forms.  As a result of the subsequent discovery,discussed below, of a material weakness within our internal control frameworkas it existed at March 31, 2004, our Chief Executive Officer and our ChiefFinancial Officer have concluded that our disclosure controls and procedureswere not effective to ensure that information we are required to disclose inreports that we file or submit under the Securities Exchange Act of 1934 isrecorded, processed, summarized and reported within the time periods specifiedin Securities and Exchange Commission rules and forms.

 

There was no change inour internal control over financial reporting that occurred during the periodcovered by that Quarterly Report on Form 10-Q that has materially affected, oris reasonably likely to materially affect, our internal control over financialreporting.

 

Subsequently, during the second quarter of 2004, we identified adeficiency within our internal control framework.  We determined that our previously reportedrevenue and net income for the three months ended March 31, 2004 wereoverstated by $0.3 million and $0.2 million, respectively.  The overstatement was the result ofunauthorized intentional improper changes to operational data, which resultedin an incorrect calculation of performance bonus amounts on a single clientprogram at an operating site in one of our business units.  The error did not affect previously reportedbasic and diluted earnings per share of $0.07. This Form 10-Q/A restates the March 31, 2004, interim financialstatements for the correction of the error. Because the error resulted in the restatement of revenue and earningsfor the three months ended March 31, 2004, we determined the deficiency withinour internal control framework to be a material weakness.  We implemented corrective action to detectand monitor changes in operations data through a secondary review.

 

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**PART II – OTHER INFORMATION**

 

**Item 1. Legal Proceedings**

 

From time to time, we areinvolved in litigation incidental to our business. We cannot predict theultimate outcome of such litigation with certainty, but management believes,after consultation with counsel, that the resolution of such matters will nothave a material adverse effect on our consolidated financial position or resultsof 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 ofinvestigating and resolving such matter. We might also seek a license under thepatents. Any such license may not be available under commercially reasonableterms. Any license costs would increase the cost of doing business in thefuture and may or may not be fully reflected in our pricing. To our knowledge,no litigation has been initiated against our client or us concerning thismatter. At this stage, due to the inherent uncertainties, we are unable to predictwhether this matter may have a material adverse effect on our business or onour financial condition or results of operation.

 

**Item 5. Other Information**

 

**Forward-LookingStatements**

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

 

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

 

 

**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 February 4, 2004, which reported underItems 7 and 12 the issuance of a press release. The press release was filed asan exhibit 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 9,  2004 | By     | /s/ *Jorge A. Celeya* |
| ** **                                                                                                                                |   |                  | **Jorge A. Celeya**          |
| * *                                                                                                                                  |   |                  | *Chief Financial Officer*    |
|                                                                                                                                      |   |                  | (Duly Authorized Officer and |
|                                                                                                                                      |   |                  | Principal Financial 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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